Opendoor Technologies Inc. (NASDAQ:OPEN) Q2 2023 Earnings Call Transcript

Opendoor Technologies Inc. (NASDAQ:OPEN) Q2 2023 Earnings Call Transcript August 3, 2023

Opendoor Technologies Inc. misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $0.38.

Operator: Good day, and thank you for standing by. Welcome to the Opendoor Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Whitney Kukulka, Investor Relations of Blueshirt Group. Please go ahead.

Whitney Kukulka: Thank you, and good afternoon. Details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our website at investor.opendoor.com. Please note that this call will simultaneously be webcast on the Investor Relations section of the company’s corporate website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal Securities law. All statements other than statements of historical fact are statements that could be deemed forward looking, including but not limited to statements regarding Opendoors’ financial condition, anticipated financial performance’, business strategy and plans, market opportunity and expansion and management objectives for future operations.

These statements are neither promises nor guarantees and undue reliance should not be placed on them. Such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Opendoors most recent Annual Report on Form 10-K for the year ended December 31, 2022 as updated by our periodic reports filed after that 10-K. Any forward-looking statements made on this conference call including responses to your questions are based on management’s reasonable current expectations and assumptions as of today and Opendoor assumes no obligation to update or revise them whether as a result of new information, future events or otherwise, except as required by law.

The following discussion contains references to certain non-GAAP financial measures. The Company believes these non-GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the company’s financial performance. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metric, please see our website at investor.opendoor.com. I will now turn the call over to Carrie Wheeler, Chief Executive Officer of Opendoor.

Carrie Wheeler: Good afternoon. Also on the call with me today is Christy Schwartz, our Interim Chief Financial Officer; and Dod Fraser, President of Capital and Open Exchange. Opendoor’s vision is to build the most trusted e-commerce platform for residential real estate where home buyers and sellers can transact with simplicity and certainty. Regardless of the macro environment life and home transactions continue and we’re committed to being the first and most trusted place that people look to and considering their move. In navigating the current environment, we’re leveraging the lessons we’ve learned and focusing on what we can control. We’ve made significant progress in strengthening our offering, driving cost efficiencies and managing risk.

We’re building a healthy new book of inventory, it demonstrates our ability to generate positive unit economics in what continues to be an uncertain time in the U.S. housing market. We remain focused on making investments in durable growth levers in our pricing and operations platforms that will benefit us for years to come. We are doing what we’ve always done. We’re leading with the consumer experience as we innovate, build and adapt Opendoor to be an all-weather product and the best option for millions of people who want to buy or sell a home. We have intentionally moderated our acquisition pace this year to manage risk. We’ve maintained above average spreads resulting in lower conversion and higher customer acquisition costs and our direct to consumer paid marketing channels.

We’ve leaned into our partnerships with homebuilders, agents and online real estate platforms. These channels have fixed customer acquisition costs and that’s are highly efficient and represent durable, long-term partnerships for us. In Q2, acquisition contracts and partnerships grew 78% sequentially and represented 40% of total acquisition contracts. We expect these partnerships to continue to grow. However, we also plan to increase our paid marketing to drive additional direct to consumer volume as we see more market stabilization and reduced spreads. Partnerships and paid marketing drive our top of funnel growth bringing true sellers and registered sellers defined as those who received an offer, but have not yet sold their home to Opendoor.

Not everyone is a true seller at the time they request an offer but we treat everyone as a possible future seller, reengaging our base of registered sellers until we decide to sell their home requires de minimis incremental cost. Three quarters of acquisition contracts in Q2 were from sellers who didn’t accept their initial offer, but accepted a subsequent one. We believe that growing our registered customer base, which gives us access to true sellers whenever they do choose to sell will continue to be an important source of growth. Direct to consumer paid marketing remains an important channel for us delivering 60% of our contracts in Q2. However, given the higher spread environment, we have prioritized limited but highly effective marketing investments such as creative ad campaigns, brand media and consumer and agent influencer programs.

Despite reducing marketing spend nearly 80% year-over-year in Q2, our aided brand awareness remained flat in the quarter. As we think about durably reducing spreads and reaccelerating growth much is within our control, but we need to be nimble and reactive to what we’re seeing in the broader housing market. The housing macro has improved since the beginning of the year but sitting here today, we’re looking for signals of further market stabilization, including a more certain outlook for HPA. We have taken prescriptive action on the things we can control as we navigate ongoing uncertainty. We are focused on investments to improve our pricing accuracy, inventory management and overall cost structure. These actions are intended to durably reduce spreads trusted customers while still achieving our target contribution margin.

