Item 2. Management’s Discussion and Analysis
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. Management’s Discussion and Analysis of Financial Conditions and Results of Operations contain forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. See “Item 1 A. – Risk Factors” in our 2022 Annual Report and “Item 1 A. – Risk Factors” in this Quarterly Report for a discussion of certain risks, uncertainties and assumptions associated with these statements.
This MD&A is divided into the following sections:
● Overview
● Market Conditions and Industry Trends
● Key Business Metrics
● Results of Operations
● Business Segment Disclosures
● Non-U.S. GAAP Financial Measures
● Liquidity and Capital Resources
● Critical Accounting Policies and Estimates
All dollar amounts are in USD thousands except share amounts and per share data and as otherwise noted.
OVERVIEW
eXp World Holdings empowers the new economy through its people, technology platforms and personal and professional development solutions. Through our brokerage, eXp Realty, we operate one of the world’s fastest-growing real estate brokerages. We are focused on being the most agent-centric company on the planet and offer our agents a generous commission model, and a thriving community built on our proprietary and unique cloud-based brokerage and collaboration suite.
eXp manages its operations in four operating business segments: North American Realty; International Realty; Virbela; and Other Affiliated Services.
While we do not consider acquisitions a critical element of our ongoing business, we seek opportunities to expand and enhance our portfolio of solutions.
Strategy
Our strategy is to grow organically in North America and certain international markets by increasing our independent agent and broker network. Through our cloud-based operations and technology platform, we strive to achieve customer-focused efficiencies that allow us to increase market share and attain strong returns as we scale our business within the markets in which we operate. By building partnerships and strategically deploying capital, we seek to grow the business and enter into attractive verticals and associated businesses.
Throughout 2022, and during the first six months of 2023, we continued to make progress in achieving our strategic goals, including a 7% increase in our agent count, going from 82,856 agents as of June 30, 2022 to 88,248 agents as of June 30, 2023. The increase in our agents occurred even though, according to the National Association of Realtors (“NAR”), real estate industry agents declined 1.1% from June 2022 to June 2023. The expected outcome of these activities will be to better position us to deliver on our full potential, to provide a platform for future growth opportunities, and to achieve our long-term financial goals.
MARKET CONDITIONS AND INDUSTRY TRENDS
In June of 2023, the existing home sales market declined 18.9%, compared to June of 2022 according to the NAR. Due to the increasing interest rates and increasing inflation, the market began a contraction trend in the second quarter of 2022.
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The Company believes it continues to be well positioned to grow in the current economic climate. We have a strong base of agent support, which should drive organic market share growth, retention and productivity. Additionally, we have an efficient operating model with lower fixed costs driven by our cloud-based model, with no brick-and-mortar locations.
Regardless of whether the housing market continues to slow or begins to recover, we believe that we are positioned to leverage our low-cost, high-engagement model, affording agents and brokers increased income and ownership opportunities while offering a scalable solution to brokerage owners looking to survive and thrive during fluctuations in economic activity.
National Housing Inventory
According to NAR, inventory of existing homes for sale in the U.S. was 1,080,000 as of June 2023 (preliminary) compared to 1,250,000 at the end of June 2022.
Mortgage Interest Rates
The sharp increase in mortgage rates have continued to negatively impact the demand for homebuying. Based on Freddie Mac data, the average rate for a 30-year, conventional, fixed rate mortgage was 6.7% in June 2023 vs 5.7% in June 2022.
Housing Affordability Index
According to NAR, the composite housing affordability index decreased to 93.8 for May 2023 (preliminary) from 98.3 for May 2022. When the index is above 100, it indicates that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20% down payment and ability to qualify for a mortgage. The housing affordability index has been declining year over year due to increasing mortgage rates.
Existing Home Sales Transactions and Prices
According to NAR, seasonally adjusted existing home sale transactions decreased to an annual rate of 4.2 million in June 2023 (preliminary) compared to 5.1 million in June 2022 a decrease of 18.9%.
According to NAR, the nationwide existing home sales median price for June of 2023 (preliminary) was $410,200 compared to $413,800 in June 2022, a decline of 0.9%. Housing inventory was also up to 3.1 months of inventory compared to 2.9 months last year.
KEY BUSINESS METRICS
Management uses our results of operations, financial condition, cash flows, and key business metrics related to our business and industry to evaluate our performance and make strategic decisions.
