Q4 2023 Opendoor Technologies Inc Earnings Call
Participants
Kimberly Niehaus; IR; Opendoor Technologies Inc
Carrie Wheeler; CEO; Opendoor Technologies Inc
Christy Schwartz; CFO & Interim; Opendoor Technologies Inc
Dod Fraser; President of Open Exchange & Capital; Opendoor Technologies Inc
Dae Lee; Analyst; JPMorgan Chase & Co
Benjamin Black; Analyst; Deutsche Bank
Nicholas Jones; Analyst; JMP Securities LLC
Ygal Arounian; Analyst; Citigroup Inc
Curtis Nagle; Analyst; BofA Securities
Ryan Tomasello; Analyst; Keefe, Bruyette, & Woods, Inc
Mike Ng; Analyst; Goldman Sachs
Presentation
Operator
Thank you for standing by, and welcome to open doors Fourth Quarter 2023 earnings conference call.
At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session to ask a question. During the session, you will need to press star one one on your telephone to remove yourself from the queue, you may press star one one. Again. I would now like to hand the call over to Kimberly Newhouse, Investor Relations. Please go ahead.
Kimberly Niehaus
Thank you, and good afternoon. Details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our website at investor dot Opendoor.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the Company's corporate website.
Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact are statements that could be deemed forward-looking including, but not limited to, statements regarding open doors, financial condition, anticipated financial performance, business strategy plans, market opportunity and expansion and management objectives for future operations. These statements are neither promises nor guarantees and undue reliance should not be placed on them. As such, forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Opendoor most recent annual report on Form 10 K for the year ended December 31st, 2023, as updated by our periodic reports filed after that 10 K. Any forward-looking statements made on this conference call, including responses to your questions are based on management's reasonable current expectations and assumptions as of today, and Opendoor assumes no obligation to update or revise them, whether as a result of new information, future events or otherwise except as required by law, the following discussion contains references to certain non-GAAP financial measures. The company believes these non-GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the Company's financial performance. A reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metrics, please see our website at investor dot Opendoor.com. I will now turn the call over to Carrie Wheeler, Chief Executive Officer of Opendoor.
Carrie Wheeler
Good afternoon. Also on the call with me today is Chris Schwartz, Interim Chief Financial Officer, and David Fraser, President of capital and open exchange for Opendoor 2023.
With your focus, execution and results, despite a dynamic macro environment marked by the lowest level of home sales since 1995, the team focused on controlling what we could control, and we made meaningful progress. We grew our acquisition volumes sequentially every quarter and tripled our market share from Q1 to Q4. Our new book of inventory generated a contribution margin of 8.3% in the year, demonstrating the health of our more recent acquisitions. We also made improvements to our tooling, technology and processes to make our platform more efficient, which resulted in a year-over-year reduction of nearly 30% in adjusted operating expenses in Q4, excluding the reduction in our advertising spend with these improvements, we now enter 2024 with the foundation in place to rescale the business and build the future of sustained profitable growth. Last month, Mark opened doors 10 year anniversary since our founding, we've made it possible to sell your house with the tap of a button, something unthinkable a decade ago, we built the largest e-commerce platform for residential real estate and have served over 250,000 customers across 50 markets. And we're committed to building a product suite to become the place for every seller can start their home selling journey in a way that the traditional process cannot provide with simplicity and certainty.
Looking into 2024, we're excited about our ability to reach and attract more sellers to our platform, namely to increase advertising spend, continued growth of our partnership channels and more attractive spread levels. Last year, we reduced our marketing spend by over 60% versus the prior year as elevated spreads made our marketing investments less efficient. Despite these reductions, we maintained our aided awareness, a testament to the effectiveness and efficiency of our creative advertising efforts in 2024, we plan to ramp our total marketing spend to widen the top of our funnel and reach more sellers, and we're spending more creatively last Sunday during the Super Bowl. We live stream accounts family, getting an open-door cash offer on their home and Atlanta during halftime proving just how easy and quick it is to sell to us acquisition from our partnership channels, which includes online real estate platforms, homebuilders and agents continue to increase in the fourth quarter, up 35% versus Q3 and up over 140% since Q1. These partnerships have effectively positioned us as the branded cash offer for residential real estate and are a true win-win and offering enhanced the design experience of our partners' platforms to their customers and also provides us with a source of acquisitions and customers and they're attractive to expand. We expect volumes from this channel to continue to grow on an absolute basis in 2024.
