Q1 2021 Zillow Group Inc Earnings Call
As described in our SEC filings for additional information we undertake no obligation to update these statements as a result of new information or future events as the.
Except as required by law.
This call is being recorded on the Internet and is accessible on our Investor Relations website.
A recording of the call will be available later today and 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 our earnings release, which can be found on our Investor relations website as they contain important information about our GAAP and non-GAAP <unk>.
<unk>, including reconciliations of historical non-GAAP financial measures and.
In addition, please note we will refer to our Internet media and technology segment as our IMT segment. We will now open the call with brief remarks, followed by live Q&A and with that I will turn over the call to rich.
Thank you Brad.
Good afternoon, everyone and thank you for joining our first quarter 2021 earnings call.
We are and a much better place compared to one long year ago, and I'm. So grateful and impressed these miraculous COVID-19 vaccines are now widely available across the country.
Hope that you and yours are beginning to find some normalcy after such of trying here.
And the typical year spring begins the traditional home buying season, but we know that this past year was anything but typical.
<unk> never really slowed down.
The great reshuffling, driven by changes and what we want and need out of our homes has fueled continued interest and moving.
And we expect this moving demand to continue as.
As we all adjusted to a safer world ahead.
Our research team recently published a survey based mover report, which we have hyper link to from the shareholder letter.
It's a great read when you have the time.
The report indicates that the pandemic has indeed caused people to rethink where they live and concludes that approximately $8 million existing homeowner households that have been on the sidelines may answer of real estate market already beset by unrelenting demand.
Additionally, eight 9% of consumers plan to purchase a home in the next six months near a 20 year high for the conference boards April of consumer confidence survey.
The reaction, we got from our own employee base, when we told and last March that we intended to have a more flexible workplace policy for the long term is an interesting case study and how remote work catalyses the great reshuffling.
We found 30% more employees moved and the year following our announcement compared to the previous pre pandemic year.
At this time last year, we had employees in 25 states now.
Now they are and all 50.
This is obviously a small sample, but it shows how the great reshuffling might play out as people get certainty about their companies post COVID-19 workplace plans.
Zillow was and early Embraceor of of more flexible long term workplace models. So we are a few steps ahead and firming up our plans.
We expect that other companies will adopt more physical location flexibility to varying degrees simply because it's hard to take back something that employees have been given and the value.
That cultural shift will free up more restless households to lift and move and Zillow will be here to serve as their trusted partner and resource.
Beyond the continued reassessment of where we all of our heads at night. The housing market is underpinned by demographic and economic tailwind that will persist for the foreseeable future.
Millennials are moving up baby boomers of downsizing and in between people of all of generations are rethinking their lives.
Despite recent shocks mortgage rates are expected to be quite constructive for the foreseeable future and are near all time lows versus historical levels.
It appears that housing turnover should accelerate from the historically low rates for the past several years, along with an easier digital transaction. All of these trends point to more liquidity and household formation and long term, which creates a healthy backdrop for the housing market and the business and which we operate.
And of course of the most powerful and important shift driving our business of the titles shifts moving consumers and real estate dreaming searching and transacting from offline to online.
Just as they have and many other parts of their lives consumers of experienced the greater convenience of of digital technology enabled homes search and some of the magic of of digital transactions.
They will only expect further advancements in the future.
Moving on now to some business results from another strong quarter here at Zillow cloud HQ.
First and foremost first and foremost all of this energy around moving has created a zillow wave of sorts and our customers are surfing. It every day.
Just last week time named Zillow, one of the 100, most influential companies for in their words quote, making and extraordinary impact on the world and.
And.
A little Grand perhaps but definitely a non to the vast reserve of brand goodness that we had been building up over 15 years.
And uptick in pop culture of recognition. This past year has helped to accelerate our traffic and Q1 221 million average monthly unique visitors users visited our sites and apps, which represents an increase of nearly 30 million average monthly unique users versus this time last year.
This is the level that we previously would not of thought possible and should provide the fuel for years of customer growth into the future.
Our top of funnel of engagement with our customers translated into excellent results across the suite of products and services.
Our flagship buy side business Zillow Premier agent once again generated the strongest results we've ever seen.
38% revenue growth year over year in Q1.
Our nascent sell side business Zillow offers continued to accelerate out of the pause we instituted in the pen that make generating over $700 million and revenue and surpassing our internal expectations on revenue EBITDA and the unit level economics.
The success from our buy side and sell side offerings, when combined with solid execution from our adjacent services and supporting businesses true.
<unk> related and to total revenue growth of 54% sequentially and total company EBITDA of $181 million for the quarter.
With that number in context of the <unk> history. It represents 90% of our full year 2018, EBITDA, which was just prior to the commitments commencement of our heavy investment and our Zillow two point of vision.
We are now beginning to register the benefits of the investments we have made across our product innovations for buyers and ventures as well as our major ventures into Zillow offers zillow home loans and Zillow closing services.
