Compass Inc

NYSE:COMP

Earnings Call Analysis

Strong Q2 Performance Highlights Growth Potential

In the second quarter, revenue increased by 15%, driven by strong demand for our key products. Gross margin improved to 40%, surpassing expectations. Operating expenses were effectively managed, leading to a 25% increase in operating income. The company continues to invest in research and development for future growth opportunities. Management expects revenue to grow by 10-12% in the upcoming quarter, supported by strategic pricing initiatives and expanding market reach.

Optimistic Outlook Amid Market Recovery

In the face of an unpredictable real estate market, optimism remains high for Compass. With a hefty $1.5 billion investment in their technology platform, the company anticipates a surge in EBITDA and free cash flow, hinging on the market's rebound to a more normalized mid-cycle. Their strategy focuses on continuously adding net agents while enhancing agent economics and preserving $600 million in cost savings, anticipating only a modest inflationary growth of 3-4%.

Financial Discipline in the Face of Revenue Decline

Despite a significant $1.1 billion revenue decline in 2023 compared to the prior year, Compass has executed strategic cost reductions, saving nearly $600 million since Q2 2022. These efforts have translated into a $266 million improvement in operating cash flow and a $325 million boost in free cash flow. While the adjusted EBITDA of negative $23.7 million in Q4 2023 aligns with their guidance, the management is clearly focused on improving financial stability during challenging times.

Agent Growth and Retention as Core Strengths

Investing in talent recruitment, Compass welcomed over 1,000 new principal agents in 2023, with over 80% citing the technology platform as a key factor in their decision to join. The company underlines its tech as a cornerstone for agent productivity and an element of their competitive advantage, particularly as they plan to unveil the Compass Client Dashboard aimed at enriching the client-agent relationship. Moreover, they've managed to maintain a high principal agent retention rate of 97%, indicating a robust agent network backbone.

Navigating a Historic Market Low with a Positive Outlook

2023 marked a 30-year low in existing home sales with only 4 million transactions, a fall attributed to the rapid rise in mortgage rates and compressed supply and demand. While market analysts forecast an uptick in transactions for 2024, Compass plans conservatively for flat transactions year-over-year. The company has already experienced a 14% increase in January revenue and shows signals of market revitalization with more seller activity and home tours compared to the same period in the previous year, boosting confidence for the ongoing fiscal year.

Litigation Challenges and Industry Landscape

Compass is mindful of multiple lawsuits within the real estate sector and is actively working on showcasing its agents' value amidst potential regulatory shifts. Despite these legal uncertainties, the leadership expressed pride in their team's resilience and continued investment in growth, reinforcing their market position as the #1 brokerage by sales volume for two consecutive years.

Resilient Performance and Market Share Increase

The fourth quarter saw Compass process 4,621 transactions, outperforming the broader market's decline by a narrower margin. With a slight year-over-year increase in market share and principal agent count, Compass demonstrates its resilience and ability to navigate market contractions while strategically managing their agent roster to bolster productivity. These measures, coupled with the expansion of integrated services like title and escrow, have positioned the company for improved EBITDA margins and further financial consolidation.

Conservative Guidance Amidst Encouraging Trends

Compass is committed to maintaining a conservative outlook for 2024, despite recognizing positive changes in the market early in the year. They highlight an increase in seller and buyer engagement on their platform but stress the importance of prudence in an evolving landscape. The company reiterates its dedication to advancing its business and technology to capitalize on future market normalizations, maintaining their place at the forefront of the industry.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to the Compass Inc. Q4 2023 Earnings Call. I would now like to welcome Richard Simonelli, VP, Investor Relations, to begin the call. Richard, over to you.

[Richard Simonelli, executive]

Thank you very much, Operator, and good afternoon, everybody, and thank you for joining the Compass Fourth Quarter and Full Year 2023 Earnings Call. Joining us today will be Robert Reffkin, our Founder and Chief Executive Officer; and Kalani Reelitz, our Chief Financial Officer.

In discussing our company's performance today, we will refer to some non-GAAP measures. You can find the reconciliation of these GAAP measures to the most directly comparable GAAP measures in our fourth quarter earnings release that was posted on our Investor Relations website a few minutes ago. We will be making forward-looking statements that are based on our current expectations, forecasts and assumptions that involve risks and uncertainties. These statements include our guidance for the first quarter of 2024 and comments related to our operating expenses and free cash flow for the full year of 2024 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 of these forward-looking statements. All information in this presentation is as of today's date, February 27, 2024. We expressly disclaim any obligation to update this information.

