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

[Audio Gap] everybody. I'm Brad Erickson. I cover Internet here at RBC. Very pleased today to have the Jeremys. Sorry, I had to say it. Yes. Hofmann and Wacksman, CFO and CEO, newly named CEO. Congratulations on Zillow.

Thanks for having us. We're excited to be here.

Thank you for being here. We're both from the Northwest. So we figured this let's fly out to New York and have a little conversation in person so...

A lot nicer weather here today.

It is. It is. So, cool. We're a little late, so we'll get started quick here. Why don't we start with just 1 or 2 minutes on the quarter, how you're feeling? And then we're obviously going to get into some of the product stuff that I think everybody is really interested to hear about.

Yes, happy to. I mean we're really pleased with Q3. Revenue was up 70% year-over-year and growth really across the business, growth across residential, rentals and mortgages. And we talked a bunch about this on the call for those who have listened. We're just pleased that we're seeing this integrated transaction strategy start to drive results. You're seeing that come to more and more of what we call our enhanced markets, where we're bringing this better consumer experience with the best agents to more of Zillow customers. And that's, of course, driving some of the outperformance, but that's also just driving the growth in our strategy in Q3 and what we plan to do again in Q4.

Yes. Got it. So let's get into the enhanced market strategy. Everybody -- the #1 question I get asked on this is what is it? What is it?

It's a great question. And for those who don't follow us as closely, I mean enhanced market is really our go-to-market motion, our go-to-market strategy for this integrated transaction. We go into a market and we bundle together a Real Time Touring experience for the consumer, we bundle together as a little home loans is a financing opportunity. We partner with the best Premier Agents we have. They are using our software, our CRM card Follow Up Boss more and more. 80% of the connections in these enhanced markets are landing in Follow Up Boss. And so that creates this more integrated experience for a buyer, whether a buyer wants to start with a real-time tour which is booking a tour the way you might book a restaurant on OpenTable, a much less friction, a much more delightful experience to meet an agent and get to a house. Whether a buyer wants to start getting prequalified or preapproved and talk to a home loans loan officer and then shopping on Zillow and partnering with that agent as they shop and ultimately buy a house. That's the enhanced market experience. We do it that way because to make that integrated transaction go, it is, of course, software. It's software for the customer, but it's also finding, training and working with the best partners and pairing them with great loan officers and great technology. And so we are doing that market by market, team by team. That's why you hear us talk so much about the enhanced markets. It's not a national switch that you flip. It is a capability that we are bringing to more customers all the time.

Yes. Yes. Got it. And then just within that, and I guess, digging in a little bit, what -- obviously, this is intended to all drive better conversion, right? And so maybe talk about like some of the mechanics that do that. And then maybe one for you, Jeremy H., how does the auction respond to that? Like, talk about the timing of how that occurs, right? I think of it as -- or we talk about it at Internet sometimes is value creation and then value capture, right? And there can be a lag there. Maybe talk about those 2 things, if you could?

So on conversion and the drivers of growth, the few things we look at are -- what makes a great partner is customer satisfaction, are they delighting the consumer, and we audit and survey the customer and track that. So how often does the customer want to work with the agent, fantastic predictor of downstream conversion. The ability to meet more customers, respond to more customers via software is a great input to conversion. And then use of Zillow Home Loans is a great predictor of conversion, too. We talked about that some on the call. We find that when we are talking to customer about financing and our agent partners are working with that customer while they're shopping, doing those 2 things together, it helps convert the customer. Which makes sense when you level up from the business and think about it if we're both helping nurture and meet the customers' needs, the likelihood they're going to transact with us and our partner is higher. So we watch customer satisfaction, customer intense signals. We ultimately, of course, watch are they converting more? Are they using our services more as an output, but the inputs to that -- those conversion drivers are really are those customers using our software? Are they landing with great partners who are great at their job. And then combined, are we helping them get across the finish line?

