Q2 2021 Zillow Group Inc Earnings Call
And then the third 1.
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Yes.
Yes.
Of course.
Yes.
Okay.
Thank you.
Of course.
Good day.
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Yeah.
Got it.
Excuse me encourage you to consider the risk factors 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, except as required by law. This call is being broadcast on the Internet and is accessible on our Investor Relations website for recording of the call will be available later today during the call we will discuss the gap and non-GAAP measures, including adjust.
Good EBITDA, which we referred to as EBITDA, we encourage you to read our shareholder letter and our earnings release, which can be found on on an 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.
[noise] Telecom segment is our Imt's segment will now open the call with 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 zilla with our consolidated business as well as each segment meeting of beating our outlook fringes with the.
A gun to show of good execution on Zillow to point out.
Our 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 topline some quarterly highlights.
On the right side Premier agent revenue group, 82% year over year, and 50% compared to 2 years ago.
2 our 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 last quarter, we recognize that our Zillow offers the unit economics are above our plus or -200 basis point guardrails as we build and scale of the business of trend. The continued in Q2, despite our efforts.
We expect these unit economic trends to normalize over time, as we iterate continue to learn and as 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 a market maker across housing cycles.
We expect the homes, we are scheduled to purchase will trend towards our plus or -200 basis point target over the course of the second half of the year.
Additionally earlier this week on Zillow offer subsidiary launched and priced the securitized debt offering which is expected to close next week.
Alan will provide more details on this later in the call.
As of the Zillow offers business continues to accelerate we are seeing lift to our zillow home loans with approximately 40% of purchase originations in Q2 sourced from Zillow offers.
In total our Q2 purchase originations grew by 90% year over year as we continue to build of mortgage factory that serves 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 of total company revenue of $1.3 billion up 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 Q2 up 92% year over year and 79% from the same period 2 years ago.
Now onto 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 <unk>.
Pandemic has jolting re and dramatically unbundled work from location for many creating a new flexibility by enabling people to optimize for work and location separately and simultaneously.
Spencer confusing emotionally and financially thought process of buying and selling at home.
Our initial dream was to build the most trusted environment home related marketplace and the solve a big problem in real estate the lack of transparency in home shopping.
Turn on the lights.
The Street started with both of his estimate are killer algorithm that put a price of on every rooftop 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 the Villa.
This transparency inconvenience became the accelerant for establishing the those 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 on 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 for 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 of relative to this large and daunting challenge.
So our expanded dream is to reengineer streamline and digitize the moving process or you heard me call. It many times of allergic to point out the.
We believe customers want speed simplicity integration and value fairly safe consumer device desires in 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. The can be mixed and matched to make it radically easier for all of the dreamers and shoppers on delay to transact and move to the next chapters.
We are executing nicely on the sandwich 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 to point out.
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 objected for IMT segment annual EBITDA of $600 million and 30% margin.
And our home segment is performing well display completely shutting down purchases in the early phases of the pandemic.
And billing 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 the generate annualized revenue of $20 billion within the original 3 to 5 year time on.
Brazil of home loans were also on of 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 to start 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 1 example, we're building the program called Zillow 360 that enables our customers to sell the current on the Zillow offers.
By their next time with the Premier agent and finance it was zillow homeland the.
The customer then using Zillow closing services to finalize the transaction and ultimately received the discount for using the bundled package.
While we still have a long way to go on scaling until the 360, we're seeing strong interest in higher clothes rates when offering packages of the services to customers versus single Standalone services.
Looking forward, we see our ability to execute on programs legs of of the 360 of competitively differentiated.
Due to the volume of visitors to our absence 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 of beginning to emerge in service of our customers.
In an effort to pick of long term success measure of the considered this integration we have increasingly been focusing on total company gross profit dollars per.
The context in 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 the streets the right incentives to run our business and is much more in line with how we want our customers to think about what we offer to them.
Second of this metric levels, the playing field for comparability between our seemingly disparate businesses there are actually showing up the 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.
The 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 over time.
From an external perspective are gross profit measure of reminds us that we have built the differentiated platform for growth..1 that is tackling all parts of the moving process with so much room to grow across all of our services and.
And last as we scan across the competitive said, we look at our sizeable gross profit pool as the competitive advantage. The further invest in innovation with the end goal of building terrific customer experiences and driving sustainable long term profitable growth.
Yeah.
Wow.
To close as the significant zillow shareholder I evaluate our opportunity in 3 ways.
Is our Tam large and untapped.
Are we in a strong position to capture that opportunity.
And.
Are we able to execute.
It is clear in my 2 and a half years back in the CEOC debt. The answers to these 3 questions are all of a 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.
