Offerpad Solutions Inc. (NYSE:OPAD) Q1 2024 Earnings Call Transcript May 6, 2024
Offerpad Solutions Inc. misses on earnings expectations. Reported EPS is $-0.65 EPS, expectations were $-0.37. OPAD 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 afternoon. Thank you for attending today’s Offerpad First Quarter 2024 Earnings Call. My name is Tamiya, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Taylor Giles. You may proceed.
Taylor Giles: Good afternoon and welcome to Offerpad’s first quarter 2024 earnings call. I’m joined today by Offerpad’s Chairman and Chief Executive Officer, Brian Bair; and Interim Principal Financial Officer and Senior Vice President of Finance, James Grout. During the call today, management will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and events could differ significantly from management’s expectations. Please refer to the risks, uncertainties and other factors relating to the company’s business described in our filings with the US Securities and Exchange Commission. Except as required by applicable law, Offerpad does not intend to update or alter forward-looking statements, whether as a result of new information, future events or otherwise.
On today’s call, management will refer to certain non-GAAP financial measures. These metrics exclude certain items discussed in our earnings release under the heading, Non-GAAP Financial Measures. The reconciliations of Offerpad’s non-GAAP measures to the comparable GAAP measures are available in the financial tables of the first quarter earnings release on Offerpad’s website. With that, I’ll turn the call over to Brian.
Brian Bair: Thanks, Taylor and thanks to those who joined the call. The first quarter of 2024 continued the positive trajectory I discussed in our last earnings call. With $285 million in revenue, we met the high end of our revenue guidance, reflecting a 19% increase versus Q4 of 2023 and marking our third consecutive quarter of topline growth. We also met the high end of our guidance for homes sold coming in at 847, up 19% quarter-over-quarter. Adjusted EBITDA was also in line with expectations. Importantly, we remain confident in our ability to reach sustainable positive adjusted EBITDA in 2024. Both gross margin and contribution margins improved in the quarter as our asset light platform services grew and time to cash, or TTC, was in line with expectations.
Despite the ongoing macro challenges of affordability and locked-in sellers, our focus remains on the factors within our control. Our team’s strong execution is driving the expansion of our platform scalability, encompassing four distinct platform services. As a reminder, those four services include Renovate, which allows B2B partners the opportunity to tap into our renovation technology, cost management, logistics and ground game within the Offerpad platform. Similar to Renovate, Direct+ enables B2B partners to integrate with our top-of-funnel strategies, conversion efficiencies and in-house closing teams. This program allows us to help more homeowners and reach more customers, while also providing them with the benefit of receiving an optimized offer for their home.
Our Agent Partnership Program served as our listing and referral platform, with the goal to discover the best solution for every customer. And finally, our cash offer stands as the foundation of our services. Renovate continues to thrive, demonstrating strong operating and financial performance. We consistently receive extremely positive feedback from our customers who value our timely, cost efficient and high quality renovations. In Quarter 1, Renovate projects grew 78% year-over-year and represented 11% of our overall contribution profit after interest. We successfully completed nearly 400 projects, yielding more than $5 million in revenue and setting us on an annual run rate significantly above the $12 million we achieved in 2023. Alongside the success of Renovate, our other asset light platform services continued to scale.
Together, these three services represented 43% of total transactions in the quarter, reshaping our product mix and yielding higher contribution margins. These services were instrumental in expanding our reach into markets where our cash offer solution is not currently available. We are pleased with the continued growth and great potential of these asset light businesses in conjunction with the performance we are seeing in our core cash offering. In the previous quarter, I emphasized the significance of our partner programs, including homebuilder services, agent referral network and the recently enhanced Agent Partnership Program or APP. As a reminder, APP offers industry-leading referral fees to agents whose sellers opt for our cash offer. This program has been a key contributor to our growth.
In Quarter 1, APP requests represented over 20% of total requests, with acquisitions from those requests rising by 50% quarter-over-quarter. APP allows customers to use Offerpad in the way that works best for them, their agents and Offerpad. Real estate continues to evolve and change as we have seen with the recent NAR settlement. It’s very important to note, Offerpad’s founding vision was to create a one-stop solutions platform that removes the friction out of the real estate transaction and gives consumers what they want, certainty and control. Having a seamless platform, where customers trade in their current home and find their next home is exactly why Offerpad was founded. We strongly believe the ability to own the home and the listing will be more valuable than ever, and this is the core of our business.