Finally, as a reminder, our spreads are important lever in managing seller conversion and mitigating risk on our platform meaningfully reduced spreads during 2023, which resulted in improved conversion and acquisition volumes throughout the year.
Looking ahead, based on where we are at today, we expect to see an increase in contract volume late in Q1, which would translate to sequential acquisition volume growth in Q2.
Kristie will speak to our outlook next, but I want to quickly address our goal of returning to positive adjusted net income. We have strong tailwinds at our back, but we're still facing ongoing macro uncertainty. Mortgage rates remain volatile, whereas in the lessons we've learned in recent years and taking a prudent approach to balancing growth and profitability while also operating within our risk management framework, we expect to make significant progress in both scaling acquisition and resale volumes and meaningfully reducing our losses this year. However, we don't anticipate reaching positive adjusted net income for a full quarter in 2024. We are focused on driving sustainable growth, and our entire business is organized around durably.
Getting back to positive A&I. I am proud of what our teams accomplished in the last year. We've emerge smarter, leaner and energized, and we are building a platform that over the long term has the potential to transform the way millions, sell and buy real estate. Today, we stand alone in not only what we offer, but also the scale at which we are able to do so and we're just getting started.
Christie will now review our financial results and guidance.
Christy Schwartz
Thank you, Carrie. Our fourth quarter results came in above the high end of our outlook across the board as we continue to increase acquisition volumes while driving margin and cost improvements.
As we enter 2024, we remain committed to rescaling our business, delivering healthy contribution margins and operating with disciplined cost management, all while providing a best-in-class customer experience. We delivered $870 million of revenue in the fourth quarter above the high end of our guidance range. We continued to make progress on selling through our old book of inventory and had less than 75 of these homes non resale contract as of year end. For the full year, we achieved $6.9 billion of revenue. As a reminder, we intentionally slowed our home acquisitions beginning in the second half of 2022, prioritizing risk management and inventory health. This resulted in lower resale volumes in 2023 versus the prior year. As Carrie mentioned, we reduced our spreads this year as we saw signs of market stabilization resulting in increasing acquisitions sequentially each quarter, we purchased 3,683 homes in the fourth quarter, up 17% from the third quarter and ahead of our prior expectations of approximately 1,000 homes per month. We continued to generate positive contribution profit in the fourth quarter, delivering contribution margin of 3.4% ahead of the high end of our implied guidance range. While ahead of our expectations, contribution margin declined sequentially for two reasons. First, to maintain our clearance target we implemented home level price drops last quarter in response to the amplified seasonal decline in market level sell-through rates. Second, sales from the tail homes of our old book continued to be a drag on overall performance. For the full year, contribution margin was negative 3.7%, driven by sales from our old book of inventory. Notably, as Carrie mentioned, the new book of homes generated a contribution margin of 8.3% in 2023, demonstrating the health of the more recent acquisition cohorts. Adjusted EBITDA loss was $69 million in the fourth quarter ahead of the high end of our guidance range. We ended 2023 with adjusted EBITDA loss of $627 million versus a loss of $168 million in 2022. Adjusted operating expenses totaled $99 million for the quarter, up from $92 million in Q3 and down from $144 million in Q4 2022. The sequential increase was expected as we continued to rebuild inventory in the fourth quarter for the full year, adjusted operating expenses were $369 million, down 47% from $693 million in 2022, which reflects the progress we've made in reducing our cost structure.
Turning to our balance sheet, shareholders' equity decreased by $53 million in the fourth quarter. We ended the year with $1.3 billion in total capital, which includes $1.1 billion in unrestricted cash and marketable securities and $161 million of equity invested in homes and related assets, net of inventory valuation adjustments. We also had $8.1 billion in nonrecourse asset-backed borrowing capacity composed of $3.8 billion of senior revolving credit facilities and $4.3 billion of senior and mezzanine term debt facilities, of which total committed borrowing capacity was $2.8 billion.
Looking ahead to 2024, we will continue to operate with focus and execution to drive results. We expect our Q1 revenue to be between $1.05 billion and $1 billion contribution profit between $40million to $50 million, which implies a contribution margin of 3.8% to 4.5% and adjusted EBITDA loss between $80million to $70 million. We expect adjusted operating expenses to be approximately $120 million, a sequential step-up as we re-ramp marketing and rebuild inventory levels. Additionally, we expect first quarter home purchases to be approximately flat from Q4 and up over 100% year over year. We expect home acquisitions will increase sequentially in line with typical seasonality into Q2 as we enter the spring selling season in earnest. As we begin 2024, we are focused on rescaling our business in a sustainable fashion. We have the benefit of a book of inventory that is generating healthy margins. And the steps we took last year position us well to accelerate volumes throughout the year with an improved cost structure and a line of sight to achieving our annual contribution margin target range of 5% to 7%.
