Redfin Corporation (NASDAQ:RDFN) Q1 2024 Earnings Call Transcript

Redfin Corporation (NASDAQ:RDFN) Q1 2024 Earnings Call Transcript May 7, 2024

Redfin Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Redfin Corporation First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And, as a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Meg Nunnally, Head of Investor Relations. Thank you, Meg. You may begin.

Meg Nunnally: Good afternoon, and welcome to Redfin’s financial results conference call for the first quarter ended March 31, 2024. I’m Meg Nunnally, Redfin’s Head of Investor Relations. Joining me on the call today is Glenn Kelman, our CEO; and Chris Nielsen, our CFO. Before we start, note that some of our statements on today’s call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but our actual results may turn out to be materially different. Please read and consider the risk factors in our SEC filings together with the content of today’s call. Any forward-looking statements are based on our assumptions today, and we don’t undertake to update these statements in light of new information or future events.

On this call, we will present non-GAAP measures when discussing our financial results. We encourage you to review today’s earnings release, which is available on our website at investors.redfin.com for more information regarding our non-GAAP measures, including the most directly comparable GAAP financial measures and related reconciliations. All comparisons made in the course of this call are against continuing operations for the same period in the prior year, unless otherwise stated. Lastly, we will be providing a copy of our prepared remarks on our website by the conclusion of today’s call, and a full transcript and audio replay will also be available soon after the call. With that, I’ll turn the call over to, Glenn.

Glenn Kelman: Thanks, Meg, and hi, everyone. Redfin’s first quarter earnings exceeded the guidance we gave investors on our last call. An adjusted EBITDA loss of $28 million compared to guidance of $29 million to $36 million. On revenues of $225 million compared to guidance of $214 million to 223 million. Each of our four business segments was at or above the top of our revenue guidance compared to the first quarter of 2023, gross profits grew 22%. The share of home sales brokered by our own agents and through referrals to our partner agents increased from 0.72% in the fourth quarter of 2023 to 0.77% in the first quarter of 2024. We expect a year-over-year share gain in the second quarter of 2024. These results put Redfin in a good position to earn a full-year adjusted EBITDA profit despite the recent increase in mortgage rates.

Since 2015, our largest quarterly loss has always been in the first quarter, when we invest in serving customers who close in the summer. Compared to a first quarter adjusted EBITDA loss of $67 million in 2023, we’re nearly $40 million ahead of where we were a year ago. Beyond turning an adjusted EBITDA profit this year, our goal isn’t just to reduce costs or to breakeven, but to offer shareholders the largest growth opportunity in real estate. We’ll do that by pairing a thriving online marketplace with a disruptive broker and best-in-class lender. After a year of unprecedented investment from a new rival, we’re competing effectively for traffic and adding customers to our rentals marketplace, which is now a source of profit. Our brokerage restructuring has generated immediate share gains.

Our lending attach rate hit an all-time high. Best of all, our mission to redefine real estate in consumers’ favor has prepared us thrives on industry change. According to Comscore first quarter visitors to redfin.com grew 2% year-over-year, the same rate as realtor.com and slightly faster than zillow.com. Keeping pace with other major real estate sites is remarkable given that Redfin ran television ads in the first quarter of 2023, but not in the first quarter of 2024. As Redfin has added listings over the years by expanding our brokerage and supporting rentals, we expect more online visitors from search engines, projects to publish more commentary from our agents about listings and neighborhoods should also increase traffic. But to engage that audience, we’re increasingly turning to artificial intelligence.

Artificial intelligence has long been effective at bringing visitors back to redfin.com, listing recommendations for homebuyers and home value updates for homeowners. In the fourth quarter of 2023, we first began using generative artificial intelligence to imagine how the rooms in a home for sale could be redecorated. This capability is available in five markets. More recently on March 7, we piloted Ask Redfin, an online chat tool for our iPhone application. Ask Redfin uses large language models for instant answers to visitors’ questions about a listing. Since more online visitors have as a result scheduled meetings with our agents, our iPhone application began offering chat nationwide on April 24. We plan to offer Ask Redfin on our website and our Android application later this year.

