Welcome to the Redfin Fireside Chat at the Goldman Sachs Communacopia and Technology Conference. I have the great privilege to introduce Chris Nielsen, who's the Chief Financial Officer at Redfin. Prior to joining Redfin in 2013, Chris was the CFO and COO of Zappos. My name is Mike Ng. I cover Redfin as part of our real estate tech coverage here at Goldman. Today, we're gonna talk about the state of the housing market, Redfin's strategy and expansion efforts in their core brokerage business, as well as their strategy in rentals and mortgages, and we have about 35 minutes for today's presentation, inclusive of some audience Q&A, which we'll get to at the end. With that said, thank you again, Chris, for making yourself available and being here. So Redfin's a technology-powered real estate brokerage firm that aims to disrupt traditional brick-and-mortar real estate brokerages with its digital platform, its solutions, Redfin.com. Maybe we can just start, bigger picture, talk about Redfin's long-term mission, you know, how it's managed to disrupt brick-and-mortar and gain share. You know, what strategic decisions has Redfin pursued to, you know, drive differentiation over time? Sure, well, thanks for having us. Really appreciate it, Mike, and you know, the way we think about our mission is to redefine real estate in the consumer's favor, and the way we began was with a website and hiring our own agents to help customers all the way through a transaction. We've continued to refine our services there, to charge people less, and to deliver lots of information for consumers from the website, and probably the way the business has changed the most then, over the course of the last couple of years, is by adding service offerings to that, so we now provide mortgages to our consumers, so they can see all the way through a transaction. They can make that transaction easier to close and get a really great deal on the financing of it. And we've also expanded our services to provide rentals information that many consumers we've met, particularly over the last few years, who've been interested in buying a home, have also considered renting a property, because with housing prices up, that becomes more of a trade-off decision. And so that's probably the way the business has changed most over the last couple of years, is expanding service offerings. But we're continuing to remain really focused on saving customers money, providing the right information in transactions all the way across those services. Great. And, you know, it's hard to talk about Redfin without talking about the broader housing market. So I was wondering if you could just speak a little bit about that. You know, according to the MBA, existing home sales this year should be about 4.2 million, up slightly from 4.1 million last year. Redfin's always done a really great job about offering its views on the broader housing market, so, maybe you can talk about that. What's your U.S. housing outlook and, you know, for volumes and pricing in 2024 and 2025? Sure. So just starting with that, mortgage interest rates are down over the last few months. That's great news. Most recently, interest rates are about 6.3%. Rates were up over 7.5% earlier this year. So that's a really positive catalyst in terms of volume, but we haven't quite seen that pull through in more recent transactional volume. Existing home sales from National Association of Realtors for July was a little under four million units. I think that we're continuing to see consumers internalize these lower mortgage interest rates and probably think about what it means for them, but we haven't started to see it really have an impact on transactional volume, at least yet. We think that that continues to pull through as we move into 2025. A lot of consumers would have already made their choices about buying or selling homes so far this year, and I think we're really interested to see, as we get past the election, as there's more certainty around macro conditions, about how those lower mortgage interest rates pull into transactional volume. But, I think we've been encouraged with the way the year has played out and, you know, from a Redfin business standpoint, are set up for growth as we go into 2025. Okay. On your last earnings call, you talked about how the housing market was transitioning more to be a buyer's market. It doesn't feel like we've seen that much in terms of price correction yet, but maybe you can just talk a little bit about, you know, what aspects you're seeing to characterize it as more of a buyer's market, and, you know, how this impacts the U.S. housing market and business overall as it does. Yeah, I think there are two things that are starting to move the market power more towards buyers. One is what we talked about just a minute ago, which is lower mortgage interest rates. Affordability was a real challenge earlier in this year for many buyers, and so with lower rates, more homes are coming into their sweet spot, their consideration set for homes. The second factor is that inventory levels are now starting to head up a little bit. They're still far below pre-pandemic levels, but that's been a real constraint on transactional volume over the last couple of years, and so a little bit more inventory is good news for home buyers, and you've seen that come through in that now some potential sellers are taking markdowns on their property after it's been on the market for a while. So you put that together with lower mortgage interest rates, and there's starting to be a few more buying opportunities than there would have been earlier this year. And so, you know, it's still a relatively balanced market, probably a little bit in favor of sellers, but a little bit more of the influence is now starting to move to buyers based on those two things. Okay, great. I wanted to get, you know, a financials guidance question in. You, Redfin talked about its expectations for roughly Adjusted EBITDA breakeven in twenty twenty-four, with some market share gains, some cost cutting. How's Redfin tracking against those expectations? What gives the company confidence that they'll be able to continue to deliver