Greetings, and welcome to the Redfin Corporation First Quarter 2024 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Meg Nunnally, Head of Investor Relations. Thank you, Meg. You may begin. .

Good afternoon, and welcome to Redfin's financial results conference call for the first quarter ended March 31, 2024. I'm Meg Nunnally, Redfin's Head of Investor Relations. Joining me on the call today is Glenn Kelman, our CEO; and Chris Nielsen, our CFO. 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. On this call, we will present non-GAAP measures when discussing our financial results.

We encourage you to review today's earnings release, which is available on our website at investors.redfin.com, for more information regarding our our non-GAAP measures, including the most directly comparable GAAP financial measure and related reconciliation.

All comparisons made in the course of this call are against continuing operations for the same period in the prior year, unless otherwise stated. Lastly, we will be providing a copy of our prepared remarks on our website by the conclusion of today's call and a full transcript and audio replay will be also available soon after the call.

With that, I'll turn the call over to Glenn. .

within real estate services, an industry veteran to run our partner business; in our other segment, a leader of our display ads business; in our rentals segment, a new sales-driven President of Rent, the marketplace we acquired out of bankruptcy in 2021.

As these bets pay off, Redfin shareholders should reap the full value of an online real estate audience of approximately 50 million monthly visitors. The most important of these digital bets is on rentals, which earned its third straight quarter of adjusted EBITDA of about $500,000 on 16% year-over-year revenue growth.

In the first quarter of 2023, this segment's first quarter adjusted EBITDA was a $9.7 million loss. First quarter net bookings were $5.2 million compared to $11.3 million a year ago. But the quality of revenue has been higher in 2024. More of our sales were high-margin marketplace sales.

We also sell digital marketing solutions in which we use software and staff to run our customers' Google, Facebook and TikTok campaigns. But marketplace growth is more lucrative and more important to our competitive position.

Even better, more of our marketplace sales were year-long rather than month-to-month contracts, which should lead to steadier growth. Despite higher industry marketing expenses in the second quarter, we expect full-year profits from Rent, driven not only by revenue gains, but also cost savings.

Integrating Rent with Redfin has let us operate both businesses more efficiently, with 1 group, not 2, running a department like HR, Finance, Legal, or Technology Infrastructure. Already expenses in the first quarter of 2024 were $51 million compared to $57 million in the first quarter of 2023.

These efficiency gains should continue through the first quarter of 2025, giving us more money for growth or profits. The benefit from integrating the 2 companies isn't just cost savings. We can also draw on one another's expertise at attracting and engaging online visitors to our sites.

Rent's largest sites, which include rent.com and apartmentguide.com, ranked higher in Google searches in March than in February, their first combined month-over-month gain in years.

Rank slid back in April, but we expect more gains than losses in the months ahead just because search-engine optimization and visitor engagement are such long-standing areas of Redfin expertise.

As our rentals marketplace adds more listing customers and draws more online visitors, Rent can drive much bigger long-term revenue gains, changing the shape of Redfin's overall business to be more profitable and less cyclical.

Before turning the call over to Chris, let's discuss the housing market, which suffered another setback when mortgage rates rose from 6.85% on March 8 to 7.50% on April 16. Since then, growth in new listings has slowed, a factor which perhaps more than any other may limit sales this summer.

Over the last 2 weeks, our agents have reported less foot traffic in open houses and fewer offers, even for desirable listings. The number of redfin.com visitors asking to tour homes has from the start of 2024 been below 2023 levels. But this comparison hasn't been entirely fair.

Low rates in the first 4 months of last year encouraged many people to tour homes who didn't close. Our hope has been that sales have held up better than demand so far in 2024 because some of the same buyers who deferred moving in 2023 will be more determined in 2024. Redfin has also been better prepared for a rate increase this year.

After a rate increase broke our hearts in 2023, Redfin limited hiring and spending through the first quarter of 2024 to see how many sales actually close later this year. The song I've been singing to Chris since January is "Won't Get Fooled Again." More of our agents are exclusively paid on sales.

And since more of our sales are coming from returning customers, we're less dependent on first-time homebuyers. Our initiatives to meet our customers face to face have made it easier to guide them through this volatile market. We're earning more money from digital channels and we're spending less. Our bet isn't that the market will get better.

The reason Redfin will win this year is because we've gotten better. We still have a long way to go, but the direction we're going is, we think, mostly up. Take it away, Chris. .

