Good day, and welcome to the Redfin Corporation Q2 2020 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Elena Perron. Please go ahead, ma’am..

Thank you, Casey. Good afternoon and welcome to Redfin’s financial results conference call for the second quarter ended June 30, 2020. Joining me on the call today are Glenn Kelman, our CEO; and Chris Nielsen, our CFO. You can find the press release on our website at investors.redfin.com.

Before we start, note that some of our statements on today’s call are forward looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but our actual results may turn out to be materially different.

Please read and consider the risk factors in our SEC filings together with the content of today’s call. Any forward-looking statements are based on our assumptions today, and we don’t undertake to update these statements in light of new information or future events.

During this call, the financial metrics will be presented on a GAAP basis and include stock-based compensation as well as depreciation and amortization expenses. In the event we discuss any non-GAAP measures today, we will post the most comparable GAAP measure and a reconciliation on our website.

All comparisons made in the course of this call are against the same period in the prior year, unless otherwise stated. With that, let me turn the call over to Glenn..

Thanks, Elena, and hi, everyone. Redfin’s second quarter revenues and net loss were better than we projected in our last earnings call. Revenue was up 8% from the second quarter of 2019 to $214 million. Losses narrowed from $12.6 million in the second quarter last year to $6.6 million in the second quarter of 2020.

Redfin now our business of buying selling homes on our own account grew revenues from $40 million in the second quarter of 2019 to $72 million in the second quarter of 2020. Over the same time, our other businesses primarily lending and titled services grew 37%.

In our core business of brokering home sales through Redfin agents and through other firms agents working as our partners. Revenues declined 12% compared to the same quarter last year. But those declines were confined to April when core revenues fell 28% compared to the same month last year and to May when core revenues fell 17%.

In June, revenues generated by our own agents and by our referrals to partners agents increased 4%. Our market share decreased by 1 basis point from the second quarter of 2019. The loss is due largely to the high proportion of sales Redfin gets from western part to the US that almost entirely shut down in March and April.

But we also need to hire more agents. Our commitment to employing agents led us set pricing and service levels and safeguards the welfare of many of our workers. But that commitment also limits our brokerage capacity when demand spikes as it did after our April reduction in force.

The week before we furloughed 36% of our lead agents and laid off another 11%, customer inquiries were down 41% year-over-year. By the end of June, inquiries were up 40% year-over-year, that’s crazy. Our partners have stepped into the gap serving customers from Redfin.com when our own agents are busy.

This buffer Redfin financially from the housing markets typical ups and downs, at least to a point. Partners generate less Redfin profit per transaction and much less Redfin revenue. Partners also generate fewer transactions overall because customer success rates are higher with Redfin agents.

But partners improved brokerage margins by letting our agents focus on the most lucrative customers. In June 2020, the proportion of customer inquires handled by our own agents was 17% lower than in June, 2019. We’re extending our software and potentially our call centers to give our partner agents more in the support now reserved for our own agents.

These efforts should improve our partners’ agent service and increase the average gross profit Redfin generates per website visitor. We’re also rapidly hiring. The number of lead agents we employed on June 30 including new hires and those invited back from furlough was 14% lower than pre-furlough levels. As of July 25, it was still 10% lower.

To meet current levels of demand our lead agent census would have to be 13% higher than pre-furlough levels. Despite reports that our furloughed agents were being aggressively quoted by other brokerages, 83% returned from furloughed only 8% quit. This is a testament to our wonderful employees loyalty.

At some point in the fourth quarter, we expect to be fully staffed against our current forecast of 2020 demand and to keep hiring from that point on pays with demand.

Since many of the customers will meet in the fourth quarter won’t close on a sale until the first quarter of 2021, we may have to wait until the start of 2021 to gain share at a historical rate of around 10 basis points per year. The good news is by then; we may be able to perform even better than our historical rate.

Mainly due to gains in our share of online real estate traffic and even before being fully staffed. We expect our market share will almost certainly improve in the third and fourth quarters. One reason we’re confident that the demand for more agents will continue to at least through September is because Redfin.com’s traffic is accelerating.

Comparing the second quarter’s 2019 and 2020 average monthly unique visitors increased 16% with June’s visitors up 31% and July’s visitor set to grow at a similar pace. June’s rate is well above the 26% increase in average monthly unique visitors that occurred between 2018 and 2019.

In May and June, Redfin for the first time attracted more visitors than Trulia. With only zillow.com and realtor.com still ahead of us. Much of our traffic gain is due to increasing levels of home buyer interest which benefits the home market. But some of that gain is because Redfin is competing better for traffic.

By comparing our traffic growth to that of other major sites and to industry reports on home touring activity and pending home sales. We’ve concluded that we’re increasing our share of real estate traffic even as the overall volume of traffic to all real estate website increases. We have reason to believe our traffic share gains will continue.

For many Google real estate searches we’re now one of the top three results. A position that draw us far more traffic. And for most of 2020, we’ve been getting more of the visitors who discover redfin.com to the first time to stay, increasing the rate at which those visitors subscribe the listings from redfin.com or download our mobile application.

And it isn’t just more online activity. Redfin.com visitors are becoming customers at higher rate; with growth in customer inquiries outstripping traffic gains at every stage of the home buying process consumers are now more serious about buying a home than before the pandemic.

For example, the customers who went on their first home tour in May, June and July have been about 10% more likely than last year to return to redfin.com within a week of their tour. In the past, this pattern of touring and browsing has been a reliable early indicator of customer’s likelihood to buy a home.

We’ve never seen such a sharp increase in home buying intent. With Redfin getting more home buying customers and more serious home buying customers. Our challenge now is serving them well. This goes beyond the agent hiring we discussed at the outset of the call.