The following table outlines the key business metrics that we periodically review:
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
(in thousands, except transactions and agent count)
Performance:
Agent count
88,248
82,856
88,248
82,856
Real estate sales transactions
119,277
136,074
206,378
238,925
Other real estate transactions
17,922
13,958
33,126
25,412
Volume
$ 48,570,132
$ 57,894,767
$ 81,811,749
$ 99,274,268
Revenue
$ 1,232,927
$ 1,415,060
$ 2,083,543
$ 2,425,791
Gross profit
96,516
107,250
169,573
190,714
Gross margin (%)
7.8%
7.6%
8.1%
7.9%
Adjusted EBITDA (1)
24,729
26,914
38,056
44,627
(1) Adjusted EBITDA is not a measurement of our financial performance under generally accepted accounting principles in the U.S. and should not be considered as an alternative to net income, operating income, or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S. GAAP Financial Measures”.
We periodically evaluate trends in certain metrics to track the Company’s performance.
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Our strength is attracting real estate agent and broker professionals that contribute to our growth. Real estate sales transactions are recorded when our agents and brokers represent buyers and/or sellers in the purchase or sale, respectively, of a home. Other real estate transactions are recorded for leases, rentals and referrals. The number of real estate transactions is a key driver of our revenue and profitability. Transaction volume represents the total sales value for all transactions and is influenced by several market factors, including, but not limited to, the pricing and quality of our services and market conditions that affect home sales, such as macroeconomic factors, local inventory levels, mortgage interest rates, and seasonality. Real estate transaction revenue represents the commission revenue earned by the Company for closed brokerage real estate transactions.
We continue to increase our agents and brokers in the United States, Canada, and certain international locations through the execution of our growth strategies. The rate of growth of our agent and broker base is difficult to predict and is subject to many factors outside of our control, including macroeconomic factors affecting the real estate industry in general. With our unique business model, we anticipate being able to continue to grow for the remainder of the year, despite the less favorable economic outlook.
Settled home sales transactions and volume result from closed real estate transactions and typically change directionally with changes in the market’s existing home sales transactions as reported by NAR, as disproportionate variances are representative of company-specific improvements or shortfalls to the norm. Our home sale transaction performance was directly related to the performance of our agent base over the prior comparative period.
We utilize gross profit and gross margin, financial statement measures based on generally accepted accounting principles in the U.S. (“U.S. GAAP”) to assess eXp’s financial performance from period to period.
Gross profit is calculated from U.S. GAAP reported amounts and equals the difference between revenue and cost of sales. Gross margin is the calculation of gross profit as a percentage of total revenue. Commissions and other agent-related costs represent the cost of sales for the Company. The cost of sales does not include depreciation or amortization expenses as the Company’s assets are not directly used in the production of revenue. Gross profit is based on the information provided in our results of operations or our consolidated statements of comprehensive income and is an important measure of our potential profitability and brokerage performance. For the three months ended June 30, 2023 and 2022 gross profit was $96.5 million, and $107.3 million, respectively. For the three months ended June 30, 2023 and 2022, gross margin was 7.8% and 7.6%, respectively. For the six months ended June 30, 2023 and 2022, gross profit was $169.6 million, and $190.7 million, respectively. For the six months ended June 30, 2023 and 2022, gross margin was 8.1% and 7.9%, respectively. Gross profit decreased in the first six months of 2023 compared to 2022 due to lower revenue related to the slowdown in the housing market. However, for the first half of 2023 and for the three months ended June 30, 2023, gross margin increased year-over-year primarily due to a lower increase in commissions and agent-related costs due to a lower percentage of agents reaching their commission capping requirements, entitling them to a lower percentage of the home sale commission.
Management also reviews Adjusted EBITDA, which is a non-U.S. GAAP financial measure, to understand and evaluate our core operating performance. Adjusted EBITDA has declined for the first half of 2023 and for the three months ended June 30, 2023 compared to the same periods in 2022 due to lower revenue partially offset by lower operating costs.
Agent and Employee Experience
The Company has embarked on an initiative to better understand both its agents’ and employees’ experiences. In doing so, we have adopted many of the principles of the Net Promoter Score® (“NPS”) across many aspects of our organization. NPS is a measure of customer satisfaction and is measured on a scale between -100 and 100. An NPS above 50 is considered excellent. The Company’s agent NPS was 72 in the second quarter of 2023.
