Q2 2021 Zillow Group Inc Earnings Call

[music].

As required by law. This call is being broadcast on the Internet and is accessible on our Investor Relations website of recording of the call will be available later today.

During the call, we will discuss gap 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 gap and non-GAAP results, including reconciliations of historical non-GAAP financial measures.

In addition, please note we will refer to our Internet media and Telecom segment is R. I M. T segment will now open the call with the remarks, followed by live Q&A and with that I turn the call over the rich.

Thanks, Brad Hello, everyone I hope, you're all enjoying the summer wherever you may be I am zoom connecting once again from Zillow cloud H Q.

We had another strong quarter for Zillow with our consolidated business as well as each segment meeting of beating our outlook ranges.

Of begun to show good execution on Zillow 2 point O R.

Dream of building, a seamless integrated experience for our customers and partners.

I will talk more about that in just a moment, but first I will top line some quarterly highlights.

The when we present the Zillow offers concept the largest objection is there must be of catch.

I'm pretty happy to market to that objection.

As we discussed on our last call. We entered Q2 with strong customer interest in Z O, which accelerated throughout the quarter and into Q3.

Allen will get into more details, but as we sat on our queue..1 call. We saw of significant customer demand at the beginning of Q2 that we expected would drive revenue growth on of lagged basis in Q3, which is now leading to a strong Q3 outlook.

And we continued to see strong growth in customer demand as we entered Q3 that we expect will favorably impact revenue in future quarters.

With that in mind, we are focused on making progress automating key workflows in support of building a large scale operation.

Also as we discussed the last quarter, we recognize that our Zillow offers unit economics are above are plus or -200 basis point guardrails as we build and scale of the business of trend of the continued in Q2, despite our efforts.

We expect these unit economic trends to normalize of her time as we iterate continue to learn and is home price appreciation inevitably slows.

We've been testing price elasticity in this hot housing market and we saw rapid conversion gains throughout the quarter as we improved our offer strength.

We believe these tests will serve us well across future market conditions, as we strive to be of market maker of cross housing cycles.

We expect to the homes were scheduled the purchase will trend towards our of plus or -200 basis point target over the course of the second half of the year.

Additionally earlier this week of Zillow offers subsidiary launched in price securitized debt offering which is expected to close next week.

Allen will provide more details on this later in the call.

As the Zillow offers business continues to accelerate we are seeing lift tour of Zillow home loans with approximately 40% of purchase originations in queue to sourced from Zillow offers.

In total our queue to purchase originations group by 90 per cent year over year as we continue to build a mortgage factory that serves of both purchase and refinance transactions.

An example of this is our new self service mortgage prequalification, offering, which automates the process and makes it more efficient of our customers.

All of these efforts came together this quarter to deliver a total company revenue of $1.3 billion of 70% year over year.

And importantly, our newly provided gross profit measure, which I will talk to more in a moment was $538 million in queue to up 92% year over year and 79% from the same period 2 years ago.

Now on to what's happening around us.

We believe there is strong durable support for the housing market historically work and location have been inextricably bound together.

The pandemic has jolting Lee and dramatically unbundled work from location for many creating a new flexibility by enabling people to optimize for work and location separately and simultaneously.

Moving to the Big City is no longer a requirement for many job seekers and that shift will inevitably dispersed talent and economic opportunities.

This untethering of location from work feels deeply important to me for the future of work and life and by implication housing.

What we've been calling the great reshuffling.

It is also why we at Zillow leaned in hard and early on the cloud H Q idea as the future of work as you can read about in today's in today's New York Times Front page business section of article by Sarah Kessler, featuring Zillow, Vice President Megan Rives done 1 of our many folks who cut the cord from our old Seattle, HQ and moved to Asheville North Carolina.

To be near and support her family.

On the recruiting side year to date, we have had 153000 candidates apply for a job at Zillow, which we believe has been fueled in part by the possibilities of our permanent location flexible policy.

This is 1 of the factors, we see driving the housing market for some time the other important factors being millennials entering their prime home buying years and low interest rates.

Stepping back we've always had audacious goals guided by a strong urge to empower people visa V. The expensive confusing emotionally and financially fraught process of buying and selling a home.

