Item 7. Management’s Discussion and Analysis
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to inform the reader about material information relevant to an assessment of the financial condition and results of operations of eXp World
26
Holdings, Inc. and its subsidiaries for the three-year period ended December 31, 2023. The following discussion should be read together with our consolidated financial statements and related notes included elsewhere within this Annual Report. This discussion contains forward-looking statements that constitute our estimates, plans and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements. See “Forward-Looking Statements” and “Item 1A. – Risk Factors” included elsewhere within this Annual Report on Form 10-K for a discussion of certain risks, uncertainties and assumptions associated with these statements.
This section generally discusses items pertaining to and comparisons of financial results between 2023 and 2022. Discussions of 2021 items and comparisons between 2022 and 2021 financial results can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 MD&A”). The 2022 MD&A is incorporated by reference herein from Part II, Item 7 of our annual report on Form 10-K filed on February 28, 2023 (Commission File No. 001-38493 ).
This MD&A is divided into the following sections:
● Overview
● Market Conditions and Industry Trends
● Segments
● Key Business Metrics
● Recent Business Developments
● Results of Operations
● Business Segment Disclosures
● Liquidity and Capital Resources
● Critical Accounting Policies and Estimates
● Non-U.S. GAAP Financial Measures
All dollar amounts are in USD thousands except share amounts and per share data and as otherwise noted.
OVERVIEW
eXp is a diversified portfolio of service-based businesses whose operations benefit substantially from utilizing our enabling technology platform. The Chief Operating Decision Maker (“CODM”) manages the business and allocates resources as four separate operating segments. See additional information in Note 10 –Segment Information to the consolidated financial statements included elsewhere in this Annual Report.
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 the North American 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 attractive vertical and adjacent markets.
In 2023, our primary emphasis was on achieving operational excellence, which we monitor using agent Net Promoter Score (“aNPS”). aNPS plays a crucial role in attracting and retaining agents and teams, especially during a period marked by market contraction, due to lower transaction volumes and higher mortgage rates. To counter these challenges, we instituted a series of strategic initiatives including Boost, Thrive, Accelerate, and Masterminds, with a sustained emphasis on agent productivity. Through these initiatives, we were able to increase our agent count by 2% compared to the prior year, despite difficult market conditions. Furthermore, we were able to increase our market share of total transactions. Additionally, we implemented cost savings initiatives that we believe will better position us to grow as real estate market conditions improve. We remain focused on optimizing our operating costs to match our revenue trends.
27
One critical area of capital deployment is our Sustainable Revenue Share Plan (the “Revenue Share Plan”), whereby we pay real estate professionals affiliated with the Company a portion of eXp Realty’s commission for their contribution to Company growth. We launched the Revenue Share Plan when the Company was in its infancy as a competitive differentiator that has since disrupted the residential real estate brokerage model. Participants in the Revenue Share Plan are eligible to receive additional income from the Company’s closed real estate transactions based on the participant’s number of frontline qualifying active (“FLQA”) agents. An FLQA agent is an agent or broker that a participant (“sponsor”) has personally attracted to the Company and who has met specific real estate transaction volume requirements. Revenue share is paid to the sponsor from the commission earned by the Company on transactions closed by the sponsor’s FLQAs. Additionally, all sponsors must adhere to eXp’s policies and procedures and may not, among other things: (i) take actions that result in criminal liability; (ii) engage in activities constituting harassment; or (iii) interfere with, coerce, or otherwise unethically convince a prospective or current agent’s choice of sponsorship declaration.
The supplementary income distributed to the sponsor under the Revenue Share Plan is exclusively derived from the Company's portion of the transaction commission and is not earned on transactions for which the Company does not receive a commission (e.g., when an FLQA has capped and earns 100% of commission on its closed transactions). The Revenue Share Plan does not impact or reduce the commission earned by the FLQA on the transaction. The Company’s costs incurred under the Revenue Share Plan are included as commissions and other agent-related costs in the consolidated statements of comprehensive income.
The revenue share program is integral to our growth strategy, fostering a collaborative brokerage that aligns with our core values of sustainability and collaborative success. Regular evaluations are conducted to ensure the plan’s continued alignment with the Company's overarching objectives and for regulatory compliance.
MARKET CONDITIONS AND INDUSTRY TRENDS
Our business is dependent on the levels of home sales transactions and prices, which can vary based on economic conditions within the markets for which we operate. Changes in these conditions can have a positive or negative impact on our business. The economic conditions influencing housing markets primarily include economic growth, interest rates, unemployment, consumer confidence, mortgage availability and supply and demand.
