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

Let's give it a second for everyone to enroll in here.

How's the conference going?

The conference is going great. I've learned a ton in the past couple of days. And you're our last presenter, so going off of the bank for sure.

I'll try.

So thrilled to end our conference here with Zillow's CEO, Rich Barton. Zillow has very much been the center of public attention in the past 5 or 6 months or so and continues to be a lot happening both in the near term and now over the next 3 years as well with the new targets you've set. So excited to dive in. And really, thanks for being here with us, Rich.

Thanks for inviting me. It's great to sort and not see everybody, but I could feel you out there.

So you highlighted at 4Q a housing super app. Let's just talk about what that means exactly. What is the housing super app? How does it differ from the Zillow experience today?

Okay. Yes. Well, great to see everybody, and hope everybody is keeping their heads in these crazy times. The crazy times continue. So the housing super app is a kind of a reference model and a design goal for thinking about the moving process from a customer's perspective and how a customer, a typical mover, has to basically be the systems integrator and the program manager and the general contractor for this move process that involves all of these disparate pieces that don't talk to each other and they keep having to repeat themselves and double back and shop different services from different providers and then try to land the plane and make it all come together at close. And it's a conceptual framework for us to hold out there for our product teams to basically take Zillow app, which exists on most shoppers' smartphones right now and realize that our opportunity to make this process a whole lot easier is to integrate all of these discrete, disconnected services, bring them onto one platform, offer the customer a persistent view of what's going on there and basically ease this transition over the chasm of despair, as we call it, which is moving, get them over the bridge and into the new house. Finally, I'll recognize that it also conceptually leaves room for us to create and offer these services ourselves and plug them into the super app process like we're doing with touring for instance or mortgages for instance as well as to connect partners into the super app such as we do with Premier Agents and plug them in and make it the single repository. So that's kind of -- that's conceptually what we're doing. And this is -- the super app is a -- we found is a really terrific way to communicate concept internally.

Great. So I think the conversation will kind of lend itself to helping understand what all that means and how we're going to get there. So one thing you noted when you exited iBuying was the vision for Zillow 2.0 remains unchanged. And you talked about -- we'll get to your '25 targets, which we'll talk about also in a bit. Just that the original shift to the transaction, when you first went into iBuying, it was very much centered around that iBuyer transaction. So maybe let's start with just walking through how we get to that vision now without iBuying being the central component of it.

Yes. I mean we do get a real lot of questions. Are you still going for the transaction? Is that still your vision? I don't know if this is going to land, but my answer the other day to somebody who asked that was a Dave Chappelle reference. I don't think I saw -- see a stand-up comedy. But same super hero, new boots. Anyway, no, our strategy is the same, and that is to basically make the whole moving process much more digital, integrated and easier and open up a world of addressable market for us simultaneously by actually participating in the transaction. That is consistent. One of the potential innovations along that way was iBuying, and you can kind of think of that as an extended experiment that we ran to try to figure out if that was going to be the answer for us in -- or one of the ways we help people do that. And we just found out that it's far too risky and volatile and way too actually narrow and then a number of customers can serve for us to continue to do it. And so we now view that particular thing as an opportunity for partnership rather than having to jump in title chain and be a primary in that one. But in the meantime, we've assembled all of these components and built all of these components that are the building blocks for the digital transaction. And now it's a matter -- and that is things like touring, 3D home shopping, mortgages, closing, document, routing, signing. We have a whole host of building blocks, and now we are working hard to put them together to build the super app and make it really smooth for customers.

Okay. Great. We'll dig into all that in more detail. Before we do, I just -- I want to hit on Premier Agent for a little bit. From the way you described the super app and that approach, it almost feels like looking at PA in isolation really isn't the right way to do it anymore or it's not going to be. But just maybe bridge from between now and when we get there. What are the drivers for growth in PA are before that bigger integration? So frame for us kind of opportunities to drive growth in PA. What are the secular trends we need to keep in mind or organic growth opportunities in the coming quarters and in '22 as you start to build that super app out?