The NPS measure is an important vehicle for delivering on our core value of transparency. While we strive for high satisfaction, it is equally important to investigate a low or unfavorable trending of NPS. As NPS scores are often leading indicators to agents and employees’ future actions, we are able to learn quickly what may be a ‘pain point’ or product that is not meeting its desired objective. We then take that information and translate it into action with an effort to remediate the specific root cause(s) driving the lower score. Our fast and iterative approach has already led to improvements in parts of our business such as agent onboarding, commission transaction processing, and employee benefits.
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RESULTS OF OPERATIONS
Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022
Three Months Ended
% of
Three Months Ended
% of
Change
2023 vs. 2022
June 30, 2023
Revenue
June 30, 2022
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 1,232,927
100%
$ 1,415,060
100%
($ 182,133)
(13)%
Operating expenses
Commissions and other agent-related costs
1,136,411
92%
1,307,810
92%
(171,399)
(13)%
General and administrative expenses
82,541
7%
91,391
6%
(8,850)
(10)%
Sales and marketing expenses
2,878
-%
4,210
-%
(1,332)
(32)%
Total operating expenses
1,221,830
99%
1,403,411
99%
(181,581)
(13)%
Operating income
11,097
1%
11,649
1%
(552)
(5)%
Other (income) expense
Other (income) expense, net
(1,299)
-%
62
-%
(1,361)
(2,195)%
Equity in losses of unconsolidated affiliates
143
-%
567
-%
(424)
(75)%
Other (income) expense, net
(1,156)
-%
629
-%
(1,785)
(284)%
Income before income tax expense
12,253
1%
11,020
1%
1,233
11%
Income tax expense
2,831
-%
1,661
-%
1,170
70%
Net income
9,422
1%
9,359
1%
63
1%
Add back: Net loss attributable to noncontrolling interest
-
-%
-
-%
-
-%
Net income attributable to eXp World Holdings, Inc.
9,422
1%
9,359
1%
63
1%
Adjusted EBITDA (1)
$ 24,729
2%
$ 26,914
2%
($ 2,185)
(8)%
Earnings per share
Basic
$ 0.06
$ 0.06
($ 0.00)
-%
Diluted
$ 0.06
$ 0.06
$ 0.00
-%
Weighted average shares outstanding
Basic
153,249,120
150,783,418
Diluted
156,693,959
155,816,038
(1) Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S. GAAP Financial Measures.”
Three months ended June 30, 2023 consolidated financial highlights, including certain comparisons to the same year-ago quarter:
● Revenue decreased (13)% to $1.2 billion.
● Gross profit decreased (10)% to $96.5 million.
● Net income of $9.4 million. Earnings per diluted share of $0.06 compared to earnings per diluted share of $0.06 in the same period of prior year.
● Adjusted EBITDA (a non-GAAP financial measure) of $24.7 million.
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● As of June 30, 2023, cash and cash equivalents totaled $124.7 million. The company repurchased $48.8 million of common stock during the second quarter of 2023.
● The Company paid a cash dividend for the second quarter of 2023 of $0.045 per share of common stock on May 31, 2023. On July 28, 2023, the Company’s Board of Directors declared a cash dividend of $0.05 per share of common stock for the third quarter of 2023, expected to be paid on September 4, 2023 to stockholders of record on August 18, 2023.
Revenue
Our total revenues were $1.2 billion for the three months ended June 30, 2023 compared to $1.4 billion for the same period in 2022, a decrease of ($182.1) million, or (13)%. Total revenues decreased in the second quarter of 2023 as a result of a decrease in real estate transactions and home prices compared to the same period in 2022 primarily due to the continued decline of the US and Canada residential real estate market.
Commission and Other Agent-Related Costs
Commission and other agent-related costs were $1.1 billion for the three months ended June 30, 2023 compared to $1.3 billion for the same period in 2022, a decrease of ($171.4) million, or (13)%. Commissions and other agent-related costs decreased primarily as a result of a decrease in real estate transactions and home prices compared to the three months ended June 30, 2022 due to the continued decline of the U.S. and Canada residential real estate market.
General and Administrative Expense
General and administrative expenses were $82.5 million for the three months ended June 30, 2023 compared to $91.4 million for the same period in 2022, a decrease of ($8.9) million or (10)%. General and administrative expenses include costs related to wages, stock compensation, and other general overhead expenses. General and administrative expenses decreased as a result of lower stock-based compensation.