It’s harder to schedule tours automatically and bidding wars have strung up in places where they were once uncommon because market conditions and customer loads have swung wildly from February to July. Our efforts to increase home buyer success rate will be hard to judge in 2020. But other efficiency gains are easier to see.

As part of April layoff, we increased the number of agents under each manager reducing the brokerages per transactions cost by about 1%. This change originally planned for later in 2020 is part of the long-term plan we discussed with you on previous call to develop a more entrepreneurial sales force.

We have the opposite challenge of serving buyers instead of seller. Listing agent productivity has been high, but we need more demand. Since June 1, listing agent productivity increased year-over-year from an already high level having already increased in 2019 over 2018. Our agents are making the most of our opportunities. But just need more of them.

This problem with listing demand began before the pandemic. Year-over-year growth had already begun to slow from the first quarter of 2019 through February 2020. At that point, demand plunged due to the pandemic before partially recovering in the last four weeks, with year-over-year growth in the high single digits.

At a time when sellers have been much slower to recover from the pandemic than buyers, any growth in listing demand is meaningful. Market-wide new listings declined 43% year-over-year in April and still haven’t completely recovered. Over the last four weeks, market-wide new listings are down 3% year-over-year.

Since a home can take months to stage and sell, home owners more than buyers are skittish about economic volatility. But also about health risk. To be buyer, you have to decide only to walk through each home you’re interested in evaluating the risk home-by-home.

But selling a home can be an open-ended commitment to welcome all comers for as long as it takes to find a buyer. Once a seller decides to meet an agent about a listing her home, she wants to get it sold quickly. The net increase in Redfin’s listing fees that we rolled out in December 2019 hasn’t helped Redfin agents meet more customers.

But it hasn’t hurt us much either. Reducing demand only modestly. Comparing the large markets where fees went to the smaller markets where fees decreased slightly. The large markets have gotten customers inquiries at about the same or in even better rate. But in the market with the fee increased those customers have then had a moment of pause.

Who are slightly less likely to schedule a listing consultation? This modest net decrease in how many listing consultations our agents from a given group of website visitors has been in line with our expectations. Since our fee increase didn’t apply to listing customers who buy their next home by Redfin.

We anticipate that the impact on listing transactions will be offset by an almost commensurate increase in home buying transactions from our listing customers and of course we expect the impact on listing transactions to be more than offset by a 35% increase in revenues per listing wherever the price increase took hold.

To drive more listing demand we shifted our mass media ads to promote our listing service when earlier in the year we had promoted our service to both buyers and sellers. The ad that we shot with cell phones for $17,000 in May is outperforming traditional ads that cost more than $1 million to produce.

Since we launched the new ad at the beginning of June, the year-over-year change in listing inquiries in the markets where the ad ran was eight points higher than in the other markets.

This performance coupled with the possibility that the real estate fees will extend deeper end to the fall because of the pandemic has encouraged us to spend another $6 million to $11 million on TV media in the third quarter. This ranges broader than usual.

We had only spent $11 million of advertising rate stay low despite the election and if this year’s housing market keeps bucking the typical pattern of an early summer peak in demand. We also want to create new online channels for potential home sellers to contact our agents. Since [indiscernible] agent network and software to support on demand tours.

We’re now developing a capability to deliver on demand pricing analyses. So homeowners can talk to an agent at a moment’s notice about the price at which Redfin would list their home and how we assess nearby home sales to develop that price.

Homeowners have responded enthusiastically to early trials of this capability which could lead to high single-digit increase in Redfin listings once fully rolled out. The rollout will draw and one of the great competitive assets Redfin has developed over the years. We long ago hired locally licensed agents to work in call centers.

At first to answer telephone inquiries from our website. We now expect to expand those call centers to support on demand pricing analyses in most major market by early 2021. Longer term, we want to take listing share not just with new demand channels but with new products.

This is why we aim to be the first company to give homeowners across the US complete set of choices for selling their home. First choice is standard full service a low fee. The second option is a Redfin Now instant offer that lets the homeowner dispense with hassle or financial risk in exchange to a lower sales price.

The third option is Redfin’s concierge service to renovate the home for a top dollar sale. Rather than selling each of these services through a separate online channel and a separate sales force.

We’ll guide customers through the merits of each products with one channel on our website, one sales advisor in our call center and one agent in the customer’s living room. We started piloting this approach yesterday in Southern California, but even before that we changed the bonuses, we pay the Redfin Now employees who generate instant offers.

When we restarted Redfin Now on May 7, our offer specialist earned the same bonus of a customer accepted Redfin Now instant offer or listed a home with a Redfin agent. The results have been gratifying. Among the homeowners, who rejected a Redfin instant offer we more than doubled the percentage who met with the Redfin listing agent.

This ability to make money from a failed instant offer is crucial because so Redfin.com visitors ask for an instant offer and so few accept it. For every homeowner who accepted a Redfin Now offer in 2019 another seven who contacted us about a Redfin Now offer sold their home in a brokered sale.

So we also want Redfin Now to make money in its own right even straddling the pandemic. Redfin Now second quarter gross margins improved year-over-year by 90 basis points to negative 1.6%. Not only did we sell our pre-pandemic inventory at a slightly higher price than we promised in our last earnings call.

We were also able to start buying homes again with lower offers. We’ve been helping this regard by homeowner’s reluctance to show their properties during a pandemic. Off the homes we bought and then put on the market many have gotten an offer for a higher price than we expected.

Our goal is to generate gross profits from the business in 2021 or 2022 rather than betting on economies scale from owning billions of dollars in home far in the future. Redfin Now today is limited to 10 of our 97 markets. Our concierge service operates at another 10 sometimes more expensive market.

Redfin Now and concierge service overlap today in five markets. We plan to resume expansion of both services to new markets in 2021 after we’ve unified the process for selling concierge, Redfin Now in our brokerage service and after we built the systems in staff to renovate many homes.

