eXp World Holdings, Inc. (NASDAQ:EXPI) Q1 2024 Earnings Call Transcript

eXp World Holdings, Inc. (NASDAQ:EXPI) Q1 2024 Earnings Call Transcript May 2, 2024

eXp World Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Denise Garcia: Good afternoon, and welcome to eXp World Holdings’ First Quarter 2024 Earnings Fireside Chat via live stream and our metaverse on the web, Frame. My name is Denise Garcia, and I manage Investor Relations for eXp World Holdings. Today, we will begin with our earnings fireside chat with prepared remarks from Glenn Sanford, Founder, Chairman and CEO of eXp World Holdings; and Leo Pareja, CEO of eXp Realty; followed by a review of the first quarter 2024 financial highlights presented by Kent Cheng, Principal Financial Officer and Chief Accounting Officer of eXp World Holdings. Following our prepared remarks, we will open the call to a Q&A session with eXp World Holdings covering analysts and questions submitted to eXp. Let’s begin with a review of the safe harbor.

There will be a number of forward-looking statements made today that should be considered in conjunction with the cautionary statements contained in the company’s SEC filings. Forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Please see our filings with the SEC, including our most recent filed annual report on Form 10-K and quarterly reports on Form 10-Q, for a description of specific risks that may affect our business performance and financial condition. We assume no obligation to update or revise any forward-looking information. As a reminder today’s call is being recorded and a reply will also be made available on expworldholdings.com.

Now for a few logistics and then we’ll get started. For those of you joining in Frame today, to zoom into a specific screen, you can click on that screen and then click zoom in. If that content on that screen disappears or if you lose audio, simply refresh your page. While in Frame, if you need help, just use the help button at the bottom right. If you wish to ask a question during our presentation, you can enter your questions by scanning the QR code presented on this screen with your mobile phone, or go to slido.com and type the event code EXPI. From there, you can submit a question or vote up an existing question by giving a thumbs up if you’d also like that question to be asked. The screen will remain up and on the right-hand side of this page for the duration of our presentation.

Now I’ll turn the call over to Glenn to begin our fireside chat.

Glenn Sanford: Awesome. Thanks, Denise, and thanks, everyone for joining us. And before we jump into our first quarter results, I want to just review our business strategy and provide an update on our structure. Our strategy, as per the beginning, is to ultimately create the most agent-centric real estate brokerage on the planet and to really drive that value. One of the things we’ve been able to do is, from the profitability of North America, it’s actually enabled us to invest in growth opportunities across the business, including international, which we see as the largest potential driver of growth for the company. Through the profitability of eXp North America, we’ve been able to build a platform for agents worldwide. That includes personal development, health resources, media and technology.

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Q&A Session

This quarter, we increased our operational efficiencies by focusing entirely on Frame, our metaverse where we’re meeting today. And we’ve actually discontinued our VirBELA operations. At a high level, we’re now reporting on three business segments: North American Realty, International Realty and then Other Affiliated Services, which is all the other businesses, which includes SUCCESS and FrameVR.io. Kent will also review the results of each segment in a moment. We’re also increasing the transparency of our operating expenses. Starting this quarter, we’re reporting technology and development expenses separately. And as you’ll see from our financials, we are a technology company really at our core and have achieved significant scale. And moving forward, we expect to leverage our investment to support margin expansion while continuing to innovate and lead [indiscernible] in technology.

Now I’ll move to some highlights from the first quarter. I’ll start with NPS. The work we did in 2023 to improve the agent value proposition, increase support and asked our (ph) agents during the market downturn helped drive a higher Net Promoter Score, which resulted in a 3 point increase from last year, from 70% to 73%. As you know, agent Net Promoter Score is a good indicator of our future growth and our retention, an important measure of our success that is often not reflected in the current quarter’s financial results. I’m also pleased to report a 5% increase in real estate transactions and 11% increase in overall volume — or overall revenue. We continue to add multiple highly productive teams and agents around the world during this quarter as well, which we highlight a separate press release, like we did back in mid-April.