I'd now like to turn the call over to the operator to open up the line for questions.
Question and Answer Session
Operator
Thank you. As a reminder to ask a question, you will need to press star one one on your telephone. If you have not already to remove yourself from the queue, you may press star one one. Again, please stand by while we compile the Q&A roster. We ask that you limit yourself to one question and one follow-up. Our first question comes from the line of David Lee of JPMorgan. Your question, please.
Dae Lee
Great. Thanks for taking the question. I guess the first one on reaching adjusted net income profit pressure. I appreciate the color on the timing but just curious to hear like what needs to happen to reach this target. Has it's just a matter of and a ramp in your acquisition volume or do you need to key industry transactions.
Carrie Wheeler
We'll cover two Southern metals and the day out. It's Gary. I'll take that on a couple of things. One is we're highly focused on rescaling the business, but we're intent on doing it in a sustainable way. So right now, what we're managing to is what I'd call a macro neutral environment. We're now willing to lean into spreads were not willing to lean in to access marketing to drive growth at the expense of margin. Certainly, if there are macro tailwinds, say second half of this year, we are well-positioned to take advantage of those. But our Our objective is to meaningfully ramp our acquisitions this year and to do so within our Canada contribution margin target range. We've talked about all of which will substantially reduce our CNI losses year on year. So this is about wind. No.
Dae Lee
And I guess as a follow-up on the Glory Leisure spread right now, I guess relative to exiting 2023 and I guess early part of 2023 and down this breadth and the federal level to be at the higher end of your contribution margin target. Is that the right way to think about it?
Carrie Wheeler
Yes, when we made substantial improvement last year in our cost structure, much of which we fed back into durably, reducing spreads so the combination of cost structure improvements and home price stabilization allowed us to take those down throughout the year. And we like where they are today, which is why we're ramping advertising spend by 50% in Q1 and why we are leaning into acquisition contract growth.
Dae Lee
Understand. Thank you,
Carrie Wheeler
Welcome.
Operator
Thank you. Our next question comes from the line of Benjamin Black of Deutsche Bank. Your question, please, Benjie.
Benjamin Black
Hi, this is Jeff on for Ben. Thank you for taking my questions. Because I noticed that you exited three markets on this quarter. What are you seeing there that led to and the decision to exit this market and change your strategy around market expansion going forward?
Dod Fraser
Yes, happy to take that. It's certainly not an indication of our forward plans. These were three small markets that represented less than 1% of our volumes. And really it's more just a cost structure question, given the size of those markets and where they're physically located, they were approximate they weren't next to one of our other markets. And so it was more just a cost inefficiency question.
Benjamin Black
Yes, I guess just as a follow-up then. So as you think about expanding your buybacks in a given region, is there sort of a contribution margin impact of doing that? Or is it simply a matter of adding the capability to kind of expand your and your addressable market and therefore, you'll see similar contribution margins to other other homes in a similar region or where does that come at the expense of some gross margin constitutes.
Dod Fraser
And our goal in expanding buy box is more about pricing accuracy. And so we expand our buy box as our pricing system improves, and we believe we can price accurately so that we can deliver the same contribution margin across the expanded buybacks.
Benjamin Black
Thank you.
Operator
Yes, thank you. Our next question comes from the line of Nick Jones of JMP Securities. Your line is open.
Nicholas Jones
Thanks for taking the questions on. So the new book on Zilver contribution margin of 8.3%, very solid kind of targeting 5% to 7%. I guess what gets you comfortable maybe increasing that range gone five to seven and maybe being north of eight over time?
I guess just some some clarity as to why not expanding that range yet?
Carrie Wheeler
Hey, Nick, it's Gary. I'd say at a very high level, last year's 8.3% GM on the new book, which was great was about long Lasher spreads. And we realize that 8.3% I mean this year, given where we sit our spread, that's why we're reaffirming our 5% to 7% contribution margin target. So again, we're balancing that interplay of growth margin risks, and we reduced the spreads to a level where we want to deliver within that 5% to 7% for the year.
