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

Hello, everyone. I'm Tom Champion. I head up Piper Sandler's Internet research team, along with my colleague, Jim Callahan. Today, I'm joined by Zillow Group COO, Jeremy Wacksman. Mr. Wacksman is long-tenured at Zillow, having joined the company in 2009, following stints at Microsoft and Trilogy. Jeremy, it's terrific to see you. Thanks so much for joining us today.

Yes. Great to be here. Thanks for having me, Tom.

Okay. Let's start with the real estate market overall. You've been working in the industry, obviously, for quite some time. What's kind of your perspective or your take on the current market?

Yes. I mean this year has seen quite some extremes in the real estate market, and we're starting to see some normal seasonality return. Home prices are obviously still appreciating, but they're not quite appreciating as quickly as they were before, especially the torrid pace earlier this year. And we're also starting to see some uptick in inventory and as well with that, some uptick in homebuyer sentiment. Homebuyers are saying, "Hey, now maybe is a good time to buy." It's creeping back up. And so improved listings and inventory, slower home price appreciation, low rates, those are all great macro factors to help the market become a little more balanced. And then obviously, that all is then aided by the 2 tailwinds we, at Zillow Group, have spent a lot of time talking about. One, those demographic shifts, right? Millennials entering their prime home buying years and the great reshuffling we talk about a lot, where everyone really in all segments is thinking a little differently about what do they need from home. And then the pandemic helping everyone really see the off-line to online needs and potential of real estate and people wanting the buttons on their phone to work in all categories, real estate included, and getting a taste of digital touring and getting a taste of digital signing, people starting to buy homesite unseen at a bigger pace. So those 2 tailwinds, combined with kind of the market changes we're seeing, we think, set up the real estate market for a really good place to be.

Great. Okay. Let's dig into the business by segment. So at the quarter, senior leadership made a big point to reaffirm long-term financial targets. That was great to hear. Maybe starting with Premier Agent, help frame for us the opportunities to drive growth in Premier Agent within IMT. What are kind of the key secular trends we need to keep in mind and organic growth opportunities?

Yes. I mean Premier Agent, and I would say, transactions overall for Zillow on the buying and selling side, the big picture opportunity for us is to grow our transaction share commensurate with our audience share, right? We still -- the vast majority of people thinking about buying or selling a home come to a Zillow Group real estate website, and still a very small percentage of those end up transacting on our platform, either with our partners or even smaller with Zillow Group services directly. And so there's a lot of room to grow. And again, those tailwinds of the demographic shift of people wanting to do this more and people wanting more digital tools and wanting more digital services and real estate, we think, set us up well to grow that. We talked on the call last quarter about some tactical examples of what we're doing. Strategically, it's just about helping more and higher-intent customers find better ways to start their real estate journey on our platform and then connecting them with more and better high-quality partners that we're continuing to cultivate in our Premier Agent business. And so we gave some examples of 3D touring adoption and making it easier to shop. We've talked a bunch about trying to make it easier and faster for customers to raise their hand and get connected to an agent more instantly and having tech really remove the friction of that process and then touring overall, whether that is 3D or whether that is physically and in person, being able to schedule that tour, work with a great Premier Agent to go see a house when they want. All those things help customers convert better because it helps them see things more on their terms and be more ready when they end up talking with our partners.

That's great. I wanted to dig into the topic of touring a little more deeply. It was brought up as one element of the equation of driving higher quality connections and boosting close rates. Just curious if you could elaborate on that.

Yes. I mean the example I give, if you're a customer, think about what action you might want to take. You may not be sure what you need. You may need to get prequalified. You may just need to talk to an agent. Those are all actions you can take. Those are buttons you can push on our website, right? Scheduling a tour saying, "I want to go see this home. I'm pretty interested in this home," right, that gives customers an opportunity to get a feel for the type of the home better and more. And so whether that's with an agent partner and they can schedule on their terms or whether that's letting themselves in the door themselves, right, with Zillow-owned homes, you can go see a home any time, that ends up leading to a higher-intent customer, right? And that higher-intent customer, maybe further down the funnel. And so if you're one of our great partners, you're going to help all of our customers navigate that process. But the more higher-intent ones come, the easier it is for them to help those buyers work, especially in a competitive real estate market. And so showing drives close rates because it's a higher-intent customer signal and it's a higher-intent customer action.

