Q2 2020 Zillow Group Inc Earnings Call

Thursday

Thursday Thursday, Thursday Thursday

Good afternoon. My name is Abigail and I will be your conference offer for today at this time. I would like to welcome everyone to the Zillow group second quarter 2017 conference call online box placed on mute to prevent any background noise after the speed of the month. There will be a question-and-answer session. If you would like to ask questions during this time, followed by the number one on your telephone keypad. If you would like to enjoy your question, press the pound key. Thank you. Please note this event is being recorded. Thank God.

I would not like to send a conference over to Brad burning vice president investor relations, please go ahead.

Thank you. Have a girl a good afternoon and welcome to Zillow group. Second quarter 2020 conference call joining me today to discuss our Q2 results are Zillow groups co-founder and CEO and CFO Alan Parker during the call will make forward-looking statements about our future performance and operating plans based on our current expectations and assumptions. These statements are subject to risks and uncertainties. And we encourage you to consider the risk factors described in our SEC filings for additional information. We make undertake no obligation to update these statements may result of new information or future events except as required by law. This call is being broadcast on the internet and is accessible on our investor relations website recording of the call will be available later today.

During the call. We will discuss Gap in.

I got measures including adjusted ebitda, which we refer to as Eva. We encourage you to read our shareholder letter and our earnings release which can be found on our investor relations website as they contain important information about our gaap and non-gaap results including reconciliations. It is storical non-gaap financial measures. In addition. Please note. We will refer to our internet media and Technology segment is our IMT segment. We will now open the call with brief remarks followed by live Q&A and with that. I'll turn the call over to Rich

Thanks Brad. It's great to be on the line with you all from Zillow Cloud HQ to discuss our results. I hope you're getting some down time this summer and staying Safe Money Down time matters. Now more than ever. So taken care of yourselves and get some. Okay. The second quarter was one for our history books. We faced down fear and uncertainty and took prudent action to control costs stopping short of layoffs or furloughs and to extend the life line to our valued agent Partners. We refinanced a convert and raised nearly a billion dollars of capital for defense and processing since the curse had coded commenced for us here in the US. You've heard me speak several times on quarterly earnings and pop up conference calls striking. What was perhaps a more optimistic tone than you thought was warmer. This quarter's numbers are even better than we had hoped and firm up our beliefs. The business is experiencing powerful tail winds in both real estates and Technology.

As I said before, I believe we were at the dawn of a great reshuffling.

I'm sure I don't need to spell it out for you because we are all living in spending an average of 9 hours more per day at home. Zoom zoom meetings are changing the way families think about space and privacy home office are in high demand back yards and more desirable than parts and Jim's work from home policies are eliminating the commute for many. There's an endless list of considerations millions of people are correct considering upsizing downsizing getting closer to family further from the office et cetera. And the last week. We announced our intent to be a flexible employer offering most of our employer option to work remotely at least part of the time in definitely. It's something we never could have anticipated a year ago new habits and Norms are forming rapidly right now in many cases as with working from home. We have found better more efficient and more healthy ways to live and work.

We're not going to just go back to the way things were this is a tectonic shift that we expect to play out for years to come additionally home. Turnover has been abnormally low since the global financial crisis, which means we entered the pandemic already carrying pent-up demand. These are the forces driving the real estate Tailwind supported by all she has received and into it.

you see the

It's reflected in our performance in Q2 on most every measure which sets us up. Well going into Q3 for which we have an Outlook that now exceeds our pre-code estimates on most metrics off. The great reshuffling is driving unusually high interest in home Shopping as the category leader synonymous with real estate. We had a record $218 million average monthly unique users this court the month of June we grew users on Zillow group sites and apps by more than thirty two million year-over-year.

