Q3 2019 Earnings Call
Good day and welcome to the Zillow group's third quarter 2019 earnings Conference call. Please note. This is I guess being recorded.
I'd now like to turn the conference over to Downline, Chief Corporate Relations Officer, and acting head of Investor Relations. Please go ahead.
Thank you Amy good afternoon, and welcome to Zillow group's third quarter 2019 conference call.
On the call I had not yet.
Or to doing says can joining me today to discuss our Q3 results are still a good co founder and CEO , which Burton.
So Parker.
During the call will make forward looking statements about our future performance in operating plans based on current expectations and assumptions. These statements are subject to risks and uncertainties and we encourage you to consider the risk factors described in our FTC filings for additional information.
We undertake no obligation to update these statements are the result of new information or future about except as required by law. This call is being broadcast on the Internet is accessible on our Investor Relations, Let's say a recording of the call will be available later today.
During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to EBITDA. We encourage you to meet our shareholder letter and earnings release, which can be found on our IR site.
They contain important information about our GAAP and non-GAAP results, including reconciliations of the Oracle Nongaap financial measures.
In addition, we know we refer to our Internet media and technology segment I M Pesa.
We will open the call with Mark.
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I'll now turn the call too rich.
Thanks, Don.
Hey, everyone. Thank you for joining us today.
Our third quarter results were strong demonstrating zillow groups business model expansion to mechanize real estate transactions is gaining traction as consumer demand reveals people want an easier way to buy sell rent and finance homes, what we called below two point out.
We're in the early stages of re platforming industry with a 1.8 trillion dollar Tam.
We have a strong cash position, having recently raised $1.2 billion through our convertible debt offering and just two weeks ago. We closed on an additional 500 million dollar non recourse credit facility to support growth in our Zillow offers goodness.
Before getting to this quarter's highlights I want to pause a moment and re want.
We received feedback that many of you would like more clarity on our premier agent business model, specifically as it relates to the impacts of our flux test.
To clarify the success measures for our Premier agent business remain the same.
Regardless of monetization model, we maximized for customer satisfaction revenue and profit yield per lead.
To recap during our Q2 call, we announced plans to expand our flex test into Phoenix Atlanta in Q4.
These plans affected our 2019 revenue and EBITDA outlook, because we expect a portion of our prepaid lead generation revenue to shift the future periods.
In the flux transaction model, we're paid a success fee only after an agent close a deal.
Because every real estate transaction is different and timelines can vary significantly from several weeks to several months were being methodical and our testing to better understand the financial implications of this post pay pricing model.
In total our flux chats, including Phoenix Atlanta are expected to represent only 5% Premier agent M.R.R. as we exit 2019.
We fundamentally believe flux will be a win win win it will offer better service for customers better business for our partners and better profits for Zillow.
However, we will not expand flex beyond the current announced 5% of Behmer our footprint until we have the data to convince us and view the flexible ultimately become accretive to our bottom line.
Having just talked about the boundaries of flux, Oh zoom up one click and talk about our premier agent business, which re accelerated this quarter.
Revenue exceeded our outlook coming in at $241 million, an increase of 3% year over year.
Excluding the impact of six markets were testing different iterations of flex Q3 Premier agent revenue grew 5%, but you'll see reflective in the chart on page five of the shareholder letter.
This chart provides you with a same store sales view of our MSR growth rates for our market based pricing model, which are really accelerating growth rates in this core business.
We expect same store sales growth to continue to accelerate in Q4, which has prompted us to raise Q4 and full year revenue outlook for Premier agent.
As a reminder, it's the Sars and strength of pure agent and other marketplaces in our I M. T segment that allow us to invest in an expanded zillow offers and other transaction businesses. So quickly.
The combination of these highly complementary complementary businesses provide zillow group distinct competitive advantages.
Said another way the success of Premier agent and I am tea is fundamental to the success of below 2.0.
This was reinforced in our Q3 as increased operating leverage and agent retention levels contributed to expanding I M. T. EBITDA margins that we are able to reinvest in zillow to point out.
The future of Premier agent is dependent on strong and constructive partnerships with the best of the best agents and teams.
Last week, our team hosted Zillow unlock our largest industry conference today in which we invited the top premier agents rental property managers and home builders to Las Vegas to share our future vision.
This included 1500 of our top Premier agent with whom we discussed the importance of working together as our co pilot to help navigate and lead zillow to point out.
We believe strong partnerships with top professionals were supported by modern technology and offer highly personalized services are the key to unlocking a full potential of this evolving category.
The positive reception in high engagement from our partners reinforces for me that we are onto something it's not just consumers who are ready for silver 2.0, the industry is ready as well.
Turning to homes.
The third quarter marks the first time home segment revenue exceeded our I am Ti revenue coming in at $385 million ahead of our outlook and up from just $11 million in the third quarter of 2018.
During the quarter, we purchased nearly 2300 homes and sold more than 1200 homes.
And just 18 months Zillow offers is live in 21 markets, we launched a record eight markets in the quarter one about every two weeks.
First of all offers team has delivered ahead of schedule on a remarkable growth pace and we're now getting close to a national footprint, which has been an early goal for us in order to drive national marketing efficiency.
Our unit economics for Q3 came in within our targeted range, which as we previously previously discussed is plus or minus 200 basis points average return for home before interest expense.
At scale, we are targeting 400 to 500 basis points and we also see profit opportunity from adding adjacent services to the transaction.
And speaking of adjacent services those new home grown closing service is also now alive and a handful of markets he's or very early days and small numbers, but we are encouraged by the early consumer signals, we're receiving that reinforced the value of bundling multiple services around each real estate transaction.
To wrap in our home segment Angelo offers I'd like to highlight that this kind of growth from a standing start may not be unique but it is certainly rare.