In periods of economic growth, rising consumer confidence and lower interest rates, demand typically increases resulting in higher home sales transactions and home sales prices. Conversely, in periods of economic recession, declining consumer confidence and higher interest rates, demand typically decreases, resulting in lower home sales transactions and home sale prices. Additionally, regulations imposed by local, state and federal government agencies and geopolitical instability can also negatively impact the housing markets in which we operate.
In 2023, the existing home sales market declined 18.7%, according to preliminary data from the National Association of Realtors (“NAR”), the lowest level in nearly 30 years. Due to increasing interest rates and continued low inventory of homes for sale, the market contraction that began in the second quarter of 2022 continued through 2023. According to preliminary NAR housing statistics, existing home sales continued to decline to 4.09 million for the year ended December 31, 2023, down 18.7% from 2022. NAR reported that the preliminary pending home sales index increased 1.3% in December 2023 compared to December 2022, and decreased 16.8% for the full-year ended December 31, 2023, compared to the full-year of 2022. The pending home sales index measures housing contract activity and is based on signed real estate contracts for existing single-family homes and condos.
The Company believes that it continues to be well-positioned for growth 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 decline or growth returns, we continue to believe that we are positioned to leverage our low-cost, high-engagement model, which affords agents and brokers increased income and ownership opportunities while offering a scalable solution to brokerage owners looking to prosper amidst fluctuations in economic activity.
National Housing Inventory
In 2023, the continued increase of mortgage rates and higher home prices have caused inventory levels, as measured in months of supply, to rise. According to the United States Census Bureau, new construction housing starts decreased by 9% in 2023, compared to 2022; however, new construction housing completions increased 4.5% in 2023 compared to 2022. According to NAR, inventory of existing homes for sale in the U.S. was one million.
Mortgage Rates
Persistently high mortgage rates continue to negatively impact the demand for homebuying. Based on Freddie Mac data, the average rate for a 30-year, conventional fixed-rate mortgage was 6.61% in December 2023 compared to 6.42% in December 2022. Mortgage rates are expected to decline in 2024 due to continued moderate levels of inflation, which we expect to boost homebuyer demand and homebuilder sentiment.
Housing Affordability Index
28
According to NAR, the composite housing affordability index decreased to 94.2 for November 2023 (preliminary) from 109.3 for December 2022. As home prices and interest rates have increased, the housing affordability index has become unfavorable. 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 percent down payment and ability to qualify for a mortgage. The unfavorable housing affordability index is due to increased mortgage rate conditions and higher average home prices driven by inventory levels.
Existing Home Sales Transactions and Prices
According to NAR, existing home sale transactions for the year ended December 2023 (preliminary) decreased to 4.09 million compared to 5.03 million for the year ended December 2022. NAR believes that December 2023 represented the bottom of the housing market during the current cycle and expects a return to growth in 2024.
According to NAR, nationwide existing home sales average price for December 2023 (preliminary) was $382,600, up 4.4% from $366,500 in December 2022, the sixth consecutive month of year-over-year price increases. For full-year 2023 (preliminary) the nationwide existing home sales average price was $389,800, up 0.9% from $386,400 for full-year 2022.
SEGMENTS
The Company has four operating segments and four reportable segments.
The CODM uses Adjusted Segment EBITDA as a key metric to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions and allocate resources.
The Company has four reportable segments as follows: North American Realty, International Realty, Virbela and Other Affiliated Services. We report corporate expenses, as further detailed below, as “Corporate expenses and other.” All segments follow the same basis of presentation and accounting policies. See Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included elsewhere in this Annual Report for additional information about the Company’s significant accounting policies.
Corporate expenses include costs incurred to operate eXp World Holdings, Inc., including expenses incurred in connection with strategic resources provided to the agents, as well as certain other centrally managed expenses that are not allocated to the operating segments, including administrative, brokerage operations and legal functions.
The following discussion focuses on the operating performance of the Company for the years ended December 31, 2023 and 2022 and the financial condition of the Company as of December 31, 2023.
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 to track the Company’s performance:
Year Ended December 31,
2023
2022
2021
Performance:
Agent count
87,515
86,203
71,137
Real estate sales transactions
422,772
460,150
407,197
Other real estate transactions
71,636
51,709
37,170
Volume
$ 169,202,948
$ 187,252,204
$ 156,101,836
Revenue
$ 4,281,105
$ 4,598,161
$ 3,771,170
Gross profit
324,051
366,899
296,031
Gross margin (%)
7.6%
8.0%
7.8%
Adjusted EBITDA (1)
$ 57,548
$ 60,549
$ 77,995
(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, and a discussion of why we believe Adjusted EBITDA is useful to investors, see “Non-U.S. GAAP Financial Measures”.
