Monday, March 4, 2024

Compass must cut faster and deeper to break even in 2023: DelPrete

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This post has been republished with permission from Mike DelPrete.

Compass continued to burn cash in the latest quarter but also demonstrated a reduction in operating expenses as the company aims to break even in 2023.

Why it matters: With a historically high cash burn in a cooling real estate market, Compass needs to cut costs extensively to achieve profitability.

  • Furthermore, the company signaled further cuts to bring expenses in line with revenue in 2023.

Behind the numbers: Compass burned $76 million in Q3 2022, continuing a run of cash flow negative quarters.

  • Of that $76 million, there were one-time restructuring and litigation expenses of $40 million.

Compass ended the quarter with $355 million in cash.

  • Historically, Q4 and Q1 is where cash burn is highest, due to the seasonal decline in revenue.
  • Coupled with a cooling market, the next six months are going to be tough.

What they’re saying: On its earnings call, Compass signaled that further cuts are coming:

  • “We will be implementing additional cost reduction initiatives to get ahead of any future market declines.”
  • ”We are committed to driving our non-GAAP operating expenses well below the low end of our range of $1.05 billion in 2023.”

Compass’ initial cost reduction program was an effort to get annual operating expenses to a run rate of $1.05 billion to $1.15 billion (down from $1.48 billion).

  • In total, the proposed cuts would represent an overall reduction in operating expenses of around 33 percent — a very significant change.

Dig deeper: If breakeven in 2023 is the goal, working backward reveals the various revenue estimates needed to achieve that goal.

  • Compass’ first set of cuts suggested a 5 percent revenue decline in 2023, but the latest cuts suggest a deeper 14 percent drop in revenue.

The bottom line: All brokerages, Compass included, are entering the literal and figurative winter of real estate; the next two quarters are going to be tough.

  • With a historically high cash burn, Compass needs to cut faster and deeper than most other brokerages — and it is.
  • The question for all brokerages making cuts remains the same: Can it be done while still remaining attractive to, and providing the same value to, agents?

Mike DelPrete is a strategic adviser and global expert in real estate tech, including Zavvie, an iBuyer offer aggregator. Connect with him on LinkedIn.

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