The business that’s growing most quickly within Redfin is Redfin mortgage which now accounts for about half of our other revenue. A title business title forward contributes much of the rest. Redfin mortgage turned its first monthly gross profit in May and had another month of gross profits in June.

Second quarter gross margins for our other businesses improved year-over-year by 1,100 basis points to 13.2%. Some but not all of the gross margin gains are sustainable. We stopped hiring lenders when the pandemic first began causing economic carnage in April. Even though mortgage demand kept rising.

This in turn forced us to limit volume by raising rates a tactic common among lenders in 2020. Revenue per loan increased as a result. We’re now investing aggressively in Redfin mortgage confident not only that we can loan money to our brokerage customers.

But Redfin mortgage can recruit customers directly from Redfin.com for purchase loans and refinancing. As with our brokerage service for home buyers, our main challenge with Redfin mortgage is just keeping pace with demand.

We’ve had to defer expansion to Seattle, Portland and California that we still hope to reach these markets by year end depending on how quickly we can hire lenders. This expansion would list the percentage of brokerage customers we can reach from 59% to 94%.

We now have the tools and processes to handle refinancing but have served only a few customers because our lenders are busy. We expect to start processing a significant number of refinancing in the first quarter of 2020. Setting up mortgage for a two-pronged growth strategy.

The question hanging over our aggressive hiring plans for mortgage, the brokerage and even our title business is about the [indiscernible] to the housing market and the overall economy.

Against the backdrop of double-digit unemployment, a second surge of Coronavirus infection and widespread protest, the strength of the housing market almost feels eerie. We are monitoring mortgages in forbearance where the borrower has requested to delay mortgage payments for up to 12 months.

As the government moratorium on US foreclosures about 4.1 million loans or nearly 8% of US loans are in forbearance, that’s down from a peak of nearly 5 million loans in mid-May, but still high.

3.2% of mortgages were delinquent in January 2020 because widespread forbearance will extend at least in the spring of 2021, we don’t express to stress sales to dampen home prices in 2020. But a big question for next year is whether Americans will get back to work before forbearance expires.

This disparity between the white-collar home buyers and others worried about to keeping their home coupled with the speed of the downturn and then of the recovery, has made it hard to call the 2021 housing market. Every week the summer execs who led the company through an April layoff have updated our demand forecast and improved more hiring.

But never without also discussing the possibility that bottom could [indiscernible]. Just last week, we asked our economist to look at the markets where infections are soaring to see if demand there had faltered compared to other markets. But even the earliest demand indicators still show that buyers are mostly unfazed.

The touring demand slowed slightly in Arizona before rebounding. The housing market maybe volatile, but for now it would be hard to overstate how strong it is.

For the homes listed between June 22 and July 19 asking prices increased by a whopping 14% and still buyers were undeterred, 46% of new listings had an offer within two weeks up from 34% for the same period in 2019. In June only 13% of listings dropped their price down from 16% in June, 2019. Pending sales have increased 8%.

The number of homes on the market over the last four weeks decreased 29% year-over-year with the drops only accelerating since April. Price increases have begun to draw new listings into the market but still at lower levels than last year and far below the rate of purchases.

As a result, the number of homes are sell in the US is at its lowest level since the National Association of Realtors and the government began tracking this data in 1999. In Maryland this month one Redfin listing got more than 100 showing request in three days.

Low mortgage rates, a flight to affordability, more interest in the home generally and more interest in vacation homes are all driving demand. We hear from our agents in outlying areas that more workers each month are getting permission from their employers to move far from the office.

As a result, buyers are flooding into markets like Phoenix, Sacramento, Fresno, Bridgeport, Vegas and Detroit. In markets like Tucson, our agents meet buyers willing to pay $600,000 for a home in a market where the average is closer to $250,000.

In markets like Palm Springs, we meet buyers willing to pay $1 million where the average is less than $500,000. Some customers who are planning to buy a vacation home decide halfway through the purchase to make it their only home rather than leaving the city for the summer, they never come back.

Perhaps the most important trend for Redfin is an increase in home ownership rates.

In early June, we predicted the first major increase in home ownership rates since 2004 noting that many of our buyers in affordable outlying areas where people who only a few months prior were planning on renting an apartment in an expensive big city for years to come.

On Tuesday, the US census released a report showing that home ownership rates increased from 64% a year ago to 68% last quarter potentially the largest such increase in its history. Before turning the call over to Chris, we want to update you on our efforts to build a diverse workforce.

This will be a brief but important feature of our earnings calls because our diversity efforts advance a commercial goal of vital importance to every Redfin stockholder to hire talent and reach customers that other businesses overlook.

Over the past month, we published a report showing an increase in the representation of people of color at Redfin from 30% in 2018 to 31% in 2020. Also this month we set provisional 2021 diversity target. We’ll finalize this target through December once we settled on how many people, we need to hire next year.

We plan to base 25% of executives bonuses on those targets, focusing on 2021 since we cancelled 2020 executive bonuses.

What’s even more important than recruiting is developing the people of color now at Redfin for senior roles here, through better management training and mentorship programs? By year end, we also expect to add a new board member which gives us an opportunity to add a diverse perspective on Redfin at the company’s highest level.

It has been a wild year. We were spotted quickly to the downturn. Now we’re scrambling to capture demand. Blowing out our financial projections from just a few months ago. We’re running naked through the jungle with a Bowie knife clenched between our teeth, which is the way Redfin was born to be.

Now before I sign off, Chris and I wanted to thank the scrupulous and insight Elena Perron, who’s moving from Investor Relations to run Financial Planning and Analysis for Redfin. Elena joined us just before our IPO and taught me how to host in earnings call.

