Zillow Group, Inc. (ZG) Earnings Call Transcript & Summary

All right. Welcome, everyone. Checking in, Rich and Allen, are you guys on the line?

Hey, Brian, this is Rich.

Hey, Rich.

Hey, good morning, Brian. Allen Parker here as well.

Hey, good morning. All right. Well, this is a first. We've never done this before. I don't have as good hair but if Howard Stern can do it, I'm going to do my best. So we're going to give this a whirl. We're going to start with the sauciest content and specifically the disclosures. And please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, all appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures. They're also at the registration desk. Some of the statements made today by Zillow may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements made today by the company are based on assumptions as of today, and Zillow undertakes no obligation to update them. Please refer to Zillow's Form 10-K for a discussion of the risk factors that may affect actual results. So we have Rich Barton and Allen Parker dialed in, the CEO and the CFO of Zillow. Rich co-founded Zillow and announces a return to the CEO, essentially, last year. He was a -- previous to last year, he'd been the CEO up until 2010. And then Allen assumed the CFO role in 2018 coming from Amazon, where he served as VP of Finances in Amazon Devices, the App Store as well as Amazon Pay. So thank you both for dialing in for wherever you're dialing in from. How are you guys doing?

We're doing great, Brian. Thank you for making accommodations for us like this and giving this a try. I can hear you more clearly than last year when I was sitting on stage right next to you. So maybe there's a trend here, but I hope everybody can hear us okay. And I guess, I first wanted to apologize for not being there in person. As you might imagine, Seattle is a little bit ahead of the curve on the coronavirus nervousness scale because we've had some more cases and a couple of deaths in Seattle. So our first concern right now is to make sure we are taking care of our employees and making sure that we have good policies and procedures to make them feel safe. We also, in a minor way, we don't want to be transmitters, we don't want to be getters, while we try to figure this out, too. That's kind of minor, but that's part of it. But I guess, I do want to close this intro by emphasizing that our lack of being there in person, it does not reflect any desire on our part to hide from your questions or from the business itself. Business is really strong, as evidenced by our recent quarterly results, which I'm sure we'll talk about. So anyway, I apologize and thank you.

Perfect. No, thanks. We completely understand. Don't worry. We're going to hit you with the same questions if you were sitting next to me. I just -- I can't see your socks. I know you're always a very well-dressed man.

So where do I want to start? So it's been about 12 months ago since you came back to Zillow, Rich. And I guess, the first question is, as you sort of sit in your seat today, what have been your 1 or 2 biggest surprises over the course of the last 12 months? And as you sit in investor meetings and you talk to investors, what do you think is really sort of the most misunderstood aspect of the Zillow story?

Yes. Well, it's been a -- I put it in my script from the conference call a couple of weeks ago, that it was a tumultuously remarkable year. All of my word friends got a kick out of that. It was a pretty amazing year of transition for the company, and a transition in mindset from a top-of-funnel mindset to a bottom-of-funnel mindset as we move towards the transaction -- really innovating on the transaction and replatforming this giant industry. It's required a lot of cultural change, a lot of personnel change and up leveling, a mission change and refinement values, et cetera. And those kinds of things are hard to lead in a big organization. It doesn't happen very quickly, nor does it happen without pain. But I'm really proud of what we did, and we were able to do that in the last year, while reaccelerated -- kind of turning around the core or media business, the Premier Agent business, which is in our IMT segment, getting growth really going in that business again and expanding margins at the same time. So I'm really pleased with that as well. So while we did that, we also invested a -- made a major investment in this kind of new future business of Zillow Offers and grew that in a way that is really quite extraordinary. The -- going from effectively 0 to a $1.4 billion in revenue in that business in 2019. It's pretty remarkable in opening up all those markets. So I'm proud of the team for doing that, and doing that in a way that had a good eye towards kind of Allen Parker, our CFO, his fitness goals, kind of being quite mindful of costs because operating businesses need to be mindful of cost in order to gain leverage. So we did all of those things in 1 year. I'm glad that year is behind us, and we're feeling good about where we sit right now.