Thanks, Glenn. First quarter revenue was $225 million, up 5% from a year ago. This marks our first organic revenue growth since interest rates started to rise. At the same time, gross profit of $71 million was up 22% year-over-year and total gross margin expanded from 27% to 31%.

Total operating expenses were $140 million, down $18 million year-over-year for our continuing operations. The decrease was primarily attributable to $13 million in lower marketing expenses, $6 million from foregoing our annual company-wide event, and $5 million in lower personnel costs.

This was partially offset by a $9 million increase in legal contingencies primarily connected to the proposed settlement that we announced yesterday with an 8-K filing. The $9.25 million settlement amount was recorded in our first quarter results and is excluded from our adjusted EBITDA calculation.

Our adjusted EBITDA loss of $28 million was up from a loss of $64 million in the prior year. Seasonal losses in the first quarter are to be expected, but we are making steady progress toward positive adjusted EBITDA. Our trailing 12-month adjusted EBITDA loss now stands at $40 million today compared to a loss of $145 million 1 year ago.

We expect to continue narrowing that gap in the second and third quarters and post positive adjusted EBITDA on a consolidated basis for the full year. Net loss is $67 million compared to a net loss from continuing operations of $57 million in the prior year, or $61 million including discontinued operations.

This was in line with our $72 million to $65 million loss guidance range. Neither the $9 million in legal contingencies nor the $6 million gain on extinguishment of notes was contemplated at the time of guidance. In the prior year, we had a $42 million gain from the extinguishment of notes.

Our adjusted EBITDA from continuing operations was $28 million, which was slightly better than the top end of our guidance range. Diluted loss per share from continuing operations attributable to common stock was $0.57, compared with $0.52 one year ago.

Now turning to our segment results, Real Estate services generated $131 million in revenue, up 3% year-over-year. Brokerage revenue, or revenue from home sales closed by our own agents, was up 5%, on a 3% decrease in brokerage transactions offset by a 8% increase in brokerage revenue per transaction.

Revenue from our partners decreased 23%, on a 16% decrease in transactions and mix shift to lower value houses. Real Estate services gross margin was 15.4%, up 300 basis points year-over-year.

This was primarily driven by a 280 basis-point decrease in tour and field costs, a 220 basis-point decrease related to not holding a company-wide event in 2024, and an 80 basis-point decrease in personnel costs and transaction bonuses. These were offset by a 220 basis-point increase in seller home improvement expenses.

Total net loss for real estate services was $39 million, up from a net loss of $58 million in the prior year, and our adjusted EBITDA loss was $25 million was up from $44 million in the prior year. The increase was attributable to higher gross margin and lower operating expenses, as well as revenue growth.

Our Rentals segment posted its sixth straight quarter of growth, with revenue of $50 million and growth of 16%. Total net loss for Rentals was $13 million, up from a net loss of $23 million in the prior year. Adjusted EBITDA for the third quarter was about $460 thousand, marking the Rentals segment's third straight quarter of positive adjusted EBITDA.

Our Mortgage segment generated $34 million in revenue, down 7% year-over-year. This result was above our guidance range as strong progress on attach rates drove incremental volume. Mortgage gross margin was 23.4%, up from 19.9% a year ago. Net loss for mortgage was nil, compared to a loss of $1 million in the prior year.

Adjusted EBITDA was positive $1 million, which was roughly flat compared to the prior year. Our other segment generated revenue of $11 million, compared to $7 million in the prior year, as both our title and digital revenue businesses grew. Other segment gross margin was 41.7%, up from 26.3% a year ago.

Total net income was $3 million compared to a small net loss in the prior year, and adjusted EBITDA was positive $3 million compared to roughly flat in the prior year. Now turning to our consolidated financial expectations for the second quarter.

For the second quarter of 2024, total revenue is expected to be between $285 million and $298 million, representing a year-over-year growth between 4% and 8% compared to the second quarter of 2023.

Included within total revenue are Real Estate services revenue between $180 million and $188 million, Rentals revenue between $50 million and $51 million, Mortgage revenue between $39 million and $42 million and other revenue of approximately $16 million.

Total net loss is expected to be between $34 million and $28 million, compared to net loss of $27 million in the second quarter of 2023. Adjusted EBITDA is expected to be between negative $4 million on the low end and positive $2 million on the high end which, at the midpoint, would narrow our trailing 12-month adjusted EBITDA loss to $34 million.