market share gains? Yeah. So mostly this is the way the year set up for us, which is we've been gaining market share at the top of the funnel, competing really well against the other websites and against others who provide information to consumers. So that, that's the basis for us to be set up for share gains. And then we've then continued to hire agents through the course of the year, which gives us more capacity to serve customers all the way through a transaction. Just in terms of what that means from a financial standpoint, is that we should be set up for some volume gains in the second half of the year. But because also we're paying our agents now on a more variable basis and less fixed costs, that improves our margins, particularly as we get into the slower parts of the year, the Q4 and the Q1 of next year. And so there's additional profit opportunity that comes from that change, that we think will play through the P&L. And then, you know, here I've talked mostly about revenue and gross profit, but at the same time, we've been continuing to reduce our expenses, our operating expenses, really across the headquarters teams. And so we'll continue to do that in the Q4, as we have been in the earlier parts of this year. And so that's what gives us a lot of confidence that we're on the right track, driving to profits. This is a path we've been on now for a while, where if you looked quarter after quarter, we've been reducing our Adjusted EBITDA losses, and so we're gonna stay on the same trajectory and drive to the kinds of profits we were talking about on the most recent earnings call. Great. That's a great segue to talk about this shift towards more variable compensation models. You know, just this morning, you guys put out a press release around the expansion of Redfin Next to a nationwide model, starting, I think, it was October twenty-seventh, so if we could talk a little bit about that. What is Redfin Next, for those that may not know? What's the rollout been? Because it's been a very deliberate rollout, where there have been market pilots to make sure that it works and it achieves your objectives, but could you just elaborate a little bit around Redfin Next as a business model and the decision to roll it out nationwide, I guess, starting next month? Sure. So a little bit of history here. Redfin agents are employees of the company. Historically, we've paid a base component to people's compensation. That was about 25% of total compensation was in the form of base. And beginning in the first part of this year, with four pilot markets here in California, we began moving to an all variable compensation. We did that because we believed that would allow us to attract slightly more experienced agents to serve customers better, particularly in some of the higher priced markets, like we see in California. And that program was very successful in the earliest months, so we expanded it then to about a third of the U.S. in the Q2 of this year. By the Q3, it was to about three quarters of our market, and we did announce today that we're expanding it to the rest of the U.S., and just to go back to the reason for this, we do think it sets us up to hire more experienced agents. It's better for agent compensation, for top performing agents, to have more of their compensation variable. People can make more money. Not only can they make more money, but they are making more money, and so it's been really impactful that way, and there has been, just as I was mentioning earlier, we think a nice side benefit for Redfin as a corporation, which is, because the compensation is more variable, it has our costs more lined up with our revenue. And so that, in some ways, has de-risked the amount of agent hiring that we can do and put us in a spot where we can be somewhat more aggressive, assertive about agent hiring, even when there's market uncertainty, because we're going to, as a company, bear lower fixed costs with that hiring. And so, you know, we're sitting here in late twenty twenty-four with some amount of uncertainty about the housing market the rest of this year and into next year, but we are aspirational about hiring agents even today because of this component, which is we know the housing market's going to recover, some over the next couple of years, and we want to be in a position to be able to serve customers well. And Next allows us to do that, taking less company risk. Yeah. Yeah, in addition to being more capital light, I think it also improves the quality of agents on the platform, which I know has been an investor debate for some time. Yeah, we do think of it as a win-win from both of those standpoints. Yeah. While we're on the topic of agents, maybe you can talk a little bit more about your agent hiring plans. Last quarter, you had an average lead agent count of 1,719, still well below the 2022 averages. What are Redfin's plans for agent hiring in the near future against the backdrop of the housing market? Right ... but also some of the new models that you have with Redfin Next? Sure. So we're looking to hire agents really across all the U.S. In part, it's related to the capital light conversation that we just had. More generally, we do think there'll be opportunities as we go into twenty twenty-five with an improving housing market, and we feel like we've got a lot of customers on the website today who want service. So we're not providing specific guidance on that, but you should expect that our agent counts will be headed up over time, for all the reasons that I just mentioned. Okay. Let's round out the discussion and talk about the partner network, partner agents. Last year, a little bit more than half of the Redfin.com customer inquiries went to partner agents. How has the expansion of Redfin Next influenced the economics of the partner agent strategy, given that, you know, fixed costs are obviously lower? Is there gonna be a lower reliance on partner agents, given that you'll be able to get more coverage? I think at least here for some short period of time, as we're hiring more agents through our Next program, there probably is a little bit of a migration away from customers being introduced to