Understood. Now I think that's helpful in sort of some of the big areas that you've made traction in. I guess sort of a -- maybe a little opportunity for some self-grading. Give us a couple of examples of areas where even after a year, you still think are really important to improve in the organization, either from a top line perspective, a user perspective or an OpEx. Where are sort of the biggest areas for improvement going forward over the next couple of years?

Yes. I mean I think that we've done -- if you think of the new business opportunities as kind of a hub-and-spoke opportunity where the hub of the transaction is Zillow Offers, when we are actually buying and selling homes and acting as the market maker, we see a really big consumer demand, as you saw with the Bowens, if you heard, that lead-in with Bowens. I never used to think that this could be a -- the home transaction and moving could be considered something delightful or joyful just because it's so painful for all of us. But you can see from the video that, actually, there is this new way, and it is causing delight and surprise. We are on to something big from a consumer perspective there. We believe we can make that, and our target is to make that hub profitable in and of itself and gain nice attractive return on invested capital there by being a market maker. But then we also think that we have opportunity to hang all these spokes off of the hub with these adjacent businesses with things like mortgage and title and escrow and perhaps moving and the other leads that come off from -- that flow from actually owning these transactions. We've got those underway, but I would say I would have liked to see more progress. And for one, I'd highlight, I would like to see more progress in our mortgage business in getting that up and running. It's been a difficult mortgage environment for purchased mortgage because the refi business has been so hot, hot, hot, that it's a difficult hiring environment in terms of getting the best loan officer. So that's one of the drag. We could see some improvement there, but I'm feeling pretty good about our leadership and the traction we're gaining in that business right now. Let me hop back though, and then maybe I'll give Allen a chance to jump in. We said kind of one of -- or are there any misconceptions with your last question. Brian, I think that the kind of biggest lingering misconception right now about Zillow probably has to do with the Zillow Offers business and not totally -- that business doesn't really -- hasn't really existed before, so trying to gain an understanding of that and investors thinking that it's house-flipping business when what it really is, is a market-making business. We're not trying to make directional bets in real estate. That is not what we're doing there. We are transactional, not directional. We're not trying to take advantage of homeowners who are in difficult positions and make outsized profits at all. We're really actually just trying to provide grease in the gears of the industry and we think it's working. And we move houses so relatively quickly that the -- their overall direction of the market, we can price into the dynamic fee that we charge. And so it is not -- if you could walk away with one thing about Zillow Offers, trying to begin to think of this business as a -- our business here as being a market-maker, not a house-flipper. And then maybe I'll turn it over to Allen a bit to talk about kind of returns in capital in that business.

Yes. Hey, good afternoon. Yes, what I'd say is another misconception, I think we feel is there's a lot of concerns as we talk to investors about ZO being a bad business given its lower margins and its higher capital nature. As we look at it and we think about the opportunity of serving our customers better and helping them close transactions, as you heard in the video, while it is at our scale economics that we've talked about on a per-unit basis of 400 to 500 basis points of profit, pre-interest, that is a lower-margin business, but it doesn't account for the higher-margin adjacent services that we expect to cross-sell with the home transaction, including financing, Closing Services, et cetera. And so when you put the 2 together, we actually -- and the fact that our homes business, while more capital-intensive, is a levered business that we currently have bilateral agreements up to 85% loan-to-value that we expect to improve over time, both as longer-term asset-backed deals as well as deeper into the home value. This can be quite compelling, both return on invested capital and ROE basis, if we get it right. And so again, what I like about the homes business is that it gives us the opportunity to marry our [indiscernible] and this homes business in our core center and then build into this sort of around this hub that can actually generate quite a return of such basis with a little more capital. It does require optimal [indiscernible] technology and AI [indiscernible] execution, but we're really excited about the long-term prospects and returns of this business.

Got it. That's helpful. I guess just to maybe drill in a little more into the Homes business. This is, I guess, a jump-off for either one. But Rich, you mentioned $1.4 billion of Homes revenue in 2019, certainly is bigger than we thought. You really have kind of scaled the business from a top line perspective faster than we thought you would. That's a long ways though between the $1.4 billion in sort of the $20 billion revenue target that you've laid out for the next 3 to 5 years. So maybe just sort of help us understand how you think about the 1 or 2 key investments in areas that you have to execute on to scale this business from $1.5 billion to $20 billion in the next 3 to 5 years.