Across industry, we're all studying. We are seeing an acceleration in the pre-existing 020 customer migration navigating from offline to online in the absence of being able to do much in the physical world folks of turns to digital Delivery Systems Amazon Netflix Zoom cetera. These are the forces powering Tailwind number to the technology Tail in

We believe We Are the outsized beneficiary of this tale win no company and our industry is better positioned in Zillow to deliver on seismic shifts and Technology adoption wage recreated what it meant to search and find realistic but we are now investing to recreate and digitize the transaction itself three out of four u.s. Adults says they want to use video or talk to our technology to shop for a home right now sellers are creating three times as many Zillow 3D home tours that they were in March.

Okay, these two Tailwinds real estate and Technology are rapidly converging with Zillow at the Nexus the Odo shift as it pertains to Zillow is in fact we've been talking about is real estate 2.0 and we're seeing years of adoption accelerated new month real estate 2.0 will be an integrated transaction virtual shopping digital document running and one day a trade in Boston for your house.

Zillow has the tech and R&D capabilities to enable this shift and with the leading brand and real estate. We are best positioned to capture more transactions as more people change the places they call home.

These Tailwinds pair with excellent execution this past quarter and set us up. Well for the future, let me recap a few highlights.

In the Heat of uncertainty as The Crisis began we budgeted conservatively but we planned aggressively to be ready to step on the gas when Real Estate bounced back we avoided life another deep permanent cuts to our cost structure and we've set ourselves up to press advantages and in Q2 with 3.5 billion in cash this positions us. Well now that the job market is snapping back more quickly than many expected.

Our primary agent business delivered its best sales and retention month on record in June. We expect this momentum to continue on our forecasting 16% year-over-year Revenue growth in Q3 month regardless of the monetization model We Believe goodness flows from partnering with high-performing agents and teams to deliver High customer satisfaction and maximization of profit and profit per customer to choose higher than expected Revenue in our IMT segment coupled with Cobra dispense Prudence drove a year-over-year margin expansion of $580 back that far exceeded our expectations.

we continue to see

Topline momentum in this segment which informs the Q3 ebitda margin Outlook of close to 40%

Should we achieve this Outlook it will serve as a preview of The Profit leverage we can achieve in this business. However, we continue to see attractive growth opportunities and I empty and we'll invest appropriately.

Indu offers we used to enhance selling strategies and differentiated data signals to manage our inventory the fact that we were able to make it gracefully through uncertainty of the past five months continuing to sell industry inventory is a testament to the team's agility are combination of machines and humans is getting smarter and more experienced.

We have since reopened all 24 markets after our March paused offering a certain convenient and safe way to sell and the digital shopping experience of the future for buyers. This includes the lapse 3D home tours from anywhere virtual home tours, but they still owe Premier agent by appointment and in-person self tours where buyers can unlock Zillow owned homes with their mobile phone. Not a recent study by researchers at Stanford. Northwestern in Columbia showed has Zillow offers should increase liquidity and Mobility by making it easier for people to move especially people who are dead Zillow offers is likely helping Grease the skids of the gray tree shop one.

Home Loans business is doing well with Jean loan volume up two point six times versus a year ago. Our best month ever deliver Closing Services is now up and running in all the developers month after less than 12 months still early, but these are adjacent businesses are gaining some traction offering our customers value and convenience along the way.

Real estate 2.0 is picking up steam and we are leading the way going forward. We remain focused on driving more transactions across all business segments during this remarkable moment in time that we are all living through people in all sorts of situations are rethinking their living space and they're coming to go for help to rent five sell finance and we are continuing to invest heavily technology and services that will allow more people to do more of their transactions Mozilla whether that's through our Zillow branded transaction services or our best-in-class partners.

The video we included the shareholder letter of Seattle landlord real pillow and is the tenants demonstrates the technology Tailwind in action.

Roll is a local doctor and a Columbian immigrant whose fledgling real estate investment businesses piece of his American Dream.

When Public Health orders made it difficult to show his townhouse to potential renters this summer. He turned his pillow and discovered a suite of virtual tools that made it possible for renters to take a 3D to our online go on a personalized birthday go on a personalized virtual tour sign your lease and pay their rent all without ever meeting. Hello in person.

