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

Great. I think we're live. So good afternoon, everybody. This is Stephen Ju from the Credit Suisse Internet equity research team. We're very pleased to have joining us the President of Zillow, Jeremy Wacksman. So welcome, Jeremy, and thank you so much for joining us today.

Yes, thanks for having me, and happy to be here.

All right. Awesome. So let's talk themes, and let's talk about the question that is on everybody's mind right now, which is the life after the pandemic. How sustainable, in your view, are the tailwinds that you guys are seeing in the industry once there is a vaccine and once we are free to go outside and do the things that we normally did?

Yes. I mean I think it's a great question. It's obviously on all of our minds personally and how it will impact us from a health standpoint as well as economically. I think we talk a lot, at Zillow, about these 2 tailwinds. One is this great reshuffling that I think COVID and the pandemic has really kicked up and created; and the second one is coming off of that accelerating technology adoption in all aspects of our lives, but especially in the shelter business and in real estate. And we're big believers that both of those tailwinds are here to stay. Obviously, we don't have a crystal ball, but there are a number of factors that are really supportive of the health of the housing environment even as we start to get back to pre-pandemic life. We've seen that 3/4 of those who are working from home want to continue to do that. 2/3 are interested in moving if their employers will allow it. And that's part of why we talk about this as a great reshuffling. This isn't urban/suburbanization shifts. This isn't fleeing from cities. This is people reevaluating what they want from home and work and making sure that work can bend around their home life as much as home bends around work. And that's causing everyone to ask questions about their living space and creating this pent-up demand that we're seeing at Zillow and we're seeing in the industry. And then that second tailwind, that technology shift, once customers get a taste of digital transactions, once they get a taste of less friction, less hassle, more certainty, they tend to create this expectation, right? It goes from convenience to expectation very quickly. And so in the same way, you see a lot of other off-line to online shifts, this tailwind, this acceleration that's created to us, we see that as long term and really accelerating that off-line to online shift.

Yes. So let's unpack that a little bit. So you referred to the great reshuffling. Can you tie that with the broader trends that you were seeing in housing migration? Can you tie that to the demographic shift that we're seeing right now? And can you tie that to, I guess, the urbanization and I guess now seemingly over the last 5 months, if this holds, what seems like de-urbanization and what that ultimately means for your business?

Yes. So again, we use that phrase greater shuffling to really describe kind of an increased desire and a growing ability just to move, right? To rethink the space you're living in, to whatever your living situation, your family situation is, you're thinking about it differently now than you were a year ago. And again, that is somewhat the work-from-home trend. That's somewhat maybe urbanization, de-urbanization shifts. But even before the pandemic, we have this pent-up desire to move against the actual transaction volume. If you asked 100 Americans if they were thinking about buying or selling a house in the next 2 years, the majority would say yes, but yet only 5 million or 6 million homes would trade hands, right? So you have this supply/demand imbalance largely driven by kind of friction and stasis of the workplace. And so now that we're seeing people open their eyes up and again, the trends towards more flexibility in the workforce, a byproduct of all that is creation of even more demand into what has been a constrained housing environment, right, and a pretty healthy housing environment with limited inventory. So in terms of urbanization shifts, it's not necessarily about that popular headline, right? People are -- again, they're reevaluating what they need, and we're seeing that drive demand both in urban and in suburban areas. There are a few exceptions, right? So rents in San Francisco and somewhat in New York are definitely feeling it. But in general, it's not this great flee from the cities. It's more about transaction volume and velocity and sort of customer demand in ways we haven't seen before.

Got it. And you also brought up technology and how that plays into the broader macro and consumer trends here. Can you talk about some specific examples or even some products that you can call out, especially as your user base, theoretically, ages down over time?