Our initial dream was to build the most trusted and vibrant home related marketplace and to solve a big problem in real estate, the lack of transparency and home shopping.

Turn on the lights.

The stream started with both of the zest omit are killer algorithm that put a price on every rooftop of in America, and Zillow Dot com, 1 marketplace, where everyone could search and find homes with data easily at their fingertips.

Something not possible prior to Zillow.

This transparency inconvenience became the accelerant for establishing Zillow brand in real estate and making it the most popular place to dream and shop with an average of 229 million monthly unique users coming to our mobile apps and web sites in queue too, including are great adopted sister brands Trulia and Streeteasy.

Zillow brand became synonymous with real estate empowerment, but the fundamental transaction continued to be painfully stuck in the fifties resisting the gravity of Digitization.

So our dream and ambition moved from the top of the consumer funneled on to the bottom of the funnels of the transaction itself.

We of course recognize that are huge brand in traffic as well as our DNA as software engineers. Many of US grew up at Microsoft in the nineties would advantage us relative to this large and daunting challenge.

So our expanded dream is to reengineer streamline the digitize the moving process or as you have heard me call him anytime Zillow 2.0.

We believe customers want speed simplicity integration and value fairly safe consumer devout desires on which to invest in my opinion.

To deliver on the stream our strategy has been to build an integrated set of real estate products and services, both owned and operated and with professional partners that can be mixed and matched to make it radically easier for all of the dreamers and shoppers until the to transact and moved to their next chapters.

We are executing nicely on this ambition ambitious growth strategy and progressing well towards each of the 3 to 5 year growth objectives that we communicated 2 and a half years ago, when we announced zillow of 2.0.

And our Imt's segment are stated 3 to 5 year objective was $2 billion in revenue up from $1.2 billion for 2018, and we are on track to deliver.

Additionally, our current run rate has already exceeded our original 3 to 5 year objective for Imt's segment annual EBITDA of $600 million and 30% margin.

And our home segment is performing well despite completely shutting down purchases in the early phases of the pandemic and building operations during the most rapid change in home prices ever recorded.

As I said above we are now back on track with our original objective to purchase 5000 homes per month and to generate annualized revenue of $20 billion within the original 3 to 5 year timeline.

Brazil of home loans were also on course to achieve our stated goal of 3000 mortgages originated per month within the original time frame we set.

Today, we are seeing more and more signals from our customers that validate our integration thesis and growth strategy.

Home shoppers and buyers who wants just thought of Zillow as a place to search and find are starting to understand and take advantage of the reality that we now offer so much more as.

As 1 example, we're building a program called Zyla 360 that enables our customers to sell the current home the Zillow offers by.

By their next time with the Premier agent and finance it was Zillow homelands the.

The customer then uses the law closing services to finalize the transaction and ultimately receives the discount for using the bundle package.

While we still have a long way to go on Scalings of the 360, we're seeing strong interest in higher clothes rates when offering packages of services to customers versus single Standalone services.

Looking forward, we see our ability to execute on programs like zillow through 60th competitively differentiated.

Due to the volume of visitors to our apps and sites on a daily basis, we are able to spread or low customer acquisition costs across these additional adjacent services, which allows us to pass along savings to our customers while generating returns for our shareholders.

As we broaden and integrate our services our business lines are beginning to merge in service of our end customers.

In an effort to pick of long term success measure of the considers this integration we have increasingly been focusing on total company gross profit dollars.

The context, and the last 12 months or total company gross profit was just over $1.9 billion growing 54% compared to the prior 12 month period.

Moving forward, we plan to focus on growth profit dollar growth is the key measure of success.

The first and foremost the metric is increasingly how we are measuring the business internally.

Instead of optimizing for gross profit dollars generated by 1 particular service we are increasingly find ourselves finding ourselves thinking about the total enterprise gross profit pool of it is produced when we offer multiple services to our customers. We think this creates the rite of incentives to run our business and is much more in line with how we want our end customers to think about what we offered to them.

Second of this metric levels, the playing field for comparability between our seemingly disparate businesses there are actually showing up to customers under 1 zillow branded umbrella.

Said another way gross profit enables us to simplify comparisons across the various segments, including Zillow offers where we report revenue based on the full sales price of the home.