As acquisitive as Redfin has been about our online audience, we’re moving even faster to improve sales execution. In our last call, we outlined three sales initiatives; Redfin Next, which replaces agent salaries with higher bonuses, All You Can Meet, which assigns a homebuyer to an agent only if the agent can host the first tour and Sign & Save, which refunds commissions for customers who sign an exclusive buyer’s agency agreement. Of these initiatives, the most transformational is Redfin Next. In the first quarter, the four California markets piloting Redfin Next grew market share, luxury sales and loyalty sales significantly faster than the rest of Redfin. The aggregate gross margins across the four markets were better in the first quarter of 2024 than in the first quarter of 2023.

We’ve been concerned that agents who lost their salaries would quit, hurting our culture and our market share, but attrition so far in next markets has been only slightly higher than our national rate. We expanded Redfin Next to seven additional markets on May 5, with a much larger third wave of markets planned for the summer. We’re also broadening other sales initiatives. All You Can Meet, which expanded nationwide except to a handful of small markets on April 1, has lifted the percentage of homebuyers who meet their Redfin agent on a first tour above 90% in April. The historical range for this metric, which accounts only for customers new to Redfin has mostly been between 60% and 65%. The balance of customers meet contractors whom Redfin pays to provide short notice property access.

Redfin still uses these contractors frequently for subsequent tours, but we need our best sales people to treat the first tour like a listing consultation, in which we tell customers about our credentials, then ask for a sale. That’s where the third initiative comes in, Sign & Save. Homebuyers who sign a buyer’s agency agreement before their second Redfin home tour have gotten a commission refund between 0.25% and 0.5% of the home’s value. This commission refund has been easily offset by more sales, comparing close rate gains in pilot markets and control markets indicates that customers in Sign & Save markets are about 20% more likely to close with Redfin on a sale. Such an increase if it does in fact pull-through across the whole year would be Redfin’s first full-year buyer close rate gain in a decade.

We began piloting Sign & Save in September 2023. Since March 7, it has been available in all but a handful of markets where commission refunds are still somehow illegal. The discipline of presenting a buyer’s agency agreement to our customers will serve us well later this year, when rule changes proposed by the National Association of Realtors are scheduled to take effect. The first major rule change requires agents to document our fees before every first tour, though as of last week, it became unclear if the fee at issue is just for the tour or for the entire purchase of a home. In June, Redfin will start adding these disclosures to our online forms for requesting a first tour, likely testing one version that sets the tours free with another explaining the fee for the ultimate purchase of that home.

We’ll leave it to our agents to present a full buyer’s agency agreement after that tour. We’ll have the whole summer to learn how best to explain our fees without confusing prospective customers. The second much larger change will prevent a listing from promising a fee to the buyer’s agent by the Multiple Listing Services or MLSs used by agents to share listings though brokers may still share fees via other channels. If the homebuyer has to include the fee for a buyer’s agent in an offer, that could over time reduce how much that agent earns because a lower buyer’s agent fee will make an offer more competitive. Beyond the rule changes themselves, the press coverage of these changes seems likely to raise consumer awareness of brokerage fees.

That in turn could benefit Redfin. For nearly our entire history, our low fees have been poorly understood by homebuyers who believe their own agent is free. If later this year or next buyers’ agents are going to compete on price, we hope the world will beat a path to Redfin’s door. We believe we can serve those customers profitably. Redfin’s original service prepared offers, negotiated inspections and handled closings using software and agents-based in a sales center at less than half the fee in dollars that we charge today. Later, we built a network of contractors for on demand property access. These competitive assets are still in place and let Redfin thrive at a price other brokers may struggle to match. If the fees do start to fall, many listing agents may seek to represent the buyer of that listing as well as the seller, lowering the total fee for selling a home while still protecting that agents’ income.

This is where Redfin’s online audience, the largest by far of any broker gives us a competitive advantage in recruiting both listing customers and listing agents because we can connect potential buyers of the listing directly to the listing agent. Since October 2023, we’ve also been preparing software to let agents at other brokerages get the same routing for their own listings on redfin.com, a four-fee service we expect to launch this summer. Redfin’s preparation for the possibility of lower fees goes beyond our efforts to make our brokerage more efficient. Our fundamental belief is that a brokerage as a standalone entity will be replaced over time by businesses that combine online search with agents, lenders and title services. The cost of meeting a home buyer and earning her trust is too high to be paid for by the fees from a single sale.