Nicholas Jones
Got it. Helpful. And then on the homes that are kind of lifted over 100,000 a day, you took that down to 18% versus I think it was 21% of markets, those homes, whereas you're kind of outperforming the market given the model over time, like how what kind of outperformance can we expect in terms of on the homes you're selecting and how long it's on the market versus kind of the average in those markets? I guess ultimately, where does that kind of percentage go of overtime and maybe what's kind of the standard hold time today is the market's kind of neutral as we ended 2020?
Dod Fraser
Yes. So we are I think from a business portfolio management perspective, I really think about from the homes that we are shorter and hold periods of early days on market, we want to be slower and then as homes sit on our balance sheet longer, we want them to be selling faster than market. So our goal is to outperform market. And at on that older cohort of homes. We think that's appropriate portfolio management and sort of disciplined risk management. But there's not a specific target to your specific question of where we're trying to get to X number of it's much more about for homes that are 90 to 120 days on market. We want to be outperforming market.
Nicholas Jones
Yes. Thank you.
Operator
Thank you. Our next question comes from the line of Hugo Reunion of Citi. Your question, please?
Ygal Arounian
Yes, hi, guys. Yes, Max on free golf. So wondering if we could if you could walk us through how you think about the pace of acquisitions through the rest of the year, given your market neutral comment on the macro comm, how your expectations are for home acquisitions and anything you're seeing kind of as we head into the spring season.
Carrie Wheeler
So at a high level, you should see a meaningful increase in acquisitions 2024 over 2023. I'll repeat some of our guidance, which was Q1 being up 100% year on year. So we're going to see good acquisition growth in the first quarter what we're seeing right now as we'd expect to see for this time of year.
Just given seasonality, people kind of getting back and just thinking about selling post Super Bowl is we're seeing a ramp in contracts month to month, so February, higher than January, March and February. And we're going to see those contracts turn into closes in Q2, which is why we indicated like you should expect to see from us sequential acquisition growth Q2 over Q1 for that. That's what I can tell you in terms of acquisition pacing for the first half of the year.
Ygal Arounian
Okay. Great. And then on a follow-up, just is any updates on the 3P model as we look into 2024? And are you more focused kind of on the corporates.
Carrie Wheeler
I'd say we're focused on both, but I would say our plan to get back to positive cash flow is all about the current core business today or sell direct model that gets us back there. Our cost structure and our balance sheet allow us to deliver on that marketplace for us, certainly important long term strategic one here and do it right? We're about connecting buyers and sellers, but we're doing in a single market. We've said consistently, we want to make sure that we focus on having great product market fit before we scale it. I would say that this has been a tough year for experimentation against a low market supply like record low market supply. That's challenging, but that short term long term, we remain committed to continue to evolve the marketplace product.
Ygal Arounian
Okay, great. And just welcome.
Operator
Thank you. Next question comes from the line of Curtis Nagle of Bank of America. Please go ahead.
Curtis Nagle
Curtis conservative.
Thanks very much.
Let's see. I guess first of all would be in terms of the I think there's a $20 million delta on the operating expenses in 4Q positive. That is what accounted for that? And I guess how should we think about quarterly operating adjusted expenses 24, assuming that should be maybe something a little bit above 100 mill given the higher marketing costs or what's the right way to think about?
Christy Schwartz
Hey, Curtis, it's Christine. Thank you for the question. And so our the performance of 99 versus our guidance of 120 is a reflection of us continuing to make meaningful progress throughout the P & L. We saw continued strong execution from our teams in the fourth quarter, which allowed us to smooth the timing of some hiring from 4Q to 1Q as we're ramping up. And we continued to realize some cost saving initiatives we guided in Q1 to $120 million, and that just to unpack that change, it's about roughly half is marketing and advertising. And the other half is increasing our operations. And we expect that increase from Q4 to Q1 to be the biggest bump for the year.
Curtis Nagle
So. Okay, that's very helpful. But maybe staying on the marketing front. So you guys obviously made a big push with the Super Bowl this year, or I guess is that indicative of sort of plans for brand margin for the rest of the year?
Like it can't be like a one and done, right. If that's really kind of a first shot and would love to hear like any is there any metrics you have in terms of a lift in traffic or perhaps people inquiring about it offers post-harvest.
Carrie Wheeler
In terms of Jeremy, I think you're are you asking your marketing mix question for you?
Curtis Nagle
I just quoted. The question was right. So you did your first your Super Bowl ad, right? That's a very splashy form of brand marketing. So is that indicative of a big ramp up right as we've kind of been talking about in brand marketing and just kind of how to think about that for the rest of the year. And then again, just to note to you what you see in terms of a response in the first the first week from that end?
