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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and thank you for standing by. Welcome to the Opendoor First Quarter 2022 Earnings Conference Call. [Operator Instructions].
I'd now like to hand the conference over to your host today, Elise Wang, Head of Investor Relations.
Thank you, and good afternoon. Full 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.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, including, but not limited to, statements regarding Opendoor's financial condition, anticipated financial performance, business strategy and plans, market opportunity and expansion and management objectives for future operations. These statements are neither promises nor guarantees and 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's most recent annual report on Form 10-K for the year ended December 31, 2021. Any forward-looking statements made in this conference call, including responses to your questions, are based on management's current expectations and assumptions as of today and Opendoor assumes no obligation to update or revise them, whether as a result of new developments 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 and supplemental operational measurements to evaluate the company's financial performance. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metric, please see our website at investor.opendoor.com. I will now turn the call over to Eric Wu, Cofounder, Chairman and Chief Executive Officer of Opendoor.
Good afternoon. On the call with me is Carrie Wheeler, our Chief Financial Officer; and Andrew Low, our President. Our customer experience is the focal point of what we do here at Opendoor. So as always, I want to start this call by hearing from one of our recent customers, the Blasingame family.
[Presentation]
The Blasingames, alongside more than 100,000 happy customers are the reason why we know we will transform the broken off-line process into a digital seamless experience. As we reshape the consumer experience, we are also building a durable generational company. This means not only driving rapid growth but also sustainable margin improvements and a reduction in our cost structure that enable us to grow and be profitable across economic cycles.
Our first quarter results are a testament to this effort. We surpassed our expectations delivering record revenue of $5.2 billion, gross profit of $535 million and contribution profit of $332 million. We also demonstrated profitability with adjusted EBITDA of $176 million and adjusted net income of $99 million. These past 8 years of investments and hard work on our cost structure, automation, technology platform and pricing engine are enabling us to deliver durable margin improvements as we scale.
Alongside our progress in our key financial meters, we also continue to make improvements against our consumer flywheel. For home sellers, adoption continues to accelerate, with offer requests up threefold versus prior year. And our reengagement strategy is also successfully fueling growth. Most encouragingly, we've been able to maintain real seller conversion at over 35% and NPS north of 80. For home buyers, we hit all-time highs for purchase offers, driven by the adoption of Opendoor-backed offers and Opendoor Complete. We've also continued to make progress on our financing offering, including adding Lower.com as a strategic partner which will enable us to offer a broader suite of products, serve more customers across our market footprint and that fulfillment flexibility as we launch our digital open door financing app in coming weeks.
And finally, we continue to take major steps towards our goal of servicing every home seller and homebuyer across the country. We recently entered some of the largest markets, including San Francisco Bay Area, New York and New Jersey, and we continue to demonstrate that we can operate in all markets in the U.S. Before I turn the call over to Carrie, I wanted to touch base on some of the macro dynamics impacting the short- to medium-term outlook for housing.
While rising interest rates and waiting affordability are factors we monitor very closely, we're confident in our ability to hit our financial targets across cycles. First, we have made significant progress in our margins, driving 240 basis points of structural improvements via cost reduction and services attach since 2018, which gives us the necessary margin of safety in our unit economics; second, if we study the data, housing recessions have been historically slow. And last, we hold highly liquid homes for short periods of time, aiming to turn our inventory every 90 to 100 days. Setting aside the fact that our forecasts incorporate risk and volatility, the combination of very healthy margins driven by structural price and cost improvements, and our short duration sale-ready inventory makes navigating market turbulence very manageable.
In summary, this quarter marked another step along our journey to transform the real estate industry. While I am encouraged by our financial performance, I'm most proud of how we delivered these results. We focused on delivering system-level changes that enable us to drive sustainable margin improvements. We focused on a company culture, ensuring that we show up as 1 team, combining the best technology with operational excellence. And last, we focused on the consumer experience, building and innovating on products and services that will delight customers for decades to come.
I will now turn it over to Carrie to discuss our financial performance in more detail.
Thanks, Eric. Before I discuss our Q1 results, I wanted to note that we've updated our annual investor presentation. You can find that on our Investor Relations website. And as always, please refer to our shareholder letter and our upcoming 10-Q for full details of the quarter. Moving on now to some key highlights. As Eric mentioned, we delivered another record quarter where we significantly outperformed our expectations on growth and profitability. We saw all-time highs in our quarterly revenue, gross profit, contribution profit and EBITDA. In addition, we generated nearly $100 million in adjusted net income, which for us is a good proxy for operating free cash flow and a strong testament to our growing scale, margin sustainability and ongoing cost structure improvements.
