Compass' Cash Burn Problem

Compass' latest financial results reveal a company that burned $142 million in cash during the first three months of 2022, with $476 million left in the bank.

Why it matters: Manufactured profitability metrics aside, cash is the fuel that powers all businesses.

• Compass has a track record of significant cash burn (over $400 million in the past 15 months), with high fixed operating costs and expensive acquisitions.

There's a widening gap between Compass' gross profit (revenues after commission expense) and its operating expenses.

Compass is burning more cash and operates more unprofitably than any of its publicly-listed peers.

• Realogy, eXp, and Douglas Elliman all have gross profits higher than their operating expenses.

Compass' cost base is significantly higher than last year; operating expenses are up 50 percent from Q1 2021 (excluding stock-based compensation).

• But revenue growth is soft; Compass is only projecting eight percent revenue growth in Q2.
  

• This is only operating expenses, and doesn't include capital expenditures and acquisitions.

Compass' cash burn over the next 12 months is highly dependent on the overall real estate market.

• There's not a lot of margin of error; a challenging 2022 market will depress revenue and increase cash burn.
  

• Specific projections aside, there is an undeniable downward trend in Compass' available cash balance, which is becoming more difficult to ignore.

What to watch : Compass is not in immediate peril, but it is approaching a critical juncture where it will either need to raise more money or reduce expenses.

• The Compass business model relies on massive amounts of investment capital to subsidize massive financial losses.
  

• It's not clear that the business can achieve breakeven on its current trajectory; its cash burn is unsustainable.
  

• Compass may be forced to enact significant layoffs to recalibrate its burn rate.

Cash is king : After years of big spending, access to seemingly unlimited amounts of capital, and sustained unprofitability, the time has come for Compass to demonstrate a durable, self-sustaining business model.

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A note on projections : This analysis uses the midpoint of Compass' guidance for Q2 revenue ($2.1 billion), and seasonal estimates for Q3 and Q4.

• Gross margin is assumed to be 18 percent (Q1 2022 actual).
  

• Operating expenses remain flat at Q1 2022 levels.
  

• Roughly $50 million of capital expenditure and acquisition costs for the year (much lower than historical amounts; there was $190 million in 2021).