Sales and Marketing
Sales and marketing expenses decreased to $2.9 million for the three months ended June 30, 2023 compared to $4.2 million the same period in 2022. The decrease of ($1.3) million is due to decreased advertising to offset the contraction in the real estate market.
Other (Income) Expense
Other (income) in the second quarter of 2023 relates primarily to increased interest income when compared to the second quarter of 2022.
Income Tax Expense (Benefit)
The Company’s provision for income tax expense amounted to $2.8 million and $1.7 million for the three months ended June 30, 2023 and 2022, respectively, which represented effective tax rates of positive 23.20% and 15.16%, respectively. The provision for income tax expense was primarily attributable to increase in income from operations, lower deductible stock-based compensation windfalls and return to provision true-ups in various jurisdictions.
The Company is subject to a wide variety of tax laws and regulations across the jurisdictions where it operates. Regulatory developments from the U.S. or international tax reform legislation could result in an impact to the Company's effective tax rate. The company continues to monitor the Base Erosion and Profit Shifting (BEPS) Integrated Framework provided by the Organization for Economic Co-operation and Development (OECD) including the legislative adoption of Pillar II by countries, and all other tax regulatory changes, to evaluate the potential impact on future periods.
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Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022
Six Months Ended
% of
Six Months Ended
% of
Change
2023 vs. 2022
June 30, 2023
Revenue
June 30, 2022
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 2,083,543
100%
$ 2,425,791
100%
($ 342,248)
(14)%
Operating expenses
Commissions and other agent-related costs
1,913,970
92%
2,235,077
92%
(321,107)
(14)%
General and administrative expenses
154,308
7%
166,713
7%
(12,405)
(7)%
Sales and marketing expenses
5,841
-%
7,910
-%
(2,069)
(26)%
Total operating expenses
2,074,119
100%
2,409,700
99%
(335,581)
(14)%
Operating income
9,424
-%
16,091
1%
(6,667)
(41)%
Other (income) expense
Other (income) expense, net
(2,179)
-%
472
-%
(2,651)
(562)%
Equity in losses of unconsolidated affiliates
485
-%
884
-%
(399)
(45)%
Total other (income) expense, net
(1,694)
-%
1,356
-%
(3,050)
(225)%
Income before income tax expense
11,118
1%
14,735
1%
(3,617)
(25)%
Income tax (benefit) expense
243
-%
(3,488)
-%
3,731
107%
Net income
10,875
1%
18,223
1%
(7,348)
(40)%
Add back: Net loss attributable to noncontrolling interest
-
-%
18
-%
(18)
(100)%
Net income attributable to eXp World Holdings, Inc.
10,875
1%
18,241
1%
(7,366)
(40)%
Adjusted EBITDA (1)
$ 38,056
2%
$ 44,627
2%
($ 6,571)
(15)%
Earnings per share
Basic
$ 0.07
$ 0.12
($ 0.05)
(42)%
Diluted
$ 0.07
$ 0.12
($ 0.05)
(42)%
Weighted average shares outstanding
Basic
152,899,883
150,049,170
Diluted
156,119,627
156,579,590
(1) Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S. GAAP Financial Measures.”
Six months ended June 30, 2023 consolidated financial highlights, including certain comparisons to the same year-ago period:
● Revenue decreased (14)% to $2.1 billion.
● Gross profit decreased (11)% to $169.6 million.
● Net income of $10.9 million. Earnings per diluted share of $0.07 compared to earnings per diluted share of $0.12 in the same period of prior year.
● Adjusted EBITDA (a non-GAAP financial measure) of $38.1 million.
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● As of June 30, 2023, cash and cash equivalents totaled $124.7 million. The company repurchased approximately $78.7 million of common stock during the first half of 2023.
● The Company paid cash dividends for the first six months of 2023 of $0.045 per share of common stock on March 31, 2023 and $0.045 per share of common stock on May 31, 2023.
Revenue
Our total revenues were $2.1 billion for the six months ended June 30, 2023 compared to $2.4 billion for the same period in 2022, a decrease of ($342.2) million, or (14)%. Total revenues decreased in the first half of 2023 primarily as a result of a decrease in real estate transactions and home prices compared to the same period in 2022 primarily due to the decline of the US and Canada residential real estate market.
