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

Good afternoon, everybody. I'm Mark Mahaney, Director of Internet Research here at RBC. Thrilled to have Rich Barton, CEO, Co-Founder of Zillow and a lot of other things in its history, something I've had a lot of working with for -- and tracking for 20-plus years. But today, we're just going to be talking about Zillow. So we've got only 30 minutes. I'm going to go through a series of questions. There's a Q&A box at the bottom right. If you want to ask any questions, put them down there, I'll do my best to thread them in.

Rich, thanks you so much for joining us today. I want to start off high level with you. You talked about these 2 tailwinds that have emerged over the past year in residential real estate, the great reshuffling and then the adoption of technologies. So just spin a little -- riff a little bit on those and really answer the question of how -- whether those are permanent changes or not.

Yes. Okay. Great to be here with you, Mark. I know we had some technical issues. I think we all have to move to Zoom eventually because it's just that much easier. But yes, great to be here with you. Good to see you. I wish I could see everybody in the audience here. So the 2 tailwinds you're talking about is what I was chatting about on my last -- on our last conference call for Zillow, and these are pretty obvious, maybe debatable, but pretty obvious. I'll start with the technology tailwind, which is a tailwind that is affecting pretty much every vertical that you would look at, pretty much every aspect of life. And this is basically the acceleration towards digital from analog towards online from off-line. Every peak your business that you look at, and you've seen maybe 5 years of acceleration of technology adoption be compressed into this kind of COVID time period right now. We, Zillow, as the digital leader in real estate are kind of the outsized beneficiary of that same type of shift. Consumers want to shop digitally more now than they did before. A piece of evidence of that is just that our top-of-funnel users at Zillow Group grew to 236 million unique users last quarter that we reported, and that was up -- I don't have it in front of me right now, but up something like 30% year-over-year, don't hold me to that. But some huge amount that I -- if you'd asked me a year ago, I wouldn't have thought possible. So things are shifting. And people want to shop virtually, they want to tour virtually, they want to let themselves into homes with just their app, et cetera. So that's kind of the technology tailwind that we're benefiting from. The one that's kind of a more engaging topic is the real estate tailwind. And this is where I've been chatting about the great reshuffling. And basically, it's pretty clear that COVID has caused us to reassess how we work, where we work, how we live, where we live, why we live there. And this has driven a huge amount of demand and shopping behavior, demand to move. So quite simply, people really just want to move. Again, we see all this top-of-funnel activity happening to -- as evidence of that, and we have a lot of other evidence of that, too, just look no further than the great results we just posted. So we're seeing a lot of that. That was long, but you asked about durability. I think that's the interesting debate. That is certainly the interesting debate, and you're probably debating it with all the companies you're looking at, as are the investors in the audience who are trying to think about it for their various investments. Are we just going to snap back to the way things were? Or is this kind of a permanent shift in the way we're doing things? And I guess I would say that we can't know. I don't have a crystal ball, but it does really feel like these trends are durable and sustainable. It does feel like office work for knowledge workers is not going to just go back to the way things were. It feels like a lot of people are going to choose flexible for the way they work because many people have found this to be a better, more efficient, more healthy way to live their lives. And so changes in the housing market don't happen very quickly. And it takes a long time to actually get through the whole process of moving. And we're just continuing to see this rolling build of demand to move, and it is not abating. The final thing I'd say is that we have demographics behind this trend as well, kind of, defending the sustainability. Specifically we have a whole lot more millennials who are getting ready right now to move into the home-buying phase of their lives and then an even bigger generation, Gen Z, right behind them pushing. And so I think we're -- we kind of have demographic push, low mortgage rates push that will probably continue for some time. And all of this says to me, this feels like a durable thing.

For what it's worth, we had Marc Andreessen speaking yesterday at the conference. And he said his mental test was if you had asked the S&P 500 CEOs at the beginning of the year whether 6 to 9 months work from home situation would have dramatically impaired their company's productivities, they would have all answered yes. And now all of them will tell you that there has been no impact on -- negative impact on productivity, at least for the kind of the white-collar workforce. So that's a good argument for why this well -- may well be permanent. And so therefore, this is also -- I've pitched this as kind of the vaccine conference. This is the first time that public investors have looked at these companies post what looks like the initial signs of real traction towards more open economy, open societies. Your point of view is that that's probably not going to negatively impact the reopening. It's probably not going to negatively impact sales business fundamentals.

