Compass Inc

NYSE:COMP

Earnings Call Analysis

Compass Reports Strong Q3 Growth and Optimistic 2024 Outlook

In Q3 2024, Compass saw impressive results with an adjusted EBITDA of $52 million, a jump of 139% year-over-year. Revenue grew by 11.7%, outpacing market trends as transaction volume rose by 16.1% versus a market decline of 1.9%. They achieved a 4.8% market share, adding over 750 new agents, marking their strongest retention rate at 97.8%. For 2024, they project adjusted EBITDA exceeding $100 million and reaffirmed positive free cash flow guidance, anticipating a full-year revenue around $5.47 to $5.57 billion, a 13% increase from 2023.

Strong Performance Amid Market Challenges

In the recently concluded third quarter of 2024, Compass has showcased impressive growth, achieving adjusted EBITDA of $52 million, which is a remarkable 139% increase compared to $21.8 million in the same period last year. This performance outstrips their guidance range, reflecting the company's ability to thrive despite challenging conditions, with existing home sales at three-decade lows.

Healthy Revenue Growth and Market Share Expansion

The company's revenue reached $1.5 billion in Q3, marking an 11.7% increase year-over-year. This growth is noteworthy as it indicates that Compass is gaining market share during a period when overall transactions in the real estate market declined by 1.9%. Their market share now stands at 4.8%, a rise of 49 basis points compared to last year. Furthermore, transactions processed increased by 16.1%, significantly surpassing the market's performance.

Record Agent Recruitment and Retention

Compass is experiencing robust organic growth, having recruited over 750 principal agents in Q3, the highest number in nearly three years. This recruitment is complemented by an impressive agent retention rate of 97.8%, which enhances the company's competitive strength. Over the past year, the principal agent count has increased by 2,927, or 20%, further solidifying its market position.

Integrated Services Drive Additional Revenue Potential

The company is seeing positive momentum in its title and escrow businesses, evidenced by record attachment rates. They have increased their attach rate significantly by 700 basis points over the past three quarters. This trend reflects successful efforts to integrate these services into the Compass platform, catering to both new and existing markets.

Improvement in Operating Expenses and Agent Economics

Compass's disciplined approach to managing operating expenses has paid off. Non-GAAP operating expenses in Q3 were $215 million, showing slight improvement compared to Q2. Notably, agent economics improved by 54 basis points year-over-year, driven largely by efficiencies in agent marketing expenses. This operational efficiency becomes critical as the company scales, ensuring that growth translates into profitability.

Guidance for Future Growth and Cash Flow

Looking ahead, Compass provided guidance indicating adjusted EBITDA exceeding $100 million for the entire year. For Q4 2024, revenue is expected to be between $1.225 billion and $1.325 billion, with adjusted EBITDA ranging from $0 to positive $10 million. The company anticipates maintaining a positive free cash flow for the year, albeit with a slight decrease in Q4 due to seasonality.

Long-term Strategic Vision and Market Resilience

Compass aims to navigate the housing market fluctuations with confidence, projecting mid-cycle transaction levels of approximately 5.4 million to 5.6 million existing home sales. They are focused on keeping operational expense growth between 3% and 4% annually, which coupled with their market share gains, positions them for substantial free cash flow in the future. The company’s long-term vision includes a strong commitment to technology investment, with an additional $100 million planned for 2024 to continue improving their platform.

Innovative Technology to Enhance Agent Efficiency

The recent launch of innovative tools such as the Compass Reverse Prospecting tool aims to provide agents with deeper data insights to drive transactions. This is part of their broader strategy to equip agents with superior technology, thereby retaining top talent and improving overall service delivery.

Navigating Industry Regulations and Market Dynamics

Compass is also navigating potential regulatory changes in the market, with a proactive stance on the Clear Cooperation policy that affects how listings are marketed. The leadership believes that fostering a seller-centric model can further enhance their competitive edge against traditional models.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. And at this time, I would like to welcome everyone to today's Compass Incorporated Q3 2024 Financial Results Call. [Operator Instructions]

So without further ado, I would like to turn the call over to CFO, Kalani Reelitz. Kalani, please go ahead.

[Kalani Reelitz, executive]

Good afternoon, and thank you for joining the Compass third quarter earnings call. Ahead of our prepared remarks, I want to welcome our new Head of Investor Relations, Soham Bhonsle. Soham comes to us from the sell-side with a decade of experience covering the entire life cycle of a real estate transaction. He began his career covering the homebuilders and mortgage insurance companies, but over time, expanded his expertise into title insurance, mortgage origination, prop tech, home improvement, home furnishings and, of course, the residential brokerage industry. Welcome, Soham. We are excited to have you here at Compass.

[Soham Bhonsle, executive]

Thank you for the introduction, Kalani. I'm thrilled to be here and look forward to working with all our shareholders and covering analysts going forward. In addition to Kalani, joining us today will be Robert Reffkin, our Founder and CEO.

In discussing our company's performance, we will refer to some non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our third quarter 2024 earnings release posted on our Investor Relations website.

We will be making forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the fourth quarter of 2024 and full year 2024, including comments related to our expected financial results, operating expenses and free cash flow as well as our expectations for operational achievements.

Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available on our Investor Relations website.

You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, October 30, we expressly disclaim any obligation to update this information.

I will now turn the call over to Robert Reffkin. Robert?

[Robert Reffkin, executive]

Thank you for joining us today for our third quarter conference call. I'm pleased to share that in the third quarter, we again grew market share, grew agent counts, grew attach of title and escrow, realized industry-leading agent retention and generated another quarter of positive free cash flow.

Before we dive into the results, I want to take a moment to express my sincere gratitude for the hard work of the entire Compass team over the past 2 years. Their efforts have driven the positive results we're seeing today and have been more convinced than ever that cost discipline will be a cornerstone of our ongoing success going forward.

As the market makes its way back to mid-cycle transaction levels of 5.4 million to 5.6 million existing home sales, I'm excited to showcase the true earnings potential of our platform, while continuing to provide unparalleled support to our agents.

Thanks to our team's incredible work, we are now able to guide to adjusted EBITDA in excess of $100 million for 2024 and reaffirm our positive free cash flow guidance for the full year. This is a remarkable achievement, especially given the challenging market backdrop with existing home sales at 3 decade lows.

