Business Breakdowns
· Geoff Collette
[00:00:00] S1: For 2025, the free cash flow margin, percent of revenue will be roughly 3% for the business. Roughly $1.2 billion in gross profit this year. That's at a high teens margin. And there's roughly a billion dollars in OPEX. And that includes almost $200 million of annual technology spend. I think it's actually somewhat easy to contextualize the operating leverage and the trajectory of the company based on the discipline and framework that they've put around it. So they've committed now for I believe several years at this point and into the future to keep OPEX growth at 3 to 4% annual increases. And there's just inflationary dynamics that feed into that. This quarter they actually announced some cost savings that while somewhat moderate, flow directly to the bottom line and can be meaningful to profit dollars. I think that they really found religion around cost discipline in 2022 and there's actually more potential for this over time. Just think about the use cases around document processing of transactions. There's a good amount of human intensity as it relates to this that could come out of the system over time with the advent of new technology. And it's also worth noting that they've acquired a company called @properties that came with Christie's business. They generate a high single digit EBITDA margin and they're really great operators. And so I think the idea really is Compass can be the low cost operator for owned brokerage. And I don't think that investors really think of Compass in this way. And then just depending on the rate of growth with production basically at that high teens margin, which can grow with the mix shift in agents as well as the attachment of title and escrow and potentially mortgage over time, the incremental free cash flow margins can be in the double digits and that can make it such that not too high levels of growth can result in very rapid free cash flow growth.
· Matt Reustle
[00:00:00] S0: Yeah, it's very interesting when you find these inflections or trajectories that are clearly moving in a different direction than they were once in on that 2 to 3% OPEX growth and more. Looking at the technology spend, does that encompass what you were mentioning at the very beginning in terms of investing in the technology for the platform? I don't know where this would fit, whether it would be in an OPEX line, a CAPEX line, wherever it might be. But how do you frame that and the capital that still needs to go towards that effort of technology investment?
· Geoff Collette, Matt Reustle
[00:00:00] S1: So it's that close to $190 million line that's inclusive of investment in new capabilities. I think what's important to understand about that is the industry is at a trough level and there's been this trend in commission splits and just the level of scale necessary to invest that makes it such that they stand alone in their ability and their stance on investing. And so others are really starved in an ability to do that and really don't have a structure to even do that. It's really a hodgepodge of third party software tools. I think where this is going for Compass is actually potentially really exciting because they own all the software that's all interconnected and all of the data which makes it such that they've announced some capabilities around AI that are in beta stage that can actually end up taking on a lot of the manual tasks that an agent will do and even proactively suggest next best actions that can transform the agent's day to day life in a manner that could be very differentiated and hard to replicate by others in the industry. [00:00:00] S0: Yeah, very interesting. I should have looked this up beforehand, but I have to ask, with this particular cohort of businesses, stock based compensation is always a focus. What does that look like here? Is it point of contention from the market? Where does that stand?
· Matt Reustle, Geoff Collette
[00:00:00] S0: Yeah, very interesting. I should have looked this up beforehand, but I have to ask, with this particular cohort of businesses, stock based compensation is always a focus. What does that look like here? Is it point of contention from the market? Where does that stand? [00:00:00] S1: Where it stands is it's basically a fixed cost now in the business and their approach to it is very similar as overall OPEX such that it shouldn't grow that materially from here on out. What that means is free cash flow per share should be very attractive. The name of the game for them is really bringing on productive capacity. They've designed their business now in a way where they can bring on agents, teams, brokerages, the franchise affiliate model. They kind of welcome folks joining their platform in any way that best fits them. It's that pace of gross profit, profit growth over the relatively fixed cost base, including the SBC. That's the framework here. [00:00:00] S0: In terms of the growth and achieving some of those numbers that you laid out before about that 30% in the 30 markets you have organic. Your agents continue to chop more wood and capture some of it. But it sounds like M&A has been a part of the DNA here for a while. How much of the growth story do you expect to come from acquisitions of brokerages, brokerages, houses, whatever it might be in terms of how they target?
· Geoff Collette
[00:00:00] S1: I think it could be very material. Just to kind of reiterate, the industry is very fragmented. There have been changes and we're in a trough environment that make it difficult and make it that the propensity for folks to want to invest in, enhance their value proposition to be able to grow is very real. And so you'll see announcements somewhat often of smaller brokerages joining really getting from here to 30% market share will require meaningful M&A. They've acquired meaningfully sized brokerages in Tennessee, in Louisiana, the @properties Christie's deal that was very sizable, that came with title and mortgage joint ventures. That multiple was 9 times EBITDA with synergies that are running ahead of plan, that should bring it down to five to six times. In general they're targeting four to six times EBITDA. That could fall to two to three times post synergy, all while keeping OPEX flat. And there's also a dynamic where there are quote unquote walkover situations where a brokerage can shed its costs and join Compass. And so I think that it's a very central part of the go to market strategy. And I think that if you step back and think about the advantages that the company brings, plugging in productive capacity actually has the ability to strengthen the overall value proposition and actually incent more people to join.
· Matt Reustle
[00:00:00] S0: Interesting. And then on the risk side, I guess you just have general macro risks. We talked before about housing market and to the extent that you had major downturns that would obviously impact the business. But is there anything else that stands out? It feels like what they're doing, I wouldn't expect a competitor to try to capture all this money, spend on tech, spend on brokerages, maybe nip at the heels a little bit. But is there any other risk that really stands out to you besides maybe some of the more obvious?