Got it. That makes sense. So IMT margins are set to decline in the second half. Maybe could you talk a little bit about the drivers of that and where you're investing, if it's in Premier Agent. What features are you looking to build out?

Yes. I mean, as I said, it's still very early days, and we're still relatively small transactions there. So we're very focused on growing, growing both on the buying side and the selling side of our business. And so the investments we're making really, we intend to benefit both those businesses as we think about building out Zillow 2.0. And if you look through the volatility of the last year, we're guiding to about 1,000 basis points of growth over 2019. And the investments that we're making here are really around our entire 2.0 vision. So it's improving the customer experience. We talked a bit on the call around 3D photos, floor plans, 3D tours. It's also about Zillow 360 and building out the integration of a more seamless and bundled offerings, right, having the customer who might want to trade in to Zillow or sell with a partner agent also work with us for their home loan and get connected with our partner agent on the buy side and investing in the tools and the platform to enable and make that more real. So we expect these investments to deliver strong ROI and gross profit growth over time. But as we've talked about, it's still really early days. So investing to be able to build those services out and scale those to more customers is our focus.

Great. Talk a little bit about the potential for sell-side leads. This seems to be one of the opportunities enabled by the iBuyer business.

Yes. I mean we call it partner leads because it is both folks who don't want to sell to Zillow Offers, maybe wanting to list their home and folks who do sell to Zillow Offers, wanting to then go buy their next home, right? And so -- and that framing is important because, again, we're just trying to help movers move. And so when a mover comes and they need to sell, they need to buy, they need to finance, they need to close, we think about it more as how can we help provide multiple of those services to those movers. And so that's where we get really excited about Zillow Offers because it really becomes the beachhead for that move. And we gave a stat on the last earnings call, about 40% of our purchase originations on the mortgage side in the second quarter were sourced from Zillow Offers, right? And that's customers raising their hands and saying, "Hey, I need to move. These are all the things I need to do, and I want to talk to you about selling my house. Can you help me with other things?" So partner leads, we think, fits really well into that suite. Again, whether it's the listing, if they don't end up wanting to sell to Zillow Offers, or helping that customer buy their next home or finance it and/or close those transactions.

Got it. Maybe you could just briefly touch on the rest of the IMT segment and kind of how you're thinking about rentals at this point. And maybe any other parts of IMT that could be meaningful going forward?

Yes. I mean rentals continues to grow nicely, and we don't talk about it as much. It is a great stand-alone business, and we're excited about the growth and the potential there. Building the platform for renters, where there's more rental transactions than actually purchase transactions in the country every year and building that same digital transaction platform, whether that's helping people apply, helping landlords write the lease and collect payments and helping those folks connect with both our long-tail landlords and our multifamily professionals who are offering those at scale. But it's also a really good integration opportunity in the real estate business because today's renters are tomorrow's buyers, right? And so a lot of our rental customers are looking at rental inventory. They're also trying to decide if they can afford to buy a house, they may be talking to our Premier Agents. They may be thinking about that rent-versus-buy decision. And even if they rent this year, they may buy in future years. So it's very strategic to us to think about it as one place. And if you think back to our vision of helping all customers move, this is the largest volume of moves. So we're pleased with the growth and the progress so far, and we've got a long way to go, both in building that platform and in building the integration into the real estate business.

Super. Okay. Let's switch gears and talk a little bit about the Zoffers business. And I think the company was able to really effectively rebuild inventory in the second quarter. And this was more of a challenge in 1Q. Maybe you could talk a little bit about what changed in the interim and how the company is getting better able to react to the current pricing environment with sharply rising prices.