Her absolute mastery of our business and her professionalism in calm fades all of you from my Dingbat impulses to turn these calls into a fiasco. Take it away, Chris..

Thanks Glen. The impact of COVID-19 on our second quarter results was less than we had anticipated specifically in June when we meaningfully exceeded our expectations. Second quarter revenue was $214 million up 8% from a year ago. Real estate services revenue which includes our brokerage and partner businesses declined 12% year-over-year.

Brokerage revenue or revenue from home sales closed by our own agents was down 12% on an 11% decrease in brokerage transactions. Revenue from our partners was down 13% on a 20% decrease in partner transactions. The property segment which consists of homes sold through our Redfin Now program generated $72 million in revenue, up 81% from one year ago.

Our other segment which includes mortgage, title and other services contributed revenue of $7 million an increase of 37% year-over-year. Total gross profit was $46 million down 5% year-over-year.

Real estate services gross margin was 34.2% up 200 basis points year-over-year primarily driven by a 140 basis point decrease in home touring and field expenses, an 80 basis point decrease in personal technology expenses, a 70-basis point decrease in listing expenses and a 50-basis point decrease in travel and entertainment expenses each as a percentage of revenue.

This was partially offset by a 170-basis point increase in personnel cost and transactions bonuses as a percentage of revenue driven by additional pay for agents as deal volumes temporarily declined.

Properties gross margin was negative 1.6% up 90 basis points from a year ago primarily driven by a 270 basis points decrease in personnel cost and transaction bonuses as a percentage of revenue. This was partially offset by a 220 basis point increase in home purchase cost and related capitalized improvement as a percentage of revenue.

We’re still being careful about the prices that we pay to buy home through Redfin Now. Since we believe that the real estate market has normalized after COVID-19 related disruptions earlier this year. We’ll go back to no longer providing an update on the capital limit for this business.

Other segment had a gross margin of 13.2%, an increase of 1,100 basis points from a year ago primarily driven by a 690 basis point decrease in outside services cost as a percentage of revenue. These businesses continue to scale against their fixed cost.

Total operating expenses were down 17% year-over-year and represented 24% of revenue down from 31% of revenue one year ago. Technology and development expenses increased 12% from last year driven by an increase in personnel costs.

Marketing expenses declined 65% year-over-year as we paused our mass media and performance marketing campaigns in late March. General and administrative expenses grew 30% year-over-year driven entirely by a net $6.2 million of incremental and direct restructuring cost related to COVID-19.

Our net loss including stock-based compensation and depreciation was $6.6 million compared to a net loss of $12.6 million in the second quarter of 2019. We also recorded a dividend on convertible preferred stock of $1.3 million. As a result, our net loss attributable to common stock was $7.9 million.

Diluted loss per common share was $0.08 compared with a net loss of $0.14 per share one year ago. Now turning to financial expectations for the third quarter of 2020. Revenue is expected to be between $214 million and $225 million, representing a year-over-year decrease between 10% and 6%.

We expect our property segment to account for $10 million to $14 million of that revenue representing a decrease between 88% and 83%. We don’t typically provide guidance on gross margin because our lead agents are so busy right now with serious customers. We do expect real estate services gross margin to increase year-over-year for the third quarter.

This would mark our fifth straight quarter of improving real estate services gross margin as compared with the prior year. Net income is expected to be between $18 million and $23 million compared with a $6.8 million net income in the third quarter of 2019. This guidance assumes that we spend high end of the advertising range that Glen mentioned.

Our guidance also includes approximately $8.8 million of stock-based compensation and $3.8 million of depreciation and amortization. We also expect to pay quarterly dividend of 30,640 shares of common stock to our preferred stockholder. Accordingly, a value of those shares will impact our net income attributable to common stock.

This guidance assumes among other things that no additional business acquisitions, investments, restructurings or legal settlements are concluded and there are no further revisions to stock-based compensation estimates. And now we’ll take your questions..

[Operator Instructions] we will take our first question from Jason Helfstein of Oppenheimer..

Hi guys and Elena, we’ll miss you in the IR role. I don’t know again I’m multitasking, did you comment on what you thought the impact was on the change in market here normally you gained market share this quarter was basically flat on a year-over-year basis.

And then just a follow-up on Chris’s comment about the real estate gross margin to the second quarter, it sounds it will be basically 38% of better which will be up sequentially and it would seem like maybe second quarter was even better than you thought for [indiscernible] gross margin.

Should we start to think that, we’re kind of at a new I don’t want to say new paradigm, but at a new level of age and productivity and you feel like obviously pending market volatility that new level of real estate gross margin is sustainable. Thanks..

Why don’t I handle share and Chris you can talk margin? Jason, the comment we gave in the earnings script was just about how share was flat to down because we are concentrated in western markets which were hit hardest by the pandemic. But also because we laid or furloughed 1,000 people. So demand went down 40%, couple a months later it was up 40%.

We had to hire as many people as quickly as we could. So we’re pleased to how many folks came back from furlough. We’re now hiring above and beyond now. But we need to do that to, to get back to really strong share gains..

And then with regard to margin, we did expect third quarter real estate services gross margin to be improved over the third quarter of last year. I’d be just a little bit careful about extrapolating that too far though because our agents are super busy right now.

They have really met a lot of customers over the last few months with very high intent that’s allowing for very strong productivity. But may or may not be kind of the normal state of the housing market and so it’s something that we’ll just have to watch here for a while.

But just as it relates back to the second quarter, we were pleased with the gross margin we were able to achieve a big chunk of that is, just as demand came in strong and closed strong, that obviously helps gross margin win when the revenue piece of that works out well..

Thank you. We’ll take our next question from Tom White of D.A. Davidson..

Two, if I may. Just first on your mortgage business.