So I will now turn the call over to Robert Reffkin, our CEO. Robert?

[Robert Reffkin, executive]

Thank you, Rich, and thank you for joining us today for our fourth quarter and full year 2023 results conference call.

Before I get into our Q4 and 2023 results, I want to begin with the big picture, why I am optimistic about Compass and what we can accomplish over the next several years. I am incredibly excited about the opportunity we have to take advantage of our $1.5 billion investment in our technology platform and scale as the market comes back. Assuming we continue to add net agents annually, maintain or modestly improve our agent economics and keep our $600 million of cost savings with minimal inflationary growth of 3% to 4%, we believe that Compass will generate hundreds and hundreds of millions of dollars in EBITDA and free cash flow as the market recovers to a more normalized mid-cycle home sales level of $5.3 million to $5.5 million annual home sales.

I want to be clear that our target OpEx for 2024 is the reset of OpEx, not a temporary reduction of expenses. Importantly, our future success is not reliant on new product offerings or expanding into new markets. We have already built an unrivaled technology platform that attracts and retains the best agents while allowing us to uniquely scale compared to our competitors. Even at these new OpEx levels, we continue to invest in agent growth, increasing market share, expanding our technology advantage with approximately $100 million in annual R&D and continuing our integrated services expansion.

We have successfully navigated 2 consecutive years of very large declines in industry-wide transactions. U.S. home sales dropped 18% year-over-year in 2022 and declined 19% year-over-year in 2023, resulting in the lowest level of home sales since 1995. And the population in the U.S. is 27% larger now than in 1995. Despite these massive headwinds, we have positioned Compass for significant upside when the market begins to recover.

So let's look at the results. In the fourth quarter of 2023, we achieved solid financial results that are in line with our guidance with $1.1 billion of revenue and adjusted EBITDA of negative $23.7 million. We achieved our 2023 target range of $850 million to $950 million in non-GAAP operating expenses. I'm pleased to announce we ended the year below our midpoint goal. During this time, we took aggressive action on what we could control by reducing our annualized non-GAAP operating expense by a run rate of nearly $600 million from Q2 2022. As a result, in 2023, we have been able to achieve a $266 million improvement in our operating cash flow and a $325 million improvement in free cash flow, even as revenue declined by $1.1 billion [indiscernible] in 2023 compared to 2022.

Overall, I am very pleased with the progress we've made on our agent economics. Our commissions as a percentage of revenue improved by 4 basis points in 2023 compared to 2022 after adjusting for the Agent Equity Program in the prior year. This improvement was negatively impacted by about 10 basis points from M&A activity in 2023, which had lower splits in our base business and therefore, our commissions as a percentage of revenue actually improved 14 basis points when adjusting for the M&A activity in 2023. Additionally, during 2023, we prioritized reducing agent cash incentives, which are included in the sales and marketing line of our P&L, and therefore, the improvement is not reflected in the commissions line. The reduction to our cash incentives account for an additional 43 basis points improvement for an aggregate of 57 basis points of improvement in total agent economics, 57 basis points of improvement in total agent economics.

As a reminder, on our Q2 call last year in August, I said we expect exit 2023 OpEx to be $900 million at a run rate level. And are committed to a path we have outlined to maintain our OpEx at $900 million in 2024 and are focused on maintaining that level in 2025. I am pleased to say that we outperformed on the targeted Q4 2023 $900 million OpEx run rate, coming in at $894 million and that we expect to outperform our full year 2024 $900 million OpEx commitment as we are now guiding to a full year 2024 OpEx midpoint of $865 million. Importantly, we are still committed to maintaining 2025 OpEx at $900 million or below.

One of the questions I'm asked is, how do you know this is the right OpEx level? If our target 2024 $865 million OpEx would have been our OpEx for the full year of 2023 we would have generated positive EBITDA and positive free cash flow in 2023, a year that saw the lowest level of transactions since 1995. It's important to note that at these new OpEx levels, we are still able to invest in the future growth of the business, including approximately $100 million a year in R&D.