Based on the momentum we're seeing across the business, we expect to continue to drive exceptional year-over-year growth through the rest of 2022. I'd like to focus now on a few areas that are topical in today's environment, namely our margin sustainability and our expectations for how housing will trend over the coming quarters. First, it's important to reiterate that what is core to our business model and frankly what is most misunderstood is that our systems and margin structure are designed to be durable across different housing environments. That's not to say we're immune. Housing dynamics are a key input to our business, and we've custom-built our pricing and operational systems to give us a deep understanding of the underlying drivers and to be able to dynamically adjust to changing conditions. That's reflected in our offers. And those account for the level of certainty in our home acquisition pricing, inclusive of forecasted HPA.
And in environments of high volatility, our models are designed to be more conservative. Combining this with holding liquid sale-ready homes and having updated views on home pricing on a daily basis gives us the confidence that we can deliver against our baseline annual contribution margin targets of 4% to 6% across market cycles.
To that end, with respect to what we're seeing in the macro environment, our expectation is that the housing industry may begin to experience a slowing in HPA and transaction volumes beyond what's normal from seasonal trends, beginning in the second half of this year, the pace of which should be gradual and consistent with the typical slowdown. There's a reasonable chance that housing is going to continue to be stronger for longer.
But notwithstanding that, we have been and continue to be conservative in our home valuations in light of greater macro uncertainty. And at the same time, as we've been adjusting our pricing to be more conservative, we've not seen an impact on our conversion. Our macro viewpoint is underpinned by what's happening on the supply side. We continue to operate in a historically low inventory market, which has been the predominant driver of home price increases over the last 2 years.
This supply dynamic differentiates current conditions from what led to the last housing downturn, which was during the global financial crisis. At that time, we saw very high levels of consumer leverage and willingness to take on debt at high rates that all resulted in a demand-driven bubble, even though housing supply was high and increasing. This led to multiyear delevering behavior, as well as the forced selling of assets during the GFC and subsequent recovery.
In contrast, the significant delevering, higher savings rates and lower household formation rates post GFC have resulted in debt-to-income ratios today that are well under those observed prior to the GFC. While affordability has waned with increasing prices over the last 2 years, there is currently little risk of forced selling given the strength of consumer balance sheets. Notwithstanding, real estate prices have tended to move slowly in market declines. Outside of the GFC, there have been only 6 quarters of HPA declines out of 188 since 1975, all very modest at around 1% or less. This further renders a sharp housing downturn unlikely in our view. And even during the GFC, the largest price decline sustained in a single quarter was down 3%.
On the interest rate front, while market expectations for Fed rate increases have translated to higher mortgage rates, it's worth noting that real rates today remain reasonable at around 2% compared to the pre-pandemic average of 2.5% and a pre-GFC average of 4.5%. Based on the long-term relationship between real rates and demand, again, it would suggest a gradual softening in [indiscernible] mortgage applications as rates rise rather than a sharp downturn.
What's the upside of all this? First, we expect the housing industry to gradually flow and two, we're confident in our ability to respond to changing conditions and to deliver on our stated margin goals. Furthermore, as homeowners have to navigate the changing housing market, the simplicity, certainty and speed that we offer relative to the traditional listing process will only become more valuable to consumers, allowing us to be a share gainer across cycles.
Turning now to our guidance for Q2. We expect to continue to deliver substantial year-on-year growth. Revenue is expected to be between $4.1 billion to $4.3 billion, representing over 250% growth at the midpoint. This amounts to revenue of $9.3 billion to $9.5 billion for the first half of this year versus our prior expectations for $8 billion. We expect adjusted EBITDA to be between $170 million and $190 million, which represents an EBITDA margin of 4.3% and a year-over-year increase of over 600% at the midpoint of the range.
Adjusted operating expenses are expected to increase sequentially by approximately $35 million and contribution margins are also expected to increase sequentially in the second quarter. We are continuing to manage our business against a baseline annual contribution margin range of 4% to 6%. However, we are going to be opportunistic from time to time and choose to capture additional margin when market conditions are exceptionally strong, and we expect that dynamic to be the case in Q2.
Before I open the call for questions, I want to thank all of our teammates at Opendoor. I'm proud of all that we continue to achieve together in delighting our customers with building a durable generational company. And with that, I will now open up the call for questions. Thanks.
[Operator Instructions]. Our first question comes from Jason Helfstein with Oppenheimer.
This is Chad on for Jason. Could you give a little bit more color on what drove the strength in gross margin in the quarter? And then the assumingly implied further improvement in 2Q? And then how should we think about the back half of the year? And then I have one follow-up.