An example is our continued investment into home condition, which relies on computer vision, AI based condition modeling and interior assessments, all of which give us more structured data to improve our overall data insights, which in turn informs home level pricing and pricing model accuracy. We remain steadfast in our mission to power lives progress one move at a time. The actions we are taking today reflect our commitment to return the business to adjusted net income positive and will allow us to emerge from this cycle more resilient and positioned for market leadership. There is still much to do and we’re heads down as we continue to build a generational company that will transform home transactions for many years to come. With that I’m going to turn the call over to Christy to review guidance and financial results.

Christina Schwartz: Thank you, Carrie. Our second quarter results reflect progress and selling through our longest held homes, while continuing to build into a new book of inventory. We remain focused on delivering healthy risk adjusted contribution margins and preserving capital through disciplined cost management. We delivered $2 billion of revenue in the second quarter. This exceeded the high end of our revenue guidance by 7% driven by strong market clearance rates and the sell-through of our longer-dated homes. Notably 99% of the Q2 cohort, which is homes we made offers on between March and June of last year was sold or under resale contract by quarter end. On the acquisition front, we purchased 2,680 homes in the quarter, down 81% versus Q2 of 2022.

The decline versus the prior year comes primarily as a result of elevated spreads embedded in our offers since June of last year coupled with sellers remaining on the sidelines. New listings in our buy-box declined 21% year-over-year in the first quarter of 2023 and continued to decline to 31% year-over-year in the second quarter. We reduced the average spread offered between the first and second quarter of 2023 to reflect pricing model improvements related to home condition, reduced holding and selling costs due to shorter expected holding times and a modest improvement in our view on home prices. Even though spreads are still at elevated levels, the reduction translated to a 53% increase in acquisition volumes from Q1 to Q2 2023. Our Q2 contribution margin was negative 4.6% versus positive 10.1% in Q2 of 2022 and negative 7.7% in Q1 of 2023.

These results were driven by the negative contribution margin performance of the old book of inventory, which represented 57% of our resale mix. Our new book of homes continues to show strong margin performance with this cohort generating gross margins of 14.4% and contribution margins of 10.6% in the second quarter. We expect this group of homes to perform in line with our revised contribution margin target of 5% to 7% once fully sold through. We expect contribution margin to return to positive in the third quarter when the new book of inventory composes a majority of resales. Adjusted EBITDA loss was $168 million in the second quarter inclusive of our previously recorded inventory valuation adjustments of negative $156 million. This beat the high end of our guidance range with an adjusted EBITDA loss of $180 million and as an improvement from an adjusted EBITDA loss of $341 million in Q1 of 2023.

Adjusted operating expenses, which we define as the delta between contribution margin and adjusted EBITDA was $78 million in Q2, down from 100 million in Q1 of 2023 and $204 million in Q2 of 2022 driven by reduced marketing spend, operational capacity and fixed expenses beginning in the second half of last year. We expect adjusted operating expenses to be approximately $100 million in the third quarter of 2023. The sequential increase from the second to third quarter reflects our expectation to begin rebuilding inventory at a modest pace in the third quarter. Turning to our balance sheet. We ended the second quarter with $1.1 billion in total shareholders’ equity, which is an increase of $50 million from the first quarter of 2023. This was partially driven by our convertible note repurchase in May, which was done at a substantial discount to face value.

Combined with the repurchase we completed in March, this reduced our convertible note obligation by almost 50% from $978 million to $510 million. We ended the second quarter with $1.6 billion in total capital, which includes $1.2 billion in unrestricted cash, cash equivalents and marketable securities and $269 million of equity invested in homes and related assets, net of inventory valuation adjustments. At quarter end, we had $10.1 billion non-recourse asset backed borrowing capacity, comprised of $5.4 billion of senior revolving credit facilities and $4.7 billion of senior and mezzanine term debt facilities, of which total committed borrowing capacity was $4.3 billion. During the quarter we round down the last of our dedicated Q2 offer cohort financing facilities given the substantial progress we’ve made in selling through these homes.