Yes. Brian, the past year has been about planting flags and opening markets and doing that in as rationally a rapid way as possible for a number of reasons, not the least of which is we think if we can get to a national enough-ish footprint that we can begin to bring the power of our customer acquisition, marketing and branding to bear on this whole business. Not to mention the fact that we think that this -- in order for this business to work and work well, it does need to be a scale that high -- high-volume business in order for us to get the economies and the awareness and the fees down and what have you. And so last year was about planting flags and opening markets. We opened most of our markets in the last 2 quarters -- the large majority of our markets in the last 2 quarters of the year, many of them in the last quarter of last year. And that was our goal to get that going. And despite moving really, really quickly in opening markets, we still were able to far exceed even our -- well, certainly, our guidance and our internal estimates for how big the business would get. Now we've got the pipe laid, we're going to get the water flowing. We're going to turn to focusing a lot more on getting volume through those markets and increasing depth in those markets and beginning to apply the learnings we've gotten from all the signal we've taken in and begin to refine the operations and grow the volume. It is a long wait. It feels like a long wait to $20 billion, a $20 billion annual run rate, which was a 3- to 5-year guidance for this business. But I'll just walk through the math quickly. At an average price point of $300,000 a home, which is about our average, $20 billion per year in action is about 5,000 homes per month, which would be about 200 homes per market, assuming a kind of a static market opening. We've guided towards 26 markets mid-2020. And if you assume that 26 markets and we've got 200 homes per market, none of these numbers feel daunting to us. And one more framing issue for you. $20 billion would represent only about 1% of the total U.S. residential transaction value. And I do believe, based on what we're seeing from a consumer signal perspective, that there ought to be a lot more than 1% demand for this breakthrough product. So we feel pretty good.

Got it. Now that's helpful, with the way to think about the market rollout, et cetera. I guess the other part of the homes debate, that's the top line story. I think the profitability still comes up a lot in investor discussions, both the near term and the long term. So maybe just sort of to get into the near term a little bit, it looks like the per unit economics on homes are still weakening a bit sequentially from 3Q to 4Q in the back half of last year. So I guess, maybe, Allen, this is a question for you. Where -- what are the major sources of that incremental weaker leverage in the P&L between renovation costs, holding costs, acquisition, et cetera? And then talk to us about what has to happen qualitatively for the efficiency on those unit economics to improve.

Yes. So I'll start out by saying, I wouldn't read too much into a quarter-over-quarter change in our per unit economics as the trend. We were -- in Q3, our per unit economics were just about breakeven pre-interest, and they moved to about negative 48 basis points pre-interest in Q4. But there's a lot of moving parts, and we're actually continuing to iterate and test across markets as well as adding and expanding. So we expect some variation, which is why we had initially set the guardrails to be plus or minus 200 basis points per unit pre-interest. So I wouldn't call anything a trend yet. We're very much in the test and grow stage, and it's still very early to draw a trend line. We are learning. And we saw some of those learnings as we brought that back into our feedback loop, improved our resell performance in Q4, which was part of the reason for hitting the $600 million in home sales. But we do believe, getting back to the individual pieces, we believe there's opportunity across the board. For Q4, we saw that acquisition costs was about 90% of revenue. Renovation was 4.69%, and that did deteriorate versus the 4.02% in Q3. There's a lot of things we're doing in renovations to test how much we have to do, what adds value to the house and what are things that we may be spending money on that don't add value to our eventual buyers. And so I think we have a lot of opportunity there. Holding costs was relatively flat at about 1.23% and then selling costs at 4.33% was slightly favorable. So again, we expect these to move. We definitely, long term, have to bring these down to get to our 400 to 500 basis points of profit pre-interest per home before fixed costs and interest. But we have ideas. Our focus in '19 was really to expand and grow fast. That does allow for us to learn as we go into 2020, but it also means that we're going into a lot of markets prior to learning a lot from the previous market we opened. And so again, I would expect, and we've provided that plus or minus 200 basis points is going to continue to be our guardrails, we expect it to move back and forth. We have a lot of ideas on how long term we get there. We're going to be focused on ensuring that we get to a scale and a size that allows us to leverage some other things like advertising and a little leverage on fixed costs around our platform before we try to do anything that may slow that down. So we're excited about the fact that we grew as big as we did and launched as many markets as we did while staying within those guardrails. And again, we're excited about the opportunity in 2020. The one thing that I typically call out is that we continue to share the per unit economics to allow our investors to know how we're doing, but I also focus -- one of our goals is also to ensure that on an EBITDA margin basis, that we continue to show leverage annually on that. And so that's one of the metrics that we also look at. It may not be always quarter-over-quarter improvement. But we finished the year at about negative 18% EBITDA margin for 2019, but we saw improvement throughout the year going from negative 27% to closing Q4 at negative 14%, and our guidance has us between negative 12%, negative 14% in Q1. So we continue to focus on that as well, and we're excited about the opportunity.