Can you talk a bit more about the strength there? Is it just one of the expansions into new states over the last several months? Is it rising attach rates to your buy side transactions? Is the pandemic driving more consumers to utilize the product perhaps just some color there and if you could update on attach rates too for mortgage and title that would be great and then just a quick follow-up?.

Great, so there are many reasons that the mortgage business is growing. Our agents love recommending that product, so we’re bullish on attach rates. We also just see more opportunity for profit because rates are so low and every lender is so busy.

So what we did and what other lenders have done just to limit volume is to raise our rates above what they would normally be increasing revenue per mortgage.

We’re expanding and at the same time, we think we can monetize a vast redfin.com audience by offering mortgages to people who are not Redfin brokerage customer who may want that to buy a home through another agent or who wanted for refinancing, we have request from our customers who did use Redfin to buy a home, but two or three years to have Redfin handle the refinancing.

So or many months out, Redfin mortgage is going to grow as fast as we can scale, our hiring, our training, our culture..

Great and then just on. There’s been a lot of data points out there about this trend of urban flight [ph] and people leaving congested. Glenn, I’ll just be curious to hear about.

Is that an opportunity or risk for you guys? Obviously, there are a lot of [indiscernible] driven markets that are big core markets for you and if people are leaving, I guess that’s good for the sell side part of your business. If they’re moving to rural areas or maybe you’re not - not as big just trying to think through that..

If Cheyenne, Wyoming has a real estate boom. We’ll miss out on it because we don’t cover that market. But we do cover a massive number of markets. We’re in places like Rochester and Buffalo and Raleigh and Savannah. So it has been a huge business benefit to us almost all of our agents are reporting and exited from San Francisco, LA, Boston and New York.

If you talk to those folks you hear about how proximity that transit doesn’t matter in Connecticut. About how people aren’t worried about an open floor plan anymore. They want a different room to Zoom from for the kids and for themselves.

So what they want in a house and where they want to live coupled with the fact that they’re just thinking more about a home means that they’re going to be more real estate transactions in the United States and it’s up to us to take advantage of that and continue to shift our operations to smaller and mid-sized markets.

We think we have an opportunity to take more search share into smaller and mid-sized markets because our engineers are located in places like Seattle and San Francisco we’ve unconsciously buy us the site towards the cities, searches work much better there than they do in these smaller places and so as we redefine neighborhood boundaries and recognize listing attributes that may not have been [indiscernible] in some of the big cities.

I think we’ll take more search share, we’re definitely going to hire faster in the smaller markets. We’re really bullish on growth. So it would be hard to say that this is anything but a boon to Redfin..

Thank you. We will take our next question from Edward Yruma of KeyBanc Capital Markets.

Two quick ones from me. I guess first, you guys gave some statistics around agents that were on furlough that came back. But given the kind of intense market that you right now what’s the retention like on your lead agents that you’re seeing hire attrition and then as a follow-up.

I know you guys have been very innovative in terms of kind of contactless showings. What’s your sense on the consumer appetite for this going forward as we start to see mobility improve? Thank you..

Got it. Well first of all just to comment on agent attrition, we haven’t seen a significant uptick in attrition. But we are worried about the welfare of our employees.

Folks are working really hard under stressful conditions because their kids are at home unable to go to camper school and they’re worried about meeting customers one after the other, when infection rates are risk is still high. So we were just drawing on the reserves in our culture and we’ve been doing that all summer.

Where employee love for Redfin has been tested and so far, we passed that test. But we’re really going to have to be mindful of it when earlier there was a question about gross margins and the opportunity to get more leverage over gross margins.

Chris responded cautiously because we could maximize agent output over the next six weeks and have everybody quit when we’re done with the quarter and instead, we want to play a long game and be the best employer in real estate.

So the fact we’re not taking share quite as fast as we could, the fact we’re not working our agents absolutely to the bone is because we are trying to balance with financial objectives and long-term agent welfare, long-term customer satisfaction. As for contactless showings, we’re really enthusiastic self-service access to properties.

If you talk to a listing customer what they’re most worried about is the open house and all the private showings. But when you get a vacant listing. You can sell it all day. So the challenge for us is getting an iPhone enabled lock on the doors of those houses and letting people into the properties.

We’ve experimented first with Redfin Now just because we wanted to be guinea pig and what we discovered is.

That it’s not just lookie-loo’s or people trying to have a party in the house, folks who walk through the property on a contactless iPhone enabled tour end up making offers and now we can make that pitch to people, who own the house beside Redfin and say, it is worth it. You should put that lock on your door.

You’re going to get more offers as a result and we think it is an awesome part of the future, whether there is a pandemic or not..

Thank you. We’ll take our next question from Ygal Arounian from Wedbush Securities..

There’s obviously a lot going on in - I’m trying to understand the demand and how it is accelerated since the beginning of the pandemic and time that into your guided [indiscernible].

Is there any way to think about what part of that is pent up demand you would have seen in late March and April and how much of it is being driven by lower rate [indiscernible] new environment of work from home etc.

or do you not think about it that way? And then last one on Redfin Now and properties you mentioned or at least what it sounded like to me kind of slowing down the expansion of Redfin Now [indiscernible] unify the sales process.

So maybe any additional color on how to think about the expansion of Redfin Now, what it’s going to look like for the rest of the year? Are you going to be a lot more active in the markets here in or just kind of take it easy and slow until we get into 2021? Thanks..

Sure. So on pent up demand. I think it’s still hard for us to tell how much of what we’re seeing right now is a carryover from the second quarter. It’s something we’ve been trying to pay a lot of attention to; I think we’re now getting more comfortable that there is a lot of muscle underneath this because we’ve now been seeing it for a while.

It was not just an initial kind of rebound. But it’s now been several months where we’ve seen really strong demand and when you put that together with the kind of traffic growth that Glenn talked about, we do find that to very encouraging in a long run for growth..