This guidance includes approximately $41 million in total marketing expenses. We're currently planning to spend approximately $115 million in marketing for the full year, which is down 2% compared to 2023 and reflects our decision to pull back on mass media advertising in light of the rising rate environment. One final note.

We have signed a letter of intent to sell nearly all of our mortgage servicing rights. The mortgage servicing rights were valued at approximately $32 million on our balance sheet as of March 31, 2024. We have not included any potential gain or loss on the sale within our guidance, and expect to complete this transaction during the second quarter.

Now, let's open the lines for your questions. .

[Operator Instructions] And the first question comes from the line of Naved Khan with B. Riley Securities. .

A couple of questions from me. Glenn, maybe just talk about -- you gave us some color on the housing market and how the interest rate has kind of impacted it recently. But just give us a sense of what you think how the year would look like, especially as we enter this peak period for the second and the third quarter? So that's one.

And the other question I had is around mortgage attach. So it's great to see attach rate increase to around 30%.

Can you maybe talk about what you're seeing in maybe your best markets in terms of attach and where do you think this attach rate can realistically end up in the medium-term?.

Glenn -- I think you may be on mute, Glenn. .

That's a dingbat. Kind of I started answering the question while I was on mute. But this is only to say that we prepared some color in the remarks and everything I could add would be consistent to that, which is that rates have come up.

We are hopeful that since this happened last year and so many people put off their homebuying plans that this year, they are slightly more likely to go through with it. But there's no question that rates are going to take their toll on the market.

What's been interesting to me, especially just hearing the anecdotes from this weekend, is how mixed the response has been, where we are getting signals that buyers are still going to go through with it, that sellers are coming on to the market, sales are going to keep happening elsewhere, there are price drops, often even within a market, we're seeing listings sit on the market.

So I think the consumer is very confused right now. I think they are very sensitive to macroeconomic news and obviously, interest rates. It's just a jittery time in the overall economy and in the housing market, and that has made the signals that we're getting just very mixed and very confusing.

Top of the funnel has been light almost all through the year. But what's been surprising is how many of those customers that do come to us end up buying or selling a home.

I think the most worrisome trend is that we saw this acceleration in the number of listings coming on to the market at the beginning of the year, and that is really starting to slow. Interest rates eased just over the past few days. So maybe that trend will reverse again. But mostly, this market has been inventory constrained.

So when we see more listings come on to the market, we see more sales. No matter how much interest rates have risen and that's affected buyers, it affects sellers more because they just decided they can't move up. They can't afford their own house when the mortgage goes from a 3% rate to a 7% rate if they had to buy it again. So that's the first part.

On a mortgage attach. Our best markets are closer to high 30s, low 40s. It really is a function of price and service and the relationship between the agent and the lender. And just over the past 2 or 3 years, we've been working much better together.

I wish there was a silver bullet that we could point to, but most of it is actually just persevere of building these alliances one by one, but has certainly helped that we are doing 2 things. #1, we mentioned that we integrated our systems with Bay Equity systems.

So when somebody completes the tour, we tell them, why don't you talk to your Bay Equity loan officer. When somebody writes an offer, we alert the Bay Equity loan officer that someone is making a bid. And so that kind of systematic integration has helped augment the relationships that the agent has with the lender.

And then the second point is that we have introduced in some markets an incentive for real estate agents to recommend Bay Equity. And the results of that have actually been mixed. The systems integration, the relationship building has worked better than the money. Couldn't believe it. .

And the next question comes from the line of John Campbell with Stephens Inc. .

Congrats on a solid quarter. Glenn, I just want to maybe go back to the buyer agency agreement. I actually asked about this last earnings call, but I was asking whether you thought it would be a standard. It seems like that we're kind of heading down that path now. I wanted to get your take on that.

And you guys -- I think one of the challenges you face is you've had some low intent or maybe no intent consumers that have kind of used as the hobby. So I think that we're thinking that maybe buyer agency agreements will help kind of knock out some of that out of the mix, right, where you get higher intent consumers.

So I want to ask about that if you think that that's going to play out? And then on the Sign & Save, it sounds like you're going to keep that in place where you continue to give the rebate even with the mandated buyers agency agreement. I was going to see if that's -- if you have the potential to take away that rebate again. .

Well, I'll answer the second question first. We don't anticipate eliminating the refund. But we do feel that Sign & Save has been a seismic change in our business. We've been trying to get close rate up for nearly a decade and have it go up 20% is massive for us.

The biggest problem Redfin has had over the years is that the website keeps generating more opportunities for our agents, but close rate keeps going down.

