Q2/2020: EXPI Just Slays It… But…

Let me get this quick hitter out, as the numbers posted by EXPI for Q2/2020 are awesome. I mean, they just killed it. There’s no two ways about that, right?

But you don’t come here to get just surface analysis; that’s available elsewhere. So while I think EXPI had a fantastic Q2, and frankly, a fantastic 2020 so far, there are some interesting numbers that raise a few questions. I hope to ask a few of these tomorrow at the Q&A session.

Let’s get into it.

The Numbers

As I said in my previous Q2 analysis, I’m not going to bother posting the longass tables and such, because frankly, you can get them right off of the earnings releases. If you want them from me for some reason, let me know.

The topline results are astounding. From the press release:

• Revenue increased 33% in the second quarter of 2020 to $354 million, compared to $267 million in the second quarter of 2019.
• Gross profit grew 55% to $34.4 million in the second quarter of 2020, compared to $22.1 million in the second quarter of 2019. Gross profit is calculated as revenues less commission and other agent-related costs.
• Net income was $8.3 million, or $0.11 per diluted share in the second quarter of 2020, compared to a net loss of $2.2 million, or $(0.04) per diluted share, in the second quarter of 2019.
• Adjusted EBITDA (a non-GAAP financial measure) was $13.6 million in the second quarter of 2020, compared to $3.8 million in the second quarter of 2019.
• Cash flow from operations increased 57% to $28.5 million in the second quarter of 2020, compared to $18.1 million in the second quarter of 2019.

The biggest eye-opener was, without a doubt, EXPI’s profitability numbers. Going from an operating loss of $2.2 million to an operating profit of $8.3 million is, well, let’s say “unexpected.” But what a result!

Glenn Sanford and his whole team deserve kudos, congratulations, atta-boys and whatnot. Hopefully, this will get more institutional investors interested in the company going forward.

I mean, I’m not sure what there is to add really. It was a great quarter. A fantastic quarter.

So why the “But” above?

Beneath the Surface

Longtime readers know this is nothing new here at Notorious. Let me present you with some Key Metrics numbers, which I compile personally for my own understanding.

I went from Q2/2018 to Q2/2020 so we can get a slightly bigger picture of what’s going on.

So, the growth in units, in volume, and in agent count are all super impressive. But we already knew that about EXPI: it’s a recruiting monster. They’re just slaying it on the recruiting front, and from my Q2 research (soon to be published!), I expected that EXPI was going to have a very good quarter/year because of COVID.

The key, I think, is that EXPI has managed to turn things around slightly in agent splits. Look at the last 3 quarters: they’re all improved YOY. We’re talking small improvements, but they’re improvements. Compare that to how Realogy is doing with agent splits, and you can see the real difference between the two.

Those small differences (though 140bps is not really a small difference in this realm) mean that EXPI went from losing money on every deal to making money on every deal. In Q4, EXPI made $29 in net income per agent; in Q1, $5 per agent, and then in Q2, a whopping $265 per agent. That’s the absolute key to how Glenn and team have managed things to profitability.

Having said that, the Closed Sides per Agent number is a bit concerning. It’s down 21% YOY, and treading water over the last 3 quarters, when EXPI improved its margins.

Why is this bit concerning?

If you read my Redfin vs. Realogy Q2 piece already, you know that I think the agent team is the most important trend in real estate today. EXPI has had great success in recent months in attracting some top tier agent teams to the virtual environment it offers. So that’s really, really good.

But what the per-agent closed sides number implies to me is that the gains in production, the gains in revenue, the gains in sales volume are all coming disproportionately from the agent teams at EXPI. As is expected during COVID times, since the better agents are killing it, at the expense of the mediocre and inexperienced agents. So EXPI’s agent teams are likely having a banner quarter, but the vast majority of its agents are having the opposite, which drags the per-agent closed sides number down, to the tune of 21% decline YOY.

And the one thing I know from all of the stats, all of the numbers, all of the stories, all of the interviews of agents, team leaders, and brokerage owners is that the inevitable impact of agent teams is erosion of brokerage profitability. EXPI has managed around that, which is an amazing feat for which the team there deserves credit, but the longterm trend on profitability is not good on EXPI’s current business model.

My Expectation

Now, I know Glenn Sanford pretty well. I know many of the senior management over at EXPI, and they’re all uniformly smart, savvy and personable men and women. I think Q2 and the past 3 quarters have shown how talented they are. I’m reasonably confident that they see the trend as well, and they’re as aware of the problem/challenge of agent teams as anybody in the industry.