We think our focus on bringing teams of agents will not only improve the quality of our agents, it will lead to productivity gains, particularly when the market downturn ends. We’ll feel confident about this because our internal research shows eXp agents on teams are 77% more productive than individual agents. Last quarter, I mentioned that I expect International Realty to be the largest driver of future growth for the company. And the international segment continues to outperform with revenue from international increasing 45% over the first quarter of 2023. We continue to strengthen the agent value proposition and expand our management team across a variety of key functions, such as human resources, technology, marketing and growth. Last week, Wendy Forsythe joined our team as our Chief Marketing Officer.

And earlier in the month, we actually named Leo Pareja as CEO of eXp Realty. I’m handing the reins over to — of eXp Realty over to Leo, so I can focus on more macro opportunities at the eXp World Holdings level. Leo is truly an innovative and well-recognized leader in the industry. He’s iterated and improved on the agent value proposition since joining eXp two years ago. And I think he’ll continue to add value to our agents, strengthening our competitive advantage and drive growth for eXp Realty across the board. With that, I’ll turn the call over to Leo, who can walk you through the first quarter highlights in our core businesses. Leo?

Leo Pareja: Thanks, Glenn. And thanks, everyone, for joining us today. While this isn’t my first time I’ve joined our quarter earnings call, this is my first time as the CEO of eXp Realty. I’m excited to be here, and I’m excited about the growth potential this year and the years to come. We’re doing exciting things. And I’ve had the good fortune to be part of that. And we’ve started to see the results from our efforts across the business. I’ll start with an industry update. Home sales transactions in the U.S. were down nearly 3%. Despite that, eXp Realty was up 2%. As we continue to do better than the industry, we continue to grow our market share. Market share grew nearly 5%, increasing to 4.4% of all home sales transactions in the United States, thanks to the hard work of our agents and teams during what’s undoubtedly one of the most challenging markets most of us have ever experienced in our careers.

Moving on to agents. As Glenn mentioned, NPS is our leading indicator for our future growth, reflecting on our agent satisfaction with eXp. aNPS helps us at the management team understand where we can improve and where we can focus our resources. Last year, we said we’d focus on delivering vetted, high-quality opportunities to agents, expanding personal and professional services, like SUCCESS, revenue share equity opportunities and affiliate agreements, streamlining operational support to our agents and enhancing our technology. We delivered all these promises in 2023. And we believe it’s reflected in the higher agent NPS scores this year. More specifically, agents have told us that they are happy about our eXpert Care Desk because they’re able to get a quick resolution to their issues and have one phone number to contact 24 hours a day, seven days a week worldwide.

They’ve also told us that they’ve been particularly happy about our transition from VirBELA to exp.world or Frame. They’re enjoying Frame because it’s web-based, which makes it easier to access wherever they are working. Transaction processes have also improved with 87% of our agents rating the process a 9 or a 10 on a scale of 1 to 10. We’re also introducing [Technical Difficulty]

Glenn Sanford: Did Leo cut out? Yes. So one thing to note is, today, we actually announced our eXp REVenue Share 2.0 program. So that — so you may have seen the press release that went out earlier today. Obviously, this last year, we paid out more than $230 million in a combination of revenue share and equity benefits to our agents and brokers. And with the new model, and just anecdotally, our agents are ecstatic about our REVenue Share model 2.0. We recognize that we have competition in the industry. And since we really created this new rev share model, we redesigned it to give agents the best rev share opportunity that exists in the market today. And we also have a Fast Start program that’s going to be kicking in, in July, which we think is also going to be super exciting that we talked about in the press release. Leo, let me know if you’ve arrived back, and I can certainly turn it back over to you. Let’s go on to the next slide and I’ll keep things moving here.

Leo Pareja: Sorry, I just got disconnected.

Glenn Sanford: Well, then I will wait for you to take over Slide 12 here.

Leo Pareja: Slide 12, sorry about that. Perfect. I’m very proud of the eXp [Technical Difficulty]

Kent Cheng: I think we’re losing Leo again.

Glenn Sanford: I think his Internet connection must be having issues. So just to note, obviously, we have a number of agents who have been named to our — to the 2023 top producer list. And one of the things that was kind of interesting is that if you actually looked at those agents that were listed, our top 200 — 250 agents, they would have actually ranked in as a single brokerage in the top five or six brokerages in the entire industry, so pretty cool just to see a lot of the accolades. Here, a few weeks ago, I was actually awarded the Bravo Leadership Award from DSU. And eXp was awarded the number one spot in transactions on the 2024 RISMedia Power Broker Report. I want to make sure that everybody — it’s important to note that these rankings really reflect our continued focus on our agents.