We anticipate that over the coming months and years, homebuyers will become more accustomed to dealing with sellers and listing agents directly, and Offerpad is uniquely positioned for this new environment. We are pleased with our strong start of the year. Our teams are laser-focused on advancing our three strategic imperatives. Taking the friction out of real estate, growing our asset light platform services and expanding our partner ecosystems to support more consumers. We’re pacing to achieve positive adjusted EBITDA and remain committed to building long-term shareholder value. I want to thank our world-class Offerpad team members for their hard work and dedication to our mission. We look forward to updating you on the continued progress throughout the year.
I’ll now turn the call over to James. James?
James Grout: Thank you, Brian. The first quarter was solidly on plan as we continue to see growth among our various businesses. We also continue to drive improved operating leverage, more efficient ad spend and productivity from our partner channels, all of which are helping us drive down operating expenses. We’re on track to deliver more than the $30 million in incremental cost efficiencies in 2024 we highlighted last quarter. This is enabling us to execute towards our goal of positive adjusted EBITDA and ultimately free cash flow. We exited Q1 with our portfolio in a healthy position. We had 900 homes in inventory, of which only 8.5% were owned over 180 days, with roughly half of those under contract to be sold. This is a normal seasonal increase from the end of the year and a significant improvement from the prior year at 32.3%.
Homes sold in the quarter had an aggregate TTC of 113 days, up quarter-over-quarter and in line with our seasonal expectations, we expect TTC to seasonally come down in the second quarter. As we mentioned last quarter, after the slowdown in the market at the end of the year, we saw improved request volume and acquisition pace to start the year. We acquired 806 homes in the quarter, up 19% compared to Q4 and 121% year-over-year. With the recent rise in mortgage rates, we will continue to maintain a more conservative approach to acquisitions, and thus expect acquisitions to be flat to slightly up compared to Q1. As Brian said, our cash offer is the foundation of our business and our asset light services continue to show strong momentum. Diversifying our revenue through these additional services will continue to be a priority.
In the first quarter, they provided roughly a third of contribution margin after interest and we expect this momentum to continue. It’s still early in our rollout of APP Max, but we feel confident about our strategic approach to working with partner agents to monetize our out of buy box leads. We’re particularly pleased with the progress of Renovate, which is becoming a more strategic offering, allowing us to expand in two additional markets in a new way. In the quarter, we began working on Renovate projects for existing clients in Minneapolis and Oklahoma City. This introduces an efficient way for us to enter a market and begin building a local presence without upfront capital investment. In the first quarter, revenue was $285 million at the top end of our guidance range and up 19% quarter-over-quarter.
We sold 847 homes also at the top end of our guidance and up 19% quarter-over-quarter. Net loss was $17.5 million, a 13% decrease from Q4 and a 71% or $42 million improvement year-over-year. Fourth quarter adjusted EBITDA was negative $7.1 million, coming in flat as expected, quarter-over-quarter. This represents an 84% or $38 million improvement year-over-year. Gross margin for the first quarter was 7.9%, 100 basis point improvement from 6.9% last quarter and up significantly from 1.2% in the first quarter of last year. Gross profit was $23 million, an improvement of more than 200% year-over-year, largely driven by expanding contribution margin in our cash offer business and the strength of our asset light services at more than 40% of total transactions.
Operating expenses, when excluding property related selling and holding costs and contribution margin, were up $27.8 million in Q1, up from the prior quarter, where a one-time $7 million credit positively impacted OpEx. That’s down 26% year-over-year, driven by our advertising spend efficiencies and cost management activities. We ended the first quarter with $69 million in unrestricted cash, $266 million in inventory and $255 million of SPV level asset-backed debt and zero parent level debt. As a reminder, in Q4, we extended three of our primary credit facilities used to finance our inventory and maintain key terms around advance rates and funding mechanics, while adjusting size to align with our expected needs in the coming years. Looking forward to the second quarter, we’re again expecting sequential improvement in profitability.
Sales pace is expected to follow the previous quarter’s acquisitions, producing revenue between $250 million to $300 million, supported by 750 to 875 homes sold. With our focus on operating leverage and expanded contribution margins, we’re expecting approximately breakeven adjusted EBITDA. Looking at the balance of the year, we’re pleased to be closing in on sustainable positive adjusted EBITDA as we continue to strategically invest in and grow our asset light services. With that, I’ll open the call for questions.
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Q&A Session
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Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Nick Jones with JMP Securities. You may proceed.
Nick Jones: Renovate piece, I think the contribution profit after interest is like low 20% range. Can you remind us how high can that contribution profit after interest go over time? And then, I guess given the low supply and transaction volume, is there an opportunity to maybe invest in some advertising and accelerate growth there, given people maybe are opting to Renovate as opposed to move?