This increased profit generation and after such a meaningful investment period gives us confidence that the bets, we're making across the business are accretive and we are allocating our time, our people and our capital appropriately for the long term.
Speaking of our people.
Fortunate and named Zillow, one of its 100 best companies to work for based on our own employees feedback about working at Zillow and 2020, including how trustworthy caring and fair. They felt the zillow has been during the pandemic, which forced most and presume line.
As we re imagine the future of our workplace, we are grateful for our flexible and talented workforce.
While our employees are doing well and our quarter quarterly results are strong we are oriented to the multi decade journey in front of us the journey to digitize and simplify the huge industry delivering more and more movers gracefully to their next homes.
Pursuit of these growth opportunities desserts continued appropriate reinvestment of profit.
As part of that journey, we recently launched a new advertising campaign with the tagline to move us to growth.
We think it wonderfully captures the essence of line moving is both exciting and.
And daunting.
And how we at Zillow are increasingly able to help our customers navigate this crossing.
The campaign supports the expedition, we're on as the company as well just as we've been Reorienting, our employees and mission around transactions, we have the exciting task of Reeducating, our customers and who the new Zillow is and what we can do for them.
Signal, we see based on data and customer feedback is that customers expect and demand of more seamless experience the.
The facility of two point out.
The Great example of our customers' enthusiasm for ease of the reaction to our recent announcement that many homeowners and Zillow offers markets now can see that Theres estimate is a live initial offer from zillow.
The announcement the announcement press alone drove record breaking interest and the service with requests coming in at levels, we've never seen before.
We believe we are onto something with this estimate offer.
The continuing challenge and opportunity going forward will be to translate customer interest into transactions.
Now that we have many of the ingredients for our end to end home transaction to sell other services and products. We are upgrading our giant leaky customer funnel and converting more browsers and the customers.
We are motivated every day to ensure we deliver our customers excellent integrated experiences on par with simpler smaller e-commerce transactions and other parts of their lives.
To reiterate it is still early days and these efforts and there is so much work to be done as we begin to scale.
Cross sell or we estimate that our 2020 gross profit was larger than any other player and the residential real estate technology category Budd, our buy side primary agent business and sell sides Zillow offers businesses still represent less than 2% of the total annual residential real estate industry service fees.
We are proud of our business, but we have an ocean of opportunity in front of us.
Each customer who uses the alert to move has the story.
One we're sharing today is about first time home sellers, Jessica Leroux Briscoe and her husband Sean.
They turned to Zillow when they were anxious about and move from Colorado, and Texas, where they wanted their two year old son to grow up near their families.
Zillow connected Jessica two and agent partner at among group and he walked you through the selling process.
Was all new to her and she was scared and dubious.
I'm going to take a gamble on new she told them.
Adams experience and professionalism kept their worries and Jessica and Sean felt informed and prepared throughout their move.
I really feel like we were able to be connected with the best real estate agent for us because we went through zillow adjusted consent.
The happy ending to the story is that the Sun is now spending time in Texas, and Jessica grandparents, who are and their nineties.
We are motivated every day by customer and partner success stories, like Jessica Sean and items.
Like our AD campaign says to move us to growth.
And we're seeing that here at Zillow with our employees, our customers and with our industry partners.
As for our Investor Partners. We appreciate the support as we go on this journey with you.
With that.
I'll turn it over to Alan.
Thank you rich.
And as rich discussed Zillow group delivered another strong quarter reporting Q1 consolidated revenue of $1 2 billion and EBITDA of 181 million both exceeding the high end of our outlook range.
Q1, IMT segment revenue of $446 million grew 35% year over year as we continued to see accelerated growth and premier agent and strong growth and rentals.
IMT segment, EBITDA was $209 million and Q1 are 47% of IMT segment revenue and <unk>.
Accelerating revenue growth combined with year over year declines and operating costs translated into 143% year over year EBIT growth and Q1.
Premier agent revenue grew 38% year over year and Q1 the.
The accelerated growth was primarily driven from connections growing faster than traffic.
As well as our focus on providing outstanding service and optimizing to connect high intent customers with high performing partner agents.
Growth in Zillow offers continue to Reaccelerate in Q1.
We reported homes segment revenue of $704 million, which exceeded the high end of our outlook with 90 to 165 homes sales.
Resale velocity was above our expectations in Q1, we sold 128% of the beginning inventory of 531 homes, which contributed to inventory declining at the end of Q1 to 422 homes.
Purchases increased to 856 homes in the quarter from <unk> hundred 89 homes purchased in Q4.
But not quite at the pace of the planned as we continued to work on refining our models to catch up with the rapid acceleration and home price appreciation.
During Q1, we continued to focus on unit costs automation, and adding capacity and sharpening pricing models to improve off of strength as we continue to scale.
Our Q1 Zillow offers unit economics of 549 basis points return before interest expense was above the plus or minus 200 basis point guardrails, we've set for ourselves while working to scale the business.