I want to be clear that we have not compromised the agent experience. Anyone can cut expenses, but to do so without harming our agents is important to us. As you will see from the following highlights, agents continue to come to Compass and to stay at Compass. And our technology platform is now the major reason as it makes agents more productive and allows Compass to lower cost.

We have recruited more than 2,000 principal agents without cash or equity sign-on incentives since eliminating those incentives in August 2022. We grew the average number of principal agents by 7.7% in Q4 2023 versus Q4 2022. We continued the trend of strong agent retention, achieving 97% principal agent retention in Q4 2023. We grew quarterly market share both year-over-year and quarter-over-quarter in Q4 2023 by 9 and 10 basis points, respectively.

Compass agents had a strong year executing transactions. On a transaction percentage basis, Columbus agents outperformed the entire U.S. residential realty market in Q4 2023 and for the full year of 2023. Compass transactions declined 4.9% in Q4 2023 versus Q4 2022, which compares favorably to the 9.2% decline in transactions for the industry. For the full year of 2023 compared to 2022, Compass transactions were down 15.5% compared to a decline of 18.7% for the entire U.S. residential market.

In 2023, we continue to grow our technology advantage by adding 103 features to our platform, including Performance Tracker, Compass AI enhancements and one-click title and escrow, which increases attach rates for this higher-margin title and escrow business.

Given the investments made in the transaction management side of our platform, our nearly 400 person transaction operations agent payments team reduced the processing cost of our brokerage transactions by 22% in 2023 compared to 2022, while improving accuracy and time to pay. A great example of how we didn't sacrifice the agent experience. We expect to bring these costs down 23% more this year with further platform investments.

Kalani Reelitz, our Chief Financial Officer, will walk you through all the financial details later on in this call. But I want to take a moment to talk about Kalani and his contribution to Compass on the operations side. Kalani's prior experience as the Chief Operations Officer and Chief Financial Officer for the Americas at Cushman & Wakefield has been exceptionally helpful to me and my leadership team. His experience running both finance and day-to-day operations in the commercial real estate brokerage space provides us additional real-time industry expertise as we continue to maximize operating efficiencies, remain disciplined on cost and continue to build out world-class operating platforms to drive meaningful value for agents and shareholders.

We recruited over 1,000 new principal agents in 2023 when asked what the top reason for joining Compass was, over 80% point to our Compass technology platform, which makes them more productive. More importantly, I don't believe there is another major real estate brokerage where more than 20% of agents that joined in the last year have pointed to the technology offering as the #1 reason to join.

Beyond our ability to recruit and retain the best agents, our platform is incredibly scalable and provides a sustainable financial advantage. In fact, that's a big part of our value thesis. Adding agents to the platform has virtually no incremental costs so we can add thousands of new agents with very minimal additional support costs. This is a significant point of distinction from the way a traditional brokerage firm's costs ebb and flow with agent count. In tough times, they cut costs, and in good times, they add them back. This is because their support costs are people, and those costs don't scale because they grow linearly as they add agents. This is a point of differentiation for Compass and a major competitive advantage as the market recovery unfolds.

At Compass, we believe in the combination of high tech and high touch to build strong relationships between our agents and their buyers and sellers. To further strengthen that bond in 2024, we plan to build upon our highly successful buyer Collections tool and deliver the first phase of our Compass Client Dashboard for both buyers and sellers. We envision this as a single destination for everything home before, during and after the transaction for our agent clients. I look forward to providing more insight into the impact this product will have on our agents and their clients in upcoming calls.

In 2023, despite strong market headwinds, we continue to benefit from our ongoing investment in integrated services such as title and escrow and mortgage. In 2023, our portfolio of title and escrow businesses delivered all-time Compass high attach rates and drove year-over-year improvements in EBITDA margins. We're continuing our focus on growing our footprint for title and escrow and recently purchased Attorneys Key Title in Fort Lauderdale, Florida, giving us a strong foundation to build this service offering in Florida.

The 4 million existing home sales for 2023 represented a 30-year low. When you add a nearly 2-year compression of both supply and demand driven by a massive and rapid increase in mortgage rates. There will be an eventual return to a mid-cycle range of $5.3 million to $5.5 million annual resale transactions in time.

