Q4 2019 Earnings Call
[music].
Good afternoon, and welcome to the Zillow Group fourth quarter 2019 earnings Conference call.
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I'd now like to turn the conference over to Brad Berning, Vice President Investor Relations. Please go ahead.
Thank you Sarah good afternoon, and welcome to Zillow group's fourth quarter and full year 2019 conference call for the old Mccall that I haven't met yet I'd like to look forward to doing so soon joining me today to discuss our Q4 and full year results are Zillow group's co founder and CEO, Rick Barton and CFO Allen Parker during the call will.
Forward looking statements about our future performance and operating plan 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 FCC filings for additional information we undertake no obligation to update these statements as a result of new information or future events excepted.
Required by law, it's called being broadcast on the Internet, there's a sensible on our Investor Relations website recording the call will be available later today during the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we referred to as EBITDA. We encourage you to read our shareholder letter and earnings release, which can be found on our investor relations.
Web site is they contain important information Mason about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures. In addition, please note we recruit referred to our Internet media and technology segment as our I M T segment.
Open the call with brief remarks, followed by live QNX and with that I will turn the call over to rich.
Thank you Brad I'd like to start by officially welcome you to do our team.
Many of you know Brad from his work on the other side of this phone most recently as the sell side analysts covering below another companies.
He has decades of experience with deep expertise in housing in financial services are delighted to have them on our team.
And we expect the called Big happens long now that he's not asking usual multipart questions. We quit seriously bretts already making a significant contribution and we look forward to introducing him on the red in the weeks or months ahead.
Okay. It's been exactly 363 days since Alan and I joined you for our first quarterly conference call.
We sit here a year later, our 2019 results clearly demonstrate we're making progress against our plan to Replatform real estate and move down funnel to deliver our customers a seamless integrated transaction experience.
I'm pleased with our team's strong execution, which delivered Q4 and full year results that beat our outlook.
This multiyear expedition has a phone course to not only streamline the moving experience, but also to dramatically expand our market opportunity and profit potential.
I'd like to start like calling out just a few of our 2019 accomplishments.
First we stabilized then re accelerated growth in our core premier agent business.
Gross do we expect to carry on and 2020.
We continue to be methodical innovating and optimizing monetization of our lead flow and are optimistic about the future of coverage.
Second we grew our new Zillow walkers business in the home segment to $1.4 billion in revenue in 2019 up from a mere 52 million the year before.
Ending the year on at 2.4 billion dollar annual revenue run rate.
We did this while opening 17, new markets and executing within the unit profit.
Our grails, we laid out for a launch phase.
This was extraordinary execution against a rich vein of consumer demand for a novel consumer service.
Third. The addition of transaction oriented businesses has necessitated a leveling up in how we operate infusing cost discipline and operational rigor and every business in corporate function.
Internally, we call this getting fit.
The sharp focus on scaling efficiently.
Much more disciplined and accountable planning and review process. He has had been critical here.
Fitness is essential for the expectation that that'd be expedition.
Foundational for profit leverage.
Demanding a perpetual focus and improvement.
Next we strengthened our balance sheet, and then ended 2019 with $2.4 billion in cash and investments.
Our strong balance sheet with increasingly diversified funding sources provides us with the flexibility to pursue our growth opportunities in a disciplined wet.
Next we filled out our management bench with seasoned operators in mortgage title and escrow corporate relations marketing finance operations and more.
All the while we continue to attract outstanding Tech industry talent and are consistently recognized as a great place to work and build a career.
Our team is strong and we continue to add it up level key positions as we grow.
And finally, we are in the process of galvanizing our employees around the new mission statement that animates, our transition to Zillow to point out.
At below our mission is to.
It gives the people the power to unlock life's next chapter.
And do it again.
Below our mission is to give people the power to unlock likes next chapter it was meant to be more dramatic.
Our homes represent distinct to chapters of our lives and we're building our technology services and operations to make it easier to as Bob Seeger says turned the page.
And our quarterly shareholder letter you will find a link to a short video you might enjoy watching I mean, when you might enjoy watching about our new mission.
It never fails to bring it to your tomorrow.
Okay to wrap my brief you're in your view introduction I'll reiterate that I'm extremely proud of what our team has accomplished over the past year, especially in light of how much business and cultural cultural change I have asked for.
Alan will take you through the Q4 and full year results and 2020 outlook, but first I want to spend a couple of minutes on our premier agent and homes businesses and share our areas of focus for 2020.
Starting with Premier agent well, we entered 2019 was significantly heightened partner churn versus the prior year. We have started 2020 with some of the best retention rates, we've seen in recent history.
Our connection rates are on rise and through our work to partner with the best agents, we saw a customer satisfaction continue to increase during the quarter.
This has been driven primarily by solid execution as our team has heightened it's focused on making connections between our customers and our best partners, which contributed to strong premier agent revenue growth.
I want to commence Susan Daimler, who leads our premier agent business and her entire extended team for first stabilizing this core business and then leading a reacceleration of it.
As you can see in the Premier agent same store sales chart, you know shareholder letter when we back out the impact of our 2019 Flex test. We ended December with 12% year over year same source same store sales growth in monthly recurring revenue up from 5% at the end of September.
