In the third quarter of 2024, Redfin (NASDAQ:RDFN) Corporation (NASDAQ: RDFN) reported modest revenue growth amidst a challenging real estate market. CEO Glenn Kelman announced a 3% year-over-year revenue increase to $278 million during the company's earnings call on October 30, 2024. Despite this growth, Redfin faced a larger-than-expected full-year adjusted EBITDA loss forecast and a net loss of $34 million, which was notably higher than the $19 million loss in the previous year. The company is undergoing strategic changes, including the Redfin Next (LON:NXT) initiative, which has shown promising results in improving agent productivity and gross margins.
Key Takeaways
- Redfin's revenue increased by 3% year-over-year to $278 million.
- Adjusted EBITDA profits were reported at $4 million, at the lower end of guidance.
- The company's share of home sales fell slightly, with a revised full-year adjusted EBITDA loss forecasted to be between $15 million and $22 million.
- The Redfin Next initiative, which changes agent compensation from salaries to bonuses, has been rolled out to 74% and is correlated with higher close rates and agent growth in pilot markets.
- Net loss increased to $34 million from $19 million the previous year, with restructuring costs contributing to operational expenses of up to $129 million.
- The rentals segment grew by 9% to $52 million, marking its eighth consecutive quarter of growth.
- Redfin anticipates increased home sales in 2025, with potential buyers expected to be more active following recent political events.
Company Outlook
- Redfin projects Q4 2024 revenue between $237 million and $247 million.
- Real estate services revenue is expected to be between $144 million and $150 million.
- The company forecasts a net loss of $32 million to $25 million for Q4.
- Redfin plans to enhance profitability through operational efficiencies and increased marketing investments.
Bearish Highlights
- The company's market share dropped slightly year-over-year due to aggressive advertising by competitors like Homes.com.
- High mortgage rates, which surpassed 7% in November 2023, could potentially price out buyers if they continue to rise.
Bullish Highlights
- The Redfin Next initiative has led to a 22% increase in agent census in pilot markets.
- The company aims for significant agent base growth in 2025 without increasing managerial staff.
- Redfin's rentals segment displayed robust growth, with an 8% revenue increase in the mortgage segment.
Misses
- The company experienced lower-than-expected mortgage and brokerage sales in August and September.
- Redfin's real estate services revenue declined by 1%.
Q&A Highlights
- Kelman discussed the impact of rising mortgage rates on home touring activity.
- The company is focusing on AI and technology investments to improve customer engagement and close rates.
- Redfin is adjusting its sales management structure to improve revenue generation and anticipates a 600 basis points improvement in gross margin for real estate services in Q4.
Redfin Corporation is navigating a period of transition with strategic initiatives aimed at bolstering its market position. The company's efforts to adapt its agent compensation model and invest in technology and marketing could position it favorably for the anticipated market recovery in 2025. However, the increased net loss and competitive pressures highlight the challenges Redfin faces in a volatile housing market. The company's executives have expressed a commitment to optimizing costs and improving operational efficiencies to drive future growth.
InvestingPro Insights
Redfin's recent financial performance and strategic initiatives align with several key insights from InvestingPro. Despite the challenges outlined in the earnings report, InvestingPro data reveals that Redfin has experienced a significant return over the last week, with a 10.94% price total return. This short-term gain is part of a broader trend, as the company has seen a strong 65.85% return over the last three months and an impressive 94.9% return over the past year.
These positive price movements are particularly noteworthy given the company's current financial situation. According to InvestingPro Tips, Redfin is trading at a low revenue valuation multiple, which could be attractive to investors looking for potential value opportunities in the real estate technology sector. This low valuation aligns with the company's strategic focus on improving profitability and operational efficiencies, as discussed in the earnings call.
However, it's important to note that InvestingPro Tips also indicate that analysts do not anticipate the company will be profitable this year, which is consistent with the reported net loss and the forecasted adjusted EBITDA loss for the full year. This underscores the importance of Redfin's ongoing initiatives, such as the Redfin Next program, in driving future profitability.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Redfin, providing a deeper understanding of the company's financial health and market position.