And was our hope to not just get in there and it was our hope to not just get on the field in this big exciting consumer category, but to become the team to beat.
And doing so within our profit rails is even more impressive you teams can pull up that kind of new business entry. So quickly and it took to hold the Zillow group team to make this happened I want to thank and applaud them.
The company is now in a much more secure strategic position for the long term and has a much larger market opportunity as a result.
So another essential piece of the integrated transaction is mortgages, which delivered as expected in Q3.
And the third quarter, we welcome seasoned executives with deep experience building scaling and running consumer direct lending businesses.
Brian theory joined as President of Zillow home loans, and Libbey Cooper joined as VP of operations combined. These two have more than 40 years of experience. We're thrilled to have them onboard to build out our home financing platform.
Recent positive feedback from our customers demonstrates the substantial value. There's only 2.0 provides when we begin to offer and streamline all aspects of the transaction picked him a retired U.S. marine who lived in Riverside, California, and got a job offer in Phoenix.
As he was checking is estimate on Zillow. This summer in anticipation he might so you saw a button known as some details page that invited him to request an offer from Zillow offers to purchases huh.
Click and 48 hours. He received an offer that he believed was fair from a brand he trusts.
He went through the process and after six days accepted the offer and went on to start the process of finding a new home in Phoenix.
He was referring to is that what premier agent, who helped and find this new home at the same time. He was pre approved for a long through zillow homeless.
You will find a linked to this video interview on page seven in our letter.
Stories like Tim's, our our inspiration and give us the opportunity to see the real potential of the business. We're building, it's gratifying to watch our plan to help people unlock life's next chapter come together.
We have a long way to go to fully realize our vision.
But the possibilities are bundled real estate transaction experience. There are a one stop zillow platform that helps people save time money in hassle are clear.
Real estate broadly defined is a huge industry has been impressively resistant to technological advance.
The internet connected to a PC it first and now billions of smart devices has given power to the people and transformed industry. After industry, many of which I had been lucky enough to have had a part it.
Consumer expectation for speed convenience and price is at historical high and is accelerating at what seems at times a nauseated pace.
Modernizing and Replatforming this massive industry will take time and investment, but it is inevitable.
And we have brand traffic skills and the capital to lead this phase shift. This is why the zillow team and I are here and so Florida.
[noise], we balance our excitement with long multi company demonstrated experience building profitable businesses. The most obvious example, being our I.M.T. businesses right here inside of Zillow group, where we are showing profits and demonstrating leverage.
Alan the rest of the team and I treat the investment you had made in us with respect and care.
We are meaningful shareholders as well.
Thank you for your partnership I'll now turn the call over to Alan to walk us through the results in greater detail.
Thank you rich I'm going to quickly summarize a few key financial results overall, we exceeded our revenue and EBITDA expectations for all segments. In Q3, we reported revenue of 745 million.
That's up 117% year over year and exceeded the high end of our outlook much of this growth in revenue was driven by our home segment, which generated revenue of nearly 385 million growing 55% sequentially and as rich noted is continuing to outperform expectations.
I am T. segment revenue grew 7% year over year to 335 million and exceeded our outlook for.
Premier agent revenue exceeded our expectations at nearly 241 million up 3% year over year.
As rich noted we are pleased with this the.
Stabilization and recovery in the Premier agent business as we highlighted in our shareholder letter growth in our core Premier agent market based pricing business on a same store sales basis was up 5% in Q3, and we expect this year over year growth to accelerate in Q4.
As we stabilize premier agent retention, we have been focused on managing costs and driving increased profitability, primarily in our I.M.T. segment.
To that end I am pleased to report that for the nine months ending September Thirtyth, we expanded our empty EBITDA margin by 240 basis points and grew I M T EBITDA by 19% year over year.
As I've stated in previous earnings calls during this time of transformation at Zillow group My priorities as CFO are focused on establishing processes and mechanisms in support of the follow.
Scaling our new businesses.
Executing within our I.M.T. segment in order to fund investments into new segments, along with additional growth opportunities and implementing focused cost discipline and operational rigor across the company as we scale.
I am pleased with how we have executed on those three priorities for the first three quarters in 2019, and I will continue to be laser focused on them as they continue our business transformation.
We ended the quarter with 2.3 billion of cash and short term investments on our balance sheet, including the proceeds we raised in our recent 1.2 billion convertible debt offering.
In addition to the cash in investments on our balance sheet. We're pleased to announce that in October we completed our third non recourse asset backed credit facility for our Zillow offers business. This new facility has a maximum borrowing capacity of 500 million, which combined with our two other zillow offers facilities brings our total non recourse asset backed up.
Tony maximum borrowing capacity to 1.5 billion.
As a reminder, these facilities provide us the ability to finance up to 85% of the home value using each home as collateral.
We believe the amount of cash and investments on our balance sheet combined with our asset backed credit facilities provides a significant flexibility to take advantage of market opportunities, while prudently managing expenses, gaining operating leverage and being mindful of our weighted average cost of capital before we take your questions I wanted to take a moment provide some.
Comments on our outlook.
Due to the underlying strength the premier agent, we are updating our I MTD and premier agents full year revenue guidance range.
Brian T., we expect revenue growth of 6% the midpoint and we're bringing up premier agent full year outlook to between 915 and 919 million.
Which represents 2% year over year growth at the midpoint.
For Q4, we expect I didn't see revenue growth of 4% and Premier agent revenue growth of 3% at the midpoint.
We're also bring up the full year outlook by empty segment EBITDA to between 284 and 289 million.
The consumer demand for Zillow offer service continues to be strong were anticipating Q4 homes segment revenue to grow to for 65.
