So, we just think we can be this instant response website for answering a wide range of homebuyer questions and it can increase demand. And, the reason I sound a little vague on how much it will increase demand is that right away you get a lot more people contacting you and we’re still trying to sit through how many of those are actually going to buy a house. But usually when we have a boatload of people contacting us, it has a gross margin impact because we have to answer all those questions with people. This time it’s kind of a cost free experiment where we’re getting a lot more volume at the top of the funnel without incurring additional cost in terms of labor. So, we’re pretty bullish on it. We wouldn’t have rolled it out more broadly if we weren’t.
It’s not just for the earnings release or for the press. We’re trying to sell more houses here and we think this is going to help us.
Stefanos Crist: Got it. Makes sense. Thank you.
Glenn Kelman: Thank you.
Operator: And, the next question comes from the line of Ryan McKeveny with Zelman and Associates. Please proceed with your question.
Ryan McKeveny: Hi there. Nice job on the quarter and thanks for taking the questions. To follow-up on Jason’s earlier question about Redfin Next. So Glenn, I think a comment you made a couple of quarters ago was that it should work in high priced markets, but the structure might need to have some modification to work in mid or low priced markets. So, I guess I’m curious with this next round of seven markets going to Redfin Next, which seems to probably include some mid credits like maybe a Dallas. I guess, is there any differentiation in the economic model you’re bringing to the various next markets at this point in time? And, just generally how you’re thinking about maybe this expansion of these next seven markets to do some more maybe testing and iteration in that process of potentially expanding further? Like what are those milestones you’re looking for to feel good about additional markets on the road? Thank you.
Glenn Kelman: Sure. As answering Ryan’s rental question, I started thinking more about Jason’s question. So, I’m glad you circle back to it because you’re really asking the same question. Jason, was asking if there are changes to our cost structure that Redfin Next is going to drive and you’re asking how it’s going to work at some of these lower cost markets. And, what I should have said then and I can say now is that as we’ve gone to lower cost markets, it’s put more pressure on our support costs because suddenly you’re exposing to the agent. Here’s why your split is what it is. You’re paying this much for a transaction coordinator. You’re paying this much for associate agents to help you handle the second, third or fourth tour.
And, those agents have said, well, I’m not sure I want to pay that. So, that has been really healthy for our business to align the agents’ incentives with the company’s incentives, so that we’re all trying to sell as many houses as we can and keep as much that commission as we can for either the agent or the company, and of course, giving the customer a good deal too. And so going to Chicago, in particular, has been the market where we have been really aggressive about trying to figure out how we can get more efficient so we can offer agents these fantastic splits and still have a great gross margin for Redfin, because as you know, our model does give us much better gross margins than other brokerages. We have more leverage because we source the customer.
So, I would say that we’ve been pleasantly surprised at how well the roll out has gone to mid-priced markets and even lower mid-priced markets as opposed to premium markets. There is one other difference between the high-priced markets and the mid-priced markets that you should be aware of, which is that in California we were at a deficit of agents. We had more demand than supply of agents. And in some of these mid-priced markets that hasn’t been as much the case. So, we think there will be a pretty strong reaction as we bring next to all these other markets. If it’s anything like California, it’ll be a miracle. But even if it’s half of what it was in California, it’ll be pretty good. And, so I think it might not be quite as strong as it was in California because Chicago or Dallas are already well staffed.
And what we found is that as we bring in more next agents, we just get more sales. I know that’s a pretty simple direct relationship, but we’ve been pleased to see that it’s true. So, we might just get more aggressive about hiring in those markets too above and beyond what we’d originally expected. Agents want to come work with us. Recruiting has been going reasonably well. And, I think we need the extra agents to take extra share.
Ryan McKeveny: That’s very helpful. Thank you, Glenn. And Chris, one for you, just on the balance sheet capital side of things. I think the 25 notes, obviously, you bought back a good amount over the last year or so. Any thoughts you can share as to how you’re thinking about the convert maturity? I think it’s next October. Just any general thoughts on how you’re thinking about that going forward? Thank you.