Turning to guidance, we expect third quarter revenue to be between $950 million and $1 billion and adjusted EBITDA loss to be between $60 million and $70 million. We expect the second quarter to mark the last quarter of negative contribution margin with positive contribution margin levels beginning in Q3 when our fresh book of inventory comprises the majority of our resales. We expect to perform within our 5% to 7% contribution margin target beginning in Q4 of 2023. We are managing our business to return to positive adjusted net income, which is our best proxy for operating cash flow and we believe we have the cost structure and balance sheet in place to do so. We expect to reach A&I breakeven at steady state annual revenue of 10 billion or approximately 2200 acquisitions and resales per month at our target contribution margin range of 5% to 7%.

While the overall state of the housing market has improved relative to our expectations at the beginning of the year and we anticipate opportunistically making modest spread reductions in the back half of 2023, we are continuing to operate with elevated spreads to account for ongoing home price uncertainty. We expect to return to revenue growth in 2024. While getting to A&I breakeven as an important destination, it is not the end of the journey. Given the inherent lag in our business between home acquisition and resale, the period in which we reached the A&I breakeven inflection point will be impacted by the pace at which we lean into growth. If our acquisition pace exceeds our resale pace, we would recognize certain acquisition in inventory holding costs such as marketing, financing and variable SG&A costs before realizing the corresponding revenue.

The second half of 2023 will showcase our continued investments in our pricing and operations platforms, durable growth levers and improving our overall cost structure via efficiency and automation. I’d like to thank our Opendoor team members for their pursuit of these initiatives and their dedication to serving our customers with a reduced cost structure, healthy book of inventory and strong capital position. We are very encouraged by the go forward outlook. I’d now like to turn the call over to the operator to open up the line for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Dae Lee with JPMorgan. Your line is now open.

Dae Lee: Great, thanks for taking the questions I have two. So first one on the partnership, it sounds like it’s a pretty core component to your second half expectations and the growth in 2024, I mean it looks like the mix grew from about a third last quarter to 40%. Could you help us unpack what drove that – drove that growth? And as you look ahead, how should we think about the mix of partnership as an overall volume perspective? And then secondly on your adjusted OpEx starting on quarter-over-quarter, I think you talked about growing your inventory in 3Q as the main drivers I think is. Help us understand like what incremental costs are actually going in today, that more about brand spend or do you need more headcount to drive your inventory? Thank you.

Carrie Wheeler: Hi, Dae it’s Carrie, I’m happy to take the partnership question, and I’ll hand over to Christy and she will talk about adjusted OpEx. I missed you a little bit in your first question, but I think I got adjusted sort of missed something just please, please jump in. On the partnership side for us this is a reminder, partnerships include homebuilders, includes agents and includes the online real estate platforms like for us Zillow, Realtor and Redfin and we’d like these channels variety of reasons, one of them being that they are fixed from a customer acquisition cost standpoint. So they are agnostic to spread and durable kind of in all environments. You noticed it was, it was a really nice growth driver of contracts for us in the quarter, it was 40% of our overall contract mix, they grew almost 80% in total quarter-on-quarter.

We don’t break out the various parts of what makes up partnerships, but I would say if you think about the evolution of those over time we’ve been in business, for the longer for a long time and it’s a great channel for us so to traded customer within a natural use of the Opendoor product agents also a group that we’ve been working with for a long time, but as we, we moved into an elevated spread environment, we really recognize the power of that partnership with agents and have been into that channel and driven incremental growth from them over the last year plus and we continue to expect to do so. And then the last part of that is online real estate, which for us is the most nascent of the three. And we are just ramping really to Zillow relationship for example 525 markets in the last quarter and that’s just starting to grow really nicely.

So probably in that order, in terms of growth, without getting into specifics after actual mix. Christy, do you want, talk about the OpEx, please.

Christina Schwartz: Yes, absolutely. So I’ll start by saying that we’re still very focused on optimizing cost and we are making progress throughout the P&L in that effort. As a reminder, adjusted OpEx is the delta between contribution profit and adjusted EBITDA. And so the debt and adjusted OpEx that you saw in the second quarter is a reflection of the relationship between contribution profit and adjusted OpEx. When inventory is growing adjusted OpEx will bear additional costs related to that growth. Conversely when inventory of contracting as it did in 2Q, adjusted OpEx will benefit from the movement of some of these costs specifically holding costs related to the resale cohort to contribution margins. As we began rebuilding inventory at a modest pace in the third quarter, we expect 100 million per quarter to be an appropriate estimate.

Dae Lee: All right. Thank you.

Operator: Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is now open.