He went from nervous to relieve and surprised he said there's no other way. I would have been able to do this without the Zillow platform.

Before I customize I want to take a moment to acknowledge that we recognize the Tailwinds. We are experiencing are an advantage of being in the shelter business, which is at the same Maslow's hierarchy of needs a good and lucky place to be in a pandemic. Our country is grappling with fear loss protests and anger through a Health crisis a social Reckoning. I'm proud of how I our team and zilla's responded. Our employees helped raise over 1 million dollars for covid-19 Relief efforts in our communities and additionally our company since pledged at least 1 million dollars to support equity and racial Justice.

Further we have made a public comment that we can and will do more starting at our own company and helping to be progress in the real estate industry, which has a troubled Legacy of discrimination. That is a long time to Generations recently deceased US Representative. John Lewis wrote that quote. Nothing can stop the power of a committed and determined people to make a difference in our society and close. We are committed and determined to help shape a more Equitable world.

We appreciate your partnership in this journey.

Okay, Allan.

Thank you all followed by a discussion of our outlook for Zillow group delivered a strong second-quarter. We reported Consolidated revenue of 768 million up 28% year-over-year. Our Revenue outperformance was primarily due to a better-than-expected sales results are home segment in int and mortgages also both outperforming our Outlook while our Zillow offers home buying with pause temporarily at the beginning of Q2 our actions improve housing market conditions and low mortgage rates help drive better Revenue than expected for all three of our segments stronger Revenue combined with continued focus on managing costs delivered consumer a $16 significantly out-performing our expectations of a loss of sixty 1 million at the midpoint of our Outlook range.

I am seeing segment revenue of 280 million and the underlying Premier agent revenue of $192 million was impacted by The Better Together discounts provided to our partners during all these discounts were effective in retaining a partners and put it in a strong position to benefit from the faster than expected housing market recovery while our int segment Revenue declined 30% year-over-year. The decline was better than the 25% increase decrease at the midpoint of our future outlook.

And which mentioned in June we experienced record new premier agent monthly recurring revenue and at the end of June experience our highest level of total Mr. Are in Washington since the Inception of our Premier agent in BT program given where the quarter started this is a strong Testament to our team's ability to manage through Market volatility IMT segment. Show me margin with 25.6% approximately fifteen hundred basis points above the midpoint of R22 Outlook. This performance allowed us to grow even $2 12% year-over-year off even with the declining revenues. Well home segment Revenue decreased sequentially due to the Pods at home buying during the first half of the quarter we did we did sell 1437 number eighty percent of the inventory. We had at the beginning of Q2 exceeding our expectations housing transactions proved resilient as we are partners and the broader in dog.

participant account created to

Listen to enable real estate transactions and customers to move forward safely. We restarted purchasing home Midway through the second quarter and we are pleased with the initial inputs. We are seeing a solid demand while driving continued operational improvements in safety measures are cute two mortgages segment Revenue a $34 increase 25% year-over-year, exceedingly higher rent increase loan officer productivity enable us to participate in the refinance wave driven by low mortgage rates. The mortgage is segment also delivered ibadah of $5.

As you stated on previous earnings calls. My focus is CFO continues to be establishing processes and mechanisms and support a three key priority. Those priorities are scaling new businesses executing within our int segment in order to fund investments in our new segments along with additional growth opportunities and implementing focused cost discipline and operational risk across the company of these scales last quarter. I also discussed that during the time certain time the team and I have been focused on liquidity preservation to protect the Enterprise and ensure we are well-positioned to execute them one opportunities to lead the industry to real estate 2.0. We ended the quarter with 3.5 billion in cash and Investments the highest violence in our history in may we completed nearly $1 in capital raises with a combined convertible debt and Equity offering effectively refinancing a portion of our convertible. Guess do next year.

Turning to our Outlook. We are providing it 1/4 outlook for all segments while we are pleased with the execution of our team coming out of Q2 in the strong current input friends have informed our Q3 outlook on life do know that given the pandemic there remained a more that remains more of a macro uncertainty in our current environment than normal.