Yes. I mean you hit on it. Some of the inventory growth timing was just based on the fastest home price appreciation we -- any of us had ever seen before and much stronger than both our internal and other third-party forecast we're seeing at the beginning of the year. So keeping up with rising home price appreciation, both on our acquisition side and then finding that price in the markets we're in, that continue to be a new and unique challenge coming out of pandemic. But I will say what we've learned is that this business, Zillow Offers, is a business that exists across all housing market cycles, right? And that's been a question that we've touched on over the past few years. Is Zillow Offers more interesting in a hot or a cold or a medium market? Zillow Offers is a really interesting opportunity for our customers in all markets. Now what customers may value continues to shift, right? In a super hot market, it's not as hard to sell your house, yet we're still seeing record demand for Zillow Offers and services like us. And why is that? It's because customers -- those same customers are struggling to buy. And they need to fix and get the certainty of selling so they can both go -- go be a competitive buyer in a hot market, right? Now in a cooling market, maybe that's not as much their focus, but the certainty is. And then underlying all that is the convenience factor of you have to live in this asset while you try and sell it and move. So we were really encouraged to see while we saw these incredibly hot markets, the strength and the appeal for Zillow Offers just continues to grow, and we're even more confident now that this is going to be a service really in all weather markets.

That's great. Again, related to the long-term financial targets, just kind of in broad strokes, walk us through the steps to scale the business from where it is today, still relatively nascent to kind of a $20 billion annual revenue business. What -- walk us through the steps to get from here to there.

Yes. It's a good question. And it's important to remember, as exciting as we get about Zillow Offers, and I think a lot of our investors get about Zillow Offers, it's still incredibly early. I mean we are basis points of market share in the country right now. And so that portends 2 big challenges. One is customer awareness and demand challenge. The vast majority of people haven't heard about this. And that's going to take time. You discover things, you tell your friends about them, you come to trust them and you ideally trust them from brands you know and trust like Zillow. And then there's an operational challenge to that. So as we build to these new levels of scale, it requires even more technology, tools and automation to be able to deliver these services more quickly and more cheaply at scale, which then reinforces the flywheel of stronger offers to more customers, more transactions, begets more customers. So both of those are challenges. I would say in the near term, for us, the operational challenge is more acute, just given we're seeing so much demand even with the low awareness and low trial of Zillow Offers and services like ours. But over time, to get to that scale and then ultimately get to the long-term margin profile we talked about, we see both of them as really exciting challenges to go tackle.

Maybe more near term, what are the current demand signals you're seeing leading to that very strong 3Q guide? We noted your recent report on iBuyer transactions reaching about 1% of total in 2Q. That seems like an interesting milestone.

Yes. I mean the -- we're very focused on technology and scaling automation and operations efficiently, right? So we've talked a bit about doing that. Kind of what we call at the -- more at the top of the funnel and the pricing side where we're now able to put Zestimate offers on more homes, we're able to get customers an initial offer faster. But you're going to see other automation and technology opportunities that we're biting off across the ZO experience in the renovation and the holdings phase and also in the resale side, where we've just really started to scratch the surface on how can we make it not just more delightful and a better customer experience to buy one of these homes, but make it more efficient for this -- for the buyer and working with Zillow and our great partners when that happens. So we're really focused on how do we scale and build the technology to be able to deliver that to more customers. And you're right. That report, it's super exciting, but it's super exciting to be at 1%. And 1% means we got 99% to go. So it is really early days, and it is really early days with customers. So you asked about demand. We're seeing increasing demand, and we're seeing more and more customers come to us and to our peer iBuyers. But if you ask most customers what this is, the vast majority don't know what it is. And some of these markets have started to really register and recall and want to try these things on their own. But if you think about kind of unaided awareness, right, people who know what one of these services is and choose to go do it, that's still really low. And so over time, as that builds, we're really encouraged that we're seeing such strong trial of it almost opportunistically and in a latent fashion, let alone once customers know to go and try this and know this is the way they can do things.

Got it. 2021 has seen Zillow really consolidate existing Zillow Offers markets. I guess in light of the nascency of the opportunity, why not expand more rapidly? And/or maybe help us think about what does the market expansion plan look like looking into '22?