This simplification allows us to measure our operating efficiency in a more holistic and understandable way as we ultimately strive to grow total company cash flows overtime.

The commitments.

In N Toni decided to accept an offer to sell their home the zillow.

Recognizing the ease that zillow brought to this experience they were intrigued when our team's told them they could buy financing closed their new home as of late.

The opportunity to a line the buying and selling process. So it could work on their time line was too good to pass up.

[noise], so we connected them to 1 of our awesome agent partners, who helped helped them find their dream home.

By this point financing with Zillow was a no brainer for the couple to put icing on the cake I found out last week that Tony was so impressed with the during his move that he subsequently applied for God offered and then accepted a role with our Zillow offers team as an estimator.

Wow.

To close as of significant zillow of shareholder I evaluate our opportunity in 3 ways.

Is our Tam large an untapped.

Are we in of strong position to capture that opportunity.

And.

Are we able to execute.

It is clear in my tune of half years back in the CEOC. The the answers to these 3 questions are all of resounding yes.

I'm really proud of the progress of the team has made but we do have miles to go before we sleep.

In our new home.

On a soft pillow above the kitchen with marble countertops and of doggie door to the backyard.

We truly appreciate your continued support confidence and investment I will now pass the microphone over to Allen.

Oh. Thank you were on mute Allen Oh, I'm off [laughter]. The thank you. Thank you rich zip.

Zillow group delivered another strong quarter reporting queue to consolidated revenue of 1.3 billion and EBITDA of 183 million both exceeding the high end of our outlook range.

While we accelerated investments into our business and Q2 is important to note. The total EBITDA of 183 million was up from 2 million in the same period 2 years ago.

We are at the point in our Zillow 2.0 journey, where it makes sense to evolve how we measure our success.

As our business becomes more integrated our focus is shifting towards growing our total gross profit pool. This will allow us to continue to invest in the innovation for our customers and partners and drive sustainable profitable growth for shareholders.

The getting this quarter and going forward. We are now presenting gross profit within our statement of operations. We have made adjustments to our prior period cost of revenue figures to reflect the calculation of gross profit in accordance with GAAP.

These adjustments or summarize the note to to our form 10-Q.

Gross profit for Q2 was $538 million of 92% year over year and was 1 billion for the first half of 2021 up 70 per cent year over year.

As we look forward. It is important to note that we will optimise for total gross profit and EBITDA versus individuals segment results as we execute to best serve our customers.

Moving to a segment results Q2, Imt's segment revenue was 476 million growing 70% year over year and 40 per cent on a 2 year stock basis.

Our Imt's segment continued to benefit from improved execution that drove hyatt that drove growth and higher internet connections and Premier agent continued demand for services on our other imt's or segment marketplaces as well as tailwinds in the housing market year over year.

IMT segment EBITDA was 218 million in 2.2 or 46 per cent of IMT segment revenue. The revenue outperformance and continued operating efficiency translated into more than 130 per cent year over year EBIT of growth in queue too when excluding the impact of our of better together discounts from the same period of the year of.

Go.

Wrote in Zillow offers continue to accelerate and Q2 and exceeded our expectations with 2086 home sold driving 777 million and home segment revenue we.

We made progress this quarter and improving our pricing models, including launching the neural decimate with sharpened our offers strength.

The narrows estimate puts more weight on attribute of homes and allows more granularity at the asset level, placing less emphasis on repeat home sales price comparisons. In addition, we continue to make progress building automation at the top of the final when providing offers the customers. These improvements drove rapid gains in conversion rates in queue.

2 when compared to Q1, resulting in record purchases more than catching up to our prepandemic pace. We purchase 3805 homes during the second order more than double what we purchased in Q1.

R Q2, Zillow offers you know the economics of 576 basis points before interest expense was above the plus or -200 basis point guard rails, we set for ourselves while working to scale of the business. The outside the outsized economic results there were 665 basis points higher than the <unk>.

222020 did benefit from the ongoing strong housing market, which we fully recognize is temporal of nature and largely contributed to the 312 basis points lower home acquisition costs of 87.1 per cent in queue too we.

We also note that the 353 basis point improvement from a year ago in renovation holding and selling costs were largely durable operational improvements clearly some portion of of the holding costs and of smaller portion of the renovation costs likely benefited from the strong housing market, but we also see opportunities for.

