Opendoor Technologies Inc. (OPEN) Earnings Call Transcript

Hello. Thank you for standing by, and welcome to the Opendoor Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Elise Wang, VP of Investor Relations. Please go ahead.

Thank you, and good afternoon. Full 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 be simultaneously 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 laws, including, but not limited to, statements regarding Opendoor's future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and 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 Opendoor's annual report on Form 10-K for the year-ended December 31, 2020, and Opendoor's other periodic SEC filings, including the quarterly report on Form 10-Q for the period ended June 30, 2021, to be filed with the SEC. Any forward-looking statements made in this conference call, including responses to your questions, are based on current expectations as of today, and Opendoor assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. The following discussion may contain non-GAAP financial measures. 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 Eric Wu, Co-Founder and Chief Executive Officer.

Thank you, Elise, and good afternoon. On the call today, I'm joined by Carrie Wheeler, our Chief Financial Officer; and Andrew Low Ah Kee, our President. I'm excited to share our outstanding second quarter results and the significant progress towards our goal of making it possible to buy, sell and move at the tap of a button. As always, the consumer experience is at the center of everything we do here at Opendoor. We recently hit a special milestone of completing our 100,000th customer transaction, and I'm proud to have that family, the Petitto's, share their experience with Opendoor. [Presentation]

Jack and Nicole's story is one of many that we hear every day from consumers who have trusted us with their most important financial transaction and to make their life transition a whole lot easier. We set out with an audacious goal, to redefine how people buy and sell a home, and we knew we could reach 100,000 consumers en route to millions. But we didn't imagine it happening this quickly. We pride ourselves on our relentless focus on the consumer experience, pricing expertise and operational excellence, and our progress is clear in our results. In the second quarter, our revenue grew 59% versus Q1 to nearly $1.2 billion. This top line outperformance, combined with our strong unit economics, led us to generate $25.6 million in adjusted EBITDA, which is $28 million higher than the prior quarter as well as $2.5 million in adjusted net income. What's even more exciting is that based on our current progress, our second half revenue run rate is on track to exceed our 2023 target, a full 2 years ahead of plan. These results are driven by the progress we've made across our 3 strategic priorities. Starting with existing market share growth, we continue to drive all-time highs again in seller offers and true seller conversion across our existing markets. In Q2, we acquired a total of 8,494 homes, the highest in our history by nearly 50%. This record volume was in part driven by our buybox expansion as we are now able to underwrite the majority of homes in all of our existing markets. We expect this increase in market coverage to play a key role in driving the next phase of our growth. We are also observing an increase in awareness of our product offering with direct traffic up 103% since the beginning of this year. This tells us our value proposition is resonating deeply with consumers and more and more home sellers are exploring Opendoor as an alternative to the traditional sale. In our top 5 markets, for example, we are driving a combined acquisition run rate of over $8 billion. This momentum is further evidence of the seismic shift in consumer demand towards a modern real estate experience, and we are meeting this demand with a home sales experience that continues to exceed a Net Promoter Score of 80. Secondly, we continue our expansion efforts into new markets, making progress towards our goal of servicing buyers and sellers nationwide. We launched 12 new markets in the second quarter and 2 additional markets in July, which broadens our total market presence to 41 as of today. The scalability of our model is driven by our improvements in our launch playbook, investments in technology and automation and increased centralization, allowing us to expand into new markets quickly with limited upfront cost. And finally, we continue to make progress towards our north star of building the end-to-end digital experience for every buyer and seller. Our product teams are driving towards an on-demand transaction that is simple, certain and fast. For sellers, we launched self-service assessments, allowing customers to completely self-serve and on-demand complete the home assessment with just their mobile device. This is not only a superior customer experience, but also reduces our cost structure allowing us to put more money in the pockets of our customers. For buyers, we continue to see significant growth of our buy with Opendoor products with the recent addition of Opendoor Backed Offers experiencing rapid adoption since launch less than 6 months ago. We are excited to share that our Buy with Opendoor products has crossed the $1 billion run rate and will continue to grow in scale at a rapid pace. This is a great example of the speed in which we were able to innovate to meet consumer demand on top of our platform. Lastly, we know that 65% of sellers are also buyers, so we are integrating our products into one bundled experience. We were adding Buy with Opendoor for each of our sellers also looking to buy and bundling title, escrow and home loans to meet the transaction completely seamless and low cost. As we look ahead, we believe that a relentless focus on the consumer experience, developing the most accurate pricing engine and building the lowest cost platform are our foundation to become the clear digital one-stop shop for all homebuyers and sellers. Before I turn the call over to Carrie, I want to thank all of our teammates at Opendoor. It is their dedication and hard work in servicing our customers every day that allows us to deliver the industry's best-in-class conversion, best-in-class unit economics and best-in-class customer satisfaction.