Yes. I mean a couple of things there, right? One, when we as users, when customers are introduced to new technologies, they don't tend to throw them out if they make their lives better, faster, cheaper. And soon as you can order food on your phone, you don't go back. As soon as you can hail an Uber on your phone, you don't go back, right? And so we've seen that across a lot of industries, there's been this kind of COVID-catalyzed increase in and reliance upon technology. The concrete is setting on those habits, right? We're getting used to those in a pandemic world, and it's pretty unlikely we're going to want to go back to the old analog ways. An example in our space is things like virtual tour requests, right, the ability to maybe spend more time checking out the house virtually before I go see it. That might have been a hassle avoidance thing before the pandemic. It might be a safety thing now and just not wanting to interact with our people. Those requests have more than tripled as of when the stay-at-home orders began. And also things like closing digitally. So in our Zillow Offers business where we're closing our own transactions, we now see nearly 2/3 of our homes are purchased -- are closed digitally with a remote notary, and that was not a service that was broadly used before. So those are 2 kind of examples of, again, the pandemic might have driven the increase and the need for it more broadly, but that's going to become the standard and people are not going to go back to wanting to wet sign documents if they didn't have to.

Yes. I mean that seems to be the underlying theme as we talked to a lot of companies who are participating at the conference. Yes, you might be afraid that the consumer will retreat this path to the way they were doing things before. But basically keeping them on the same journey of doing things online, that's completely up to the companies. You just have to improve the consumer experience relative to what they were used to before.

Yes, I think that's right. And the last piece on that, at least in our industry, is the segmentation shift of the buyer, right? So that's all happening. That's all happening to us. We're all being reprogrammed, and then the segments of homebuyers are also shifting, right? Millennials are aging into their prime home-buying years. Gen Z is actually lining up behind them. And those digital natives are going to show up in our category and go why aren't these things all already working this way.

Yes. Absolutely. So let's go a little bit deeper into some of the products that are out there. Help us think about the opportunity for Flex. And more importantly, can you talk about the underlying dynamics that has you excited about the Premier Agent product in aggregate?

Yes. Absolutely. So Flex, again, which is really a monetization model of our Premier Agent business, right, we have 2. We have market-based pricing, or MBP, where agents are buying a share or a set of leads upfront. And we have Flex, where we have partnered with them and we're getting paid when those transactions from those leads occur as opposed to getting paid upfront. And again, we really think about those as our 2 revenue monetization tools. Both are focused very much on providing higher-intent customers, right, so increased quality and increased selection of customers to higher performing agents. Because ultimately, if we can find the higher-performing agents and agent teams who provide better CSAT, who can convert well, who can scale to work with a growing set of buyers, those agents are going to convert more our business. They're going to make more money. They're going to spend more money on our platform. And so agents are then able to grow as we grow. We operate them both today. Obviously, Flex is newer, and we continue to roll out and learn from Flex as we bring it to more agents and more markets. And our testing has shown that both can coexist really successfully together.

Yes. This was like a type of product that you probably could not have built several years ago. It seems like it requires a ton of data in terms of you guys figuring out the level of consumer purchase intent as well as the track record among some of the agents that might be more high performing. So at the end of the day, it seems like, if I'm thinking about this correctly, it's the right lead for the right agent at the right time. Is that correct?

Yes. I mean, yes, generally. And it's also our focus on moving down the transaction means our focus on working with our partners to provide the customer with the best experience. And that's been a big shift for us. I mean you've heard us talk a lot over the last couple of years about moving down the transaction. That's what that means in our Premier Agent business. It means working more closely with a set of partners and helping them grow, right? And you help them grow by getting them the right types of customers for their agents and working with them in their market and their price range for what works for them and helping them convert more customers and measuring that with -- together with customer satisfaction, with conversion metrics because when they're doing better, that means our customers are happier and that also means they're making more money.

Got you. Let's switch gears a little bit to Zillow Offers. So what have been some of the takeaways that you got from Zillow Offers over the last 24 months? It went through a recent pause, and then it went through a subsequent restart. So maybe talk about what the takeaways were for that segment.