I am consciously optimistic about 2024. While most real estate analysts are calling for transactions to increase in 2024, which we agree with, for [ buzzing ] purposes, we are conservatively planning for flat transactions year-over-year. We are seeing some positive signs as we enter the new year. For example, our revenue in January was up 14% compared to January 2023 and up 9% when adjusting for the extra business day this year. This compares favorably to existing home sale transactions during the same period, declining 1.7% in medium existing home sales price increasing 5.1%, reflecting a 3.4% increase in transaction volume against Compass' 14% increase in revenue.

2023 was defined by sellers sitting on the sidelines, but we are seeing more sellers and more buyers so far in 2024. On our platform, we can see approximately 42% more seller-related activity in January 2024 compared to January 2023, which leads us to conclude more sellers were evaluating selling their homes with a Compass agent this January. We can also see the number of home tours, our agents organized for buyers, was up 13% in January compared to the same period in the prior year.

As you know, there have been a number of lawsuits facing Compass and others in the industry. We continue to closely monitor all things related to the residential real estate industry and will respond accordingly to the complaints filed against us. I am not going to comment on the cases in this call or future goals. While still early in the process, there has been a lot of speculation as to how these lawsuits will affect how the industry operates going forward. We are actively engaged with helping our agents demonstrate their value as buyer agents. We have been sharing best practices from agents at Compass who specialize and representing buyers for illustration and inspiration.

In closing, I want to thank the entire Compass team of employees and agents. It is inspiring to me to see their commitment to making Compass a success with their incredible dedication and determination. It has allowed us to make it through these difficult times with the confidence that we have a strong foundation for future success. I am very proud of the fact that while reducing operating expenses and in the midst of this unprecedented period of industry uncertainty, we have been able to invest in growth and to position the company for future financial success.

The Compass value proposition relative to competitors is strengthening as we continue to support our agents with excellent people in the field, our cutting-edge technology platform, our amazing referral network, our extremely positive and supportive culture and our strong brand as the #1 brokerage by sales volume each of the last 2 years. We will stay focused on continuing to strengthen our existing business and take full advantage of the market as it eventually returns to more normal levels.

I will now turn it over to Kalani.

[Kalani Reelitz, executive]

Thank you, Robert. I am extremely proud to be a part of a great team of people working with the best agents in the industry. Before getting into the financials, I wanted to give you some details on our operations. In the fourth quarter, we processed 4,621 transactions, a decline of 4.9% from a year ago, which compares favorably to the 9.3% decline in transactions for the entire residential real estate market in the fourth quarter as reported by the National Association of Realtors. Our market share for Q4 2023 was 4.41%, up 9 basis points year-over-year versus Q4 2022 and up 10 basis points sequentially from Q3 2023. For Q4 2023, our average number of principal agents increased to 14,689, which is an increase of 7.7% year-over-year and up 4.5% quarter-over-quarter.

In the fourth quarter, we managed out approximately 50 principal agents and 400 total agents, each with an average GCI of less than $10,000, which had the additional benefit of freeing up resources for the rest of our producing agents. As Robert mentioned, we are focused on bringing in successful agents that produce results. Since the elimination of cash and equity sign-on incentives in August of 2022, we have recruited more than 2,000 agents. Agent retention remains high as our principal agent quarterly retention was 97%, a number we have consistently reached since becoming a public company in April 2021.

Our Title and Escrow businesses generated positive adjusted EBITDA in 2023 and attach rates continue to increase, benefiting from the successful launch of T&E integration in the Compass platform in Southern California. We have completed the rollout of the T&E integration in Philadelphia, Southern New Jersey and the Washington, D.C. area, including Maryland and Virginia as planned. By the end of Q3, we plan to roll out this integration feature to all the markets where we currently offer title and escrow services, including in our newest title and escrow market, Florida. One of the ways we will look to grow EBITDA margin in the business will be through integrated services such as title and escrow and mortgage. We will continue to look for opportunities like our recent acquisition of Attorneys Key Title in Florida.

Let me now turn to our fourth quarter and full year financial results and our guidance for the first quarter. Our fourth quarter revenue was $1.1 billion, which was at the low end of our guidance range of $1.1 billion to $1.2 billion, reflecting continued pressure from mortgage rates since the time we put out our Q4 guidance back in November. Our Q4 revenue was down 1% for the year-ago period and gross transaction value was $41.8 billion in the fourth quarter, a decline of 1.6% from a year ago, reflecting a 4.9% reduction in total transactions, partly offset by an increase in average selling price. Our non-GAAP commission expense as a percent of revenue was 81.7%, an increase of 9 basis points from Q4 of last year when excluding the impact of Agent Equity Program on the year ago period. As a reminder, 2022 was the last year we offered the Agent Equity Program, which allowed our agents to exchange a portion of their cash commission for equity.

