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This post has been republished with permission from Mike DelPrete.
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 operating 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 8 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.
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).