Yes. It's a good question. And we haven't put out any '22 guidance, but you're right. This year, we've been focused on growing within the markets we're in. And it's important to remember, the markets we're in represent about 25% of the U.S. housing stock. So while we, over time, believe this can be a service that is offered to the majority, to over 50% of the housing stock, and we will get there, right now, we're focused on getting operationally ready to scale and scaling out the operation and the customer offerings we have within the markets we're in. So we will get there over time, and we haven't put out any guidance for the future. But you're seeing the growth from Zillow Offers just in the core markets we're in as we build the platform out, and then we'll be able to scale that platform to more and more markets and more customers.

Got it. At the quarter, management talked about automating key workflows to support kind of a large-scale organization. Can you flesh that out a little bit for us? What are some of these workflows that you're applying software to?

Yes. I mean, if you think about the end to end assembly of helping a customer sell their home to a buyer, right, you think about having to get that home ready to sell, having to price that home, having to do work to the home, we obviously then have to hold the home and then go find the buyer. And you can think about applying technology and better scaled operations to really all phases of that process. And we've talked a bit about doing that with pricing and with our customer service and customer offering. We haven't talked as much about doing that, once we take hold of the home and the renovation process and then getting that home ready to sell and then obviously, the sales process. You heard us talk a bit about the launch of our Zillow homes brokerage or the ability to internalize some of the workflow where we work directly with our buyers' agents and their buyers. And so starting to scale that to more markets. But just think about it as kind of where can we apply technology and operational scale across all parts of that. We started to buy it off, obviously, the biggest places where we can make the most impact and pass those unit economic savings on to our customers in terms of stronger offers because as we reduce our cost, that can be a stronger offer for our customer we're buying home from. But over time, we're going to apply that same approach to really all parts of the operational cycle.

Got it. How do you think about competition in iBuying? And curious if you think Zillow has just a fundamental customer acquisition cost advantage relative to some of the peers in the space.

Yes. I mean we really believe in this strategy of kind of an integrated offering, both because it's a better customer experience. If you are moving, you have to sell, you have to buy, you have to finance, you have to close, you got to move, you have to coordinate all these things. And so if we can provide a more integrated service, it's more delightful. We also think it's cheaper and better for the customer and for Zillow, which then translates into a CAC advantage. So we are very focused on building that integration for those reasons. And we do believe that having a brand you trust and then being able to talk to the customer for multiple things when they're coming to you for any one of those things begets that advantage. So especially in a world where it's so early and the awareness of these new services is so low, when we talk to customers about them, being able to do that the most efficiently and then being able to do that from a brand that they already trust with some of their move decisions, we think, really sets up well. But again, I want to caution, like it is very early days, and these things take years. Often when we talk to investors, they want to see that progress happen overnight. And money can't make up for time in customers' minds, and customers have to try these things, especially in these low consideration infrequent categories where it takes a lot to get the word out in a brand-trusted way.

Absolutely. So getting the economics right at the unit level is really paramount for this business to be successful and to hit the kind of the long-term margin targets that you've laid out. Kind of -- can you talk about that? How are you feeling about the ability to profitably run the business, especially on some of those line items below gross profit at the unit level?

Yes. It's a good question. And we talk about wanting to run the business at a plus or minus 200 basis point guardrail on the unit level. And in Q2, we saw unit economics of nearly 600 basis points, I think 576 basis points. And so yes, a good chunk of that is home price appreciation, right, in the market. And you saw that in HPA itself, but also in kind of holding costs correlated with the velocity of sale. But some of those unit economic improvements are durable, right? The work we're doing on more dynamic renovations, the work we're doing on selling costs as our homes brokerage improvements roll out more gradually, you're going to see us book those improvements as unit economic savings to the unit and be able to pass those back on to the customer and eventually to the bottom line. So we feel great about the ability to get to scale. We are -- we want to obviously remind folks that our goal in the midterm target of the $20 billion run rate is not the profit target, right? The profit target is sort of at scale beyond that. And the reason for that is, again, getting the word out to the customers and helping ZO be the beachhead for all these adjacent services while also being a great business is our goal. And so it's why we're so focused on building the operational capacity we need, starting to build the demand that we need with our customers and then rapidly scaling that to more customers.