And I think that's really a function not just of what Redfin is doing, but what other portals are doing, it's really created real estate as a hobby for people to go tour homes so they feel no emotional obligation to the agent. And so that secular change in consumer behavior was just blowing a hole in our P&L.

And instead of having it go down 5%, 10% a year to have it go up 20% a year. It just really changes the economics of our business, but it also changes the morale within the sales force that we're making more out of less. And it's certainly why we are fairly confident that we're going to do well this year despite a worsening housing market.

So we've built this sales muscle to get buyers agency agreements signed. Not all of our customers want to sign them. About half of our sales comes from customers who say, you know what, I'm not going to sign it, but I just want to keep touring with you. And then the other half comes from those who do sign it.

So we need sales from both groups, and that's a good reason to keep the incentive. The fact that we rolled this out broadly only in the last couple of months means that I think the best results are yet to come. .

Okay. That's a good answer. And then just kind of staying at the high level, I mean, some of our -- from the portal landscape, some of your competitors have obviously late, kind of late the seeds for listing of the sell-side agent ad products. They seem to be off to a pretty good start.

I know you guys probably don't want to cannibalize obviously, your core business like in your top markets, but for the markets where you're subscale, have you guys considered launching a similar kind of listing advertising product that you could run alongside?.

Yes. Well, if you go back to the prepared remarks, there's some detail there about how we're launching a similar product. So we're doing that both for our own agents and for agents at traditional brokerages.

They can claim a listing and then the buyers who are interested in touring that listing or bidding on that listing instead of being routed to a Redfin agent on the buy side would instead be routed to the listing agent.

So that could be a Redfin listing agent if it's our listing or it could be traditional agents listing, but they would have to pay to claim that listing. So obviously, we want to be economically rational about this.

We understand how much money we make off each listing when we connect those buyers to our own buyers' agents and the listing agents would instead have to pay us a higher fee than what we could make that way. But we see it as consistent with our mission, John, because we could be facilitating a direct sale that lets consumers save money.

And we think it's part of this larger strategy that we've discussed for the last 18 months to have a digital shift where we're making more of our revenue digitally. We've been working on that since about October of 2023. We do not think that a company that is bet entirely on that model is the right choice.

We don't think betting entirely on buyer's agent is the right choice. What you really want to support is the consumer being able to decide, do I want to buy directly from the listing agent or do I want my own representation. You want to be able to monetize both audiences. So we think this is a good balance, and we hope to launch it in the summer. .

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

So it sounds like you're having good success with the newer commission structure.

Assuming that you end up moving to this, let's say, for the bulk of transactions, how do you think that kind of changes the financial model? And just like what are -- are there other kind of like fixed costs or just other changes you'd make once you get to what you'd consider kind of full scale with that type of model?.

Well, I'll start, but Chris, you may want to comment here. The goal has been to run a similar gross margin business, but one that has more scale. Jason, you were the one who pointed out that we lose on the upside, we lose on the downside when the market really takes off. We don't have enough capacity.

When it goes down very quickly, we're paying agent salaries and it's blowing a hole in our P&L. And we think we've addressed that. But the real benefit is that our incentives are aligned with the agent. We're taking share faster. We're able to recruit and retain a higher-quality agent.

The results from the initial 4 California markets couldn't be better from a revenue growth perspective from a share perspective. So the goal really has been, at least in this initial pilot to grab more revenue, to get more share, to improve our service, especially to the luxury segment where we sometimes struggle to keep and hire the best agents.

And that part has just paid off. And what we were worried would happen is that when we did that, gross margins would suffer that we'd be getting more revenue, but it would be lower quality revenue. In fact, it seems that the quality of the revenue has held up, and we're just getting higher share gains and it's across the board.

So we're doing better overall with loyalty sales with luxury sales. So could we go to an even more variable model it's possible. And then that would allow us to take out other costs. But really, what we were responding to wasn't the need so much to take out a huge amount of overhead as it was trying to grab more share.

There will be fewer managers, but that trend was already happening. We're lowering support costs. That trend was already happening. I think having an all variable workforce where they are looking at this and comparing the split at RE/MAX or Keller, some other traditional brokerage.

It just forces us to work harder and harder to lower all of our field overhead costs. So it's been a really good alignment of incentives, and the main benefit has been gaining share in the same shape business.

Chris, do you have anything to add to that?.

No, that's a good overview. I think we've had -- as Glenn said, really pleased with how the program has gone so far. .