Looking down on our Premier agent business from 50000 feet. Our goal is to pay increase our big see conversion rate from visitor to transactor and be increase our revenue and profit yield per leap.
We believe there's room for growth in both of these metrics.
Our whole history with Premier agent has been about continual business model innovation and testing in service of long term growth Mac maximization and customer satisfaction.
Since introducing the best of Zillow programming, focusing for marriage and on connection Rich service quality and most importantly transaction conversion, we've seen significant improvements in our business fundamentals.
Specifically, we've had to dig in on the capabilities on the productivity of our Premier agent partners, who are faster converting leads into transactions and this is why we are excellent expanding our flex test with high performing partners in select markets.
We're learning that conversion is a key driver of performance regardless of whether the monetization model is flex or larger market based pricing.
So as we continue to testing grow premier agent ultimately think of.
Except premier agent business models, we will deploy as an optimization problem and opportunity.
We continued to be methodical in our tests and we're making progress.
The improving performance or Premier agent has provided a strong foundation of cash flows for the rapid expansion and growth we've seen in our home segment.
We delivered more than $603 million in revenue in Q4 from Zillow offers up from just $41 million in Q4 of 2018.
Our outperformance in homes was driven by strong consumer demand as well as applying learnings to inform our resale strategies.
We also experienced less impact from seasonality than we anticipated.
In Q4, we sold over 1900 homes and purchased nearly 1700 90 homes and we ended the quarter with 20 707 homes in inventory.
Since the inception of Zillow offers we purchased approximately 7200 homes and sold 4500 homes.
It's still early days, but we're learning as we grow and consumer signals are strong.
You know, we launched a remarkable 17 new markets in 2019, most of which came online in the back half of the year.
Oh on or ahead of schedule, bringing total xeo markets at the end of January to 23.
Additionally, we remain on track to be in at least 26 markets by mid year approximating national footprint.
We're 2020, we expect continued strong growth in the Xeo business.
Well be driven primarily by servicing high demand in young existing markets and less so on opening new markets.
Hello offers is the first time, we've owned it the transaction, which we know is a hub from which multiple other adjacent transaction services hinge and we're gaining traction in building out those adjacent services as well.
We're progressing with Zillow home loans and have confidence that our new mortgage man mortgages management along with.
Only 19, and 2020 investments will set the stage for future growth acceleration.
And as another important adjacent tea and 29 team, we stood up a new title and escrow business Zillow closing services to further supports zillow walkers expansion and deliver an integrated transaction experience for our customers.
A recent Zillow offers success story is Kathy and Robert Boeing of Atlanta wanted to larger home that could accommodate their growing family of seven and someday their parents as they age.
Premier agent help them find a big yellow house with hardwood floors that they love, but it was at the top of their budget ranch.
They couldn't make the downpayment without selling their current home under traditional sale wasn't feasible with two full time jobs five kids in a dog.
They terms just below offers and were able to tying the two transactions on the same day, allowing them to move we competence and convenience.
It fit together just like a jigsaw puzzle Cathy said.
They're successful trade in is a story, that's now playing out for thousands of families around the country.
This is fundamentally why we are here nice success stories proved demand our team that people are ready for a better way.
I'll say this year, but it doesn't sound see it here, but there's a link from a shareholder letter to that video as well and it's going to only going to watch one video watch. This one that's a great short.
Okay. We're 2020, we expect to continue to grow and gain leverage on our core I am T. segment operation and use those EBITDA profit to fund our promising hydro transaction oriented businesses are still offers fill a home loans until the closing services.
Our team is focused on four key growth strategies.
One.
Grow premier agent, while maximizing revenue and profit yield per lead.
Two.
Gales, though offers an increase transactions, while gaining operating leverage.
Three.
Increase companywide operational efficiency and improve profitability.
And for continued to invest in adjacent services to deliver a seamless integrated customer experience and expand our total addressable market.
No I'd characterize 2019 as tumultuous leave remarkable.
Personally it was one of the most challenging years of my career.
We've been working to so as we've been working to simultaneously evolved the hearts and minds of our employees, our industry partners and our investor base invade base, while reinvigorating, our core businesses and dramatically expanding new ones.
Well, we have miles to go before we sleep and the way will surely be lumpy. The great progress. We've made in a short period of time gives me confidence that citigroup is in the pole position in the race to re platformed the largest industry.
Our talented team here, just making it happen, but I also want to thank you our investors they've given me and the team the space and support to turn the page and to move to the next exciting chapter in the story of Zillow.
Before I turn the call over to Alan to take you through our numbers and outlook I want to acknowledge his leadership and impact on defining the more rigorous planful and accountable operating culture of Zillow 2.0, it's great to be sitting next to you Alan.
Thank you rich, it's great to be here.
I'm going to quickly summarize a few key financial results starting with the fourth quarter and then moving to our full year results.
Overall, we're pleased with our Q4 and full year 2019 results as we exceeded the high end of our expectations for our revenue and EBITDA outlook on both the consolidated basis and across all of our <unk>.
We reported Q4 consolidated revenue of 944 million up 579 million or 158% year over year.
The outperformance in revenue was due primarily to strong demand in our home segment as we applied learnings to inform our retail strategies and as we saw less seasonal impact an expected on home sales.