And that really rings true on why we’ve been able to get the awards that we have and continue to get all of the various different accolades. So let’s go ahead and move to the next slide here. One of the things you’ve heard us talk a lot about is AI across our entire business. And we’re actually almost ready to roll out what we’re referring to as Luna 2.0. And this is headed up under our innovation team, headed up by Seth Siegler, our Chief Innovation Officer. But we’re actually ready to roll out 28 separate AI agents that each contain their own in-depth knowledge about topics and countries. And it’s able to actually handle multiple languages and lots of other cool features. So similar to Luna, we plan to develop more customized generative AI personal assistants responsive to both eXp agent and the broader industry questions.

In terms of the — we have a document creation and review process that we that we are working on improving. And another example is deploying technology to increase operational flexibility by creating what Patrick O’Neill, our Chief Operating Officer, calls following the sun strategy to leverage both AI and people to enable 24 (ph) operations worldwide in support of agents and driving enhanced productivity. So AI for us represents an enormous long-term opportunity. We’re doing a lot of things with — we’ve got a number of different projects. We’re working with some various vendors and others to really focus on the AI side. Leo, are you back?

Leo Pareja: I hope so, Slide 14.

Glenn Sanford: Okay. Slide 14 is yours.

Leo Pareja: We’re also excited about our progress against our $20 million profit improvement plan. We made good progress in implementing several initiatives in Q1 to drive our profit and cost savings. On an annualized basis, these initiatives that we put in place in Q1 will drive $27.3 million in incremental profit and cost savings per year. Because many of these initiatives were implemented in the first quarter, they are not reflected in our first quarter financials and may have even been booked as some costs, like severance, towards them, which Kent will discuss in a moment. With three quarters left in 2024, we expect to realize $6.8 million per quarter or $20.4 million this year. Turning to the next slide. Lastly, I want to provide an update on the real estate market, which in addition to the market downturn caused by higher interest rates is also impacted by antitrust lawsuits aimed at agent commissions.

Understandably, our agents have had lots of questions about what this means for them and their clients. We’ve been providing support and education to agents through regional rallies, where we can be there to answer questions about antitrust lawsuits but also engage, educate and celebrate and inspire their profession. During April, we hosted and impacted rallies in 20 locations. We plan to host more throughout the year. We’ve also created a bio representation toolkit, which includes a suite of tools to help eXp agents enhance and empower their value proposition for clients during this time. With that, I’ll turn the call over to Kent, who will walk you through the financials, and we’ll open it up for questions. Thank you.

Kent Cheng: Thank you, Leo. As we review our performance for the first quarter of 2024, I’m pleased to highlight several key metrics that underscore our progress and strategic initiatives. Let’s start with our agent Net Promoter Score, NPS. This quarter, we achieved an NPS of 73, which is a 3 point improvement compared to the first quarter of last year. This increase is a direct result of our continued investment in operational support for our agent and the enhancement to our technology platform that Glenn and Leo discussed earlier. Moving on to our agent network. We saw a slight decrease of 2% in our agent count year-over-year. This reflects both the challenged market conditions and our strategic decision to offboard a significant number of unproductive agents in the U.S. during the fourth quarter of last year and the first quarter of this year.

This move is aligned with our focus on enhancing overall productivity and efficiency. In terms of real estate transaction, our real estate sales transaction units grew by 5% year-over-year. This growth is not only a testament to our team’s hard work and also indicate that we are outperforming the industry and continue to gain market share in the U.S. While our cost per transaction experienced a slight increase year-over-year, they remain among the most competitive in the industry. We anticipate the real estate transaction costs will decrease as we leverage technology more effectively and move through the typical seasonal variation in 2024. Now let me discuss our financial objectives. I’m happy to report that our revenue for the first quarter was $943 million, 11% increase year-over-year.