That's for 65 to 490 million or 24% sequentially at the midpoint of the range, which reflects the sequential uplift from new market openings, partially offset by seasonal slowing in our home acquisition rate consistent with seasonal market trends. This brings our full year revenue estimate for homes to 1.23 to one.
Two 5 billion.
We're also tightening the range of full year mortgages revenue to between 97 and 100 million.
On a consolidated basis, we expect full year revenue to be in the range of 2.59 to 2.62 billion and we expect full year consolidated EBITDA to come in between a loss of 1 million to income of 17 million.
It all we're pleased with our Q3 performance and continued execution to streamline real estate transactions, the better help our customers move easily.
With that operator, we'll open the line for questions.
Okay.
To ask a question you May press Star then one on your telephone keypad facing a speakerphone. Please pick up your handset pressing the keys to sorry. Your question. Please press Star then too.
The first question.
Comes from Brad Berning at Craig Hallum.
Good afternoon, guys. So Richard Allen Congrats on the inflection point in the Premier agent revenues in the barge and send US. Thank you for the same store sales so disclosure ex flex, but wanted to follow up a little bit deeper and on your commentary here can you talk a little bit more about what you're seeing is the drivers behind the improved activity and what trends you expect.
On the same store sales basis. That's included in the for Q guidance and how are you thinking about you know early reads and how that's going to develop as we go into 2020.
Okay. Thanks, Thanks, Brett I'm looking at my watch right now realizing we read too fast down [laughter].
We're in for a lot of questions. So it does take deep breath.
Yeah, I mean, the PEO business is really healthy as you as you noted it's looking good.
It's kind of Reacceleration in revenue.
As you know.
When we look at the same store sales number that were there were sharing right now is really comforting.
No not to mention the.
Kind of EBITDA the business leverage we're seeing in the Iraqi segment overall, which happens to coincide with about the time Allen has been here at the company, but we're not only seeing revenue growth, we're saying, we're seeing leverage on the cost items too. So that's that's all good I think the trends.
The inputs or what we try to focus on the most Bradley beat and these inputs are looking good customer satisfaction is up.
Connection connection rate is up.
Retention rate for P.A. customers is up so the NBP the market based pricing model for P.J. is is working really nicely.
We as we look forward into Q4, we expect continued improvement in knees inputs and so that's kind of.
What's driving the Q4 guide.
We're expecting to see more more of that goodness.
You know relative to the next year, what we look forward to giving 2020 guidance.
Next quarter, we're just not we're not we're not ready to talk about it yet, but we look forward to chatting with you about them.
You have anything to add though no I think that's fair okay.
Thanks for us.
The next question is from Ron Josey of JMP Securities.
Great. Thanks for taking the question, maybe just a quick follow up on that rich good to hear retention rates up market based marketplace pricing model is up so I'm curious when we did take down guidance into Q and now we're coming back to essentially where we were was this all a surprise or just plans along the way I guess is just the first question, maybe sort of answered that with Brad but just.
Just to clarify and then just on flex really quickly I appreciate the color and transparency in understanding don't know guidance and the 20, but when you're thinking about how long it takes to prove out these test markets and understood.
5% or what have you just can you give us a little more insight on terms of like what you've learned thus far so that at least we can reach and think about the opportunity as we move to potentially this type of this model going forward. Thank you.
Okay, Hey, Ron Thanks, maybe I think Olympic.
I'll take your first maybe take a crack and things.
So the guidance, we provided in our Q Tof Q2 call reflected the impact of us, making the decision to expand flex testing the Phoenix in Atlanta.
When we look at Q3 performance and the guide for providing this call that changing guidance reflects impute and from Q3 performance that we saw in the business.
Rich touched on some inputs, we also saw improvement and our sales productivity, we touched on agent retention better than expected. So we saw several as imports trend better than expected.
And so our current Q4 and full year outlook for T.J. reflects the continuation of those trends.
And again I'd like to reiterate rich touched on as well what we're really excited about is no. While the input trends are working well in a recurrent revenue business. When we come off of that recurrent revenue balance we have to build it backed up before we can start see growth again.
As we did that this year, we were also able to focus on.
Cost discipline.
Productivity and thought for resource prioritization, all of which are areas that I've discussed our priority of mine and by building that muscle, we've been able to expand margins, which have allowed even where the 6% I empty growth rate in the first nine months, we've seen 19%.
Growth in EBITDA.
Great and and as to your as to your flex questions.
I guess that the headlines the headline is we are optimistic we continue to be optimistic that this can be a win win win.
That it really feel good from a customer satisfaction perspective to two last our compensation to the completion of what the customer is trying to get done that as close the transaction and that is clearly playing out.
It also is a much more attractive model for a certain kind of partner and we're getting a lot of positive feedback.
And now the subset of our partners that are using flex right now and other partners, who are anxious anxious to do that.
And then we continue to be optimistic that we can.
Derive more revenue.
And a more profit from the same lead flow.
Through through this model. This is all being tested however.
You know the the.
The time horizon.
For.
Figuring out exactly how this is going to play out is it a little bit is painfully long I understand it's it it will take some time.
For instance, we've announced six markets.
That we're testing flex and again those six markets represent only 5% of our EMR.
One of those markets Atlanta, we haven't even launched relaunch in next month next week actually next week. Okay. So we launch Atlanta next week and then Atlanta, we won't have you know it's not like we'll have all the data.
Even even the front end, even kind of the starting gotten of the transaction. It won't all happen at wants to play out over time and it takes transactions from several weeks very short and to several months that belong and we need an update we need to collect enough data to kind of prove our feared.
You know I do.
As I said on the call. This is this is a.
We continually innovate on business model.
In Premier agent and this is a really interesting innovation that we are that we are testing and finally I guess I'd say why we are doing this while we are innovating in knees flex test markets, our core business. The core NBP business is sound and re accelerating and growing.