And the outside the economic results were impacted by the ongoing strong housing market, which is temporal in nature.
We made progress during the quarter on improving off of strength and sharpened pricing and tightened our unit economics by approximately 120 basis points for matter of Q4.
The durable operational improvements and overall cost per home contributed 280 basis points of improvement from Q1 2020.
Our mortgages segment revenue increased 169% year over year, and Q1 to $68 million and mortgages segment EBITDA was $6 million compared to the midpoint of our outlook range for a loss of $1 million.
The revenue and EBITDA outperformance was primarily driven by mortgage loan origination volume, which was up more than eight times year over year as well as our mortgage marketplace.
Both as a result of strong refinance activity.
Beginning this quarter and going forward, we will disclose our mortgage loan origination purchase and refinance volume.
In Q1 refinance loan origination volume comprised 90% of total origination volume.
We continue to invest in our mortgage platform to provide a compelling experience for our purchase customers as well as the integrated across our business.
Turning to our outlook for the second quarter.
And of consolidated level, we expect revenue to be one $2 6 billion of 64% year over year at the midpoint of our outlook and EBITDA to be between 116 and of $140 million of.
Our IMT segment.
And our IMT segment, we are forecasting 66% year over year revenue growth and Q2, and 44% revenue growth over Q2 2019 at the midpoint of our outlook range.
Within the IMT segment, we expect premier agent revenue to be between $342 million to $350 million up 80% year over year and up 49% over Q2 2019 at the midpoint of our outlook.
This is being driven by strong top of funnel traffic and connections as we enter Q2.
It is important to note that during Q2 last year, we provided better together billing relief to our premier agent and other marketplace partners, excluding the impact of the billing relief, we expect Q2 year over year Premier agent revenue growth to be 38% and IMT segment revenue growth to be 35% at the midpoint of.
The respective outlook ranges.
We expect Q2, IMT EBITDA margin to be 41% at the midpoint of our outlook down sequentially from 47% and Q1 as.
And as we position ourselves to drive sustainable profitable long term growth, we expect Q2, IMT EBITDA margin to reflect the accelerated investments and marketing staffing and technology up from Q1 levels and we expect to further accelerate investments into Q3.
For full year of 2021, we expect EBITDA dollar growth more in line with revenue growth rates rather than expansion from the 38% EBITDA margin we reported in 2020.
And Q2, we expect our homes segment revenue to increase sequentially to $735 million at the midpoint of our outlook the <unk>.
Higher than expected Q1, resale velocity I mentioned previously pull forward of portion of expected Q2 homes sales customer interest and selling their homes to zillow and the operational improvements. We have continued to make have shown strong improvement and top of funnel as we enter Q2, which gives us confidence and our ability and our ability to continue.
Scale, the business and the periods ahead.
We expect mortgage segment revenue to be between $57 million to $62 million and Q2, which is down from Q1 or Q2 guide reflects slower industry refinance activity and narrow our gain on sales spreads.
As we have discussed for the past couple of quarters, we do not expect the cyclically high gain on sale margins from originations to be sustainable we.
And we plan to continue to capture of solid refinance demand and invest and building the factory to scale our operations as the purchase business has built over time as the results. We expect mortgages segment EBITDA to be between the loss of $9 million and a loss of $5 million.
We further strengthened our balance sheet during the quarter by initiating and at the market offering or ATM selling $551 million of capital stock.
We have been and will continue to be opportunistic and prudent and any potential future sales.
Share sales and approximately for and have approximately $450 million remaining on the authorization.
We ended the quarter with $4 7 billion and cash and investments, which puts us and a strong position to fund our vision for Zillow and make strategic long term investments both organically and Inorganically. As a reminder, we do have of $500 million commitment to acquire showing time as we cooperate with federal regulators to work diligently.
And towards closing the acquisition.
And we look forward to the balance of the year, our priorities remain focused on innovating and executing on behalf of our customers and partners, we look to grow our customer base and engagement through a compelling dream and shop experience invest and sustainable top line growth opportunities across the <unk>.
Okay.
Reduced cost structure and improve productivity and transaction services.
Drive profit growth through operational discipline.
And with that operator, we'll open the line for questions.
At this time, if you would like to ask the question. Please press Star then one on your Touchtone phone.
To withdraw your question. Please press star and pale we'll pause for the phenomena to compile the Q&A roster.
Our first question today and will come from Ron Josey of JMP Securities.
Great. Thanks for taking the question guys I appreciate it I wanted to ask clearly clearly so much going on and I wanted to maybe zero and on Zillow offers here first I mean significant demand and the quarter sales pulled forward Alan you talked about that the estimate driving even more demand.
And maybe where supply seems a lot of being a little bit harder here and youre sharpening and pricing to offset that rich can you just talk about the broader market for offers in a stronger real estate market. Just how do you acquire the inventory relative to demand how do you balance those two things together. Thank you.
Yeah, Hey, Ron Thanks.