On the adjusted EBITDA front, we generated $11 million in a very challenging market condition. The first quarter adjusted EBITDA was lower than the $14.6 million from the prior year’s first quarter due to increased SG&A, which I will explain next. We have also enhanced the transparency of our financial reporting by breaking out our operating expense to include technology and development cost, reaffirming our commitment to being a technology-driven company at heart. General and administrative expenses were $63 million, up 15% over the first quarter of 2023, primarily due to increased transaction volume, an effort to improve our NPS, coupled with higher severance and legal expenses. This quarter, we recorded a provision of $60 million for the antitrust litigation contingency.

It is important to note that this $60 million contingency is provisional and subject to change as the cases evolve. The net of tax impact on earnings of the provision is $11.4 million. Our GAAP net loss for this quarter was $15.6 million, which also includes a $1.8 million loss from the discontinued operation of VirBELA segment. Excluding the antitrust contingency provision and the discontinued operation, our adjusted loss was $2.4 million with an adjusted loss per diluted share of $0.02. In terms of liquidity, our adjusted operating cash flow was $29.4 million. We have continued our commitment to shareholder return by repurchasing $33 million of share during the quarter. The number of the shares we repurchased completely offset the share issue via our Agent Equity Program and the Agent Grow Incentive Program in the first quarter.

In the next slide, I will provide more detail about the driver behind our revenue increase. This chart shows the driver behind the increase of the revenue from the first quarter of 2023 to the first quarter of 2024. In the Q1 2023, our revenue stood at $849 million, as shown by the bar on the left. For the same period in 2024, revenue increased to $943 million, as indicated by the bar on the right, making a year-over-year increase of $95 million or 11%. This increase was primarily fueled by significant gains in our North America Realty segment, which includes U.S. and Canada, contributing an additional $90 million revenue growth. The International Realty segment also saw a rise, contributing $5 million revenue increase. Let’s dive deeper into the North American Realty segment.

A 2% decline in our agent base impacted our revenue negatively by approximately $8 million. U.S. home sales in the first quarter of 2024 declined 2.7% year-over-year, which pressured our agent production. We estimated the decrease of overall real estate market reduced our revenue by $11 million. However, the market declines were more than offset by gains from several areas in our business. Relative to the performance of the real estate market, an increase of agent productivity over prior year added $48 million revenue. Higher home sales prices contributed incremental revenue of $46 million. Additionally, our strategic focus on expanding our lease, rental and other ancillary services brought an extra $50 million top line growth. On the next slide, I will discuss financials for each segment in more detail.

This quarter, we streamlined our reporting by reducing the number of segments from four to three. This change follows the discontinuation of the VirBELA operation as we shift our focus entirely to web-based metaverse, Frame, which is now included in the Other Affiliated Services. North America Realty segment. This segment continued to be primary driver of both revenue and profit for this — for the company. We reported an 11% increase in revenue, as I discussed previously. However, our EBITDA saw a 16% decline at $80 million. This was largely due to our investment in personnel to support future growth and improve NPS and increase in legal and severance expenses, which were partially offset by higher revenue, net of agent commission and other agent-related costs.

International Realty revenue was $60 million, an increase of 45%. Adjusted EBITDA loss was $3.4 million, which is a 9% improvement from prior year. Other Affiliated Services, including Frame and SUCCESS, contributed modest revenue and adjusted EBITDA loss. So this slide summarizes our Q1 highlights, which I have discussed in the previous slides. I’m happy to report that we are off a great start to 2024. And we are well positioned to capitalize on upcoming market growth opportunity. With that overview, I’d like to turn the presentation back to Denise, who will facilitate the Q&A section. Thank you.

A – Denise Garcia: Great. Thanks, Kent. I’ll kick off for a question for everyone on the team before we open the call up to our covering analysts. First, Glenn, this ones for you. You announced some enhancements to eXp rev share model earlier today. And I think you took us through some of the highlights. I suppose the next question is what made you decide to make these updates now?

Glenn Sanford: Yeah. So there was a few things that went into this. In 2019, we announced our sustainable revenue share platform, which basically was our commitment to paying out 50% of company dollar. But it was based on the model that we originally rolled out in 2009, where if you actually calculate the numbers, we expected, we’ll call it, more breakage in the system. But we ended up overheating the rev share system to the point where we would fundamentally not be a sustainable company. So we introduced in 2019, where we are committed to paying out 50% of company dollar. But embedded in that is that we use 50% of the company dollar to pay the bills and run the company and all of that. The second part of it was because of the way it was calculated, it was a little bit unclear for a lot of our agents actually how the numbers rolled out because it was using what we referred to as a buffering system.