Full transcript - Redfin Corp (RDFN) Q3 2024:
Operator: Good day, ladies and gentlemen and welcome to the Redfin Corporation Quarter Three 2024 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host Meg Nunnally, Head of Investor Relations. Ma'am the floor is yours.
Meg Nunnally: Thank you. Good afternoon and welcome to Redfin's financial results conference call for the third quarter ended September 30th, 2024. I'm Meg Nunnally, Redfin's Head of Investor Relations. Joining me on the call today is Glenn Kelman, our CEO; and Chris Nielsen, our CFO. Before we start, note that some of our statements on today's call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but our actual results may turn out to be materially different. Please read and consider the risk factors in our SEC filings together with the content of today's call. Any forward-looking statements are based on our assumptions today, and we don't undertake to update these statements in light of new information or future events. On this call, we will present non-GAAP measures when discussing our financial results. We encourage you to review today's earnings release, which is available on our website at investors.redfin.com, for more information related to our non-GAAP measures, including the most directly comparable GAAP financial measure and related reconciliation. All comparisons made in the course of this call are against continuing operations for the same period in the prior year, unless otherwise stated. Lastly, we will be providing a copy of our prepared remarks on our website by the conclusion of today's call and a full transcript and audio replay will be also available soon after the call. With that, I'll turn the call over to Glenn.
Glenn Kelman: Thanks Meg and howdy everyone. Redfin's third-quarter revenues grew three percent year-over-year to $278 million, in the middle of the range that we discussed in our last call. Our adjusted EBITDA profits of $4 million were at the bottom of our guidance range, in part due to $4 million of one-time expenses that we didn't anticipate in our guidance. From the second quarter of 2024 to the third, the share of home sales brokered by our own agents and through referrals to our partner agents fell by 1 basis point; year-over-year, third-quarter share fell by 2 basis points. In our previous call, we said we'd be roughly breakeven for the full year, and now our fourth quarter guidance has set the boundaries of that range. 2024 adjusted EBITDA loss between $15 million and $22 million. This full-year loss is larger than we expected. August and September mortgage and brokerage sales were $7 million lower than we forecast. When rates fell in August, we didn't count on a better housing market, but we also didn't expect it to get worse. We didn't forecast about $2 million in one-time costs for the rapid transition to Redfin Next, our plan to replace agent salaries with higher bonuses, or $1 million of one-time costs from the integration of Rent. In a year when we believe our competitors' aggregate ad spending hit historic highs while U.S. home sales hit historic lows, we're glad to be coming out of 2024 with likely undiminished market-share, a better sales force, and a cost structure that gives us room to go on the attack. But still I owe our shareholders an apology. We moved heaven and earth to make money in 2024, but we fell short of our goal. We'll keep driving toward profits. Our 2024 profits will be an improvement of about $125 million over 2022, when U.S. existing home sales were 20% higher than forecast for 2024. Over the past year, almost every dollar of revenue growth has fallen to the bottom-line and now we're preparing to grow. Rising brokerage close rates, and what we believe are industry-leading mortgage and title attach rates, should let us monetize an online audience better than any other real estate site. Already, sales execution is driving what we expect to be significant October share gains, with momentum carrying through to November. Pairing our sales machine with more advertising should let us grow faster in 2025. Redfin.com's third-quarter visitors fell 4% year-over-year. As the housing market shows signs of life, we plan to increase ad spending significantly from 2024 to 2025. We'll also invest in extending our technology's core competitive advantages; at guiding online visitors to listings they'll love, at scheduling home tours for customers ahead of other buyers, at identifying serious home-seekers in need of service. Already this month, we've started to bid more for online visitors because of our increasing effectiveness at selling homes, mortgages, and title service. Until October, we didn't account for mortgage and title profits when deciding how much to pay to meet a home-buyer. Our confidence that we can deliver better service to online home-buyers is based in part on the rapid expansion of Redfin Next, our plan to pay agents larger bonuses in lieu of salaries, which first launched in January to four markets responsible for 17% of our 2023 brokerage revenues. This percentage grew to 30% in May and to 74% in August, until we completed the roll out last month. Our confidence in Next isn't based on theory, but on results. Comparing 2023 to 2024 in the four initial Next markets, the customers we met from January to June 2024 were 21% more likely to buy a home from us within 90 days of that first meeting. Other markets in those months also improved close rates, but only by 7%. In that same time period, close rates for luxury homebuyers increased 79% in the four pilot Next markets, compared to 28% in other markets. Higher close rates have been one source of share gains in Next markets, but another is our agent census. From the announcement of Redfin Next in October 2023 to June 