The continued operational improvements overtime.

Mortgages segment revenue increased 68 per cent year over year in queue to the $57 million in mortgages segment EBITDA was the loss of $6 million compared to the mid point of our outlook range of of loss of 7 million.

We made significant progress in our integrated origination platform during the quarter with Zillow offers contributing approximately 40 per cent of purchase originations, helping to drive 100 per cent sequential purchase growth in Q1, and 90 per cent purchase growth year over year.

With the increased purchase originations and the slowdown in refinance activity purchase originations now comprise 26 per cent of the total loan origination volume up from 10 per cent in Q1.

The purchase mix will bounce around from quarter to quarter based on the refinance market, but we are focused on growing our purchase origination platform. This is just 1 more example of how our services are becoming more integrated and complementary to 1 another following our success in launching Zillow closing services.

Turning to our outlook for the third quarter.

At a consolidated level, we expect revenue to be 2 billion at the mid point of our outlook and EBIT to be between 94 and $126 million.

In our Imt's segment, we expect 15% year over year revenue growth and 43 per cent growth over 2019, and 2.3 at the midpoint of our outlook range within the I M. T segment, we expect premiere agent revenue to be between 352 to 360 million up 19 per cent year over year and up 48 per.

Sent over 232019 at the midpoint of our outlook.

The progress, we have made and growing and improving our higher internet connections is allowing us to maintain our P. A growth rate on a 2 year stack basis, despite the impact of continuing low inventory and the housing market.

We expect Q3 I M T EBITDA margin to be 37 per cent at the midpoint of her outlook down sequentially from 46 per cent in queue too as.

As we discussed last quarter, we plan to accelerate investments and marketing staffing and technology in 2.3 to drive or 2.0 vision. This includes things like touring on.

Angeline immigration integration products, such as Zillow 360, expanding 3 D photos and floor plans, along with better integration between Premier agent and Zillow home loans. We expect these investment levels to be consistent in Q3 and Q4 when modeling. It is also good to keep in mind, the seasonality of typically low or 2.4.

[noise] revenue.

Thinking about full year 2021, it's important to remember that I M. T EBITDA exceeded our expectations for the first 2 quarters of the year.

We expect the incremental outperformance in the first half the flow through resulting in IMT EBIT of dollar growth outpacing revenue growth for the full year.

In Q3, we expect our home segment revenue to increase sequentially from Q2 to 1.45 billion at the midpoint of our outlook range. This step up and paced demonstrates our confidence in our ability to scale, resulting from the progress we have made in the strengthening our pricing models and automating the top of the final.

Evidence of our accelerated pace can be seen in our homes under contract, which was 1.2 billion at the end of Q2 up of 126% from 511 million at the end of Q1.

Okay of the securities.

As we look forward to the balance of the year. My priorities are focused on building processes and mechanisms to support rapid scaling of Zillow 2.0 products and services.

Prioritizing investments in sustainable gross profit growth opportunities across the company, improving our cost structure by increasing productivity and transaction services through operational discipline and with that operator will open the line for questions.

At this time I would like to remind everyone in order to ask a question. Please press Star then the number 1 on your telephone keypad, we will pause for just a moment to compile the roster.

And on our first question will come from Brent tale of Jaffray's. Please go ahead.

Good afternoon, Rich you had mentioned that you're on track to your for your 2019 original goal to head over the next 3 to 5 years could you just articulate the pathway of of what you need to do now take to the chief the full version of that goal.

And then I had a quick follow up.

Hey, Brian Thanks, Yeah, <unk> yeah. The Zillow offers is back on track, which is which is nice.

You know in terms of the kind of constraints to the plan going forward and then achieving the ultimate dream here I guess I classify them in 3 categories.

1 ourselves.

2 consumer awareness and 3 capital the the biggest 1 of the most important 1 constraint is ourselves and by that I'm, just saying it's execution like we're growing this thing as rapidly as we can and really quickly and and operationally complex way.

And we're tuning it simultaneously. So it is a it is a it is a challenge we we've got to focus on increasing automation, we've got to get better and better of pricing we have to reduce costs. All at the same time. So there is a executional constraint or challenge that I do I believe.