Yes. I mean, okay, great. I guess I'd start out by saying we have been driving our IMT business, which is Premier Agent, primarily. That has been growing incredibly nicely over the past few years while we've actually been experimenting with iBuying. And so I just would submit that as data point 1 that while we are putting out some aggressive feeling targets, we actually have been delivering against that growth for the last 3 years in this business and over delivering, in fact, from a profitability perspective. And that really stems from the fact that we have most shoppers, most movers using our apps today, okay? And that is this giant pool of potential energy. I used to talk about oil in the ground, where Saudi Arabia, we've only drilled a couple of wells. But over time, the challenge we have is unlocking that oil in the ground and bringing it out. That's illustrated pretty nicely. We dropped some new -- kind of a new framework with some new estimates of TAM and market size on you and our investors this past quarter to help kind of visualize this opportunity, but let me kind of walk through that a little bit. Basically, if you look at the universe of home transactions, there's about 6 million homes -- 6.1 million homes transacted last year. That's 12.1 million, what we call, customer transactions because there are 2 sides, okay? But 6.1 million buyers. Of those 6.1 million buyers, we estimate that 4.1 million of them use Zillow, okay? So 2/3 of the market actually uses us already, and this is the potential energy that I'm talking about. Of those 4.1 million, the really surprising thing to me as we -- shouldn't have been such a surprise, but a little bit of surprising thing to me is that 1.4 million of those 6.1 million actually raised their hand and reached out to Zillow for help, okay? So they reached that and contacted us, and yet we're converting a small percentage of those customers into transactions and revenue, so we have not fulfilled what we see as our destiny in terms of monetizing these customers. And it's through a combination of not having the right products and services, not having the right partners, not matching them well, et cetera. And we have a ton of innovation we have ahead of us that drive our 2025 targets to increase the conversion of shoppers into connections, increase the conversion rate of connections into transactions and also increase the basket size of what we offer them by continuing to offer more and more services to them. So that's kind of -- broadly speaking, that kind of sets the stage for the 2025 targets that we laid out. I have -- it is the history of the company slowly and -- but meaning -- not slowly, rapidly increasing conversion of users and turning them into customers and then having more to sell them, and that will continue.

I will bring the conversation back there, I promise. But I want to just hit on, with all this -- all the things are going on there, there was less talk maybe in the near term at earnings about just market-based pricing and Flex and kind of those 2. Maybe you can give us a little recap or just talk about some of the things that are going on between those 2. Any more color -- this is something we get from investors quite often. Just help us understand more about Flex. Anything about conversion rates, the growth there, how that's contributing, how that contributes to your goals? And then lastly, if I could put that in the context of the macro with some challenging inventory environment, how that's impacting Flex in the near term?

Yes. Okay. I mean I don't have to educate you or this crowd about the unknowns for macro forecasting right now in this industry. We've seen a wider dispersion for residential real estate this year than probably ever before than we've seen, right? And so I don't -- I certainly don't have a crystal ball there. But throughout even the macro uncertainty in the last couple of years, transactions have stayed relatively high. People do want to move. And the big lever for us that we see is really the big shift from kind of old way off-line, old way of doing things to new way, online of doing things with Zillow being the leading brand in new way online. And so our big lever opportunity is continuing that big shift and not overfocusing, I don't want to minimize, but not overfocusing on kind of near-term cyclical macro things. In terms of Flex, I mean Flex is just an example of a long history of business model innovation of drilling wells into the ground, okay? And with the inspiration that making money by selling just an ad placement to a partner was not resulting, in many cases, in the kind of customer outcomes that we wanted to see, which does help customers get into the new house. And so we innovated. We've tried lots of different things there and we continue -- we'll continue to try lots of different things. Flex being one of them, which is basically saying, "Look, we're not going to make money until the customer is in the new house." And then when they close, we're going to take a referral fee as part of that, which aligns our interest with our customers and our partners. We like that. We've been able to -- we've really been able to drive satisfaction and results on all 3 of those legs of the stool, and we'll continue to push on that. It doesn't necessarily -- it is the optimal way to do things in all instances, and we reserve the right to do lots of innovating on business model here. It does offer us more access to the customer throughout the transaction, however, and it is our goal with the super app to continue to plug more and more services: touring services, financing services, closing services, rich media listing services. It does, we believe, offer us a higher chance of plugging in a broader set of services into this full customer transaction. But by no means we'll be exclusive to that, we'll have many different mechanisms for plugging those services in. So it is an interesting thing to talk about from a spiritual and customer alignment perspective. I wouldn't necessarily overfocus on what percentage of the business is Flex or do I think Flex is to draw any major conclusions about how the company is doing.

