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The second quarter brought more of the same for online brokerage and portal Redfin.
The Seattle-based company’s revenues fell 21 percent year over year to $275.6 million, down from $606.9 million a year earlier, according to a second-quarter earnings call Thursday afternoon.
Redfin’s gross margins also took a tumble, dropping 10 percent year over year to $100.2 million, as gross profits from real estate services slid 24 percent year over year to $56.2 million. The gross margins from real estate services marginally improved quarter over quarter, rising from 29 to 31 percent.
Much like Q1 2022, the company’s cost-saving measures and focus on increasing digital-margin revenue yielded in narrowing net losses. The net loss for Q2 2023 clocked in at $27.4 million, a 64.9 percent year over year decline from Q2 2022 when losses had ballooned to $78.1 million.
“In a declining market, Redfin improved our second-quarter net income by $50 million,” Redfin CEO Glenn Kelman said in a statement. “We expect to break-even on an adjusted-EBITDA basis over the next 12 months rather than in 2023, which is a setback, but still we project that our adjusted EBITDA this year will improve by more than $140 million.”
From April 1 to June 30, Redfin’s market share declined 9.63 percent annually from 0.83 percent to 0.75 percent of U.S. existing home sales. That loss was reflected in total real estate services transactions (i.e. brokerage and partner) for Redfin, which declined 28 percent from 24,548 transactions in Q2 2022 to 17,688 transactions in Q2 2023.
The revenue per transaction also took a slide, declining 2.88 percent year over year to $10,224.
In the Thursday earnings call, Kelman said the decrease in transactions was two-fold with volatile mortgage rates softening buyer and seller activity and a series of staff and agent layoffs last quarter weakening Redfin’s ability to serve clients.
“Agent layoffs forced us to reassign about a third of our active customers, and the closure of RedfinNow eliminated 12 percent of our listing demand,” he said.
However, Kelman delivered a bullish tone about the company’s future while citing the portal’s visitor gains compared to its nearest competitors, and the bold plan to recruit an experienced agent base after a late 2022 hiring freeze on junior agents.
“Redfin.com has been drawing visitors away from rival sites, according to comScore, which we use to compare our traffic growth to others,” he said. “Second quarter visitors to Redfin.com increased year over year by 9 percent. That’s compared to a 5 percent decline for the largest for-sale search site, and a 13 percent decline for the second largest.”
“The gap in year over year visits between Redfin and these competitors averaged 12 points in the first quarter, and 17 In the second,” he added. “We know that this online traffic growth gives our salesforce more bonafide opportunities to gain share because we track the demand from our site all the way through to a sale, and comparing the first half of 2023 to the first half of 2022, a higher proportion of the people who bought a home and contacted a Redfin agent 12 months prior to their purchase.”
Although market headwinds will stick around for the foreseeable future, Kelman said Redfin is positioning itself to crush the competition when the market inevitably rebounds in the coming year. The company’s playbook includes a focus on mortgage and title services, leveraging artificial intelligence to improve the homebuying process, and continuing to recruit a legion of well-qualified and experienced real estate agents.
“We’re entering 2024 with a different approach to hiring agents in the San Francisco Bay Area, where our share is below 2 percent. But the share of people who bought a home and who had earlier contacted our agents for service is nearly 30 percent. It’s even higher for purchases above $1 million,” he said. Anyone launching a brokerage today with that much demand would have a massive advantage in recruiting and retaining the best agents.”
“Entering 2024, we plan to give San Francisco and Los Angeles agents the lion’s share of the commission on salesforce sales, while keeping ourselves behind margins on rent salesforce sales,” he added. “Our goal is to hire and keep agents who can deliver better service with higher close rates for Redfin source customers buying homes above a million dollars and incremental profits from their own sales, too.”
If the pilot works as planned, Kelman said they’ll extend it to other expensive coastal markets.
“We’ll see if this model works in California,” he said. “We’ll extend it to other coastal cities with higher home prices, driving share gains and our largest most profitable markets. Coupling these changes with the normalizing housing market, whether it happens in 2020 or beyond, could have a transformative impact on revenues, gross margins and net income.”
Although the closure of RedfinNow has receded into the background — and a horizon of more favorable market conditions moves closer — Kelman said he’s prepared for another quarter or two of annual losses.
Third-quarter total revenues are expected to decline between 9 and 13 percent year over year to $265 million or $279 million. Net losses are expected to stick around as well, but still be on the decline to between $21 million and $30 million.
“We should be careful in the months ahead about claiming victory from any year-over-year again,” he said. “This will now be comparing the second half of 2023 to a period in 2022 when the market was in full flight.”
“Sales volume is near rock bottom, and home prices are stable or even on the rise. July’s year-over-year drop-off and active listings is the largest in nearly 18 months,” he added. “There’s enough inflation risk that the Federal Reserve will have to maintain the possibility of another hike happening through the fall, keeping mortgage rates near 7 percent.”
“But the almost miraculously good news is this: Most economists saw the recession as unavoidable and now see it as unlikely. When rates come down, the housing market will be poised to grow again. For now, the only way Redfin plans to grow is by returning to our long history of methodical, glorious gains.”
Redfin’s earnings are in decline from the previous quarter when the company’s revenue fell 45 percent year over year to $325.7 million. Gross margins also took a tumble; however, Redfin’s cost-saving measures helped shrink net losses 33 percent year over year to $60.8 million.
In the hours leading up to the earnings call, Redfin stock (RDFN) was on the upswing with the price per share opening at $14.36 — a 108 percent increase from the trading price right before Redfin’s Q1 earnings in May.
The company’s stock remained post-earnings, with the stock valued at $14.35 per share in after-hours trading.