James Grout: Hey, Nick, we missed the very first part of your question, but I think it was around Renovate contribution margins and where that can go. Maybe Brian, you take that advertising part to begin and then I’ll hop in on the Renovate.
Brian Bair: Yeah. Right now we’ve been focused on the growth of our B2B line. A lot of the vacant homes been focused on that. We will eventually evolve into the B2C side, which, because you hit it perfectly, Nick, there’s a very big opportunity of homeowners that are trapped in with as far as their equity right now or mortgage rates, but it’ll be interested in staying in their homes much longer. And so that’s definitely something that we are exploring and you’ll continue to hear more about.
James Grout: Yeah. And then, Nick, on the – in terms of contribution margin, you’re right, the Renovate business, it’s performing kind of roughly in that 20% range overall. I think the thing – it’s been fairly consistent kind of quarter-by-quarter since we’ve turned that on. I think the thing that will allow us to expand that over time is as we start getting into a little bit more customizable type work, as of right now we’re working primarily with institutions that are doing work at scale. If we start to get into a little bit more customized work, maybe potentially get into working more directly with consumers on Renovate, that’s where you could start seeing that expand, and it could be pretty material what that could expand to.
But right now, just in terms of efficiency, from the platform that we’ve got and utilizing our teams in an effective way, will be focusing on that more institutional level. So the contribution margin should stay pretty flat for them overall from a margin perspective.
Nick Jones: Got it, helpful. And then as you kind of focus on getting to kind of sustainable EBITDA, profitability, kind of philosophically how are you balancing investing in growth, which I think there’s an increasing eye on. When can we see acquisitions and home sales start to increase more meaningfully versus making sure you can be profitable at current volume? So I guess, how are you thinking about the current cost base, if rates are higher and longer, is there more wood to chop in terms of cost cutting? Or is the business in good shape to kind of navigate, I guess, where we’re increasingly having lot of state at lower rates and I guess ostensibly higher volume?
Brian Bair: Yeah, we’ve made a lot of progress on navigating just this entire environment over the last year and a half. I really like where we are right now and positioned, especially with some of the other asset light product lines that we talked about. As we look at the – as our cash offer business, we’re still being very cautious there as far as the- as far as turning that on and for extensive growth again. We’re focused right now on the performance of each home that we buy is as the sensitivity to affordability is very, very high right now. So we have started to expand our buy box that’s buying up funnel a little bit more of the 2 to 4 to by more than 200 to 600 price point. So we’ll start seeing that. But we’re definitely being more cautious with the cash offer product right now and making sure that I don’t think it’s the time to really start jumping in 100% yet on that, but we’re buying decent volume there.
And then in turn focused on our other products as well.
James Grout: And then, Nick, on the cost side of the equation, I think there’s two components to that. The first one being our request channel mix and our advertising spend efficiencies. And the second one being more on the traditional OpEx sense. And on the former there on advertising, we’ve done a lot of work over the past years to really dial things in there for this new norm of what this market looks like, and rather than trying to find a homeowner right when they’re at the point of trying to sell, but that’s why we’ve been leveraging and ramping up our partnership networks and things like that. Overall, we’ve actually driven our CAC down year-over-year in the first quarter by over 50%. So we’re pretty pleased with the work that we’ve done there.
We feel like we’re actually in a pretty good spot in terms of the efficient frontier on our cost per lead curve. And so if we find good opportunities to invest from a marketing standpoint, I think there is the efficiency there from that standpoint. And then on the more traditional OpEx side, we’ve done a lot of work, as you know, over the past couple of years sort of to optimize what our structure looks like and we have to make sure we have the right people that are the most effective in the right areas. And I feel like we’ve done – we’ve made the tough decisions there and we’ve moved the folks around to the right areas that we feel pretty good about the setup and the structure that we have right now. Right now it’s all about just optimizing that operating leverage there and increasing volume.
And where we – I think a good example is the expansion of our Renovate business really allowed us to figure out a new way to utilize those renovation teams over time, right. And so just being, making sure we remain efficient and get every dollar – every ROI out of every dollar we’re spending right now.
Nick Jones: Great, really helpful. Thanks, Brian. Thanks, James.
Operator: Thank you. The next question comes from Ryan Tomasello with Stifel. You may proceed.
Ryan Tomasello: Hi, everyone. Thanks for taking the questions. Just following-up on the contribution from the non-cash offer products. I think in the prepared remarks you mentioned it was those services represented around a third of contributions margins in the quarter. How should we expect that mix to evolve over the course of the year? Can you say what you’re assuming in the 2Q guide from a mixed perspective on the cash offer versus the non-cash offer products?