Commission and Other Agent-Related Costs
Commission and other agent-related costs were $1.9 billion for six months ended June 30, 2023 compared to $2.2 billion for the same period in 2022, a decrease of ($321.1) million, or (14)%. Commissions and other agent-related costs decreased primarily as a result of a decrease in real estate transactions and home prices compared to the period ended June 30, 2022 due to the decline of the U.S. and Canada residential real estate market.
General and Administrative Expense
General and administrative expenses were $154.3 million for the six months ended June 30, 2023 compared to $166.7 million for the same period in 2022, a decrease of ($12.4) million or (7)%. General and administrative expenses include costs related to wages, stock compensation, and other general overhead expenses. General and administrative expenses decreased as a result of lower stock-based compensation, partially offset by increased personnel expenses due to the Company’s increase in employee count to continue to support our agent growth strategy.
Sales and Marketing
Sales and marketing expenses decreased to $5.8 million for the six months ended June 30, 2023 compared to $7.9 million the same period in 2022. The decrease of ($2.1) million is due to decreased advertising to offset the contraction in the real estate market.
Other (Income) Expense
Other (income) in the first half of 2023 relates primarily to increased interest income when compared to the first half of 2022.
Income Tax (Benefit) Expense
The Company’s provision for income tax expense and (benefit from) income taxes amounted to $0.2 million and ($3.5) million for the six months ended June 30, 2023 and 2022, respectively, which represent an effective tax rate of positive 2.20% and negative 23.81%, respectively. The provision for income tax expense was primarily attributable to increase in income from operations, lower deductible stock-based compensation windfalls and return to provision true-ups in various jurisdictions.
The Company is subject to a wide variety of tax laws and regulations across the jurisdictions where it operates. Regulatory developments from the U.S. or international tax reform legislation could result in an impact to the Company's effective tax rate. The company continues to monitor the Base Erosion and Profit Shifting (BEPS) Integrated Framework provided by the Organization for Economic Co-operation and Development (OECD) including the legislative adoption of Pillar II by countries, and all other tax regulatory changes, to evaluate the potential impact on future periods.
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BUSINESS SEGMENT DISCLOSURES
See Note 11 – Segment Information to the consolidated financial statements for additional information regarding our business segments. The following table reflects the results of each of our reportable segments during the three months ended June 30, 2023 and 2022:
Three Months Ended
Three Months Ended
Change
2023 vs. 2022
June 30, 2023
June 30, 2022
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
North American Realty
$ 1,219,345
$ 1,404,028
($ 184,683)
(13)%
International Realty
11,991
8,908
3,083
35%
Virbela
1,811
2,040
(229)
(11)%
Other Affiliated Services
1,072
1,043
29
3%
Segment eliminations
(1,292)
(959)
(333)
(35)%
Total Consolidated Revenues
$ 1,232,927
$ 1,415,060
($ 182,133)
(13)%
Adjusted Segment EBITDA (1)
North American Realty
34,122
39,899
($ 5,777)
(14)%
International Realty
(3,782)
(3,014)
(768)
(25)%
Virbela
(1,196)
(2,715)
1,519
56%
Other Affiliated Services
(1,168)
(747)
(421)
(56)%
Corporate expenses and other
(3,247)
(6,509)
3,262
50%
Total Reported Adjusted EBITDA
$ 24,729
$ 26,914
($ 2,185)
(8)%
North American Realty revenues decreased (13)% in the second quarter of 2023 compared to the same period in 2022 primarily due to decreased real estate transactions and home prices driven by the slowdown in the real estate markets. Adjusted EBITDA decreased (14)% due to lower revenue, as well as increased general and administrative costs.
International Realty revenues increased 35% in the second quarter of 2023 compared to the same period in 2022 primarily due to increased real estate transactions driven by increased production in previously launched markets. Adjusted EBITDA decreased (25)% in the second of 2023 compared to the same period in 2022 due to growing selling, general and administrative expenses to support the incremental production in existing operations.
Virbela revenues decreased (11)% due to softer customer demands in one-time virtual events. Adjusted EBITDA improved 56% primarily due to workforce reductions and decrease in marketing and advertising expenses.
Other Affiliated Services revenues were relatively flat due to consistent business operations. Adjusted EBITDA decreased (56)% due to increases in selling, general and administrative expenses related to adjusting business initiatives.
Corporate expenses and other contain the costs incurred to operate the corporate parent of eXp Realty. The decrease in these costs (improved Adjusted EBITDA of 50% in the second quarter of 2023 compared to the same period of 2022) reflect decreased costs primarily due to cost containment initiatives.