It's hard to say exactly, Mark. I mean, first of all, it's great, like the vaccine news and the product is just like, it's a miracle. It's like some of the most advanced science, probably the most advanced science ever done and done really quickly. And so we all, obviously, welcome rolling out these monoclonal -- these messenger RNA vaccines. So that's fantastic. I think I was chatting yesterday with a guy named Dr. Erik -- I might get his last name wrong, Brynjolfsson, who runs the Digital Economy Lab at Stanford and he's studying all kinds of these effects right now. And he said there's a word for whether or not things snap back to the way they were, a word that I hadn't known for, and I'm going to say it out loud for the first time, hysteresis, H-Y-S-T-E-R-I-S-I-S (sic) [ H-Y-S-T-E-R-E-S-I-S ]. It's not a beautiful word, but it's a really interesting thing. It's started in physics, and it was annexed, like so many physics words, by economists. And basically it says, if you push on something, it will yield. When you release it, does it spring back completely? If it doesn't, it's exhibiting hysteresis in some broad sense, okay? Magnetic fields is kind of where it started. Economists use it to talk about exactly what we're talking about right now. My feeling is the concrete hasn't set completely, but it is setting. And the further we get into these things, the more we've been knocked out of old habits; and the more we're discovering new and better ways to do things, the less likely we are to go back. And so I think that this is a -- this feels like a long-term trend to me towards digital everything. I can't hear you, Mark. I think you're muted. Yes, I think you're muted.

Yes, I did. Sorry.

The classic Zoom air.

We do have some static on the phone. So I don't know if anybody can -- who is dialed in can mute when they're not talking maybe somehow. Let's talk about the core oldest part of the business, the Premier Agent part of the business. That seems to have nicely improved over the last 2 years. This 23% year-over-year revenue growth that you put up in the September quarter. Just talk about what you've done in order to improve that business and how sustainable that kind of growth rate is, or at least elevated growth is going forward? Not too long ago, that was a single-digit grower.

Yes. We've worked really hard. If you think about the lead funnel in our traditional media business, where we sell contacts to partner agents and mortgage brokers, et cetera. If you think of it as a funnel, like we do so many of these businesses, our funnel was, has been and continues to be extremely leaky. We get a whole lot of people at the top of the funnel and just not enough to drop out the bottom of the funnel as an actual transaction. We are very likely penetrated, maybe high single digits in the number of transactions that we participate in, in some fashion of the industry as a whole and yet all shoppers pretty much come through Zillow. And so what we've done, Mark, is just systematically plugged the holes of the leaky funnel, okay? And that is by improving the quality of our partners who know how to actually convert fully into happy movers. Building a new -- experimenting with new business models, like our Flex business model that is increasingly being adopted, where we actually don't make money until the transaction is completed, which incentivizes us and our partners to do what the consumers really want, which is actually move to get to a new home. Anyway, hundreds of little things to plug the funnel, experiment with new business models that have shown how much leverage we -- and room to grow we have in this business. The further we get into it, the more I realized how much greenfield there is for us in the traditional business. I'd say one more thing, too. In the new business, the Zillow Offers business, where we are market-making for homes transaction, it's forced us to actually really get our hands dirty with the transaction. It's like a McDonald's franchise. McDonald's has owned and operated franchises, it understands how those restaurants work and that makes it a better franchisor, right? So we've been able to take what we've learned from Zillow Offers on our mortgage business and apply that to our core business in order to increase the conversion rate on transactions. So all that is showing right now.

Rich, how far do you think you'll go along this path towards leads all being monetized just on a per transaction base for a completed transaction basis? How far -- do you think you'll always have to keep that option open as to whether it's a per lead or per transaction? Or do you think maybe the industry as a whole or your business as a whole will switch to the per transaction model?

Well, there are lots of things we like about moving down closer to the transactions simply because it aligns customer's success with how we make money. So we like it. We also like that multiple business models that we can optimize for that fit different situations. So we have an increasing menu of options that we can use as we figure out how to actually get movers into a better place, and we're doing it through partners as a lead business model. We're doing the transaction-based business model with Flex and we're doing it with Zillow Offers. And so we have a pretty broad menu of things we're offering right now, and we will continue -- sometimes painfully I know, we are really aggressive business models innovators. I mean we're really willing to cannibalize our own business model with new business model because we see real opportunities. So I guess I thank investors who are coming along with us on that. The final data line is that what users, what movers really want is kind of an integrated transaction that we can kind of think of ultimately as a one-click trade, right? We should be able ultimately to line up yourselves to buy by having lots of these preparations such that, ultimately, after you let yourselves into the home for the 14th time with your Zillow app for the home you're shopping for, you're able to hit trade and buy now. This is kind of a dream or a little bit of a piping thing but this is kind of the design zone, right? Because we know who you are. We've already qualified your permits. We've already know what your house is worth, so we have an offer, a Zillow Offers on your current house. And then we then line up all the financing in title and escrow and get it all done with one click. That is the design zone. So we have a lot of room to grow. If we can do all of those transactions simultaneously packaged together, then we are able -- someone's chatting? Sorry, someone was saying something...

I think we need to have you go ahead and dial in because we're getting a lot of static again.

Okay. All right. You want me to dial on the phone?

Yes.

Okay. All right. Sorry.

Thank you, everyone, for your patience. I apologize for the technical delays.