I mean, we are rapidly learning.
How is the lives and this really this unprecedented home price appreciation environment.
The appreciation of the last six months is the largest move up or down that we observe and the dataset over the last 35 years right. So it's a very fluid market, but as you noted in your question and.
And Alan talked about and it's stripped our top of funnel indicators are good.
It turns out the speed and certainty of convenience are attractive to sellers and no matter what kind of market. They are and so we are seeing record levels of of folks raising their hand to get.
Zillow offer I think part of that is driven by this really nifty feature we launched last quarter that we internally called as estimate offers which is this.
And our live initial having the as estimate be alive initial offer for a lots of the homes inside of the buy box and Zillow offers markets.
So anyway, we're also really happy with this kind of glow that we're seeing across the business from this positive reinforcement, we have from having all of these linked businesses and having this this.
Very large single funnel of customer demand coming.
Coming in.
And the IMT and adjacent business numbers are really really commendable, but on zero and particular, Ron we're leaning in where we're leaning in and we're expanding in the 25 markets were heavily staffing as I think we made an announcement maybe Alan just talked about it too we are we are.
Planning as a company on the hiring hiring of net 2000 people and 2021.
And a lot of that will be for Zillow offers and were making other investments and the neo as well. So we are comfortable with that increased investment because of what we're seeing top of funnel because what we know about the consumer value proposition.
And also we're.
And we're leaning in because most consumers don't even know what Zillow offers is yet they didn't even know we got to take Zillow. Two point now out of the kind of quarterly conference call realm and into the consumer consumer awareness realm and.
So we've got a law that we've got a lot of work to do there and we're basis points penetrated and the business overall, so long long answer, but we are feeling we are leaning in and feeling good.
And Ron and rich I'll, just add just to give a little color to the guidance for Q2 with respect to.
Homes segment revenue.
We called out the resale of velocity pulling some sales and the Q1 and I just want to call even with strong top of funnel of activity. There is a lag as we go through between offer purchase and then eventual sale and when we see the revenue and so a lot of this top of funnel of activity.
And we'll start to show up more in Q3, and and that's part of the reason for.
The Q2 guide Thats reflected that lag is reflected in the Q2 guidance.
Super helpful. Thanks, guys.
Our next question comes from now that kind of with <unk> Securities.
Yes, hi, thank a lot less of a couple of question of so many disciplines that are too large or how do we measure it and the progress that they are.
And making.
On the inattentive and how do we think about the long term profit entity.
Vincent and the <unk> and then just maybe on hiring.
What are the what are the areas that are seeing the biggest the increase and head count.
Okay.
Subtle.
<unk>.
The two the two Dato bet is all about the fact that we believe customers want speed.
Speed simplicity integration value.
These are not risky bets to make on consumer behavior, Okay. The kind of.
Timeless features of what customers demand.
And.
We also believe that our brand and our traffic give us income a competitive advantage.
Relative to point, a point solution competitors, because we have a large audience, we can spread any customer acquisition costs. We may have for those customers over a much larger revenue profit and transaction base, So thats kind of the.
<unk>.
Business School answer to why we why we like the competitive the competitive advantage and so that's why we've made the bet.
So we've made these big bets over the last two and half years, when we really leaned into to point out.
And building out all of the two point of components like Zillow offers mortgages as the law.
Closing services, even rentals and.
The way. This is the short answer to your question is it's working.
Sure.
All of the children and appear to be above average.
I don't know if we're getting any chuckles out there to the garrison keillor reference, but all of the businesses are performing really well beyond our expectations.
And so that's a terrific proof point that that the integrated strategy and the transaction strategy.
Is is working our revenue and profit on a per user basis and steadily rising which is really nice to see and it is still quite low. So we have of ways to go and I said in my script, the kind of introduced a new kind of Tam and penetration concept.
Just two for less than 2% gross profit penetration into the total addressable market of of service fees and the industry.
We keep struggling for ways to talk about the full opportunity in quarters past, we've talked about trying to estimate transaction share and what share of transactions. We touch that is fraught because we don't exactly know how many transactions, we touched or were I challenged the team to try to figure out if there's maybe a gross profit penetrate.
<unk> metric, we can come out to communicate the opportunity for ourselves and for you all.
So that.
That could be interesting anyway, there is still a ton of work to do on two point out not the least of which as I said before is awareness and to point out and Thats, where youre seeing marketing investment.
Kris marketing investment from Us anyway.
State stay tuned we're on the path, we like the path.
Things look look look clear clear and lots of green lights of the front windshield.
Thank you for it and maybe on the head count and give us some.
For clarity on the areas.
Maybe I'll, just and maybe Alan if you want and if you want to and I guess, what I would just say and I would classify.
And we're continuing to make investments across.
A variety of our businesses, where we feel like Theres a lot of opportunity to accelerate.
And innovation for our customer shop, and Dream Byword Selwyn.
And so there's quite a bit of tech and Dev, but there's also transactional type.