Leave and I'm confident we're up for but that's the biggest the consumer awareness 1 I talked about a little bit you know in my prepared remarks.

It's not insurmountable at all it is a relatively straightforward marketing challenge to have such a compelling consumer proposition.

You know so I think we're I think we're okay. There we will have to we will have to focus on increasing consumer awareness of it though but again, we have a big advantage with these hundreds of millions of people that come to Zillow looking adds estimates many of which are his estimate of offers now. So we have we're up to that challenge and then.

Capital of.

You heard Allen talk in a very legally scripted way due to S. E. C regulations about where we are in that offering right now, but where I'm really excited by the progress we are making on cheapening deepening and lengthening hour access to cash.

Capital So while it is a really important constraint is kind of the fuel for the ship.

We're looking very good on access you know on securing access to that fuel.

Uhm I know I'm getting long winded you asked it a bit of of kind of ultimate opportunity and Tam question I I confess to.

Being quite excited by how well Zillow offers is doing in search of hot seller's market.

Which has me for 1 kind of.

Probing at the at the perimeter of my kind of penetration and Tam expectations here.

And thinking about you know just how we don't know of course, but just how much of the market will end up moving towards a ibuying and Zillow offers solution I don't know, but I'm.

Comparatively more confident now than I was even a quarter of go so even a quarter ago. So it it feels good to me.

Tam is a good question, but it is the question for later, we're so underpenetrated right now you know it less than way less than 1% of home transactions that we can kind of begin to explore that in more detail later, just because it's it's such a really days anyway. Thanks for the question from.

Thank you.

The next question comes from Y'all on Josie of J M. P. Securities. Please go ahead.

Hey, Thanks for taking the question and enrich just wanted to say I really appreciate your podcast. This this quarter on how I built this and I wanted to ask a little bit more on the early on Zillow 2.0, and the launching of Zillow of 360 I know we're in the early stages and I think you said miles to go but we also set talked about 40 per cent of purchase originations resource Bye Zillow offers and so we're starting to see.

This integration you know happen in the real World and so maybe talk just about what needs to happen for all of these integrations, maybe the bigger picture from of value. We know the consumer value of profit just the bigger picture of the roadmap of how P. A integrates with offers it integrates with mortgages et cetera, and then since we're we're more focused on gross profit.

Would love to understand the financial benefits of call. It the bundling. Thank you okay.

Thanks, Thanks for the question on Yeah, and the Guy Ross thing was it was fun. It was it was a bit of of death March though I think of the interview went for like 4 hours and he clipped it down to an hour I always kind of exhausted by the end of the thing, but it was it was it was fun.

Okay. So yeah I mean.

Clearly Z O is going and going accelerating as you as you noted and you also noted the kind of interestingly so is everything else.

Alright, and it's not just the market that's doing that for US you know of P. A is cooking really nicely and there's plenty of room of Premier agent business rentals is growing nicely mortgages is going and Zillow closing services is going really nicely as of as well.

It just turns out you know what has not of surprised the Tibet, we made but it just turns out of that all of these businesses are interrelated because it really is they're all just part of 1 transaction you know I've I've come to think of them as different doors into the same room that room is.

I Wanna move.

Make it easier please.

You know so our ability to increasingly package integrate in an offer these mix-and-match of mix-and-match menu of services is clearly working you know the numbers the numbers tell the story there so that anecdotal.

The data point, we gave you that you just say the the 40% of purchase mortgages of <unk> originating with the Z O door.

You know is 1 of the kind of specifics were sharing the kind of give some.

Light of light on that we also have had some early success with our Zillow 360, which is the new package. You know that offers of discount that were that were playing around with and that's showing real promise the zillow closing services attaches going well.

Uhm. So we can look at it we can begin to look at these little bread crumbs of of it working but I think the best evidence is really staring us in the face and that is just simply looking at quantum gross profit.

You know $1.9 billion of trailing 12 months quantum gross profit that's big and it's growing quickly you know and it is that pool of gross profit that funds all of this other cool stuff that we're doing all of this R&D all of this marketing all of these new services that are in development for our customers and as we were able to to invest all of that.

Money in these things the you know the lovely scale of economy wheel begins to turn on it's turning nicely right now anyway. So it's that integration of the businesses that has driven us internally to look at this this overall gross profit dollars rather than by vertical business. We also want to be able to play with pricing as well without you know of.