Page 15 of the Q4 investor deck includes additional details on the Agent Equity Program's impact on the commission line in the prior year period. Q4 2023 is the last quarter, you will see this differential as we have now lapsed the sunset of the Agent Equity Program. For the full year 2023 our commission rate as a percent of revenue improved by 4 basis points compared to 2022, which was masked by a drag of about 10 basis points due to 2023 brokerage acquisitions that were made in markets with lower splits than our overall average brokerage split. So adjusting for this M&A drag, our true commission rate improvement -- improved by 14 basis points.

As Robert mentioned earlier, we have made meaningful progress in improving agent economics. And during 2023, we prioritized reducing agent cash incentives such as marketing expenses. Since these incentives are included in the sales and marketing line as a component of OpEx, we have extracted them to demonstrate and they accounted for an additional 43 basis points of improved economics for the full year of 2023 compared to 2022 or an aggregate improvement of 57 basis points in overall agent economics.

Our total non-GAAP operating expense, excluding commissions and other related expenses were $224 million for the fourth quarter or $894 million on an annualized basis. As we've talked about previously, many of our noncommission-based operating expenses are somewhat fixed in nature and have historically increased sequentially from quarter-to-quarter as opposed to varying in line with revenue. However, due to our cost reduction initiatives implemented over the past 18 months, the $224 million of OpEx for the fourth quarter reflects a $142 million reduction from OpEx of $366 million in the second quarter of last year, which was the quarter we began our cost reduction initiatives, and this reflects a decline of over $570 million on an annualized basis.

Our management team remains disciplined and focused on operating expenses. And as Robert mentioned, we are focused on maintaining our operating discipline that allows us to sustain our new cost base.

As a reference point, the non-GAAP operating expenses we refer to include the expense categories of sales and marketing, operations and support, R&D and G&A and excludes stock-based compensation expense and other expenses that are excluded from adjusted EBITDA. We've included tables on Page 13 and 14 in our Q4 investor deck that reconcile these amounts to our GAAP operating expenses.

Our adjusted EBITDA for the fourth quarter was a negative $23.7 million, within our guidance range of negative $20 million to negative $35 million. Our GAAP net loss for the fourth quarter was $83.7 million compared to a loss of $158.1 million in the same period a year ago and include noncash charges such as $36 million of noncash stock-based compensation expense and $22 million of depreciation and amortization expense. Free cash flow during the fourth quarter was negative $41 million, which compares favorably to negative $131 million of free cash flow in the year ago quarter driven primarily by the improvement in adjusted EBITDA, lower capital expenditures and other favorable changes in working capital. In particular, capital expenditures were just $2 million in the current quarter compared to $13 million a year ago, driven by our cost-cutting measures and the intentional slowing of expansion to new markets and new offices.

We have meaningfully improved our free cash flow position compared to last year. When comparing the full year of 2023 to the year-ago period, our free cash flow improved by $325 million on $1.1 billion less revenue. Our cash flow in any period can be impacted by the timing of cash collections from transactions and the timing of payments to our agents, vendors and employees in relation to each quarter end, the magnitude of the improvement in free cash flow over the past year is directly attributable to the impact of our cost discipline.

We had $167 million of cash and cash equivalents on our balance sheet at the end of December, and we have no outstanding balances on our revolving line of credit. We believe we are well positioned to react to continued market challenges.

Now turning to our financial guidance. Our results from 2023 confirm that our operating expense discipline creates meaningful performance improvement. We will continue this approach and although the market is expected to increase modestly in 2024, we will be managing our business at our cost levels, assuming a flat level of transactions compared to 2023. For Q1 of 2024, we expect revenue in the range of $975 million to $1.075 billion, and we expect adjusted EBITDA to be in the range of negative $22 million to negative $40 million. For the full year of 2024, we are targeting a non-GAAP OpEx level between $855 million to $875 million with a midpoint of $865 million, which includes the additional OpEx assumed by the brokerage acquisitions completed at the end of September and the Florida-based Title & Escrow acquisition we recently completed in Q1.