2024, the four original pilot markets increased their agent census 22%. And it isn't hard to see why: bigger bonuses let us compete better for talent, with fewer financial constraints because we no longer pay agent salaries. Entering 2025, our brokerage's focus is on adding hundreds of high-quality agents. Our third-quarter agent census, which averaged 1,757 agents, grew 1% year-over-year; in October already that year-over-year growth accelerated to 8%. The flexibility that Next gives us, to hire more agents at different commission splits based on their sales experience, is letting us form agent teams around our top producers. These teams give our best agents the capacity to cultivate sales from their network of hundreds or even thousands of past Redfin customers. Already in the past four months, we've hired agents into more than 50 teams, and begun recruiting teammates for another 40 top producers. As we add hundreds of more-entrepreneurial agents for the 2025 home-buying season, we don't plan on any significant manager or support-staff hiring, which should lift gross margins. And as agents host more of their own tours and improve close rates, we can also allocate a lower percentage of revenue to the thousands of contractors who take customers on tour when a lead agent is busy. We expect gross margins to start increasing year-over-year in the fourth quarter, though some of that will be because gross margins are also becoming less seasonal: Next agents' earnings are more volatile, limiting Redfin's margins in the summer selling season, and improving margins in the winter. Since spring 2024, investors have asked us if we expect lower fees and lower margins due to the settlement of a class-action lawsuit against the National Association of Realtors. When the reforms imposed by the settlement took effect in July and August, the Multiple Listing Services that agents use to share listings stopped showing the commission offered to a buyer's agent for each listing. Most homeowners are still willing to pay the buyer's agent, but many aren't setting that agent's fee in advance, instead planning to negotiate it alongside other offer terms. This by itself has been a major change. But to our surprise, the fee that is negotiated often seems nearly identical to what buyers' agents were earning before the settlement. Fees may fall when a new and potentially more-competitive homebuying season begins; many of the buyers and sellers closing a sale this fall had hired an agent in the summer, before the settlement had taken effect. Redfin has already sought to offer our home-buying customers lower fees than other brokers; if more consumers seek better value from their broker in 2025, Redfin may expect larger share gains. And if home-buyers become more sensitive to brokerage fees, bundling mortgage and title services will become even more important. Of the brokerage customers who financed their third-quarter home purchase, 27% used Redfin's lender, down from 28% in the second quarter, but up from 22% in the third quarter of last year. Again, more than 60% of eligible customers used our title services, which have become a significant source of profit. In January 2025, we're trying new policies to increase mortgage attach rates further. Before concluding with a discussion of the housing market, let's turn to our rentals business, which is now competing aggressively for traffic. From April to October of this year, listings on our rentals websites, Rent.com and ApartmentGuide.com, increased from 262,000 to about 440,000. After the rentals and for-sale traffic teams combined at the outset of the year, in August rentals traffic was flat, after 17 months of declines. We saved $10 million in 2024 expenses on personnel and technology services, which is now funding more consumer advertising. From 2023 to 2024, we expect that our rentals media spending will have increased by $3 million, with an even larger increase planned for 2025. Our net bookings rose from $2.7 million in the second quarter to $6.0 million in the third. On the strength of improving traffic and better sales execution, we expect most of our 2025 growth to come from market-share gains. But if the market keeps improving, we can grow faster. Home-buying demand significantly strengthened since September 18, when the Federal Reserve cut rates by 50 basis points. Mortgage rates had already fallen in anticipation of the Fed's cut, but home-buying demand had nonetheless been dreadful, leading to a new September low in the annualized rate of existing home sales, $3.8 million. What has been even more bizarre is that, since September 18 and even through last weekend, home-buyers have been mostly undeterred by an October increase in mortgage rates; the increasing likelihood of larger tariffs and government deficits has made debt investors anxious. In my 19 month -- 19 years of running Redfin, I've never seen home-buyers react so slowly to a rate drop that lowered monthly payments by hundreds of dollars, then so unflinching as those savings disappeared. More and more, we live in our own reality. And that reality is increasingly political. In September and even in October, a common source of anxiety among home-buyers has been the election, not just higher rates. With the election now over, many people who put off plans to buy or sell a home over the last two years may have run out of reasons to wait. Home sales may increase in 2025, but the housing market and the world are so volatile that no one can say for sure. Given that uncertainty, Redfin is glad to have made our core brokerage business more flexible, and to have lowered our overall employee census so we can quickly invest in advertising when we see more growth opportunities. With that, I'll turn the call over to Chris.