Lenders and title companies waste too much money courting the agents who build that initial relationship with the buyer. This is why Redfin bought Bay Equity in 2022 and why we’ve worked so hard to increase the rate at which our home buying customers use Bay Equity for a mortgage. Those efforts are now paying off. Of the Redfin homebuyers who got a mortgage in the first quarter, 28% used Redfin for the loan, up from 25% in the fourth quarter and 22% in the third quarter. In March, this number hit 30%, which is a major reason why Bay earned adjusted EBITDA in the first quarter of 2024. Some of the attach rate gains are the result of integrating Redfin and Bay Equity customer communication systems. But the gain is mostly due to our having bought the right lender with fantastic customer service and a never-say-die management team that is two years into the acquisition entirely intact and completely all in.

As competitive pressures ease even slightly and our gains on sale increase, Bay Equity can become a major source of rents and profits, especially when rates fall far enough to create refinancing opportunities for the millions of homebuyers in our database. For many of the same reasons, we also feel enthusiastic about our title business, which is included in our other segment. The other segment also comprises digital businesses like the mortgage marketplace, display ads on redfin.com, lead generation for builders and the syndication of Walk Score data to other real estate sites. Since the downturn began, Redfin is focused on generating high margin revenues from digital channels. As a result of this focus, adjusted EBITDA from the other segment improved from about $400,000 in the first quarter of 2023 to $3.3 million in the first quarter of 2024.

Almost all of our executive hiring has been to bring in digital monetization talent within real estate services and industry veteran to run our partner business, in our other segment, a leader of our display ads business, in our rental segment, a new sales driven president of rent, the marketplace we acquired out of bankruptcy in 2021. As these bets pay off, Redfin shareholders should reap the full value of an online real estate audience of approximately 50 million monthly visitors. The most important of these digital bets is on rentals, which earned its third straight quarter of adjusted EBITDA of about $500,000 on 16% year-over-year revenue growth. In the first quarter of 2023, this segment’s first quarter adjusted EBITDA was a $9.7 million loss.

First quarter net bookings were $5.2 million compared to $11.3 million a year ago, but the quality of revenue has been higher 2024. More of our sales were high margin marketplace sales. We also sell digital marketing solutions in which we use software and staff to run a customers’ Google, Facebook and TikTok campaigns, but marketplace growth is more lucrative and more important to our competitive position. Even better, more of our marketplace sales were year-long rather than month-to-month contracts, which should lead to steadier growth. Despite higher industry marketing expenses in the second quarter, we expect full-year profits from rent, driven not only by revenue gains, but also cost savings. Integrating rent with Redfin has let us operate both businesses more efficiently with one group not two, running an apartment like HR, finance, legal or technology infrastructure.

Already expenses in the first quarter of 2024 were $51 million compared to $57 million in the first quarter of 2023. These efficiency gains should continue through the first quarter of 2025 giving us more money for growth or profits. The benefit from integrating the two companies isn’t just cost savings, so you can also draw on one another’s expertise at attracting and engaging online visitors to our sites. Rent’s largest sites which include rent.com and apartmentguide.com ranked higher in Google searches in March than in February, their first combined month-over-month gain in years. Rents slid back in April, but we expect more gains than losses in the months ahead just because search engine optimization and visitor engagement are such longstanding areas of Redfin expertise.

As our rentals marketplace adds more listing customers and draws more online visitors, rent can drive much bigger long-term revenue gains, changing the shape of Redfin’s overall business to be more profitable and less cyclical. Before turning the call over to Chris, let’s discuss the housing market, which suffered another setback when mortgage rates rose from 6.85% on March 8, to 7.50% on April 16. Since then, growth in new listings have slowed, a factor which perhaps more than any other may limit sales this summer. Over the last two weeks, our agents have reported less foot traffic in open houses and fewer offers even for desirable listings. The number of redfin.com visitors asking to tour homes has from the start of 2024 been below 2023 levels, but this comparison hasn’t been entirely fair.

Low rates in the first four months of last year encouraged many people to tour homes who didn’t close. Our hope has been that sales have held up better than demand so far in 2024 because some of the same buyers who deferred moving in 2023 will be more determined in 2024. Redfin has also been better prepared for a rate increase this year. After rate increase broke our hearts in 2023, Redfin limited hiring and spending through the first quarter of 2024 to see how many sales actually closed later this year. The song I’ve been singing to Chris since January is, “Won’t Get Fooled Again”. More of our agents are exclusively paid on sales and since more of our sales are coming from returning customers, we’re less dependent on first time homebuyers.