And so that's that's pretty excellent.
Next question is from Mark Mahaney RBC capital markets.
Great. Thanks. This is my Chen on for Mark just on Bill offers you spent a new markets. This quarter I think thats. The most you've ever done I was wondering if you could talk little bit about the pace of your market expansion going into and through our 2020 and then you also saw nicely improved.
On EBITDA margin year over year and sequentially, but how should we think about the path to profitability and for losses to improve in an absolute basis for that business segment.
Okay, Mike I will I'll take a crack and Alan pylons, especially during the second half.
If you want a.
You know I said it in my script, apart, but it's pretty remarkable.
Well how quickly this.
This business. The Zillow offers businesses ground of course, it's it is being driven by an a really strong consumer signal with frustrated homeowners, who want to move saying they want a better way.
Okay, but the but growing from 11 million in revenue in this line item last year to 385 million. This this quarter.
Is you know, it's pretty is pretty fantastic.
Getting to national footprint was one of our early goals getting to a.
Effectively national footprint.
And we're pretty close I think we're at I think I said, we're at 21 markets right now were about the launch last at the greater Los Angeles area next month, so be 22, I think historically, we've said it will reinforce that that mid next by mid next year, we'll be in in 26 markets, but kind of phase one of.
Rapid scaling of Zillow offers has been about planting flags in many markets and going abroad getting the word out getting data for the machine learning machine.
In input so that we can make better and better offers up phase one has been about going abroad and work, we're moving into a phase two which is getting some depth.
And in these markets and figuring out how to rollout software and systems and processes.
Such that we can gain leverage on the cost on the on the unit economic cost.
Line items.
And because the go long term in this business is not to lose money until offers and just make money on all the adjacent products. We are aiming to have the tours of walkers business make money ended up itself and make and do very well and that also give us all kinds of fantastic optional.
I'd on needs this myriad of verticals that surround the the.
The house transaction.
I don't know if I covered the whole question homes EBITDA I am I kind of hit some of it yeah and I would just that.
At this point.
And it's pretty incredible the performance of gotten up to the pace of scale.
We continue to execute within our target ranges on profitability per home.
Which we share.
It's kind of a surprise yeah honestly.
And so as we think to the future you know I still come back to the customer signal that we're getting is extremely strong which gives us a lot of excitement.
But we also plan to be prudent and make sure we understand where there's opportunities to make investment and where we need to test a little more before we go back and so.
I think when a really good place I think we're best positioned to when I've been really excited this last delavan nine months almost a year I guess watching this team go after this and.
Yes, I think we're in a good place going forward.
The next question is from Tom champion at Cowen.
Hi, Good afternoon, Alan you you've talked about.
Well as progress in building skills around cost control and.
It was a very encouraging result in EBITDA and I M. P and I'm just curious if you could.
Talk through that if there any.
Cost items that helped the resolved anything onetime in nature and then maybe a question for rich I'm.
I'm just curious if you could.
Qualitatively describe what you're seeing in the older offers markets and in particular curious the feedback you're getting from Aegions tasked with introducing Angelo offer.
To to customers that maybe those customers ultimately choose a standard market transaction, just any thoughts on that.
I would be really helpful. Thank you guys.
Yes, yes, so Tom Hodgkin Vince.
Savings or the productivity and margin expansion that we're seeing are coming from a wide range of places with respect to I empty.
What I'd say is whereas establishing just a little more rigor around how we measure how we think about incremental investments, how we measure productivity and how we ensure that we're kind of maximizing every dollar spent to get the maximize return and that is paying some yields.
The specific areas of leverage that you see.
Year over year and that nine months around better leverage on some of our sales and marketing dollars.
We've seen better leverage on some of our headcount.
And that head count includes people costs that includes a lot of discretionary spend that we are constantly looking at Ti any you know and other span that we're looking at and finding real savings year over year through three key levers, we're either negotiating more aggressively with vendors we are clarifying.
And.
Basically holding to compliance I can start policies and we're looking at demand management and so three simple levers a lot across a variety of spend categories that we put in place and we have discussions about that are starting to yield some improvements.
We expect that to continue and that can either fund investments or can drop to the bottom line, but we're excited about the progress.
Hey, Tom as to your second part of your question.
You know there aren't any older Zillow offers markets.
Really our oldest markets or I don't know 50 muscle.
So they are quite there's still quite young.
And trying to draw any kind of you know maturity conclusions from from them. It's just it is just premature.
I'm very happy with the way we're executing in these markets within within the Guardrails, we've we've laid out and and now the amount of data coming in from these markets and the amount of learning that's happening is really it's impressive.
And rapid as as to taking advantage of the kind of adjacent adjacent lead opportunities and adjacent vertical market opportunities as a result of being able to present. All these offers to people and then actually having these listings.
The currency the wrong in the real estate industry is listen and we have all these listings now we have how many homes. We have listings on right now over you know with 2800 homes in inventory right now 20, 122 homes in inventory not all those around the market yet, but a good chunk of them are.
And the delete the commission lead opportunities to kind of all the lead opportunities that come from from having this gold. These golden listings is also pretty impressive I would say, it's very early days with us monetizing all of that.
You know we've had more success with early success with some things than others, we talked a little bit about zillow closing services.
Two quick title that we are just beginning to test with the small.
We're also testing with.
The Zillow home loans is just begun to be actually be able to be integrated uncertain test.
Yes markets. So that we can see would attach rates or.
We're also playing around with a seller and buyer leads that can result from these offer presentations and that's you know we're figuring that out.
We remain long term very confident and optimistic.
There is there's a ton of opportunity in these adjacencies.
The next question is from Lloyd Walmsley at Glacier Bank.
Hey, this is Greg on for Lloyd.