I'm pleased to say that we delivered another quarter of strong growth and outperformance relative to the market through our continued focus on delivering value to our agents and the clients they represent, alongside a disciplined approach to managing operating expenses.

In Q3 2024, we generated adjusted EBITDA of $52 million, up 139% compared to $21.8 million in Q3 2023 and above the high-end of our guidance range. Revenue in the third quarter increased by 11.7% year-over-year. Transactions increased by 16.1% from a year ago, compared to the overall market where transactions declined by 1.9% during the same period. So this means Compass outpaced the market by 18%.

Quarterly market share was 4.8%, an increase of 49 basis points compared to Q3 2023. We recruited over 750 principal agents organically in the quarter, marking our highest quarter of organic agent count growth since 2021.

Year-over-year, we have now grown our principal agent count by 2,927, or 20% in what has been a very volatile 4 quarters for the industry. I'm also proud to report that Q3 was our strongest quarter in the last 4 quarters for quarterly agent retention at 97.8%.

Our title and escrow business continues to gain momentum. We finished Q3 with another record quarter of T&E attach. Over the past 3 quarters, we've improved our attach rate by 700 basis points, reflecting both our new and existing markets.

I'm also excited to report that we now have all 7 wholly owned T&E operations integrated into our Compass platform, which further increases our ability to improve attach rates. And as we stated on our last call, over the next 18 months, we are executing against our plan to launch title operations across all of our most mature transaction-rich markets, including the San Francisco Bay Area, New York City, Seattle, Houston, Boston, Chicago and Austin.

Revenue less commissions and other related expenses as a percentage of revenue in the third quarter increased to 17.83%, up 47 basis points from the second quarter. When excluding recent acquisitions, the same metric was up 62 basis points from the second quarter. These improvements compare favorably to 2023 when the same metric dropped 3 basis points between the second quarter and the third quarter.

Over the long-term, we believe we can expand our margins for a few reasons. First, we believe we will continue to get credit from our agents on the increasing value we provide to them and their clients through the Compass platform.

Second, we continue to increase margin from our ongoing expansion of integrated service offerings across our markets as well as increased attach of those offerings. And lastly, we believe we can continue to increase margin as incentives roll off from existing agents as we hire new agents at better economics.

Kalani will discuss our progress on agent economics in more detail, but I am excited to share that in Q3, we improved overall agent economics by 54 basis points on a year-over-year basis. As a reminder, when we say agent economics, this reflects Compass' margin after accounting for both commission expense and other expenses such as agent marketing spend.

In the third quarter, our total non-GAAP operating expenses, excluding commissions and other related expenses, improved both on a year-over-year and a sequential basis. I am particularly pleased that this improvement in OpEx was achieved in a period where we grew transactions 16.1% year-over-year, principal agent count 20% year-over-year, total agent count by nearly 4,000 agents year-over-year and after accounting for 4 acquisitions. And consistent with what we said last quarter, we are reiterating our expectation that stock comp will be under $130 million for the full year.

Finally, because of our cost discipline, which is again permanent, not temporary, we delivered our third quarter in a row of positive free cash flow and have now been free cash flow positive for 5 of the last 6 quarters during a period of time that reflects a trough level transaction environment of approximately 4 million annual existing home sales. We generated $32.8 million in free cash flow in the quarter. And importantly, we are reiterating our full year positive free cash flow guide.

Now zooming out and thinking about the long-term. Whether you have a bearish or bullish view on the housing market, we believe we are building a company that succeeds in any scenario. If we're faced with a housing recovery that is slower than expected, we believe our OpEx optimization and recent share gains will offset any impact from near-term interest rate volatility. This in itself should drive long-term enterprise value creation through earnings outperformance.

Any move higher in rates will likely hurt our competitors more than Compass, as they don't have the capital, technology and operational resources to scale in markets like the one we are in today, which will allow us to continue to gain share and increase our pipeline of M&A opportunities at favorable economics. This is evident by our performance in each of the past 5 quarters, where we have increased our quarterly market share on a year-over-year basis in the toughest housing markets the industry has faced in multiple decades.

In a scenario where existing home sales simply recover from roughly $4 million to $5.5 million mid-cycle levels, we plan on delivering hundreds and hundreds of millions of dollars of free cash flow and adjusted EBITDA by running our current playbook of retaining agents at high levels, gaining share, increasing attach of integrated services and maintaining operating expense growth at 3% to 4% annually.

Beyond just a market-driven increase in earnings, we have also proven that we can outperform the industry by leveraging our structural advantages and intend to continue doing so going forward.

Let me now touch on each of our 4 structural advantages briefly. Our first structural advantage is our end-to-end platform. While other brokerages have been scaling back support and technology offerings to their agents, our OpEx discipline and operating efficiencies have allowed us to continue to invest in our end-to-end platform during the down cycle, building new products and adding features that help agents run and grow their business.

In 2024, we will have invested another $100 million in the technology platform, reflecting a life-to-date investment of $1.7 billion. I am proud of the team for being able to advance the tech stack in a real estate recession when competition has been forced to stop investing.

In Q3, we launched the Compass reverse processing tool to all of our agents and the beta version of our client dashboard to several hundred Compass agents. The Compass reverse prospecting tool is a powerful new tool that enables agents and their homeowners to identify which of the 33,000 Compass agents and their millions of buyers have viewed, shared, favorited or commented on their listing.

With these insights, the listing agent can develop an informed outreach strategy to bring interested buyers to the transaction. And agents can leverage this information to secure stronger offers, accelerate negotiations and move efficiently to a successful closing. We expect this tool to help Compass agents win more listings as sellers will want their agents to have this functionality to best serve their needs.

As for the client dashboard, the full release to the entire Compass agent community and their millions of clients will be in early Q1 of 2025 and will put all of the key agent client interactions in one place for buyers, sellers and owners of multiple homes. We will be a one-stop shop for the agent client journey, not just through the life of a transaction, but through the ongoing journey of homeownership.

Over time, we will also integrate our current high-margin service offerings like title and escrow and mortgage, as well as future high-margin offerings like home insurance through the client dashboard, which will allow us to continue to build upon our record attach rates.

