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

Yes. For people, for investors looking at this business, how do you quantify the unit economics, the long-term profitability of that business?

So right now, as I said, we're not targeting making money on the transaction itself. We are -- we've guided towards plus or minus 200 basis points before interest expense on the transaction, at least until we begin to get to scale, and then we'll think about margin thereafter. Scale is super important because we're -- as you've observed this past quarter, we -- our primary 3 line items of expense all showed some leverage. So as we get bigger and better at this, we're going to see costs come down. We can take most of that cost savings and plow it back into better offers for our customers, which we think, of course, improves the demand, improves the volume that we're able to sell. And so we get kind of a positive feedback system there. So we're working on getting that flywheel spinning right now. Our customer acquisition costs are remarkably low, given that we are Zillow, and we get these 200 million users a month that come to our sites. And pertinent to your last question, which should have been my punchline on the last question, we are the Zestimate people, okay? Our dream with the Zestimate initially was to put a price on every rooftop when we launched it 15 years ago. I honestly, until we started Zillow Offers, I never would have thought that would have been a live offer, like a real live initial offer. And yet, we're beginning to test that right now, algorithmically turn the Zestimate itself in for limited -- in limited areas within a limited buy box that we're confident we can price properly, turn it into a live initial offer for your house. That could be a breakthrough. And it reduces -- dramatically reduces our customer acquisition cost, but it also could be a breakthrough on the way to a more liquid, more transparent, less friction filled marketplace.

Yes. And so we, obviously, at the beginning of the pandemic, all got a little bit of a scare and you decided to pause buying in the Homes business. How do you think about managing risk in that business in terms of what kind of exposure you're willing to have on your balance sheet, how you might finance it longer term?

Yes. I mean it's a super interesting area. We have a terrific team of people who run the Zillow Offers business who have done this before, including the President of Zillow Offers, a guy named Eric Power, who is one of the founders of the predecessor companies for Invitation Homes. So in his career, he's bought and financed probably 50,000 homes at this point. And then all of the kind of capital markets type people that go along with that. So we have a lot of experience to add to our kind of old technology Internet folk experience to create a really interesting alloy of that we think positions us really well. Now how are we going to finance it? Right now, we're doing bilaterals that are pretty straightforward, not super expensive but will have a limit because the size of the housing market is such that we will kind of probably bust through the capacity of bilaterals at some point. And what we're doing is working right now to create more structured finance products that as we get bigger, we can basically go out and find the sovereigns and others who have really deep pockets and high interest in investing in residential real estate and basically create an ongoing financing mechanism where we can offload most, if not all, probably we won't get to all, but offload the large majority of the risk associated with holding that asset. A key part of that is establishing a track record through all weather, okay? And it's pretty interesting that we've had this last year to demonstrate that even in a foul nasty weather storm, we held up just fine. Now that doesn't prove that it will always be thus, but it helps give comfort to the capital markets as such. And so we're working towards structuring those products right now as we get bigger.

Yes. How do you think about the competitive landscape for Zillow? You've got a number of competitors directly in the iBuyer category. We're seeing so many new entrants around Agent Marketing & Services as well as point solutions for various parts of the industry. How does that all come together for Zillow?

I mean I think it's fascinating. When we started Zillow, and when we launched it in 2006, we did so on this kind of simple thesis that e-commerce and technology would eventually make it to the real estate industry and that there would be an opportunity to replatform and streamline this giant business. I would tell you that most of the venture and growth investment community at the time either didn't believe it was going to happen or believed it was just too early. I would say there were also no public company comps that investors could point to and say, "Oh, if they win, they'll be like XYZ company." There just weren't many big public real estate oriented companies at that point. And so this actually, of course, created an opportunity for people like me and my co-founders at Zillow. We basically were able to bet that it was inevitable that e-commerce came to the real estate industry and have at least 10 years of relatively light competitive investment. Well that's changed in the last 5 years. As you're well aware, there's a new term for it now, it's called proptech. Maybe that existed before, but it's just kind of hit my radar. And we're seeing lots of dollars flow into the replatforming of this giant industry. I really love our position. I love the fact that SNL spoofed us on Saturday, which means our brand has achieved rare air in terms of awareness. That is a big advantage for us. Our customers really love us. There are lots of them. And our -- the breadth of our vision from an integration perspective puts us at a yet another kind of customer acquisition cost advantage relative to these point solutions that are out there. But in my opinion, more investment in digitizing real estate is more better for Zillow in the long term, just like more streaming coming online has turned out to be more better for Netflix, right? When a lot of people thought that might not have been the case. This is what's happening right now.