One on a on the Premier agent business. So you talked about retention, improving but can you maybe shed some light on the demographic agent, who isn't necessarily coming back so maybe spend type or or geographically and then two on homes with the recent developments in the private funding market have you seen the competitive it.
Environment change at all such that the I buyer path to profitability may maybe better than you initially thought thanks.
Yeah, Hey, Greg.
So.
No I guess I guess I would say.
With kind of broad strokes, we have all kinds of premier agents that are seeing success with our model and depending on the size of the city and the kind of city and the kinds of homes with this in the city. This is Ken it can differ.
But if I were to use it.
Pain abroad brushing and.
Listen characteristics of of agents, where it's particularly well suited I guess I would say that.
Agent teams that are focused on.
Hey.
I am more mass market mechanized personal.
Transaction with a team full of people that may have some specialists.
So they can handle the kind of mechanization it takes to analyze a business with a bunch of incoming leads and then either monetizing that by the NBP model or in the 586 flex market figuring out how to nurture that lead all the way to the transaction.
Using their tools and increasingly our tools to nurture that lead along the way. These these more more mechanize businesslike teams are the ones that we think are.
So at least demonstrating best best fitness for what's coming what we think it's coming in the future.
I guess, that's what I'd say generally.
I forget the homes question.
Hi that funding market have you seen in the competitive landscape or kind of Oh, yeah Ray validated differently.
Feels different feels a little different I don't want to get too.
Too optimistic too early.
It has been a burger under my saddle.
The easy money easy late stage money.
You know.
Because you know you got to play the game, it's on the field the game on the feel feels like it's changing but and.
The easy money might not be so easy and maybe a bit more demanding I'm really glad that we have this.
Incredibly healthy core business and our I am t. businesses that is growing nicely gaining leverage generating all this EBITDA for us to use to invest in kind of the next generation of growth.
And Tam I'm also really happy that we.
We decided to put put a billion dollars or so on the balance sheet. This past quarter in the convertible offering that we did.
While we could that we feel like we're in a really strong balance sheet position to to fund our growth plan, which is a which is a.
It's a real unexciting growth plan, but it's one that that we are approaching you know with with Alan by my side put it that way not just not just me, but allen's but allen's here.
And so I would say overall.
No I read the news and I'm listening to stuff, that's coming out amasses mouth that is press conference yesterday, and I were listening to things I'm you know I'm getting you know happier about the competitive environment I think it's it's too early to say, we're in a normal a normal funding environment.
Your next question is from Murray I reps at Canaccord.
Great. Thanks for taking my questions.
Maybe just a follow up on the profitability question, so without providing any specific guidance can you maybe share with us youre thinking around improving profitability versus investing for growth next year and what a key investment priorities for you in that 2020 outside of the home segment.
Now I can pump, yes, I can point that keep the first the first part to you I mean, we're not giving guidance yet, but yeah, I mean, it I'd say that.
In terms of of what do we think are our investment priority or how we will invest and next year I think that we continue to expect.
To scale homes, and as we talked about we're going to test our flex business model, while continuing to focus on our agents and customers using the NBP model.
And we'll continue to.
To put the tax and the stack and placed with our two new executives on the mortgages to to grow that business. So I mean that I look to our long term targets to provide you the best guidance on kind of how are we thinking about.
Our investment cycle over the next few years.
I look forward to sharing more detailed 2020 guidance next year, but as I mentioned on my focus.
I will continue to focus on areas, where we see the ability to improve productivity.
You know do better resource allocation or build that muscle around.
Disciplined spending that just allows us flexibility to to invest in below 2.0 or to fill let that go down as margin expansion, but we're not providing any guidance past are the guide to provide today in 2019.
That's correct.
Are you ready for the next question.
It's pleasing okay, we have Heath Terry Goldman Sachs.
Great. Thanks rich.
Just curious obviously realize that that you know everything about call. It offers is still really really early but if you could kind of mark to market for us some of the early assumptions that you and the team obviously going back to spent or talked about.
In terms of what was underlying some of the economics that.
I was thinking about in when it entered the business. The 90 day turns on on home sales the the cost of carrying the cost of financing sort of how have those assumption to evolve.
And the 15 months that you've sort of been in the business, where where do those numbers sort of said in your and your model now that you Bob had a little bit more real world experience in the business.
I mean drawn is sitting next to mention hates it when I say I'm surprised that we're operating within the rails, we laid out even 15 months ago, but.
But we are.
And I I credit, Eric in Germany, and the the Brazil offers team.
We we have airpower in particular in his in his really talented team Ericsson Phoenix.
They they came from the peak one of the precursor companies imitation homes.
And they had built up I guess invitation homes, you guys were probably know better probably as 85 90000 homes that they own that's a different business, but these folks had built up that business.
And really understood. The line item on many of the of the line items of economics that constitute is this still offers business and it's played out.
You know within within our expectations, which I really I'm really pleased about and done so while it's grown it kind of known measurable percentage year over year right. It's it's gotten it's growing really fast and gotten really big.
You know, it's I wish we had more evidence to point to you have line item leverage right now we will in the future.
But as I said I think on a previous question or maybe on the and the script.
No. We step one was go abroad step two is go deep and get leverage.
I guess I guess, we can point to one point of leverage on the financing side of course.
Financing is a very important cost component.
In this business in our.
I'm also really pleased with the way we have.
Repower and his team and in conjunction with Alan if have have put together. This a layer of bilaterals. This kind of stacker Bilaterals, we've got in place each one getting better.
And one of the things that can come out of the finance or some today I think has to do with our loan to value ratio. Yeah, I, usually expressed a simple loan to value our I'll call. It a leverage ratio, which is our homes inventory value on the balance sheet at 930 versus the.
Vehicles.
The asset backed.
Credit facilities utilized in that 79% versus 74% at the end of 630, so with improvement.