Our second structural advantage is our national scale. At the end of the quarter, we had over 33,000 agents across the country. Not only does our scale allow us to amplify the network effects of our platform as we roll out tools and programs like reverse prospecting and Make Me Sell, but it also makes us less susceptible to regional market fluctuations as we continue to expand and reduces our cost to serve per agent by spreading the cost of our platform investment over a larger agent base.

Our third structural advantage is our network of top agents. Per real trends, Compass has nearly doubled the amount of top agents as the next largest brokerage firm when measured by sales volume. Our network of top agents provides 3 distinct advantages that can't easily be replicated by other brokerages.

1, our national referral network provides our agents with high-intent leads that would be hard to come by at other brokerages. 2, it helps with agent recruiting because other high-performing agents want to be a part of our network, which in turn helps elevate our brand in each of our markets even further.

In Q3, about 2/3 of the agents we recruited were introduced by an existing Compass agent. Not only does this ensure we're hiring agents, other agents want to work with, but it is also our most efficient recruiting channel.

Lastly, culture. High-performing agents want to work with other top agents, and this helps with culture. Better culture leads to less attrition and results in a higher propensity to engage in Compass' integrated services like title and escrow and mortgage.

Our fourth and final structural advantage is our depth of inventory in local markets. Listing inventory remains the lifeblood of the residential real estate marketplace. At Compass, we already have a depth of listings in many of our local markets that is unmatched.

Our 30-30 vision of realizing on average 30% market share in our top 30 cities will strengthen this advantage by growing listings in more markets where we have the largest presence, as well as enabling double-digit growth in our gross transaction volume. Achieving our 30-30 vision will be a function of continued organic agent growth, accretive M&A and market share gains by existing agents as they win more listings from leveraging our platform.

By growing our listing inventory, we believe more and more buyers will search Compass.com and use Compass agents as it will be known that Compass has more inventory than any other website or brokerage. This inventory advantage includes not only our active inventory, but also potential inventory from our Make Me Sell, program, which allows clients of Compass agents to provide an aspirational sales price for their home in our CRM.

Since we launched Make Me Sell this quarter, we now have approximately 5,000 Make Me Sell entries that all have the potential to create incremental inventory and transactions that would otherwise not have been possible. We have even seen transactions happen from Make Me Sell to-date.

In an inventory constrained environment, we see buyers want to expand their search to unique inventory generated by Compass, whether it's the potential inventory of the Make Me Sell program or the exclusive inventory of Compass Private Exclusives and Compass Coming Soon.

Private Exclusive listings are not allowed to be publicly marketed and are only available to Compass agents and their clients, while Compass Coming Soon are listings that are only searchable on Compass.com and not on third-party sites. Coming Soon reflects that it's going to be coming soon to all the different portals and third-party sites.

Ultimately, our Northstar is to use our depth of inventory to create better outcomes for sellers, buyers and our agents, which as a function, should translate to better outcomes for Compass and our shareholders.

Now before I close, I would like to take a moment to discuss the ongoing debate in the industry regarding a seller's right to choose how to market their home. It is our view that this right is currently being infringed upon by the National Association of Realtors' Clear Cooperation policy, which says that if you want to publicly market your home and use a realtor, it is mandatory that you must submit your listing into the MLS within 1 day.

And if a realtor markets publicly for more than 1 day without putting the listing in the MLS, they can get fines up to $5,000. We don't think this is right. Homeowners should not be forced to do anything they don't want to do. Clear Cooperation is like Google saying. If you advertise anywhere, you must also advertise on Google. And if I see you advertise anywhere else, even a social post, newsletter or postcard for more than 1 day and you haven't advertised on Google, then I'm going to fine you up to $5,000.

We believe that homeowners are getting the short end of the stick. What homeowner wants days on market on their listing? So why is it there? What homeowner wants price drop history on a listing? So why is it there? It's there because the most powerful websites in real estate have made their business model one of selling buyer leads.

In the same way tabloids use negative headlines to attract readers, real estate websites use negative insights to attract buyers. Negative insights such as days on market, price drop history, crime, weather, value estimates, no homeowner wants these negative insights on their listing. But again, the powerful real estate websites use these insights to empower their model of selling buyer leads to third-party agents. While they sell leads at Compass, we sell homes.

It is important to appreciate that in our efforts to remove Clear Cooperation, there is nothing we are advocating for on behalf of an individual homeowner that professional homebuilders and real estate developers don't do every single day to maximize the value of their homes.

Professional homebuilders and real estate developers are excluded from being forced to comply with the marketing restrictions Clear Cooperation places on individual homeowners in the resale market, which puts individual homeowners at a disadvantage.

At Compass, we are committed to leveling the playing field for individual homeowners by giving them the same marketing strategies that create value for their homes used by the professional homebuilders and real estate developers.

Specifically, the choice to use pre-marketing and multi-phase marketing that protects their listings from the potential risk of exposure that results from MLS syndication to lead generation websites. The risks, which include days on market, public price drops, the listing agents name being taken off of the listing, diverting buyer inquiries away from the listing agent who knows the most about the home, and therefore, can serve the seller better.

Last year, professional homebuilders sold hundreds of thousands of homes off the MLS and avoided these risks. Remember, professional homebuilders and real estate developers are not subject to the same market restrictions through Clear Cooperation. They have a carve-out.

Individual home sellers should not be put at a disadvantage to professional homebuilders and real estate developers. Moreover, pre-marketing and multi-phase marketing strategies are used by the most valuable companies in the world. Whether the most valuable companies that sell homes such as D.R. Horton, Lennar and Pulte or the most valuable companies that sell their own products like Apple, Tesla and LVMH, they all use pre-marketing and multi-phase marketing strategies to ensure their product launch is as successful as possible.

Over time, Compass will become synonymous with homeowner value, because our agents will be known for offering homeowners the same advantages as these other companies. The future we are creating is one where buyers will know to search Compass.com, as we become known as the place homeowners list their homes early using Compass Private Exclusives and Compass Coming Soon, which protect them from the risk of MLS exposure. Risks such as days on market, price drop history, ensuring their listing agents contact information is the only information on their listing, ensuring that all the buyer inquiries go to the agent that they hired, their listing agent.