Chris Nielsen: Thanks Glenn. Third quarter revenue was $278 million, up 3% from a year ago. This marks our third straight quarter of organic revenue growth. Gross profit of $102 million was up 4% year-over-year, and total gross margin was unchanged at 37%. Total (EPA:TTEF) operating expenses were $129 million, up $5 million year-over-year. The increase was primarily attributable to a $4 million increase in marketing media costs and a $3 million increase in restructuring costs. These increases were partially offset by a $4 million decrease in amortization expense, as the intangible technology assets acquired with our rentals business completed their amortization. Our adjusted EBITDA was $4 million, down from $8 million in the prior year. As Glenn discussed, this result was impacted by one-time costs, totaling approximately $4 million. Net loss was $34 million, compared to a net loss of $19 million in the prior year. This was slightly worse than our loss guidance range of $30 million to $22 million, primarily due to $3 million in restructuring expenses that were not contemplated at the time of guidance. These restructuring expenses resulted from closing our home-repair service. Diluted loss per share attributable to common stock was $0.28, compared with $0.17 one year ago. Now, turning to our segment results, real estate services revenue was $175 million, down 1% year-over-year. Brokerage revenue, or revenue from home sales closed by our own agents, was down 1%, on a 2% increase in brokerage transactions and a 3% decrease in brokerage revenue per transaction. Revenue from our partners decreased 11%, on a 21% decrease in transactions offset by a 13% increase in partner revenue per transaction. Real estate services gross margin was 27.8%, down 260 basis points year-over-year. This was primarily driven by a 500 basis point increase in personnel costs and transaction bonuses, partially offset by a 220 basis point decrease in home-touring and field expenses as we have eliminated compensation for home-touring and field expenses and replaced it with transaction bonuses for some employee agents. Total net loss for real estate services was $9 million, compared to a net loss of $1 million in the prior year and our adjusted EBITDA was positive $5 million, down from $13 million in the prior year. Our rentals segment posted its eighth straight quarter of growth, with revenue of $52 million and growth of 9%. Rentals gross margin was 76.1% compared to 77.2% a year ago. Total net loss for rentals was $9 million, up from a net loss of $13 million in the prior year. Adjusted EBITDA for the second quarter was a loss of $436,000, down from positive $624,000 in the prior year. Our mortgage segment generated $36 million in revenue, up 8% year-over-year. Mortgage gross margin was 15.2%, up from 10% a year ago. Net loss for mortgage was $5 million, roughly unchanged from the prior year. Adjusted EBITDA loss was $1 million, up from a loss of $4 million in the prior year. Our other segment generated revenue of $16 million, compared to $11 million in the prior year, as both our title and digital revenue businesses grew. Other segment gross margin was 54.2%, up from 40.4% a year ago. Total net income was $7 million compared to $2 million in the prior year, and adjusted EBITDA was $7 million compared to $3 million in the prior year. Now, turning to our consolidated financial expectations for the fourth quarter of 2024. Total revenue is expected to be between $237 million and $247 million, representing year-over-year growth between 9% and 13% compared to the fourth quarter of 2023. Included within total revenue are real estate services revenue between $144 million and $150 million, rentals revenue of $51 million, mortgage revenue between $28 million and $32 million, and other revenue between $13 million and $14 million. Real estate services gross margin is expected to be approximately 29%, up more than 600 basis points compared to the fourth quarter of 2023 due to the positive impact our Redfin Next program has on seasonality. Total net loss is expected to be between $32 million and $25 million, compared to net loss of $23 million in the fourth quarter of 2023. Adjusted EBITDA is expected to be between positive $1 million and $8 million compared to negative $13 million last year. Now, let's open the lines for your questions!