The 500 basis points.
That is reflective of.
Our continued.
Improvement on trying to ensure as we buy these homes and put them through these facilities that we do it into a very effective and efficient way to ensure where possible. We're leveraging these facilities.
For some of the capital needs, we have versus our own capital.
But I I lost expressed at that that number will likely bearing there's still very early days that number will likely vary but with respect to our asset backed.
You know borrowing in the homes business, we continue to work we announced until the day we continue.
To work with a lot of of different parties, who are very receptive and the goal. We've expressed as that we want to go deeper cheaper and longer maturity longer so.
Which provides us more flexibility.
I would say the one.
Ill call it mark to market as you called it.
And I think it's important to clarify the 90 day.
All the time.
Is is one that's just hard because that's an average.
That really is representative of.
A lot of different distributions.
And not really representative of any of them. So when we buy homes, depending on price market number I know things, we expect those hold times to Bury that is reflective in our fee I don't want to get the impression you know in all cases were looking to reduce the whole times, but that 90 day across an average portfolio is just not the way we managed.
The business, we manage it across an expectation that we pay for and again, we expect overtime to improve that through a variety of ways, we get paid yeah.
Let me wrap this one needs by by saying, we really do you think scale I think I said this already but we really do you think scale anzio matters.
We think that we know that sellers or this is a pretty price elastic.
Business.
And that you know every little bit that we're able to to every little bit more we're able to offer a homeowner for their house, because we're running a more efficient operation we have cheaper financing expenses. We are you know.
Are able to sell a market these homes cheaper than one de Tuesday, or small folks every little bit that we're able to do actually.
Dramatically increases the size of the business that we think we can ultimately Ron so these.
There is a.
I guess I don't know if I call. This no and network effect is not really nice just a scale effect. There is a strong scale effect we believe.
In the Zillow offers business. So we think this is an important strategic decision to actually have this be big to make it yet.
The next question is from Brent fill at Jefferies.
Thanks for taking the question. This is Alex Yao on for Brad just going back to your comments around the I buying competitive environment I think we're starting to see some more overlap now between some of the bigger players we heard from Red Sun last night that they're ramping at a quicker pace as well just curious if that's starting to impact pricing at all and why.
There it impacts your thoughts around the pace in which you're entering new markets. Thanks.
There are different there are different hey, Alex there are different things, they're different competitive dynamics in different kinds of tests and learning is going on in in each market right now.
That we're in.
And it depends on competition it depends on a lot it a lot of different factors.
You know and I guess I would use that as a way of saying that.
If you if your scraping MLS data and coming to conclusions about what's going on and then any individual a market don't don't don't extra over extrapolate too much because it's early days and there are punches there are lots of tests going on.
The amount of I buying in totality is tiny it's really tiny most people don't know about it okay.
It's really really small.
And so I don't that we're not we have not entered phase in this I buying thing where the competitive dynamics actually matter all that much.
And then come into play a bit but the most important things for us to offer a product and service at a price that is attractive to the old way of doing it.
Thats what were focused on right now.
The next question comes from Justin Patterson at Raymond James.
Great. Thank you very much on P.I., you talked about customer satisfaction of revenue and profit yield that's a central pillars, focusing on not what are the key things to solve that bring a product like seller listings to market and then secondly, a big picture one rich you talked a lot about the vision of an integrated product.
You've got a ton of areas, where you can test and learn from P.A. mortgages in homes since you've come back to the company. What are the biggest changes you've made to align that aims to execute on those areas without getting too far over their skis. Thanks.
Okay. Good stuff on me on me.
So I wouldn't listing product and I chatted about a little bit before I do think a seller listings as one of many.
Kind of knock on or adjacent adjacent.
Opportunities that are out there.
And I guess I'd I'd also say that while the revenue numbers are quite large for the homes business to the end. The number of units is still pretty small and so that the the magnitude as the number of looks we're getting for this kind of opportunity are still really small and tiny.
Compared to the the hurricane of leads we get from our our traditional business and that you know 2 billion visits a month that we get on our apps on our absent site. So it's it's it's early days. There. We are rapidly learning, we're trying a whole bunch of different things you know some of it.
Sniffed around in in markets and discovered all kinds of tests that were running and so we're trying things some things are showing promise on things or not.
Or not or not.
Working.
From the triggered the second part of your question.
News integrated integrated product and what we're learning.
And.
Yeah. So.
Bringing on people, who know how to run. These businesses is job number one we you know we didnt have people that knew how to build the you know that knew how to.
By this many homes and we we recruited an amazing team to do that we Didnt know about title and escrow, we've recruited a fantastic team to do that.
We didnt know how to create a mortgage and so we purchased a small company last year and now brought on some really seasoned leadership from direct to consumer lending businesses to run the mortgage business. We're investing in these in in a in a way that I would call aggressive, but prudent without getting out over our skis.
Utilizing.
You know EBITDA from the from the main from the main.
From a from our core advertising businesses.
I feel really good that its imbalance.
And that it's working pretty well.
The next question is from Brian Noah get Morgan Stanley .
Thanks for taking my questions, Hey, guys. So I've to the first one just on the same store sale a celebration and Premier agent was wondering it could you just talked you sort of anything that change from a consumer behavior perspective that drove this are you actually seeing more more homes being sold to the platform.
Driving more bidding around impressions whats are there other changes made what sort of drove the celebrations of sort of mechanically for us as we sort of think about a further levers to go.
And then on flex maybe walk us through sort of the the framework that you guys plan to apply on a market by market basis, and just sort of evaluating which markets may or may not be best served with a with a flex offering them over time. Thanks.
Okay, you want me to take the first sure sure. Okay. So I kind of won't be quite weve been.
