Q3 2020 Zillow Group Inc Earnings Call
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Good afternoon. My name is David and that will be your conference operator today at this time I would like to welcome everyone.
<unk>, 20th one conference call.
<unk> have been placed on me to prevent any background noise.
Could you speak with too much there will be a question and answer session.
Like to ask a question during this time simply <unk> followed by the number one on your telephone keypad.
If you would like to withdraw your question press the pound.
Please note visit then is being recorded thank you I would now like to turn the conference over to Brad Bony Vice President Investor Relations. Please go ahead.
Thank you David Good afternoon, and welcome to the Zilla groups third quarter 2020 conference call. Joining me today to discuss our two three results are zilla groups co founder and CEO Rich Barton and CFO Ellenberger during the call will make forward looking statements about our future performance in our operating plan B.
On current expectations and assumptions. These statements are subject to risks and uncertainties and we encourage you to consider the risk factors described in a SEC filings for additional information we undertake no obligation to update these statements as a result of new information are further advanced except as required by law.
This call is being broadcast on the Internet and is accessible on our Investor Relations website recording the call will be available later today.
During the call, we will discuss gap and non-GAAP measures, including adjusted EBITDA, which were you referred to as EBIT.
First let's talk about the residential real estate tailwind since.
Simply put people want to move and we see additional pent up demand on the horizon.
Plus knowledge worker corporate America broadly the different companies are waking up at different paces.
This doesn't feel temporal.
It feels like it will take years to play out and could end up being the defining cultural trend of the decade.
In addition, demographic realities lead us to believe that higher housing turnover is here to stay for some time.
Blowing the abnormally low turnover since the global financial crisis.
Going into the current decade, there were about 5 million more Americans in their prime home buying years compared to 2010.
As those millennials begin to move up Jen Z, the even larger generation behind them will be in a position to take the baton and begin buying homes.
Additionally, the low rate environment feels like it's here to stay.
Sure that is balanced between offense and defense as we plan for the coming year.
However, we believe these trends we're seeing in real estate and technology are strong in the near term and sustainable in the long term underpinned by meaningful changes to consumer behavior and demographic trends.
And whether it is today or tomorrow or no company is better positioned in <unk> this opportunity.
And now on to some results.
Browser for our Zillow offers transactions early next year.
Bringing those services in house will allow us to deliver a more seamless experience for those buying homes from zillow introduce are selling costs over time.
Additionally, Zilla closing services now is now operating in all of our Zillow offers markets.
For our Zillow offers purchase transactions this quarter, we closed 98%.
With Ziller closing services.
It seems as well to move down funnel with them to be part of their home buying and selling transactions.
Even with this large and growing audience, our premier agents, who are responsible for our biggest business today and will only a small fraction of all real estate.
Transactions.
There is potential for meaningfully more growth as we continue to improve our conversion rates and customer experience and make more connections between our high intent customers in our best in class high performing edgy partners.
People are looking around their homes and same those same three words were out of here.
Revenue related to flex leads delivered prior to Q3.
The revenue growth for Premier agent would have been 20% compared to the 24% reported growth rate.
Okay, with 16 million versus our outlook for a loss of $1.5 million at the midpoint of our range.
The revenue and EBITDA outperformance was primarily due.
To better than normal margins on selling mortgage into the secondary market operates a regular on cost lines and refinance volume reflective of strong market demand due to low interest rates.
Turning to our outlook for the fourth quarter.
To improve sequentially as we continue to ramp up the purchase activity levels in each of our 25 markets. We are focused on applying our learnings in the last two and a half years as we move forward on scaling the business.
We are continuing to develop our mortgage is technology platform to provide our customers and partners and more streamlined experience. While we expect mortgages revenue to be between 49 and $53 million. In Q4, we are not assuming a stronger than normal industry sales margins will be maintained.
We also expect to continue to invest in growth, which we expect to result in mortgage segment EBITDA of between breakeven and 4 million.