Got it. Let's switch gears from Zoffers and talk about the mortgage business a little bit. It seemed like the decline in refi activity was a short-term headwind in the second quarter anyway. But balanced with a very solid contribution from Zoffers. Maybe can you help us think through some of the near- and long-term drivers of this business?

Yes. And the way I always talk about mortgages is people love to shop for a home, they don't love to shop for a mortgage. But they have to, right? And it's the most important part of the home that they love to shop for. And so we have a pretty strong belief that this becomes highly integrated in the transaction. And that's what we're focused on. And we've been talking about that for a while now, building the factory, right, the loan factory, both the technology stack, the customer experience, the great loan operations that the team is off building so that it can plug into the things our customers want to do. Go back to that Zillow Offers customer I keep talking about who shows up and wants to trade in their home, they need to buy their next home. They have to get prequalified for a loan. They have to find a great partner to shop with and decide which home they're going to fall in love with, then they need an integrated transaction platform to close on both those transactions, right? Well, the mortgage is one of the most fundamental parts of that, and being able to offer that to those customers when they show up to buy and to sell is what we're focused on. And so it's still very small, and we're focused on building the factory. But as we talked about last quarter, you're seeing some of the seeds of that start to show in where the purchase volume is coming from, right? 40% of our purchase volume last quarter came from our Zillow Offers funnel and our Zillow Offers customers. And so we're really excited to see that as an early signal of what the growth could look like as we build this more integrated, more efficient solutions.

Okay. Super. Maybe you could talk a little bit about the new focus around gross profit. And why is this a better gauge for the performance of the business?

Yes. I mean for us, it's about just seeing the business the way we want our customers to see the business, right? We're seeing transaction on these integrated suite of services. People trust our brand, and we're seeing that customers ideally want the full-service bundle or at least multiple services from us when they come in one of those various doors, right, to the company. And so we think gross profit dollar is the right way to align the way we manage the business with how we want to serve our customers. And then it also lets us express -- as we win more customers and as customers start to use multiple services from us, we can then show how the gross profit dollar growth ties to the secular growth and the transaction growth we're trying to drive across what are right now sort of disparate services. But again, back to that customer view, they're not disparate services to a customer, right? To someone who has to sell and buy and finance, they want to get that transaction done. And if we can participate in more of those transactions and then more parts of that transaction, that's what that gross profit is intended to represent.

Okay. Super. Jeremy, maybe you could talk a little bit about the capitalization of the business. There's approaching $5 billion in gross cash on the balance sheet. How much is enough? How should we think about that going forward?

Yes. Well, I mean, I'm low to make any predictions given the last 2 years, we've gone through a global pandemic and almost a real estate shutdown. But I would just say a strong balance sheet serves us well. And actually, I think that's a really good example, right? It served us well during the credit fears. The [ initial state was in the ] pandemic, when we weren't even sure if transaction could happen, and we were talking about sort of company health at the balance sheet level. And we are excited to have just closed our first securitized debt investment product to continue to funding Zillow Offers growth. That's going to be cheaper and deeper and longer-term capital source on the debt side for the ZO business. So we're going to always look for ways to appropriately capitalize the business in the future, but we feel really great about the strong balance sheet we have and the progress we're making on the debt facilities in the ZO side.

Super. I think we're almost out of time, but maybe just in our final minute, any concluding thoughts as you look into the second half of this year and '22? What are you most excited about?

Yes. I mean I'm excited about a lot of what we just talked about. I'm also excited about remote and flexible workforce and the work that Zillow is doing there to help both recruit and retain some of the best folks to build towards the Zillow 2.0 future. Rich and team have talked a lot about that. But giving our employees the ability to be flexible and work from the office when they want and have to -- and work not from the office when they don't want, that's really helped us, I think, grow in scale. And we are hopeful that it will continue to allow us to attract a world-class and a diverse team to best serve our customers.

That's awesome. Jeremy Wacksman, COO of Zillow, thanks so much for joining us today. This was terrific.

Great. Thanks for having me.