Consolidated Q4, EBITDA outperformed our expectations at a loss of 3.2 million.
And was driven by not only the health of our I.M.T. business, but also the operational rigor across the organization as all three of our segments delivered better than expected EBITDA.
I am T. segment revenue grew 6% year over year in Q4 to 320 million.
Ceding our outlook.
Premier agent revenue accelerated more than we expected in the quarter to 234 million up 6% year over year from 3% growth year over year in Q3, and what was essentially flat growth in Q2.
Our decision to partner more closely with the best agent partners is not surprisingly, yielding strong results with connections customer satisfaction and agent retention all on a clear upward trajectory.
He's inputs are key drivers on why NBP same store sales monthly recurring revenue.
Growth accelerated up the ended December to 12%.
As we did last quarter, we provided same store sales for monthly recurring revenue for our non flex market.
We estimate represented approximately 95% of our Premier agent monthly recurring revenue at the end of 2019.
I M. T segment, EBITDA margins expanded over 800 basis points in Q4 year over year to 27.4% and exceeded the high end of our expectations, our focus on cost discipline and operational rigor across the company is yielding tangible results.
Total I am T. segment operating expenses declined nearly 10 million year over year in Q4, excluding the impact of certain onetime items. We recorded in Q4 2018, as we continued to focus on delivering operating leverage.
Moving to full year 2019, the full year 2019 consolidated revenue grew to 2.7 billion, which more than doubled from 1.3 billion in 2018, primarily as a result, the rapid expansion of our home segment.
Holiday EBITDA for the year was $39 million as we invested our I.M.T. segment profits into our homes and mortgages business.
2019, I M. T segment revenue was 1.3 billion in I.M.T. segment, EBITDA was 304 million put that in context, we grew revenue by 6% year over year, while growing EBITDA, 27% expanding margins by 381 basis points.
Premier agent revenue grew 3% during 2009 team to 924 million.
We were pleased with the progress to stabilize the premier agent business in the first half of the year and the reach re acceleration in the second half of the year.
Home segment revenue was 1.4 billion for full year 2019 up from just 52 million a year ago.
As I've stated on previous earnings calls during this transformational time until a group. My focus is CFO continues to be honest stabling processed season mechanisms in support of three key priorities.
Yeah, I mean, our new businesses.
Executing within our I M segment in order to fund investments into the 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 executed on these priorities in 2019 and believe these efforts has to have positioned us for even stronger I empty segment EBITDA performance in 2020.
Fund our investments in new businesses.
Before moving to your questions I'd like to provide some select thoughts around our Q1 and full year 2020 outlook in comparison to 2019.
Due to the recovery and strong trends, we're seeing in our Premier agent business, We expect premier agent revenue growth to accelerate further in Q1, we expect Q1 premier agent revenue to be between 238 million to 243 million.
An increase of 10% year over year at the midpoint of the outlook range compared to 6% growth in Q4.
And 2% growth.
In Q1 2019.
This accelerating revenue growth is our first quarter outlook in our first quarter outlook includes the net impact of delayed revenue from flex tests without the impact of flex tests, we estimate Q1 year over year Premier agent revenue growth would be approximately 14%.
At the midpoint of our outlook range.
Turning to I.M.T. margins in Q1, we are forecasting I empty EBITDA margins to expand 90 to 120 basis points between 21.6% to 22.7%. Despite a couple of onetime items that benefit.
Benefited Q1 prior year margins by 290 basis points.
In the home segment, we expect another year of strong growth in 2020, as we applied learnings ROE into the 23 markets. We've opened in the last 20 months and launched a handful of additional markets given how new this businesses and our continuous testing and learning we will continue to provide a quarterly outlook for home segment in 2012.
In Q1, we expect home segment revenue to be between 675 million and $700 million home segment EBITDA. In Q1 is expected to be between a loss at 95 million to a loss of 85 million.
We expect to maintain the current you can be unit economic guardrails, a plus or minus 200 basis points on average return on homes sold before interest expense as we continue to test and innovate.
With regard to our mortgage segment, the new management team is in place and is making progress to develop our technology platform and expand operations expand the operations Zillow home loans as we work through this transition we are moving the mortgage segment to quarterly guidance consistent with our approach to the home segment.
As rich mentioned in our flex markets. We are seeing positive signals that are most productive agents convert transactions better than the average because of this we will begin to expand our flex test methodically with high performing partners in select markets in the second quarter of 2020.
Our full year outlook includes the potential for additional testing in the second half of the year, if we decide to expand flex further.
For full year 2020, we expect premier agent revenue to be between 980 million to 1.005 billion up 7% over 2019 at the midpoint of our outlook range.
This outlook range includes the net impact of delayed revenue from the flex test I just discussed.
Without this impact we estimate the 2020 year over year Premier agent revenue growth would be approximately 10% at the midpoint of our guidance range.
We expect I empty segment EBITDA margins to expand an additional 300 to 400 basis points in 2020, it between 26.7% to 27.9% for the full year and I empty EBITDA to grow 24% for the full year at the midpoint of our outlook range.