I think you'll see some margin benefits beyond just the revenue growth and the share growth in volatile situations when things really take off or when things plummet, the incentives are aligned better and we just have fewer salaries to pay. But mostly, we've been trying to give agents a good deal and still take share. .

And the next question comes from the line of Bernie McTernan with Needham. .

This is Stefanos Crist calling in for Bernie. Just wanted to touch on Rentals. It grew 16% year-over-year.

Any sense how much that was market growth versus share gains? And anything you've been seeing on just competitive intensity?.

Our sense is that the big players are getting bigger and the small players are getting smaller, and we want to get on the right side of that. So there has been a flight to size. I don't know if the overall market is getting bigger, but Zillow and CoStar have been trying to grab more customers at the expense of some of the smaller players.

And so we thought this was a respectable result. We're glad to keep growing. It's amazing that we went from losing $10 million in this segment a year ago in Q1 to making money for the third straight quarter now. But the next stage in the Rent acquisition is to try to grab share, handover fist and really to grow the online marketplace.

I hope the most encouraging trend in the revenue report from Rent is just that that revenue growth came from the online marketplace. Sometimes we are getting revenue growth from lower-margin tool sales when -- really what's crucial our competitive position and our profits is getting it in that high-margin marketplace.

So the main activity here to make us more competitive is just to go hog-wild on search engine optimization, visitor engagement, conversion rate optimization. These are the strong suits of Redfin.

And so integrating the 2 website teams so that we can work together on this, we think we can generate more demand for our property management customers and really turn that flywheel. But that's the big challenge is that we've got costs under control. We've stabilized the marketplace.

It's growing nicely, but we want to do way better than growing nicely. We think there's an opportunity here just given the historical ranks of Rent and apartment guide to do much better than that. So that's what you should look for from us over the next 18 months. .

That's great. And maybe just a follow-up on some of the consumer-facing AI applications.

What do you see that doing in the next 12 months and adding to the business?.

Well, our hope is that Ask Redfin is going to have a meaningful effect. We talked about 2 new generative AI applications. And the first was this redecorating capability where you can click a button and reimagine how a house looks. It is so cool, but I don't know that it's going to have a massive commercial impact.

Whereas Ask Redfin has really changed the volume of questions that are coming in, and it's allowed us to instantly answer them. We worked really hard on that because we were so worried about being compliant with fair housing laws. We'd actually worked with partners earlier.

Last year, you may remember, and we did not feel that they were being careful about fair housing laws. So I think we've been at the forefront of this. But I kind of thought it was baloney and then I used it. It was like freaky good and weird and special and magical.

So we just think we can be this instant response website for answering a wide range of homebuyer questions, and it can increase demand.

And the reason I sound a little vague on how much it will increase demand is that right away, you get a lot more people contacting you, and we're still trying to sit through how many of those are actually going to buy a house.

But usually, when we have a boatload of people contacting us, it has a gross margin impact because we have to answer all those questions with people. This time, it's kind of a cost-free experiment where we're getting a lot more volume at the top of the funnel without incurring additional costs in terms of labor. So we're pretty bullish on it.

We wouldn't have rolled it out more broadly if we weren't. It's not just for the earnings release or for the press. We're trying to sell more houses here, and we think this is going to help us. .

And the next question comes from the line of Ryan McKeveny with Zelman & Associates. .

To follow up on Jason's earlier question about Redfin Next. So Glenn, I think a comment you made a couple of quarters ago was that it should work in high-priced markets, but the structure might need to have some modification to work in mid- or low-priced markets.

So I guess I'm curious with this next round of 7 markets going to Redfin Next, which seems to probably include the mid-priced markets, like maybe Dallas.

I guess, is there any differentiation in the economic model you're bringing to the various next markets at this point in time? And just generally, how you're thinking about maybe this expansion of these next 7 markets to do some more maybe testing and iteration in that process of potentially expanding further? Like what are those milestones you're looking for to feel good about additional markets...

.

Sure. I was just answering Ryan's rental question, I started thinking more about Jason's question. So I'm glad you circle back to it because you're really asking the same question. Jason was asking if there are changes to our cost structure that Redfin Next is going to drive, and you're asking how it's going to work in some of these lower cost markets.

And what I should have said then, and I can say now is that as we've gone to lower-cost markets, it's put more pressure on our support cost because suddenly, you're exposing to the agent. Here's why you're split is what it is.