Okay. So let's go back to the '25 targets. Clearly, they have some big implications there. So maybe just for those that aren't aware of them, if there are any that are listening today, can you just restate what they are first? And then that path to double your share of transactions from 3% to 6% and then a meaningful step-up in monetization in such a short time frame. So we'll talk about -- I want to talk about what gets you there, which I'll ask you some questions there, but just maybe just set what you're trying to get to, and then we'll kind of go through how you get there.

I'll try -- I'm pulling them up in the slide deck I published because I actually...

I figured you had them by heart.

That's for sure. I just haven't answered it in a little while. Yes. I mean, broadly speaking, what we're saying is that we're going to take customer transactions from 360,000 customer transactions that we believe we're participating in and monetizing today. And that by 2025, we're going to grow that to 730,000 transactions, okay? So roughly doubling the number of transactions. All right? And we will modestly increase revenue per customer transaction from $4,100, which is what we estimate we are able to get on a per transaction basis today, to $5,200, which will take our revenue from $2.1 billion in 2021, and that is our revenue that we reported. That is everything other than iBuying, okay? Take that $2.1 billion and grow it to $5 billion. And then further, we've said the EBITDA margin on that $2.1 billion was about 39% last year, and we think it's reasonable to grow that to 45% by 2025, which would result in $2.25 billion in EBITDA. All right. So that's what they are. We can talk about how we're going to achieve that or that's at the stage for what they are.

Okay. So let me guide you through that. So the key factors were touring, mortgage, other stuff or solutions and then better integrating them. So as for touring, why is touring so important? What needs to be done in terms of integration of Showing Time into Zillow to close the gap on touring?

Yes, even zooming out above the touring financing points is these are things that drive more connections and more conversion of connections transactions, okay? And so touring is really interesting to us. We made a big investment last year in a company called Showing Time that we bought for about $500 million, which is the leading kind of touring reservation system, though it's quite manual today. We see an opportunity to digitize that and kind of do what OpenTable did for restaurant reservations, we plan on doing and integrating for home tour reservations. As you might imagine, that's a very complex process. Now we think that's interesting because customers love touring. It is the next logical step after your shopping. And that we know when we are able to connect our customers with the tour, they convert into transaction, monetizable transactions for us at 3x the rate of someone who doesn't take a tour with us, okay? So we see lots of customer satisfaction upside but also transactional conversion rate revenue upside from touring, okay? So that's one that we -- gives us confidence in these 2025 targets. Another one is financing and getting a mortgage. Most people are shopping for a mortgage at the same time they're moving. And we built up a mortgage operation and service to our iBuying operation over the last few years. And we built the factory. We have the team. We were getting good attach rates, actually. And so however, we were limited in that mortgage business to a rather small number of transactions in our iBuying operation. And so now we're basically repointing that mortgage operation at the large flow of customers, which come through our main -- on our main path, and working at offering them integrated financing solutions, which will increase transaction conversion and increase basket size. So those are 2 big ones. We also continue to innovate on kind of alt finance selling solutions. There's a lot of interesting things happening out there at alt in finance. Most of them have been here -- right here with you and your fish poster on the Zoom stage over the last few days. Hopefully, they're recording so I can go back and watch them. We're going to...