The resources that are necessary as we scale of the business and.
So I think youre seeing kind of a mix of those there are some additional innovative ideas around three D tours and other things so <unk>.
Most of the initiatives, we talked about we are looking at where we need the resource and to accelerate our investment, but it's spread across the company and.
I'll just take this moment to say, we continue to prioritize our existing resources as well to make sure we're making bets on the right the index.
But we like the results, we're seeing and we'd like the inputs that we're tracking.
And.
Look forward to execution.
Thanks, a lot.
Our next question comes from Lloyd Walmsley with Deutsche Bank.
Thanks, two questions first.
Recognizing of better growth and in the second quarter guide on that kind of a normalized basis, excluding the better together of discounts can you just talk about the sustainability of the business, particularly into the second half the comps get harder and what are some of the drivers behind the outlook for <unk> and that can help and the second half.
And then secondly, you put up the 47% segment margin and IMT guidance implies first half margins of about 44%.
Full year margins are going to be kind of flattish with last year. It implies a big step up and the second half can you give us a better sense of what youre investing in how it is going to flow across the segments and then what specifically will be weighing on the IMT segment margins and the second half given you've been sort of disciplined non core.
Growth.
They're for.
Multiple years out.
Thanks for your help there.
It sounds that.
It sounds like and Allen question.
Sure. Thanks Lloyd.
And so on growth.
And Q1 Premier agent growth.
38% year over year, if you compare it to the underlying growth rates, we've talked about.
In Q4 was 27% and and Q2 Q for 2020 was 27% and in Q3 of 2020 was 20%. So we've seen this accelerating underlying growth trend.
And Premier agent.
If you look in our Q2 outlook the underlying growth rate of 38% at the midpoint. After you adjust for the better together discounts is the continuation of <unk>.
The inputs that we're seeing.
We have of large audience strong top of the funnel and when you combine that wave of focus on some of the inputs of customer satisfaction and conversion and revenue per lead.
We're just seeing very encouraging trends on the inputs.
And I think it all.
Predicated by the focus on helping the customer get through the transaction.
In terms of the second half for not providing guidance, but what I would call out is that the premier agent Q2.
Two year growth rate of 49% that I call that we've called out and the shareholder letter.
And at the midpoint of our range is probably a good way to think about growth.
As you look at your models on how to model forward through this this weird year that we had in 2020, so hopefully that helps.
With respect to margin.
And our Q2 IMT EBITDA margin, we expect to be 41% of the midpoint of our outlook that is down sequentially from the 47% print in Q1.
And.
And we position ourselves to drive sustainable profitable long term growth.
We do expect this margin rate to reflect accelerated investments and marketing and staffing and technology to provide innovation on behalf of the customer.
And so we do expect that to the increase from Q1 levels and.
And we expect further acceleration in Q3.
And when I think about full year, given your question and what I'd say is we do expect EBIT dollar growth.
That growth more in line with revenue growth rates, rather than expansion off the 38% margin rate we printed in 2020.
So hopefully that helps.
Yes.
Great and just.
And just to clarify when you say kind of it.
Two year growth kind of consistent is the good way to think of that it is that excluding the better together or is that just on the headline basis.
That's why the headline basis.
Got it and thank you.
Yes.
It's and the 49% if you just take Q2 2019 print the Q2 2021 midpoint at 49% growth and we think Thats a good.
The good way to put in your models.
Okay. Thank you.
Our next question comes from Ryan lack of Zelman and associates.
Thank you congrats on the results and great to see the momentum continuing.
First question I apologize if I missed this but can you share and update on the transitioning to using in house agents our employees on the high volume transactions.
Maybe what's share of transactions and the quarter over for in house.
And as that transition scaling versus your expectations and second question on the mortgage business for the stat on the 90% share of <unk> is very interesting and it seems to be a bit of of kind of early confirmation of the signal that the the overall of the <unk> business is moving from.
Something that was once servicing and monetizing buyers to them sellers and that'll homeowners the might want to refi. So I guess I'm curious on the mortgage space.
Can you talk about the strategy and maybe that interplay between dragging the actual attachment and the high buyer purchase product and driving mortgage volume or generally because another thing of.
Of course, the a lot of differences and just strategy to the approach of kind of purchase versus refi share over time.
So hoping you can maybe separate those pieces and talk a bit about the strategy. Thanks, so much.
Alright, I'll start and enrich our Brad jump in but on Zillow brokerage services.
We're operating and just a few of the 25 markets.
So thats still relatively nascent it's going well.
We are excited about initial results, but there is nothing with respect to attach or any kind of data point yet.
The time, we do believe that's of great way to have a better integrated customer experience, but we still work with partners across all of our markets.
And we're learning.
And the services that we can provide but it's still relatively new.
And then on mortgage I guess, the way I would describe it.
As you think about our mortgage strategy coming together.
When we purchased mortgage lenders of America way back in 2018, they were really of direct to consumer nonconforming erosion origination shop.