You're paying this much for a transaction coordinator, you're paying this much for associate agents to help you handle the second, third or fourth tour. And those agents have said, well, I'm not sure I want to pay that.

So that has been really healthy for our business to align the agents' incentives with the company's incentives so that we're all trying to sell as many houses as we can and keep as much of that commission as we can, rather the agent or the company, and of course, giving the customer a good deal, too.

And so going to Chicago, in particular, has been the market where we have been really aggressive about trying to figure out how we can get more efficient so we can offer agents these fantastic splits and still have a great gross margin for Redfin because as you know, our model does give us much better gross margins than other brokerages.

We have more leverage because we source the customer. So I would say that we've been pleasantly surprised at how well the role has gone to mid-priced markets and even lower mid-price markets as opposed to premium markets.

There is one other difference between the high-priced markets and the mid-priced markets that you should be aware of, which is that in California, we were at a deficit of agents. We had more demand than supply of agents. And in some of these mid-price markets that hasn't been as much the case.

So we think there will be a pretty strong reaction as we bring Next to all these other markets. If it's anything like California, it will be a miracle. But even if it's half of what it was in California, it will be pretty good. And so I think it might not be quite as strong as it was in California because Chicago or Dallas are already well staffed.

And what we found is that as we bring in more Next agents, we just get more sales. I know that's a pretty simple direct relationship, but we've been pleased to see that it's true. So we might just get more aggressive about hiring in those markets, too, above and beyond what we'd originally expected.

Agents want to come work with us, recruiting has been going reasonably well. And we think we need the extra agents to take extra share. .

That's very helpful. And Chris, one for you. Just on the balance sheet capital side of things. I think the 25 notes, obviously, you bought back a good amount over the last year or so.

Any thoughts you can share as to how you're thinking about the convert maturity, I think it's next October? Just any general thoughts on how you're thinking about that going forward?.

Sure. So we've been making a yield-based decision here, which is when we see a good price on those notes, we've been wanting to buy them back. I expect we'll continue to follow that strategy. We've still got Board authorization to repurchase notes. There's about $145 million outstanding at this point.

And as we've talked about before, we have an additional $125 million available on our Apollo term loan, which does give us plenty of firepower to continue to be kind of thoughtful and aggressive here. So we've been pleased with how this has gone so far, and I think you'll see us continue to follow a similar strategy going forward.

Again, based on the yield we see and the price that those notes are offered out. .

And the next question comes from the line of Ygal Arounian with Citigroup. .

On the evolving fire agent landscape that we're going to see later in the year, I guess if we maybe simplify it and think through one of the arguments that there will be a lower pool of fees, especially on the buyer side as some people opt out or some people price shop a little bit more.

Your competitive advantage has been on the lower fee side for short.

Do you think as that happens, some of the competitive positioning narrows? Or do you think it strengthens in that kind of environment where Glenn you just pointed to one of your competitors being less profitable? Do you think that could actually put them at a disadvantage? And then if you're seeing the overall pool get smaller.

I know you're looking at some things that you've talked about some of them here on the call on the seller side to offset some of that.

Is there enough to capture all of what might get lost if maybe like a more moderate or medium to a severe case of that?.

Sure. Well, maybe just to provide an emotional response to your question. I've heard other executives on earnings calls, say that we don't expect much change at all. It will happen fairly slowly. I think that is the consensus among most high-level executives of real estate brokerages and portals.

But if you talk to the agents on the ground I think they are much more concerned about the possibility of significant change. And so I'm not trying to say that all heck is going to break loose, that the Four Horsemen and the Apocalypse are coming in August or something like that. But I do think that there could be a medium level of change.

And as someone who has been trying to get consumers a better deal only to discover that homebuyers are completely indifferent to price over the past 15 years because they've been trained to believe that a buyer's agent is free.

We have to welcome the possibility that those consumers will now become more aware of the fees and will shop based on value and price. That is what Redfin has been hoping for all along that when you give people a better deal, they actually beat a path to your door.

And I know your question is about whether lower revenue per deal can be offset by share gains. I think there's 2 offsets and only one of them is the share gain. The other is that you can operate more efficiently so that you can earn a similar gross profit from sale just by working at a higher margin.

So my expectation is that if you're working with somebody who's a first-time homebuyer, there are so many efficiencies that we used to pursuit that we stopped pursuing because those homebuyers were indifferent almost to price. When we tried to tell them we were saving them money, they'd say, what are you talking about? My buyer's agent is free.