One of our key strengths 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
29
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, economic growth, 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. 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 actions taken by our competitors and macroeconomic factors affecting the real estate industry in general including rising interest rates and declining transaction volume in the U.S.
We continue to increase our agents and brokers in the United States and Canada through execution of our growth strategies despite a challenging market. Settled home purchases and sales transactions and volume result from closed real estate transactions and typically fluctuate directionally with changes in the market’s existing home sales transactions as reported by NAR, with disproportionate variances representative of company-specific improvements or shortfalls. Our real estate sales transaction decline was directly related to the decline in existing home sales in the U.S. in 2023 compared to 2022 as reported by the NAR.
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 on our consolidated statements of comprehensive income and is an important measure of our potential profitability and brokerage performance. For the years ended December 31, 2023, 2022 and 2021, gross profit was $324.1 million, $366.9 million and $296.0 million, respectively. Reported gross profit decreased year-over-year primarily due to a decrease in real estate transactions and an increase in reported agent-related stock-based compensation expense, compared to 2022. For the years ended December 31, 2023, 2022 and 2021, gross margin was 7.6%, 8.0% and 7.8%, respectively. Gross margin in 2023 decreased from 2022 primarily due to a lower volume of real estate transactions and an increase in agent-related stock-based compensation.
Management also reviews Adjusted EBITDA, which is a non-U.S. GAAP financial measure, to understand and evaluate our core operating performance. For the year ended December 31, 2023 adjusted EBITDA declined due to lower revenue, and increased operating costs.
RECENT BUSINESS DEVELOPMENTS
North American Realty Initiatives
The Company continues to focus on growth in the United States and Canada. During 2023, the Company announced various new agent incentive programs to enhance the agent experience and to attract culturally aligned agents, teams and independent brokerages to the Company. New incentive programs include Boost, Accelerate, and Thrive, which offer unique financial incentives. During 2023, the Company also launched various new ancillary programs and services to support the development and success of its agents, brokers and customers, including the global expansion of eXp Luxury™, Military Rewards Program, Listing Kits, Bundle Select™, eXp Exclusives™, My Link My Lead™, and affiliate relationships like HomeHunter™.
International Realty Initiatives
We have operations in the U.K., Australia, France, India, Mexico, Portugal, South Africa, Puerto Rico, Brazil, Italy, Hong Kong, Colombia, Spain, Israel, Panama, Germany, the Dominican Republic, Greece, New Zealand, Chile, Poland and Dubai. The Company continues to pursue growth opportunities and increase market share in the countries where operations began in recent years. The Company has focused on increasing productivity throughout our international entities. Our operations in the U.K and South Africa, in particular are seeing meaningful agent and transaction growth. During 2023, the eXp Luxury program expanded into Puerto Rico, the United Kingdom, Australia, New Zealand and South Africa.
Virbela
We continue to develop the core Virbela enterprise virtual world technology and the newer WebXR FrameVR (“Frame”) platform through our subsidiary, eXp World Technologies, LLC. Frame is a metaverse collaboration technology that is accessible from any device with a browser such as mobile, personal computer, virtual reality device and tablet. As the post-COVID return-to-office trend continues, there's a clear surge in demand for on-the-go technology solutions. While the application-based Virbela platform has seen a decrease in demand, the web-accessible Frame platform is gaining traction. Keeping these market trends in mind, we continue to evaluate our capital deployments between our various platform offerings, while continuing to service existing and new contracts for both platforms. As a result of the changing market conditions, in the fourth quarter of 2023, the Company determined that the goodwill and certain intangible assets associated with Virbela were impaired. As a result of the impairment test, the Company recognized impairment charges of $9.2 million for goodwill and intangible assets for the year ended December 31, 2023.
Other Affiliated Services
30
SUCCESS Enterprises LLC (“SUCCESS”) is a multi-media company which includes SUCCESS® print magazine, SUCCESS.com, SUCCESS® newsletters, SUCCESS® podcasts, SUCCESS® plus (digital training courses), SUCCESS® speakers bureau, and SUCCESS coaching.