Chad, it's Carrie. I'll take that. So with respect to what we saw in Q1, I would think about the results being a more normal quarter relative to what we saw prior quarter in Q4 where we [indiscernible] the operational constraints we had. So normalized margins in Q1 and then trending into Q2 were calling for a sequential tick up in margins, really driven by the fact that as we commented in our shareholder letter, we have been increasing our spread since late last fall in light of what we foresee it to be increasing market volatility. And we're leaning into margin, and you'll see that show up in our Q2 numbers.
Okay. Great. And then how should we think about inventory through the rest of the year? Is that still kind of building through the back half?
Yes. No, we said that Q1 should mark the low point for inventory for the year, that $4.6 billion, and we expect to grow inventory through the balance of the year.
Our next question comes from Ygal Arounian with Wedbush.
First a follow-up on the inventory. Is there anything to read into a [indiscernible] commentary about the expectations of the housing market and slowing HPA and slowing transactions and the number of transactions you had here in 1Q? relative to what you purchased, I guess.
Yes. I mean, a couple of comments I'll make. So first of all, Q1, and we talked a little bit about the cadence of the quarters already in the prior quarter. But Q1, really for us the fact that we showed up with a really healthy base of inventory and we met very strong elevated demand for housing. We expected to see really high sell-through rates for inventory and we did but we probably sold more homes than we even have guided to.
In addition, we saw a little bit of pull through of demand and we expected to see some of that. We sized it at around $300 million of what we saw in Q1, was a function of people closing homes faster than we otherwise would have expected, pulling those homes from what would have fallen into Q2 into Q1. So that was a bit of a driver of the results, but certainly, not a major one. I think your question also speaks to like what are we proposing for the rest of the year with respect to housing.
As we said in our comments, what we're seeing right now or at least what we're managing against is an assumption that the housing market will cool towards the back half of the year, there will be a gradual slowing of HPA in volumes in light of rising interest rates and the pressures we're seeing on affordability. But as we also said, we expect to grow through that. We -- our offer shows up with certainty and what we think is increasing value proposition in this kind of market.
Right. So I guess what I was trying to get at was, as you -- tying together that view with your transaction, but do you -- are you buying fewer homes than you might because you think there -- I fully understand and agree with your views on the market overall, not at a collapse. There are plenty of fundamental structurally positive things in the market, but you adjust your -- the pace of your purchases based on that view. And so maybe you could take a little bit of a step back, if you think we're headed in that kind of market over the next 6 months?
No. I mean not at all. I mean what we have been doing since last fall is we have been increasing our spreads. But that hasn't inhibited either a conversion or a pace of acquisition growth. And we expect to continue to grow acquisition volumes. They'll be up in Q2. And so long that we can meet our margin targets, we will continue to grow our acquisition volumes. I think that's a really important takeaway with increasing spreads and at the same time we've not seen a real market impact to conversion and we've been growing acquisition volumes. Back to this comment that in this environment, our value prop should only increase in times of greater volatility.
This is Eric. I'd love to add on top of that, which is -- I'll say it in a different way, the value we're delivering to consumers is seeing the value we're capturing. And as we've increased spreads, we haven't seen a material impact to our conversion, which is an incredible sign that, again, if we deliver [indiscernible] to consumers, they will convert. And so we're excited to see that not only have our margins improved, we've also seen conversion held steady through this period, which gives us a lot of confidence that we can continue to grow through the back half of this year.
Okay. Awesome. That's really helpful. And then maybe just any color on the -- so far, I know it's early, but the moves into the Bay Area, New York, New Jersey. Anything you're seeing in those markets different or the same as the others? Just any kind of signs one way or the other on how things are progressing there?
Ygal, it's Andrew. The early indications, and it's still really early, obviously, on the Bay Area and New York, New Jersey are strong. And in fact, I'd extend that statement to all of the markets that will be launched in 2021, where we added 23 markets over the course of the year. Those markets continue to perform in a very predictable way as we execute our playbook against them. And we're pleased with New York, New Jersey. We're also pleased with the 23 we launched last year.
Our next question comes from Ryan McKeveny with Zelman.
Congrats on the results and appreciate the added details on the business, the cost structure and the embedded micro views, it's definitely helpful to see you guys lay that out given the uncertainty that is out there. So Eric, I wanted to dig into a topic you got into the last couple of quarters on the long-term ecosystem being a two-sided local marketplace for sellers and buyers. And I think it's interesting to think through. So on the buy side, it's obviously great to hear that the purchase offers with buyers hit an all-time high. But I guess more broadly on this kind of flywheel opportunity with buyers and sellers, if we look at it as the aggregation of local supply is important to aggregating and capturing that high-intent demand, is there a threshold of market share at the local level that we should think about as to when you get to a certain level of market share of supply that, that buy side really starts to flourish, or is that still kind of early days to get too much into that?