And on Redfin Now?.

We remain committed to it as one part of larger solution. We think everybody who is going to sell a house, at least the house under $600,000 to $700,000 is going to want to compare an instant offer to a brokered sale. They’re also going to want to look at brokers who can fix up the house as part of a concierge service.

So the only delay for us is just being able to renovate a large number of houses so that we can limit the time. We hold the properties. We’re scaling up our home services division to be able to do that. But also just unifying salesforce in exactly the way that you said.

We started Redfin Now with the idea that we needed a separate salesforce just because there was a different product and we wanted to learn quickly before trying to train a 1,000 people to sell it. But now we’ve gotten into the point we’ll still have offer specialist to figure out how much to bid on a house.

We’re going to present that through a listing agent who’s able to offer this balance complete view of all of the customer’s options. We think it’s in the best interest to the customer, to see all of those options from one person who has their best interest at heart.

But we also think it’s going to lower our delivery cost, so that we can have the most efficient channel for making ends to an offer on quality eye buyers..

Thank you. We’ll take our next question from Naved Khan of SunTrust..

This is Robert Zeller on for Naved. And congratulations Elena. In terms of for hiring more agents. I guess how do you reach your goals? What could delay the plans and then also, what could be like the perfect world or Utopian scenario that would allow you to beat your timeline or hire more agents quicker than you expected? And then I had one follow-up.

Thanks..

Great, well. The way we think about it is how many recruiters do we have and how many agents does each recruiter bring on every week? And so far, we’ve been outpacing our goals. But we need to add recruiters. When you do a layoffs in April, the first people to go are often recruiters because if you’re losing employees instead of gaining employees.

You certainly don’t need recruiters. But we’ve been able to bring back that recruiting team and they come back hitting on all cylinders, it’s a tribute to that team. The challenge is that, if real estate is hot for Redfin. It’s hot for other brokers and during those times.

It can be hard to lure someone to Redfin because they’ve got one or two deals pending with their traditional brokerage and they’re waiting for those to close.

Having said that and the whole financial statement benefits from the demand that we’re seeing because it’s not as if we’re turning away customers when we don’t have enough of our own employee agents, we send those customers to partners and that let’s our employee agents focus on more lucrative clients.

So in general, we’ve been excited about the fact that we have more demand than we can handle, that is nearly an ideal situation. And we’re fairly confident that we’re going to be able to recruit folks because we’ve been able to get people who come from backgrounds outside of real estate to be very effective as real estate agents very quickly.

We have long insisted that we can’t just feast on other brokerages census.

We have to develop agents who are great customer relationships, great at service, hardworking and when you take somebody who’s working at hospitality or retail or some other business and say can make $100,000 a year after your first year at work, that is a very lucrative opportunity for those folks and it’s especially appealing now that there’s double-digit unemployment.

So we’re excited about our ability to grow and we’re just determined to make sure that it’s high quality growth because the quality of service depends on technology and systems and policies and everything else. But it also depends just on the quality of the mammal [ph] who’s delivering that service [indiscernible] of a human being..

Got it, thank you.

And then just, how do you see this pace of home sales for the next quarter and for the rest of the year, with all the factors that are in the market right now? Which is very low supply, very low rates increased in prices? So I’m curious on what you guys are seeing in terms of in case of home sales going forward?.

Well if you’ve been on this call long enough, you know that I’m a nervous Nellie. I’m always talking about how the bottom could fallout or something could go wrong.

But if the conditions continue the way that they are, which is a big if, given that there is a second surge of infections and double-digit unemployment and the new GDP results that came out today. But right now, it could not be stronger.

Every single indicator at Redfin is bright green on traffic, customer contacts, seriousness of customer all through the pipe. The issue is going to be inventory and bidding wars. But we have a much greater supply. It used to be that everybody was bidding on 150 homes for sale in San Francisco and now they’re spread out across the country.

So I do think that bidding wars will be an issue, but not as gaiting as it was say two or three years ago when we had another big inventory crunch..

Thank you. As a reminder please limit yourself to one question. [Operator Instructions] Next, we will take our question from Heath Terry of Goldman Sachs..

Just wanted to dig into a couple of things, one on the discussion that we had earlier around market share. I know it’s largely a function of mix with the West Coast.

If you were to try and normalize for that, is there almost like a same store sale number that you could share or sort of quality for us in some way to look at what share looked like on a market-by-market basis sort of what you’ve seen there.

And then if on a kind of second question, as you look at the agent efficiency that you’re seeing, is there a way to separate out sort of the impact to agent efficiency from the technology efforts that you’re making and especially the new technologies that you’re providing to both agents as well as buyers and sellers versus sort of what you’re seeing in the macro environment.

Thanks..

Sure. So I’ll try not to answer both questions. We may claim any earnings script, that much of the share loss as 1 basis point share loss. But that was largely attributable to the fact that, there’s a mix shift and the reason we were able to make that claim, is we do have market-by-market data. We do not disclose that data.

We’ve never done it before, we shouldn’t do it now. It is not as reliable as the number that we released. But that’s what comforted the claim, that we think it’s largely a mix issue. As far as agent efficiency.

The gain has been so sharp and not entirely correlated to particular technology release that most of it is because demand went up, customer loads increased as a result and customer intent has been higher. But you meet people they’re deadly seriously about buying a house.

We have made some investments in screening out people who are not serious about buying a house and I think that is material long-term to our success. But there’s been a secular change in the home buyer. People who used to walk through houses just because they were cool, they don’t want to mask up to do that. It’s just like walking into a store.

You don’t do that anymore unless you got your hand on your credit card and you know, what you want to buy because you’re in and out, with your mask on and off again. So I think people are pretty serious about buying a house. The ones engaged in the market and plenty of people are engaged. I wish, we can take more credit for it, Heath..