In 2023, SUCCESS made strategic investments in leadership and established cross-functional departments dedicated to content creation, media relations, and business development. A streamlined strategy unified the entire ecosystem to capitalize on the brand’s strength, attract renowned personalities as cover talent such as Chance The Rapper, Tamron Hall, Steve Aoki, and others, and substantially enhance media exposure through successful appearances on programs like "The View" and "The Tamron Hall Show," reaching an audience of over four million viewers. Strategic partnerships brought new programs and content and expanded our customer offerings and reach.
The organization continues to invest in robust sales and marketing initiatives and funnels, with a focus on expanding membership, subscribers, and clients across diverse industries and global sectors. Several new customer-centric offerings are being rolled out including: a cutting-edge digital magazine, immersive virtual and live events, new online courses, comprehensive whole-life coaching services, and the inauguration of The SUCCESS Magazine Podcast. We expect these new initiatives will attract and engage new audiences and contribute to the growth of the organization.
Company-Wide Initiatives
Agent and Employee Experience
The Company has embarked on an initiative to better understand both its agents’ and employee experience. 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. A NPS above 50 is considered excellent. The Company’s aNPS was 73 for 2023 and 77 in the fourth quarter. Whether it be the overall question "How likely are you to recommend eXp to your colleagues, friends, or family?" or more granular inquiries as to specific workflows or service offerings, we believe this will ensure we are delivering on the most important values to our agents and employees. In turn, this often leads to enthusiastic fans of eXp who will promote our Company and continue leading us through strong organic growth.
The NPS process is an important vehicle for delivering our core values 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. This fast and iterative approach has already led to improvements in parts of our business such as agent onboarding, commission transaction processing and employee benefits.
The Company continues to expand agent growth opportunities in this uncertain market and has introduced programs such as Boost, Accelerate, and Thrive. Boost is a program that provides a financial incentive for culturally aligned independent brokerages to join our global platform. Accelerate is a program for individual agents who join the Company to experience enhanced revenue share capabilities with their second and third lines open for an initial amount of time. Thrive is a program for culturally aligned teams that provides a stock incentive to the team leader to relocate his or her team to the Company.
Agent Ownership
The Company maintains an agent growth incentive program (“AGIP”) whereby agents and brokers of eXp Realty can become eligible for awards of the Company’s common stock through the achievement of production and agent attraction benchmarks. Under our equity incentive program, agents and brokers who qualify are issued shares of the Company’s common stock and it continues to be another element in creating a culture of agent-ownership.
Our agent equity program (“AEP”) represents a key lever in our strategy to attract and retain independent agents and brokers. Agents and brokers can elect to receive 5% of their commission payable in the form of Company common stock at a 10% discount to the market price of our common stock . Our operational strategy and the importance of the AEP and AGIP to our strategy have not changed.
The costs attributable to these plans are also a significant component of our commission structure and our results of operations.
Additional information for our AGIP and AEP programs are more fully disclosed in Note 9 – Stockholders’ Equity to the consolidated financial statements included elsewhere in this Annual Report.
31
RESULTS OF OPERATIONS
Year ended December 31, 2023 vs. Year ended December 31, 2022
Year Ended
% of
Year Ended
% of
Change
2023 vs. 2022
December 31, 2023
Revenue
December 31, 2022
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 4,281,105
100%
$ 4,598,161
100%
($ 317,056)
(7)%
Operating expenses
Commissions and other agent-related costs
3,957,054
92%
4,231,262
92%
(274,208)
(6)%
General and administrative expenses
319,153
7%
346,132
8%
(26,979)
(8)%
Sales and marketing expenses
12,156
-%
15,359
-%
(3,203)
(21)%
Impairment expense
9,203
-%
-
-%
9,203
-%
Total operating expenses
4,297,566
100%
4,592,753
100%
(295,187)
(6)%
Operating (loss) income
(16,461)
-%
5,408
-%
(21,869)
(404)%
Other (income) expense
Other (income) expense, net
(4,414)
-%
(804)
-%
(3,610)
(449)%
Equity in losses of unconsolidated affiliates
1,388
-%
1,624
-%
(236)
(15)%
Total other (income) expense, net
(3,026)
-%
820
-%
(3,846)
(469)%
Income (loss) before income tax expense
(13,435)
-%
4,588
-%
(18,023)
(393)%
Income tax (benefit) expense
(4,462)
-%
(10,836)
-%
6,374
59%
Net (loss) income
(8,973)
-%
15,424
-%
(24,397)
(158)%
Add back: Net loss attributable to noncontrolling interest
-
-%
18
-%
(18)
(100)%
Net (loss) income attributable to eXp World Holdings, Inc.