Yes. I mean it's been quite a year for the business generally. Obviously, Zillow Offers has seen quite a bit with the pandemic and having to pause acquisitions for a brief period of time when we weren't sure if transactions could actually happen, which we did earlier this year, and then coming back and restarting acquisitions and getting back to -- getting back live in all of our markets. So pre-pause, we were very focused on expanding markets rapidly, getting initial learnings, training the machine, acquiring the signal, frankly. And the pause allowed us to take the learnings from that expansion and really retool the operation additionally for safety, right? So Zillow Offers always provided this benefit of certainty. You knew how much money you were going to get for your house, right, which you don't know when you go list traditionally; and hassle avoidance. Selling your home is incredibly painful and stressful. People think it's more stressful than almost anything they do in their life, right? So the promise of Zillow Offers pre-pandemic was both those things: certainty on price and hassle avoidance. Well, now with the pandemic, you add safety to the mix and you say, "Gosh, if I have to list or I have to sell my house right now and I have a button I can push and not have to have really anyone come through my house, I'm kind of interested in that in a pandemic world as well." And so we retooled the operation to make sure we could offer safety as best we could for our partners and our customers and our employees. And so the reopen was processing all the learnings and getting ready for the restart and retooling to be able to offer really that third benefit that we're seeing strong demand for as well.

Got it. I think the Offers product is live in about 25 different markets right now. Where is that going, presumably, nationally? And I guess what are some of the less obvious opportunities that might come up with having a product that is truly [ functional ]?

Yes. I mean our intent with Offers -- so you're right. We're live in 25 markets, and our intent has always been to be a market maker. We talk a lot about that, and market maker to us means -- we've said breakeven at the unit level, right, plus or minus 200 basis points. But the idea is we want to be making fair, transparent offers and trying to make the market to really bridge between the seller and the buyer on the behalf of the seller. And if we can do that and we can scale that, we can see a lot of cost synergy and a lot of cost savings at scale to offer that service and ultimately, sell the house for less than you would be able to sell it for yourself. And that can be a service that customers will demand, not just hassle avoidance and certainty, but also unit economics as well. And then the adjacencies that come from being able to power that move, right? So the closing services, the mortgage, that sellers often going to need a buyer's agent to go buy their next house, all those things that can come around the flagpole of this move, Zillow Offers becomes the beachhead for those transactions.

Got it. Now you've always had -- there's estimates out there for houses and property, and it seems like that should have dovetailed into a final Offers product and eliminating all the frictions in between and helping people move around a little bit more freely and to basically to [indiscernible] [ frictionless ] environment where it's [indiscernible].

I lost you for a second there, Stephen. I don't know if you want to try your question again, sorry. You just cut out for one second.

Yes. So the journey from rolling out these estimates and having, I guess, essentially what is a value placed on your house and then the end state of having the consumers be able to freely trade the asset with little friction, what additional work needs to be done from here to there in order for you to be successful in the Offers business?

Yes. I mean we talk a lot about Offers, and it's very big. And it got very big very quickly, but it's still only a couple years old. And so there's a lot of opportunity both to build scale, build more transparency, work on the cost elements of the transaction, pass those savings on to the customer, provide more certainty. We've got a long way to go to scale the operation. It's still really the early days. But you're right. The promise of it really is that a customer can come to Zillow and can think about trading in their house, ideally starting from where there's estimate is, and then that becomes the start of their move, right? And a move requires selling your house. It requires working with someone likely to find the next house to buy. It requires a mortgage oftentimes. And it requires closing services and then eventually requires other things like home insurance and other adjacent services that you need to get that move done. And so for us, the goal is to be able to offer that one-stop shop across all of the services you're going to need if you're going to go through the hassle of a move so that you can pull that off more seamlessly with less hassle, so that we can up the number of people that want to fulfill the demand we're seeing, which is they wish they could but they just can't figure out how.

Yes. You touched on this in one of the prior answers, but can you talk about the traction that you're seeing behind some of the more value-added services like you have been ramping, like Zillow Closing Services? What are some of the benefits associated with expanding that offering to supplement the Offers business, and where can you go next?