Let me start with a few Q3 highlights in Q3. We expect Consolidated ebitda at the midpoint of the guidance range to be seventy point five million dollars, which is well above what we originally expected even pre Kovac accelerated Revenue growth in our IMT and mortgages segments are the primary factors driving top-line contributions. Even the margins are expected to improve me only long as we leverage this Revenue growth with continued focus on operating expense discipline. We will begin to increase marketing and advertising investment, since you free as compared to Q2 as we prep leadership position and drive growth. However, we do expect to see continued the year when you're operating leverage into three for marketing and advertising. We also expect operating leverage in our people costs technology and development team other operating expenses people cost to expect to be relatively flat year-over-year as we planned a cautiously manage headcounts given the continued uncertain economic environment.

moving to each of our segments

Is given by expect to continue strong sales and partner retention into three coupled with discontinuing Are Better Together partner discounts other IMC segment Revenue growth is also expected to improve agree with further acceleration and rentals Revenue growth and discontinued better discount Better Together discount partner hit Market places like New York City and display are expected to impact to 3 from year-over-year declines in Q2, but still remain somewhat down year-over-year into three in light of these factors. We expect int even the margin to take a significant step upward wage is 39% in Q3 at the midpoint of our Outlook range up nearly twelve hundred basis points year-over-year from 27.2% in Q3 2019.

In Q3, we expect our home segment Revenue to be between 140 million and 160 million and an even a law to be between 80 million to 70 million revenue is expected to decline both sequentially and you're over here due to the pause and purchasing home that impacted Q2 and the resulting lower inventory balance coming into to freeze.

within the int segment we expect Premier agent Revenue to be 277 million up 15% year-over-year at the midpoint of our Outlook range is sequential improvement from 2 to

With regard to our mortgages segment. Our management team has successfully operationalized are moved to conforming mortgages from FHA and VA loan improve loan officer efficiency and has successfully navigated the dynamic rate environment. We are continuing to innovate our mortgages technology platform to provide our customers and partners in more streamlined experience. We expect to free mortgages revenues to Fifteen thirty four and thirty seven million and even it could be between a slight loss of three million and break even based upon capacity current market conditions in additional Investments and operations.

I got results demonstrate Zillow have a strong Foundation despite the ongoing complex and rapidly changing environment around us our actions and Q2 to accelerate our virtual tools provide partner discounts to support and retain Partners in our reduce spending enabled us to extend our leader position leadership position and deliver second-quarter results above expectations wage balance sheet strong and demand indicators have reached record highs and our platform and partners are well positioned and ready to help our customers move safely into the next chapter of their lives and Wednesday operator will open the line for questions.

Sure, and as a reminder to ask a question, you will need to press star one on your telephone to withdraw your question. Press the pound or haschke. Our first question comes from not enough space and player with the plague how long the line is not open?

Thank you gentlemen congrats on the execution this quarter Rich been a lot of moving Parts in the real estate industry and it even sounds like it's been stronger recently. But you know with a lot of Macross uncertainty lingering. Just wanted to see if you could give us some perspective on how you're thinking about real estate going forward.

Yeah, I mean it's it's not as hard to forecast as it was four months ago, but it's still pretty foggy. There's a ton of uncertainty but here's what here's what we're seeing. I'm sure you know, the demand is high.

Supply

Is relatively low. Okay and mortgage rates are low. So all of that is supporting prices and you know increasing prices should or you know prices should lead to increase inventory, but that's been a stubborn one. There are a couple of early leading indicators on inventory that are that are flashing yellow to Green right now though. So, that's maybe that's changing right now rents are stable to up and shopping is acted, you know, so I guess the question is why why are we seeing this right now? I mean it really is those two thousand two big Tailwind I talked about and we are we are benefiting from here at Zillow. We're lucky to be benefiting from them. The more debatable Tailwind is this great reshuffling that you've heard me, you know way too much on my arms about it. But literally, it's almost Matt if we want a lot of people want a new living space whether they want to remodel it or move and that is driving real estate demand wage.