partner agents. Over the longer term, this hasn't changed our economics or the view that we have on the importance of that partner network. When we see that there's more activity that we can serve through our own agents, we'll introduce customers to partner agents, today, and I expect that to continue to be going forward. But again, here in the near term, I do expect, and we've already seen this, some amount more of the transactional volume to be going to Redfin's brokerage agents. Okay. Let's talk about some of the changes that are happening in the industry. The NAR settlement, obviously, something that's top of mind. Buyer commissions are no longer a requirement. We can debate about how much of a change that really is relative to, the model prior to the settlement. But, in the last earnings call, Redfin talked about how, the reforms could lead to lower commissions for buy-side agents. Could you just elaborate a little bit more about this, and how you think Redfin is equipped to navigate through some of these changes related to the NAR settlement? Sure. So the change that's going on is that buyers now get more information from their agent about the commissions that those agents will earn with a closed transaction. In general, we think that that just means the buyers will ask more questions about those commissions, will negotiate more about those, there'll be more dialogue about it. We had a press release this morning that described a little bit about this, but we've already seen some amount more of that activity, where buyers and sellers and the agents are talking more about commissions. And we do think that just that dialogue will provide some pressure down on commission rates over time. In terms of how we're set up to handle that, we do believe we've built a lower cost structure than our competition. Our agents do more than two and a half times the number of deals as traditional agents. They're well served, both with technology and support staff, to help them close those transactions. And, you know, we'll continue to make sure that we're putting our best foot forward with those consumers. Yeah. And do you have a view on what the industry-wide agent commission rate is today and how it's changed over the last few years? And do you expect more of the same? So we provided some information about this a few weeks ago. Commission rates have been down a little bit, a few basis points over the last few years. You can maybe see a little bit of a change in that leading up to the implementation of the settlement provisions that went into effect in the middle of August. So there hasn't been a huge amount of change over the last couple of years. We don't have an opinion or perspective exactly on what happens after that, other again than just this observation, that as there's more dialogue about fees, we do think that consumers will ask more questions. There'll be some amount more pressure down on those fees. Okay. One of the other changes that I guess just recently got implemented is the buyer agency agreement requirement before doing a home tour. I know that Redfin has had initiatives to address this, you know, even prior to the deadline with Sign & Save. But could you talk a little bit about how the requirement of a buyer agency agreement changes the landscape, and what Redfin has done with Sign & Save to address some of those things? Sure, so part of the rule changes that went into effect, consumers need to have a dialogue, need to have an agreement with their buyer's agent. We think that transition has gone really well. To your point, we actually began this work well back into last year, to make sure that we were having a dialogue between our buyer's agent and the consumer about the fee, and to sign an agreement where it made sense to do that. We've just been able to leverage all that work and continue it going forward, so that's all been rolled out. I would describe that as mostly having gone really smoothly to date, where we do provide a fee disclosure to the consumer upfront, and then provide an opportunity for that consumer to sign an agreement with our buyer's agent. As it relates to Sign & Save, if the customer signs an agreement with us before their second tour, we're able to provide an additional discount with that consumer. It's 25 basis points across our markets, so we can save you a little bit of extra money if you agree to work with us upfront, because we know at that point that the consumer is really committed to a transaction with us, and our agent can serve the customer just that much better through the whole deal. Okay. And for the avoidance of doubt, like, do prospective home buyers have to sign something before seeing a house? Consumers need to, before they go on a tour, have reached an agreement with the consumer or with the agent about what the fee will be in that transaction. Okay. They don't have to have signed a full buyer's agency agreement. They do need to have an agreement about what the fee will look like if they proceed with the transaction. Okay. Got it. That's very clear. Shifting gears, let's talk about Redfin.com's marketing strategy. The company's pulled back on marketing expenses this year. I think there was also a little bit of a pullback on mass marketing over the last couple of years. How have Redfin's plans regarding marketing changed, if at all? You know, how do you balance investing to drive traffic to Redfin.com with driving revenue conversion and improving profitability? So the most important ways we meet consumers, one is through email. Once we've met a customer, we provide them additional recommendations on the homes that might be interesting to them, homes going on the market, homes with price discounts. That'll always continue to be a primary source for us. The second most important channel is through free traffic, through website search rankings, and the intensity of our competition there, the intensity of our investment, has not changed over time. We view that to be an incredibly powerful and important tool for us. And then, probably the third channel is competing for website traffic, buying keywords on Google and on other platforms. We've continued to do