Yes. Absolutely. And so Zillow Closing Services, which is our title and escrow business which primarily services our Zillow Offers transactions today, we're very early in the adjacent services that can come around the transaction. So as we talked about earlier, closing services maybe on both transactions, the sale of your house and the pursue your next house; the mortgage that you're going to need if you make that move happen and you purchase; the agent connection and the agent relationship for you if you're going to need help on that move; as well as potential future services, things like home insurance and things like home maintenance that we might get into once we get to scale. So again, super early days today. I would say closing services is probably the furthest along just in terms of the potential attach rate that comes with that is pretty high when we're the ones driving the transaction. So -- and we have a low cost of acquisition for those services to compete against the industry of mostly single-point solutions with higher acquisition costs. So we're pleased with our progress there. But we talk a lot about how that's important to get right at scale in the long term and the integration of those things and the delight you can provide a customer and the cost savings you can provide when you can wrap all those services together is something we talk a lot about. It's not something we offer today. And so we're starting. We have closing services today. We have mortgage today. We are working on the partner leads that work between these 2 transactions. But more to come, frankly, as we scale Zillow Offers to more customers.

Yes. It sounds like that there should be, I guess, like double-barreled benefit and reduction element, but there's also an economic element for you as Zillow as well, right?

Sorry, one more time on that? You chopped up again there.

So I'm thinking that there should be double-barreled benefits for Zillow as an organization, right? So not only is there underlying economics, but it hopefully reduces friction on the move for the consumer.

That's right. And those are somewhat intertwined, right, because the frictional costs of the services at retail rate, at whatever cost rate, comes from the inefficiency. I mean, oftentimes, these are transaction services where it takes a lot of time and effort to do the same thing in just multiple systems with multiple parties. So there's a customer benefit of that reduced friction. There's a cost savings there as well. And then that cost savings can be shared between Zillow and our customers.

Got it. You also recently disclosed that you anticipate bringing brokerage services entirely in-house. What is the rationale behind this decision? And can you also talk about some of the benefits that come with this move?

Yes. So we recently announced for Zillow Offers transactions, when we're the ones buying the house or selling the house, right, we're bringing the brokerage services in-house to run that ourselves. And the primary reason for that is the customer service for the buyer and the buyer's agents. Because we weren't licensed, we couldn't speak with customers about things as basic as home prices. And so the handoff as a seller was coming to us and we were working with them on an offer and working with our partner agent on that offer, it became awkward. It also became really inefficient. So we've hired folks who will represent Zillow's side of the transactions and provide that customer service. And one of the side benefits of doing that is it also has us joined the MLSs and have direct access to the MLS data feeds, which will help improve our data accuracy and timeliness. So for us, it is a customer benefit, and it's a friction and transaction integration benefit. It will also, over time, come with cost efficiencies, but for -- and data efficiencies as well.

Got it. Can you also talk about the underlying infrastructure investments and the strategic philosophy behind your effort in mortgages? And how can you leverage this effort across various other, I guess, items such as Offers?

Yes. I mean so the strategy around mortgages is to build and to scale up kind of a loan factory effectively to help be able to power our customers as they come in to our Zillow Offers and our Premier Agent transactions. Obviously, in the current refi environment, we're able to scale up the factory with a mix of refinance transactions, which are at relative highs right now, as well as building out originations. And we've brought in a new management team and are continuing to hire loan officers and processors to help scale off that refi business and fund our investments into purchase. But the strategy is really about having that payments arm effectively able to then better service the customers who come in through Premier Agent and who come in through Zillow Offers. And again, back to that moving concept, right, if you're a seller who is also buying and financing, that's a transaction to you. Like, yes, you have to do it as 3 transactions right now, but you'd like that to be 1 transaction. And our partners, I think, would like 1 integrated transaction that they know with certainty will close on time. And so that's really the dream here is to be able to have that integrated transaction at scale for these customers.

Yes. Is there any -- what is the incremental work that you need to do to execute against that mortgage opportunity?

I mean it's a mix of scaling up the operation as it works, right? So continued process of hiring our loan officers and processors, but then also building the technology and the connective tissue into the transactions that we're running, right, so into Premier Agent, into loan officers over time. And that's not software and technology that exists, right? There isn't a scaled, integrated transaction platform between an institutional Zillow Offers transaction, an agent partner and a loan officer. So we're in the early stages of building that.

