Compass(COMP) - 2023 Q4 - Annual Report

PART I Business Compass, Inc. operates an end-to-end technology platform for residential real estate agents to enhance their productivity and service quality Our Company and Business Model The company provides a comprehensive platform for agents, generating revenue primarily from commissions on home transactions - Compass provides an end-to-end platform with a suite of cloud-based software to empower residential real estate agents[11] - The business model is directly aligned with agent success, with substantially all revenue generated from commissions on home transactions conducted through the platform[191][525] Our Platform The proprietary, cloud-native platform simplifies agent workflows using AI, CRM, marketing, and collaborative search tools - The platform aims to digitize and simplify all real estate workflows for agents and their clients through proprietary cloud-native software and mobile apps[43] - In 2023, the company enhanced its platform by adding 103 new features, including Performance Tracker, Compass AI, and '1-Click Title & Escrow'[226] - Key platform capabilities include: Customer Relationship Management (CRM), Business Tracker, Marketing Content Creation, AI-powered Comparative Market Analysis (CMA), and Compass Collections for collaborative home searches[44][227] Integrated Services The company offers integrated title, escrow, and mortgage services, along with a program providing capital for home improvements - The company operates a mortgage joint venture, OriginPoint, with Guaranteed Rate, licensed in 36 states and Washington D.C. as of December 31, 2023[176] - Title and escrow services are provided in 7 states and Washington D.C. through five regional agencies[197] - The Compass Concierge program has facilitated approximately $1.14 billion in home improvement projects since its inception, with an average project size of about $28,800[18] Human Capital, Competition, and Regulation The company operates in a highly competitive and regulated industry, competing with traditional brokerages and technology firms - As of December 31, 2023, the company had 2,549 employees across the U.S. and internationally[19] - The company faces competition from real estate brokerage firms, enterprise technology companies, and vertical SaaS technology companies[20][48][200] - The business is heavily regulated by federal laws such as the Real Estate Settlement Procedures Act (RESPA) and the Fair Housing Act, as well as state-level licensing laws and rules from trade organizations like the National Association of Realtors (NAR)[26][50][233] Risk Factors The company faces significant risks related to its operations, legal environment, intellectual property, and stock ownership Risks Related to Our Business and Operations Performance is sensitive to economic conditions, intense competition, cybersecurity threats, and the need for continuous platform innovation - The business is significantly impacted by general economic conditions, the health of the U.S. real estate industry, monetary policies, and rising interest rates, which can reduce transaction volume[30][59][244] - Ongoing industry antitrust litigation could lead to significant changes in the broker commission structure, potentially decreasing commission rates and adversely affecting financial results[61][212] - Cybersecurity incidents, including data breaches and fraudulent activity, pose a significant risk to business operations, reputation, and financial condition[98][156][258] - Failure to continuously innovate and improve the technology platform to create value for agents could adversely affect the company's ability to attract and retain them[65][88] Risks Related to Our Legal and Regulatory Environment The company is exposed to antitrust litigation regarding broker commissions and the potential reclassification of agents as employees - The company is subject to numerous claims and lawsuits, including antitrust and anti-competition claims related to NAR or MLS rules regarding buyer-broker commissions[111] - If federal or state laws mandate that agents be classified as employees instead of independent contractors, the company's business and financial condition would be adversely impacted due to increased costs for taxes, benefits, and other expenses[112][319] - Failure to comply with a variety of federal and state laws, such as RESPA, the Fair Housing Act, and the Dodd-Frank Act, could result in fines, penalties, or suspension of operations[115][139][298] Risks Related to Our Intellectual Property Key risks include the inability to protect proprietary technology and the potential for infringement claims from third parties - The company's inability to protect its intellectual property rights, including trademarks and trade secrets, could reduce the value of its products, services, and brand[144][303] - The platform and its features may infringe on the intellectual property rights of third parties, which could result in costly litigation, substantial damages, or the need to redesign technology[146][328] - The use of open source software in products and services poses risks, as it could require the company to disclose proprietary source code or re-engineer products[121][329] Risks Related to Ownership of Our Class A Common Stock Stock ownership risks include concentrated voting power with the founder and CEO, potential price volatility, and anti-takeover provisions - The multi-class stock structure concentrates voting power with founder and CEO Robert Reffkin, who held approximately 46.5% of the voting power as of December 31, 2023, allowing him to significantly influence corporate actions[148][307][330] - The trading price of the Class A common stock is likely to be volatile due to factors such as changes in interest rates, housing market fluctuations, and overall stock market performance[153][309] - Provisions in the company's charter documents and Delaware law could make a potentially beneficial acquisition more difficult, which may limit stockholder attempts to replace management[126][152] Cybersecurity The company maintains a cybersecurity program overseen by internal committees and the Board, utilizing industry-standard frameworks for risk management - The company has implemented a cybersecurity risk management program designed to protect information systems, detect threats, and ensure compliance with privacy laws[466][478] - Cybersecurity governance is managed by an internal Information Security team, a Security and Privacy Committee, and overseen by the Audit Committee of the Board of Directors, which receives quarterly reports[482][511][513] - The company uses a leading industry cybersecurity framework to assess its controls and has