Yes. No, it's a great way to think about it. You've mentioned proptech, and I want to get into the technology side of it a little bit with the time that we have. You guys made an acquisition yesterday in ShowingTime. How do you think about sort of the impact of more cutting-edge technology on this space that your point, has been sort of slower to adopt it relative to a lot of other areas?

Yes. You just have to be okay smart and look like a genius here, honestly. No it's really fertile. It's really, really fertile, Heath. I mean -- and we've known that since doing the Zestimate. Like we had as Zestimate algorithm improvement price, much like the Netflix price 10 years ago on the Zestimate. We get lots of really interesting AI and ML engineers working on getting more accurate Zestimates with us because it was just one of these really giant big fun, big data problems. And so we've known right from the start that kind of AI techniques were going to be critical to the future of the marketplace, of the platform. And that's playing out right now. Additionally, as you might imagine, what we're seeing with immersive 3D experiences it doesn't take too much imagination. If you shop for a home or shop for anything for that matter, that the richer, more immersive, more kind of spatially accurate shopping experience you have, the more likely you are to not waste your time visiting it in person and buying it through e-commerce. And so that is an area of big -- this kind of 3D immersive technology is an area of big investment, too, because we know people want to shop virtually. We know that customers have more time to shop virtually themselves, at their computers or with their iPhones, then they could possibly have with a professional driving around in a car. So it's just augments the amount of content that people are able to have. With ShowingTime an exciting acquisition we just announced, in particular, ShowingTime addressed a critical pain point in the house touring process. 15 years -- they've been at it for quite a long time. They basically said, don't try to juggle the 4 schedules that are required to get somebody through to look at your home. We will do that on your behalf. We will juggle all those schedules, and we'll make it simple. And they built some great software. And a great team of people that we're coordinating to do all that. They have great penetration. We see now extending their reach of that, improving the network in that for the whole industry and then integrating with all these other components as a real opportunity to just get Terry from one house to the next.

Yes. No, that's going to be great to see. I mean within that technology, has a tendency to be in efficiencies in general, have a tendency to be deflationary for a lot of these industries that get disrupted. We've got the 6% commission world that exists right now. How do you see that evolving?

It's hard to know -- it's hard when you're sitting in an industry in a traditional spot, used to legacy business models, it's hard to imagine how much better it can be when you have a more liquid, more transparent market. Simply because of liquidity increase and volume increase. And so I don't know exactly what's going to happen with the business model in the real estate industry. I honestly don't care all that much as long as we're focused on getting the customer seamlessly from one home to the next. I know we'll figure out a business model that will work. And I know that the partners who are the professionals of the future, we'll figure that out too and come along with us to make that happen. And I do think all boats are going to rise because we're going to see liquidity go up as transparency increases and transactional friction is dramatically reduced. We see that in pretty much every market.

You touched on your rentals business, that's something that, obviously, in New York is a huge part of your footprint here with StreetEasy. How do you think about the opportunity in rentals longer term? How big is that opportunity relative to everything else that you're doing in the home buying/selling market?

It's exciting and meaningful. We paint a strategy picture of a bridge to get our customers from one place to the next. And a major lane on the bridge is rentals, right? More rental transactions happen every year than home transactions. And there hasn't been a fantastically properly functioning marketplace for rentals ever, honestly. And so we've taken a very methodical, long term, customer-friendly approach to building out our rentals business, both StreetEasy, but also more broadly with Zillow and Trulia. It's going extremely well. We're already automating things like applying for rent. It's traditionally been a very difficult process for a renter who wants to shop 5 different places. Each of those places makes them apply separately. So we're integrating that into a single application that can then get sent to multiple potential landlords. We have a product that enables renters to pay rent and landlords to collect rent. We see it as a wonderful long-term business opportunity that fits beautifully into our Zillow brand strategy and benefits greatly from all of the halo effects of having a big brand and lots of traffic.