Thanks, Eric. A detailed summary of our second quarter financial results can be found in our shareholder letter, so I'm going to quickly walk through key second quarter highlights before moving on to Q&A. As Eric mentioned, we are driving strong momentum across our business. We achieved record acquisition volume in the quarter. We purchased 8,494 homes, up 136% versus Q1, largely driven by high conversion and buybox expansion in existing markets. We reached record real seller conversion and over 35% of our total homes purchased in Q2 were homes that we were not able to offer on as of the end of 2019. Acquisition momentum has further accelerated into Q3, and we're on track to significantly exceed Q2 levels in the back half. On the resale front, we sold 3,481 homes in Q2, up 41% versus first quarter and generated revenue of nearly $1.2 billion, up 59% quarter-over-quarter. The increase in homes sold was due to ramping inventory levels and high transaction velocity in the supply-constrained market. Revenue growth exceeded our initial expectations, primarily due to acquisition strength fueled by record offer growth and conversion. Based on our resale strategies, enabled by our position as principal versus a traditional agent, we moderated our resale pace against our inventory at the end of Q2 and into Q3. We believe this maximizes the ROI in our portfolio while still maintaining very healthy absolute clearance levels and hold periods. You should expect that we will continually evaluate and tune our resale strategies based on market dynamics and seasonality. Unit margins were strong in the quarter, with adjusted gross margin up 50 basis points versus Q1 at 13.5% and contribution margin up 60 basis points versus Q1 at 10.8%. Our ability to use data and technology to manage our inventory resale is a structural advantage that's beneficial to our margins. We use data to manage our sell-through velocity and margin and a portfolio approach to optimize price compared to individual sellers who don't have that same level of insight. Furthermore, we continue to drive efficiency in our cost structure, which resulted in over 200 basis points of structural improvement over the last year. In addition to these durable improvements, we did see higher-than-expected home price appreciation, or HPA, as a tailwind to margins. We also continue to benefit from having a healthy inventory mix weighted to recently acquired homes. We anticipate both these benefits to moderate during the course of the second half. As a result, as we also indicated last quarter, we are planning for our contribution margins to trend lower in the second half of the year. Normalizing for these temporary benefits, we would expect contribution margin to trend to the mid-single-digit level. As we operate at ever greater scale and leverage our structural advantages around resale strategy and cost structure, we feel confident in our ability to deliver our target contribution margin in any HPA environment. Adjusted EBITDA in the quarter was $26 million compared to negative $2 million in Q1. Adjusted EBITDA margin was 2.2%, up from negative 0.3% in Q1. Adjusted EBITDA was well ahead of our expectations due to revenue outperformance and strong unit economics, both of which provided incremental leverage against our operating expense base. Adjusted operating expenses, or the delta between adjusted EBITDA and contribution profit, were $102 million in Q2, up $24 million quarter-over-quarter. We expect Q3 sequential OpEx to increase approximately $30 million from Q2 levels as we continue to invest behind the growth of the business. We ended the quarter with positive adjusted net income of $2.5 million, or 0.2% of revenue compared to negative $21 million or negative 2.8% of revenue in Q1. Turning to the balance sheet. We ended Q2 with $1.8 billion in cash and cash equivalents and marketable securities and total borrowing capacity of $4.3 billion across our nonrecourse, asset-backed facilities. As we continue to outpace our prior growth projections, we're well positioned to scale our borrowing capacity in support of our rapid growth. And as we look ahead, we're optimistic about our outlook. Starting with what we're seeing for the housing market, which continues to be underpinned by strong demand and tight supply. While inventory levels did pick up sequentially in Q2, they remain at multi-decade lows in terms of available supply. Real mortgage rates remain low and homeownership levels are still well off their previous decade highs, further supporting demand for housing. On the HPA front, we're observing a moderation from the recent all-time highs, and we're reflecting this in our pricing. That said, given our outlook for continued strong housing fundamentals, we expect HPA to remain elevated even when considering normal year-end seasonality. But taking a step back, it's important to remember that the key macro driver behind our results is the massive secular shift in consumer demand for integrated digital-first solution to buy and sell a home. Our proprietary pricing capabilities allow us to optimize our acquisition and resale strategies and be a market maker across all market conditions. We're seeing clear evidence of this through our record results in what is arguably the hottest seller’s market in history, giving us the confidence that we will be a share gainer across all cycles. Turning to our guidance. Given current market dynamics and our accelerating momentum, we expect acquisitions and revenue growth to remain strong in the back half. For the third quarter, we forecast revenue to be between $1.8 billion and $1.9 billion, which represents 56% sequential growth over Q2 '21 at the midpoint of the expected range. As a leading indicator of our momentum, we had a record 8,158 homes under contract to be purchased at the end of Q2, representing $3 billion of value. That is more than double the number of homes we had under contract at the end of Q1. We expect adjusted EBITDA to be between $15 million and $25 million, and that represents a 1% margin at the midpoint of the expected range. This reflects our planned moderation in contribution margins, as I mentioned earlier. As we look at our second half trajectory, it's helpful to put into context the acceleration we've seen in our business year-to-date. As Eric mentioned, we're operating at a second half revenue run rate that tracks to the 2023 target we provided at the time of our listing just 7 months ago. We've effectively pulled forward our financial plan by 2 years on both the top and bottom lines. We're extremely proud of our teams for making this possible. It's clear that our value proposition is resonating with customers more than ever, and we're relentlessly focused on building our business for scale and continuing to delight our customers with a best-in-class experience that's simple, fast and certain. And with that, I'd like to open up the call now for questions. Thank you.