(8,973)
-%
15,442
-%
(24,415)
(158)%
Adjusted EBITDA (1)
$ 57,548
1%
$ 60,549
1%
($ 3,001)
(5)%
(Loss) earnings per share
Basic
($ 0.06)
$ 0.10
($ 0.16)
(160)%
Diluted
($ 0.06)
$ 0.10
($ 0.16)
(160)%
Weighted average shares outstanding
Basic
153,232,129
151,036,110
Diluted
153,232,129
156,220,165
(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, and why we believe Adjusted EBITDA is useful to investors see “Non-U.S. GAAP Financial Measures”.
Revenue
Our total revenues were $4.3 billion in 2023 compared to $4.6 billion in 2022, a decrease of ($317.1) million, or (7)%. Total revenues decreased primarily as a result of lower volume of real estate brokerage commissions, which is attributable to a decrease of overall real estate transactions and lower home sales prices in our markets, partially offset by growth in our agent base, compared to 2022.
Commission and Other Agent-Related Costs
Commission and other agent-related costs were $4.0 billion in 2023 compared to $4.2 billion in 2022, a decrease of ($274.2) million, or (6)%. Commission and other agent-related costs include sales commissions paid and are reduced by agent-related fees. Commission and other agent-related costs decreased primarily because of a decrease in overall real estate transactions and lower home sales prices, partially offset by growth in our agent base and an increase in agent-related stock-based compensation.
32
General and Administrative Expense
General and administrative expenses were $319.2 million in 2023 compared to $346.1 million in 2022, a decrease of ($27.0) million, or (8)%. The decrease in general and administrative expenses was due to lower reported stock compensation expense, partially offset by increased employees, increased contract labor wages and compensation and increases in seminars and conferences expenses.
Sales and Marketing
Sales and marketing expenses were $12.2 million in 2023 compared to $15.4 million in 2022, a decrease of ($3.2) million, or (21)%. Sales and marketing costs include lead capture costs and promotional materials. Sales and marketing expenses decreased primarily as a result of a decrease in advertising costs of ($1.8) million and internet advertising costs of ($1.3) million.
Impairment expense
2023 includes impairment charges for goodwill and amortizable intangible assets of $9.2 million related to the Virbela segment.
Other (Income) Expense, Net
Other (income) expense in 2023 and 2022 includes interest income partially offset by equity in losses of unconsolidated subsidiaries.
Income Tax Benefit (Expense)
The Company's provision for income taxes amounted to a benefit of ($4.5) million, a benefit decrease of $6.4 million for the year ended December 31, 2023. The decrease in income tax benefit was primarily attributable to the decrease in excess benefit from stock-based compensation in current year and higher non-deductible executive compensation expenses.
Refer to Critical Accounting Policies and Estimates within the MD&A and Note 13 - Income Taxes to the consolidated financial statements included elsewhere in this Annual Report for further information.
BUSINESS SEGMENT DISCLOSURES
See Note 10 – Segment Information to the consolidated financial statements included elsewhere in this Annual Report for additional information regarding our business segments. The following table reflects the results of each of our reportable segments during the years ended December 31, 2023 and 2022:
Year Ended
Year Ended
Change
2023 vs. 2022
December 31, 2023
December 31, 2022
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
North American Realty
$ 4,220,063
$ 4,552,938
($ 332,875)
(7)%
International Realty
53,931
35,924
18,007
50%
Virbela
7,284
8,485
(1,201)
(14)%
Other Affiliated Services
4,802
5,084
(282)
(6)%
Segment eliminations
(4,975)
(4,270)
(705)
(17)%
Total Consolidated Revenues
$ 4,281,105
$ 4,598,161
($ 317,056)
(7)%
Adjusted Segment EBITDA (1)
North American Realty
91,101
103,255
($ 12,154)
(12)%
International Realty
(13,657)
(13,708)
51
-%
Virbela
(5,725)
(9,642)
3,917
41%
Other Affiliated Services
(3,795)
(2,600)
(1,195)
(46)%
Total Segment Adjusted EBITDA
67,924
77,305
(9,381)
(12)%
Corporate expenses and other
(10,376)
(16,756)
6,380
38%
Total Reported Adjusted EBITDA
$ 57,548
$ 60,549
($ 3,001)
(5)%
(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, and a discussion of why we believe Adjusted Segment EBITDA is useful to investors, 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, stock-based compensation expense, interest expense, net, income taxes, impairment expense and other items that are not core to the operating
33
activities of the Company. The Company’s presentation of Adjusted Segment EBITDA may not be comparable to similar measures used by other companies.