Our initiatives to meet our customers face-to-face have made it easier to guide them through this volatile market. We’re earning more money from digital channels and we’re spending less. Our bet isn’t that the market will get better. The reason Redfin will win this year is because we’ve gotten better. We still have a long way to go, but the direction we’re going is, we think, mostly up. Take it away, Chris.

Chris Nielsen: Thanks, Glenn. First quarter revenue was $225 million up 5% from a year ago. This marks our first organic revenue growth since interest rates started to rise. At the same time, gross profit of $71 million was up 22% year-over-year and total gross margin expanded from 27% to 31%. Total operating expenses were $140 million down $18 million year-over-year for our continuing operations. The decrease was primarily attributable to $13 million in lower marketing expenses, $6 million from foregoing our annual companywide event and $5 million of lower personnel costs. This is partially offset by a $9 million increase in legal contingencies primarily connected to the proposed settlement that we announced yesterday with an 8-K filing.

The $9.25 million settlement amount was recorded in our first quarter results and is excluded from our adjusted EBITDA calculation. Our adjusted EBITDA loss of $28 million was up from a loss of $64 million in the prior year. Seasonal losses in the first quarter are to be expected, but we’re making steady progress toward positive adjusted EBITDA. Our trailing 12-month adjusted EBITDA loss now stands at $40 million today compared to a loss of $145 million 1 year ago. We expect to continue narrowing that gap in the second quarter and third quarter and post positive adjusted EBITDA on a consolidated basis for the full-year. Net loss was $67 million compared to a net loss from continuing operations of $57 million in the prior year or $61 million including discontinued operations.

This was in-line with our $72 million to $65 million loss guidance range. Neither the $9 million in legal contingencies nor the $6 million gain on extinguishment of notes was contemplated at the time of guidance. In the prior year, we had a $42 million gain from the extinguishment of notes. Our adjusted EBITDA from continuing operations was $28 million which is slightly better than the top-end of our guidance range. Diluted loss per share from continuing operations attributable to common stock was $0.57 compared with $0.52 one year ago. Now, turning to our segment results. Real estate services generated $131 million in revenue, up 3% year-over-year. Brokerage revenue or revenue from home sales closed by our own agents was up 5% on a 3% decrease in brokerage transactions offset by an 8% increase in brokerage revenue per transaction.

Revenue from our partners decreased 23% on a 16% decrease in transactions and mix shift to lower value houses. Real estate services gross margin was 15.4%, up 300 basis points year-over-year. This is primarily driven by a 280 basis point decrease in tour and field costs, a 220 basis point decrease related to not holding a company-wide event in 2024 and an 80 basis point decrease in personnel costs and transaction bonuses. These were offset by 220 basis point increase in seller home improvement expenses. Total net loss for real estate services was $39 million up from a net loss of $58 million in the prior year and our adjusted EBITDA loss of $25,000,000 was up from $44 million in the prior year. The increase was attributable to higher gross margin and lower operating expenses as well as revenue growth.

Our rental segment posted its sixth straight quarter of growth with revenue of $50 million and growth of 16%. Total net loss for rentals was $13 million up from a net loss of $23 million in the prior year. Adjusted EBITDA for the quarter was about $460,000 marking the rentals segment third straight quarter of positive adjusted EBITDA. Our mortgage segment generated $34 million in revenue, down 7% year-over-year. This result was above our guidance range of strong progress on attach rate drove incremental volume. Mortgage gross margin was 23.4%, up from 19.9% a year ago. Net loss for mortgage was nil compared to a loss of $1 million in the prior year. Adjusted EBITDA was positive $1 million which was roughly flat compared to the prior year. Our other segment generated revenue of $11 million compared to $7 million in the prior year as both our title and digital revenue businesses grew.

Other segment gross margin was 41.7%, up from 26.3% a year ago. Total net income was $3 million compared to a small net loss in the prior year and adjusted EBITDA was positive $3 million compared to roughly flat in the prior year. Now, turning to our consolidated financial expectations for the second quarter. For the second quarter of 2024, total revenue is expected to be between $285 million and $298 million representing a year-over-year growth between 4% and 8% compared to the second quarter of 2023. Included within total revenue are real estate services revenue between $180 million and $188 million. Rentals revenue between $50 million and $51 million. Mortgage revenue between $39 million and $42 million and other revenue approximately $16 million.