That having internal competition and it's all just 1 transaction.

Uhm on of go forward basis, you asked what are we watching and I would say that.

You know we're focused on the normal typical transactional E Commerce Lake drivers, Okay that you experienced with your ecommerce companies very different from the old Zillow very similar to your ecommerce companies, how many transit how many transacting customers do we have.

How many transactions do we have how many services per transactions are there what is the profit per transaction, okay, and we have an eye on the overall customer of package profitability rather than optimizing for any of these individual 1 so that's 1 of the key reasons, we like it we liked the comparability too.

Uhm, our guidance ramp implies a ramp of guidance implies of ramping gross profit right, but you know I for 1 of them quite as you can hear them quite excited by the potential.

Growth of each of these variables that go into the gross profit equation. Each 1 of those drivers that I just laid out I see lots of opportunity for you know driving higher which will multiply the leverage we see the growth leverage we see and we now have organized the company of organizing our filings and segment reporting where we're getting.

Used around these new e-commerce could transactional metrics. So anyway had tons of interesting stuff ahead in my opinion.

Thanks, Rich very helpful.

The next question comes from Bad Eriksson of RBC capital markets. Please go ahead.

Hi, Thanks, So I guess the question for Allen Allen, you talked about the accelerating investment across the the I M T business I guess within that.

There's a lot of moving parts, but maybe just talk about how sustainable the I M. T margins are feeling certainly through the second half of the year and then maybe beyond and then.

Separately can you just give us any details I guess on how some of those investments are being allocated here in the second half of the year. Thanks.

Yeah, Hey, Brad Thanks for the question well I'll start you know.

Just to reiterate that.

You said 4 we believe the margins that we saw in the second half of 20 and continue into the first half of 21 Fry M T.

Are indicative of the inherent underline margins of a steady state business, but.

But we're still very early in our journey and we see opportunities to invest into growth.

Uhm, we participate only and a small percentage of transactions relative to our audience and the industry.

R Q3 outlook implies 37 per cent EBIT margin at the midpoint, which is down 875 basis points sequentially.

We expect our queue for investment levels to be consistent with 2.3 factoring in the queue for revenues do experience historically, a little weaker seasonality as compared to Q free, but but fairly consistent in the queue for I'd note that the 37 per cent margins are still up significantly over too.

Thousand 19th all of the your levels, which of 23.8 per cent and up from our 3 to 5 year objectives of 30 per cent.

So while we're increasing our investment levels in the second half of 21, we continue to generate leverage of cross the segment as we've made progress.

Even during the pandemic.

In terms of of areas of the investment or where we're thinking of of investing I called out some tangible examples of my prepared remarks.

The priorities, we have is to drive better customer experience.

Broader integrated product offerings and continued scalability through operational regular and automation across the businesses you know it gets back to Rich's point that the.

The consumers going to demand an e-commerce solution for the industry and we're well positioned to serve that.

Uhm, we do expect these investments delivered strong Roy the of gross profit growth and we believe it's prudent given our focus on the customer and driving transactions to make these investments. It's the right thing to do to continue to invest here.

Got it thanks.

The next question comes from Brian No lack of Morgan Stanley. Please go ahead.

Thanks for any of my questions guys Uhm wanted to sort of drill a little bit into the the P. A growth in the quarter. Yeah. There's a lot of the discussion around sort of the the macro the housing market and sort of of you know will of deceleration and transactions impact growth maybe talk to us about what you saw on growth and and price per <unk>.

Freshen or transaction growth of you mentioned earlier rich so what what are you seeing and sort of the underlying auction dynamics driving this growth and then what are you sort of incorporating in the guide from a transaction or a price per transaction perspective, just so we can sort of understand the the macro assumptions underlying.

Lying the the business right now.

Yeah, So maybe I'll start rich and you can follow on Okay Uhm.

Thanks for the question, Brian first of all day I I have been really impressed by our P. A T m's execution, while the macro over the last 12 months has provided some tailwind. This really is I think the story of execution in terms of our performance, we're continuing to grow the quantity and quality of the connections and we've said the.

On a few times. So R Q3 guide implies Ta revenue growth of 19 per cent year over year at the midpoint.