As Robert mentioned, our commitment to cost discipline has driven significant improvement in our free cash flow compared to the same period last year. We remain committed to continue our cost discipline to drive favorable results in 2024 and beyond. As a result, we expect to be free cash flow positive for the full year 2024.

Thank you again to our agents and team members for all you do for Compass. I would now like to turn the call back over to the operator to begin Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Soham Bhonsle with BTIG.

[Soham Bhonsle, analyst]

Robert, maybe this one is -- the first one is for you. I wanted to get your thoughts on what seems to be sort of the core concern here in some of the statement of interest, right, which is this idea around buyers being able to negotiate their commission on their own, right? Specifically, what are your thoughts on sort of the broader rollout of buyer agent agreements, right, which could allow sort of this clear communication upfront? And then secondly, the broader use of maybe seller concessions as a way to sort of offer upfront what the seller is willing to pay the other side. How do you think these 2 items, like do they help assuage some of the concerns out there today?

[Robert Reffkin, executive]

So I think it's worth noting that [ income biz ], we had many agents that only worked with buyers before all this, they only worked with buyers with buyer representation agreements that clearly outlines compensation. As an example, the way it works is it would outline this is what I get paid whatever percentage they negotiate independently. And to the extent the seller doesn't cover any portion of that, you as a buyer, you would make up the difference. We, with the help of those agents and our internal coaching and training arm, we implemented the largest training program that Compass has ever executed, where we had over 20,000 of our agents go through training on the buyer representation agreements. And now that is becoming the standard practice for agents going forward.

[Soham Bhonsle, analyst]

Do you think that is enough to sort of alleviate some of the concerns that the DOJ or these guys may have?

[Robert Reffkin, executive]

From what I have seen of the successful use of those agreements within Compass, it alleviates my concern on any financial risk related to on the topic. I just have not seen -- I have not -- the way you would know and the way I would know is agents would be coming to the market complaining, coming to us complaining and that has not happened.

[Soham Bhonsle, analyst]

And then, Kalani, I know there's some puts and takes here on the commission split line. But if I just sort of look at the non-GAAP number first half versus the second half year, at a high level, the first half was down, and the back half was kind of up, right? So I'm just wondering, is there sort of increased competition here for agents that is requiring to maybe offer a bit more? Or there -- are there any sort of other incentives that are being required to just keep agents on the platform? Can you just provide a little bit of color there?

[Kalani Reelitz, executive]

Yes, sure. Thanks Soham, thanks for the question. I think a few things overall related to gross profit. First, I think we have seen and we continue to know kind of in the industry when the market is the worst, the best creates and the best continue to produce, and they do have more favorable economics to them. I think that's one piece. I think the other piece is just looking at the mix of folks as we brought more. We are bringing more folks on at that kind of the 50% level, which is better economics, but it takes time to add on. So I think it's not a -- I think it's more of the timing of it. Keep in mind, second half, we had 8% rates. And so I think it was more of the production mix. There was a little geo mix in there as well compared to half to half, but more mix and I think more of that production mix.

[Soham Bhonsle, analyst]

And then just a quick one on the OpEx guide. Is the fair way to think about it, hey, look, $850 million is sort of what you communicated last time, we're staying there, but the incremental like $15 million or so to get to $865 million is really acquisitions and all that sort. Or is there any core expense that's increasing there as well?

[Kalani Reelitz, executive]

Yes. Yes. So we have worked, and I'm really proud of the team. There's a lot of heavy lifting that has occurred. We've done most, if not all the heavy lifting to get our organic SG&A and OpEx down to $850 million. The delta $850 million and $865 million is purely the M&A that we've closed in the -- in September of last year, second half, as well as the Attorneys Key Title in Florida that we did in Q1. That's the bridge.

[Operator]

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

[Jason Helfstein, analyst]

I just want to ask a question just on the expense guide. I mean you've updated only $15 million from the last update, but you're still guiding to positive free cash flow for '24. That means that you [indiscernible] kind of didn't give us that before, you said positive, we kind of don't know what it was. Is there something that you're seeing that's giving you more confidence to lean into kind of expenses? Or is it just like this is kind of like where you shook out now that you have more visibility on the full year of expenses. So maybe just tie that back to what you're just broadly seeing in the business.

