EXPI, RDFN brokerage revenue 2020 vs 2019

EXPI is growing revenue fast in recent quarters and there is interest in this name on this board, so I thought I’d offer the below observations on brokerage revenue for EXPI and a competitor, RDFN.

EXPI and RDFN are trying to capture market share in the residential real estate brokerage business by scaling operations with technology. EXPI is focused entirely on brokerage. RDFN has a core brokerage business but also ibuying (its “instant buying” properties segment) and other businesses related to real estate such as mortgage and title. Below is a comparison of brokerage revenue for EXPI and RDFN motivated in part by some recent posts on this board:

Because EXPI is essentially brokerage only but RDFN is brokerage plus other businesses, comparing top line revenue between the two firms is somewhat an apples to oranges comparison. In particular, RDFN’s ibuying business has an impact on top line revenue that can obscure the performance of the brokerage business.
For example, for FY 2019, 2020, total revenues ($ millions) were:

2019     2020      yoy%
$979.9   $1,798.3  83.5%
2019     2020      yoy%
$779.8   $886.1    13.6%

When comparing top line revenues, EXPI is growing much faster than RDFN. But RDFN ibuying contributed $240.5, $209.7 in FY2019, 2020 revenue, respectively.

Considering brokerage only, revenues and gross profit for EXPI and RDFN for 2019, 2020 were:

**Brokerage Business ($ millions)**
**EXPI         2019 (Q1 to Q4)			2020 (Q1 to Q4)**
revenue		$157.0	$266.7	$282.2	$274.0	$271.4	$353.5	$564.0	$609.3
gross profit	$14.5	$22.1	$23.0	$24.4	$28.0	$34.4	$46.8	$50.4
gp margin	9.2%	8.3%	8.2%	8.9%	10.3%	9.7%	8.3%	8.3%
rev gth yoy					72.8%	32.6%	99.9%	122.4%
gp gth yoy					93.3%	55.4%	103.4%	106.4%
**RDFN         2019 (Q1 to Q4)			2020 (Q1 to Q4)**
revenue		$85.9	$152.8	$154.1	$130.7	$108.6	$135.0	$209.9	$197.7	
gross profit	$5.1	$49.2	$54.1	$42.0	$15.1	$46.3	$91.9	$80.8
gp margin	5.9%	32.2%	35.1%	32.1%	13.9%	34.2%	43.8%	40.9%
rev gth yoy					26.5%	-11.6%	36.2%	51.3%			
gp gth yoy					195.2%	-6.1%	70.0%	92.5%

When comparing brokerage revenues specifically, there are several noteworthy observations.
Growth & Gross Profit
Both companies grew yoy revenue fast in 2H2020, when the real estate market accelerated. Further, gross profit grew similarly fast yoy in 2H2020, with EXPI growing about 100% and RDFN growing 70% to 90%. In FY2020, RDFN is capturing about 45% more gross profit than EXPI.
Gross Margin & Operating Leverage
EXPI shows a flat trend of gross margin of about 8% to 9% over the last few quarters, whereas RDFN shows higher gross margins of up to 40% that appears to increase with increasing revenue. RDFN’s increasing gross margin is an indication of operating leverage at this line in the income statement whereas EXPI appears to lack operating leverage in its gross margin during these recent quarters.
Commission Model
These differences in gross margin and operating leverage could be explained by differences in the companies’ compensation models. EXPI agents retain all commissions after a threshold is reached, thereby capping the firm’s gross profit as revenue increases above the threshold for each agent, which would in effect be negative operating leverage whenever an agent passes the threshold. RDFN has a salary plus commission model in which RDFN may be capturing more of the incremental revenue generated by each agent and more likely to generate positive operating leverage.

By focusing on brokerage revenue, it’s clear that the relative operating and financial performance of the two firms looks somewhat different than when considering top line revenue only. EXPI is growing revenue and gross profit faster than RDFN, but RDFN has higher current gross profit and operating leverage at the gross profit line that EXPI has not demonstrated. Hence, it’s not immediately clear which firm might grow gross profit faster as revenue increases. Further, both EXPI and RDFN showed some quarterly GAAP profitability in 2020 as revenues increased. It will be interesting to see what kind of operating leverage exists for these two firms at the net income level as revenue and perhaps profitability increases.

Of course, RDFN’s additional business segments beyond brokerage (ibuying, mortgage, title) should also be evaluated as part of any holistic investment analysis. For now, brokerage dominates (2020 10-K Segment Reporting and Revenue p. 61 Note 2: Services: $651.208 Properties: $209.686 Other: $28.212), but there are questions about the impact and viability of ibuying, which is a topic for a different thread.

I would be curious to hear anyone’s thoughts on brokerage revenue for EXPI and RDFN.