But 48 per cent growth over the 2 year stack compared to Q3.19.

Uhm no we'd have demonstrated our ability to improve and grow our higher intent connections by enhancing how our customers shop at Zillow with a particular focus on touring.

We believe this is the next opportunity and it's part of our enlist quest to improve the integrity of our final.

And improve customer experience for our consumer customers looking to move and buy a house.

When a customer raises their hand with uhm to work with 1 of our partner agents. We are constantly refining how quickly we introduced into that customer that customer to our agent and and that makes all of the difference in such a competitive buying environment. So again, what I'd say is you know.

A lot of the factors that we look to that are driving growth our our ability to take our customers that are in the final based on the actions. They take take the high intent customers provide them on a great performing agent.

Quickly to help them get to the home that they want to buy.

And again, we're continuing to uhm introduce our customers to higher performing agents as well as we go through our agent base, who share. The same goal was us which is helping our mutual customer either next phone.

So lastly, we continue to see opportunities to invest in innovation and technology, we're investing because we think there's a really good return here in a big opportunity. While we have a large audience. We're still a very small percentage of the transaction share rich I don't know if you would add anything well.

Hey, Brian <unk>, Yeah, I mean, some recent macro stuff in the industry like skinny inventory for.

You know of homes, coupled with the Super rapid.

Sales cycles, you know and and skinny rental inventory as well.

No is obviously factoring into our business in some way and factoring into our our guidance uhm.

You know I think we're we're lucky, though and that the really big trend that sits above all of the the throne to rule. The mall for US here is this kind of big shift of of off line to online. That's what that's that's the big lover kind of the old way the new way analog the digital and we're we're really of great beneficiary there as the digital leader we.

See that as the dominant trend and there are some you know kind of smaller shorter wavelength cyclical things going on in the in the industry right. Now that's certainly affect things I don't want to ignore them, but are a little less important that said even on those cycles that we see the the you know big Tailwinds being.

Demographics from millennials low interest rates and the great Reshuffling, you know as as good durable positive housing market macro wins on the P. A guide in particular that you're asking I'll also say that yes. The P a transaction.

And revenue guide is important but it is.

It is just 1 of many transactions that are happening now and happening in an increasingly integrated way so I'd be remiss without pointing out that looking at kind of transactions. Overall is the is is what tells the big <unk> I think the big story and they're really good news for us going on.

Forward.

Great. Thank you both.

Thanks, Brian.

The next question comes from Spencer can of Evercore ISI. Please go ahead.

Spencer you might be on mute.

Is that the <unk> can you hear me.

Yes, we can.

Yeah, It's Mark Mahaney, sorry, I think we got our coats a mark fixed up sorry about that rich a I like the the gross profit maximization optimization reporting strategy eat those whatever it is I'm not sure about quantum gross profit, but gross profit I I get so I think that's good I like that and then the 1 question I had it to do.

Of what these the.

The guy the Guy the guardrail, so getting back to that plus plus or -200 bps that you've been saying this for a bit in the last couple of quarters, you've been well above that what's the what's the most logical way for which of those expense items, just gonna show a little bit of deleveraging get you back down to that negative 200 deposit of 200. Thanks.

Yeah Yeah.

Yeah, I can start rich.

So so I think if you look at the improvement I called out of my remarks, the 312 basis points that we've seen versus this time last year of 2.2 of 20 and acquisition costs, that's going to be the area, where we see most of the decline as we move back into our guardrails.

Uhm.

We'll likely see if the sales velocity resale velocity goes down a little will likely see a slight uptick in holding costs, but the big change is just going to be this right now we've got a 13 per cent spread between what we sell the house for and what we acquired at 4 and again as of market maker, that's spread as being impacted by.

<unk> H P. A and we expect that to go down over time, it would be more temple.

Yeah, It's just a price price is moving really quickly mark and it's hard to it's hard for us to.

To to keep up with it on the quantum gross profit. Let me argue though just make the argument I did but maybe I wasn't clear you know as as normal.

It's just a big pool in that big pool of enables us to invest a ton more and tech.

And and R&D, then competitor so I mean, it's kind of of way of us, making sure that we can internally compare things on the level playing field, but it enables you all were looking at gross profit already honestly. So you know that's maybe that's maybe not the way it is not not big news to you.