Understood. Yes, you've talked previously about the 2% to 3% long-term EBITDA margin target or the way to think about the potential on the Home segment. I guess sort of 3 questions around that 2% to 3% EBITDA margin. The first one is just sort of to kind of to drill back into the P&L, Allen, of the -- within that detailed P&L you're giving us every quarter. How do we think about the moving pieces within holding costs, renovation, et cetera, that you need to see to get to that 2% to 3% margin? That's the first one. And the second, too, probably a jump ball, how do we think about timing? How many years away are we from being able to get to that type of leverage and scale at 2% or 3%? And third one is, do you need adjacencies like mortgages or title to get there? Or can you get to that 2% to 3% margin without the adjacencies?

Rich, why don't I take the first and third real quick, and then I'll leave to you on timing?

Okay.

Again, I believe -- and just to clarify, the 2% to 3% EBITDA margin would translate to the 400% to 500% -- or 400 to 500 basis points of margin on a per unit home basis and then reduced for funding fixed costs, and that's the 2% to 3% that you referenced in your question. And so at the per unit economics level, which is the disclosure we provide, we believe there's opportunities across the board. We believe there are things we can do to buy the homes better, not necessarily again trying to be a flipper, as Rich mentioned, but just making sure that we are smarter about what we buy because in order to sell well, we have to buy well. We believe there's lots of room in renovation costs. We believe some of these resell activities that we're doing are gaining traction, and that's going to allow us to reduce our holding costs. And then as we continue to grow and expand and work with our partner agents, we believe there are some activities that we can reduce the cost of, or eliminate, or automate that would allow us to take those out and reduce the selling cost. So we believe that we have a path at scale to get to that 400 to 500 basis points. And then the fixed cost requires, obviously, us building out the platform which we're investing in now, but then leveraging that fixed cost over the scale of the larger revenue number that we expect over time. And that's how you get to the 2% to 3%, if that helps.

Yes. That's what...

Do you want to hit the adjacencies? Or you want me to jump in on timing?

Oh, yes. To clarify, on the adjacencies, those are not included in those metrics, right? So mortgages, title and escrow, title and escrow is -- I'll just try to clarify, to the extent that we are paying the title and escrow, that shows up in our home acquisition costs and some of our selling costs. So to the extent that we're performing those services, that will show up as a lower cost in the per unit metrics, but another portion of that shows up in what the seller or buyer is paying today to a third party, that would show up as margin accretion to our total business when we start performing those activities, and that margin is not included in those per unit economics nor is mortgage profit or profit from any of the other adjacencies.

So maybe I'll hit the timing, Brian, and say that, look, we -- in our kind of 3- to 5-year guidance that we gave a little while back, we purposely decoupled -- we didn't make a profitability assertion on that because we just don't know what the growth profile is going to look like at that point. And certainly, some of it's going to depend on growth. I would say that there's kind of a unit level profitability that depends on velocity and scale, and we're working on that really, really hard and taking all of these learnings into the machine and in the humans and translating that into leverage. And we got a lot of -- we believe we've got a lot of upside there. If you step back from an overall P&L perspective right now though, and I think we said this on the call, we are basically willing to effectively self-fund this big, new option on the new businesses that we're getting into with the EBITDA profit from our established media lead gen businesses. That's kind of -- we didn't give guidance on the company overall for the year, but I think we basically said, "Look, we're willing to take..." -- last year, I think it was $300 million or so of EBITDA profit from our IMT businesses. Am I getting that right, Allen?