As you can see my priorities remain focused on scaling our new businesses executing within our eye on T. segment in order to fund investments in our new segments, along with additional growth opportunities and implementing focused cost discipline and operational rigor across the company as we scale. We are pleased with our results and believe they.
Given straight how Zillow has built a strong platform for growth.
Our balance sheet is strong our demand indicators continued to reach record highs and our platform and partners are well positioned and ready to help our customers unlock life's next chapter and with that operator, we'll open the line for questions.
Which are trending very positively right now and the teams are executing.
When I think about margins.
I think our Q3 margins of 47% that we reported in Q2, we are reflective of what this business model can generate at a steady state business.
But we still believe that there is a lot of opportunity for growth. We think we're early days in some of these this transition as rich talked about and the growth opportunities exist in this segment and we plan to invest into that opportunity as necessary.
On the levers are within our control.
And we are cautious but.
But we are planning to accelerate investments, while continuing to focus on operational rigor to drive sustainable profitable growth.
That helped out what I guess I would say is perhaps looking at the implied annual margin rate may be more representative of.
Going forward as we think about what investments are required, but again were going to reserve the right to invest as necessary.
To lean into this opportunity is below.
Got it thanks.
Your next question comes from the line of Tom White with D.A. Davidson. Your line is open.
Great. Thanks for taking my question and yes, thanks to the counter program at near term mine.
It's been a my cable TV our bank.
Two if I may rich exports. So I wanted to follow up on your comments around the sustainability of this really nice growth that you guys have been seeing.
Seeing that sounds like you think the kind of broader underlying market strength can persist shares just hoping you could give us a little more color on what kind of gives you the confidence there and then with regards to the technology transformation.
Leave that we're going to go back and backtrack much I don't I don't think that one is very debatable that trend.
I think the the great reshuffling.
Which I use pretty broadly it's not just moving it's kind of we're all reshuffling our lives and reshuffling.
The Society history shuffling right now and we think about home, there's a part of that and just one more complicated.
But I will I will tell you and I don't have to tell you, but we all have a good intuition for this that moving decisions are not made quickly.
Okay. These moving decisions take time.
And despite record transaction levels that we're observing right now six 5 million plus units September annualize. Despite that we're seeing all of this top of funnel traffic I think we're up 40 million you use year over year.
Brad not if I have if I have that one correct, yes spreads knotting in my zoom window here.
40 million you use of growth year over year.
I guess I would've guessed might be not possible. If you'd asked me that a year ago and that is a leading indicator of transactions. Okay that that is what people do when they are thinking about moving as they start shopping and I think companies are slowly awakening too.
What a cloud based company is going to look like what a distributed workforce is going to look like and Ah and are slowly beginning to let go of this antiquated or there's kind of a legacy office culture thing that we have the kind of face time office culture based thing and as companies. Let go people are going to make moving decisions and so it's <unk>.
<unk> staying in scary, but also quite exciting so I see this one is as playing out over likely a very long period of time. So that's why I'm confident that we see some sustenance sustainability in this of course, our position I think the technology. One is is undeniable and that this is just a better way to shopping trends.
<unk> it can get better is is undeniable as well so regardless of what happened with these macro trends I think zilla isn't a really good position to.
Re platform this industry, so lightly penetrated on the transactions right now we have we have plenty of upside. So we don't rely on these to grow but but we expect we expect them to sustain alright that was along with it I'm sorry, Tom and you ask the second one which is which is.
You know.
Is is the pandemic going to change the way brokerages operate.
And you ask the question is operate I think he meant commissions, but but.
Certainly it's changing the way, we all operate okay and.
The the.
I guess the usage of software in this industry and technology in this industry is kicking a great leap forward and that of course is changing the way we operate with with our agent partners in the way brokerages themselves and the whole industry operate so absolutely what we see is the effect on the business model you know.
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I would say.
This has been speculated compression here has been speculated about for a long time, we see agents, adding real value as consultants to consumers that is why we partner with them that is what they tell us they want.
And so we continue to see that so we don't foresee.
We don't predict a big change there.
Really interesting.
Yeah.
