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.
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Throughout 2022, and during the first nine months of 2023, we continued to make progress in achieving our strategic goals, including a 5% increase in our agent count, going from 84,911 agents as of September 30, 2022 to 89,156 agents as of September 30, 2023. The increase in our agents occurred even though, according to the National Association of Realtors (“NAR”), real estate industry agents declined 1.3% from September 2022 to September 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 September of 2023, the existing home sales market declined 15.4%, compared to September of 2022 according to the NAR. Due to reduced affordability driven by higher interest rates and increasing inflation, the market began a contraction trend in the third quarter of 2022, that is continuing into the third quarter of 2023.
The Company believes it continues to be well positioned to gain market share in the current economic climate. We have a strong base of agent support, which should drive organic market share growth, through greater retention and productivity. Additionally, we have an efficient operating model with lower fixed costs driven by our cloud-based infrastructure, 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 1,130,000 as of September 2023 (preliminary) compared to 1,230,000 at the end of September 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 7.3% in September 2023 vs 6.7% in September 2022.
Housing Affordability Index
According to NAR, the composite housing affordability index decreased to 91.7 for August 2023 (preliminary) from 110.5 for August 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 3.96 million in September 2023 (preliminary) compared to 4.68 million in September 2022 a decrease of 15.4%.
According to NAR, the nationwide existing home sales median price for September of 2023 (preliminary) was $394,300 compared to $383,500 in September 2022, an increase of 2.8%. Housing inventory was also up to 3.4 months of inventory compared to 3.2 months last year.
Legal & Regulatory Environment
See Part II., Item 1 of this Quarterly Report for a discussion of the current legal environment and how such environment could potentially impact our business, results of operations, or financial condition.
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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 September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
(in thousands, except transactions and agent count)
Performance:
Agent count
89,156
84,911
89,156
84,911
Real estate sales transactions
118,626
124,774
325,004
363,699
Other real estate transactions
20,854
13,580
53,980
38,992
Volume
$ 48,526,164
$ 50,392,432
$ 130,337,913
$ 149,666,700
Revenue
$ 1,214,513
$ 1,238,975
$ 3,298,056
$ 3,664,766
Gross profit
83,625
93,122
253,198
283,836
Gross margin (%)
6.9%
7.5%
7.7%
7.7%
Adjusted EBITDA (1)
18,950
12,349
57,006
56,971
(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.
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.
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, with disproportionate variances are representative of company-specific performance. 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 the Company’s financial performance from period to period.
Gross profit is calculated from U.S. GAAP reported amounts and equals the difference between revenues and cost of sales. Gross margin is the calculation of gross profit as a percentage of revenues. 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 September 30, 2023 and 2022 gross profit was $83.6 million, and $93.1 million, respectively and gross margin was 6.9% and 7.5%, respectively. For the three months ended September 30, 2023, gross profit and gross margin decreased year-over-year primarily due to decreased revenue related to the slowdown in the housing market and higher agent stock-based compensation costs in 2023.
For the nine months ended September 30, 2023 and 2022, gross profit was $253.2 million, and $283.8 million, respectively and gross margin was 7.7% for each of the nine month periods. Gross profit decreased in the first nine
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months of 2023 compared to 2022 due to lower revenue related to the slowdown in the housing market. Gross margin was 7.7% for both periods, because of the lower increase in commissions and agent-related costs due to a lower percentage of agents reaching their commissions capping requirements offset by higher agent stock-based compensation expense in 2023.
Management also reviews Adjusted EBITDA, which is a non-U.S. GAAP financial measure, to understand and evaluate our core operating performance. Adjusted EBITDA increased slightly for the first nine months of 2023 and increased for the three months ended September 30, 2023 compared to the same periods in 2022 due to 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 74 in the third 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 September 30, 2023 compared to the Three Months Ended September 30, 2022
Three Months Ended
% of
Three Months Ended
% of
Change
2023 vs. 2022
September 30, 2023
Revenue
September 30, 2022
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 1,214,513
100%
$ 1,238,975
100%
($ 24,462)
(2)%
Operating expenses
Commissions and other agent-related costs
1,130,888
93%
1,145,853
92%
(14,965)
(1)%
General and administrative expenses
78,568
6%
89,460
7%
(10,892)
(12)%
Sales and marketing expenses
3,194
-%
3,636
-%
(442)
(12)%
Total operating expenses
1,212,650
100%
1,238,949
100%
(26,299)
(2)%
Operating income
1,863
-%
26
-%
1,837
7065%
Other (income) expense
Other (income) expense, net
(708)
-%
(78)
-%
(630)
(808)%
Equity in losses of unconsolidated affiliates
354
-%
329
-%
25
8%
Other (income) expense, net
(354)
-%
251
-%
(605)
(241)%
Income (loss) before income tax expense
2,217
-%
(225)
-%
2,442
1085%
Income tax expense
868
-%
(4,627)
-%
5,495
119%
Net income
1,349
-%
4,402
-%
(3,053)
(69)%
Add back: Net loss attributable to noncontrolling interest
-
-%
-
-%
-
-%
Net income attributable to eXp World Holdings, Inc.