For most homeowners, their home is their most valuable financial asset. It deserves the most valuable marketing. It deserves to be protected from the risk of mass exposure. Regardless of NAR's decision to amend or appeal the Clear Cooperation Policy, we believe the public marketing restrictions imposed by Clear Cooperation will eventually go away for 2 reasons.

First, MLSs that represent about 1/3 of our markets have eliminated or no longer enforce off-MLS public marketing restrictions imposed by Clear Cooperation. We expect this trend to continue as more and more MLSs respond to continued pressure to remove or amend the rule.

Second, if not removed by NAR, we believe Clear Cooperation will be removed through the courts. Legal pressure continues to mount on private party litigation. Ultimately, I believe the industry will reach a common sense approach where sellers have a choice of where, when and how to advertise their home for sale.

As I close, I want to restate for the avoidance of doubt that we remain acutely focused on building the best brokerage in the industry and positioning ourselves to capture the upside as the market normalizes. This means maintaining our core brokerage OpEx at 3% to 4% growth, recruiting high-performing agents, enhancing margin by adding integrated services to the platform and pursuing accretive M&A. We believe this formula alone positions us to deliver hundreds and hundreds of millions in free cash flow per year by the time we reach mid-cycle.

I will now turn it over to Kalani.

[Kalani Reelitz, executive]

Thank you, Robert. Following on some of Robert's comments, I am very pleased with our operating and financial results. In the third quarter, we processed 55,872 transactions, an increase of 16.1% from a year ago, or an increase of 4.4% when excluding the impact of M&A, each of which compare very favorably to the 1.9% decline in transactions for the entire residential real estate market in the second quarter as reported by the National Association of Realtors.

Our market share for Q3 2024 was 4.8%, up 49 basis points year-over-year. As of September 30, 2024, we had 17,542 principal agents compared to 14,615 as of September 30, 2023, an increase of 2,927 year-over-year, or 20%. This increase was driven in part by the 2002C375 principal agents that we acquired through the acquisition of Latter & Blum and Parks Real Estate, which closed in the June 2024 quarter. But we also had a very strong organic recruiting quarter in which our team recruited 785 principal agents in the third quarter, the highest level in almost 3 years. Our quarterly retention rate in the third quarter was 97.8%.

For our integrated services, Q3 was another strong quarter. As Robert mentioned, we continue to see record levels of attach to our title and escrow businesses. And for OriginPoint, our joint venture mortgage affiliate, Q3 was their best quarter of the year, driven by a nearly 90% increase in refi volume year-over-year.

Year-over-year locked and funded volume were both up approximately 50% for Q3, owing to recruiting success and attached increases. While these integrated services are a small portion of our overall results, we're excited for the growth opportunity.

Turning to our financial results for the quarter. Our third quarter revenue was $1.5 billion, an increase of 11.7% from the year ago period, which was towards the high end of our guidance range of $1.425 billion to $1.525 billion. 5.3% of this revenue growth is attributed to organic growth, while 6.4% came from M&A.

Gross transaction value was $57.7 billion in the third quarter, an increase of 13.4% from a year ago, reflecting the 16.1% increase in total transactions, partially offset by a decrease in average selling price.

Our commission expense as a percent of revenue was 82.2%, a slight increase of 21 basis points compared to Q3 of last year at 82%. M&A completed in the past year drove about 28 basis points of the increase in commission expense as the acquisitions were completed in markets with higher average rates compared to our core brokerage. So when you exclude the impact of M&A, our commission rate improved slightly. On a sequential quarter basis, our commission expense as a percent of revenue declined by 47 basis points when comparing the second quarter of this year to the third quarter.

Now let me move into some thoughts on the topic of OpEx. First, our total non-GAAP operating expenses were $215 million in Q3. We expected a slight step-up in OpEx from the trailing second quarter due to the full quarter inclusion of the OpEx assumed from our mid-Q2 acquisition.

However, the $215 million was slightly better than the Q2 period, primarily driven by some favorability in the marketing expenses incurred by our agents in the quarter. As you've heard me say previously, the commission expense line included in our P&L only reflect a portion of the economics we share with our agents. In addition, while it varies by market, we also incur certain cash expenses on behalf of our agents, primarily marketing expenses, which are classified within OpEx in our P&L.

When combining the commissions and the additional costs included in OpEx, the total economics of our agent base improved by 54 basis points in Q3 of 2024, compared to Q3 a year ago. This improvement was due to, among other things, favorability in agent expenses, predominantly driven by efficiencies gained in agent marketing.

Second, when comparing our Q3 OpEx to Q3 from a year ago, you need to consider that the year ago period included a one-time credit of $7.2 million of for tax refund. So adjusting for that credit, OpEx for the year ago quarter would have been $226 million compared to $215 million in the third quarter of 2024, reflecting a reduction in OpEx of $11 million or 5% year-over-year.

Finally, it is important to note that this year-over-year improvement in OpEx is after considering the added expenses we assumed for the M&A completed since the year ago period. And as a reminder, when forecasting our 2025 OpEx, you'll need to consider an increase for the wraparound effect of the OpEx assumed from the Latter & Blum and Parks acquisition for the period from January 1 of this year through the respective acquisition dates in Q2 of 2024, which would be roughly $10 million in aggregate.

To wrap up my comments on operating expenses, it's worth noting that we view some of the room created from our overperformance on OpEx reductions to add some additional investments in our title and escrow entity. These investments include the hiring of additional title and escrow officers and related personnel, which drive incremental revenue and healthy incremental adjusted EBITDA to these businesses.

Our adjusted EBITDA for the third quarter was $52 million, which was slightly better than the high end of our guidance range of $30 million to $50 million and an improvement of 139% over the year ago results. GAAP net loss was $1.7 million, which reflects very favorably to the GAAP net loss of $39 million a year ago, driven by the increase in adjusted EBITDA, but also lower stock-based compensation expense, which was $32 million in the quarter compared to $38 million in Q3 of last year. Consistent with what we said in the last quarter, we are reiterating our expectation that stock comp will be under $130 million for the full year.