Note that the pace of investment is in our control to execute our creek key growth strategies, as which discussed previously while we're not providing outlook on consolidated 2020 revenue. Our EBITDA philosophically, we are managing towards a breakeven range as we use the contribution from our I.M.T. segment to help fund the expansion and growth of our.
Homes and segment homes and mortgages seconds. Furthermore, our balance sheet remains strong and provides a significant flexibility to take advantage of market opportunities to gain scale in operating leverage in our new businesses. We ended the year with 2.4 billion in cash and investments along with 900 million, an undrawn credit facilities and lines of credit.
The further support the growth of Zillow offers until the hormones.
We remain mindful of our cost of capital and we invest in these out as we invest in these opportunities and we'll continue to prudently manage expenses.
At all we're very pleased with our Q4 and full year 2019 performs the momentum are carried into 2020 and the progress we're making towards streamlining real estate transactions. The better help our customers are locked the next chapter of their lives with that operator, we'll open the line for questions.
Well now begin no question and answer session.
You ask a question you May press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then tail.
Please limit yourself to one question and one follow up.
At this time, we'll pause momentarily to assemble a roster.
My first question comes from Ron Josey with JMP Securities. Please go ahead.
Great. Thanks for taking the question lot lots to talk about here for sure, but you know maybe rich now and I wanted to focus a little bit on that just premier agent business. It first with guidance, calling for revenue growth accelerating you know to continued acceleration to continue and I think 7.5% growth at the midpoint I hear you on agent retention rates, improving see sat scores, but what do you.
No it's around flex and just you know rolling out to new markets into Q, and maybe even more markets in the back half of your just can you just talk little bit more about the confidence in that accelerating growth and premier agents, which you know clearly is the bread and butter at least what underlines the investments going forward and if I could sneak just have a follow up on flex Rich you mentioned the letter high performing agents are just converting leads to higher raw.
Right just any additional insights there would be helpful. Thank you guys.
Okay, Hey, Ron a this is rich let me, let Glenn let me, let Alan start out on that one and then I'll jump it.
Yeah, Thanks to the question.
Yeah, I'll reiterate I know you mentioned it but.
Our confidence does come from the improvement protein and some of the underlying inputs over the past six months.
Both connection to see sat metrics are up substantially and our retention has been trending you're the highest levels ever Ah. So you know well what I would say is as we look to and watching <unk> incorporated in the guidance. Its still early on blocks are we thought it was appropriate to include a.
Some flexibility to increase our testing influx, a we control the flex casting and some of the early signs are leading us to feel confident that are higher performing partners can provide returns and be accretive earlier than a full mark.
It slipped, but again you know given just the basic imports of our core business, which is still the majority of the revenue that we report from P.A. You know these trends along with a continuing product innovations investments, we're making in connections and operational improvements are driving strong forward indicators. So yeah you know.
We feel very comfortable the guidance range. We provide provided gives us the ability to continue to test a variety of monetization models, including flex a while still supporting its core it'd be p. business.
And yeah, I mean inputs are Oh, you know all the inputs are improving on me on the high performing partners question and providing more clarity.
You know, it's really what it is its unsurprisingly when we find partners who use our software understand our system, we explain our system well and they can they give good customer service and convert those customers into buyers transactors of homes.
Those are the partners, we're looking for and we are testing and learning different things in different markets. You know, it's too early to make any broad generalizations to characterize what those partners look like but we're finding them are finding enough of them. We're seeing enough. Good results to to continue to methodically or expand expand our flagship.
Yes.
I would say, we're looking for high performance partners across you know across the universe of P.A. to flex is a very small part of the overall premier agent business and the whole the companys folk new focus on the transaction itself.
And what it takes to get a customer into a new home has actually brought good news to the whole of the of the Premier agent business as well as well and taught us how to.
Focus on what customers really want so.
[noise] makes less sense, thanks, guys yep. Thanks.
Our next question comes from Mark Mahaney with RBC capital markets. Please go ahead.
Okay. Thanks, I two questions on the homes business, but rich thanks for quoting Bob Seger on the homes business [laughter]. The one thing that looks a lot is that the there was a sequential decline in homes inventories. So could you not find enough homes that you wanted to purchases. It harder for you or is there. Some reason is that a more competitive market. Just explain why this is the first time in which you.
That's kind of that those two numbers have have flipped homes sold in homes purchased and then secondly in the homes. Thanks for the business economics that that kind of drill down is a really valuable and I know, it's a small part of the cost equation here.
You've got this nice leverage in home acquisition costs, but you've got this de leveraging renovation costs and I don't know why that would be but that's kind of offsetting everything in kind of driving you I know what's within your guardrails, but it did turn your return on homes sold negative before interest expense just explain what's happening with the renovation costs. Thanks, a lot yeah. Okay. Okay, okay, great maybe help.
Maybe I'll turn the second one mark over to a Alan I'm, not but but on the on the first part of your question you know I guess I'd deflect first and say we had remarkable growth in selling our zillow and homes right. It's 603 million in revenue that was.
Oh, I'm almost 15 times from the year before so it's turned into it it's turned into a really big number and that's that's pretty remarkable on the purchase T cell.
Deceleration or decline that year that you're you asked about we actually plan for purchases to be down sequentially going into Q4 due to seasonality Q4 is the slow is historically a slow selling season.