Got it. Yes. And then on how it shows up, we think the best way to measure our success is this revenue per total transaction value metric because it gathers both how many transactions are we doing and then how much revenue per transaction are we making as well. We compare that to what the market is doing and that tells us how we're doing with respect to share gains and the things we want to drive over time, which is be a secular growth company regardless of what the macro does.

Yes. Yes. And I want to come back to that maybe in a little bit. But just first on the idea of real-time tours. I think you guys had a pretty big unlock in July, I think it was, for real-time tours. Where are we in terms of rolling those out? I know you've said you're going to be over 50% of leads, I think, of real-time tours by the end of the year, I want to say. But where are we in terms of the market rollout? What's it look like for nationwide at some point? Maybe just talk about timing and the impact there.

Right. So Real Time Touring again, for folks who tours, which is the #1 thing that consumer wants to do, are the majority of the leads that come to Zillow, they want to take a tour. The second most popular thing is actually a financing question and that's up sharply from maybe a year ago. Just put yourselves in the shoes of a first-time homebuyer. They're either starting with, "I want to go see this property I fell in love with it" or, "Can I even afford to buy a house." And so those are the 2 paths we really give them at Zillow. Tours has become the predominant way folks want to meet an agent, that's better for an agent, right? Because when you pick out a time, you want to go see a house and you actually want to go meet agent at a house, the ability for the agent to win that business versus a cold phone call is obviously much higher, and that's a higher intent customer, right? So tours are the majority. Real-time tours are a subset of that. we are at about 25% of all customer connections nationwide are real-time tours. And the real-time tours inside of touring is the easiest, simplest path for a tour. That is where we have listing inventory and we have partners trained so that you can actually just book it, right? As a consumer, you don't have to go through a game of telephone where you call your buyer's agent who calls the listing agent who figures out the seller's time, often those times don't match up and you're playing the game of telephone back and forth. And the challenge in the Internet age is when that marriage doesn't happen and those times don't work out, often it's a broken connection. The buyer might put it down or the agent misses out on winning that customer and they show up at a different way at a different time. So we're moving all that friction, of course, it's a better buyer experience. But it's also helping the agents convert because now you are meeting the customer where they want to be met, at the house they want to be met at with a chance to win their business. It is a growing subset of our tour connection. And in general, our tour connections are the highest converting type. We talk a lot about how touring leads convert about 3x the rate of other actions. And because again, it's just a higher intent consumer. It's a good example of using software and technology to enable a consumer experience that's better that ultimately yields a higher agent experience, where that's a higher intent buyer, it's a buyer that knows what they want and the great professionals we have are then able to convert and win those folks' business more often.

Yes. And then Brad, one thing to highlight. We were at 10% of all connections at the beginning of this year in Real Time Touring, we're now at 25%. We were hoping to get to 20% at the beginning of the year and we've exceeded that. So when you see some of the flow-through of performance in Q3, for example, we do think being driven by that acceleration in Real Time Touring.

Got it. And then just any comments on kind of further rollout?

Nothing yet other than our strategy this year, largely in the enhanced markets has been land and expand, and we expect that strategy to continue. As we talked about, a lot of things require really careful software rollout training agent by agent. We'll, of course, also go faster with the things that don't. So a Real Time Touring for example where we could scale the training and the enrollment faster than just how we do enhanced markets, so we did that, and that's why we're at 25% of connections there. So we'll always look for ways to bring things to the market faster when we can. But we're going to be very careful to make sure we build the integrated experience right with our set of partners.

Got it. Okay. And then just one follow-up in terms of like relative impact and maybe take it to the model a little bit. When you think about Real Time Tours, mortgage and then the Zillow Showcase, what would you say is sort of most impactful today? What could be most impactful kind of down the road?

I mean I'll start, you should layer on. They're all contributing, is the answer. Real Time Touring is probably the biggest contributor over the course of this year. Mortgage obviously helps a bunch in terms of revenue per transaction as well. And then Listing Showcase is quite exciting, but it's earlier. So we were effectively 0 revenue last year at this time, and we're now at nearly 1.5% of all new listings. So there is contribution coming, but we think the opportunity there is far beyond what we've done in 2024.

