Opendoor Technologies Inc. (NASDAQ:OPEN) Q1 2024 Earnings Call Transcript

Opendoor Technologies Inc. (NASDAQ:OPEN) Q1 2024 Earnings Call Transcript May 2, 2024

Opendoor Technologies Inc. beats earnings expectations. Reported EPS is $-0.15972, expectations were $-0.17. OPEN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. And thank you for standing by. Welcome to Opendoor Technologies’ First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the call over to your speaker today, Kimberly Niehaus, 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.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 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 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 Factor section of Opendoor’s 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-GAP 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 reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metrics, please see our website at investor.opendoor.com. I will now turn the call over to Carrie Wheeler, Chief Executive Officer of Opendoor.

Carrie Wheeler: Good afternoon. Also on the call with me today is Christy Schwartz, Interim Chief Financial Officer, and Dod 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 a 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 wrap 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 volumes year-over-year. Contribution margin was 4.8% and excluding approximately 50 homes from the book, our contribution margin was over 5%. Notably this marks the seventh consecutive quarter that our new book of homes has generated contribution margin within 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 Realty partnership went live enabling eXp Realty’s agents to easily request an Opendoor cash offer for their clients and qualifying properties.

This partnership should continue to build on our brand awareness among some 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 in 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 buyer’s 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 will generate in the same margin. We also believe this settlement could result in more transactions as commissions decrease which may encourage more consumers to transact directly including through the Opendoor’s platform instead of listing on the MLS. We believe that Opendoor stands to benefit consumers rethink how they buy and sell homes. We’ve spent the last decade building for this future. We’re offering a strong start in 2024 as we 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 their 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. Christy 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 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 2023. 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, and $181 million of equity invested in homes and related assets, net of inventory valuation adjustments.

We also had $8 billion in non-recourse 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 plan to be prudent and patient in 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 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Dae Lee with JPMorgan.

Dae Lee: Great, thanks for taking the question. I have two. So the first one, appreciate the color around home acquisition through the year, but clearance how like macro conditions kind of change help your expectations for the current clearance rate going forward, and I guess plus mortgage rates it should picked up again this week for recognize and could that impact your outlook going forward?

Dod Fraser: Sure, Dae, happy to start, it’s Dod. I think in the sort of if you sort of zoom out from macro perspective and reiterating what we said on in the letter, what we are most focused on and have been for the last 18 months 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 and markings. And so we’ve continued to see a balance of supply and demand. We do think even with some rate release 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 impact spreads.

And so that is really the primary driver of spread changes right now, which is for this time of year, we typically do increase spreads, but happy to have Carrie add 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, call it over 70% year-on-year, sorry, we doubled Q1 year-on-year, up 70% in the guide year-on-year. So the macro has not been a tailwind for us so many days, it’s been a headwind, but in terms of focusing on the control, we’re really pleased with the fact that, in a quarter where new listings for the market in our buy box was up only 6%, we showed 98% acquisition growth, and feel good about where we ended the quarter, and 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, sounds like your first quarter adjusted OpEx didn’t increase as much as expected, sequentially mostly due to more moderate hiring, so does that mean, like it’s 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 with less?

Christy Schwartz : Thanks for the question, Dae, this is Christy here. So, as a reminder, our adjusted OpEx is composed of three main pieces, our fixed costs, our marketing, our variable SG&A. Our fixed costs, we are continuing to make meaningful reductions and take costs out of our system and continuing to refine. And some of that is what you’re seeing in the outperformance. Our marketing, 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 our variable SG&A is the part that will vary with volumes. And so 107 is where it was in Q1, and we’ve guided to 110 for Q2.

Operator: Our next question comes from the line of Ygal Arounian with Citi.

Yigal Aronian: Hey, good afternoon, guys. First, let me start on following up on the first question on acquisition strategy and rates. And it sounds like no change really to your strategy here, but just thinking with the recent rate spike aligning with kind of what’s the heart of the buying and selling season, if that’s impacting how you’re thinking about things at all. And then is that 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: Hey, Yigal, it’s Carrie. Can you just say a little bit more on your first question? I wasn’t quite following that. Is it brand seasonality question or?

Yigal Aronian: Well, yes, it’s a little bit more on the recent rate spike or whatever we’ve seen over the past couple weeks has been a pretty meaningful increase in the mortgage rates. And that’s coinciding with the heart of the buying and selling season and any expectations that might soften the market and 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 be curious if you’re taking any of that into consideration.

Carrie Wheeler: Yes, I mean certainly we’re taking in all those signals all the time and we’re watching very closely kind of what the market is telling us in terms of clearance rates and 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 will be sold, post the spring selling season. So we’d expect those homes to have less of a gain to them and reflect that in slightly higher spreads. So those are adjustments where you make, every day, every week with the team. And we certainly are reflecting what really coming down the pipe given recent rate increases. Dod, you want to add on that?

Dod Fraser: Yes, I think the only thing to add on is if you look at some of the charts in the back of the shareholder, you can see what we’re observing from a new let in perspective. And although there’s a slight lag there, we really haven’t seen a sort of meaningful change on the back of the recent rate changes in terms of let in volumes, which is really a sort of key driver and input to our acquisition targets.

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