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See Note 11 – Segment Information to the consolidated financial statements for additional information regarding our business segments. The following table reflects the results of each of our reportable segments during the six months ended June 30, 2023 and 2022:
Six Months Ended
Six Months Ended
Change
2023 vs. 2022
June 30, 2023
June 30, 2022
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
North American Realty
$ 2,056,459
$ 2,405,908
($ 349,449)
(15)%
International Realty
22,748
16,002
6,746
42%
Virbela
3,974
3,853
121
3%
Other Affiliated Services
2,749
1,881
868
46%
Segment eliminations
(2,387)
(1,853)
(534)
(29)%
Total Consolidated Revenues
$ 2,083,543
$ 2,425,791
($ 342,248)
(14)%
Adjusted Segment EBITDA (1)
North American Realty
55,325
68,670
($ 13,345)
(19)%
International Realty
(7,458)
(4,970)
(2,488)
(50)%
Virbela
(2,492)
(5,487)
2,995
55%
Other Affiliated Services
(1,849)
(1,576)
(273)
(17)%
Corporate expenses and other
(5,470)
(12,010)
6,540
54%
Total Reported Adjusted EBITDA
$ 38,056
$ 44,627
($ 6,571)
(15)%
North American Realty revenues decreased (15)% in the first half of 2023 compared to the same period in 2022 primarily due to decreased real estate transactions and home prices driven by the slowdown in the real estate markets. Adjusted EBITDA decreased (19)% due to lower revenue, as well as increased general and administrative costs primarily related to increased compensation and personnel related expenses.
International Realty revenues increased 42% in the first half of 2023 compared to the same period in 2022 primarily due to increased real estate transactions driven by increased production in previously launched markets. Adjusted EBITDA decreased (50)% in the first half of 2023 compared to the same period in 2022 due to growing selling, general and administrative expenses to support the incremental production in existing operations.
Virbela revenues increased 3% due to increased customer contracts partially offset by a decrease in one-time virtual event revenue. Adjusted EBITDA improved 55% primarily due to workforce reductions and decreases in marketing and advertising expenses.
Other Affiliated Services revenues increased 46% due to expansion of SUCCESS® Coaching and SUCCESS® Media, primarily SUCCESS® magazine. Adjusted EBITDA decreased (17)% due to increased selling, general and administrative expenses to support the expansion.
Corporate expenses and other contain the costs incurred to operate the corporate parent of eXp Realty. The decrease in these costs (improved Adjusted EBITDA of 54% in the first half of 2023 compared to the same period of 2022) reflect decreased costs primarily due to cost containment initiatives.
NON-U.S. GAAP FINANCIAL MEASURES
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use Adjusted EBITDA, a non-U.S. GAAP financial measure, to understand and evaluate our core operating performance. This non-GAAP financial measure, which may be different than similarly titled measures used by other companies, is presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S.GAAP.
We define the non-U.S. GAAP financial measure of Consolidated Adjusted EBITDA to mean net income, excluding other income (expense), income tax benefit (expense), depreciation, amortization, impairment charges, stock-based
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compensation expense and stock option expense. Adjusted Segment EBITDA is defined as operating profit plus depreciation and amortization and stock-based compensation expenses. We believe that Consolidated Adjusted EBITDA and Adjusted Segment EBITDA provides useful information about our financial performance, enhances the overall understanding of our past performance and future prospects and allows for greater transparency with respect to a key metric used by our management for financial and operational decision-making. We believe that Adjusted Segment EBITDA helps identify underlying trends in our business that otherwise could be masked by the effect of the expenses that we exclude in Adjusted Segment EBITDA. In particular, we believe the exclusion of stock and stock option expenses, provides a useful supplemental measure in evaluating the performance of our underlying operations and provides better transparency into our results of operations.
We are presenting the non-U.S. GAAP measure of Adjusted EBITDA to assist investors in seeing our financial performance through the eyes of management, and because we believe this measure provides an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.
Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of Adjusted EBITDA compared to Net Income (Loss), the closest comparable U.S. GAAP measure. Some of these limitations are that:
● Adjusted EBITDA excludes stock-based compensation expense related to our agent growth incentive program and stock option expense, which have been, and will continue to be for the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy; and
● Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets, amortization of intangible assets, and impairment charges related to these long-lived assets, and, although these are non-cash charges, the assets being depreciated, amortized, or impaired may have to be replaced in the future.