Got it. And then just -- sorry, thinking beyond kind of the current offerings that are out in the public domain, maybe just talk about things you guys whiteboard about -- spitball about for the future that could also fall within a "enhanced market".

Absolutely. I mean the enhanced market, again, it's the -- how are we going to market with what we want to be a one-stop shop to buy and sell. So everything Jeremy just talked about, we want to be able to get the consumer from starting dreaming on Zillow, all the way to sign their documents inside the Zillow app. When we -- for those of who sit that don't follow us, we talk a lot about a super app as a concept because that's really what a super app is. It's being able to pull multiple services together with great customer choice of what you want to use and get your transaction done or get your transaction types done. And in real estate, for those that bought and sold homes, you have to coordinate all these different activities throughout the transaction process and it's incredibly time-consuming, fraught, costly. And so for a buyer and a seller, if we can help you go from start to finish in the Zillow app, that's the strategy. Today, that shows up really as touring, financing, great agent partners and starting to work on listing products. Over time, you would want that to include things like title and escrow and your document signing and other related transaction services that both Zillow and our partners can help recommend. Again, the goal when you talk to consumers, if you could let me do this all in one place, if you could give me transparency and empowerment on my transaction, I would far prefer that. I would be much more likely to use your services and your partner services. And so that's what we're building towards. So for over the longer time period, we'd like to get from start to finish on the Zillow app.

And just one other thing just to add there is, today, we are anywhere between 60% and 70% of all audience share in the country, depending on the month. And we are still single-digits transaction share. When we think about the opportunity to drive growth well beyond our 2025 targets, target of 6% customer share it's using this enhanced market strategy and adding more and more services, such that the experience is one that is better than the offline experience, right? That's the big problem to solve, take a lot of transactions that happen offline, bring them online. I think we are setting ourselves up for that with this strategy, but it's really early days versus what we think we can go to.

Got it. Okay. And on that point, I guess, the long-term targets, I do get this question a fair bit. Can you guys clarify the difference between the 6%, which I think is a transaction share target versus the whole trailing 12-month revenue divided by total transaction value?

You got it. So the 6% transaction share target is a subset of that revenue per TTV. We just think the revenue per TTV is more real-time way for you all to track our progress. We've doubled our share in our oldest 4 markets on that metric over the last 21 months. We feel like we're well on our way to go from 3% to 6%. It's just the revenue per total transaction value just gives us a better mile marker on a quarter-by-quarter basis.

And is it on the formal 6% goal? How do you want us to think about measuring that or assessing the progress there? Because a little harder obviously.

Yes. So I think we will give the revenue per total transaction value, and we've continued to give that update over the course of this year. And then as we get closer and closer to 2025, continue to update folks on the 6% target as well, but we feel quite good about achieving that.

Got it. Got it. Cool. And then one last one on enhanced markets. Housing market comes back in '25, it doesn't come back, who the hell knows basically. Does that amp -- like if it's better or whatever, can you guys lean into that and that might actually amplify share gains? Or does it -- are you affected by any sort of normalization one way or the other in the housing market?

The way to think about our growth is, as Jeremy talked about, secular for us to control, you saw that this year. We saw a flattish housing market, especially in transaction times price. And assuming Q4 -- using the Q4 guide, you'll see double-digit revenue growth and modest margin expansion for the year, and we expect to outgrow the category again in the future. So whether macro becomes more of a tailwind or remains choppy, we plan to grow through that. I think it's -- as you said, it's really hard to predict what's going to happen in macro. It's important for folks who don't follow as closely to remember, we are bumping along the bottom of transaction volumes all time here. The normalized housing market is more like 5.5 million, 6 million existing home sales, and we're in the low 4s and affordability is a big driver of that. Divesting supply is a big driver of affordability. It's going to a while, I think, for those things to normalize and get back to a more normal market. We're planning for more of the same, which is this year, we said, "Hey, the housing market is not going to become a huge tailwind, let's go grow not just our residential revenue, but our total company efforts across the business against that." We plan to do that again next year.