2023 Compared to 2022
North American Realty revenue decreased (7)% in 2023 compared to 2022 primarily due to a decrease in overall real estate transactions, driven by market conditions, partially offset by growth in our agent base. Adjusted EBITDA decreased (12)% due to decrease in gross profit related to the decline in real estate transactions, and increases in selling, general and administrative expenses resulting from increased headcount to support our agent growth strategy.
International Realty revenue increased 50% in 2023 compared to 2022 primarily due to increased real estate transactions driven by increased productivity in previously launched markets. Adjusted EBITDA was relatively flat in 2023 compared 2022 due to gross profit improvements related to increase in revenue, partially offset by increased selling, general and administrative expenses to support the increased production in existing operations.
Virbela revenue decreased (14)% due to softer customer demands for virtual events resulting from the post-COVID 19 work environment of return to the office and hybrid work globally, as well as the increase in the demand for artificial intelligence solutions. Adjusted EBITDA increased 41% primarily due to workforce reductions and decrease in marketing and advertising expenses.
Other Affiliated Services revenue decreased (6)% due to a decrease of coaching revenue as a result of a reset of the business strategy. Adjusted EBITDA decreased by (46)% primarily due to an increase in personnel costs and the decrease in revenue.
Corporate expenses and other contain the costs incurred to operate the corporate parent of eXp Realty. The decrease in these costs reflects the impact of cost cutting initiatives.
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 remained positive, as we have continued to grow our agent count and focus on operational excellence despite the challenging market conditions of 2023.
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. Our current capital deployment strategy for 2024 is to utilize our cash on hand to support our agent productivity, growth initiatives and investment in technology, and to a lesser extent, for repurchases of our common stock and quarterly cash dividends. There can be no assurance that future cash dividends will be declared by the Board of Directors or that the stock repurchase program will be sustained or proceed at historical levels.
For information regarding the Company’s expected cash requirement related to settlement costs, see Note 13 – Commitments and Contingencies to the consolidated financial statements included elsewhere in this Annual Report .
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 normal operating requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including the outcome of pending antitrust litigation, our level of investment in technology, our rate of growth into new markets and cash used to pay quarterly cash dividends and 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 12 months.
We currently do not hold any bank debt, nor have we issued any debt instruments through public offerings or private placements. As of December 31, 2023, our cash and cash equivalents totaled $126.9 million. Cash equivalents are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily money market funds. We currently do not hold any marketable securities.
During 2022, our unconsolidated joint venture, SUCCESS Lending, obtained $25 million in revolving warehouse credit lines from each of Flagstar Bank FSB and Texas Capital Bank, which represent off-balance sheet financing arrangements for the Company. The Company’s capital liability under the warehouse credit lines is limited to $3.25 million in the aggregate. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a current or future material effect on our financial
34
condition, results of operations, liquidity, capital expenditures, or capital resources. For information regarding the warehouse credit agreements, see Note 13 – Commitments and Contingencies to the consolidated financial statements included elsewhere in this Annual Report.
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 for the periods presented:
December 31, 2023
December 31, 2022
Current assets
$ 266,475
$ 255,113
Current liabilities
(141,640)
(127,299)
Net working capital
$ 124,835
$ 127,814
As of December 31, 2023, net working capital decreased ($3.0) million, or (2)%, compared to the prior year, primarily due to a decrease in accounts receivable of ($1.3) million, partially offset by an increase in accrued liabilities of $9.2 million and an increase in cash and cash equivalents of $5.3 million. The decrease of accounts receivable was due to lower real estate transactions in the fourth quarter 2023 compared to the fourth quarter 2022.
Cash Flows
The following table presents our cash flows for the periods presented:
Year Ended December 31,
2023
2022
Cash provided by operating activities
$ 209,131
$ 210,535
Cash used in investment activities
(13,503)
(22,461)
Cash used in financing activities
(184,089)
(204,514)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash
(38)
(87)
Net change in cash, cash equivalents and restricted cash
$ 11,501
($ 16,527)
For the year ended December 31, 2023, cash provided by operating activities decreased modestly compared to the same period in 2022.
For the year ended December 31, 2023, cash used in our investing activities decreased primarily due to a decrease of ($6.7) million in capital expenditures and an increase of $5.4 million invested in unconsolidated subsidiaries in the current year offset by $9.9 million Zoocasa business acquisition in 2022.