We’ll take our next question from Soham Bhonsle of Susquehanna Financial Group..

I just want to follow-up on the mixed shift, I guess.

Does this actually make for - is it good reason I guess to maybe keep your efforts in toward the coastal regions rather than move faster into the lower price markets, as in order to sort of maintain that share or are you still focused on sort of going into those lower price market? It just seems like if you sort of continue your efforts in these higher price markets, you won’t see this sort of differential going forward..

We’re omnivorous. We’re going to try to take share on the big markets and in the small markets, we’re hiring everywhere. It’s like those bears you see in Yellow Stone Park. They eat the garbage, the blueberries, they eat everything..

Okay, I guess. I guess just a quick --..

We’ll take our next question from Brent Thill of Jefferies..

This is John [indiscernible] for Brent Thill. I’ve a bigger picture question. As the brokerage industry as had to content with social distancing and other constraints to the traditional home touring process.

Are you seeing any signs that competitors have recently stepped up their investments in digital tools for agents and other than your site and your site traffic, maybe you can talk about how Redfin maintains its technology edge? Thanks..

So we have seen competitors start to embrace three dimensional scans of listings, which make it easier to see a house, of actually getting out of your car and walking into the property. But nowhere near the universal or near universal level that Redfin has.

So we do see individual agents trying to cobble together a special camera for taking those scans or trying to offer FaceTime video to their customers just telling each customers that I’ll do that for you.

But our platform lets us offer that to every single person who’s looking at a listing online and just being able to tell everyone that we can take you through the whole transaction without having to meet you, is a comfort to many customers.

I would say it’s just as important maybe perhaps more important to home sellers that we know how to sell a house without having to host, open house after open house because we can show you how much traffic that listing is getting online.

We can run digital campaigns and you can see the results in real-time from your computer and just talking to people about the premium amount of traffic we can deliver because of our platform because of our digital capabilities has been more important. It used to be that when you told somebody, hey we’re going to run these custom campaigns.

It’s going to be emailed. It’s going to be Redfin.com. It’s going to be Facebook. There’s plenty of work we have to do there. But what about the postcard? Are you going to send a postcard? Nobody is really saying that anymore. People really want to hear about how you’re driving virtual showings. So I do think it favors us.

I do think the industry is going to try to close the gap, but only get halfway there..

Thank you. We will take our next question from Brad Erickson of Needham and Company..

I just had two follow-ups. First, can you just talk about your agent hiring philosophy relative to demand? I guess is the goal to have your agents’ sort of really, really busy like they’re right now.

Where you’re kind of hedging on the sustainability demand or is the goal ultimately to reduce the demand funnel sized for your agents than you hire more overtime. That’s the first one. And then the second one, just on the traffic acceleration. You called out in June and July, particularly on SEO.

What do you think is driving that? Was there an algo change that benefited you? Or did something change in terms of content? Maybe you can talk about what you think is behind that. Thanks..

Sure. So we like to send some demand to our partner agents. They’re going to be ups and downs ahead. They may not be as massive as the one that we saw in April. But we try to buff ourselves against seasonal and macroeconomic swings and demand by having 30%, 40% of demand go to partners that also improves our margins.

So that our agents can focus on the most lucrative customers. But having said that, we also want to make sure that it’s a good life for our agents. That they have a sustainable workload. And what’s been different about this summer is that. They get into the red zone for a month or two every summer by design.

They know that, they plan their lives around it. They want the income. And this summer, it just hasn’t come back down. It’s month after, month after, month. So we’re intervening to bring it back down to make sure that our customers are well taken care of, but also to make sure that our employees last.

So I think our philosophy is to manage loan in part based on our sense of employee welfare and customer satisfaction. But increasingly to do it algorithmically based on agent close rates.

So there are some agents who can handle 15, 20 new customers a month and they’re going to make sure every single one of those customers who want to buy a home it’s successful and there are other agents who get overwhelmed and you can have one-size to fit them all.

So instead, you’re measuring how many of those customers are actively engaged in a home search through their online activity. But no longer engaged with the brokerage and then intervening with agents who need to have lower customer loads on an agent-by-agent basis.

And the reason we can do that is because we’ve elaborately instrumented the brokerage experience and the website to keep track of a customer all the way through from their first visit to getting the keys. And we know when there is a problem and that’s when we’re going to take action. We don’t want to get into what we’ve done to improve our sight.

But hopefully, we set up some credibility when I told Heath that we can’t take credit for increasing agent productivity. It’s largely the result of increasing home buyer intent.

Though, that I can say now that some of the traffic gain is also a market driven tailwind and some of that is because we have done things to get more traffic and the simplest evidence of that is, that we passed Trulia. If it was just a rising tide, the Trulia boat would be lifted right alongside ours. But instead, our boat has nudged ahead..

Thank you. We have additional question from Soham Bhonsle of Susquehanna Financial Group.

Thanks for getting me back in here. Just the follow-up question I had was, Glenn. The iBuyer business model just thinking about it through cycle. There’s some debate the iBuyer’s could the role that they could play during volatile times.

In one hand, some say there is - they could be liquidity providers and on the other, we found in the last couple of months. That, you guys as well as others have stopped buying completely so.

I guess the question is, what are your thoughts on the evolution that [indiscernible] to the business model, to make this more of an ongoing business rather than start, stop in times of volatility..

Chris, do you want to start with that one?.

Yes, I do think that we will continue indefinitely to adjust our pricing when we see market volatility. We want to respond to uncertain times and the way we do that is buy adjusting our pricing. And so when we’re not sure, what we can see an asset for. If we think it might less than today. We’re just going to be way more careful on pricing, a home.

You should expect that we’ll continue to kind of turn the knob on that, given what we see from a market condition standpoint..