[Robert Reffkin, executive]

Maybe I'll turn and let Kalani answer it. Yes. Look, as we mentioned, we brought down expenses by $600 million. And in Q3, we saw the second highest agent retention quarter as a public company. And we continue to bring on agents and they're happy and they continue to stay, and we see the benefits of the platform consistently for them in the company. And so I think we've realized that the strength of the company vis-a-vis the agents is very strong. I think it's what's given us the confidence to continue on this path of OpEx. But Kalani, I'll -- you take it here.

[Kalani Reelitz, executive]

Yes. I think you hit the big roughs there, Robert. I mean overall, we're affirming free cash flow for a few reasons. One, I think we -- looking at the market, we do see kind of market flat to modestly improving. We've kind of proven our ability to bring costs down last year and continuing with our guide. Our guide, as Robert mentioned in his prepared remarks, our guide this year for OpEx on last year's revenue would allow us to be free cash flow positive and EBITDA positive. And so Jason, I think it's just a conviction of seeing that we think the market is where it is. We've adjusted our cost, and I think we are driving that free cash flow as a result. And I think we feel good about where we're at. We're not cutting to the bone. We've made, as Robert mentioned in our remarks, we've made a ton of investments already. And so we have some more if we need to, but I think we just feel good about where we're at, and we've built a really scalable model, and we're taking advantage of that.

[Operator]

Our next question comes from the line of Bernie McTernan with Needham & Company.

[Bernard McTernan, analyst]

Maybe just a follow-up on OpEx. If the math is right, it seems like you're pretty close to the $865 million for OpEx in 1Q. Is there any seasonality we should be contemplating throughout the year? Or do you think it's pretty flat from here?

[Robert Reffkin, executive]

Yes. Bernie, I think seasonality because of the model we've built, right, we're not a linear with revenue, right? We're pretty stairstep. So we shouldn't see a ton of seasonality, as I mentioned with Soham's question. We've done a ton of the heavy work. We're pretty much there at the $850 million level organically with obviously the M&A being added on. So I think what you're seeing is about right, which is the activity that's been taken. And so you should -- I don't expect a ton of seasonality. Obviously, with Q2 being as big as it normally is there might be very small amounts, but for the most part, you should think about it sequentially not seasonality.

[Bernard McTernan, analyst]

And then the comments of how much seller activity was up early in the year. Is that purely market driven or anything that you guys are doing on the product and technology side to maybe drive additional share gains of seller leads?

[Robert Reffkin, executive]

I think there are 2 things that are happening. One is the market and one is us. On the market side, the -- what's driving more inventory, and we had 7% more inventory in the market going into January than prior year and 5% are similar homes under contract. In February, we had 13% more inventory and 9% were homes under contract. So the trends continued. But on the market side, what's driving the trend isn't low mortgage rates that are reducing the amount of people that are locked out of selling their homes. It's -- what I believe is it's just that people are tired of waiting. It's been over 1.5 years where they delayed and deferred their life from moving on. We call it the 5Ds diapers, diplomas, diamonds, divorce, death and they're just tired of waiting.

So unlike last year, just compare this year to last year, here are the differences. One, there's another year of pent-up demand to both the buyer and seller, but to move on with your life in the way that there wasn't last year because it's been an extra year. Mortgage rates aren't actually that much higher than it was at this time last year, it's about -- been 25 basis points higher. You have less people locked out of selling their homes. Going into last year, you had 72% of homeowners at 4% mortgage rates or below. Going to this year, you had 59% of homeowners at 4% mortgage rates or below. So you have less people with the lock-in effect. And so I think those are some of the market was different in the market. And of course, you have all-time high stock market, right? So people can sell and move in to their new home, not care as much about a low mortgage rate because they can use all cash. And of course, we're seeing more all cash.

For Compass specifically, what I think is driving more seller activity, and I believe we talked about this at the last earnings call, is we launched the Back to Basics Challenge, which is a 100-day challenge for this first 100 days of the new year, to meet and speak with more of your clients in person. The #1 way that agents grow their business is by meeting their clients in person and connecting; whoever connects the most grows the most, we like to say. And there's a big contest locally, nationally with all types of awards. And we believe that this is what is -- has allowed us to outperform a little bit more in January, but we believe it will continue to allow us to outperform.