Talking about this recurrent revenue mbps and recurring revenue model that we had it really high churn, we dug ourselves into a whole we've had to build ourselves up so I do want to be clear that there was not a significant inflection point so much as the inputs have been going.
Really well.
And we saw what I'll say productivity and agent retention in Q3 come in better than we expected to the 5% was was better than we had expected which is why we showed results we did and and we expect as did in Q4, but a lot of these trends have been going on all year, we've had to build.
It's kind of dig ourselves out of this hole that we had Doug when we had the high churn.
You know in the second half of last year.
But I and I think it's just basic blocking and tackling we PPA forward is providing more connections more warm leads to our agents, which is getting customer an agent together see sat is improving.
No. We can't track conversion on also meant that we do but we have indicators that conversion is improving.
And so it's really just basic blocking and tackling we've seen the input get better over time, and we just kind of had.
A little bit better productivity and retention.
Caused us to inflect, a little better than our forecast, which we reflected obviously in Q3 results as well as our Q4 guidance. So it's just a lot of you know it's a lot of.
Inputs that are slowly getting better and we feel like we've got continued a room to.
You know to improve the since there I guess potentially the market is the partners.
Banner customers the end consumers.
Our responding well with this push that we're making to move down funnel in the core the core P.A. business as well, meaning we're taking care to make the connection to make sure. The meeting happens to arrange the tour in a way that the tour actually happens and then to follow.
With that that shared consumer on their journey towards the transaction. We are building, we continue to roll out tools that make that happen, it's the and that's making the business work better and we expect we expect that to continue.
The second part of your question was about.
Flex convert.
Flick framework for.
For evaluation, we're trying as a a diversity of things.
In these different markets, we hope that these these five soon six markets.
Represent enough footprint and enough diversity for us to get a good.
Good.
Test signal to get a good testing now so we're trying a whole bunch of different things, we don't have any patterns.
To report on yet.
So in some places in some things are working in other places there or not.
And so we are highly motivated.
Because we're so optimistic that this is a potential big win win win.
All the way around as you as you heard of SEC and.
We we like it because it's better for customers, it's better for partners and it could be better for us.
And it fits with this move down the funnel towards the transaction that we think is so key to unlocking all of these knock on adjacent.
Opportunities again, it'll take time and I think we said that rich.
But we did choose Phoenix Atlanta, because they were zero markets that.
We were the latest to get latest in markets that we have announced I guess when I said last quarter, but we're we're in Phoenix now we're about to ship Atlanta.
There's no surprise that that those are two of our older. I. Just said, we don't have any old two of our first little offers markets.
And we have terrific Xeo partners in those markets.
Who we have done you know some of the most deep systems integrations with in order to follow these customers throughout the whole transaction and we're leveraging a lot of that infrastructure to duties flex tests as well and so that's you know it's it's it's we're optimistic.
The next question comes from Brad Erickson at Needham and company.
Hi, Thanks.
First just I guess last quarter, you know felt like the message with flex was definitely the future for the P.A. business.
You, obviously talked about the merits of the better model better monetization better customer experience all that so.
I guess wondering while the sudden it seems like the message that legacy EMR is little bit better and it's going to be more wait and see on flex I guess, how should we take out in the context of which business model, you're likely to pursue here going forward and I guess.
I don't like is there a chance where if the economics on flex aren't as good for whatever reason would sticking with the EMR model work with brought her down funnel pieces here longer term. Thanks.
[noise] there hasn't been an underlying change Brad there's just been a change in the way we communicated it and in recognition that we left and we left a big up and question on answered last quarter.
You know in terms of Hey, it's just you know it is different it could be different revenue recognition.
You know.
But just the testing we don't know when it's that I would just let the big we just let the big question, Mark which was the mistake.
We're trying to solve for that this quarter, which is what you're detecting as the changes as a potential change in the underlying way we're thinking about it we're not we're just changing we're saying look.
This test we're trying to frame. It for are you, saying it represents 5% of they are up excuse me EMR.
In the business, which seems like a reasonable amount of EMR to to test with okay.
And we're also going further saying well look we need the dedicates ourself than we know we need to make the dedicated to you.
To the extent, we move beyond it.
And why we're doing this we're growing the core NBP business really nicely getting leverage on that we like that business, but we do think it can be improved but we really like that business partners like that business and customers like that business too so.
The next question is from Eddy Hargreaves with Keybanc.
I'm just trying to keep on the flex theme. If that's okay. Obviously I know in revenue do you want me to change that can [laughter].
What do you I I'm wondering what you're looking for from a metric standpoint from a demand agent demand around flex and if if you guys can share anything around.
Sign ups or feedback so far recognizing that it.
Yes.
Yes, it's we just did this unlock event in Las Vegas, I think we had 2000 people overall, maybe 1500 to them, where where premier agents. These are the top eight these are the top agents and teams.
That that paid to come.
So it's not a representative sample of the total partner base, we have it's the ammonia.
The most productive the most forward thinking.
I would characterize it.
As.
These people are making their money from the business as it is as it currently is in any changes a little any changes a little scary.
But I would say large subset and growing our realizing this is a real potential game changer for the business long term or the whole industry long term their understanding that for the middle of the bell curve of real estate transactions. These are going to go to high volume.
Teens, it's going to get mechanize, just like every other business the technology touches and they are really anxious to be at the front of the queue for testing a lot of hands are going up saying when you come to export to my town I want to be a test partner.
And so thats it thats, an encouraging signal that others as well that we talk to and you might talk too as well that are I think you know I think it's the end of the world. This a little too strong, but I'm worried about it.
There are making money the way, they're making money and they don't want to change.
But you know we want the we want the best partners no matter, how we monetize okay. That's that's best for all and that's the best for that for for customers as well.
Hello.
The next question from Jason Helfstein at Oppenheimer.