And so we were appropriately cautious heading into the quarter and we fulfilled against our plan to do that so that was not a surprise what did surprise us a bit was.
Oh, good our resale volume was it was much higher than expected a it made us a a bigger net seller than we actually a than we actually expected.
And I would say this is a credit to acquiring all these learnings we're gaining the ends the unit by unit numbers in this business are starting to build there still small, but they're starting to build and each new units that we transact pumps data and learning into the machine and the people and we're getting better at pricing homes, we're getting better at a price drop.
Strategy, we're getting better at all the stuff that that that is required to price and solve the home and so we were able to move a lot more homes them than we anticipated I guess I'd say looking forward you know because we still are in early days most of our markets are really young a way.
We expect it to be it won't be a nice queen it'll be a lumpy it'll be a lumpy path it won't be a nice clean a linear thing which is one of the reasons were only only guiding a one quarter out now on me.
Renovation de leverage I'll turn it over to Alan Yeah, Hey, Mark Sound Parker, Yeah. So you called out renovations as a percentage of average revenue was 4.69% in Q4 versus 4.02% a negative or basically the increase of.
67 basis points quarter over quarter, you know I'll call. After we believe there's opportunity across all four lines, we didn't get 21 basis points improvement in home acquisition costs I wouldn't read too much of anything into quarter over quarter trends right now as we're testing in iterating across all of these markets what I will.
Say is we have a team is very focused on what's the right amount to spend on renovation to make the home rate for our customer, but without overdoing, it and spending money on things we don't need to so are you know we've got an opportunity. We obviously in total we were 48 basis points negatives or as a percentage of.
Revenue and you know.
Well within our as you mentioned, our plus or minus 200 basis points I wouldn't read too much into changes, but that's definitely an area. We are focused on and renovation or although we're we're focused across all four expense lines as well.
Okay. Thank you own thank you rich.
Yeah. Thanks Bye.
Your next question comes from Justin Patterson with Raymond James. Please go ahead.
Great. Thank you very much a couple of on flux. It could you talk about your learnings in 2019 marketshare expanding to went 2020 and on the puts and takes around further expansion and then finally I wanted to go back to Flex partners and Extensibility is there anything you can do to health announced that general agent population toward becoming.
Higher performers in flux or do you think it's a little more binary it simply works for some but not everyone. Thanks so much.
Okay, Hi, Justin.
Yeah, I mean, I think our our big learnings for.
You know for P.J. overall, but flex included for 29 team is is how.
You know regardless of business model, we are looking to like any other funnel transaction business increased conversion and increased sacred increased deal.
Okay and.
And we haven't had an intuition that there's upside in those in those two big levers for quite some time and we're starting to actually we're starting to actually see that and we feel that both have room to grow the history of our Premier agent business is a history of innovating on the business model trying to drive those two levers and.
Flex is.
Simply the latest incidence of that innovation that we had to start talking about it more specifically because of revenue recognition stuff, but it's really just an instance of that business model, a innovation and were pretty early.
The first big plaques markets were really Phoenix in Atlanta, which we launched in Q4. So we're still really in the early learning phase of this but we've seen in Ah interesting stuff on these Ah interesting results with these high performing high performance partners or give us the competence to expand the test so we've seen out.
Data, we're expanding methodically you know Elena taking you through what the impact will be going forward in 2020, but we like what we're seeing and I guess the customer oriented person and me also really likes that with flex we drive a better.
Conversion percentage of better conversion rate and that is the single greatest driver towards customer satisfaction and so we have happier customers.
Well, it's all about as a long winded away a bit kinda, saying.
We kind of look at this is the integration problem now and we're continuing to innovate on these on these Ah you know on these models yeah, I'll just add rich that in terms of you know the launch plan or Mark plan, it's still very fluid as rich said, it's early we just felt a that including a the flexibility too.
Have to expand testing as needed and calling out the impact of that in our 2020 outlook.
Provided you guys with a little bit of stabilization on flexes impact and gives us some of the flexibility to look at testing I think initially it's going to be a very small test that starts in Q2.
But if we find that there are some benefits there a in that we become accretive sooner we've given ourselves some flexibility to expand those tests in Q3 in Q4 without having to come back with the guidance change if that makes sense and Justin I think your last you last question last part of the question was Oh no.
Jim binary.
As their stuff that we can do to nudge up we think we have a ton.
Upside.
And then <unk> Mechanizing and Professionalizing.
And applying software in modern technology to this nurture funnel to the sales funnel.
And there has been a woeful an embarrassing lack of tech investment in the real estate industry for pretty much its history and so we're we're waiting into normally problem, yes, but but it's a really fertile it's a really fertile feel there's all there's a long pent up desire.
Prior to kinda Mechanizing professionalize through software. This industry. So we have a lot we see opportunity everywhere, we look right and it's fair to say that that opportunity can be spread across our NBP business. The learnings no question.
Which is which is a great levered, it's not just influx, yeah and honestly like.
A lot of the learnings, we're gaining are coming from our Zillow offers business as well because where actually the primary.
With our Zillow and homes until offers and.
You know that has a way of focusing the mine ER and with the development.