So we got a lot of feedback that our agents wanted something that was easier to calculate. But then the other piece was we definitely got feedback around agents who, we’ll say, are mid-level attractors, who had built reasonably large organizations in eXp and really were — are key to the growth of the company. But they weren’t opening up more of the levels, and yet they were instrumental in the growth of the company. So what we have seen, some of the attrition that we were seeing when agents were leaving to some of our competitors was really that group of agents who were kind of in the middle. They weren’t super big agent attractors, meaning they weren’t going in 30, 40, 50 people personally. But their organizations, they were really involved in supporting the [indiscernible].

Basically, the program, as its laid out, is that starting in the U.S. and Canada in May 9, levels 1 through 3 are opened up for all agents in the company. And then levels 4, 5 and 6 are opened up with 5, 10 and 15 agents that they’ve personally brought in. We still left level 7 at the same, which was 30 or more. And so that’s really for those people who are, I’ll call it, the broker-owner persona, the sales manager persona. That’s what they do is they do a lot of recruiting. And that’s how they’re wired. But for the masses of agents, we wanted to make it more accessible to agents. And just as I mentioned, the anecdotal evidence of just the feedback today has been really, really positive. So many people saying, this is exactly what we needed to get excited about sort of the next evolution of eXp. And so I’m pretty excited where we’re going to go with this.

And we’ll be rolling this out across the globe. But we launched it in the U.S. and Canada to start.

Denise Garcia: Great. Makes sense. The next question is for Leo. I have a couple of questions for you about agent growth trends. First, just a near-term question about the first quarter if it was continued to be impacted by the cleanup of nonproductive agents that you undertook last quarter. And more longer term, what are you focused on in terms of agent growth?

Leo Pareja: Thanks, Denise. Yeah, there are two drivers impacting agent count. First, some agents have left the industry due to tougher selling environment that we’ve been experiencing over the last 18 months. And second, the cost of nonproductive agents, such as technology support and other things. So we purposely offboarded a large number in the fourth quarter. And yes, it did extend into the first quarter. We’re really focused on building our agent base with the highest quality of agents in the industry. We have been very encouraged by the number of teams that have joined eXp in 2023 and again in Q1 of 2024, along with the increase in our agent productivity. We invest quite a bit in tech to support our agents, which is offset a bit by the agent fees.

For example, subscription to kvCORE, which would cost an individual agent hundreds of dollars per month to pay directly, is included in our $85 a month agent fee. We believe the fee deflects nonproductive agents, who can be counted at brokerages that don’t charge fees. Clearly, our agent value proposition is resonating with productive agents and teams of agents joining us. And we believe our focus on these agents will put us in an optimal position to capture growth as the market turns.

Denise Garcia: Got it. And now the last one for Kent, can you discuss the components of the $20 million profit improvement plan?

Kent Cheng: Yeah, happy to do that. We know there are a few adjustments we initiated in the first quarter with regard to the risk management fee, Agent Equity Program discount and other profit enhancement opportunities. Those initiatives have helped us on profit-generating side. We estimate they will contribute about $30.3 million on an annualized basis. On the cost savings side, we took action in the first quarter to reduce personnel costs, primarily through the headcount reduction, by estimate, about $10.9 million in the realty business and $3 million in the VirBELA business on an annualized basis. The combined of these two actions approximately will generate about $13.9 million annualized cost savings. So overall, you add them together, we get about $27 million overall profit improvement.

Denise Garcia: Got it. Okay. Now I’ll open up the call to our analysts to ask questions. I’ll start with Jonathan Bass, who’s sitting in for John Campbell from Stephens. You can open up your mic and ask the question, Jonathan.

Jonathan Bass: Hey, guys. Thanks for taking my questions. I wanted to start off on agent count growth. It sounds like the offboarding of nonproducing agents continued into 1Q. Is that expected to flow into 2Q and potentially beyond? And then looking forward on agent count growth, maybe like breaking it down between North America as well as international growth, could you talk about what you’re expecting for the remainder of the year?

Glenn Sanford: Leo, do you want to take that or…

Leo Pareja: I was going to ask you the same thing.