It was $304 million.

Okay. So $304 million of profit. And we took the bulk of that, not all of that, we took the bulk of that and invested it in building these new businesses, laying the groundwork for these new businesses in the future that we think are going to be quite profitable and successful in the long term, and that is kind of how -- that is our mindset right now for the way we're thinking about 2020 from an overall profitability perspective. We think it's a reasonable constraint for ourselves given what we see as the opportunity to kind of target breakeven-ish as well. We'll see how it works out, and we'll see how the competitive environment changes. If so, we'll see what kind of leverage we're able to get on these cost line items. How soon, but that's kind of the broad way I've been thinking about it.

Understood. Last one on homes. Rich, you mentioned how mortgages is one area where, in your mind, you could have executed a little better last year. So maybe talk to us about the 1 or 2 key investment areas in mortgage. It sounds like it could be heads. And then how do we think about sort of timing of integrating that into the platform? Is that a 2020 event? Or is it more like a couple of years to sort of really drive material mortgage traction with the business?

Yes. It's not just a head thing, Brian. It was also a tech thing. We bought a little mortgage originator, MLOA, M-L-O-A, Mortgage Lenders of America, in Kansas City. As a way to kind of get us in -- from a regulatory perspective, kind of out of the gate fast and get us into the business. We underestimated our ability to bring technology quickly to this complex manual process that's kind of fraught with regulation. And so we didn't do the best job putting new tech under this whole platform as quickly as we wanted. We're feeling better about that now. But that was a little slower than we expected. And then the refi market hit us hot and that caused some people issues. We have now turned over leadership there almost completely and are guardedly optimistic. I'm feeling like the tires are actually just beginning to really bite. Job #1 is to build a digital mortgage that could integrate into the Zillow Offers transaction to give our customers who are demanding an integrated product experience, a -- as close to a one-click transaction experience as they can. So that's job #1. I'm pleased with where we sit there. Job #2, once we get that going, will be to figure out how we can distribute that new digital product via our traditional distribution channels being the Premier Agent channel, and that should be an interesting optionality on a new business for us there as well. But that's the sequence we're looking at it. And we're initially wanting to make it work with ZO first. I don't know what our guidance -- I think we're guiding mortgages just for a quarter. Right now, while we are -- it's mostly focused on the Zillow Offers business, and it's hard for us to go beyond a quarter because that business is growing and changing so quickly. And so that's kind of the time frame we're talking about the mortgages in right now, Brian.

That's helpful. Yes, the other piece of the incremental potential revenue stream that's sort of, I think, it's come up the last -- a lot over the last few years, sort of this white elephant of the seller lead opportunity. So maybe asking the same question about seller leads, where are you now from a technology perspective and integrating it into the flow? And then when do you sort of see yourself really scaling that and pushing that out to more and more agents across the U.S.?

Yes. I mean the adjacent opportunities that come from us doing these transactions and owning these homes in Zillow Offers and having all of this foot traffic come through, virtually on the website and then physically through the homes themselves, creates a cascade of lead opportunities for us, of which one of them is seller leads to people who raise their hands for Zillow Offers. We don't end up buying a bidding on or buying their homes. That's actually a fairly small end right now. So we wouldn't expect there to be a ton there, even though it's a small end, and we have not actually figured out exactly what the right menu -- how to present that menu of options to the seller to show them that we're indifferent as to how -- we just want to help them get over the bridge. We want to help them get into the new house and unlock what is next chapter, that's been our new mission. And we want to set things up so that we're agnostic as to what path they take to get to the new home, whether or not it's the express lane with Zillow Offers or it's the more traditional lane with an agent. We haven't quite figured out how to put that offering together, but we're working with our partners to do that, and we're making progress. But we do have all these other lead opportunities that come from owning these homes as well, and we are very excited to be in the transaction in such a real way for the first time to be able to begin to take advantage of these things. And I guess, I'd say one more thing, and that is the -- all of the software that we are writing to streamline our Zillow offers process, we are now realizing that a bunch of that transaction-oriented thinking is and will be very interesting for our core IMT media business as well. So if we write software to enable a 3D walk-through captured by your iPhone and our Zillow Offers homes, we ought to be able to offer that same thing to our partners in our traditional channel. Likewise, hands-free touring. Likewise, figuring out how to nurture a potential lead into a transaction. So we are -- and a surprising thing from our Zillow Offers experience is just how applicable a lot of the software and learnings that we're getting from the Zillow Offers side is to our traditional business.