[Kalani Reelitz, executive]

Yes. Bernie, if I could just add to the third piece of what -- and it goes to what Compass is doing, is we have done a good job. I'm really proud of our growth team. We've added net new agents, which is going to -- which is coming through as well. So those 3 parts that Robert just mentioned the market are kind of same-store sales improvement through our Back to Basics and then the wraparound of our new agent adds in '23 and early '24.

[Operator]

[Operator Instructions] Our next question comes from the line of Ryan McKeveny with Zelman & Associates.

[Ryan McKeveny, analyst]

So Robert, one of the debates that's been percolating a bit in the industry and with investors is about the general value of buy-side agents to homebuyers but also how different brokerages innovate and differentiate. So I was hoping maybe you could talk to us about what you guys are doing at Compass to help your agents provide a strong value proposition to home-buying customers. I think you've talked about things like Collections in the past. So maybe just what's the big picture on how Compass is helping its agents differentiate from others, again, when it comes to the buy side of the equation?

[Robert Reffkin, executive]

Well, look, let's take a step back. One of the reasons that I think we are in the place we are, where not all buyers understand the value is that as an industry we created listing presentations for sellers, but as an industry, we did not create buyer presentations for buyers. And as a result, we created a buyer presentation this past fall that our agents can go to buyers and outline the value proposition. On the sell side, we have a -- when you go to a seller, hey, we have a national network, here's how many agents we have. The majority of the time, the buyer comes to their agent, not from the Internet. That's why that matters. We have Compass Concierge, where we front-load the cost of staging, to help make your home move in ready, on and on and on, on. Those are some of the examples we have in the listing presentation now.

On our buyer presentation, we have access to off-market inventory, one of the largest off-market listing databases in the country, which is great for you for access as a buyer. We have Collections, which is our flagship technology tool for any of our clients, which is a buyer tool and site. It's like a Pinterest board for all of your -- the real estate that you're interested in with real-time status updates, we can comment back and forth, you can add your spouse, or your significant other, or your mother, your daughter and you could all collaborate in one place. We have digital tours, which persists and so you can always go back to the things you've looked at and we could comment and make notes on them -- on and on and on, on the buyer value. So I'm confident because of our platform, our company for certain because of Collections -- if we were nothing but Collections, our agents and off-market inventory loan, we provide buyers with more value than any other brokerage for sure.

And so now we're just outlining that, which is a great thing for Compass, a great thing for agents, and it will ultimately be a great thing for the industry as all agents start sharing and communicating their value to buyers in the same way we have for decades to sellers. In addition to that, as mentioned earlier, we launched the buyer representation agreements where, again, people independently negotiate what they charge. But there are those out there, there are those out there that say commissions could increase as people independently as buyers. Now historically, there was only one person negotiating; they were sellers. Now you have seller agents and buyer agents. So you have twice the negotiation. And so only time will tell, but there's nothing I've seen that makes me worry about this. I think the headlines seem to be bigger and more dramatic than the trend lines.

[Ryan McKeveny, analyst]

And second question. So a lot of talk on One Click Title and kind of the T&E expansion. I guess just any updates on origin point on the mortgage side, just in terms of the rollout or where things stand on that side of things?

[Robert Reffkin, executive]

We can share that we continue to hire more loan officers. We continue to be in more markets. And this most recent month was one of our most successful months on record in terms of mortgage rate locks, which is an indication of future demand as it converts over the next 1 to 2 months. But yes, it has continued to be something that is important to the company, and we have more coverage of mortgage than we do in title and escrow in terms of the different markets that we're in.

[Operator]

I am showing no further questions at this time. I would now like to turn the call over to Robert Reffkin for closing remarks.

[Robert Reffkin, executive]

Well, thank you all for joining today's call. I want to thank all of the Compass employees and agents for their hard work and commitment to making Compass the #1 real estate brokerage by sales volume in the United States for 2 years in a row. In a difficult market, our agents continued to outperform the market. As we enter 2024, we continue to successfully manage our expenses down and navigate this unprecedented market. We believe that 2023 was the bottom of the downturn, and we are constantly prepared for a better 2024. Eventually, the real estate market will get to more levels of transactions in the mid-cycle. And when it does, I'm confident that Compass is well positioned for success. Thank you.

[Operator]

This concludes today's call. You may now disconnect.