developed a multi-year plan to enhance its processes and practices based on these assessments[468] Properties The company leases its New York headquarters and various other office spaces throughout the United States - The company's headquarters are in New York, NY, with an office space of approximately 32,500 square feet under a lease expected to expire in June 2030[514] Legal Proceedings The company is involved in multiple antitrust class action lawsuits related to broker commission rules - The company is a defendant in ten putative class action lawsuits alleging violations of the Sherman Act related to real estate commission rules[914] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE under "COMP," and it does not anticipate paying cash dividends - The company's common stock began trading on the New York Stock Exchange under the symbol "COMP" on April 1, 2021[487] - The company has never declared or paid cash dividends on its capital stock and does not anticipate doing so in the foreseeable future[464][489] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Revenue declined in 2023 due to a market slowdown, but net loss improved significantly due to successful cost reduction initiatives Results of Operations Revenue decreased by 18.8% in 2023, but a significant reduction in operating expenses led to an improved loss from operations Consolidated Statements of Operations Data (2023 vs. 2022) | Metric | 2023 (in millions) | 2022 (in millions) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $4,885.0 | $6,018.0 | $(1,133.0) | (18.8%) | | Loss from operations | $(314.9) | $(589.4) | $274.5 | 46.6% | | Net loss attributable to Compass, Inc. | $(321.3) | $(601.5) | $280.2 | 46.6% | - The decrease in revenue was primarily driven by macroeconomic conditions that led to a 15.5% decline in Total Transactions for 2023[419][421] - Operating expenses decreased significantly, with Research & Development down 48.8% and General & Administrative down 39.6%, largely due to workforce reductions and cost control initiatives[452][459] Key Business Metrics and Non-GAAP Financial Measures Total Transactions and Gross Transaction Value declined in 2023, while the number of principal agents grew and Adjusted EBITDA loss narrowed Key Business Metrics (2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Transactions | 178,848 | 211,538 | 225,272 | | Gross Transaction Value (in billions) | $186.1 | $230.3 | $254.2 | | Average Number of Principal Agents | 13,973 | 13,296 | 11,180 | Reconciliation of Net Loss to Adjusted EBITDA (in millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net loss attributable to Compass, Inc. | $(321.3) | $(601.5) | $(494.1) | | Adjusted EBITDA | $(38.9) | $(210.0) | $1.6 | Liquidity and Capital Resources The company's liquidity is supported by cash reserves and credit facilities, with a substantial improvement in operating cash flow in 2023 - As of December 31, 2023, the company had cash and cash equivalents of $166.9 million[631] Cash Flow Summary (in millions) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(25.9) | $(291.7) | $(28.6) | | Net cash used in investing activities | $(11.7) | $(100.1) | $(192.5) | | Net cash (used in) provided by financing activities | $(157.4) | $135.4 | $399.3 | - The company maintains a $75.0 million Concierge Facility, with $24.8 million outstanding, and a $350.0 million Revolving Credit Facility, with no borrowings outstanding as of year-end 2023[608][609][635] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and related notes for the past three fiscal years Business Combinations In 2023, the company acquired three real estate brokerages, resulting in the recognition of goodwill and intangible assets - In 2023, the company acquired two residential real estate brokerages and the assets of another to expand in key domestic markets[798] - The 2023 acquisitions resulted in the recognition of $11.4 million in goodwill and $10.8 million in customer relationship intangible assets[799] Debt The company's debt consists of a Concierge Facility and a Revolving Credit Facility, with no borrowings outstanding on the latter at year-end - The company has a $75.0 million Concierge Facility, which had an outstanding balance of $24.8 million and an interest rate of 8.93% as of December 31, 2023[332][608] - A $350.0 million Revolving Credit Facility is also in place, with no borrowings outstanding as of December 31, 2023, and matures in March 2026[335][853] Commitments and Contingencies The company faces ten antitrust lawsuits related to broker commissions and holds contingent liabilities for escrow and trust deposits - The company and its subsidiaries are named as defendants in ten putative class action lawsuits alleging antitrust violations related to broker commissions[885][914] - As of December 31, 2023, the company was contingently liable for $120.0 million in escrow and trust deposits related to real estate transactions[617][919] Stock-Based Compensation Stock-based compensation expense decreased in 2023 due to lower headcount, and the Agent Equity Program was discontinued Stock-Based Compensation Expense (in millions) | Expense Category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Commissions and other related expense | $11.6 | $59.0 | $128.7 | | Sales and marketing | $35.0 | $42.0 | $38.4 | | Operations and support | $16.1 | $15.6 | $16.9 | | Research and development | $45.7 | $57.5 | $92.7 | | General and administrative | $49.8 | $60.4 | $109.6 | | Total | $158.2 | $234.5 | $386.3 | - The decrease in stock-based compensation in 2023 compared to 2022 was primarily due to lower headcount resulting from workforce reductions[367] - The Agent Equity Program was discontinued following the issuance of RSUs in Q1 2023 related to the 2022 program[765][1008] Controls and Procedures Management concluded that disclosure controls were effective, and previously identified material weaknesses in internal control have been remediated - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2023[987] - Previously disclosed material weaknesses in internal control over financial reporting were remediated as of December 31, 2023, following the implementation of enhanced controls, policies, and personnel[385][386][1020] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information for these items is incorporated by reference from the company's 2024 Annual Meeting proxy statement - Information for Part III (Items 10-14) is incorporated by reference from the company's forthcoming Proxy Statement[992][993][994] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the annual report - This section contains the list of all financial statements, schedules, and exhibits filed with the 10-K report[543][999]