Operator: Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Ygal Arounian from Citi. Go ahead.
Ygal Arounian: Hey guys. Good afternoon. Maybe just to start with the profitability and if we could -- I guess a few things. If you look at the 4Q guidance, even if you hit the guidance in 3Q would have implied, I believe, that the full year outlook would have missed. And so just want to think through what's kind of -- what's in the EBITDA number for this year? And as we translate into next year, is it for breakeven profitability next year? How do we think about the road map on that? And I think with maybe tying in the increase in marketing spend, how we should be thinking about that with the target of profitability as well?
Chris Nielsen: Sure. This is Chris. I'll start. So the primary difference from the way we were thinking about the second half of the year is related to third quarter results, whereas Glenn mentioned, volumes were lower than we expected, that led to less revenue. And then on top of that, we had additional costs that we hadn't anticipated, particularly related to the Next program. We've already addressed the extra costs that we had in the Next program and made program changes. So, those won't be continuing into the fourth quarter and into next year. So, that's a piece that we've already addressed just in terms of the profitability. But again, most of the variance from what we were expecting in the second half of the year really did occur in the third quarter.
Glenn Kelman: And just to comment on next year. We're not going to be issuing 2025 guidance, especially not now. But it's a fair question, how we're going to be able to afford more marketing when we obviously want to make money. And the answer is that we are going to continue to find efficiencies in the business. We have come to the conclusion that at some level, you do have to invest in growth and that the best investment in growth is in part going to be in media. Obviously, we're also continuing to enhance our website, trying to draw more organic traffic. But we are going to need to get further enhancements in our cost structure so that we can invest in growth, and then we're going to need market share. We benefit somewhat because we made all these cost reductions in the second half that we'll get a full year benefit from in 2025. So, we ended our concierge service. We're running more efficiently in our support organization. We eliminated sales managers. We've made some other cuts, and we just think we can continue to get more efficient.
Ygal Arounian: Okay, great. That's really helpful. And just on Redfin Next and the expansion from the pilot markets into every market now. Any early indications of what you're seeing in those markets? And are they kind of following the trends that you saw in the earlier markets? And as you think about the expectations for share gain next year, what are you expecting or contemplating from the Redfin Next expansion in -- that's needed to reach the share gain that you're looking for? Thanks guys.
Glenn Kelman: Well, we're fairly optimistic about it for a few reasons. The first being close rate where a better agent has closed sales at a significantly higher rate given the same number of opportunities, and that's especially true for luxury customers. So we often report on unit market share. But on a dollar basis, we think we're doing -- we're going to do even better. But the other factor is agent census that sometimes our agents have gotten too many customers or we've sent too much demand to partners because we haven't been able to recruit agents as quickly as we wanted to. And three of the four major markets where we had share problems over the past six months, we were actually understaffed. And so those markets are recruiting really successfully right now, and it's a different profile of talent than we've been able to get before. So, we don't want to count our chickens until they're hatched, but it's been a long time since Redfin has been adding hundreds of agents, and we've never done that where the agents have been so experienced, some of them bringing sales to the company, albeit at lower margins.
Ygal Arounian: Understood. Thank you guys.
Operator: And our next question comes from Curtis Nagle from Bank of America. Go ahead Curtis.
Curtis Nagle: Great. Thanks very much. So, maybe a question for you, Glenn. Just I don't know, any view that in terms of this bump in activity that we've seen, I guess, through October that could perhaps be temporary, just kind of given the dynamic with rates. And yes, just kind of interested in your view there? And then curious your thoughts on 2025 existing home volumes, do they grow? How much? What are your thoughts there?