For the year ended December 31, 2023, cash used in financing activities decreased primarily related to lower repurchases of our common stock of $18.9 million and increased proceeds from stock option exercises $4.3 million compared to 2022 partially offset by an increase in dividend payments of $3.3 million compared to 2022.
Outlook
As we continue to scale our Company by investing in people, technology and processes, we expect to increase market share, agent base and real estate transaction volume in the U.S. and Canada and selectively grow in the international markets.
These operating ambitions are not forecasts and do not reflect our expectations, but rather are aspirational targets for future performance that may never be realized. These statements involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in them. Factors include, among others, (i) changes in demand for the Company’s services and changes in consumer behavior; (ii) macroeconomic conditions beyond our control; (iii) the Company’s ability to effectively maintain its infrastructure to support its operations and initiatives; (iv) the impact of governmental regulations related to the Company’s operations; (v) the outcome of ongoing antitrust litigation; and (vi) other factors, as described in this Annual Report in Part II, Item 1A, “Risk Factors.”
35
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in the preparation of the statements. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included elsewhere in this Annual Report.
Accounting estimates are considered critical if the estimate requires us to use judgments and/or make assumptions about matters that were uncertain at the time the accounting estimate was made and if different accounting estimates could have been used in the reporting period or changes in the accounting estimates are likely to occur that would have a material impact on our financial condition, results of operations or cash flows.
Stock-based compensation
Our stock-based compensation is comprised of agent growth incentive programs, agent equity program and stock option awards. The Company accounts for stock-based compensation granted to employees and non-employees using a fair value method. Stock-based compensation awards are measured at the grant date fair value and the stock-based compensation cost is recognized over the requisite service period of the awards, usually the vesting period, on a straight-line basis, net of forfeitures. The Company reduces recorded stock-based compensation for forfeitures when they occur.
Recognition of compensation cost for an award with a performance condition is based on the probable outcome of that performance condition being met. The Company estimates the share-based liability based on estimated performance probabilities based on our most recent estimates on probable achievement of the performance measures established under our agent growth incentive program. These estimates are calculated based on the agent’s historical performance for each award type. Also, the requisite service period at the grant date of performance awards is estimated based on the probability of the period of time it will take an agent to meet the performance metric. The value of the stock award is amortized over this period and recognized as stock compensation expense starting on the grant date.
If factors change causing different assumptions to be made in future periods, estimated compensation expense may differ significantly from that recorded in the current period. See Note 9 – Stockholders’ Equity to the consolidated financial statements included elsewhere in this Annual Report, for more information regarding the assumptions used in estimating the fair value of our awards.
Revenue recognition
The Company generates substantially all of its revenue from North American Realty and International Realty and generates a de minimis portion of its revenues from software subscription and professional services.
North American Realty and International Realty
The Company serves as a licensed broker in the areas in which it operates for the purpose of processing real estate transactions. The Company is contractually obligated to provide services for the fulfillment of transfers of real estate between buyers and sellers. The Company provides these services itself and controls the services necessary to legally represent the transfer of real estate. Correspondingly, the Company is defined as the principal. The Company, as principal, satisfies its obligation upon the closing of a real estate transaction. As principal and upon satisfaction of our obligation, the Company recognizes revenue in the gross amount of consideration to which we expect to be entitled.
Revenue is derived from assisting homebuyers and sellers in listing, marketing, selling and finding real estate. Commissions earned on real estate transactions are recognized at the completion of a real estate transaction once we have satisfied our performance obligation. Agent-related fees are currently recorded as a reduction to commissions and other agent-related costs.
At each reporting period, we estimate and accrue revenue for closed transactions for which we are entitled to but have not yet received the closing documents due to timing of when a transaction settles. The accrual for estimated revenue was immaterial for the years ended December 31, 2023 and 2022.
Business combinations
The Company accounts for business combinations using the acquisition method of accounting, under which the consideration for the acquisition is allocated to the assets acquired and liabilities assumed. The Company recognizes identifiable assets acquired and liabilities assumed at the fair values as of the acquisition date. Acquisition-related costs, such as due diligence, legal and accounting fees, are expensed as incurred and not considered in determining the fair value of the acquired assets.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. These assumptions and estimates include projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates and other market factors. Significant assumptions used in determining the allocation of fair value include the following valuation techniques: the cost approach, the income approach and
36
the market approach, which are determined based on cash flow projections and related discount rates, industry indices, market prices regarding replacement cost and comparable market transactions.