[Operator Instructions] Our first question comes from Ygal Arounian with Wedbush Securities.

I guess the first one is for Eric. Can we just dig into Opendoor Backed Offers and Buy with Opendoor a little more, and maybe get a little bit more color on how that flywheel is working? You noted, I think it was $1 billion run rate at OBO. What was that referencing exactly? And then Zillow highlighted a product that kind of gives discounts around different things to bring someone in all the way from the top of the funnel to the bottom of the funnel. Is that something you guys have thought about doing as well? And then for Carrie, can you expand on the strategy around moderating resale pace in Q2 and Q3? And why that -- why do you use that approach? I just want to understand that a little bit better. Not sure if we got cut off. Did you guys hear my questions?

Got it. Ygal, I think we are on mute, so let me first thank you for the question. And so I might tag team this with Andrew. But digging into Opendoor Backed Offers, we are excited by the progress we made. We launched the feature less than 6 months ago when we're seeing rapid adoption. It's very clear that buyers love this service and are attaching to buy with Opendoor. One of the things we look at as a leading indicator is, of the homes we sell, how many customers are saying, yes, to Buy with Opendoor? And in some of our mature markets, we're seeing a 50% attach. That means for every 2 homes we sell, we're seeing 1 customer say yes to Buy with Opendoor, which is part of our flywheel. To the second part of that question, we're seeing a $1 billion GMV number. Again, it's very early since launch, and we're seeing rapid adoption in some of our core cities we're focused on driving attach. So we're really excited about the product market fit there, about the growth and subsequently, the conversion that we'll see into services from that. You mentioned the bundled services. It's something that we've been focused on for years, transparently. We've talked a lot about building a digital one-stop shop, and we've made big investments in our platform to make that possible. And for us, this means the consumers can buy sell and move at the tap of a button. And that's been our product vision for a very long time. We integrated title and escrow in 2017, and that was a big step towards that vision. We launched Buy with Opendoor and Home Loans as additional steps. And we're leading the way, and we're building the connective tissue between all of these services in-house to make it truly seamless for the consumer. I'll pass it to Carrie to answer the second part of your question.

