Home News Profitability Within Reach for Compass, But Challenges Remain

Profitability Within Reach for Compass, But Challenges Remain

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Photo illustration by Robert Lefkin of Compass (Getty, Compass)

Update, December 1st 10:37 AM: Compass faces a pivotal six-month stretch.

With an interim goal of being cash flow positive by the end of June and aiming for profitability, brokerages need to stick the needle by cutting costs without losing agency and revenue.

it has took the hatchet Compass hopes to cut costs by $320 million this year.

The magnitude of this number equates to a 20% reduction in operating expenses and is a reminder of how the company has been wasting cash. It also points to the degree of tightening of the belt needed to achieve profitability amid the biggest slowdown in the housing market in the company’s history.

If Compass hits its fourth-quarter revenue forecast of $1.3 billion and achieves the savings advertised to investors, it could break even.

Not sure if it can be done. The same is true for how the housing market performs in times of rising mortgage rates.

Real Trends co-founder and home brokerage analyst Steve Murray says one of his biggest clients said he was “implementing plans for 2008” to weather a sharp drop in sales. rice field.

“This is going to require some tough decisions,” Murray said.

Mike Delprete, a real-estate technology analyst who invests in the brokerage side, calculates that Compass will earn no less than $5.3 billion in revenue to reach breakeven next year. 14 percent.

The headwind is strong anyway.the number of 28% fewer homes sold in the US Year-on-year in October, the trend continues to present a major earnings challenge for brokers.

“When I was at Compass, we never saw a recession this big in such a short period of time,” CEO Robert Reffkin said last summer. October’s decline in home sales marked his ninth straight month of decline, the longest on record.

Nonetheless, as it added more agencies and gained market share, the broker is well on its way to a banner year in terms of revenue. maybe. Rising mortgage rates are scaring buyers and discouraging listings by owners unwilling to part with low-interest mortgages.

DelPrete calculates that Compass needs $1.32 billion in revenue each quarter to be profitable by the end of next year. Winter is usually the slowest season for home sales, and another 1.5% rise in mortgage rates could as some predictionsthat could blow the wind away from the spring and summer sales seasons.

The good news for Compass is that Number of agents and market share Even though the company has stopped using cash and stock to recruit, it has continued to grow. It’s a small pie now, but we still need to get the bigger slices.a Recent drop in mortgage rates When climbing the list is also a positive sign.

Compass’s dwindling cash position makes it even more difficult to reduce revenue. Its cash position, moverever, is not as strong as it seems.

Cash on hand has fallen more than 40% this year, from $618 million to $355 million. But for Compass to meet the terms of his $300 million revolver loan, of which he has to keep $150 million in the bank. Compass says he has access to over $600 million in cash, but the actual number is closer to $500 million for him.

That’s still a lot, but Compass has run out of $120 million in the last two quarters. If earnings fall below his $3.8 billion, an unlikely scenario, he could lose access to revolvers.

“I haven’t seen a scenario where it works,” said one Compass executive. “[The revolver] It’s really there on rainy days. Even if revenues are significantly lower next year because the market is so depressed, it’s there. “

Compass’s fate may rest on its ability to add services to the sales it brokers. The company integrates ownership, mortgage and escrow services into an end-to-end technology platform.Management says it is possible double your earnings Other brokerages calculate the benefits of these services much more conservatively, but they dramatically increase profits on each trade.

“The impact of these tools is starting to be felt,” brokerage chief executive Rory Gorrod previously said. “It ultimately shows up in financial results.”

Correction: A previous version of this article erroneously stated the timeframe during which Compass estimated that the cuts would save $320 million. This year, not this quarter.

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