Yes, they're recording.

Yes, we're pitching a big tent on these solutions with big eyes and ears on integrating these things and how they're going to work out to help customers solve one of the particularly difficult pain points but only one of the many pain points in moving, which is I got to sell my d*** house, and so we see lots of interesting things there.

Okay. What's the integration process? Like what level of work would you say there is to do to integrate Showing Time and the mortgage business into the super app? Is it really complex kind of medium? What do you need to do there to get it done?

I mean it will be both easy and hard. We have the raw material now, but wiring it up both -- from a software perspective, not all that difficult. But from a process perspective, yes, difficult because it's the way software interacts with people and processes and partners where the magic will really happen. And figuring out all the incentives properly with this vast network of partners that we have that are really valuable to us to have this really -- we get a ton of leverage via our partner network. And so making sure we're fitting into their processes and solving what they need to get solved for in addition to what customers get solved for, I mean it will take some time, but we're in a terrific position with all the building blocks to do that. So my expectations are very high that we'll be able to get this done. It will take a little bit of time to manifest, but I'm confident.

Okay. Right. So one area you mentioned it just now, but you really hammered this whole -- but not 4Q or 3Q earnings was just how iBuying proved to be too unsteady and risky around the inventory risk, and we did highlight was the opportunity to be a bigger part of the transaction using a more asset-light approach. We didn't talk so much about that in 4Q. We've spoken a lot about that yesterday and today. It's a huge trend in the space around power buyers and those kind of models. I'd love to hear your take on that approach. It feels like that would really plug in very well with what you're trying to do and how that can help you get to your targets as something you would kind of build in.

Yes. I mean I'm really excited, Ygal, about our -- I mean for a number of reasons that I don't have $8 billion of balance sheet or soon to not have much balance sheet risk anymore with owning all this inventory. But -- so that's nice. It's liberating. It's freeing. But it also -- one of the really interesting things is it frees us up to dramatically expand our minds about what interesting things are going on out there and working with different partners to experiment with these new and emerging models including iBuying, by the way, like which we think is quite interesting. We didn't like the risk and volatility associated with it, especially as a public company, but we do think it's a pretty interesting way to solve that pain point. I would call it early days in innovation here. I mean this is why you have all these interesting companies on your stage right now. And we are in a terrific privileged position of having close to a couple of hundred million unique users to our sites and apps every month, which gives us some space to innovate and the right to do so in a way that should end up having a nice profit profile and be a leveraged way of doing it. I guess I would categorize -- not to trivialize all these things. I'm not trivializing them at all, but I would say that a lot of the innovation that's happening here is trying to figure out what a more modern mortgage looks like, what a more modern financing solution looks like. You can kind of -- all roads kind of lead to that. And I don't totally know how all that's going to play out. But the mortgage regulatory environment, product, processes that we have inherited from decades of legacy buildup have put us -- it's just showing signs of strain. It's very, very creaky, and there has not been a lot of monetization. And so I love that we're a primary in this right now as well with mortgages so that we can bring our software expertise and kind of disruptors' mindset to figuring out what a modern mortgage is going to look like. I broadly categorize these things that way.

Okay. Great. Actually, follow-up on -- from the field on what you just said. Rocket is also trying to modernize mortgage in their own way. Any thoughts on what they're trying to do? I think they're kind of coming at it from the other side of what you're coming out of it.

I mean Rocket is an amazing company and a great brand and comes from a really strong position, especially in refi. They're a company that really succeeded on consolidating, centralizing, nationalizing refi. The opportunity in purchase is more complicated as everyone out there knows. It's a much longer tail business. It's local. It's fragmented. It's not digital. It's fraught from a regulatory perspective. And so it's just going to -- it's a Rubik's cube. I don't know that any of us have quite figured out the Rubik's Cube yet, but obviously, many companies see this opportunity.