1,349
-%
4,402
-%
(3,053)
(69)%
Adjusted EBITDA (1)
$ 18,950
2%
$ 12,349
1%
$ 6,601
53%
Earnings per share
Basic
$ 0.01
$ 0.03
($ 0.02)
(67)%
Diluted
$ 0.01
$ 0.03
($ 0.02)
(67)%
Weighted average shares outstanding
Basic
153,392,005
151,826,315
Diluted
158,183,888
155,915,307
(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, a reconciliation of Adjusted EBITDA to net income and a discussion of why we believe Adjusted EBITDA provides useful information to investors, see “Non-U.S. GAAP Financial Measures.”
In addition to the financial information noted above, the Company had:
● As of September 30, 2023, cash and cash equivalents totaled $120.1 million. The Company repurchased $55.9 million of common stock during the third quarter of 2023.
● The Company paid a cash dividend for the third quarter of 2023 of $0.05 per share of common stock on September 4, 2023. On October 25, 2023, the Company’s Board of Directors declared a cash dividend of $0.05 per share of common stock for the fourth quarter of 2023, expected to be paid on November 30, 2023 to stockholders of record on November 16, 2023.
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Revenue
Our total revenues were $1.2 billion for the three months ended September 30, 2023 compared to $1.2 billion for the same period in 2022, a decrease of ($24.5) million, or (2)%. Total revenues decreased in the third quarter of 2023 as a result of a decrease in real estate transactions compared to the same period in 2022 primarily due to the continued decline of the U.S. 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 September 30, 2023 compared to $1.1 billion for the same period in 2022, a decrease of ($15.0) million, or (1)%. Commissions and other agent-related costs decreased primarily as a result of a decrease in real estate transactions compared to the three months ended September 30, 2022 , such decrease is partially offset by increased agent related stock-based compensation.
General and Administrative Expenses
General and administrative expenses were $78.6 million for the three months ended September 30, 2023 compared to $89.5 million for the same period in 2022, a decrease of ($10.9) million or (12)%. General and administrative expenses include costs related to wages, stock compensation, and other general overhead expenses.
Sales and Marketing Expenses
Sales and marketing expenses decreased to $3.2 million for the three months ended September 30, 2023 compared to $3.6 million the same period in 2022. The decrease of ($0.4) million is due to decreased advertising to offset the contraction in the U.S. and Canada residential real estate market.
Other (Income) Expense
Other (income) in the third quarter of 2023 relates primarily to increased interest income when compared to the third quarter of 2022.
Income Tax Expense (Benefit)
The Company’s provision for income tax expense(benefit) amounted to $868 and ($4,627) for the three months ended September 30, 2023 and 2022, respectively, which represented effective tax rates of positive 39.02% and 2055.79%, respectively. The increase in the provision for income tax expense was primarily attributable to 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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Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022
Nine Months Ended
% of
Nine Months Ended
% of
Change
2023 vs. 2022
September 30, 2023
Revenue
September 30, 2022
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 3,298,056
100%
$ 3,664,766
100%
($ 366,710)
(10)%
Operating expenses
Commissions and other agent-related costs
3,044,858
92%
3,380,930
92%
(336,072)
(10)%
General and administrative expenses
232,876
7%
256,173
7%
(23,297)
(9)%
Sales and marketing expenses
9,035
-%
11,546
-%
(2,511)
(22)%
Total operating expenses
3,286,769
100%
3,648,649
100%
(361,880)
(10)%
Operating income
11,287
-%
16,117
-%
(4,830)
(30)%
Other (income) expense
Other (income) expense, net
(2,887)
-%
394
-%
(3,281)
(833)%
Equity in losses of unconsolidated affiliates
839
-%
1,213
-%
(374)
(31)%
Total other (income) expense, net
(2,048)
-%
1,607
-%
(3,655)
(227)%
Income (loss) before income tax expense
13,335
-%
14,510
-%
(1,175)
(8)%
Income tax (benefit) expense
1,111
-%
(8,115)
-%
9,226
114%
Net income
12,224
-%
22,625
1%
(10,401)
(46)%
Add back: Net loss attributable to noncontrolling interest
-
-%
18
-%
(18)
(100)%
Net income attributable to eXp World Holdings, Inc.