Your next question comes from the line of Tom cancel with Python Stanzel lines open.
Good afternoon, guys Richie been an observer the housing market for a lotta years now.
Already offer some comments on this but I'm wondering if if you could.
Just.
Hey, or offer some perspective on the current market conditions and what are the the one or two or three defining characteristics of this period, whether it would be.
Low inventory or hire transactions right or high price, what what is that.
The one or two or three really defining characteristics of this time and then.
Separately very impressive visit a growth that scale I'm curious if you could talk a little bit about the visit or growth specific to the 25 Zillow offers markets.
And.
What what growth looks like there and how that funnels down.
Into that primary agent business. Thank you.
Okay, Hey, Tom.
I'm not sure I quite got the second.
Got the second question, but.
Let me answer the first thing that we can we can get you to re reinstate it.
Yes on all three of those variables that you mentioned I think the headline variables for the market that are garnering the most attention.
<unk> cuts.
Or.
Or are they better they worse I mean, im just curious if theres any knowledge in there.
Yes, I have not personally done that maybe we've taken a look at it.
I have not personally done that so I don't know, but you know what.
My guess is like awareness in most of the Zillow offers market awareness of Zillow offers is very low.
Okay. So the likelihood that it's having an impact on the top of the funnel is extremely low I would guess so we have a lot of work we have a lot of work to do and that's just because we're so lightly penetrated were just educating people on what it is right now.
Thank you very helpful.
Okay.
Next question comes from the line of Lloyd Walmsley Deutsche.
Keybanc Your line is open.
Just wondering.
Okay happy scaling up.
Hey.
Yes.
Well, yes.
Yeah Nick.
Cell sites.
Could you please give us call.
Nick market.
Yes, yes.
This piece.
And then secondly on the on the mortgage segment. So I think that some investors tend to focus on on this idea of kind of attachment to buying but.
But I tend to think that with your online audience theoretically the mortgage opportunity could be be much more significant in more of a kind of direct to consumer fashion, which I'm sure you're kind of embarking on to some degree you mentioned the re Fi side of things in your internal.
No.
So just curious if you can talk about this year, what you're seeing in terms of kind of high buyer attachment on the mortgage side versus more of a direct to consumer type opportunity and and ultimately how you think about those and kind of strategize on that for the years ahead. Thank you so much.
Oh, Thanks, Ryan I was on mute Alan maybe you want to you want to start out on that.
Sure. So thanks, Brian for your question is again on Parker so.
So on the capacity side first.
We feel good about the team's execution in growing the factory.
We're still building out the platform.
But we have been able to grow our capacity both when the loan officers as well as the film it team.
To close on the loans and that's consistent with the Forex growth.
That that was called out on our originations business in Q3.
As reflected in our guidance in Q4 again, we're not possibly not counting on some of the kind of extremely wide margin.
Margins that were experienced in Q3, given some of the capacity constraints as well as a few other factors. So we feel good about the the team's ability to continue to build a factory.
With respect to your second question.
No.
We.
We view this as an opportunity to serve our customers, regardless, where they come in.
So they will offer his line.
Working with our Premier agents and their customers is another as well as direct to consumer and we also have a marketplace business. So we think that there is a lot of opportunity. If we build a great product and integrated trends action to make a seamless and less friction.
To continue to grow this business.
We're just in the very early stages, we're really happy with the leadership team we brought in.
To to build the originations business and.
And we are in very early innings, but we see a lot of opportunity there.
Thank you so much that's very helpful.
Your next question comes from the line of Brad Erickson with Needham and company. Your line is open.
Thank you.
Alan I think you mentioned 200 basis points of help collect maybe getting an acute for PPA guide I guess for leads delivered for Q4. So I guess just to clarify can you quantify just how much help.
Q4, PPA guided getting from flex in total and then more broadly I guess for rich or Alan just talking about what you've learned with flex date and wonder if you're able to talk about any update to expanding the rollout of that program into more markets as we look out to next year. Thanks.
Great. Thanks, Brad I'll take the first part of that.