Our initial strategy was to move to a broader mix of conforming mortgages, while updating and transforming the platform and bringing in new leadership and.
In 2020, and we started to share.
Our focus on building the factory, bringing in the <unk>.
Loan officers and loan processors and building the systems and.
And we did that off of the strong refinance demand.
And we continue to do that in the Q1 I think over time Youll see that mix.
Normalize more to industry standards, but.
And we want to have a compelling and great customer experience and we're continuing to.
And to work with customers and learn and.
Over time.
We expect to provide all mortgage services that a customer may want whether it be refi or customer of both those that are doing other services within zillow as well as refi customers, who kind of looking for refi. So.
Excited about what the team has done and where we are.
And we think that mortgage is a very important part of the Zillow two <unk> and we're continuing to expand there.
Very helpful for yourself.
Our next question comes from Yigal of Iranian with Wedbush Securities.
Thanks, guys. Good afternoon. So just one question on Zillow offers one on Premier agent.
Let's go back to Alan's comment I hope I'm not misquoting highlighted.
Purchases of or not.
The pay for your.
Expecting kind of over the course of the quarter and.
The work to come catch up with HPA and the the really strong environment can you expand on that and what.
And what you're doing.
Catch up and take.
And that and fix the model or just the model for what we're seeing especially.
Especially in light of some data that we've seen some of the choke and of your competitors continuing to accelerate some of the purchases there.
And then on <unk>.
You highlighted improvements and Ta connections and the best of what I was hoping you could talk about that a little bit and then.
And as listings are still challenged overall.
Can you talk about the impact that has the <unk> business.
And it was down significantly year over year does that all of a meaningful impact.
Thanks.
You want to start with the <unk> stuff, Alan and I share yeah. So.
I think rich hit it pretty well.
And what I'd say is if you look at our unit economics and and.
As I mentioned 549 basis points of return on homes sold before interest expense being above our plus or minus 200 basis point guardrails.
The the driver.
And Thats there that has improved from Q4.
And is home acquisition costs as a percentage of sales so it's at 87%.
Of home Rev homes revenue versus $85, nine and Q4, but still higher than we would expect and that's reflective of this resale of velocity and our selling of homes.
And at rates higher than we would've expected or underwrote Roe to when we acquired them and so.
And it's this expansion that we're catching up with.
There's also a lot of nuance just in the offers and how we present them.
And that we're also iterating, so I guess, what I would describe as.
We are continually figuring out how to improve our offer strength and the way we communicate that to our customers. The top of funnel and the interest is strong we're seeing early trends in Q2 that give us confidence that this is something that we are going to be able to do.
And the Guy that I provided in Q2 is reflective of the lag.
As we purchased those homes renovate them and and we sell them as well as the Q1 kind of over performance, but we're very confident that we have a compelling offer that I buying is something customers want even in this market.
And the early signs give us confidence that we can continue to grow and scale of this business for hopefully that helps.
On the on the.
Well before I, let me editorialize on that just a little bit.
At the risk of keeping this issue of <unk>.
Alan.
The unit economics of the margins that we're earning on a on a unit basis right now our.
Not what our goal is I'll just reiterate that we.
We want this and know this can be a giant business and it's only going to be of giant business. When the pricing is perceived to be fair to consumers. So it's not our goal to have 549 basis points of whatever it is we just printed.
On a on a on a unit on a unit basis now, it's slightly better than last quarter and other words, it's lower but we what we're aiming to do is to provide a fair offer and charge a fair fee to our customers and thus we believe we maximize the Tam we maximized the number of transactions we can do.
Touch and participate in.
And.
We have the ability to sell a bunch of adjacent services around those transactions. So it's just it's worth pausing their perfect.
Alright.
And the listings question.
Yes.
But a tenant on the airplane when she says even though the airbag does not appear to inflate the oxygen will flow that is what's happening clearly and the market volumes are up.
Home price appreciation is way up too, but homes of just moving really really fast and.
So we we like to see.
A market where lots of activity is happening we see demographic, we see offline to online shifts happening and we see demographic shifts happening, we see great reshuffling things happening all too.
Ill put wind and the sales.
Our <unk> business and our business indeed overall.
Thanks.
At the group.
Quick follow up on Zillow offers.
One of the characterized.
Slowly and your purchases are being more cautious on their purchases based on what's going on with the HPA.
<unk> is always an important component of.
Of pricing of.
Of course and forecast of home price appreciation is the very important part of the pricing as well and needless to say were and are really just and a really fluid environment.
On that and we're learning really quickly.
Okay. Thank you.
Yep.
Our next question comes from John Campbell with Stephens, Inc.
Hey, guys. Good afternoon, congrats on the continued success.
Okay, and you guys have a couple of positive things kind of spinning up across the product set obviously, but it sounds like rentals just since the.
The kind of flattening of the radar.