Okay. Great. And then so we have a few minutes left here. I'd just go back to the margins on the 2025 target, what that means in terms -- in the context of the level of investments you need to do to get to where you want to get. So presumably, there's still a lot of wood to chop, and maybe you would disagree with that, but to kind of get that full future vision of Zillow. And presumably, that comes with a good amount of investment. So how should we think about the margins and that 45% relative to kind of where through your investments going to be?

Yes. I mean we are -- I think it's 39% in 2021. We said, I think, our guidance implies 41% EBITDA margin for Q1. So it implies a modest increase in profitability. You could look at that 2 ways. Like don't you have all the pieces in place? And why isn't it here? Or you could look at it the way you just asked the question. I think what it does is it reflects that even when we hit these targets, our percentage of customer transactions, our penetration should be 6%. We estimate it would be 6%, which, to me, feels like we still have a lot of oil in the ground, right? Given that most everybody uses us and trusts us, we ought to be able to ultimately end up with meaningfully higher percentage than 6% penetration. Not to mention that everywhere you look and every direction you look is an adjacent opportunity that wants to be plugged in and digitized and to make the moving process easier. This is just a wonderfully giant complex, broadly speaking, industry. And so what I think these margins -- the target margins reflect is that we anticipate continued growth opportunity between -- beyond 2025. And we will appropriately make, we hope, appropriately make investments relative to continued growth beyond 2025, even during this next few year period.

Okay. Great. So I want to end up on this, which is something that -- it's a little bit more of a near-term dynamic, but certainly important longer term, and it's something that investors have really been focused on as you shut down the Zillow Offers business. And you highlighted this a lot last quarter also, going from net debt position of $1.7 billion as you sell the homes, recapture that cash to a net cash position of about $1.7 billion. That cash, that flip in net debt to net cash is something investors are very focused on. So -- but people want to understand how you think about utilizing that cash, return to shareholders, M&A, share repurchase, internal organic investment. How do you think about that cash influx you're going to be getting over the next couple of quarters? What to do with it?

Yes. Well, it's a nice flip. It has felt really good. We haven't quite completed the flip yet, but we're in the process of completing the flip. And embedded in that flip from minus $1.7 billion to plus $1.7 billion net cash is $3.1 billion in cash as of the end of last quarter. You did see us a couple of quarters put about $750 million capacity buyback, of which at the end of last quarter, we completed $450 million or thereabouts of buybacks. So you -- I wouldn't say that's something --that isn't the beginning necessarily of a trend. It possibly could be. I don't want to count that out, but you shouldn't -- we shouldn't be thinking that that's the mode we're in. We actually -- we do see a ton of investment. It's just merely a nod to the fact that we cashed up and staffed up for a business that was very cash consumptive as it grew in iBuying. And it just reflects that it didn't -- the current and future business didn't require that, and so we have -- we do show willingness to do that. Here's the thing. I think about it. I like having a reasonable amount of cash on the balance sheet at hand, especially as we move -- as we navigate into geopolitical instability, macro instability, market instability. Having the stability of cash and the comfort of some cash on the balance sheet is attractive to me, and it creates optionality for us. As the tide goes out, if indeed the tide is going out, there will be a lot of interesting things left on the shore or washed at sea, and giving us some optionality on M&A is interesting to me as well. We have shown a history of kind of opportunistic M&A. But I wouldn't say we're not a continual M&A company like some other companies. We're not -- that's not how we think, but we do look at M&A opportunistically. I don't know if that answers your question.

It does, and right on time. So thanks, Rich. I appreciate your time here today. Great way to end up the conference. And thank you, everyone, for joining. It's been a great couple of days. Speak to you soon, Rich.

Thanks, Ygal. See you, everybody.

Thanks, everyone. Bye.