As a reminder, the non-GAAP operating expenses we refer to omit certain expenses that we exclude from the calculation of adjusted EBITDA, including stock-based compensation and depreciation and amortization. And as always, we've included tables on Page 12 and 13 in our Q3 investor deck that reconcile these amounts to our GAAP operating expenses.

Free cash flow during the third quarter was positive $32.8 million, an improvement of 169% over the free cash flow of $12.2 million in Q3 of last year. On a year-to-date basis through September 2024, our free cash flow was $79 million, compared to $4 million in 2023. This reflects an increase of $75 million year-over-year, which would have been even higher if excluding the $29 million paid in Q2 for the first 50% of our legal settlement. The second 50% of this legal settlement will be paid in Q2 of 2025.

As an additional reminder and consistent with my comments from prior quarters, it's important to note that our quarterly cash flow is impacted by the seasonality of our business cycle, along with a handful of timing items that tend to be neutral for the full year, but can create choppiness for individual quarters within the year.

Specifically, while we continue to expect free cash flow to be positive for the full year, we expect to see negative free cash flow in Q4. We ended the third quarter with $211 million of cash and cash equivalents on our balance sheet, and we have no outstanding draws on our revolving line of credit.

Turning now to financial guidance. For Q4 of 2024, we expect revenue in the range of $1.225 billion to $1.325 billion, and we expect adjusted EBITDA to be in the range of $0 to positive $10 million. When combined with the actual results for the first 3 quarters of the year, this implies a full year revenue range of $5.47 billion to $5.57 billion and a full year adjusted EBITDA range of $109 million to $119 million. The midpoint of the full year revenue and adjusted EBITDA ranges reflect an increase in revenue of 13% and an increase in adjusted EBITDA of $153 million compared to the full year of 2023.

As it relates to OpEx, we are reiterating our OpEx range for the year 2024 of $876 million to $896 million. As we laid out last quarter, this range starts with our core company OpEx of $850 million and adds in $15 million for 2023 M&A OpEx, $12 million of OpEx for the Latter & Blum acquisition that closed in April and an additional $9 million for the balance of 2024 from the Parks entities that we acquired in May. Given some of the favorability we saw in OpEx for Q3, we now believe OpEx will trend towards the lower end of that range for the full year.

Finally, as I stated earlier, we are reiterating our expectations to be free cash flow positive for the full year of 2024. However, we expect free cash flow to be negative in Q4 given the seasonality of our business. As a last point of guidance, we expect our weighted average share count for the fourth quarter to be between 510 million to 513 million shares.

As I wrap up my prepared remarks, I'd like to once again extend a sincere thank you to our agents and employees for their hard work and dedication that resulted in another great quarter of results, where year-over-year, we meaningfully grew market share, agent count, attach and cash flow.

At Compass, we have built the leading platform in residential real estate, and we are executing against a strategy that positions us for success in any market scenario. And quarter-after-quarter, I only gain more conviction that we have the winning formula.

I would now like to turn the call over to the operator to begin Q&A.

[Operator]

[Operator Instructions] And it looks like our first question today comes from the line of Matthew Bouley with Barclays.

[Matthew Bouley, analyst]

Thanks for taking the questions and for all the helpful color at the top. I wanted to ask on that commission rate topic. I think I heard you say, and correct me if I'm wrong, that excluding M&A, your commission rate was actually -- I think it was improved year-over-year.

And again, correct me if I'm wrong. But yes, just obviously, given the change in the industry in August, I'm curious if you are starting to see any transactions occurring at lower commission rates than otherwise may have or just kind of how that's trending since then?

[Robert Reffkin, executive]

Look, let me first start by saying thank you to all the people that did such a great job training our agents on the Buyer's Representation Agreements. We had over 90% of our agents trained over the previous months before August 17, including 66 national training sessions and hundreds of local training sessions.

I can tell you we are not seeing any meaningful change to our business since the announcement in our settlement or post August 17 related to commission rates, and they're still in line with historical internal averages. Anecdotally, we are hearing things at both ends of the spectrum, but we're hearing a number of top agents, for example, saying that they're now -- they're charging a more -- a stronger commission rate more in their favor since they are now able to negotiate for themselves. Again, as a reminder, every buyer agent or most buyer agents were just accepting the commission that was negotiated by the listing agent.

I'd say one other thing that has changed is, I think, this is driving some of the worst agents and part-time agents out of the business. The way I would describe it and what I hear from the market is before August 17, you could be a buyer agent, do one transaction every 2 years. And if someone comes to you about buying a home, you say, hey, don't -- you don't have to pay me, it will come out of the listing agent, and the seller will pay for it, and you don't need to sign anything.

And so it's really -- it was not something that required commitment from the buyer in any meaningful way. And as a result, it allows someone who, again, does one transaction every 2 years to be able to compete and get paid based off of what the listing agent negotiated on their behalf.

Now post August 17, you do 1 transaction every 2 years and a buyer comes to you and you try to -- you have to convince them to want to work with you and you have to convince them to sign something before showing property. And you have outlining compensation. And so it's much harder for agents without a lot of experience to compete.

There's a reason why agents that were newer in the business tended to work with buyers more than sellers, because you didn't need a strong commitment. You need a strong track record because -- again, they didn't have to sign anything like sellers did with the listing agreement.

So I think those trends tend to go to our favor as a company, because we are a company that focuses on agents with experience that are full time, highly professional. And I think on balance, again, that will do us -- we will perform better because of this.

[Matthew Bouley, analyst]

Got it. Very helpful. Secondly, I just wanted to touch on the overall housing market trends. It seems like every time we have interest rates starting to go in the right direction, and that kind of reverses course. So I'm just curious, maybe into October, if you can even quantify it a little bit. What are you seeing around inventory and transactions? Are your agents saying anything around election uncertainty playing into the market at all? Yes, just any kind of near-term market color there would be helpful.

[Robert Reffkin, executive]

Yes. So look, let me start by saying in the year following 10 of the last 11 presidential elections, transaction volume went up. In the year following 10 of the last 11 presidential elections, also prices of homes went up. The -- yes, single-family or existing home sales in September was down 3.5% year-over-year. And of course, every month last quarter was below 4 million seasonally adjusted annual rate of home sales for existing home sales. So it's a really, really low level of transactions.