that, and I expect we'll continue to do that over time, where our teams just get more and more insightful, smarter about the opportunities and places to bid on terms. And so we'll keep driving that going forward. At various times, we've spent more and less on mass media, and mostly that's been related to the state of the housing market. That when the housing market has been slow, we've found that to be a not very effective investment. That you can spend a lot of dollars trying to convince a customer to buy or sell a home, but there are many other factors that are more important than your television advertising. And so that's what you've seen earlier this year from us, where we did run a campaign for about a month or so in the Q2 of the year. We then pulled back on that as we saw mortgage interest rates during that period of time up, and we concluded that the housing market would be, on a relative basis, slower this year. We'll continue to look at that opportunity to spend more or less on mass marketing, depending both on the strength of our offering, but then also the broader housing market. I do think if the housing market improves going into 2025, that'll have us encouraged to spend more on that mass marketing, but we'll continue to evaluate that along the way. Great. Moving to rentals, it's certainly been a bright spot, a business that outperformed, you know, my initial expectations. As of last quarter, you had seven consecutive quarters of revenue growth, four consecutive quarters of positive EBITDA. What's your long-term vision for the segment? You know, how has Redfin been able to differentiate itself relative to competitors? And, you know, what are some of the key things that Redfin's changed following the acquisition of RentPath? Yeah. So we're really pleased with how this has gone over the last year and a half or so. The team's just done a fantastic job at improving the offerings we provide to the building owners. That's driven more revenue growth, and at the same time, has really worked to keep costs down. An important initiative this year has been a further reduction in costs in that business, mostly through integrating back office activity with the broader Redfin teams. So you can think about things like human resources, financial operations. We've been able to reduce costs in that business by driving some synergy, linking some things up on the back end. You know, just in terms of prospects for the business going forward, we're really happy with how we're competing for apartment buildings. We do think there's more opportunity going forward to provide additional services for individual homeowners who want to put their properties for rent, on Redfin and on the other websites we operate through, our rentals marketplace. And so that's probably the area that we're most enthusiastic about. But just in general, really focused on delivering lots of good leads, lots of good potential customers to each of the apartment buildings. As we do that, we've just seen an incredibly good response from the buildings themselves. Yeah, and it feels like Redfin's in this very unique place to aggregate inventory, right? Unlike single-family home sales, there's no central depository like a MLS for rentals, right? So it just provides an opportunity to further differentiate yourself. You can get differentiated inventory. Yeah, I mean, that's right. This is a place where it's hard to put your hands on all the inventory. We do a lot of work to get as much apartment building inventory as we can, and as I mentioned earlier, we're going to continue to be focused on putting our hands on rentals inventory from individual homeowners, because we know that inventory is also really compelling to a consumer on Redfin.com, who also might be thinking about buying a home. Yeah. And tying it back together with the financials, you know, rentals revenue growth has been double digits for the first two quarters of this year. You know, how is the company sustaining that double-digit revenue growth momentum while managing OpEx? And is this a good run rate, at least for the top line, to think about in the near future? Right, so mostly, the way we've thought about this is that we're trying to reduce expenses on back office activity, the kinds of things that get performed across the whole platform, while continuing to invest in driving leads to consumers or, or to the apartment buildings, so the most important thing we can do for an apartment building is give them more potential opportunities for leases, and so that's where the focus has been and the investment has been, and we've been able to use savings from various places to drive more leads, and I expect that to continue to be the case going forward. And, you know, all this is part of a broader shift within the Redfin business, where if you looked at it a few years ago, the business was more reliant on existing home sale activity, more connected to momentum in the housing market and through rentals, through our mortgage business, and maybe we'll have a second to talk about our other segment in advertising as well. The business mix has shifted more to these kinds of digital revenue opportunities with higher gross margin and a little less cyclicality as well. Yeah. Well, why, why don't we talk about the digital revenue opportunity? You know, it's not something that we talked about a year or two ago, but it feels like a more prominent, more traditional digital advertising opportunity. Yeah. And so what we've done on the website over the last couple of years is looked at placements where we can provide advertising for other businesses. We can earn some revenue in the course of doing that. That revenue comes in at very high gross margin. We've been really pleased with how that's gone. We're, of course, being really thoughtful to ensure that we're not taking away from the customer experience for someone who's looking to buy a home or sell a home, but we've just found this to be extremely additive to profits. The business is, of course, very lucrative because their cost structure is quite low for this additional advertising placement. And so the momentum here has been really good. I expect