12,224
-%
22,643
1%
(10,419)
(46)%
Adjusted EBITDA (1)
$ 57,006
2%
$ 56,971
2%
$ 35
-%
Earnings per share
Basic
$ 0.08
$ 0.15
($ 0.07)
(47)%
Diluted
$ 0.08
$ 0.14
($ 0.06)
(43)%
Weighted average shares outstanding
Basic
153,065,727
150,622,845
Diluted
156,834,985
156,434,440
(2) 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, a reconciliation of Adjusted EBITDA to net income and a discussion of why we believe Adjusted EBITDA provides useful information to investors, see “Non-U.S. GAAP Financial Measures.”
In addition to the financial information above, the Company had:
● As of September 30, 2023, cash and cash equivalents totaled $120.1 million. The Company repurchased approximately $134.6 million of common stock during the first nine months of 2023.
● The Company paid cash dividends for the first nine months of 2023 of $0.045 per share of common stock on March 31, 2023, $0.045 per share of common stock on May 31, 2023, and $0.05 per share of common stock on September 4, 2023.
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Revenue
Our total revenues were $3.3 billion for the nine months ended September 30, 2023 compared to $3.7 billion for the same period in 2022, a decrease of ($366.7) million, or (10)%. Total revenues decreased in the first nine months of 2023 primarily as a result of a decrease in real estate transactions compared to the same period in 2022 primarily due to the decline of the U.S. and Canada residential real estate market.
Commission and Other Agent-Related Costs
Commission and other agent-related costs were $3.0 billion for nine months ended September 30, 2023 compared to $3.4 billion for the same period in 2022, a decrease of ($336.1) million, or (10)%. Commissions and other agent-related costs decreased primarily as a result of a decrease in real estate transactions compared to the period ended September 30, 2022 such decrease is partially offset by increased agent related stock-based compensation.
General and Administrative Expenses
General and administrative expenses were $232.9 million for the nine months ended September 30, 2023 compared to $256.2 million for the same period in 2022, a decrease of ($23.3) million or (9)%. General and administrative expenses include costs related to wages, stock compensation, and other general overhead expenses.
Sales and Marketing Expenses
Sales and marketing expenses decreased to $9.0 million for the nine months ended September 30, 2023 compared to $11.5 million the same period in 2022. The decrease of ($2.5) million is due to decreased advertising to offset the contraction in the U.S. and Canada residential real estate market.
Other (Income) Expense
Other (income) in the first nine months of 2023 relates primarily to increased interest income when compared to the first nine months of 2022.
Income Tax (Benefit) Expense
The Company’s provision for income tax expense (benefit) amounted to $1,111 and ($8,115) for the nine months ended September 30, 2023 and 2022, respectively, which represent an effective tax rate of positive 8.31% and negative 56.22%, respectively. The increase in the provision for income tax expense was primarily attributable to 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 September 30, 2023 and 2022:
Three Months Ended
Three Months Ended
Change
2023 vs. 2022
September 30, 2023
September 30, 2022
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
North American Realty
$ 1,198,207
$ 1,226,368
($ 28,161)
(2)%
International Realty
14,896
10,146
4,750
47%
Virbela
1,720
2,328
(608)
(26)%
Other Affiliated Services
979
1,417
(438)
(31)%
Segment eliminations
(1,289)
(1,284)
(5)
-%
Total Consolidated Revenues
$ 1,214,513
$ 1,238,975
($ 24,462)
(2)%
Adjusted Segment EBITDA (1)
North American Realty
27,171
22,445
$ 4,726
21%
International Realty
(2,647)
(4,614)
1,967
43%
Virbela
(1,297)
(3,197)
1,900
59%
Other Affiliated Services
(918)
(563)
(355)
(63)%
Corporate expenses and other
(3,359)
(1,722)
(1,637)
(95)%
Total Reported Adjusted EBITDA
$ 18,950
$ 12,349
$ 6,601
53%
(1) Adjusted Segment 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 Segment EBITDA and a reconciliation of Adjusted Segment EBITDA to net income, see “Non-U.S. GAAP Financial Measures”. Management evaluates the operating results of each of its reportable segments based upon revenue and Adjusted Segment EBITDA. Adjusted Segment EBITDA is defined by us as net income before depreciation and amortization, interest expense, net, income taxes and other items that are not core to the operating activities of the Company. The Company’s presentation of Adjusted Segment EBITDA may not be comparable to similar measures used by other companies.
North American Realty revenues decreased (2)% in the third quarter of 2023 compared to the same period in 2022 primarily due to decreased real estate transactions driven by the slowdown in the U.S. and Canada residential real estate markets. Adjusted EBITDA increased 21% due to lower general and administrative expenses, partially offset by lower revenue.
International Realty revenues increased 47% in the third 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 improved 43% in the third of 2023 compared to the same period in 2022 due to increased revenue which was offset selling, general and administrative expenses to support the incremental production in existing operations.
Virbela revenues decreased (26)% due to softer customer demands in one-time virtual events. Adjusted EBITDA improved 59% primarily due to workforce reductions and decrease in marketing and advertising expenses.
