Deeper Cuts Announced as Compass' Cash Burn Continues

Compass' second quarter results are in with a higher than (I) expected cash burn rate for the quarter, but paired with a robust set of new cost cutting initiatives.

Why it matters: Compass has a cash burn problem (it spends more than it makes) and it needs to significantly reduce expenses to remain solvent -- which is exactly what it's doing.

• Management's top goal is "generating free cash flow" as it announces a new, $320 million cost reduction program.
  

• Compass' CEO took the unusual step of asserting that "Compass will not run out of cash."

Go deeper : Compass' challenge is that it burned through another $45 million in Q2, typically the most profitable quarter of the year for real estate brokerages.

• Last year, Q2 was the only quarter when Compass generated free cash flow with a $41 million gain.
  

• Cash burn was higher in Q1 than last year, and higher in Q2 than last year; in a rapidly cooling market, the pressure is on for the rest of the year.

Between Q1 and Q2 , Compass grew its brokerage revenue in line with its peers (except Douglas Elliman for some reason).

• The cooling market appears to be affecting all brokerages evenly, regardless of brand, tech platform, agent compensation, or anything else.

Compass is retaining its agents ; there has yet to be a noticeable decrease in agent growth, a positive sign for the company.

After layoffs earlier in the year, Compass is cutting deeper with a $320 million "cost reduction program."

• These cuts will target technology spend and agent incentives (remember, Compass has a 1,000 person tech team).
  

• For reference, Compass is on track to spend $360 million on technology in 2022 (excluding stock-based compensation expense) -- the cuts will likely hit its tech team hard.

The bottom line : Compass continues to have a cash burn problem, but running out of cash would be a weird outcome.

• To become cash flow positive, Compass is making major cuts -- the question is, can it do so while still remaining attractive to, and providing the same value to, its agents.