The following tables present a reconciliation of Adjusted EBITDA to net income, the most comparable U.S. GAAP financial measure, for each of the periods presented:
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Net income
$ 9,422
$ 9,359
$ 10,875
$ 18,223
Other (income) expense, net
(1,156)
629
(1,694)
1,356
Income tax (benefit) expense
2,831
1,661
243
(3,488)
Depreciation and amortization
2,779
2,429
5,358
4,387
Stock compensation expense (1)
8,488
9,230
18,148
17,028
Stock option expense
2,365
3,606
5,126
7,121
Adjusted EBITDA
$ 24,729
$ 26,914
$ 38,056
$ 44,627
(1) This includes agent growth incentive stock compensation expense and stock compensation expense related to business acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are our cash and cash equivalents on hand and cash flows generated from our business operations. Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to fund our operations and capital expenditures, repurchase our common stock, and meet obligations as they become due. At present, our cash and cash equivalents balances and cash flows from operations have strengthened primarily due to transaction volume growth and improved cost leverage over the prior five years, attributable to the expansion of our independent agent and broker network and, to a lesser extent, increased average prices of home sales.
Currently, our primary use of cash on hand is to sustain and grow our business operations, including, but not limited to, commission and revenue share payments to agents and brokers and cash outflows for operating expenses and dividend payments. In addition, the Company has no known material cash requirements as of June 30, 2023, relating to capital expenditures, commitments, or human capital (except as passthrough commissions to agents and brokers concurrent with settled real estate transactions).
For information regarding the Company’s expected cash requirement related to settlement costs, see Note 10 – Commitments and Contingencies .
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We believe that our existing balances of cash and cash equivalents and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including our level of investment in technology, our rate of growth into new markets, and cash used to repurchase shares of the Company’s common stock. Our capital requirements may be affected by factors which we cannot control such as the changes in the residential real estate market, interest rates, and other monetary and fiscal policy changes to the manner in which we currently operate. In order to support and achieve our future growth plans, we may need or seek advantageously to obtain additional funding through equity or debt financing. We believe that our current operating structure will facilitate sufficient cash flows from operations to satisfy our expected long-term liquidity requirements beyond the next twelve months.
Net Working Capital
Net working capital is calculated as the Company’s total current assets less its total current liabilities. The following table presents our net working capital as of June 30, 2023 and December 31, 2022:
June 30, 2023
December 31, 2022
Current assets
$ 356,373
$ 255,113
Current liabilities
(224,454)
(127,299)
Net working capital
$ 131,919
$ 127,814
For the six months ended June 30, 2023, net working capital increased $4.1 million, or 3%, compared to December 31, 2022.
Cash Flows
The following table presents our cash flows for the six months ended June 30, 2023 and 2022:
Six Months Ended June 30,
2023
2022
Cash provided by operating activities
$ 154,168
$ 165,298
Cash used in investment activities
(9,962)
(8,077)
Cash used in financing activities
(90,935)
(91,209)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash
620
(1,141)
Net change in cash, cash equivalents and restricted cash
$ 53,891
$ 64,871
For the six months ended June 30, 2023, cash provided by operating activities decreased ($11.1) million compared to the same period in 2022. The change resulted primarily from decreased real estate transactions.
For the six months ended June 30, 2023, cash used in our investing increased primarily due to increased investments in unconsolidated affiliates, partially offset by fewer capital expenditures.
For the six months ended June 30, 2023 and 2022 cash flows used in financing activities primarily were related to stock repurchases and the payment of cash dividends.
Acquisitions
While we do not consider acquisitions a critical element of our ongoing business, we seek opportunities to expand and enhance our portfolio of solutions, access new revenue streams, or otherwise complement or accelerate the growth of our existing operations . We may fund acquisitions or investments in complementary businesses with various sources of capital including existing cash balances and cash flow from operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2022, which provides a description of our critical accounting policies. There were no changes to critical accounting policies or estimates as reflected in our 2022 Annual Report. For additional information regarding our critical accounting policies and estimates, see the Critical Accounting Policies and Estimates section of MD&A included in our 2022 Annual Report.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposures to market risk since December 31, 2022. For details on the Company's interest rate and foreign currency exchange, see “Item 7A. Quantitative and Qualitative Information About Market Risks” in our 2022 Annual Report.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.