Got it. Okay. Lowering level -- keeping that bar low on EHS expectations, it's fine.

Some of it is maybe that but more than anything, it's our internal message is don't wait for macro to save you. Our internal message is we've got regardless, and you've got to do idiosyncratic things regardless of what the macro environment does and we're proud of what we've done in '24 as a result, but we're planning our cost structure for more of the same as we talk about.

Yes. Got it. So let's move to rentals. This is kind of the new shiny toy of the model or whatever. You're spending a lot on marketing. You obviously made a big push into multifamily. I guess 2 things, a, where has the business arrived that caused you to say, "Hey, this is the time we're going to go down and start spending on the marketing dollars?" And secondarily, just when we think about the growth algorithm for this business, I want to dive into the products and the model a little bit. But like between adding new units and then just price, right, selling more value, essentially, what's the growth the mix there going forward for rentals?

So our rental strategy is really unique and solves a real customer problem. And that's what gets us excited about. That's what's driving it to be a great business. The #1 problem in the rentals market is there is no national database of all rentals and renters are operating on an even more compressed time frame than buyers do. And so they are in a heightened sense of trying to find what's available to make a decision. And so when we started our rentals business, we said, let's try and solve that problem. How can we amass as much of the inventory as possible. The majority of the inventory is actually not in multifamily, it's actually in the long tail of the single-family and smaller units. There's millions of them out there. And so we built tools and a marketplace off the Zillow brand, which you know for housing to start to amass and organize our supply. We now have the largest amount of inventory in the country. And that's what yields brand awareness. When you ask a renter, where do you shop for rental broadly, we are the largest brand, and you can measure that in audience share, where we have the largest audience of renters and that's up year-over-year, I think, 20% according to third-party measurement, so large and growing because that strategy works, right. The #1 thing to solve is help them with as much of the supply as possible. They're still going to need to shop everywhere as quickly as possible. They're still going to apply multiple pieces. But every year, can we give them more of a one-stop shop. That strategy is now what's yielding multifamily advertisers to want to advertise that audience. And over the last couple of years, now that we have seen that strategy bear fruit, we have turned our focus to, can we bring more multifamily advertisers and multifamily units on to Zillow, and that's the revenue growth you're seeing in Q3. It's where multifamily revenue is growing even faster, and you can look at building count as a good proxy for that. So we now have 47,000 multifamily buildings on Zillow, up from 40,000 at the beginning of the year. So really sharp growth there. And that strategy, we feel is very durable because it solves a real customer problem and it's solving an advertiser problem. That's why we're so confident in the growth to continue. So we put $1 billion-plus revenue target out there for the business in the future, and that's really driven mostly by multifamily advertisers and continuing to penetrate and bring more of those folks online to want to advertise for a growing audience.

Got it. And maybe just a follow-up there. I guess, what are kind of sales cycles look like on these multifamily units? How quickly do they ramp? And then what's the model here? I think a lot of it is subscription, but maybe just -- maybe a little more color on that.

Yes. So on the model, 80% of our business is in subscription on the rental side. So it's a vast majority subscription business. And then sales cycle-wise, it tends to be throughout the year. There are different parts in which folks come on faster or slower, but we've been pretty steady, like Jeremy said, we've been steadily growing the property count throughout the course of the year, and we've been really pleased with that. I think if you think about the growth algorithm from here, the driver to get to that $1 billion-plus target really is in multifamily, and that will be primarily on the back of buildings growth. We are well priced such that we show up, I think well to our partners, the folks that we're selling to, but the bulk of the growth is going to come from us just adding more and more properties and making sure that we're supplementing that with the right amount of consumer demand.