Docket to when we're actually buying and selling homes and we need to do it more efficiently and we want to do it more efficiently were actually utilizing some of those processes. We're learning from zero for our PPA business as well.
Thank you.
Our next question comes from Tom White with D.A. Davidson. Please go ahead.
Great. Thanks for taking my question goes into a very nice quarter. A couple on the guidance. If I may I guess, what stood up most to me was the big ramp in implied EBITDA margins for the I.M.T. segment I think the midpoint was like 27%.
And the and the high end with something like 28% can you just talk a bit more about the specific drivers of that leverage and then on on the P.A. outlook for a 2020 or I think it sounds like back to double digits kinda ex flex.
Maybe it sounds like you're leaning into these please kinda top performing agents I'm trying to reconcile that with the comments about retention at peak levels.
Just kind of curious about how some of the other not peak performing agents are behaving or reacting to you know the fact that that presumably getting.
Fewer leads if you were connections thanks.
Okay, Hey, Tom or maybe.
The only thing first part yeah, Yeah, Hey, Tom Thanks for the question so before I get to 2020, I'm just going to step back to the performance. We saw in margin expansion in 2019. So again in 2019, we were able to expand I empty margins by 381% our 381 basis.
[laughter] had 381 basis points and that expansions coming from you know in kind of reflects the fundamental health of our business. We have improved connection to their customers, which is leading to better retention rates with our agents and has driven accelerating revenues and at the same time our cost management.
It's driving operational leverage or so it's kind of.
Faster both worlds our teams have been focused on prudent resource allocation and cost controls and it's what you efficiencies in our operations and overhead.
We are investing we're investing now and we're investing in product, but we've been able to fund those investments through prioritization and kind of a lot of discipline around discretionary spending so with that 381 basis points of expansion looking into accelerating growth and our outlook for 2020, we feel like.
We can continue those trends continue to invest to grow the business, but also yield 300 to 400 basis points of leverage in margin it and you're right. It at the midpoint, it's about 350 basis points of margin improvement and about 27.3% or margin rates. So.
You know again, we we made a lot of traction this year and as we grow and we can grow with investments, but funding those internally and taking a hard look at discretionary spend leverage efficiency, we feel really good about our opportunity to grow next year or and to grow EBITDA at you know away.
You'd have to an after three times, our topline <unk> yeah. I mean, that's really wanted to be seems to be your Tom as good as this operating leverage mindset and this prioritization mindset and this mindset for teams don't don't go into budgeting thinking Oh, what is my add to what I already have how many more heads am I going to add its actually you know having Chris.
Priorities, okay ours against the priorities and having us all together make trade offs all the way throughout the organization about what but the priorities are to really bearing fruit and I I sense. There's there's Ah you know there's there's.
You know, there's more leverage but I don't know I think Alan would agree with that anyway on your last bit.
I think we should probably kinda, let it was about retention and how agents are feeling about the moved to flex in some markets and Z O a move which is unsettling to a lot of agents and what that's doing to retention I think the numbers kinda can speak for themselves like although I guess, we didn't share specifics, but we have we had said that we're seeing some of the.
Highest retention rates in our M. B P. P. I saw the core the core traditional business the big business that the one that you're worried about.
We're seeing a highest some of the highest retention rates we've ever seen.
And so despite the fact that we are doing all these are making all of these.
You know something I characterize as aggressive moves, but really just you know innovative moves into space with Zillow offers.
And with flat or we are we are you know doing well with our traditional partners. They sense they sense real opportunity here. They also know so we get a 173 million unique users a month they come to our sites and that our brand zillow to where Zillow research more in Google them. The term real estate they know that.
And so goodness flows from that Oh, you know that great relationship we have with with all these customers.
There's so much.
Our next question comes from Lloyd Walmsley with Deutsche Bank. Please go ahead.
Thanks, I have two if I can first.
Can you give us any sense for how monetization of flex looks on a per lead basis versus the kind of traditional premier agent business. You know what are you seeing in terms of the ultimate Rev per lead accretion and what kind of Rev. Rec lag should we be thinking about in in terms of timing and I guess second one would just be.
You can you can you walk us through the impact of adding the requested core Oh the impact of that on the conversion to leads and kind of the the timing of that rollout across the footprint and anything you can help us with there would be great.
Oh, Okay, Hey, like.
I want to maybe you could always kartik. The first one and so to answer you know it's still really early.
In our testing as rich mentioned, we just launched Phoenix and Atlanta, a in Q4. So we don't have enough data points, yet to extrapolate a curve on what we think that multiplier impact will be but as rich mentioned the goal of the program is to improve.
Our revenue per lead Ah, so we needed to be accretive for it to work we control the the testing here as we get farther along I think we will be able to have more information and we'll share that as we as we feel good about what that extrapolation curve looks like a so what we have done right. Now is try to give you like I said just guard rail of what we think.
The impact will be on our topline growth wafer for the flex programs or.
So you can kind of have away them without as you think about your growth curves. Your same thing you're talking about 300 is 400 basis points for the year EUR 400 basis points for Q1, and then with respect to the Rev. Recognition. We continue to assess that we've made a lot of progress in improving and putting the structure in place to ensure that.
We understand when transactions occur and get paid for that.