The current EXPI model works out to what is effectively a 90/10 split, but with the cap it has on commission splits, if the agent teams keep gaining market share at the expense of other agents, that split simply cannot be maintained. Think about it.

My expectation, therefore, is that at some point, EXPI will pivot its business model to the 100% fee-only model because that is one of only two ways I know of today to deal with the challenge of agent teams.

It makes the most sense for who EXPI is, and what they’re really good at doing.

If they make that switch, investors should welcome it, as it heralds in a new era of driving profitability ever higher.

And given these results, if I’m the CEO of any major national franchise or large brokerage company, I have a new reason to worry. Time is ticking.

A Few Headscratchers

The press release, however, contains a few headscratchers. Maybe they make more sense after I listen to the Q&A, but right now, I’m kind of like… WTF?

• The acquisition of Showcase IDX was completed in July 2020, bringing a technology company focused on agent website and consumer real estate portal technology to eXp World Holdings. The company will continue to operate Showcase IDX and offer its services to clients. With this acquisition, eXp will be able to strategically focus on creating consumer home-search technology.
• eXp intends to aggressively expand presence in commercial real estate by attracting a significant number of commercial real estate brokers to join the company in the next twelve months as a result of a strategic initiative. This initiative is anticipated to lead to commercial real estate becoming a strong contributor to growth of the company.

EXPI is acquiring an IDX company… right when the industry is talking about getting rid of IDX altogether?

I guess that capability can be used if/when we move to a unified data feed, but it’s a bit odd.

Tom White at DA Davidson thinks this is just another carrot to dangle in front of recruits:

At a high-level, a real estate search portal will help EXPI agents grow their respective businesses by providing a source of incremental new customer leads and customer data. We believe an eXp Realty-branded search portal could add even more fuel to EXPI’s already impressive agent attraction momentum and seemingly very sticky retention stats. Moreover, a slick/polished search portal would also help promote the eXp brand more broadly with consumers.

I’m scratching my head because I can’t imagine any agent — never mind an agent team — that doesn’t already have an IDX website, unless they’re brand spanking new, in which case their future prospects are dimmer than they have ever been. I mean, more carrots are always good, I guess, but this one is just a tad puzzling. Maybe it’s the cost savings from a free IDX plugin? Meh, who knows. Or maybe Showcase IDX (a company I had never heard of) has some incredible tech that we haven’t seen yet, so I’ll reserve judgment until later.

The announcement about commercial real estate is the real headscratcher, seeing as how everyone expects CRE to take it on the chin for years and years due to massive and sudden changes in the way we work, the way we shop, and the way we live thanks to COVID. This is especially true of the kind of commercial real estate that a predominantly residential company does: small retail, small multifamily, and maybe small offices. Other than small multifamily — which is “commercial” only in the loosest sense of the word — it isn’t clear to me how small retail and office are going to become a contributor to the growth of the company, never mind a strong one. Maybe I’m missing something, since some 60% of restaurants are expected to go out of business permanently, over 100,000 small business (many of them small retail) are already closed for good, even retail chains are shuttering stores everywhere, etc. etc. so… I’m just not seeing commercial real estate as a bright spot moving forward.

Wrap It Up

So let’s just wrap this up for now.

EXPI had an awesome Q2, and is having a great 2020 overall. They’re just slaying it. The team over there deserves all the credit in the world for how they managed to improve profitability while maintaining their torrid growth. While the improvement is not surprising to me, as I’ve been crunching data, the magnitude of the improvement is a pleasant surprise.

The issue of agent teams bears watching, and the longterm viability of the model bears watching as a result, but I’m not seeing any headwinds for the remainder of 2020. We’ll see what future months brings, since this pandemic and the crazy election year we’re in makes nothing certain whatsoever.

The slight odd strategic moves have me scratching my head (I mean, IDX company? Commercial real estate? Instead of offering a Buy Now, Sell Later program?) but Glenn is a very, very smart guy as is RJ Jones who heads up their strategic moves. They likely know something I don’t, so I’ll try to find out. 🙂

That’s it for now, until I’ve had a chance to hopefully get on the Q&A and maybe learn more about their future plans. But EXPI is a real bright spot in the brokerage space right now, and rightfully so.

-rsh