Yes. And Rich, I would just add, again, because I had mentioned it in the misconceptions that seller leads, along with these other adjacencies, are part of our thesis for our total company being a -- our Zillow Offers driving a very positive kind of ROIC or ROE-type business. So they are extremely important. It's just really important that we get homes right first in order to be able to turn the crank and leverage things and make that end that Rich mentioned, the number of opportunities to interact much larger. And so our focus in '19 and even as we go to '20, is going to be on making sure we get the homes, the ZO part, right. But we -- in our long-term thesis, these are all extremely important.

Let me add one thing before the next question, Brian, as well, and that is, in my mind, I have these kind of 2 interlocking flywheels going, one being our traditional PA business, and we can talk about that, and then another being our Zillow Offers business. And they're interesting in that I talked about the leads and the learnings spinning out of and being a byproduct of the ZO flywheel that we're just getting going beating our IMT Premier Agent flywheel, but it probably goes without saying, but we're in such a strong position with these transaction businesses because our customer acquisition costs for those businesses are effectively 0 because we get 175 million-plus unique users a month coming to Zillow and our other brands and apps and website. And so we are able to siphon off, in a very cost-effective way, the people that are interested in products like Zillow Offers. And that gives us a major competitive advantage.

That's helpful. Yes, to maybe sort of dive into the other half of the flywheel, in your mind, Rich, of the core sort of IMT PA business. Flex has been one of the big changes that's happened over the course of the last year or so. You've rolled out to a handful of markets now. We've -- our rough monkey math shows that it looks like Flex could increase your per unit economics, in some cases, 1.3 to 1.5x more. We're going to make more per transaction in the flex world eventually. I guess -- so the question is, one, what's your reaction to that math? And then secondly, if that is the case, how do you sort of communicate and manage that with your agents if you're taking a higher percentage cut of every home sold?

Okay. Monkey math, like it. Allen, you want to start?

Well, yes. I mean I guess, I would start, you can kick in with what our real focus here is. Flex is one of many continuing evolutions to our business model and offerings that we're making with the intent of driving improved conversion, meaning more of our consumers who come to our site and want to close the transaction. We closed more of those. So I actually look at it not so much on what does Flex do in terms of our take for a particular transaction. I think Flex is a vehicle that's going to allow us to work with our partner agents and these -- some of these high-performing teams to improve conversion, meaning getting more of our consumers into the transaction they want to close. That's going to generate a higher dollar pool through our system, of which we're going to benefit as well as our partner agents, and that is going to drive a higher revenue yield per lead. And I look at it kind of that way versus, "Are we getting a bigger take per transaction?" And so we are very excited about this customer-centric approach that we've moved towards as we move deeper into the transaction. We have seen, even with our current MVP business, an improvement in customer satisfaction scores. We've seen an improvement in conversion. And those 2 things are going to create more transactions through our system, which is going to grow revenue and revenue per lead. So I'm not going to actually, I guess, say anything about the monkey math. We do believe that we have a lot of opportunity, given the traffic that Rich mentioned earlier, to improve the number of transactions through improving conversion and the experience. Flex is one of those that allows us to direct more leads to high-performing agents that provide great customer satisfaction and know how to close deals and get our customers into the homes they love. Rich, I don't know what you want to add to that.