The the in is still fairly small just given when we started in Q4. So we don't have a good curve for cash cash collection curves you know at the full cohort of say a month of lead so well keep you posted on that on the impact of tours are.
Conversion.
You want to get that yes, right okay.
Okay. So.
Do you think about the conversion funnel I'm wavy my Armstrong's picture in the Air here you know at the very top of the funnel, we have visits and at the bottom we have somebody moving into their new home.
Lots of steps in that conversion funnel lots of opportunity the levers and decision points all along the way.
To improve conversion for example, or a visitor turning into a submit their submit into a meeting you know a meeting into a house to are you know.
Meeting into a house to or straight from summit to House tour from House tour to offer et cetera et cetera. Every one of these levers we have the opportunity to to pull we believe twist and ER and improve and we can address a lot of these with better training, but also with software which is great. The tour leverage.
Just one of them a and it's an interesting one as you might imagine a lot of buyers are on Zillow, and Trulia and Streeteasy and what they really want to do is go see the plates.
And so we have done some great future work in the last corridor to improve the coverage of of tour. It now for our customers and that is just one of a you know a patchwork or a collection of features and products that were working on to improve that convert.
Yeah.
Our next question comes from Brian Nowak with Morgan Stanley. Please go ahead.
Thanks for taking my questions Hey, guys.
I see your and rubber Frost same out fared remarks, a tough that's already [laughter].
[laughter] I I have two so [noise].
I know, it's early in flex with only two markets with Atlanta, and Phoenix, but just maybe can you talk to us a little bit about one or two of the the friction points or areas that you really improved on in those two markets, whether its measurement tiny things through getting there at agents just talking through some of the blocking and tackling that's improved that you think will make flex.
So smooth there going forward and then on homes, maybe talk to us how you're thinking about sort of the profitability of your your oldest markets. Throughout 2020. Once you sort of have less upfront costs since start to get more central leverage et cetera. Thanks.
[laughter]. Thanks are recognizing that Brian I don't know if I had any other embedded references in there.
No on the only they kind of flex friction points and what's working and let's not I mean, we are we are really early but we are discovering.
Oh, you know as I said before kind of a local a woeful lack of kind of <unk>.
<unk> application of software to better nurture and transaction experience in this industry.
Traditional brokerages do not have and have not had big tech and Dev budgets. They have really they just haven't invested in in technology and that hasn't really necessarily been their primary concern anyway, because their business models have been a little different.
You know so we're seeing a tremendous amount of opportunity all along the you know the nurture funnel.
Other customer and as we find things were automating. It we're finding the right partners, who can who are better at converting these these things I mean, even basic things like drip marketing and email communication and one is the right time to call them. When is the right time to send an email and you know don't overwhelmed consumers and bombard them with emails.
Because they'll get turned off and they'll go away. These kinds of you know some basic stuff that that that we have been isn't a tech business for a long time kind of take for granted but we're bringing those does it was freshkills to this to this industry and yeah, we feel lot opportunity.
On the home the second part of Brian's question, Alan you want to try to there's some homes. His own question. Yeah. Yeah. So I think the question was how are we looking at profits in our oldest home markets in 2020, [noise]. So again, you know with respect to sell homes in all markets actually we're continuing to do.
Measure and look at ways to ensure were improving year over year.
But at the same time, even in our oldest markets. There are still you know not that old and we are testing and it a rating on resell an acquisition and a variety of other measures that could in fact profitability quarter over quarter just given.
What that test is in and what it outcome is so you know right now what we're looking at homes on is we expect to improved overall margin percentage on homes on an annual basis. It may not always be sequentially quarterly we are holding homes you know a accountable.
Well for improving efficiencies and processes and all of the automation things that are required for us to scale. So we have okay ours as rich mentioned to ensure we are getting more productive inefficient, but at the same time we are.
Ill very much iterating and learning around the sale the acquire and resell process that could affect profits from time to time. So I I guess, what I'd say is that we'll continue to look for that homes profitability to improve annually as a percentage of revenue, but I don't.
There's a bifurcation between what we'll call old home markets, a new home markets today.
Okay, great. Thanks, guys.
Thanks.
Our next question comes from NAV. It can with Suntrust. Please go ahead.
Yeah. Thanks, a lot or maybe you can give us some sense at all and I'm. The extension of flex. So traditionally mcus was economies of course, a there's going to be entitled markets, you're thinking about maybe in second quarter. The back half kind of 5% cover that do half of cuts going to go to 10%, but you then.
No it.
So.
You know, we're learning really rapidly on the <unk> on the expansion flex we try to punch a different things in different markets are and you know.
Hanging our strategy on a particular geography or ZIP code is kinda not the way we're doing it we're looking at high performing partners getting it working and then explaining and expanding from there.
And so that'll take that'll take different that'll take a different shape or maybe how we've talked about it in the past we can see we can see flex running simultaneously.
In markets right alongside M B P and us optimizing.
Ah between the two.
As we as we grow at learn.
You know on the 5% question you know I think what we're trying to do in our 2020 guidance or maybe I'll, let Alan repeat it you know we're trying to simply build that build what some room to test flex and expand flex methodically it right into our guidance.
Yeah in the way I would describe it is that.