Carrie Wheeler
Yes. I mean, all credit to our creative marketing team, we actually did buy a Super Bowl ad. To be clear, we said this is going to have cost discipline, as you know, as we were not trying to compare it also because we are yes, we were lighter with the different. We want to be part of the Super Bowl, you know, free run and part of the conversation. And I think our team did a good job of putting us in that room. And we did a lot of stuff in and around Super Bowl before the game. And then we had a live out during of time in Atlanta. So I'd say it's too early to tell the impact of that. We definitely saw a big pickup in traffic and awareness in Atlanta specifically, I think we know time will tell in terms of what the what the impact of that is, say at a higher level.
Do you think about how we think about marketing spend in the last year, we took down spend substantially. That was in response to where spreads were because some spend became less efficient. And you think about this year, we have really leaned into some of our more efficient marketing channels, branding. One receivable thing is that the evidence is one of those. But what we found is that brand lift all boats for us. So we increased our brand spend, and we're finding that increases conversion across all avenues. And actually, even though we had lower spend last year, we actually maintain our brand awareness is something we're really proud of and partnerships will continue to lean into because they're very efficient from a customer acquisition cost perspective and then there's paid. So you should expect to see more creative from as you start to see more brand, but we're going to do with them, you know, making sure we manage the overall envelope figure for that research, virtual network functions.
Operator
Thank you again to ask a question, please press star one one on your telephone. Again, that's star one one on your telephone to ask a question. Our next question comes from the line of Ryan Tomasello of KBW. Please go ahead.
Ryan Tomasello
Ryan, Tyler, thanks for taking the questions. And it seems like one of the more important variables you focus on from a macro perspective is not necessarily the absolute level of rates, but the volatility in rates is that an accurate statement? And if so, it would be helpful if you can just elaborate on how you define rate volatility if there's a difference between upward versus downward volatility, if that makes sense. And just generally how that plays into your willingness to ramp volumes?
Dod Fraser
Yes, happy to have it right? Yes, I think a rate volatility really flows through and impacts the overall market by keeping sellers and buyers on the sidelines. And I think that is why you can see in the numbers and the metrics that we have in the back of our shareholder letter as well.
If you look at where you've seen rates come down and you've seen increases in supply and demand. And so I think really for us, at least we care most about the balance of sellers and buyers, the balance of supply and demand and so that's really where we stay focused. And based on what we're seeing right now and what we've seen year to date, we continue to see a balance between the sellers and buyers, and that is leading to relative price stability and in line with what we've seen historically.
Ryan Tomasello
Okay. Okay, thanks. And then just on the capital structure, it looks like borrowing capacity came down by a few hundred million quarter over quarter, and you've removed the language from the shareholder or shareholder letter around sufficient capacity to hit the breakeven targets. Just just to clarify that, that commentary and that move in the capacity? And second, just how you're thinking about longer-term capacity beyond the $10 billion in volume, especially as you have to dip into the higher cost floating rate debt and obviously you bought back some of the convert. Just any updated thoughts there on capital allocation to the convert?
Dod Fraser
Yes. I'm certainly not trying to signal any change. So we're comfortable that with our current capital base, both on the equity and debt side, we can get to that breakeven point. We are and always have and you saw us do this in COVID modulating how much capacity we have lenders don't like to have unused capacity. So I think that is something we've been working with our lenders on and they like to reduce unused capacity and they've been there for us in the past. I think really for the near term, we're very focused on the fact that we have these term debt facilities that are fixed through the full year, and we feel very comfortable about our ability to use those facilities and cash on hand to sort of finance our business. And so really feel quite comfortable on the capital side. And I think if you sort of zoom out a bit and think about your last question there, Tom, but we obviously don't talk about future capital decisions. But we as you alluded to, we did three convertible note buybacks last year. We will always be opportunistic on and on the capital front.
Ryan Tomasello
Great. Thanks. You bet.
Operator
Thank you. Our next question comes from the line of Mike Ng of Goldman Sachs. Please go ahead, Mike.
Mike Ng
Hey, good afternoon. Thank you very much. For the question. I just had a follow-up on the earlier question regarding OpEx and marketing spending. I was just wondering if you could talk a little bit more about on any of the direct benefits that you see from increasing marketing spending? Is there a direct relationship between marketing and sales.
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