Ryan, it's a valid question. The way that I think about it is that if we're able to aggregate supply, in our case, it's actually unique supply, it's our inventory, we're going to build a differentiated experience on top of that supply.
And really the end state that we're building to that, we [indiscernible] possible to be able to buy a home with peace of mind with just your mobile device. And we're using our inventory to build that experience as the first step. In terms of aggregating demand with that unique supply, we are seeing really good progress and signal that we're able to do that. When the market tips and maybe to try to define that term where every single buyer in market is looking, downloading and using our app to shop, we're not certain, but we do see really good correlation with if we increase supply that we have and build a differentiated experience on top of that supply, buyers are actually using Opendoor directly.
Got it. That's very helpful, Eric. And one more on the topic of the acquisition underwriting and obviously the spread dynamic and Carrie really helpful to hear your commentary on how the adoption and conversion has remained strong. But I guess if we do think about a period in the housing market where some geographies maybe do see price weakness or at least have greater risk of price weakness than others, should we think about your approach as kind of continuing to bake that risk into underwriting, but still making offers in all locations? Or is there a scenario where you have a big enough footprint of 50 markets and maybe the market dictates you leaning into certain geographies and pulling back or pausing even in potentially riskier areas? Maybe just comment on that geographic kind of balancing act that is out there.
Ryan, it's Carrie. One of the duties of being in all 48 markets is we really have a diversified portfolio that we can make trade-offs against and we really do manage the business in that way. We can make trade-offs across markets, across home types, we can allocate capital differently depending on what's going on. So we would look to do so if that was paramount. What I would say today, though, is we are positioned, we believe, really well for the back half of the year. For the reason I said, one, gradual slowdown, we can respond to that; two, we've been increasing spreads, we're positioned for that; and three, we've operated across all different HPA environments historically.
And so as we sort of see HPA moderate, we're comfortable of our ability to thrive in that environment.
And Ryan, to add on top, just to provide some more context there. The way we think about it is, if there's additional volatility, obviously our spreads would increase. Now the promising signal that we're seeing is that the market also perceives the volatility, and we've seen conversion not materially change as a result. With that information, it may mean that we can be market share gainers across all markets, even as spreads fluctuate.
I don't compare when we exit a market. I just don't -- I don't see it is a realistic scenario for us and we can price to that.
Our next question comes from David Malinowski [ph] with Bank of America.
It's Dave on for Curt. I guess we're curious principally about pricing mechanisms, I know it was commented on earlier. I just wanted, I guess, to think about for modeling velocity, why you might think it's sustainable going forward, particularly as affordability is decreasing in your largest markets? And then I guess a quick follow-up if rates are going up, how should we be thinking about modeling interest expense for the year?
I think there's two parts to that question. One is just how do we -- how we respond to a changing HPA environment for the balance of the year, if I have got that right. I'll come back to the interest rate one. We have been consistent with the comments we made earlier about our expectations for housing may perform, to be clear, there's a very good scenario that housing is going to be stronger for longer, just given the fact that there's just structurally no supply out there right now. That being said, we are going to prioritize margins in this moment and make sure [indiscernible] time that we're meeting our margin targets. And so we're assuming this scenario is gradual slowing of HPA, gradual slowing of volumes, and we feel really good about our ability to respond to that.
So on the second half question, which is around rates, I guess there's -- as it relates to our P&L, I'd say a couple of things. We're certainly modeling rising rates into our forecast, understandably. We expect [indiscernible] the overall impact to our P&L should be quite manageable. This is consistent with the comments we made last quarter, but just to parse it through. If you look at our senior loans and how we finance our homes, today, that cost us about 70 basis points on a per home basis just based on the turns we have. And if you extend that and look through to the end of the year, we'd expect that to increase on the order of [indiscernible] 100 basis points.
And that's based on a combination of things, certainly, the forward curve which exists today and how we assume we're going to mix in different senior facilities over the course of the year. The net of that increase, maybe 30 basis points, is pretty modest relative to our overall cost structure. And perhaps more importantly, it's important to understand that we pass on the full cost of interest to the customer via our spreads, our objective is we're going to manage to contribution margin after interest to be neutral.
Our next question comes from Ryan Tomasello with KBW.