However, let's look at purchase mortgage applications and let's look at pendings. Purchase mortgage applications in July were in the -- down in the kind of low to mid-teens. In August and September, they were down single digits. In October, the last 4 weeks of October, it was up 9%, up 8%, up 7% and up 10%. And so purchase mortgage applications year-over-year have increased every week for the last -- it looks like 10 weeks.

And so even with mortgage rates going to 6.9% the last week, you had purchase mortgage applications actually increase. And again, this is also right before an election. So I think that's -- I think that shows a level of resilience that people aren't really talking about as much in the market.

In terms of pendings, the last 2 weeks of pendings in contract listings that are in contract to be sold, it was up 10%, 2 weeks ago and a week ago, up 9%, which is consistent with the purchase mortgage applications. And so again, just in the rising rate environment that we've seen over the last couple of weeks to see the pendings and purchase mortgage applications go in the favor of transactions, I think, is a healthy sign.

Of course, we aren't overly optimistic, but it does look like the worst is behind us. And also at Compass, like we mentioned and alluded to on the call, I think there's a real case where Compass will do better over the medium-term if the market stays where it is. And so we're here to perform and execute regardless of the environment.

[Operator]

And another Matthew in queue. Our next question comes from the line of Matthew Cost with Morgan Stanley.

[Matthew Cost, analyst]

Sorry about that. So I wanted to follow up on the point about Clear Cooperation. Robert, I think you made a very compelling case for some of the drawbacks that it causes and why it might be going away. I guess in an environment where that policy does go away, what fills the void or what does the environment look like ultimately when there's no longer that requirement? Because obviously, being forced to place a listing on the MLS does provide some value, certainly to potential homebuyers and in terms of information being available in the market. So what changes? What fills that void? And what does it mean for Compass?

[Robert Reffkin, executive]

Look, I think what it means for Compass are Compass will -- look, if agents and homeowners wanted to be forced to put their listings on MLS in 1 day, I wouldn't be against Clear Cooperation. Agents are my clients. I work for them, not the other way around. And they are infuriated across the country for being fined with the $5,000 for doing what their clients say to keep a listing off the MLS for more than 1 day and still have public marketing.

And so I share that because I think in a world where Clear Cooperation goes away, more great listing agents and the homeowners will want to come to Compass list with Compass, because we are -- we have built and are continuing to build a platform that protects them from the risk of mass exposure and syndication into all these third-party websites. We talked about a days on market price drop history, all those different things.

I mean, it is almost laughable, the amount of IP that has been stripped away from agents over the years. No agent can even put a watermark on their listing on their photo. But then when it goes to MLS, the MLS puts a watermark on it, so that they can sell the data.

Imagine going to a big developer and you can't put a watermark on your photo or the listing agent, your sales agent in the building, 400 units in the building that their contact information is going to be taken off their listing on thousands of sites. And you can do nothing to control that. Of course, you can't bully people like that. I mean, we have a billionaire clients who want an off-market listing to off MLS marketing.

And then the -- his agent got the fine in the e-mail, $5,000. And the agent said, I have to put it on the MLS or I'm going to pay this fine. You know what that homeowner did? He hired some lawyers and he sued the Board of MLS. You know what the Board of MLS did? He said, "Hey, do whatever you want, you can market. And we're not going to make -- we're not going to enforce this.

But the question is, should you have to be a billionaire to be able to afford lawyers to be able to market your home how you want in this country? And so again, a long way to say that I think we will be known as the -- Compass will be known as the defenders of homeowner value, the defenders of homeowner choice, your home, your choice that -- and we will -- we have built a product that can protect them from the risk of exposure.

We are working with our agents and their clients to create a company that better serves homeowners. We're protecting and maximizing the value of their homes. And Compass, all we're doing is, again, there's nothing that we're asking for, for an individual homeowner in marketing that the carve-out for Clear Cooperation for homebuilders and real estate developers, lets them do every single day.

Compass, what we are going to launch in the weeks ahead is a program where Compass gives individual homeowners the same advantages as real estate developers and professional homebuilders. And we're going to frame it as such. And so we will level the playing field between those 2 parties.

In terms of searching, look, I would love -- there are so many arguments on the other side that -- but one of them is where will -- it was so hard to find the inventory everywhere, and they like to point to other countries. By the way, in a lot of these other countries, it's not as hard as it used to be 10 years ago and 15 years ago. It's really gravitating 1 or 2 places. And so it's a little -- it's a past recollection.

But look, I'd love to be able to search everything, I'd love to be able to only go on Netflix and be able to see any TV show I want. But that's just not the world. In a free and fair world, there's something called competition. And different companies come in and create different offerings. And so I got to go to Netflix for one place, Disney+ for another. By the way, Disney+ controls their own content and didn't let all the disruptors, just take advantage of like some of the other companies had done.

And I go to Apple Plus for something else. I think in the future of real estate at some point in this country, people will come to Compass to find listings. They'll go to MLS to find listings. They'll go to 1 or 2 aggregators to find listings. But it's not going to be unlike almost any other product that you want to buy.

[Operator]

And our next question comes from the line of Ryan McKeveny with Zelman & Associates.

[Ryan McKeveny, analyst]

Congrats on the results. Kalani, I wanted to dig in a little on the OpEx commentary. So really nice outperformance this quarter, but maintaining that full year target. I think it implies something like a $20 million to $40 million step-up in costs. And I heard you call out the additional T&E investments, is that the entirety of things? Was there anything timing related where 3Q may be benefited, but some expenses flow into 4Q? I'm just trying to understand that trajectory to expect for the fourth quarter.

[Kalani Reelitz, executive]

Yes. Overall, again, I'd start by saying we are pleased, and I thank all of our teams who support our agents really driving down efficiencies. We really built muscle and discipline and kind of in our DNA operating efficiencies, you're seeing that come through. I think we have not moved our overall operating guide. I do believe that we'll be on the low end of that overall and so nothing really new. There's a little bit of seasonality, but mostly it's going to be driven by the M&A and the annualization of M&A from a year-over-year perspective.