Yes. You've referenced the mortgage market a couple of times. We all know where rates are and how competitive that market is at the moment. Given all of the entries that you have to that home buyer and seller, what's it going to take to see a higher attach rate for Zillow mortgages and the influences of the transactions that you influence?

For early days, we showed some great numbers in the quarter. I can't remember exactly what they were. I should know, but maybe a triple year-over-year. I mean we're really getting finally, thanks to the mortgage team out there, Ryan and company, great job, finally getting that thing traction. We could have taken the easy way and partnered and had that up and running for a while, but we decided to kind of roll our own and build our own, which has been difficult, but we think fundamental to integration, okay? And so we're still just kind of finishing, setting up the mortgage factory. It's operating. We got product flowing through the factory. We've got real pros in charge. And now we're beginning to experiment with integration of that mortgage into the transaction itself. The first place we're seeing that is with Zillow Offers. So the homes that we buy and sell, our ability to integrate a financing option in with that product is much higher. So we're experimenting there and I'm quite encouraged.

So Rich, to wrap up, you're someone who has founded multiple public companies, you're on the Board of multiple companies as a venture investor, you've invested in dozens of others. I would be -- it would -- I've got to ask within the time that we have in this market that we're in right now with all of the activity that we're seeing around SPACS and an incredible growth in the venture side of the market. How do you view sort of where the markets are on really both sides of that, the public and the private side?

I mean I see them as really healthy. I'm a company creator mainly. So I see availability of capital as a boom. It's rocket fuel for innovation. We're seeing it right now. Will a lot of these innovations crash and burn? Yes, yes. But when I was on the roadshow taking Expedia public in 1999, on the road with me, it was kind of silly to think, I was 32 years old. On the road with me was e-toys because I knew -- we were like moving in and out of the same conference rooms in Boston and Kansas City or whatever, right? I'm sure you were doing that stuff back then as well. Carrying bags for everybody and whatever, publishing the 5-year models quietly and sliding it to people. Anyway, on the road with us was e-toys, pets.com, but also Amazon, it just gone public, okay? And so there are going to be a lot of ones that don't work, but some of them will, and some of them will turn into Expedia and Amazon and other great companies. So I, as an innovator, I see this as fantastic. The SPAC thing is a -- I kind of view it like the Zillow Offers of the IPO business in a way. Look, it's -- we have these start-ups or private companies that are sellers, right? They're trying to figure out how to become public. And SPAC is showing up out of that field, kind of an old guy, dusty and a little sketchy. He kind of walked a lot of deep love field. And all of a sudden, he's looking a little better. It's looking like it can offer kind of pricing transparency, timing, certainty, a lot simpler process, possibly a cheaper process, possibly a cleaner game. So I'm giving that a chance. I'm keeping it up in mind about that. I worry about some of the frenzy on the buy side of these packs. But hey, speculation is part of markets, that's hope, fight and fear, right?

Yes, absolutely. So as an investor, particularly as a venture investor, where do you see opportunities now, whether it's new business models or new technologies, emerging technologies that get you excited.

Heath, the history of our species is kind of this exponential growth curve of technology, right? Like early in our species, it took millions of years to make small tech advancements. And then it took millennia, and then it took centuries, and then it took decades. And now it's taking years, it's pretty wild. I really believe, Heath, that the amount of equity wealth value creation that's happened since the PC was shipped back in the '80s, the -- some total, the amount of kind of tech-driven value creation since then to now, I haven't done this math, so I'm just -- I'm doing this, okay? I believe that same amount of value creation will happen in the next 10 years. It's just -- it was following this natural exponential curve. It's very difficult for us to wrap our minds around what that means. And so I'm interested in all this stuff. I just think it's fascinating. It's clear that technology is continuing to rapidly revolutionize everything. So specific stuff, like how exciting is it that we're talking about space again? How cool is it that we're going to reengineer the whole power generation and usage system and the way electricity is generated and used and sent around. I mean, and there was a flying helicopter thing that went public today or something, some stack. I mean, anyway, I think that we're capturing the imagination of dreamers right now. It's fueled by low rates and lots of hope and not as much fear, but this stuff is exciting.

Yes. Completely agree and can't wait to see it. Rich, thanks so much for taking the time to join us. This has been great and I definitely look forward to the next time we get to do it in person.

Okay, Heath, good seeing you, good seeing everybody.

Thanks, Rich.