Guys put up some good growth this quarter of last couple of quarters of good growth just curious about the drivers there and how much lift you're seeing from kind of the shift in the the monetizing of the rentals and then maybe also the broader opportunity ahead for for Zillow rentals manager.
Alright.
When you take the threat scan and you start, yes, yes, and a 46% year over year growth rate is fantastic we're.
Really pleased with our rentals business.
<unk>.
It comes from and is driven by a lot of the decisions we've made to invest in.
And a fairly good streamline set of product innovations.
And I think we're starting to see the benefit of some of those over the last few years that we've made.
A lot of those are integrated service.
Services like one click applications payments listings and the services are all kind of coming together and in fact, as we talked about Zillow two <unk> getting closer to the transactions I believe we're seeing that and the rental space.
It's also assisted though by the continued strength of top of funnel and our large audience.
And even some of the demographics, we've talked about on the housing market the broader the great reshuffling and the demographic tailwind and also helping our rentals business. So.
We're excited with the progress there.
And the growth has been strong.
And we're excited about the products and services, the we're able to deliver both to our customers and to our property managers I don't know Richard do you want to add anything.
Complete and great. Thanks, Tom.
And then one more follow up and appreciate the color and that's very helpful. On the IV ex shift for you guys.
If you've ever frame. This up because you can help maybe help us understand kind of the offset on operating costs from the shift.
Yes.
So I would say is.
<unk>.
We're now taking feeds as where MLS. There is there are some puts and takes across that.
I would say that.
We continue to invest to make that.
Great experience and there is some some costs that come with that whereas there's also some costs that are reduced from some of the other data acquisition costs that we may have had and the future but.
It's not a big enough callout, I think where we disclosed one way or the other what the the savings are what we really think it's of great customer experience and it's just really consistent with our ability to have great information on the site and to provide a great experience.
And to our customers. So that's the real win I think on the IV ex side.
And on and I'll, just jump in and look like it and it was really Q3 of last year. When we saw the largest net benefit there has been other tangible benefits, but the other clos to invest and the platform. Since then so it's been and the expense infrastructure for a couple of quarters of it.
Okay. That's very helpful. Thank you guys.
Thanks.
Our next question comes from Mark Mahaney with Evercore ISI.
Okay. Thanks, Let me try two questions just talk to the EBITDA margins and the mortgages segment and Im sorry, if you.
Touched on this before it seemed like they ticked down a little bit and that doesn't seem anything material, but just talk through that and then getting back to the unit economics on the homes business. So it sounds like and you want to run this business with those I forget what you call and the railcars of whatever it is plus plus 200 minus 200 and the strategy Rich is I think as you extract economics from this.
And then to take those economics and bring them down to the card rails. So that long term you can bring down commissions and some of that you can expand paths and just and as feed the beast. So thats my understanding of the of the flywheel now there are scale advantages as you do more and more of this where does the scale advantages most show up in terms of.
And bringing those costs down as a percentage of revenue and so maybe that's the maybe that's really the question I'm asking here is as you as you get more and more experience and more and more scale in the homes business, where do you think the where are you seeing and where do you think the most leverage is going to come from and the expense line items and that's going to allow you to pass more of those savings back to the <unk>.
Tumor and feed the flywheel.
Yes.
Nice to see of brand new analysts from Evercore here on the call with us today. Thanks.
Thanks, Rick and Doug welcome.
Welcome and congrats on the new job.
And.
Think I think al and maybe start with the DHL margin question and then we can both tackle the.
The why don't I do mortgage I'll start <unk> and you can jump on.
So mark one thanks for the question.
On mortgage EBITDA margin.
We see and what's reflected in the guide is that a significant portion of the revenue downtick.
And our guide compared to Q1 is related to the gain on sales spreads and and our guidance.
And so that kind of falls through we still are very excited.
About the platform, we're building and we're continuing to build the factory and so when you see that down tick. It has an effect that kind of falls straight through the EBITDA versus Q1s performance.
And so that's what's driving the majority of that downtick Q1 to Q2 on the the mortgage margin rates and on zero, sorry, I think.
You hit it right on the head what I'd say is we still provided long term targets of 400 500 basis points return before interest but.
Current period and near term our guidance that we provided is.
And it's plus or minus 200 basis points because of the size of the opportunity and because it's important.
To get out there and provide a great experience as we learn who are willing to invest in the plus or minus 200.
And as we learned the business.
And I'd say, we see opportunities across all areas, we have improved 280 basis points.
Primarily across the renovations and selling costs versus last year.
You can imagine renovations as you have.
More density in the area for you or renovations and as you get better and smarter about what needs to be done and what the customer is willing to pay for who is repurchase in the home that youll see benefits in that area of that right now is about 3%.
Of course, the cost of revenue holding costs.
A reflective of a lot of things, but there are definitely many things we can do to improve that's a relatively small cost and then selling costs over time as we as we.
Growth Zillow brokerage services and as we reduced through automation and technology. Some of these non value added.