there'll continue to be more opportunity here, and that while we've leveraged a lot of the available inventory on the website itself, we have other places, including through email, where we will look for advertising opportunity, and so we'll keep looking for ways to drive that advertising revenue going forward. Okay, great. Why don't I squeeze in one more before I see if there are any questions from the audience? We'll round out to talk about mortgages, the last ancillary revenue opportunity, which we haven't really talked about. But mortgage attach rates have been very good, 28% last quarter, you know, continuing to grow. What is Redfin's strategy in mortgage? You know, how are you driving mortgage attach, mortgage growth in the, you know, context and backdrop of a relatively tough, like, housing and mortgage environment? You know, what's your strategy there? Sure. So driving attach rates. Attach rate has been the primary way we've been growing that business. The attach rate's been up from 24% a year ago, 28% more recently. We're really pleased with how the teams are working together. So mostly this has been, to date, a person-to-person connection between our Redfin agent and the local loan officer, who can then help serve that agent's customers all the way through the transaction. The enhancement that we're making is to use even more of our technology to introduce the customer early on, even if the agent isn't able to make a good connection to that loan officer. And so we've been using a variety of other forms, including advertising, placements on the website, and email, to drive even more of that activity. So we've been really pleased with how that's gone so far. We do think there will also be a refinance opportunity for consumers over time in the mortgage business. We'll be ready for that as mortgage interest rates come down. We've, of course, met a lot of customers over the last few years who have higher mortgage interest rates, and with lower rates expected into twenty twenty-five and beyond, we do think there'll be a refinance opportunity that's really just additive to the business there. Great. We have a little bit over five minutes. Let me see if there are any questions in the audience for Chris here. All right. Well, if you do have one, just... Oh, sorry. Just wait for a mic. Hi, thanks for your comments today. Could you kind of, you know, compare or contrast with your approach to the new verticals, you know, the mortgages and the rentals with some of your competition, which is also growing out those verticals, and where you see the differentiating making a difference? Let me start with mortgage. So because we employ our own agents, because those agents are connected to our brokerage, we're able to work with the agents, we think, much deeper than our competition, and as a result, we're able to drive higher attach rates. You can just look at the data, but our attach rates are double what we see from our competitors. In local markets, that's just a big profit opportunity that we think is on the table, working with our customers, that others will be challenged to get to. And then, in terms of the rental business, you know, our offerings are a little bit different. We tend to work with slightly larger apartment buildings, and some of our competition, slightly smaller than other of our competitors. I think, really, we go head-to-head there to make sure that we're delivering the right number of leads to each of the buildings. As we do that, we've seen really good response. But I think the bigger differentiating factor, just as it relates to attach rate, is coming from our employee agents. We haven't spoken about this business yet today, but we also operate a title business. That title business has 60% attach rates in our local markets, and again, we attribute that to having agents as employees and connected to the brokerage. Great. You know, one other initiative that's been helping to improve the quality of the service on the Redfin platform is All-You-Can-Meet. Could you talk a little bit about, like, what All-You-Can-Meet is? You know, how did Redfin help connect prospective buyers to contractors to show homes before, and what's the difference now, and what's been the uplift to the business? Sure, sure, so this is an initiative that rolled out this year, where we're having our agents meet customers on the first tour. Previously, we would try and match the time a customer wanted to see the home, but we have found that it's just that much more impactful to make sure that the agent-to-customer relationship starts on that first tour, and so there's just been a real focus to schedule the agent's time to do that. The All-You-Can-Meet part of it refers to how we talk to our agents about this initiative, and that's that you can meet as many customers per month as you want, but you need to meet them on that first tour, and it's just made a real difference in terms of forging that relationship at the beginning. And what we can see is that that improves the close rate when we do that. So a big change in customer and agent behavior to make that early introduction. Great. In the last couple minutes here, we can close out with a question about key priorities, strategies for Redfin over the next twelve to twenty-four months. You know, how does it all fit into the long-term strategy? Is there a deliberate focus to reduce capital intensity and gain share? How are you executing against that? Sure. So I think we've made the changes in the business we've wanted to over the last couple of years. We wanted to have a financing business, a mortgage business that we could serve customers well with. We're really pleased with that acquisition. We think that sets up well as a big profit opportunity over time, and we're also really pleased with how the rentals business has begun to contribute to profit. So we think there's a lot of opportunity to keep growing the business from here going forward, and that mostly our expectations are about revenue and gross profit growth, and we don't expect to be able to or need to add a lot of operating expenses to the platform we've put in place. And so it does start to set up with-