Got it. Got it. Okay. And then I mean the business was already growing like pretty well, right, before you guys announced the intent to spend and put out the deck kind of giving people a better sense of the market. So as we move forward, I guess you started the spend, it sounds like it's going to be a little lighter in Q4, but maybe seasonally, logically, we might expect it to sort of pick up in the next year. Are we -- is it safe to assume we should be assessing these results as a sign of success from those efforts? Or are those -- is the payoff maybe a little bit down the road? Just talk about kind of results from the early read on spend -- on the ad spend, I should say, on rentals?

Yes. I can start. You layer on. I think we're really pleased. I would say though, Brad, our marketing spend not the primary driver of growth. The primary driver of growth is the strategy that we've put out and the organic ability to bring as much supply online, which then gets traffic, which then gets supply, like there's a real 2-sided marketplace dynamic here that's really driving the growth and then we'll use some marketing spend in a targeted way to supercharge that. I think we've been pleased with those early results, but that's just one small component of the overarching strategy.

Yes. I mean I think both for rentals and you've seen us in for sale, advertising is a tool, not a strategy. And in rentals, we talked a lot about the strategy, what's driving -- it's product-led growth. It's a great marketplace for both the renter and the supply. But within that, we found a gap in audience. We were under-indexed on -- there's a segment of audience that is real dedicated apartment seekers and because we didn't have as much supply, we weren't in organic channels as often, we were underrepresented there. Even for as big as the Zillow brand is in rentals. And so that's a great problem that advertising can solve. It's a tool. And so we'll use advertising in a bespoke way to help bolster product-led efforts, but you see us on the for-sale side doing the same thing, right? We use advertising to amplify, to drive awareness for new things, but it is a tool in the toolbox. And it will always be -- we love it as a modest driver of growth and when we can use it to solve problem. So it's a good example of solving a problem with a good tool.

Yes. Got it. Let's move to financials a little bit, talk margins. I think you guys have given actually a really nice sort of formula for leverage in the business, right? Kind of talked about 70% of the cost is fixed. Pretty well baked at this point. The variable costs, the other 30%, maybe a little bit of deleverage because of, I think, partially because of this rental spend. So I guess maybe if you can break those up, how do you want people to think about sort of the flow-through of this business, right? Because you've got drivers like mortgage, right, which everybody knows kind of a lower margin business and that sort of thing. So put it all into context and maybe if you can, just to separate it between the variable and the fixed component?

Yes. So 25% to 30% of our revenue is in variable spend. That's on sales primarily in sales support. Then we use marketing, we'll dial that up or down depending on opportunities we see fit. And then $1 billion or so is in fixed cost. So what we've said and what we'll continue to say is we're going to look to control our fixed costs. We expect that to grow modestly with inflation, and we're going to try to fight that inflation where we can. We grew fixed costs year-over-year 4% this past quarter, and that was with 3 acquisitions. So that gives you a sense of how well we're controlling our fixed cost because we think we're well invested to go hit these share targets based on the fixed cost that we have today and the amount of investment we've made today. On the variable side and on the marketing side, we're going to dial that up and down depending on where we see opportunities. So in 2024, one of -- or a few of the big opportunities we had were rental sales, ZHL, loan officer growth and Zillow Showcase sales. We're happy to invest there. We know those are good businesses for us, and some of them are more nascent, and we're not going to slow growth entirely because we know we have nascent opportunities in those spaces. And as a result, we'll go grow sales, that will get leverage over time. And you can obviously see if a big piece of the cost structure is fixed, and we're controlling fixed costs. We feel quite good about the margin flow-through as well, just making sure that we're balancing long-term growth as we drive margin expansion.

Yes, yes. And maybe just a follow-up on the variable cost side, because oftentimes, what happens, right? You guys have talked about, you have half a dozen-plus opportunities where you're already investing today, right? And you can sometimes find white space and find more room for investment. So help us like unpack or separate the sort of near-term deleverage versus leverage over time?