Yes, just to be clear.
We called out in my prepared comments the change impacting Q3, and it will have an impact on Q4 growth and what that change is this following accounting guidance now that we have more data historical data to estimate.
What we believe the value of the leads we deliver to our flex partner agents will be at the time of the.
The transaction close.
And the way that rolled out.
Any leads we provided to our agents in Q3.
We recorded the estimated value of those leads in Q3 and any lead we provide in Q4, we will record the estimated value in Q4, but what you have is kind of this lag effect of lead we provided since we launched flex that have not closed yet are still going to be recorded on a cash basis as the transactions closed.
And we estimate that that has an impact of about 400 basis points on revenue growth in Q3.
And again in Q4 to be about 200 basis points, but it has to do with leads delivered prior to Q3. So from Q3 on were clean and that number will become immaterial going forward. So we're.
Going forward, our NBP phase.
Based revenue recognition and our postpaid flex revenue recognition are going to be more closely aligned and consistent.
And so I think we won't be having these puts and takes anymore, which is great does that hopefully that helps answer your question.
And we'll respond to your second part of the question what are we learning and blacks.
It's still early innings, we have lower year under our belt.
We believe that we have a variety of monetization model that worked well to deliver a great experience for our customer working with our partner agencies are under NBP are under flex.
Both NBP influx.
Reflective in the guide for Q4 show continued growth and accelerated growth. So we're happy with both.
And we're continuing to.
Test and iterate and figure out how to maximize.
Customer satisfaction for our customers improved conversion and adding increased revenue per lead that that's what we're focused on and we have a variety of monetization model do that.
Let's say thanks.
Your next question comes from the line of Brian loans with Morgan Stanley. Your line is open.
Thanks for taking my questions I have two first one on flex, maybe just sort of a big picture one talk to us about what are the gating factors or the characteristics that you all are monitoring sort of determine the pace at which you push flex out to more markets and the second one on homes and the high buying ethic used.
Turning to sort of talk about some steps to.
Move external agents from the business.
On January 21.
How do we think about the impact to the overall long term profitability of homes, what those changes. Thanks.
Hey, Brian.
Maybe I'll take a crack at least at the first part on maybe I can do both but but.
Yes.
Brian we're not we're not thinking about it in the way you're asking the question anymore. Because this accounting change kind of liberates us from what Alan just described as the puts and takes of flex.
We're really trying to optimize for.
A great customer experience.
A great partner experience getting the customer what they really want which is a transaction.
And then at the end of the day getting more revenue and profit per customer and that comes as a result of the prime business model and then ultimately because of the ecosystem economics that we get when we are able to.
On transactions I am I missing anything there on that on our own.
No no I think thats right I'd say improve the experience reduce the friction and a byproduct will be improved cost productivity, but that's not the priority it's an outcome.
The transaction.
Got it very good thank you both.
Thanks, Ron.
Your next question comes from the line of low Vol mobile Deutsche Bank loans open.
All right can you hear me now.
Yes, Hey, Lloyd are absolutely not.
Hi, Hey, everyone.
Two questions. The first one was just.
Can you talk about the partner leads products a bit more in terms of how you're thinking about expanding the test kind of from a timing perspective, what you're seeing maybe in terms of mix of buy side and sell side leads and I don't know two calls to two years ago, you gave us some color on the Phoenix market any update on those tests in terms of the scale you are seeing.
Of the market your end.
And then the second one was just on on the rental business a big acceleration there is that product driven is that market strength in.
And is that level of growth.
Stena bulk for the next few quarters until you kind of come through it or more just a function of market activity that that is going to be subject to the market. Thanks.
Rich you want to hit rentals, and then I'll cover the other one yeah why don't you start with the other one and then onto opinion, okay well. Thanks for the question is Alan.
So listen on partner leads.
As we've talked about we believe that as we build this platform we have opportunities for a variety of adjacent revenue.
Incrementality that includes our closing services DHL and partner leads we are still in very early days, but we're excited about the long term opportunities as risk called out.