So I think we can run at a good gross margin, and we can take a lot of share if you asked me 10 years ago, if you could change one thing about the American consumer, what would it be? I'd say, make sure they know how much a buyer's agent really costs and make them care about it. We've already seen that with the sell side.

The reason that we clean up in every listing consultation is the seller is paying her own real estate agent. And any time we get in front of a listing customer, we're almost certain to get the listing and then to close the sale. The problem is that our website is filled with homebuyers.

They are people looking at pretty pictures of houses and the action they want to take is not the list of property but to tour one. And so I'm pretty optimistic that if there is a significant change, we'll be able to adapt to it much better than anyone else. Am I also worried about uncertainty? Of course, but you want a CEO to be worried.

We have better cards than anyone else, though. .

Appreciate that thoughtfulness. And I agree. I think you want to be at least worried or thoughtful that rather than just brush it off as a non-event. And then just to follow up on the adjusted EBITDA profitability path for this year. I know the macro has been kind of a moving needle here.

Is it embedded in that expectation? Is it the macro stays similar rates stay elevated at this sort of this newly elevated level? Is it expectations that it gets better? Or does it not matter as much now given kind of what you guys have put in place and you feel like you can get that if it moves up to and was down a little?.

No, we updated our whole budget, including our spending on the assumption that the housing market would be like it is right now for the rest of the year. It could get worse. And then we have to take other measures, I guess.

But the big difference is that last year, there were so many people touring houses in the first quarter, none of them seem to close because rates went up right after we paid all this cost to meet them. And we were just in a $60 million, $70 million hole in Q1.

So being $40 million better than that coming out of this Q1 and running more efficiently across the next 3 quarters with sales initiatives that should improve close rate and all these digital businesses generating profit instead of incurring losses.

There are no guarantees in life, but this is about as good of a position as we could be in with the housing market being in about as data position as it could be in. 4 million units, 4.1 million units, that's about as low as you can go.

There's a placeholder in the earnings script for me to write the housing section, and I don't do it until like a day or 2 before the earnings script. But the placeholder was called the Walter slides off a shelf and somehow falls into a trench to the bottom of the ocean.

So that means that, yes, housing was bad in Q4, Q1, but now we expect it to be worse. And we don't think it could get that much worse. The people we're talking to right now are the people who have to move. They've been divorced for a year, and they've been living with someone who's driving them crazy.

They had a third child and they're still laying in townhouse with one extra bedroom. .

And the next question comes from the line of Tom White with D.A. Davidson. .

This is [ Wyatt ] on for Tom. I just had one on buyer's wrap agreement requirements.

Could you help us understand what the net effect that this could have on your business? Like do you foresee that it might negatively impact on your ability to convert some of your traffic into customers? Or could it pressure the ROI on the leads you send to partner agents?.

We don't think it will have much of an impact, but it's hard to say.

So last week, some of the brokers, some of the portals talked about having a very nominal agreement where instead of disclosing the ultimate price that a real estate agent would charge, you'd simply say that the tour is free and all we're doing is sending you out on the tour with a contract that covers 1 day or 1 tour.

And the notice requirements like that could be when you sign up for the tour or could be after the tour. Also, we saw several states like the state of Maryland object to this. So we're trying to respond to it in real time. Obviously, we want to do what's right for the consumer.

We're going to comply with all of the rules that are being put out by the National Association of Realtors and others. We're just trying to figure out the lay of the land. But it seems pretty clear right now that the industry is trying to figure out a low friction way for websites to introduce homebuyers to real estate agents.

And so we'll be on the same playing field as other real estate websites, and we think that the friction will be fairly low. It's a separate question as to whether or not that's the way it should be. We've always been an advocate for consumers and sometimes we wanted to create a more transparent marketplace around the fees that different agents charge.

But that's easier said than done. Right now, it's trending towards low friction, very low friction. .

[Operator Instructions] Our next question comes from the line of Dae Le with JPMorgan. .

Just one for you, Chris. I kind of felt like 1Q was an interesting quarter from a marketing and engagement perspective. You tend invest against a significant marketing push from of our rivals. So just curious if there are any learnings you can share around what you might have learned from the dynamic in 1Q.

And then I think going forward, you said marketing will be $150 million in 2024, which still suggests you're expecting either sequential growth therapy growth in 3Q just curious what's giving you the confidence to the impact into marketing into the back half of the year?.