Yes. And I think it comes back to, are we doing well on our fixed cost base and controlling the amount of investments we have there. $1 billion of the $1.7 billion of EBITDA costs are in fixed costs. And then on top of that, one of the things that we care about over time is driving strong GAAP profitability. And for us to be able to do that, we have to control stock-based comp, 90% of our stock-based comp charge sits in that fixed bucket. As we get leverage there, we will naturally get leverage on stock-based comp as well and drives the ultimate profitability.

Yes. Yes. Talk about that just, I mean, culturally, et cetera, stock-based comp. It's obviously a question we get from investors and dilution over time. Like how do you guys think about capital allocation, return on capital?

Yes. So stock-based comp, we've committed to decrease the absolute level from '23 to '24 and then it will decrease as a percent of revenue even more because revenue is growing. So that's been a big focus of ours. That will continue to be a big focus of ours. And again, if we are able to control our fixed cost, we will control stock-based comp. With respect to capital allocation, we have been pretty big returners of capital over the last few years. So we have bought back roughly $2 billion of stock since the end of 2021 at an average price of around $45. We've been really pleased with that program. And then on top of that, we are cleaning up our convertibles. So we have 3 convertibles at the start of this year. We will retire 2 by the end of this year and the third will be retired in May of 2025. So as a result of that, we'll look forward in Q2 of '25, debt-free with a really nice healthy balance of cash that allows us to be thoughtful on both organic opportunities, inorganic opportunities and the return of capital where we will see the opportunities.

Yes. Yes. Got it. Okay. And I have an AI question, maybe I'll slip in a regulatory one here. But when you guys think about AI expense, and this isn't a -- this isn't like judging your infrastructure costs, don't take it like that. But when you just think about generally running a company in your shoes or similar digital native at least, you're obviously allocating some portion of your budget to AI, right? And this year, I'm sure it's XYZ percent. When you think about years forward, I mean, is that piece of the budget going to grow faster than your overall IT budget? And are you going to find those dollars from somewhere else in the IT budget? Or do you allocate new dollars based on kind of what you're seeing early signal-wise?

Yes. I think it goes -- the strategy for resource allocation is unchanged. As Jeremy talked about, we're going to always look for where do we want to invest more and where are we going to trade off investment to, and we're doing that all the time. And the great thing about the cost discipline that we've shown over the last couple of quarters and couple of years is that's really owned by the leadership team broadly. Everyone has the ability to go invest more and go find ways to fund those investments. And if you think about AI similarly, I mean, we -- AI is not a new thing for us. We've been doing AI since 2006. Many folks may not realize this, but the Zestimate was 2006 AI, our very first product as a company was machine learning back then. And we've been investing in AI technology as a company for a long time, personalization efforts, all of our rich media, everything that powers those team showcase is machine learning and computer vision AI. And so now as generative AI came, our AI team really ran at what -- how can we use the next tool in the toolbox to build experiences. So this isn't some new capability, a new department that showed up last year for us, it's something we've been investing in building capabilities for customer, for operator, for employees for a long time. So we think about generative AI as the latest tool we can use in the toolbox to build, and it's -- and that's how we think about it. It's a tool, right? It's not a blanket you throw over the company. It's like what's the right tool for the right purpose. So as we think about investments, we'll always be looking for innovations and we'll use our innovation, people, team, dollars to go after the new things, and we'll find ways to fund that off of the priority list. So that's what we do.

Got it. Okay. One last one, just lightning round on the regulatory front because it's a hot topic. Buyer commissions, there's no real substantive evidence yet that they're going down kind of -- we'll say they're holding flat for right now, give or take. Is that because it's just too early to judge, like not enough time has passed and sort of -- or do you think there are other dynamics going on where maybe it's just not going to be that big of a deal like everyone was worried about?

Yes. I think for -- we can't speak to the broad real estate industry because the folks that we -- our Premier Agents tend to be the top 20% of all producers, like that's the vast majority. And in that group of people, we've been highly confident that those folks command value and we'll be able to articulate their value. So we've seen commissions stay in a tight band, and that's been our expectation since the moment has all got announced.

We are out of time. We'll clip it there. Thank you, guys. I appreciate it. Thanks for being here.