That’s because the SoftBank-backed company, which has blown away $1.73 billion since 2017, suddenly ran out of runways.
To wolf richter for wolf street.
Compass, which calls itself “America’s No. 1 brokerage firm” and has hyped its technology over the years, has positioned itself more as a technology company than a real estate broker. I’ve banged people on the head so many times tonight.
- This time around, the loss was massive at $101 million, bringing the total loss since 2017 to $1.73 billion.
- Second quarter earnings grew very little and fell short of guidance.
- A shocking reduction in earnings guidance in the third quarter is forecasting earnings to plummet 25% when analysts were predicting earnings growth!
- “The Fed has taken a series of actions that have directly hurt earnings,” Chief Executive Robert Refkin said on an earnings call.
- Another Refffkin quip: “This year the real estate market is gearing up to drop nearly 25% below what industry experts believed was just six months ago.”
- and a company whose business model was to “grow at all costs” with plans to cut costs significantly.
CEO Reffkin explained at the financial results briefing (via transcript looking for alpha): “There is still buyer demand and prices are flat even in good markets. The number of days on the market is definitely increasing, so overall we remain negative on the outlook.”
KATHOOMPH rose in after-hours trading today, plummeting 12% to 20% to just over $4, down 82% from its first trading day after its April 2021 IPO.I can barely see it (data via Y-chart):
The cost savings are interesting because Compass was never designed to be profitable in the first place. It was designed to rake in cash from investors by promising them everlasting growth and blowing this cash to achieve this growth.
At the start-up stage, it raised $1.5 billion. From the Geniuses of Softbank, which later raised $450 million in its April 2021 IPO. Over the past few years, Compass has blown this money by overpaying real estate brokers and poaching brokers from other brokers, promising massive cash and stock-based compensation. And by investing heavily in developing a much-touted software platform, it’s all based on the promise of perpetual growth, forgetting profit.
Now, however, that scenario is being shaken by a weak housing market and an expected plunge in earnings.
Compass had already announced in its May 12 earnings call that it had stopped all expansion into new markets and acquisitions of other brokerages. In early July, Compass announced it would furlough his 10% of its workforce, about 450 people.
so today Financial results announcementsaid the market conditions in the second quarter were “very challenging”. By June, he also announced a “new cost-cutting program” that would cut operating costs by about $320 million over a 12-month period, compared to a 12-month period. And this cost reduction will allow us to “generate positive free cash flow in 2023” in this environment of sharply declining revenues. That’s right, they’ll be cash flow positive during a 25% recession after burning huge amounts of cash. Yep, I got it during the hottest real estate market ever.
“Specifically, we plan to reduce the two largest cost areas of technology and agency acquisition incentives,” they said on a conference call.
“If the market deteriorates, we will take the necessary steps to meet that target,” – free cash flow positive in 2023 – Chief Operating Officer Greg Hart said on a conference call .
Reducing costs when the business model is “grow at all costs” is always unique. But now that the housing market is sluggish, home sales are declining, and it’s much harder to sell and earn a commission, cutting costs is doubly important for a “grow at any cost” company. It’s unique. In essence, it’s conceding to investors the defeat of the business model it’s been promoting all along.
This is a desperate move as investors flee, making it even harder to raise and burn new money.
Compass has a reason for this desperate move. There may be a shortage of runways. Net cash used in operating activities was reported at $120 million in the first half of 2022. Ended the quarter with $430 million in cash, down from $618 million six months ago Did. So, at this cash burn rate, you can count on the fingers of your hand how many quarters you have left before your company runs out of cash.
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