Glenn Kelman: Well, it's been shocking, as I said, I've been doing this for a long time. And usually, there's a very strong inverse relationship between mortgage rates and sales activity. But even on election day, November 5th, we were surprised to see how many people were touring homes. We just have really good real-time data throughout the funnel because of our vertical integration, and it's been really strong. And both Chris and I sit there pinching ourselves because sooner or later, it's going to take a toll. If rates keep climbing above 7%, there are people regardless of what they read in the media or how long they've been waiting are just priced out. So, I do expect the laws of physics to still apply to the housing market. And it's really hard to predict what's going to happen. I think there's so much geopolitical question right now, plenty of confidence about the new President and his plan for the economy, but also some concern about inflation driven by tariffs and just deficits. So, really hard to say what's going to happen to interest rates, mortgage-backed securities investors are worried about it. That's why rates have traded up on really no Fed news, even including today. Rates have just gone up some because of geopolitical anxiety. So, it's really hard to say. If you're asking me, I do think 2025 is going to be better than 2024, especially kind of the September low, hitting 3.8%. And that's a number that's just way outside the strike zone of what we've seen over the past 20 years.
Curtis Nagle: Got it. And then just kind of a quick follow-up in terms of the market share dynamics in 3Q dropped a little bit, I think, a couple of bps year-over-year. What drove that maybe due to the transition in the next or just kind of what's going on there?
Glenn Kelman: Yes. Well, you win some, you lose some. We expect to get back to a cadence of taking share every quarter. Maybe it won't be by leaps and bounds, but there should be a steady gain of share every quarter. That's been the long history of Redfin. And in this case, I think some of it is that earlier in the year, we had less traffic growth. Homes.com was advertising so aggressively. It's been an unprecedented level of advertising, and we had actually pulled back, and that's part of the conclusion that we've drawn about 2025 that we've just got to get our cost structure to a place where we can increase advertising. And some of what's going on for full year profits is that we're actually leaning into direct marketing because we've got more mortgage and title profits from every customer. We're more confident that we can buy that at a profit. It won't be in year, but it will be over the course of the season, which spans or straddles 2024 and 2025. So, I just think we have to get one step more aggressive about demand generation because we really believe that we can close those sales better than ever before.
Curtis Nagle: I guess just with all due respect and just kind of a natural follow-up, if -- I don't know how aggressive Homes.com is being in the market right now, but if that -- it sounds like impacted your return hurdles. Thinking about 2025 and a big step up, do you think that perhaps that could be tricky if they're still spending so aggressively?
Glenn Kelman: Yes, I mean, look, it's a competitive market. We're not asking for any forbearance from investors. because we're bigger or smaller than one company or another. But I do think that having a new entrant in the market affected us somewhat. So, I don't expect them to increase their budget from 2024 to 2025. I think they've been clear on that point that they don't expect to do that. And we expect to increase ours. So, spending more on growth and less on other areas should lead to growth. And it would be sort of a speculative investment if our traffic weren't growing right now. We've got year-over-year growth in October and November, and that's not even based mostly on marketing expense. That's just getting back in the horse on organic traffic growth.
Curtis Nagle: Okay. Appreciate the comment. Thank you, Glenn.
Operator: Thank you. And our next question comes from John Campbell from Stephens. Go ahead John.
John Campbell: Hey guys. Good afternoon. Glenn, I maybe want to touch on Clear Cooperation Policy. I know that's a pretty hotly debated topic right now in the industry. Maybe if you could just kind of recap your stance there? And then just assuming if you can just play a scenario if that were to be eliminated, maybe in what ways that would affect Redfin positive or negatively?
Glenn Kelman: Well, our position has been the pro-consumer position. Buyers want to see all the homes for sale. It's playing that, that is what's in the best interest of the consumer. It's playing that the regulators were going to see it the same way. So, we've just been pleased to see that so far, the National Association of Realtors has supported that. And if it were to change, we run the largest brokerage website in America. So, if we get into some battle with other brokerages about how we're going to market listings privately on our own website, we think we're in a better position than other brokerages because of our website's reach. So that's our position.
John Campbell: That makes sense. And then I want to touch on Seattle or just maybe the broader Puget Sound area. I mean, obviously, that's your top market. So, maybe if you could talk to October. From what we're seeing, it looks like a bit of a breakout, I think, across closed sales, spinning home sales, new listings, price acceleration, like every.