But we're beginning to it we have begun to really focus on on internally anyway, Yeah. No no. It makes a lot of sense of thanks.

Range [laughter] [laughter].

The next question comes from Ryan the Kevin right of Zellman and Associates. Please go ahead.

Hey, guys. Congrats on the results and also on the securitization. Thank you for taking my questions Uhm following up a bit on on Mark's question, just now around the guardrail of guardrails, and maybe asking a bit differently.

Where where are the the the service fees today, and if you can't say directly maybe.

Directionally Hell of it has changed and I think implied in your commentary about testing the price elasticity and seeing the conversion on the improved all of her strength effectively implies a better better feed of the customer.

I guess part 2 of this question is ultimately if we move to the housing market that home price is growing at of more normal pace as opposed to the rapid gains we've seen what what do you envision is that is that consumer fee. You know maybe relative to the competitive set of of traditional commission rates cause I think ultimately that's what investors are.

Somewhat grappling with on the margin profile of of Ibuying is ultimately you know where the margin shakes out in the more normalised environment. So so we'd love to hear of your thoughts on kind of the consumer fee piece of things you know, where that's where the has trended and ultimately where that may shake out in the more normal environment. Thank you very much.

You want to start on I can yeah, yeah. So I guess I would describe it 1 thanks for the question.

Is we've provided you know kind of long at scale type profitability. We think we can get on a return on home soil before interest of around 400 of 500 basis points, but but again given the the penetration of the low penetration numbers of Ibuying right now and the opportunity.

The scale the guardrails that we've set of the plus or -200 basis points. We don't think about it I guess, an individual components of fevers is value uhm.

We kind of look at it what's the overall transaction costs of the customer uhm.

To incent them and that we can still turn it into a profitable business. So I think the fees likely to continue the the vacillate and change as we test pricing and elasticity. What we're focused on is trying to get the most accurate pricing to be fair to the customer and to continue to reduce our cost structure with the benefits of scale automation and per.

Rodak Timothy So I guess the answer your question, we still believe you know on a standalone basis the.

The 400 of 500 basis points at scale is likely of number that we would see.

As the market maker uhm, but it'll come in a lot of different forms and then as rich mentioned you know what will also be there is as we have our customers come through various funnels on zillow their ability are on their willingness as we introduce multiple services to them to take those multiple service.

Allows us to provide even sharper pricing across those services because we're we're we're not having to go out and use tack to acquire each customer free service Rich R. Brad would you add anything.

I thought I thought that was pretty good Allen really good [laughter] you know we think if we can get you know we'll play with all of these different levers that we have Ryan you know.

With the home price of appreciation appreciation net price et cetera will play with it but ultimately we were trying to do is is get people in the amount of dollars in their pocket that they would have gotten approximately what they would have gotten via any other way that they they would've sold that's that's the goal and we think doing of that off.

Bring a fair price, it's a terrific consumer proposition and the great business for us.

That's that's really helpful. Thank you. Thank you both in 1 follow up question on the on the cost side of the idea of your model. So the the selling cost as of per cent of revenue of I think this is the third quarter in a row, maybe maybe longer that that's been 3.8 per cent of revenue and I think 1 of the assumptions has been the that using in house agents on the ice.

Hi, or transactions would over time move that selling cost lower effectively more leverage and the model on that so is that still of fair expectation going forward and maybe just the big picture, where where are you in the process of of transitioning to the in-house agents.

Thank you.

Yeah. So so I think the answer to your first question is we we continue to see opportunity to reduce the 3.8 per cent.

As as we build Zillow brokerage services as well as continue to partner with our agents. We are still very early in the number of of markets that we have zillow broken services in and so you know we are we are focused on scaling the business as well as zillow brokerage services, but it's still relatively early.

As we roll that out.

Got it thank you very much.

This completes the a lot of time for questions I will now turn the call back over the rich Barton for any closing remarks.

Okay, well thanks, everybody. Thanks for your time today I know it's of busy earnings day, and I'm on the East coast. So I know, it's approaching cocktail hour as well. We appreciate your continued support and confidence on I look forward. We all look forward to talking with you again really soon have a nice night.

The <unk>. This concludes today's conference call you may now disconnect.