Dcs achieved 98% cash on purchase transactions on video acquired homes.
This quarter, our mortgage business is going really really well as we build the factory. So we think there's opportunities to offer a streamlined.
Service there and on partner leads we are continue to make progress on understanding how to work with our customer throughout the funnel. So I don't have any specific update on staff were.
Coming off pause and opening up in the 25 markets and and there is a lot of noise with the low end right now.
But as we have more and more adjacent services they positively reinforce each other positively.
And as we are getting the pieces together.
Together, we are getting better and better at linking the services and that's why we feel like we are so well positioned.
With the current environment as well as our platform and our product offerings.
To do really well here. So we feel really good about where we are and the opportunity ahead of us.
Okay.
That was great on I mean I'll just.
Camera that point these kind of we're pretty focused on the ecosystem economics.
As we think about all of these adjacent opportunities and we really see our kind of PNM and business advantage.
As translating this lower customer acquisition costs that we have with this huge traffic base in this big brand that we built over all these years.
And being able to they do more transactions convert to more transactions and then be add more other transactions to that transaction and maximize the number of spin off transactions from all this so it is it really it's just a it's a really interesting long term opportunity that we see we see lots of Blue Cross Blue Ocean.
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On the on the rentals.
Question.
We're really we're really excited by the the results that the that the rental scheme has posted.
And we have a very big top of funnel, we have a we have a lot of rental shopping demand and activity and I'm really pleased with the way. The team is translating that into results right. Now there is some noise about.
Migration out of cities to Europeanization et cetera.
And I think there is a little there there is some are relatively speaking more interest in.
Non city locations. However, the tide is so high that that there is just more shopping demand everywhere and that includes rentals. So the whole the whole of the housing industry is atypical, but very healthy and that includes the that includes the rental business.
All right. Thanks, guys.
Next question comes from the line of now that come through Securities. Your line is open.
Hi, This is Robert Taylor on for an event. Thank you for taking the questions.
So just on on the average.
On the average fee per sale offers for how sustainable do you think the 7% average fee is and has it come down at all recently, how should we think about this long term and if it does come down how much would you expect this to affect conversion rates for home sellers accepting offers.
And then what is the plan for inventory levels on the balance sheet. During this time of uncertainty.
And when can we expect a resumption of going deep into existing markets as a part of digital 2.0, and I just have a very quick one afterwards. Thank you.
Okay.
All right I mean, I guess I'll start by just saying.
When we think about the fee there are multiple elements that are included in the offer in fees just one of them. So.
So.
I would just caution focusing just on on that print number.
But there's a lot of different ways to deliver value and price. The offer we feel that were extremely competitive in our pricing and we're transparent to our customers on the various elements of the offer.
What we're finding is total economics matter to the customers.
So we feel were competitive and well positioned to provide.
Flexible in the fee and total offer we provide.
Relative to the environment, which called out some of the things.
They are happening in the environment real estate environment today in terms of.
Short cycle times, and a variety of other things low inventory.
So I wouldn't.
Face an average fee is as anything that static for us we're constantly testing at a rating we feel were competitive and well positioned to provide a great offering to our customers and that's what we're seeing as we ramp back up.
I guess I just said the team is really working well we believe it's an all its Alaska.
No, it's definitely elastic half how to judge and characterize that probably has changed and you know it's difficult to characterize but it definitely has an elastic transaction. So.
Our net dollars to the seller matter a bit and we're focused therefore, we are focused on lowering every single one of the line items.
To make the unit economics better including.
The customer acquisition cost right, where we have where we have a.
A good advantage.
Just wanted to wanted to hop on there I think the inventory levels. When can you expect us to go deep.
We're charging as deeply as we can as quickly as we can see there's nothing holding us back other than execution.
So we're working on it yes, I was going to call rich that we have you know we've used about $114 million of our $1.5 billion in capacity.
We our warehouse facilities, we feel we are well positioned on the balance sheet on a cash basis.
Right now thats not the constraint I mean, we're obviously careful in our underwriting.