Glenn Kelman: Wait a minute, John. Are you querying the Northwest MLS about our Seattle market share?
John Campbell: Exactly. So, yes, if you could talk to whether you're seeing that within your system or just any kind of broad commentary on Seattle?
Glenn Kelman: I'm not going to comment on one market after another because I'll just encourage more analysts to be like you, John, and then where would we be? But in markets that have transitioned to Redfin Next, we are adding agents, and it's a pretty straight line when you have enough demand, you add agents, you're going to get more sales. So, that has been the dynamic. We should have transitioned to Redfin Next a long time ago.
John Campbell: Makes sense. Thanks Glenn.
Glenn Kelman: Well done John.
Operator: And our next question comes from Jay McCanless from Wedbush. Go ahead Jay.
Jay McCanless: Thanks for the questions. I was going to ask first, if you think about just the average home sale, I mean, how much more are you paying out to a Redfin Next agent for the same dollar sale that you would have paid last year?
Glenn Kelman: Twice as much if the agent sourced it himself, but most of our sales are sourced by the website. So, we have no competitive advantage with agent source sales. No brokerage does. That's why it's a low-margin business. But when we source the sale ourselves, which is the overwhelming majority of our sales, it is at the same or better margins than what we did with our classic pay plan. We actually modeled it to be the same, but what we've discovered is, first, that the agents close sales at higher rates. And when you have a higher close rate, it actually improves gross margins because we're paying other support staff to handle touring. And then second, they're doing better at the high end. And then third, they're more independent. All of those let us get leverage over margins. So, in August, we did a cut where we transitioned some sales managers to the individual contributors so they could carry revenue for us or they left the company. And some of that's just driven by an early experience we had in San Francisco, one of the first Next markets where agents said, the worst part about this job is meeting my manager. And Chris said, I'm only too happy to solve that problem for you. You can meet them once a month if you have questions.
Jay McCanless: And then I know you don't want to talk about 2025 guidance, but is 600 basis points improvement something that might be realistic as we think about modeling 2025 under this new plan?
Glenn Kelman: Chris, what 600 basis points is he talking about?
Chris Nielsen: This is for real estate services in the fourth quarter. And to answer that question, mostly, you should think about the shift of our business to Redfin Next as being neutral on gross margin. So, Glenn described that on a per transaction basis, we do pay higher bonuses under Next than we did previously, but we've reduced the fixed compensation, the salary for the agents. And so really, this is about taking dollars that were previously fixed or in salary and moving them to transaction bonuses.
Glenn Kelman: The Q4 gain is in part seasonal. We tried to emphasize that in the script. So, our margins were lower in the summer, and that's because it's more volatile for the agent. So they make, hey, while the sun shines. But then in the winter, when we used to sustain significant margin damage paying agent salaries, we don't have to anymore. So, we hope that you can see that across 4 quarters when we start lapping the full rollout of Next on October of 2025.
Jay McCanless: Okay, sounds good. Thank you.
Operator: Thank you. [Operator Instructions] And our next question comes from John Colantuoni from Jefferies. Go ahead John.
Unidentified Analyst: Hey, thanks for taking the question. This is Vincent on for John. Just a quick one here on maybe some examples of areas in the business where you could look to source some of those further efficiencies for funding the ramp in advertising that you have planned for 2025? Thanks.
Glenn Kelman: Tough question when the call is open to the general public, but what's sacred to us is our investments in growth. So, we're going to continue to fund building a better search experience, having it be engaging, funding artificial intelligence to drive better listing recommendations, which brings users back to the site and just drives overall traffic. And we're also going to fund investments in technologies that can help us with a fairly long sales cycle, improve close rates. So, when we invest in artificial intelligence to contact customers who have been out of touch with us and identify which ones are most likely to transact, that's a good bet. Everything else is on the table.
Unidentified Analyst: Got it. Appreciate the answer. Thanks.
Operator: [Operator Instructions] And there appear to be no further questions at this time. I would now like to turn the floor back to Glenn for any closing remarks.
Glenn Kelman: We appreciate all of your questions. Thank you so much for listening to me and Chris rattle on. See you in three months.
Operator: Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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