Just following up on the seller conversion, nice to see that still holding in strong despite the strong sellers environment. But curious if you've noticed any initial signs of benefit to conversion rates in any markets that may already be starting to go off. I guess where do you think that 35% plus conversion could go in a more normalized environment? And do you -- have you put any long-term internal targets around that metric?
Ryan, it's Eric. Again, like I mentioned, we're quite pleased with some of the early evidence we're seeing that as we've increased spreads, obviously, it's reflective in our gross margins and contribution margins. We have not seen a material damage to the conversion rates. And again, we had a hypothesis going into this even back when we founded the company that when there's the most uncertainty, that's when Opendoor is needed the most, which means that we're creating the most value when there's times of uncertainty. And subsequently, we can actually capture that value that we're creating for consumers. I don't -- we don't have a view today on what that could look like through any softening in the back half of this year. But we're certainly optimistic that our conversion rates will be steady at the very least. And so again, as we think about increasing spreads throughout the year.
And then considering the geographic expansion that continues, can you say what level of, I assume, drag that these new markets are initially having on the consolidated business, maybe in terms of the margin delta between your most mature markets and your ramping markets, if that's the way you look at it maybe on a contribution profit basis?
Yes. It's Andrew here. The reality is pretty small in terms of the drag and actually in our updated investor presentation, we actually shared some of the cohort profiles of what margin looks like in those markets, and they're all positive and they're removing actually the profitability even more quickly than any of our prior cohorts have.
Our next question comes from Justin Ages with Berenberg.
Just wanted to follow up on the entry into the New York, New Jersey, San Francisco markets. Can you talk about any additional oversight that you guys take into account given some of the uniqueness of the houses in those areas, if any? And then a follow-on after that.
Sure. Look, I think, first of all, what I'd call out is our ability to enter the San Francisco Bay Area and New York, New Jersey it's actually a testament to 8-plus years of investment in our pricing and investment platforms. Our ability to underwrite a market is the fundamental gating item for us to enter a market. And that's what we look at. And we rigorously, rigorously test that before we launch. And that actually after we launch, our focus is not on growth in those markets, our focus shortly after launch is making sure the model is performing the way we expect them to. And what we've seen so far is that, that's what happens. And we monitor every market launch very, very carefully and very closely. And it's only once we feel comfortable with the risk we're taking on that we actually begin to apply our go-to-market playbook and [indiscernible] in those markets.
All right. That makes sense. And then on the vendor management system that you guys called the attention to in the letter, have you seen any improvement in kind of the inventory turnover? I know you mentioned 90 to 100 days, but is there reason to believe that, that system can bring those numbers lower and improve significantly or reduce the holding times?
We're relentless in our pursuit of operational excellence. And the team is hard at work, constantly turning over rocks, looking for opportunities, embedding process improvements into technology, into platforms so that we can continue to drive down our cost structure. And I think one of the things you saw is that over a 3-year period, we've actually been able to drive 240 basis points of structural margin improvement. And a big portion of that is cost. And so yes, we do believe that continuing to invest in our technology and operations platform -- I'm sorry, our transaction and operations platform will continue to yield cost savings.
[Operator Instructions]. Our next question comes from Stephen Ju with Crédit Suisse.
So I was wondering if you can give us an update on the uptake rate of some of your ancillary services, I think some time ago at least for the title and escrow product I mean there was a high -- pretty high uptake in those markets where they were rolled out first. So where are the most mature markets now? And is there any reason to believe why there should be some sort of structural ceiling below 100%, almost full adoption. And are those markets that are a bit newer in terms of these products were being rolled out. Are you still seeing a similar adoption path as some of the original/older ones?
Specific to our title business, we continue to see strong attach rates overall. We do see different attach rates market to market as we launch, particularly as we enter new or different states. One of the things we're very conscious of, particularly early in a market's life cycle is that we have flexible capacity, we can go up and we can go down as needed. And so we're prioritizing that flexibility in some ways early in markets over just the absolute highest attach because we actually think that leads to better system level profitability over time.
And so we, I would say, see very strong attach overall in our title business. We don't think it goes to 100% per se, but we think where it is, is a pretty good indicator, and we think that we'll see that in all of our markets.
That concludes today's question-and-answer session. I'd like to turn the call back to Eric Wu for closing remarks.
Thank you. I just want to say that I'm incredibly proud of the Q1 results. And as Carrie mentioned, [indiscernible] entire team for working hours and hours on servicing our customers and delighting them. We are managing our business with a great deal of discipline around our margin and cost structure. And more importantly, we believe we're going to be net beneficiaries and market share gainers from any upcoming volatility. Our future is very bright. And we are reshaping the entire real estate marketplace with a far superior digital product in a $35 trillion market. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.