Hi, This is Jason Hoffman on for Jason Helfstein, Oh, we were wondering how many like what is the percent of homes in inventory that is greater than 60 days and just last quarter. You mentioned that you were increasing the size your foot now you're not how much of those being pulled forward into.
Your guide.
Going forward.
Maybe we can take the second question first just because I think it's short.
I'm not sure I understood.
We announced we were expanding our flex tests.
At the end of our Q2 call and that because we were going to be flipping those markets from our prepaid model to this flex testing, which is where we get paid upon the close of the house that that would have the impact of deferring revenue into future periods and.
Our our change in guidance for the second half of the year was lowered to reflect that movement of revenue into future periods.
Nothing has changed with respect to that we are flipping those.
Those markets as expected.
And so as I mentioned before that impact.
In Q2 was driven by flex expanding that market the adjustment the performance in Q3 in the adjustments. Our Q4 outlook is reflective of our core NBP business, improving in both sales productivity and retention rate versus our expectations at the time of the Q2.
Guidance.
With respect to your first question.
We don't provide a.
We don't provide a distribution of our homes in our aging as I mentioned, we don't believe the actual age days is very reflective.
Externally just given that it varies a lot by market by price of home and a variety of other factors.
All of our underwriting and pricing takes into takes that into account when we.
Again provide our offer.
Because homes that we believe will take longer to sell we charge more for.
Related to the holding costs interest than others.
So I think the the best thing to kind of consider as it provides a per unit home metric and then.
We did we talked about last.
Call and we do assess as.
Required to Mark down our inventory to the lower of cost our net realizable value and we do that assessment.
For inventory in the balance sheet on a quarterly basis.
It's an accounting adjustment in does require us to mark those.
That inventory that is below cost to a net realizable value.
But it does it it's not a mark to market. So we don't take the Mark on the high end and that Mark.
In Q3 was consistent with Q2, it at a little less than 1% of the inventory values hopefully that helps.
The next question is from that they turn Suntrust.
Yeah. Thanks, a lot a that's something that inventory.
Valuation.
Oh that things that you can.
Thanks to them. So maybe in terms of this pricing and make the offers you just.
On that rather than to the pricing is better than you don't you do less of though that's meant a and then secondarily on the on the Martin on the integrate integrated mortgage and what does nation offering I guess.
On the last call you said it was delayed any updates on Monday and go to market with ER.
With that.
Yeah did you get the first part.
Could you just repeat the question deferred first talk or whatever you say it are there things we can do.
Yeah, So I.
And I want to reduce the inventory reserve.
The the question ties to the I guess the write down on the on the inventory carry Oh, it's what's happening last quarter and I think you said that it was a similar to spend this time around and comes a percentage of the.
As a person just component.
Things that you can do in terms of how you evaluate the obvious when you buy them. So that you kind of low what are their just spend if it's a put a downward.
Yeah, Let me I guess, what I'd say is in general as we think about this business.
And we make offers to our our customers who are interested in selling to us we are attempting to provide them a fair value for their price.
Adjusted for renovations that we need to make and what we expect the holding costs about home over the period, we expect to sell it along with a fee for the service we provide.
So what I've learned in the homes businesses that obviously pricing that home is very important and that is where you know overtime as we get more data and we have access to a lot of data would continue to get more we will get better and better about what types of homes, what attributes to allow us.
Predict better what that performance of that house should be.
Within a range that we expect something to do better and some to do worse.
But the smarter, we get into more we leveraged data and machine learning, we will be able to tighten.
That standard deviation between what the average of that portfolio does what this lower of cost our net realizable value reserve adjustment does it's an accounting adjustment that requires to take those houses that are on one side of that standard deviation I.E. that we we are going to sell them for less than we bought and four including selling costs.
And make that adjustment in the current period versus when we felt we don't get a hallmark, where we take the benefit all the houses on the other side of the mean one standard deviation.
That we make more money.
But again as we what I guess I would say is our expectation. Our you know obviously to be successful. This business data has to help us reduce that variance.
On a portfolio basis from the mean when you think about one standard you gave that tail and as we do that we would expect to have less.
As a percentage in here, but but it's a normal adjustment we do expect that there will always be.
Homes on both.
If that helps I don't know if we want to close on this with the with the Sparkler I can I can get has.
Other.
Yeah, Hi, this is just to give people scale on kind of the.
The homes economics, this would be basically accumulation of the the party and economics that we provided a in the last three quarters and as you know.
Lifetime or four quarters like comments, we saw 814 million Hall.
With that 840 million of revenue off of 2588 homes. Our return on homes sold before interest expenses 2.3 million and that return on homes sold after interest expense is a loss of 9 million selling scheme of when rich talked about we're really excited about the scale we've had.
And how our operating when the limits that's a pretty tight.
That could have gone a lot of different way, it's impressive [laughter], it's impressive and relatively small.
So as a good way to innovate. Your last question was about the integration of mortgage were executing on our plan.
It looks it looks good.
We've got some exciting new management in place with Ryan and Libbey that I talked about before we're doing some localized test of integrated digital home loans as per that fantastic video that I'm sure you guys, a long time to click on.
From the shareholder letter I, you know, it's a fund video actually in its true story. So it's cool.
So it's beginning to happen. This one like like many of these adjacent keys is going to play out over time, as we learn and build the business though.
But we're excited about that we're very excited about the long term profit potential in these adjacent businesses.
I think that's it.
Thank you guys very much.
We're really excited by the progress, we're making sure that mechanize this transaction and its funding to update you guys.
On our progress along the way so thank you for thank you for joining us on this thank you for your investment dollars we will.
We take it as I said before we care we're shareholders.
And we will take care of your capital into our best with it. Thank you for being great partners.
Your next quarter. Thank you.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Right.