Costs that currently happened and the.
The world today, we expect that number to come down and we expect the acquisition cost to be.
Could be.
Collective of of fair offer as rich mentioned, but a solid cost structure.
Our decision to be plus or minus 200 basis points is reflective of the us reinvesting any improvements we make right now to be at this plus or minus 200 because of the size of the opportunity.
And as we've mentioned several times the.
Fact that were 549 is just saying that we're still working.
Kind of catch up here.
And at the scale, we are right now thank you for clarifying what I said al and I didn't mean to imply we didn't want to make money at natively off this business.
But we are subscale dramatically subscale right now and are in our estimation.
And while we are scaling it and we're targeting this plus or minus.
200, so anyway. Thanks.
Thanks for clarifying and you have the flywheel right. That's the flywheel bet, we're making we also bet and addition to the leverage we see on the three line items Alan was talking about we see leverage on customer acquisition costs, because we have a we have a cheaper way of a much cheaper customer funnel.
This estimate offer of being just like the perfect characterization of that people come look at those estimates and if that adjusted.
More and more customers know that his estimate is alive and initial offer for their homes, we are more likely to get the first crack at them.
Now the challenge is making sure that people leave and know Zillow offers exists and what it is and is there a trick and instituted to be true and education and marketing. So we're we're in that we're in that early phase of doing that right now.
Okay. Thanks, rich thanks Alan.
Our next question comes from Maria <unk> with Canaccord.
Great. Thanks for the questions.
I just wanted to follow up on the <unk> revenue growth. It seems like a lot of strength. There I think you made the comment on how <unk> is performing relative to your core key business in this kind of strong environment and I would like to.
The share with us any color on how you're thinking about extending flex the on your current market and if so sort of what determines what markets of <unk>.
Both of the scrapping model and then I have a quick follow up.
Yeah.
Thank you for oriented Alan.
What I'd say is our.
And our revenue growth and Q1 of 38%.
And.
And compared to that underlying growth statistics I gave of 27 and Q4 of 2020 and 2000.
20% and <unk>, obviously accelerating.
And there arent any.
The significant there are no changes in revenue accounting of the revenue recognition the call out in Q1. So that's that is the underlying growth rate.
And we've talked about the guide of 38% adjusted in Q2 at the midpoint.
That is a combination of both MVP and flex programs working together.
And as to monetization tools that we have and they are both performing well.
And again, if you go to the inputs of improving <unk>.
Driving more and more of our customers through our connections program and delivering high intent customers. The high performing agents. Those are all things the input dials that we're driving go across both flex and our MVP model.
And we're seeing results.
We are continuing to look at it and and we expect to.
Increase the flex.
Presentation's across our pool.
Theres not any particular market it requires understanding and identifying agents that are willing to grow with us and.
There's not really any particular attribute to call out or the metric to give I think our growth rate is reflecting the loss of optimizing the process of monetization models, we have available.
And the inputs that we're driving around the customer and customer experience.
To help close transactions.
Got it that's very helpful. Thank you and then just a quick follow up on the set of adjacent services opportunity, especially around the home insurance can you maybe just talk about how you're thinking about bringing potential of being the sort of additional service to consumers within your platform and any thoughts sort of.
Around going after this opportunity on your own versus partnering with someone else in the space.
And Maria this is rich we see we see lots of continued adjacency logical adjacency opportunities.
All around the transaction we haven't.
Targeted or begun talking about any additional ones other other than.
The the businesses, we're in right now with mortgage title escrow et.
Et cetera, but we do obviously see other large adjacencies we're just.
Going to knock things of one at a time and evaluate each additional one as of the.
As the time calls for it and thank you very much one more maybe Brad.
Our last question for you it will come from Tom White with the April call.
Great. Thanks for slipping me in guys I'll ask just one and maybe a follow up on on your comments about kind of your cost advantages and the offer of business and the multiple opportunities you guys are kind of developing.
To sort of monetize the customers that hopefully stick with you.
I'm just curious to hear your thoughts on like your appetite for maybe increasing the prices of the homes that you're going after any time soon.
As soon as the way to maybe increase your Tam.
Hey, Tom Thanks for thanks, Thanks for the.
And the question.
Sure.
We are constantly experimenting on the market by market basis, with the buybacks and what works and what doesn't and we have lots of data streaming and not as much as I would like I would like it to be even bigger.
The if you step back and look at the overall in the number of transactions. We've conducted here, it's still relatively relatively low so we want to get that up keep the learning machine going and get the buy box as broad as we possibly can and as many markets as we possibly can.
But thanks, guys congrats on the nice quarter.
Thanks, Tom.
Okay. Great question for non construction I would like to turn the call back over to rich Barton for any closing remarks.
Thank you very much and thank you all for your time today, we're really grateful to have you along for the journey and we look forward to speaking with you again next quarter if not sooner.
Soon.
The conference call. Thank you for attending today's presentation you may now disconnect.