Yes. Let me start with the second question first, which is we did provide guidance on marketing spend for the full year as well as for the second quarter. And in general, what you should take away from that is that we spend dollars in Q1, we'll spend more in Q2, but then both in Q3 and Q4, sequentially, our marketing spend will be down.

And that is related to what Glenn was talking about earlier, which is we're taking a look at the macro environment here, and just being really careful about spending those dollars into a housing market that is not super strong right now. And so mostly, what you'll see us doing, again, is spending less as the year goes on marketing.

And then just in terms of Q1, what worked well, how that's gone. This is really tried and true within Redfin, which is we compete really well for website visitors.

Our teams just do an excellent job of having the right information the right data structures, the right initiatives to allow consumers to find information, but also for search ranking sites to have a good view on the quality of the information that we provide.

And so competing for traffic in that way is the most important thing that we did in the first quarter and it's the most important thing that we do, frankly, all the time. .

And just as a follow-up, and I'm sorry to keep going back to the representation agreement and around the commission piece.

But I mean how do you plan on positioning like who's going to pay for the fee when you roll out the representation agreement? It does feel like there a lot of different views around like actual implementation of those going to be paying for the buyer agents.

I was curious to hear how you're thinking about this that you plan to test over in June?.

The question is somewhat moved because the buyer's agent is going to be paid out of the proceeds from the sale in most cases. So we could say that the buyer is paying that because he's the only one bringing a checkbook to the closing table.

We could say the seller is paying that because that's money that would have otherwise been wired into his account. It's just being deducted from the proceeds. And from the agent's perspective, what's important is that the buyer doesn't have to pay for this out-of-pocket in advance of a transaction, essentially that it can be financed. .

And the next question comes from the line of Jay McCanless with Wedbush Securities. .

The first one I had, the pullback that you talked about, Glenn in traffic and foot traffic in April and into May.

Have you seen that same type of decline in Sign & Save markets? Or is it too early to tell since I think you said in the comments that you went fully live with that on March 7th?.

Yes. I can only presume that the pullback has been universal across Sign & Save markets and non-Sign & Save markets. Remember, we're not talking about pure Redfin buyers per se. We're talking about on our own listings when we host an open house, how many people are coming through that open house.

They could be neighbors, they could be buyers represented by other brokers. They could be buyers represented by Redfin. But most of them are just going to be members of the general public or customers of other brokerages.

And I think what we're really trying to say here wasn't a comment on what portion of home sales are we going to represent the homebuyer. Sign & Save is helping with that. I think we're commenting on how many people want to buy houses generally.

And houses that used to get 8 or 10 offers are now getting 2 or 3, houses that got 2 or 3 offers are now sitting for an extra week. We're seeing more price drops just over the past 8 or 10 days.

The data that we have that not everyone can access aside from the anecdote from our agents about what happened this weekend is number of people who were touring who didn't end up writing an offer, a number of listings that after a week or 2 weeks, didn't withdraw from the market because they've accepted an offer.

A number of listings that dropped their price. So before sales goes down, what you see is activity in the market go down in ways that we can track a little bit better. And we saw that go down a little bit. So that's in line with the interest rate increase. And the only thing I would say, contra to that is just that the signals have been mixed.

Like we had a crappy week last week, and then we had an awesome weekend. It's just crazy right now where things look really bad and then they look really good, and then they look really bad and then they look really good. So I think the consumer will settle down a little bit.

It's kind of netting out to what we think is going to happen across the year, and we're pretty comfortable with it. But lots of mixed signals. .

And then second question, I know you all published the details around the lawsuit settlement.

Could you just remind us what other potential lawsuits are out there that you might need to settle? And I guess, in terms of the sits or suit, any impact we need to be mindful of as it relates to Redfin?.

We think the settlement was worthwhile. It's small relative to what other brokerages paid consistent with our having been a consumer advocate. There are 2 other cases that are out there that name Redfin. They are much earlier stage instead of being on behalf of sellers. They are on behalf of buyers. Our defenses are really good. .

At this time, there are no further questions... .

That's it, isn't it?.

Yes. And I would like to turn the floor back over to Glenn for any closing comments. .

We just appreciate you sticking with us to tick and then. This business has gotten meaningfully better and it's the same old song, even though the housing market is bad, Redfin has put our shoulder to the wheel, and we think we're going to keep taking share, and we think we're going to have a good year.

So appreciate your listening to all these crazy questions and all of our crazy scripts over the past year, but we're pretty excited about 2024. Thanks, everybody. .

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation..