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

Welcome, everybody. We have the Zillow fireside chat at the Goldman Sachs Communacopia and Technology Session -- Technology Conference. My name is Mike Ng, and I cover Zillow here at the firm. It's my absolute privilege to introduce Jeremy Hofmann, who is the Chief Financial Officer and Chief Operating Officer at Zillow. First and foremost, thank you so much for being here, Jeremy. I really appreciate you coming out here again.

Yes. Thanks for having me.

Awesome. To start things off, I would just love to ask a big picture strategic question. Zillow, clearly a household name, the primary digital front door for real estate discovery, diligence in the United States, an incredible amount of reach as measured by unique users. So to kick things off, could you just walk through some of the core operational pillars of the Zillow ecosystem and how the strategy has evolved over time?

Sure. Yes. So we've been in existence for about 20 years now. I'd say the first 15 years were really around building what I'd call the dream and shop layer for our business. So what most people know us for today is you go on Zillow and you dream and shop. That has yielded great benefit to us. So our brand is quite strong. We're anywhere from 70% to 75% of category share in real estate online. We are -- the term Zillow is more often Googled than the term real estate and 80% of our traffic is direct to us. That comes from great product and innovation and really building that dream and shop layer. And it comes from having more content than anyone else across existing homes for sale, rentals and new construction. So the shopping experience is more robust than you'll find anywhere else. That was, I'd say, the first 15 years and the mission around really building a big consumer brand. Over the last 5 years, we've been building out as fast as we can a transactional layer and underlying operating system for real estate. And I'll click into each of those because I think they're important. They're the things that are driving the revenue growth, but probably less understood to a day-to-day consumer. So on the underlying operating system front, we now power 90% of all tours in the country with Zillow through ShowingTime. dotloop sees 50% of all offers in the country, another piece of software that we own. Our rich media, which is proprietary technology that we built and developed around floor plans and 3D media virtual walk-throughs, that's on more than 10% of all listings in the country today. And in our biggest markets, it's upwards of 30%. Last but not least is Follow Up Boss, which is a CRM that we bought now about 3 years ago. That is the CRM for the most productive real estate agents in the country. That is the first thing they log into on a day-to-day basis. We have about 138,000 active users of that on a monthly basis, which is up over 20% year-over-year. And within the most productive real estate agents, the folks that we work with, that we call Preferred agents who really work with our consumers, pretty much all of those Preferred agents who are the most productive agents in the country use Follow Up Boss. So that's the -- we have the dream and shop layer. We have the operating system layer, and then we have the transactional layer. That transactional layer has been the big set of bets that we've made over the past few years. It's really been around move the brand from just dream and shop to buy, sell, rent and finance. And underlying those words has been really good growth. Zillow Home Loans has become a top 25 lender in the country. We continue to take share both in buy-side and sell-side transactions with Preferred. And we are rapidly growing our Rentals business on the back of that strategy as well. So that's been the strategic evolution, started with dream and shop, moved into operating system for real estate professionals and a transactional layer. The biggest challenge we've had in the category and the biggest challenge with our real estate -- with the real estate category online is it is a long shopping cycle. It is an infrequent purchase and a lot of it still happens offline. Now we fast forward to today, AI gives us the opportunity to really accelerate and reinforce all 3 of those layers and give people so much more advice than we were able to do when it was solely map-based search. So in each of those layers, dream and shop, we are now able to marry a really comprehensive and good visual search with a conversational assistant to learn more about what you're doing from a dreaming and shopping perspective than we were ever able to do before. We can answer so many more questions with AI and having an assistant guides you through that process. On the operating system layer, we are great builders of software. We have made the products better with AI, and we are the most capable technologists in the real estate space. So the software strength that we have from those assets I highlighted earlier, get only stronger with AI. And last but not least, the transactional layer, there are just so much -- there's so much more advice we can give people using AI in the transactional layer than we were ever able to do when it was solely map-based search. So we look at today and say, in the way that we've built the business and the underlying layers that we now have, AI becomes a reinforcement mechanism and an accelerant. And to finish all that off, we've been executing quite well through this period of time as we've been on this strategy. The company has grown revenue 29% annually since being public on a 29% CAGR. Last few years, we've grown revenue mid-teens in the housing market that's been as challenged as it's ever been. We're growing profits faster than revenue. We're growing net income faster than both EBITDA and revenue. And we've shrunk the share count by, call it, 10% over that period -- over the last, call it, 3 or 4 years as well.

Great. Yes. And to your point, the results in many ways speak for themselves in terms of the revenue growth that you've been able to deliver in what's been a very sideways real estate market. Yes. I was wondering if you could talk a little bit about how unifying the CFO role and the COO role positions Zillow allows you, right, to execute with a higher level of speed and effectiveness.

Yes, it's been a pretty seamless transition. We -- I stepped into the role about a month ago alongside our last earnings call. And I've been at the company for almost a decade now. I've been heavily involved in the strategy and operations of the company through that period of time, know the leaders well, have worked with the management team. And I think combining the roles, what I look forward to and what I've enjoyed even in the first month since has just been, can we move with more speed? Like are we able to -- the strategy feels pretty well set. The growth -- kind of structural growth algorithm is intact. And now it's how fast can we go and capture that. And going back to the first question, how much can AI really accelerate the business strategy as well.

Great. Moving to some of the revenue lines within the financial model. Maybe we can start with for-sale revenue. That line grew 13% year-over-year. Looking now into the second half of 2026, an increasing portion of for-sale monetization moves from residential into mortgage. It's a little bit harder, I think, to tease out what's happening as it relates to the underlying growth of the business just because of some of that movement. But maybe you can just shed some light in terms of what's happening there in that residential to mortgage transition and how we should think about just the underlying growth of the business?

Yes. For those of you that may not be as familiar with Zillow, what we're doing is we are moving the primary monetization model with real estate agents from a pay-upfront ad-based model to a success-based model when a transaction closes. So that is the move from market-based pricing to Preferred, which Mike just called out. That has -- that is a better business model for us because it allows us to more tightly integrate with the real estate agents that are working with our customers. It allows us to be more directive on the software and tooling that they use in service of those consumers. And then it allows us to better integrate services like Zillow Home Loans because we are working with the real estate agents in a more tightly integrated manner. So that's the reason why we're doing it. What it means is that our residential -- some of our residential revenue actually shifts into the mortgages category. And as a result, there are some moving pieces that we outlined over the course of the next few quarters. When we get past that transition, why did we do this? Why do we want to do it? It is to accelerate our transaction layer, basically. Having a tightly integrated set of partners who work really closely with us and are incentivized the same -- like all of us being incentivized the same way, which is basically happy customer, right? A consumer moves, agent gets paid, we get paid. That's a great mechanism to build a transaction strategy on top of. And we see our revenue per connection actually increasing as a result. So in the Preferred model in 2025, that grew 23% more than the legacy ad-based model. And we expect that to be roughly 35% more growth in 2026. So it's a better business model. It's a bigger opportunity because we can touch more transactions. And then it's coupled with our Home Loans business getting profitable, so we can profitably scale that as well. That's why we're doing it. That's why we're so excited and the moving pieces between residential and mortgages is just mechanically what we have to do as we accelerate, and we want to make sure folks understood that, but the underlying growth drivers feel well intact for us.

Great. Zillow has also made a lot of progress monetizing the sell side of the transaction, which I guess hasn't always been the case. But maybe we can talk a little bit about Zillow Showcase, which has scaled to 5% of all listings nationwide. How is the expansion of listing products like Zillow Showcase and agent software packages like Zillow Pro helping with your relationships with listing agents and brokerages? And then from a strategic standpoint, do you view some of the stand-alone software subscriptions evolving into distinct high-margin recurring revenue streams beyond just the transactional-based nature that some of your other revenue streams are based off?

Yes. So what I talked about Preferred is basically how we come to market with buyers looking to buy a home, right? It's integrating agents and integrating Home Loans and then ultimately, other adjacent services as well, doing more and more of that online. What Mike is asking about is now what are we doing on the sellers, the folks that are looking to sell a home now. We've been able to grow our share there fairly rapidly over the last few years, primarily on the back of a product we call Zillow Showcase, which is a souped-up listing. It's basically you get higher-quality photo, all digital walk-through of the property and integrated floor plan, so you really understand where you are. And that's all built on our technology that we've been developing over the last, call it, 10 or so years. It's a place -- so the seller, that's been great, like we've been happy to grow the way that we have. I think seller continues to be an opportunity that is far bigger than even what we've been able to do. And that's where I get really excited about some of that conversational assistant stuff we were talking about earlier, where before we had an AI mode, there's only so much you can put on a pixel, right? There's only -- sorry, there's only so much you can put on a screen, right? It's like contact an agent, get prequalified, take a tour. It's about as much as the consumer can handle on a [indiscernible] listing. In a conversational way, there are so many more ways in which we can interact with consumers. And on the sell side, nothing to share today, but there's a lot of exciting ideas around the ability to be more impactful in helping people thinking about listing, potentially listing their home and on and on. And we can pair that with best-in-class real estate agents to help guide them through, but there's so much more we can do online than we were ever able to think about pre having this really rich conversation back and forth with prospective sellers. So buy side feels well intact. Sell side, there's a lot of growth to come on the back of what we've already seeded plus the ability to use AI to make a seller even more thoughtful in what they do. And then you couple that with the software that we've either built or acquired over the years. To your question there, what we're trying to do is make a real estate agent's life easier and make them more productive. So we invest heavily to go do that. There are -- the software business for us, the software line item is already like decently sizable. It's part of the reason why residential has grown the way that it has. But most important in the software is to really help facilitate transactions. And then yes, there's high-margin business on top of that, but the bigger opportunity is around transactions. And with the software that we have, we want it really for adoption, and we'll make money on top of that, but it's really around adoption such that the transaction strategy is even further accelerated.