But we are excited to be back buying homes again and innovating on behalf of our customers.
I mean, it's hard to hold onto because there's so much demand out there so.
Okay. Okay. Thank you appreciate the color and then just really quickly on.
The revenue recognition for flex so I mean, basically if I understand this correctly and just effectively pushing up the revenue recognition to now versus.
In the future.
And this.
Well and then you will no longer be lapping it after Q4 is that correct.
Yes, the impact because we'll have most of the transactions related to leave we provided pre Q3 will have occurred by the end of Q4 the effect after Q4 will be minimal.
Is what our expectations.
Got it okay. Thank you that's exactly right it.
We now recognize for both NBP.
Revenue related to lead we provide those agents partner agents in the quarter and with this change which is consistent with accounting guidance on what you are required to do we are recognizing the estimated value of the leads we provide to our flex partners agents.
Trying to provide leads.
Okay. Thank you appreciate it.
The final question comes from the line of Jason crimes of Craig Hallum. Your line is open.
Hey, Thanks, guys. Two from me on until offers with most of the pre coal that inventory now out of the portfolio. Just wondering if you can give us a sense of how we should think about ill or I guess, how youre thinking differently about buying and selling now versus how you were a year ago and then piggybacking on that you had mentioned rich the lower way.
Our initial Zillow offers just wondering if you can kind of walk through the game plan for building that up over time.
Yes, Alan you want to start an affinity sure sure. Thanks for the question Jason.
Yes, so again.
We went through this pause there's an air gap.
We are now back acquiring.
Homes, we still feel like there are opportunities.
Related to our cost structure for us to continue to go after we're re scaling.
We learned a lot over that two plus years as we opened 25 markets and were able to apply that I think the most.
No obvious one or one that easy to see is that our resale.
Learnings allowed us to accelerate.
The retail velocity.
And that we started to see as early as Q4 of last year, which helped us get through this this uncertainty.
Relatively.
Painless way.
Team executed really well so I think we'll continue to to.
Push on.
Penetration, but what we're seeing and we think there's opportunities that we can go after both on the acquisition cost by.
By being smarter and machine learning on renovations.
Our holding costs as we improve the velocity and on selling costs in a variety of areas.
And on your on your second part you know when you were asking about increasing awareness of Xia.
So.
We worked really hard and really effectively for a very long time 15 years to.
To be lucky.
And not lucky position that we're in is to have a really big trusted brand with.
236 million average.
Once we you use right now and a lot of the reason those you use those users are coming to our sites and apps is to check Theres estimates is to look at Theres estimates and to try to get a feel for what their home is worth.
What a home they are shopping for his words and we are the really liked the Bloomberg.
That's a good analogy anymore and we are the Bloomberg Navy.
Of the real estate industry and so our app. So we are in a very unlucky and advantage position, where when we have a zillow offer for a particular home and someone comes and looks at those Theres estimate we.
We will be more on the if we can't merchandise that zillow offer service and get awareness as in that way as the primary is the primary way we markets. There will be other activities, we undertake to gain awareness and it takes time for customers to transition how they think about zillow in the end the Zillow brand.
From a kind of information based.
Service that they are using down to a transaction oriented one but it's a challenge we're excited to rise too and we think it's a very logical one.
Okay, great. Thank you guys. Thank you guys very much.
Yes, now we can should I should I conclude yes, we can return to our regularly scheduled program take whatever your favorite cable news channel isn't on units. So we can see what's happening back in the political race I'll.
Close by saying this this inevitable shift from offline to online really has been accelerated in this year.
In our in our new home based life.
And distributed work.
Let's call it a rethinking of where and how we live so are these third quarter results confirmed.
Miller group's ability to capitalize on these forces in the near term, but with a clear eye on the long term opportunity, which is vast and nascent.
So with our trusted brand our technological capabilities and experienced team of operators were on our way. We really appreciate your partnership on this journey to build a 2.0, we look forward to talking to Houston. Thank you.
This concludes today's conference call you may now disconnect.
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