Total net loss is expected to be between $34 million and $28 million compared to a net loss of $27 million in the second quarter of 2023. Adjusted EBITDA is expected to be between negative $4 million on the low-end and positive $2 million on the high-end, which at the midpoint would narrow our trailing 12-month adjusted EBITDA last to $34 million. This guidance includes approximately $41 million in total marketing expenses. We’re currently planning to spend approximately $115 million in marketing for the full-year, which is down 2% compared to 2023 and reflects our decision to pull-back on mass media advertising in light of the rising rate environment. One final note, we’ve signed a Letter of Intent to sell nearly all of our mortgage servicing rights.

The mortgage servicing rights were valued at approximately $32 million on our balance sheet as of March 31, 2024. We’ve not included any potential gain or loss from the sale within our guidance and expect to complete the transaction during the second quarter. Now, let’s open the lines for your questions.

See also 15 States with the Lowest Homeless Populations Per Capita in the US and 25 Best Kept Secret Places to Visit in Florida.

Q&A Session

Operator: Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] And the first question comes from the line of Naved Khan with B Riley Securities. Please proceed with your question.

Naved Khan: Yes. Hi. Thanks a lot. A couple of questions from me. Glenn, maybe just talk about you gave us some color on the housing market and how the interest rate has kind of impacted it recently. But just give us a sense of what you think how the year would look like, especially as we enter this peak period for the second quarter and the third quarter? So, that’s one. And the other question I had is around mortgage attach rates. It’s great to see attach rate increase to around 30%. Can you maybe talk about what you’re seeing, and maybe your best markets in terms of attach? And, where do you think this attach rate can realistically end up in the medium term?

Chris Nielsen: Glenn, I think you may be on mute, Glenn.

Glenn Kelman: Hey, that’s a dingbat. Hi Naved, I started answering the question while I was on mute. But, this is only to say that we prepared some color in the remarks, and everything I could add would be consistent to that, which is that rates have come up. We are hopeful that since this happened last year and so many people put off their home buying plans, but this year they are slightly more likely to go through with it, but there’s no question that rates are going to take their toll on the market. What’s been interesting to me especially just hearing the anecdotes from this weekend is, how mixed the response has been where we are getting signals that buyers are still going to go through with it, that sellers are coming onto the market and sales are going to keep happening elsewhere.

There are price drops often even with [Animark] (ph) that we’re seeing listings sit on the market. So, I think the consumer is very confused right now. I think they are very sensitive to macroeconomic news and obviously interest rates. It’s just a jittery time in the overall economy and in the housing market and that has made the signals that we’re getting just very mixed and very confusing. Top of the funnel has been light almost all through the year, but what’s been surprising is how many of those customers that do come to us end up buying or selling a home. I think the most worrisome trend is that we saw this acceleration in the number of listings coming onto the market at the beginning of the year and that is really starting to slow.

Interest rates eased just over the past few days, so maybe that trend will reverse again, but mostly this market has been inventory constrained. So, when we see more listings come onto the market, we see more sales. No matter how much interest rates have risen and that’s affected buyers, it affects sellers more because they just decide they can’t move up, they can’t afford their own house when the mortgage goes from a 3% rate to a 7% rate if they had to buy it again. So that’s the first part on a mortgage attached. Our best markets are closer to high-30s, low-40s. It really is a function of price and service and the relationship between the agent and the lender. And, just over the past two or three years, we’ve been working much better together.

I wish there was a silver bullet that we could point to, but most of it is actually just perseverance, building these alliances one-by-one. But, it has certainly helped that we are doing two things. Number 1, we mentioned that we integrated our systems with Bay Equity systems, so that when somebody completes a tour, we tell them why don’t you talk to your Bay Equity loan officer? When somebody writes an offer, we alert the Bay Equity loan officer that someone is making a bid. And, so that kind of systematic integration has helped augment the relationships that the agent has with the lender. And then the second point is that, we have introduced in some markets and incentive for real estate agents to recommend Bay Equity and the results of that have actually been mixed.

The systems integration, the relationship building has work better, than the money, couldn’t believe it.

Naved Khan: Thanks, Glenn. Appreciate the color.

Glenn Kelman: Thanks.

Operator: And, the next question comes from the line of John Campbell with Stephens Inc. Please proceed with your question.