Thanks, Eric. Ygal, so resale, let me answer that in 2 parts. One is how we think about resale, and we'll talk about what we're doing today. We are structurally better at selling in the market. We are operating as a principal, not an agent, not a single-home seller. That means we're making decisions that are all economically-based, they are formed by substantial amounts of data and we're doing that against a diversified scale portfolio, very different from how any individual home seller agent is going to make those same decisions. And we're managing resale relative to the environment we're in. And we're balancing all the time, how we maximize return on our portfolio. At the same time, we manage risk and our balance sheet/inventory balance. That's the approach to resale. With respect to the comment that we slowed resale in Q2, which we did, I would say that it was just, frankly, a different flavor of that, though. I mean we are still selling into a very, very receptive market for residential housing. We are maintaining very healthy sell-through rates in terms of how quickly we're selling through our inventory base, and we're still managing the very short holding period relative to the historical averages. So they did moderate relative to, say, prior quarter. But again, I think we feel very good still about how we are selling down and managing our inventory. And in Q3, you'll see us pick up that resale pace just to foreshadow that as we respond to seasonality. That's just what we do.

Okay. And then just a quick follow-up on OBO and home loans. Anything you can share in terms of the attach rate there or how OBO is driving the mortgage product?

Ygal, it's Andrew. As we've been pressing on services, our focus really has been on driving that buyer product, and that's because we know there's very strong attach between that buyer offering and the whole host of other services that go around it. We've been focused, therefore, I'm really pressing on the buyer offering as the leading indicator as the tip of the spear, so to speak, around driving private engagement services.

Our next question comes from Nick Jones with Citi.

Great. 2. First, your profitability comes in kind of better than expected. Could you potentially accelerate market launches today? Is that an opportunity in this market to be able to do that? And then the second question is that was interesting on the homeowners that came back after the first offer. What are your thoughts on that dynamic? And does that increase as a percent of the offers you're buying, the Opendoor solution kind of marinates for these homeowners?

Sure. Happy to take both of those. In terms of our overall launch cadence, launch sequence, we're really pleased that we're on track to deliver our 21 markets in 2021. As Eric mentioned, we currently launched 20 markets this year, and the new launches are performing really well. We honed that launch playbook and continued to refine it. You saw us launch 6 quarters -- 6 markets in a single day this quarter. And given that we're on track to deliver those market launch goals, and that at the same time, our run rate acquisition volume is really where we're targeting in our 3-year plan, we're shifting some of the resources away from incremental market launches, really to help us operationally scale to meet that massive demand, and also driving more and better integration as we execute on that digital one-stop shop that Eric has been talking about. Our focus is really on scaling the business and providing an absolute best-in-class experience to our customers right now versus more markets. With respect to the second part of your question or your second question around homeowners that came back. We think it's a powerful testament to the brand experience that we offer. The experience we offer is the sum total -- the brand we have is the sum total of all the interaction the customer has. And we think that the fact that 35% of our Q2 acquisitions actually came from customers who first engaged with us before the beginning of the year, speaks to the value that customers see and receive from Opendoor. And that they're willing to engage at different points in time as we build up our offering, as we build up awareness, that those people come back and that they really value the offer and the service that we deliver.

Yes. One more thing to add on top of that, Nick, is that our -- there's a world where every single home seller starts their journey of a move with an Opendoor offer. And that can happen 12 months from the move or 6 weeks, and we're excited to really drive towards that outcome.

That's great. Just maybe a quick follow-up on that. What do you think happens? Like do they come, get an offer and then maybe talk to an agent and start kind of realizing what they're going to have to go through to sell it and they're just kind of like this seems easier and better? I mean any thoughts on maybe what they're doing between the first offer when they come back?