Other Affiliated Services revenues decreased 31% due to lower SUCCESS® print media, partially offset by expansion of SUCCESS® Coaching. Adjusted EBITDA decreased (63)% due to increases in selling, general and administrative expenses related to investing in business initiatives.
Corporate expenses and other contain the costs incurred to operate the corporate parent of eXp Realty.
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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 nine months ended September 30, 2023 and 2022:
Nine Months Ended
Nine Months Ended
Change
2023 vs. 2022
September 30, 2023
September 30, 2022
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
North American Realty
$ 3,254,666
$ 3,632,276
($ 377,610)
(10)%
International Realty
37,644
26,148
11,496
44%
Virbela
5,694
6,181
(487)
(8)%
Other Affiliated Services
3,729
3,298
431
13%
Segment eliminations
(3,677)
(3,137)
(540)
(17)%
Total Consolidated Revenues
$ 3,298,056
$ 3,664,766
($ 366,710)
(10)%
Adjusted Segment EBITDA (1)
North American Realty
82,496
91,115
($ 8,619)
(9)%
International Realty
(10,105)
(9,584)
(521)
(5)%
Virbela
(3,789)
(8,684)
4,895
56%
Other Affiliated Services
(2,767)
(2,139)
(628)
(29)%
Corporate expenses and other
(8,829)
(13,737)
4,908
36%
Total Reported Adjusted EBITDA
$ 57,006
$ 56,971
$ 35
-%
(1) Adjusted Segment 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 Segment EBITDA and a reconciliation of Adjusted Segment EBITDA to net income, see “Non-U.S. GAAP Financial Measures”. Management evaluates the operating results of each of its reportable segments based upon revenue and Adjusted Segment EBITDA. Adjusted Segment EBITDA is defined by us as net income before depreciation and amortization, interest expense, net, income taxes and other items that are not core to the operating activities of the Company. The Company’s presentation of Adjusted Segment EBITDA may not be comparable to similar measures used by other companies.
North American Realty revenues decreased (10)% in the first nine months of 2023 compared to the same period in 2022 primarily due to decreased real estate transactions driven by the slowdown in the real estate markets. Adjusted EBITDA decreased (9)% due to lower revenue, partially offset by lower general and administrative costs.
International Realty revenues increased 44% in the first nine months 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 (5)% in the first nine months 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 (8)% due to a decrease in one-time virtual event revenue. Adjusted EBITDA improved 56% primarily due to workforce reductions and decreases in marketing and advertising expenses.
Other Affiliated Services revenues increased 13% due to expansion of SUCCESS® Coaching. Adjusted EBITDA decreased (29)% 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) in the first nine months of 2023 compared to the same period of 2022 reflect decreased costs primarily due to cost containment initiatives, partially offset by increased employee count to continue to support our agent growth strategy.
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.
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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 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 September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Net income
$ 1,349
$ 4,402
$ 12,224
$ 22,625
Total other (income) expense, net
(354)
251
(2,048)
1,607
Income tax (benefit) expense
868
(4,627)
1,111
(8,115)
Depreciation and amortization
2,790
2,767
8,148
7,154
Stock compensation expense (1)
11,764
5,800
29,912
22,828
Stock option expense
2,533
3,756
7,659
10,872
Adjusted EBITDA
$ 18,950
$ 12,349
$ 57,006
$ 56,971
(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. 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 September 30, 2023, relating to capital expenditures, commitments, or human capital (except as passthrough commissions to agents and brokers concurrent with settled real estate transactions).
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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 September 30, 2023 and December 31, 2022:
September 30, 2023
December 31, 2022
Current assets
$ 299,810
$ 255,113
Current liabilities
(171,931)
(127,299)
Net working capital
$ 127,879
$ 127,814
For the nine months ended September 30, 2023, net working capital increased $0.1 million, or 0%, compared to December 31, 2022.
Cash Flows
The following table presents our cash flows for the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30,
2023
2022
Cash provided by operating activities
$ 176,516
$ 187,324
Cash used in investment activities
(11,318)
(18,890)
Cash used in financing activities
(150,843)
(156,376)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash
403
(771)
Net change in cash, cash equivalents and restricted cash
$ 14,758
$ 11,287
For the nine months ended September 30, 2023, cash provided by operating activities decreased ($10.8) million compared to the same period in 2022. The change resulted primarily from decreased real estate transactions.
For the nine months ended September 30, 2023, cash used in our investing decreased primarily due to cash used for acquisitions in 2022, as well as fewer capital expenditures.
For the nine months ended September 30, 2023 and 2022 cash flows used in financing activities primarily were related to stock repurchases and the payment of cash dividends. The decrease in cash flows used in financing activities for the nine months ended September 30, 2023 is due to fewer share repurchases.
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
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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.
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.