John Campbell: Hey, guys. Good afternoon. Congrats on a solid quarter. Glenn, I just wanted to maybe go back to the buyer agency agreement. I actually asked about this last earnings call, but was asking whether you thought it would be a standard. It seems like that we’re kind of heading down that path now. Wanted to get your take on that and you guys I think one of the challenges you face is you’ve had some low intent or maybe no intent consumers that have kind of used as a hobby. So, I think that we’re thinking that maybe buyer agency agreements will help kind of knock out some of that out of the mix, right, where you get higher intent consumers. So, I want to ask about that, if you think that that’s going to play out.

And, then on the Sign & Save, it sounds like you’re going to keep that in place where you’ll continue to get the rebate even with the mandated buyer’s agency agreement. So, I was going to see if that’s, if you have the potential to take away that rebate again?

Glenn Kelman: Well, I’ll answer the second question first. We don’t anticipate eliminating the refund but we do feel that Sign & Save has been a seismic change in our business. We’ve been trying to get close rate up for nearly a decade and have it go up 20% is massive for us. The biggest problem Redfin has had over the years is that the website keeps generating more opportunities for our agents, but close rate keeps going down. And, I think that’s really a function, not just of what Redfin is doing, but what other portals are doing. It’s really created real estate as a hobby for people to go tour homes, so they feel no emotional obligation to the agent. And so, that secular change in consumer behavior was just blowing a hole in our P&L.

And instead of having it go down 5%, 10% a year to have it go up 20% a year, it just really changes the economics of our business, but it also changes the morale within the sales force that we’re making more out of less. And, it’s certainly why we are fairly confident that we’re going to do well this year despite a worsening housing market. So, we built this sales muscle to get buyers agency agreements signed. Not all of our customers want to sign them. About half of our sales comes from customers who say, you know what, I’m not going to sign it, but I just want to keep touring with you. And, then the other half comes from those who do sign it. So, we need sales from both groups and that’s a good reason to keep the incentive. The fact that we rolled this out broadly only in the last couple of months means that I think the best results are yet to come.

Okay.

John Campbell: Okay. That’s a great answer. And then, just kind of staying at the high-level, I mean, some of your from the portal landscape, some of your competitors have obviously laid kind of laid the seeds for listing of the sell side agent ad products. They seem to be off to a pretty good start. I know you guys probably don’t want to cannibalize obviously your core business like in your top markets, but for the markets where you’re subscale, have you guys considered launching a similar kind of listing advertising product that you could run alongside?

Glenn Kelman: Yes. Well, if you go back to the prepared remarks, there’s some detail there about how we’re launching a similar product. So, we’re doing that both for our own agents and for agents at traditional brokerages that can claim a listing and then the buyers who are interested in touring that listing or bidding on that listing instead of being routed to a Redfin agent on the buy side would instead be routed to the listing agent. So, that could be a Redfin listing agent if it’s our listing or it could be a traditional agents listing, but they would have to pay to claim that listing. So, obviously we want to be economically rational about this. We understand how much money we make off each listing when we connect those buyers to our own buyers’ agents and the listing agents would instead have to pay us a higher fee than what we could make that way.

But we see it as consistent with our mission, John, because we could be facilitating a direct sale that lets consumers save money and we think it’s part of this larger strategy that we’ve discussed for the last 18 months to have a digital shift, where we’re making more of our revenue digitally. We’ve been working on that since about October of 2023. We do not think that a company that has bet entirely on that model is the right choice. We don’t think betting entirely on buyer’s agent is the right choice. What you really want to support is the consumer being able to decide do I want to buy directly from the listing agent or do I want my own representation. You want to be able to monetize both audiences. So, we think this is a good balance and we hope to launch it in the summer.

John Campbell: Makes a lot of sense. Thanks, Glenn.

Glenn Kelman: Thank you.

Operator: And, the next question comes from the line of Jason Helfstein with Oppenheimer. Please proceed with your question.

Jason Helfstein: Thanks. So, it sounds like you’re having good success with the newer commission structure. Assuming that you end up moving to this, let’s say, for the bulk of transactions, how do you think that kind of changes the financial model and just like, are other kind of like fixed costs or just other changes you’d make once you get to what you’d consider kind of full-scale with that type of model? Thank you.