Chris Nielsen: Sure. So, we’ve been making a yield based decision here, which is when we see a good price on those notes, we’ve been wanting to buy them back. I expect we’ll continue to follow that strategy. We’ve still got Board authorization to repurchase notes. There’s about $145 million outstanding at this point. And, as we’ve talked about before, we have an additional $125 million available on our Apollo term loan, which does give us plenty of firepower to continue to be kind of thoughtful and aggressive here. So, we’ve been pleased with how this has gone so far and I think you’ll see us continue to follow a similar strategy going forward, again, based on the yield we see, and the price that those notes are offered out.
Ryan McKeveny: Thank you.
Operator: And, the next question comes from the line of Ygal Arounian with Citigroup. Please proceed with your question.
Ygal Arounian: Hey, good afternoon, guys. On the evolving buyer agent landscape that we’re going to see later in the year, I guess if we maybe simplify it and think through one of the arguments that there will be a lower pool of fees, especially on the buyer side as some people opt out or some people price shop a little bit more. Your competitive advantage has been on the lower fee side for sure. Do you think as that happens some of the competitive positioning narrows or do you think it strengthens in that kind of environment where Glenn you just pointed to some of your competitors being less profitable. Do you think that could actually put them at a disadvantage? And then, if you’re seeing the overall pool get smaller, I know you’re looking at some things that you’ve talked about some of them here on the call on the seller side to offset some of that.
Is there enough to capture all of what might get lost if maybe like a more moderate to, or medium to severe case of that?
Glenn Kelman: Sure. Well, maybe just to provide an emotional response to your question. I’ve heard other executives on earnings calls say that we don’t expect much change at all. It will happen fairly slowly. I think that is the consensus among most high-level executives of real estate brokerages and portals. But, if you talk to the agents on the ground, I think they are much more concerned about the possibility of significant change. And so, I’m not trying to say that all heck is going to break loose that the Four Horsemen and the Apocalypse are coming in August or something like that. But, I do think that there could be a medium level of change. And as someone who has been trying to get consumers a better deal only to discover that homebuyers are completely indifferent to price over the past 15 years because they’ve been trained to believe that a buyer’s agent is free.
We have to welcome the possibility that those consumers will now become more aware of the fees and will shop based on value and price. That is what Redfin has been hoping for all along that when you give people a better deal, they actually beat a path to your door. And, I know your question is about whether lower revenue per deal can be offset by share gains. I think there’s two offsets and only one of them is the share gain. The other is that you can operate more efficiently so that you can earn a similar gross profit from sale, just by working at a higher margin. So, my expectation is that if you’re working with somebody who’s a first time homebuyer, there are so many efficiencies that we used to pursue that we stopped pursuing because those homebuyers were indifferent almost to price.
When we try to tell them we’re saving the money, they’d say what are you talking about. Our buyer’s agent is free. So, I think we can run at a good gross margin and we can take a lot of share. If you asked me 10 years ago, if you could change one thing about the American consumer, what would it be? I’d say make sure they know how much a buyer’s agent really costs and make them care about it. We’ve already seen with the sales side, the reason that we clean up in every investing consultation is that seller is paying her own real estate agent and that anytime we get in front of a listing customer, we’re almost certain to get the listing and then to close the sale. The problem is that our website is filled with homebuyers. There are people looking at pretty pictures of houses and the action they want to take is not to list the property, but to tour one.
And so I’m pretty optimistic that if there is a significant change, we’ll be able to adapt to it much better than anyone else. Am I also worried about uncertainty? Of course, but you want a CEO to be worried. We have better cards than anyone else, though.
Ygal Arounian: I appreciate the thoughtfulness, and I agree. I think you want to be at least worried or thoughtful rather than just brush it off as a nonevent. And then just a follow-up on the adjusted EBITDA profitability path for this year. I know the macro has been kind of a moving needle here. Is that embedded in that expectation? Is it the macro stays similar and rates stay elevated at this — towards this newly elevated level? Is it expectation that it gets better or does not matter as much now given kind of what you guys have put in place and you feel like you can get that if it moves up a little bit and moves down a little?
Glenn Kelman: No. We updated our whole budget, including our spending on the assumption that the housing market would be like it is right now for the rest of the year. It could get worse and then we’d have to take other measures I guess. But the big difference is that last year there were so many people touring houses in the first quarter. None of them seem to close because rates went up right after we paid all this cost to meet them. And we were just in a $60 million, $70 million hole in Q1. So being $40 million better than that coming out of this Q1 and running more efficiently across the next three quarters with sales initiatives that should improve close rate and all these digital businesses generate profit instead of incurring losses.