I completely agree. Imagine if you’re an investor and you had to buy stock, every single day in the market. No one says, if you decide not to buy stock one day, that you’re no longer an investor. They just say you’re a prudent investor and that’s what we want to be with Redfin Now. There is a time to reap and a time to sow.

In a bad market, we may stop purchasing again. It won’t probably be for very long but we need to get a sense of what the clearing price for a house is going to be..

Makes sense. Thanks guys..

Thank you. We’ll take our next question from Nat Schindler from Bank of America Merrill Lynch..

Well, I think most of my questions have been answered. But I really have a kind of a big question, that maybe you’ll help out on. We’ve been hearing about the suburbanization trend for a long time and everybody is talking about people desperately moving out of the cities, to get to the suburbs and I get that.

There’s just a thing I’ve been confused about, there’s a second side to that equation.

Where the people that are in the suburbs will go?.

Well I think there’s a long-term trend not just to the suburbs but to outlying areas. So Boise, Buffalo, Rochester, Raleigh, Savannah, Tucson. These smaller cities and towns are also getting plenty of folks and then the suburbs can get bigger. Seattle is a perfect example of city that’s bounded on several sides by water.

But they’re sprawled in those cities where you can plot out new development. And for the longest time after the great financial crisis, developers were scared to do that. They were excited about urban infill and trying to make Seattle or San Francisco more dense and often frustrated by zoning policies and by the cost of land.

But eventually you just decide especially in a place like Nashville, where it’s a zoning free for all. We’re just going to build houses as fast as we possibly can. So the builders are really ramping up to take advantage of this. I also just think that the suburbs themselves are going to get more dense.

So you see pressure on suburbs to up zone to provide more mixed housing to be more affordable..

Thank you. We’ll take our next question from Ryan McKeveny from Zelman and Associates..

Congratulations really great quarter, very nice guidance here. of course a lot has been asked already. But one big picture one from me. So if I look at how this year played out. So you look at the first quarter you had very strong revenue growth and I’m talking excluding the Redfin Now to just real estate services and significant margin expansion.

If I look back just the last few years just let’s say since 2017, you had a revenue CAGR of something like 25%, but the counter was real estate gross margins trended over that time and even with the impact of COVID now. The guidance you gave for 3Q, I think that implies real estate services revenue up something like 20%.

You said gross margins will be higher. So it seems the revenue side of the equation. I guess the question is, is there any reason to think that something around 25% revenue CAGR going forward can’t be continued and then part two, it seems like the gross margins really did that the kicker here. where you’ve seen effectively a step function higher.

So the question is just, how do you keep the growth growing combined that with margin. Obviously, that’s the best of both worlds. But I know you’re not give specific guidance. But just curious how you think about that on a go forward basis combining the revenue side with the margin trajectory going forward? Thank you..

Sure.

So on the revenue front we haven’t given that kind of guidance on expected revenue growth rate and in part it is because there are ups and downs in the housing market and so we always just want to be careful about our focus around gaining share in the long run and not around specific CAGRs because again those come down up or down based on housing market conditions.

We do believe for all the reasons we talked about in the call, that there is plenty of opportunity to gain share going forward and so that really is our focus here. And on the gross margin front, I would just add may one more lens in that. Over the last couple of quarters and here I’m talking about Q2 and our guidance for Q3.

It is a little hard to disaggregate all of the pieces that are influencing gross margin up.

But even before that, we did have two or three quarters where it was up on a year-over-year basis and so we have been making sets of changes, small changes in the business as it relates to how agents meet customers, to tool if they use that we think are having a positive impact on gross margin and we’re focused on continuing to drive that up overtime and I do think that the clouds will clear here a little bit as we get into a more stable housing economy and as that happens, little bit easier for us to comment on the actual trajectory on gross margin excluding some of these kind of weird recent factors..

And just to add to what Chris and it’s really your line Chris. But his thesis has always been that Redfin.com is significantly under monetized. That we’ve been promoting one brokerage service to all of our visitors when we’ve invested so much in different products, when we have a partner network.

So I wouldn’t just look at a revenue growth as function of real estate services. I’d be encouraged by the fact that, these other businesses. They were kind of turkeys for a little while where we just investing money without getting much return were starting to pay off. Turkey is financially..

We will take our last question from Spencer Tan [ph] of RBC Capital Market..

Just wanting on touch on kind of gross margin trends in the homes business. I know that you pointed to kind of home acquisition cost as well as some personnel cost.

Just trying to maybe bifurcate some of the gross margin decretion [ph] and maybe just try to get a better understanding of kind of what you’ve learned in this tough environment and whether that gross margin was a result more of COVID scenario or more of just overall macro environment such as low inventory rates and so forth?.

Sure. So we commented on two pieces on the properties gross margin. One was related to decrease in personnel cost and really that’s the result of a scaling of that business.

There’s a certain amount of fixed cost capacity to operate the business and we did have a lot of volume in the second quarter and that allowed us to see a decrease in the percentage of revenue on those personnel cost.

And then the year-over-year offset to that was that, we did make less on kind of the difference between what we bought the home for and what we sold it for and that really was a function of us being careful that own a lot of homes in April and wanted to make sure that we could sell those homes quickly and so we did price the homes accordingly to move them along, just given the uncertainty that we had around the housing economy at that point in time and so that was really I think a bit of unusual negative on the quarter, was that we were so aggressive in trying to sell through those homes just given that uncertainty.

So again, it’s little hard to extrapolate all that to more normalized conditions just given the unusual behavior in the second quarter..

Certainly, understood. Thank you..

Thank you. This concludes the question-and-answer session of today. We can now transfer the call right back to Elena Perron..

Thank you, Casey and thanks everyone for joining us today and for your interest in Redfin. We appreciate it..

Thank you, ladies and gentlemen. This concludes today’s call. You may now disconnect..