Further Cuts on Compass' Path to Profitability

Compass continued to burn cash in the latest quarter, but also demonstrated a reduction in operating expenses as the company aims for breakeven in 2023.

Why it matters: With a historically high cash burn in a cooling real estate market, Compass needs to cut costs extensively to achieve profitability.

• Furthermore, the company signaled further cuts to bring expenses in line with revenue in 2023.

Behind the numbers: Compass burned $76 million in Q3 2022, continuing a run of cash flow negative quarters.

• Of that $76 million, there were one-time restructuring and litigation expenses of $40 million.

Compass ended the quarter with $355 million in cash.

• Historically, Q4 and Q1 is where cash burn is highest, due to the seasonal decline in revenue.
  

• Coupled with a cooling market, the next six months are going to be tough.

What they're saying: On its earnings call, Compass signaled that further cuts are coming:

• ”…we will be implementing additional cost reduction initiatives to get ahead of any future market declines.”
  

• ”We are committed to driving our non-GAAP operating expenses well below the low end of our range of $1.05 billion in 2023.”

Compass' initial cost reduction program was an effort to get annual operating expenses to a run rate of $1.05–$1.15 billion (down from $1.48 billion).

• In total, the proposed cuts would represent an overall reduction in operating expenses of around 33 percent -- a very significant change.

Dig deeper: If breakeven in 2023 is the goal, working backwards reveals the various revenue estimates needed to achieve that goal.

• Compass' first set of cuts suggested a five percent revenue decline in 2023, but the latest cuts suggest a deeper 14 percent drop in revenue.

The bottom line : All brokerages, Compass included, are entering the literal and figurative winter of real estate; the next two quarters are going to be tough.

• With a historically high cash burn, Compass needs to cut faster and deeper than most other brokerages -- and it is.
  

• The question for all brokerages making cuts remains the same: can it be done while still remaining attractive to, and providing the same value to, agents.