Cash Burn Continues as Compass Navigates to Breakeven

The results are in and Compass burned $143 million in cash during Q4 2022, leaving the company with a cash balance of $362 million.

Why it matters: With a clearly articulated goal of reaching breakeven after billions in losses, 2023 is Compass’ seminal make-or-break year.

• Despite another quarter of high cash burn, the company appears to be positioned to achieve breakeven in 2023 after massive cuts made over the previous 12 months.
  

• Even in a much softer market, Compass’ Q4 2022 cash burn is less than a year ago, a reflection of the cuts already made to the business.

Compass started 2023 with a cash balance of $362 million – which includes a $150 million drawdown from its revolving credit facility

• Without that additional loan, Compass’ cash balance would have been $212 million – dangerously low for a company that just burned $143 million in a quarter.

The key to breakeven is Compass’ ability to reduce its non-GAAP operating expenses (OpEx), primarily achieved through layoffs.

• OpEx has dropped significantly over the past six months, and is on track to drop further through the rest of the year.
  

• It appears that Compass is aiming for OpEx of around $950 million for 2023, down about 30 percent from $1.35 billion in 2022.

It’s fair to say that any brokerage, Compass included, falls apart if it’s unable to recruit or retain agents.

• For the first time, Compass’ agent count has gone flat, reflecting the challenging market and environment for agents (less transactions = less agents).
  

• Yes, but : It takes several data points to create a trend, and most brokerages are seeing a similar slowdown in agent count growth.

Analysis time : Assuming Compass’ national market share and revenue per transaction remain consistent with 2022, we can see what needs to be believed for the company to reach breakeven in 2023.

• Compass’ current non-GAAP operating expense target of $950 million suggests that 4.5 million transactions in the national market are necessary to give Compass the revenue and gross profit necessary to break even for the year.
  

• A bear case of 4 million transactions would require Compass to cut an additional $100 million of operating expenses to reach breakeven.
  

• Please note: these are back-of-the-envelope calculations that provide directionality, not certainty.

What to watch : Like other brokerages, Compass only has so many levers to pull to reach breakeven.

• On the revenue side, the company is considering franchising as a less-expensive growth strategy, and will be trying to accelerate its mortgage joint venture.
  

• If the market remains soft and revenue drops, the only option is to cut even more costs out of the business.

The bottom line : Compass is not alone in needing to cut costs during a significant market downturn – its future depends on it.

• The company dipped into its “emergency reserve” last quarter – $150 million from its revolving credit facility – for the home stretch to profitability.
  

• It appears that Compass has made the deep cuts necessary to achieve breakeven this year, as long as nothing else unexpectedly goes wrong.