Perfect. If we could turn to rentals. This is a business where Zillow certainly hasn't achieved their fair share yet. And I think that speaks to some of the very strong growth that you realized in that business to date. I think you have guidance for high 20% year-over-year revenue growth for the upcoming quarter, 30% for full year 2026. So I was just wondering if you could walk through some of the levers that are driving that high-growth trajectory within rentals and any moving pieces that you would call out just as we think about the full year outlook?

Yes. And then just to level it up, the stuff I've been talking about to date has all been on the for-sale part of our business. We have 2 main lines of business. It's for-sale, which is residential and mortgages and then rentals. So as you think about how to think about the growth in Zillow, it's -- there's for-sale, there's rentals, there's total company, and we've been able to grow those quite nicely because the business has diversified more than it was maybe 5 and 10 years ago. The big driver of that has been the rentals business. And the strategy there is to be the place that has all the rental inventory available. It is single-family homes for rent and apartment buildings for rent. That has -- that's like a labor of love. We've been after it for a long time, but we're now at a point where more than 70% of all single-family homes for rent in the country are on Zillow, and the majority of those are unique to us. So that drives traffic advantage. And as we've been able to do that, we've been able to rapidly grow our multifamily apartment buildings on the site as well. And that's been the big driver of revenue growth over the past 3 or 4 years. Going forward, the goal is to get more and more of that inventory. And then with multifamily specifically, it is continue to grow properties and to continue to have the advertisers that advertise on Zillow spend more with us by upgrading their packages. So it's been a pretty tried and true strategy over the last 3 or 4 years. The business has grown quite well. And we think we have a real right to win in multifamily because our ROI is best-in-class.

Great. I guess related to rentals, I wanted to ask about the Redfin partnership. There was a recent settlement reached with the FTC and Zillow as it relates to the Redfin partnership. I was just wondering if you could lay the foundation for what the partnership was, what the settlement is and if there are any changes that come on the back of that?

Yes. So this would have been early 2025. We did a partnership with Redfin, which basically had us distributing our multifamily content to Redfin sites and apps. And Redfin drives more and more traffic to their sites and apps, which provides value to the Zillow advertising product. So a property management company who is the buyer of this advertising before the Redfin partnership, when we went and sold to them, we would say, hey, you're going to get great exposure on Zillow, Trulia, HotPads, Realtor.com. That was another partnership we did. Fast forward to post doing the Redfin partnership, we could walk into those folks' offices and say, and by the way, now you're getting Redfin, Rent.com and ApartmentGuide. So this is expanding our network, expanding our reach. And for us, it's a win because it allows us to give even more value to the property managers. That's been -- that's allowed us to really grow that property count. For Redfin, it was a win because they were getting more content than they had previously. So that helps their traffic. And then for consumers, it's a win because consumers are now seeing more properties on more parts of the Internet. So it was a pretty clear win-win-win, which is when you get into these partnerships, the only way they work is everybody has to be happy. Otherwise, one side doesn't invest. So that's where we went. FTC had some questions about that. We got to a settlement probably about a month ago or so at this point, maybe a little bit less than that. And we're pleased with the settlement. The partnership stays intact. So the way that we sell today will be the way we continue to sell. And then there will be potential SKUs of Redfin-only and Zillow-only ad products. So that adds potential ad products to the marketplace. But the most attractive advertising to these property management companies will continue to be what we are offering today. So there's not a lot of change to the business as a result.

Nobody would willingly reduce their reach, I suppose, but...