Got it. I've been asking all of the companies that present this week to just kind of talk about the current operating environment and how that operating environment changes into the future. We touched on this in the initial set of questions, but there's an underlying customer lifetime value that you expect and there is an underlying customer acquisition cost that's always out there. I think all of those things basically changed during the pandemic. So what do you think the underlying ROI on your ad spend looks like coming out of the crisis?

Yes. I mean I think 2020 will end up looking like an aberration for many categories and not in the same ways, right? There are categories that I think are grinding to a halt, and so their ad spend efficacy looks one way. And there are categories that are seeing tailwinds. And so the return on that spend might look great and then all of a sudden, less competitive advertising environment. So you can make an argument for different categories to behave very differently. I think going forward, a few things remain true. One is in a shelter business, it's an episodic business with new customers who enter all the time. And so being top of mind and helping teach people where they should start their search and how they can get their transactions done remains really important. And we've been doing that for almost a decade now, and that's how we've built and amassed the largest brand and audience in the category. And that's something we'll continue to invest to grow and protect. And then as these new services come online, you have this added challenge of we taught the category you could shop online, but we have yet to really teach many people what you can do online. And these new e-commerce services are still new. You ask 100 Americans what something like Zillow Offers is, most people don't know. And you ask them how a mortgage works, most people don't know. So we still have a lot of work to do to educate even folks in category, let alone help attract the new ones. So even as the marketplace for advertising and the LTV to CAC ratios for all businesses return to places that feel like normal competitive environments, I think the overall trend in our category persists the way it had before. And I think you'll see that especially as more digital natives come in and they are looking for services to behave the way they expected to and they're shopping for the first time.

Yes. I think one of the other themes that we picked up as we talked to folks during the conference is that hard to say for sure how things will persist into next year. And to your point, you said buying a house is episodic. We don't do this every day. But for the new cohorts of users that are coming in, they seem to be power users right now. So -- and you talked about, I guess, the new cohorts of users, especially the younger demographic or digital natives. So are you seeing, I guess, an overall higher level of engagement and people doing more things on the service to help give you the comfort that, yes, I mean, like these new cohorts that we're getting, I mean, there is going to be, I guess, extra value or increased amount of value or LTV that we can extract over the long term.

I mean I think it's too early to know for sure, but you can think about the inputs to that question, right? We're seeing increased demand for sure, right? And we're seeing that from new types of customers. And you're reading articles now about how Zillow's growing, is the new hopes growing, right? And it's the new thing to do with the holidays. And when people were stuck in their home and they couldn't travel, well, they were traveling virtually on Zillow. But you're seeing a lot of demand actually turn into transactions, right? And even in a challenged inventory -- challenged market from an inventory standpoint, you're seeing transactions up. So how those inputs translate into outputs in the long term, I don't think anyone knows yet. But if you -- again, if you go back to those tailwinds, right, if the goal is to help bring the transaction online, make it more seamless, allow people to get more of this done with a platform and digital tools and a great partner and we can provide that for more and more customers, and we're still at a very small share of the overall transactions that are happening, well, tailwinds are just going to help us be able to bring that to more and more people regardless of how it shakes out.

Got you. I [ take from ] here. So let's put a theoretical question out there. So let's fast forward to a year from now and once again, you are presenting at the Credit Suisse Technology Conference. What do you think we'll be talking about in terms of what you've accomplished in the trailing 12 months?

Well, first of all, I hope I'm there in person and we're not stuck in our rooms over Zoom. Yes, so hopefully, if it's 12 months now, we're talking about having gotten back to a little bit of travel and a little bit of seeing each other face-to-face. But I think you're going to, hopefully, hear very similar things. You're going to hear from us how these tailwinds provided this accelerant and they kept us on this trajectory of growth of bringing the transaction online and teaching customers they can do more of this natively. You're hopefully going to hear from us that we've scaled Zillow Offers to what we plan to do next year and that we're further to the future on Flex and on the integrated transaction and thinking about those adjacent services becoming more available to more of our customers. So my hope is it's a little boring and that we're saying the same things 12 months from now with the benefit of hindsight as we're saying now, and that we're just doing it in person.

Understood. Well, we're going to wrap it up there. Thank you very much, Jeremy, for joining us and best of luck.