Glenn Kelman: Well, I’ll start, but Chris, you may want to comment here. The goal has been to run a similar gross margin business, but one that has more scale. Jason, you were the one who pointed out that we lose on the upside, we lose on the downside. When the market really takes off, we don’t have enough capacity. When it goes down very quickly, we’re paying agents salaries and it’s blowing a hole in our P&L and we think we’ve addressed that. But the real benefit is that our incentives are aligned with the agent. We’re taking share faster. We’re able to recruit and retain a higher quality agent. The results from the initial four California markets couldn’t be better from a revenue growth perspective, from a share perspective.

So, the goal really has been at least in this initial pilot to grab more revenue, to get more share, to improve our service, especially to the luxury segment where we’d sometimes struggle to keep and hire the best agents. And, that part has just paid off. And, what we were worried would happen is that when we did that gross margins would suffer that we’d be getting more revenue, but it would be lower quality revenue. In fact, it seems that the quality of the revenue has held up and we’re just getting higher share gains and it’s across the board. So, we’re doing better overall with loyalty sales, with luxury sales. So, could we go to an even more variable model? It’s possible. And then, that would allow us to take out other costs.

But really what we were responding to wasn’t the need so much to take out a huge amount of overhead as it was trying to grab more share. There will be fewer managers, but that trend was already happening. We’re lowering support costs, that trend was already happening. I think having an all variable workforce where they are looking at this and comparing the split at Remax or Keller or some other traditional brokerage. It just forces us to work harder and harder to lower all of our field overhead costs. So, it’s been a really good alignment of incentives and the main benefit has been gaining share at the same shape business. Chris, do you have anything to add to that?

Chris Nielsen: No, that’s a good overview. I think we’ve been, as Glenn said, really pleased with how the program has gone so far.

Jason Helfstein: Okay. Appreciate the color. Thank you.

Glenn Kelman: I think you’ll see some margin benefits beyond just the revenue growth and the share growth in volatile situations when things really take off or when things plummet, the incentives are aligned better and we just have fewer salaries to pay. But mostly we’ve been trying to give agents a good deal and still take share. All right.

Operator: And, the next question comes from the line of Bernie McTernan with Needham. Please proceed with your question.

Stefanos Crist: Hey, this is Stefanos Crist calling in for Bernie. Thanks for taking our questions. Just wanted to touch on rentals, grew 16% year-over-year. Any sense of how much that was market growth versus share gains and anything you’ve been seeing on just competitive intensity? Thanks.

Glenn Kelman: Our sense is that the big players are getting bigger and the small players are getting smaller and we want to get on the right side of that. So, there has been a flight to size. I don’t know if the overall market is getting bigger, but Zillow and CoStar have been trying to grab more customers at the expense of some of the smaller players. And so, we thought this was a respectable result. We’re glad to keep growing. It’s amazing that we went from losing $10 million in this segment a year ago in Q1 to making money for the third straight quarter now. But, the next stage in the rent acquisition is to try to grab share hand over fist and really to grow the online marketplace. I thought the most encouraging trend in the revenue report from rent is just that revenue growth came from the online marketplace.

Sometimes we are getting revenue growth from lower margin tool sales when really what’s crucial to our competitive position and to our profits is getting it in that high-margin marketplace. So, the main activity here to make us more competitive is just to go hog wild on search engine optimization, visitor engagement, conversion rate optimization. These are the strong suits of Redfin. And so integrating the two website teams so that we can work together on this, we think we can generate more demand for our property management customers and really turn that flywheel. But that’s, the big challenge is that we’ve got costs under control, we’ve stabilized the marketplace, it’s growing nicely. But, we want to do way better than growing nicely.

We think there’s an opportunity here, just given the historical ranks of rent and apartment guide to do much better than that. So, that’s what you should look for from us over the next 18 months.

Stefanos Crist: No, that’s great. Thank you. And, maybe just follow-up on some of the consumer facing AI applications, what do you see that doing in the next 12 months and adding to the business?

Glenn Kelman: Well, our hope is that Ask Redfin is going to have a meaningful effect. We talked about two new generative AI applications and the first was this redecorating capability where you can click a button and reimagine how house looks, is so cool. But, I don’t know that it’s going to have a massive commercial impact whereas Ask Redfin has really changed the volume of questions that are coming in and it’s allowed us to instantly answer them. We worked really hard on that because we were so worried about being compliant with fair housing laws. We’d actually worked with partners earlier. Last year, you may remember, and we did not feel that they were being careful about fair housing laws. So, I think we’ve been at the forefront of this, but, I kind of thought it was baloney and then I used it and it was like freaky good and weird and special and magical.