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He described further steps the company is taking to mitigate the potential for future losses: “As a result of investments in prior years, even at this reduced level of operating expenses, we continue to invest in growth and technology to further strengthen the company during this downturn in the market. We are seeing industry forecasts for negative volume of 22.6% from Fannie Mae, negative 18.6% from MBA, and negative 12.6% from NAR. We expect to achieve our goal of being free cash flow positive in 2023 at each of these levels. We are confident that this is the right level of non-GAAP operating expenses.”
More cost-cutting measures may be in the offing: “However, as we have demonstrated throughout 2022 and into 2023, we are prepared to move swiftly to implement additional cost cuts if the markets turn out to be worse than expected. Our employees have worked incredibly hard to reset our cost base over the last 12 months. We believe it’s the right cost base. We continue to differentiate ourselves through our technology platform.”
Greg Hart, chief operating officer, offered additional insight: “The challenging economic headwinds facing the residential real estate industry grew stronger in the fourth quarter of 2022. But as Compass has done throughout our history, our core business has continued to outperform the industry based on our ability to continue to add agents, improve our technology advantage and maintain our industry-leading principal agent retention of over 90%. The good news is that with our expense reductions taking hold, we are operating the business more efficiently today, and we’ll continue to drive further efficiencies as part of our everyday go-forward strategy.”
As 2022 deteriorated the industry, Hart said the company took drastic measures to keep costs down: “After a great 2021, unfortunately, and unexpectedly, 2022 turned out to be the worst year for residential brokerages in decades as aggressive Fed actions drove mortgage rates from an all-time low of about 3% to a 20-year high in excess of 7% in a matter of months, bringing transaction activity down sharply. As a result, we had to bring our cost structure in line with reduced top-line revenue, making 2022 a challenging year from a personnel standpoint. When the revenue growth that we and the rest of the industry expected for 2022 did not materialize, we had to make the difficult decision to reduce headcount, taking actions in June, September, and at the beginning of January of this year.”
Additional measures were taken: “When it became apparent early in 2022 that revenue growth could be challenged, we paused our expansion into new markets and also halted all M&A activity,” he said. “As the year progressed, we eliminated cash and stock agent sign-on bonuses of any kind, driving a more profitable approach to growth. We always intended to move deeper into our existing markets by attracting the agents in the top 50% in those markets. This would allow us to evolve the mix of agents over time to improve our gross margins.
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