And then we are making some really smart and timely investments in our T&E businesses to really drive growth. Just a reminder, that comes with really healthy economics. And so we've taken a chance. But I think to get to the -- to be at the low end of the range, we'll continue to look and feel the same way we have with operating expense, and we'll, quite frankly, continue to drive our actions in that discipline.

[Ryan McKeveny, analyst]

That's helpful. And then one, you called out OriginPoint a little bit in the prepared remarks. It looks like in addition to the growth you called out, it looks like that actually flipped -- the JV flipped from kind of modest losses to a modest gain this quarter. So maybe, Robert, maybe Kalani, but just taking a step back, maybe you can give us a bit of a status update where things stand in terms of just adding loan officers, expanding markets, maybe it's too soon to really talk to attach rates, but maybe just generally how you're thinking the path of OriginPoint expands in the coming years.

[Robert Reffkin, executive]

Yes. No, it's really been a great story. We've seen -- I mean, we've seen the whole market in that mortgage kind of hit bottoms over the last 2 years. And the team has really, first of all, controlled cost and made some real timely investments as well as cost savings. Q3 was our strongest quarter. We did kind of turn a corner there, as you mentioned.

We continue to look for the loan officers and originators who are really, quite frankly, the teams that our agents want, right? And so Robert says it often, we don't do anything that our agents don't ask for, and we work for them. And so I think what the team has really done is been able to focus in our markets that we're in.

At this point, we're not expanding as much as we're driving down deeper attach in the markets we're in and really, quite frankly, working with the agents that we have, our best agents to determine who they support and work to grow originators and loan officers there.

So I'm pleased with the results. We'll continue to grow and continue to make prudent investments with the right thing, but I think the connection between our teams and at OriginPoint and our agents and driving that partnership is going to continue to be a key for our success.

[Operator]

And our next question comes from the line of Jason Helfstein with Oppenheimer.

[Jason Helfstein, analyst]

Hey, how is it going? So I apologize if this was already answered. So when we think about like your reverse prospecting and Make Me Sell products they're about to launch, what other companies -- or I guess you won't say which, but how many other companies out there have the scale to offer something similar?

And I guess second question, how should we think about your ability to continue doing tuck-in acquisitions, let's say, into '25, kind of what's the likelihood that we continue to see acquisitions?

[Robert Reffkin, executive]

So let me start with the, I guess, the Latter. I think you'll continue to see us execute acquisitions. There's a strong pipeline of great companies with great leaders and great agents that we're -- we continue to speak with, and that's all moving well.

In terms of technology, let me start with Reverse Prospecting. There is no other company that has 33,000 agents in almost every major market in the country that can go to the homeowners in their markets and say, I can let you know anytime any of our 30,000 agents nationally.

And the millions of clients they serve have shared, viewed, commented, favorited your listing when they last viewed it, how many times they viewed it, how many comments there were. So I can say, "Hey, Sharon, agent Sharon in our market, you have 18 comments with your client on a listing, come bring the buyers, let's make a transaction. I've already -- we launched it yesterday. And we've already -- I've already had e-mails from agents saying that buyers came to the transaction and were sourced because of this.

And I've heard the word game changer more times than I could count. You can look at some of the social posts that agents have sent about it. But it's -- we are unique in that we built our own platform. It's not a third-party platform. It's our own. So you can constantly make more and more investments in it to display more things.

In terms of Make Me Sell, remember, this was the #1 rated idea of any agents in the history of Compass. And what it was specifically is we have 100 million addresses in our CRM. It's our CRM. It's not a third-party CRM. And our platform is the same platform where agents can search for listings.

And so the idea is when I search for listings, let's call it, Soho Penthouses, it can tell me of the 300-odd Soho Penthouses, how many are in my CRM and how many are in other Compass agent CRM. And so you can say, well, 80% of the Soho Penthouses, we are in our CRM. We as Compass, we know them. And so then I can go to a buyer and say, I can give you access and help try to create listings that may not be available.

And then we are giving -- we have already given our agents the ability to put on all of their CRM contacts an aspirational Make Me Sell price. Most people, of course, don't want to sell, but if you ask them, if there -- what is the price that you would sell, most people will have a number.

This idea actually came of adding the Make Me Sell because one of the top technology CEOs in the country, if not the world, want to buy a specific house. And that house was not available, because it wasn't available. And so the agent went to that house, knocked on the door and then put in a Latter. And then that Latter -- in the Latter said, I have a buyer who's willing to pay almost anything that you can imagine, would you be willing to sell? And then the seller sold.

And so what we're doing, like with everything we do, we observe how agents, the best agents help their clients, and we try to empower it through software. And so in this overall process of Make Me Sell, we're almost in a different way to describe it, we're digitizing door knocking. And it's something very old school, we're bringing into software.

[Operator]

And our next question comes from the line of Michael Ng with Goldman Sachs.

[Michael Ng, analyst]

I wanted to ask about the strong principal agent net adds in the quarter. I know you mentioned the agent retention and the 750 organic net-adds. Could you talk a little bit more about what's been driving that agent net add strength? I think it was probably one of the stronger organic net add quarters that we've seen in some time. And if you could also discuss your outlook for net adds for the foreseeable future.

[Robert Reffkin, executive]

So I think Compass on a relative position has become stronger and better. We worked really, really hard to rebuild our culture. We brought employees back full time into the office to support our agents well before most brokerages. Some companies still aren't back in office. Agents -- what agents value, they value people and they value culture.

And so it's hard to create a great culture virtually. And so that -- there's nothing that I could ask them that would help us more than if every one of our brokerage competitors decide to be completely virtual. And we just have a very different philosophy. We -- and so I think that has been one thing that's really helped.

2, we -- what was surprising is this August 17 change, a lot of smaller brokerages, their agents said they had 0 training, 0 preparation. They felt scared and under prepared. And like I mentioned earlier, we had 66 national training sessions, 100 of local ones. And we have incredible compliance, broker records, and we just did a lot there. And so I think that was almost like a market opportunity come to Compass where you can get great training and great coaching and great support.

Then the technology has really become an advantage. I mean I call every principal agent that comes to Compass, I ask them why they come. It's well over 95% of the time, they say, it's rare that they don't say technology as a reason. And so look, you should just call any agent that's come to Compass in the last year and say, why did you come? You'll hear about technology.