At the acquisition date, the Company recognizes the identifiable acquired assets, liabilities assumed and contingent liabilities (identifiable net assets) of the acquired company on the basis of fair value. Recognized assets and liabilities assumed may be adjusted during a maximum of one year from the acquisition date (the “measurement period”), depending on new information obtained about the facts and circumstances in existence at the acquisition date.
If current expectations of future growth rates are not met or market factors outside of our control change significantly, then our goodwill or intangible assets may become impaired. Additionally, as goodwill and intangible assets associated with recently acquired businesses are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to impairment risk if business operating results or macroeconomic conditions deteriorate.
Goodwill impairment
Goodwill is not amortized but is subject to impairment testing. We review goodwill for impairment on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that indicate goodwill may be impaired. We assess goodwill for possible impairment by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. No additional impairment steps are necessary if we qualitatively determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. An impairment loss for goodwill would be recognized based on the difference between the carrying value and its estimated fair value, which would be determined based on either discounted future cash flows or another appropriate fair value method.
The evaluation of goodwill for impairment requires management to use significant judgments and estimates in accordance with U.S. GAAP, including, but not limited to, economic, industry and company-specific qualitative factors, projected future net sales, operating results and cash flows. Although we currently believe the estimates used in the evaluation of goodwill are reasonable, differences between actual and expected net sales, operating results and cash flows and/or changes in the discount rates used could cause these assets to be deemed impaired. If this were to occur, we would be required to record a non-cash charge to earnings for the write-down in the value of the goodwill, which could have a material adverse effect on our results of operations and financial position but not on our cash flows from operations.
During the fourth quarter of 2023, we performed an assessment of goodwill. The Company determined that the goodwill associated with Virbela, the Company’s technology segment, was impaired. During the impairment evaluation, the Company determined that the projection for future cash flows associated with Virbela had declined significantly resulting from the post-COVID 19 work environment of return to the office and hybrid work initiatives globally, as well as the increase in the demand for artificial intelligence solutions . Based on this determination, the Company determined that the estimated fair value was significantly lower than the book value of Virbela and the goodwill associated with Virbela should be impaired. As a result of the impairment test, the Company recognized an impairment charge of $8,248 for goodwill in the fourth quarter of 2023.
To perform these assessments, we identified and analyzed macroeconomic conditions, industry and market conditions and Company-specific factors. As a result of the analysis performed, management believes the estimated fair value of the reporting units continue to exceed their carrying values and does not represent a more likely than not possibility of potential impairment.
Income taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. A valuation allowance against deferred tax assets would be established if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets are not expected to be realized. Our assumptions, judgments, and estimates relative to the value of our deferred tax assets take into account predictions of the amount and category of future taxable income. As of December 31, 2023, based on our assessment of the realizability of the net deferred tax assets, we reached the conclusion that our net deferred tax assets will most likely be fully realized and therefore no valuation allowance was recorded.
Although management believes that the judgment and estimates involved are reasonable and that the necessary provisions related to income taxes have been recorded, changes in circumstances or unexpected events could adversely affect our financial position, results of operations, and cash flows.
See Note 12 – Income Taxes to the consolidated financial statements included elsewhere in this Annual Report for further information related to our income tax positions.
37
Litigation
We recognize expenses for legal claims when payments associated with the claims become probable and can be reasonably estimated. Actual costs of resolving legal claims could have a material adverse impact on our results of operations and cash flow. While the currently pending antitrust litigation presents various reasonably possible outcomes, the financial impact(s) of such litigation is not presently estimable. S ee Note 13 – Commitments and Contingencies to the consolidated financial statements included elsewhere in this Annual Report for further information related to our litigation.
NON-U.S. GAAP FINANCIAL MEASURES
To supplement our 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 compensation expense and stock option expense. Adjusted Segment EBITDA is defined as operating profit plus depreciation and amortization and stock-based compensation expenses and impairment expense. 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, 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:
Year Ended December 31,
2023
2022
Net (loss) income
($ 8,973)
$ 15,424
Total other (income) expense, net
(3,026)
820
Income tax (benefit) expense
(4,462)
(10,836)
Depreciation and amortization
10,892
9,838
Impairment expense
9,203
-
Stock compensation expense (1)
43,178
30,861
Stock option expense
10,736
14,442
Adjusted EBITDA
$ 57,548
$ 60,549
(1) This includes agent growth incentive stock compensation expense and stock compensation expense related to business acquisitions.
The primary driver for the changes in Adjusted EBITDA was lower net income attributable to lower revenue and impairment charges, partially offset by reduced operating costs.
38