Oh everywhere, not just in the suburbs everywhere.

That is more powerful and advantages Zillow more is this technology-driven and just retail digital that's happening in every category of course, but it's beginning to happen. It's really happening in real estate now and we're the digital leader, you know all the way from the top of funnel search and find right through 3D floor plans deep down the shopping club. So I guess we're benefiting from this this title shift, you know up and down the funnel we're positioned really well going forward given Our Roots really are roots are at the tech company yesterday. I spoke to 106 Zillow interns in a cloud, you know, and a zoom based Cloud meeting.

It's pretty phenomenal the large majority are of these interns our engineering and data science in terms. You know, I say few other few other companies are in our industry even have an intern program wage such a diverse set of young bright people from top schools and we're running at all remotely. This is really quite an amazing and it's it's it's a great Advantage for us if it weren't for a pandemic and potential economic Calamity. We could really get excited. Anyway, it's sort of exciting nonetheless. I hope that I hope that helps clarify things, but but signals are looking pretty good.

That does a lot of good color in there. Thank you.

And our next question comes from the line is Brad Erickson with Needham is not open.

Hi, thanks. So the IMT and Premier agent business in particular the Outlook you give that 43 is I think ahead of what most of us were thinking talking about some of the factors that are driving that may be rich just talk about sustainability those Trends you look out maybe a bit beyond to 3. How should we think about that? I mean, it feels good. I mean it feels it's up and down the funnel. I mean the top of the funnel and it was driven by this auto shift, I guess and people wanting to find a new place but but just for instance with the stat I I cited was that we increased you use in June Buy 32 million many users, but the more interesting thing to sustain and we can't expect that kind of thing to continue home. So we have to move down funnel to find the levers to drive the business in a sustainable way. Right and we have these letters all the way down the front of these kind of dials that we have all the way down the funnel that we took

Not yet maximizing Armada.

Titan we'd begun to turn them over we're beginning to see action. So our Focus, you know, we began a year or a little over a year ago a focus focus on transactions and that phone now I'm driving transaction is helping us drive more and better connections out of the same traffic flow. We got an increase tropical but it's helping his drug more and better connections out of a similar traffic flow. We're getting them to better Partners who are delivering better customer satisfaction and more transactions. So all of that results in more revenues and profits per customer per month, so you're seeing that and show up in our Q2 results which are surprisingly good and you're seeing that in our in our Q3, you know Outlook, it's hard to know beyond that but we sent a party of road ahead for improvement in these Styles and optimization of them given the amounts just the sheer amount of blue ocean. That's that's off our file.

If it's great, thanks.

And our next question comes from the line is Josie with JMP Securities is no open great. Thanks for taking the question. And yeah, really great to see everything coming back here and try to stick with the premier agent business to two questions within here. You mentioned a comment around regardless of the revenue model. The focus is on Revenue maximization. I'm curious if the the page and accelerated flexor how you're thinking about that, assuming no change, but interesting comment and then maybe Alan but even that margins The Guiding the around $39 40% or so in the int business advertising coming back. Would you talked about the strike despite strong user growth? So that that that's one thing, but just wondering how sustainable that margin is for the IMT business and and what's driving that thank you.

Yeah, do you want Hey Ron, thanks for the question was I can take the 2nd and then we can talk about so the thoughts are with respect to our Q3 guide on int margins are are marginal looking to 3 is reflective of how our Marketplace business models can perform in top-line growth is combined with cost discipline. Our focus is providing a great customer experience by improving connections customer satisfaction and conversion for our customer technology and partnering with high-performing agent Partners. This focus is working as evidenced by the strong friends were experiencing exiting Q2 and has informed the accelerating revenue office in corporated enjoy to three Outlets.

but we can throw the cost levers and will continue to focus on cost of