And then lastly, I think the brand of Compass 2 years ago was hurt by -- we were hurt for reasons that some fair and some not fair. And one that may not be fair is like from an investor perspective, we were the fastest to do rifts. We did 3 rifts within effectively 7 months. We didn't -- and now people are still doing rifts because they didn't do them back then.

So from your perspective, you say, hey, that was a great job. But when you're the first to do rifts, 3 rifts in 7 months in an industry that's covered by press every single day where they're saying, "Oh, can go out to business all these rifts, like that was a problem. And when the stock price went from where it was to where it went, that was a problem. But now others are doing rifts and we look stable for quite some time.

Now it's much more rare to see a negative article about Compass. And so I think we look like a leader, we look stable, and we look like we have a good culture. And I personally travel on average 3 days a week to visit agents and our employees across the country. I visit open houses basically every weekend on Sunday during my personal time, bring my entire family to support agents that open houses. And I put on social media to create a signal to the agents and employees that we care. We are all in. We care about agents.

And this -- literally this morning was talking to one of the great leaders in our space. And he said, I track the fall of every brokerage firm back to -- I don't want to mention the names of them, but back to the '70s. But these are all like the great names that aren't -- that kind of moved down. And I said, what was there a theme? And what he said that long, he said, it all came to when they lost their culture, where the management team stopped showing that they care more about the agent than anyone else. And this is not going to happen here at Compass.

In order to be successful at Compass as an employee, you need to love agents. They are our clients. When they succeed, we succeed. That's the foundation of our business. We -- when I meet agents and some people say, hey, this is one of my top clients. And so that's -- I think it's that culture with the other things we mentioned that's really helped us perform in this period of time. But I'll pass it on to Kalani.

[Kalani Reelitz, executive]

Yes. Yes. No, I think we're definitely feeling, Michael, the momentum that Robert is mentioning. I would just say to answer the second part of your question, we've recalibrated and extremely proud of our recruiting team, our strategic growth team. We should expect, to your question, about 700-plus principal agents added organically every quarter. We're seeing the momentum.

Folks are -- we have incentive plans and all of the right conversations locally to really win. So we should expect the 700. As a reminder, our 30 for 30 strategy is built on organic agent growth. So that 700 principal agents, some tuck-in M&As, as Jason asked, and then productivity from the platform that we've continued to enhance. And so all of those things should continue as you're seeing this quarter.

[Operator]

And our final question today comes from the line of Chris Kuntarich with UBS.

[Christopher Kuntarich, analyst]

Maybe 2, if I can. First one for Robert. Just curious how you're thinking about the strategic road map and the implications for Clear Cooperation policy. This is maybe another way to put it, how much of your, call it, 18- to 24-month strategic road map hinges on changes around Clear Cooperation policy? And maybe how could we see that potentially change if there are not changes to be made?

[Robert Reffkin, executive]

Yes. Look, I want to reiterate that the core of our business is allowing the market to recover and keeping our OpEx growth at 3% to 4% organic OpEx growth of 3% to 4%. So that's the core business that is the core of our strategy. And then just being best in the world and making agents better. And that's kind of what we have been and will continue to be.

Clear Cooperation is, I would call it, from your investor perspective is -- would be an upside case, a very likely upside case. And again, this is the only industry that I know of where people's asset, their hard work, the agent gets the listing. They build the relationship, they get the listing, they take the photos, they pay for the photos, and they are forced to put their entire listing and their photos into an MLS they cannot watermark it and the MLS watermarks it, they can't get any economics for their listing, but then the MLS can sell the listings to countless third parties.

And so I think this is that to end. And I think the only reason it's lasted as long as it has is because people didn't fully understand what was happening. But yes, it's not core -- I'd say, what is core to the strategy is inventory -- Compass will continue to help homeowners, list properties in ways that help homeowners more, not -- as opposed to the current environment where the industry is being forced to list properties in ways that help third-party lead diversion companies sell leads the best or help MLSs sell client data the best or help MLSs sell -- charge agent dues the best because they have 100% market share in order to do your job as an agent, you have to have access to MLS -- there's no competition in listing systems, right?

And so again, this thing -- it will end. It will become -- but I do believe in a strong MLS, all that said is I don't believe you should be able to force every homeowner in the country to do something they don't want to do. And so we will get better and better at helping homeowners, and that will help us get more listings that will help listing agents get more listings that will make listing agents want to stay here. That will make listing agents want to come here. And we will lead the journey with other brokers, by the way, of having inventory be an asset, not just an input.

[Christopher Kuntarich, analyst]

Got it. Very helpful. And Kalani, maybe just one quick follow-up on the 30 for 30 program. I think last call, you said you guys were a little more than halfway there. Can you just talk about kind of the range of market shares within that group of 30 markets? And then just should we be thinking about that 30% market share target being achieved? I think you said in '26, but I just want to clarify if that's the average of '26 or exiting '26.

[Kalani Reelitz, executive]

Yes. I'll work backwards. We believe and we'll work to get faster, but we believe that, that rate is kind of exiting '26. I think we're excited by the opportunity. And I think when you look at it, we're looking for an average across.

So as we sit here today, we're probably halfway to it. We have a few markets that are at or over. We have a lot of markets kind of in that high-teens area and some markets that we just started going into as we went into the market downturn.

And so we do believe we kind of run the full gamut in our top 30 markets, but we can see the markets, we can see the TAM, and we are operationally aligning all of our prioritization in the recruiting team, M&A to make sure we achieve it. So, I do think we'll get there exiting '26 though, to answer your question directly.

[Operator]

And with that, I will now turn the call back over to Founder and CEO, Robert Reffkin, to close this out. Robert?

[Robert Reffkin, executive]

Well, thank you for joining the call today. I just want to express my gratitude to all of our agents, to all of our employees as well as to all the shareholders. Your commitment to Compass has driven our success and outperformance in a difficult market, and we've collectively put the company in a position to thrive as the market conditions improve. With that, thank you. Have a great rest of your day.

[Operator]

Thank you, Robert. And ladies and gentlemen, that concludes today's call. Again, thank you for joining, and you may disconnect.