As a percentage of M.R.R.
And have a buried in effect, depending on what period of time throughout the year you do it. So we think the most appropriate metric to share with you guys to give you a feel for with or without flex is what are our expected impact that impact of flex is for the year, which is a 300 basis points a revenue growth that we called out.
In my.
Prepared statements. So what if we get the midpoint of the guide on 2020 is premier agent growing seven.
7% correct.
<unk>, plus 300 basis points to 7.4%.
300 basis points, a 10% just sorry, 300 basis points to 10% right got it just adding it to the seven point exactly but just wanted to be clear yeah and again. It is really flu I think the only thing we've kind of no we're going to do is start.
It's a very small testing with high performing partners in various markets, but that will be a small test in Q2, and then well have better learnings from our test we launched last year as well as early reads on those to the churn or whether we do anything in the second half. We just wanted to give ourselves the flexibility of provide.
Slide you would those guard rails. So we worked a surprising but as we learn stuff that you know around a lot of the questions that have been asked today I will continue to communicate where appropriate.
Overall in P.A., we really like the growth. We're seeing were impressed with the growth. We're seeing the growth of EBITDA is the growth rate of EBITDA is far exceeding the growth of revenue as well, which is nice so we're showing leverage.
This is a healthy business that we're optimistic about.
Our next question comes from John Campbell with Stephens, Inc. Please go ahead.
Hey, guys, good afternoon, and great great job getting premier agent back on Oh, no firm footing.
I'm you know I'm sure you guys saw this with with your you know your Seattle brother, and Redfin, you know they announced the pricing change we were kind of viewing that as it is maybe serving as potential to you know increase the stickiness or drive you know some desire behavior around the home sellers also using them on the bottom line on the buy side on the next home I don't I was pretty interesting, but you know.
Don't know what you guys can do but I'm curious you know is there something that you can do to drive better adoption, you know across the ancillary businesses or maybe help steer more customers to flex conversions I don't know if you can offer up you know lower closing costs or if there's some type of rebate that you can provide from the commission fees from flux.
You know hey, Jon Wolk, we will test all kinds of things and I in fact, our testing all kinds of things. Some of you. It's actually noticed assessments and things don't over extrapolate those things [laughter] onto the onto the whole ER business I guess, what I'd say or at least with respect to Zillow offers and that is and.
Adjacent cheese is that we're really focused on getting a hub.
Oh, the wheel of transaction, you know a a tam or solid enrolling we want to get the wheel rolling and getting the Zillow offers transaction to a place where where it's solid predictable in showing leverage first is our number one priority and then we have all these ancillary adjacent transit.
Action that hanging off of and are dependent upon are tied to that transaction.
Including title and escrow and mortgage and others in the future. Perhaps we're working on you know we're working on those and we have planned it's a good stakes in the ground and they're showing good a good promise, but the overall numbers of Zillow offers home transactions are actually still pretty small so we're not going to see a lot that we're not.
Good to see a lot of action in that force for for a little while we do feel like the the whole wheel of transactions, though provides us with a large amount of opportunity and we believe that once they are integrated.
We can offer a highly differentiated customer experience because they are all connected and so that the customer can approach a more one click like transaction, we're not really seen that yet in real estate, but we're seeing it in card transactions. The Tesla, we're seeing it in a lot of other major transactions the people wouldn't know.
Certainly have thought of as ecommerce transactions and we're going to see that in real estate to these transactions are going to get much more streamlined efficient and integrated right and I think our partner agents are going to play a role in those innovator transactions as well.
And that is what we're testing yeah. No question in fact that Boeing for example, I use watch the video I'm serious it's really good that's the bone transaction the Atlantic up all doors Atlanta family. It started with a premier agent.
And it ended up incorporating zillow offers into that and enabling not a one click but they won a one step like a a same weekend type transaction and that's cool.
And speaking I'm not extrapolating I've I feel like I have to ask you. This but you know that with the brokerage license you guys recently got New York I'm guessing that's because aflacs, but can you talk and why you need that and whether we should expect you to maybe continue picking that up on a state by state basis as you expand flex.
Yeah, you know, but most people don't know this but we've been brokers for a long time in most places you know, we're going around cleaning stuff up and doing that now we've done that in an abundance of caution kind of belt and suspenders stuff because the.
The amount of regulation in me in these industries. We operate is quite high on so long ago, We got our AR, we got our brokerage licenses. This happened to break into the into the surfacing get get into the open air in New York and attract a little attention, but really there's there's no new news there.
Okay.
[laughter].
This concludes our question and answer session.
I'd like to tend to conference back on Friday, Rich Barton for any closing remarks.
Okay. Thanks for your time today, guys. We're really pleased with our progress to re platform the real estate industry and work where as you can tell excited about what's yet to come.
Today's ondemand always on consumers are eager for a better way to move in where the best positioned the company with our audience size. Our technical expertise are great partners our platform our team we're in the best position to lead this revolution.
Our investments are enabling zillow to begin to participate directly in market, making dramatically expanding our Tam that we believe will drive top and bottom line results for us and for shareholder return overtime. We really appreciate your support your council and your feedback as partners in this journey. Thanks, a lot we'll talk too soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.