Yes. I mean I think embedded in your question is -- or at least the second part, Brian, is a little bit of a kind of a churn kind of thinking and watching churn and are you upsetting your current partners because you're trying to take -- increase your take rate or what have you or lower their ROI. I -- look, we're really beginning to think about this as a business model optimization question -- problem and opportunity. We've got these different ways we can monetize. Our focus on the transaction, which resulted from our rollout -- testing rollout of Flex really got us focused on those agents and agent teams that can convert, okay? And those that can convert turns out the customers are happier too because they want to move. And so their customer satisfaction goes up. And so it's this focus on conversion and what we're kind of thinking of as these high-performing partners is what we've been talking about has -- we've seen benefits on focusing on high-performing partners, regardless of whether we're using a postpaid Flex business model or a prepay, auction-based -- indeed, market-based pricing model. So it's goodness across the board. We'll continue to innovate on this, but we're moving from a world where we're kind of we're less takers here of money than we are givers of leads and customers to and only to those agents that we know are going to be good at converting those customers into transactions, which, of course, will provide more dollars for all of us.

I know we're up against the clock. There's one more I just have to ask, I think it's important for the overall story because Rich, you sort of mentioned how the core IMT PA business is sort of the cash cow that is sort of fueling homes investment. And Allen, one of the things that you've really brought is a new discipline. I think the core margins were up almost 400 basis points last year. I guess just sort of talk to us a little bit about how early are you in this cost-cutting process in the core. And where do you sort of see still the biggest areas for low-hanging fruit from a cost-cutting or efficiency perspective in the core IT business?

Yes. Rich, I'll start and then you can add. Yes, we grew margins, we were able to expand margins at 381 basis points in 2019. Our full year guidance for IMT we were like at the midpoint, another 350 basis points of expansion. What I really like about where we are at IMT and the performance in 2019, Rich mentioned it, was we were able to reaccelerate growth within the Premier Agent business while expanding margins. I think you say cost-cutting, I think it's just cost focus is how I would describe it. It comes from a variety of ways, as I worked with the teams, and there's been a lot of positive reception to us just looking at prioritization. So a lot of the opportunity that we banked in 2019 and that we believe will continue to accrete in 2020 is around ensuring we have our teams working on the most important things. And those teams where maybe we were working on things that weren't as critical to our success, we're able to reprioritize into the things that are driving growth. I think it's important to comment that we are investing. Connections, is as an example. We are investing in our connections team who interact with our customers and ensure they get a live transfer to agents, which we believe is improving customer SAT and conversion. And we are investing -- we invested heavily in that in '19, and we'll continue to increase that investment in 2020. Other things we're looking at are some basic blocking and tackling. We have an internal initiative we call Airstream, where we just go out and do the basic blocking and tackling around our discretionary spend. Are we negotiating fairly and correctly? Are we getting the benefit of the growth that we provide our vendors? We're looking a lot at demand management and ensuring that every manager and every person has a transparent look at what we're spending on and why and where it makes sense. And then we're moving to a lot of analysis. Marketing would be an example of spending that marginal dollar, that nth dollar, that next dollar to get what is the marginal or incremental return on that, not average. Because if you spend to an average, you're always going to overspend. So I think it's a lot of basic blocking and tackling and just a lot of focus, and the teams are excited. We have a lot of opportunity, we believe, to grow. Our -- the long-term, our midterm guidance, 3- to 5-year guidance we provided -- our targets we provided last February, we're getting to a 30% IMT EBITDA margin. We'll be fairly close, or at least our guidance assumes we're making a lot of progress there in the first 2 years. So I come from an area or a company where you always look to continually improve and continue to gain leverage. I believe IMT has an opportunity to continue to grow. We can get leverage on that growth. And we continue to look for areas to not spend money that we may have been spending money on in the past. It's just not driving that return that we think is significant enough to spend the money on.

Great. All right, with that, the red lights are flashing. Rich and Allen, thank you so much for dialing in. We really appreciate having you here.

Yes. We're sorry. Thank you, Brian, and thank you, everybody. We're sorry we're not there in person, but we hope to see you soon. Take care.

Thank you.

Thanks, Brian.

Thanks.