On a soft pillow above the kitchen with marble counter tops in the doggy doors of the backyard.
We truly appreciate your continued support confidence and investments I will now pass the microphone over to Alan.
Thank you Ron you Alan Oh I'm on.
[laughter] the thank you thank you rich.
Bill of group delivered another strong quarter reported Q2 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 in 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 <unk> 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 innovation for our customers and partners and drive sustainable profitable growth for shareholders.
Beginning this quarter and going forward, we are now presenting growth 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.
Driving $777 million and home segment revenue.
We made progress this quarter and improving our pricing models, including launching the neuro estimate, which sharpened our offer strength.
The narrows estimate puts more weight on attributes 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 funnel when providing offers to customers. These improvements drove rapid gains in conversion rates in Q.
2 when compared to Q1, resulting in record purchases more than catching up to our pre pandemic pace. We purchased 3805 homes during the second quarter more than double what we purchased in Q1.
Our Q2 Zillow offers unit economics of 576 basis points before interest expense was above the plus or -200 basis point guardrails, we set for ourselves while working to scale the business.
On the outside the outsized unit economic results that were 665 basis points higher than Q2.2020.
Did benefit from the ongoing strong housing market, which we fully recognize the temporal in nature and largely contributed to the 312 basis points lower home acquisition costs of 87, 1% in Q2.
We also note that the 353 basis point improvement from a year ago, and renovation holding and selling costs were largely durable operational improvements.
Clearly some portion of the holding costs and a smaller portion of the renovation costs likely benefited from the strong housing market, but we also see opportunities for continued operational improvements overtime.
Mortgages segment revenue increased 68% year over year in Q2 to $57 million in mortgages segment EBITDA was the loss of $6 million compared to the midpoint 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% of purchase originations, helping to drive 100% sequential purchase growth in Q1, and 90% purchase growth year over year.
With the increased purchase originations and the slowdown in refinance activity purchase originations now comprised 26% of the total loan origination volume up from 10% 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.
And the consolidated level, we expect revenue to be $2 billion at the midpoint of our outlook and EBITDA to be between 94 and $126 million.
On our IMT segment, we expect 15% year over year revenue growth and 43% growth over 2019 in Q3 at the midpoint of our outlook range within the IMT segment, we expect premier agent revenue to be between $352 million to $360 million up 19% year over year and up 48 <unk>.
Sent over Q3.2019 at the midpoint of our outlook.
We expect our homes segment revenue to increase sequentially from Q2, the 1.4 of $5 billion at the midpoint of our outlook range. This step up in pace demonstrates our confidence in our ability to scale, resulting from the progress we have made in strengthening our pricing models and automating the top of the funnel.
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.
I will reiterate that our goal here is to become a true market nature as we think about unit economics on a go forward basis, we would expect to see unit economics trend towards our stated goal of plus or -200 basis points before interest expense over the course of the second half of the year.
Please also note that this quarter, we provided a wider forecast range of our homes segment, which incorporates a range in retail velocity that we think is appropriate given we are finding market pricing levels and of protein the flows of slower seasonal period of the year.
We expect mortgages segment revenue to be between $55 million to $62 million in Q3, which is roughly flat from Q2.
Our Q3 outlook reflects slower industry refinance activity.
<unk> gain on sales spreads and continued growth in purchase originations.
As the result of flat revenue and continued investments to grow mortgage originations, we expect mortgages segment EBITDA to be between the loss of $13 million and $6 million.
We ended the quarter with $4.6 billion in cash and investments, which puts us in a strong position to fund our vision for Zillow and make strategic long term investments both organically and Inorganically.
As a reminder, we have of $500 million commitment to acquire showing time as we continue to cooperate with federal regulators to work diligently towards closing the pending acquisition.
Earlier this week, a zillow offer of subsidiary launched and priced the securitized debt offering which is expected to close on or around August 11th the company anticipates growth proceeds of approximately $450 million from the author of the.
The Securities will have a 30 month term and the 24 month reinvestment period, and a weighted average interest rate of 243%, which is lower than the rate on our existing credit facilities.
Similar to our existing debt financing. This is a non recourse to Zillow group subject to limited exceptions proceeds of the offering will be used to finance the growth of Zillow offers business the securities Werent registered and nothing on the call should be interpreted as an offer 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 <unk> 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, we'll open the line for questions.
At this time I would like to remind everyone in order to ask the question. Please press Star then the number 1 on your telephone keypad, we will pause for just the moment to compile the roster.
And all of our first question will come from Brent Thill of Jefferies. Please go ahead.
Good afternoon, Rich you mentioned that Youre on track for.
2019 original goal the head over the next 3 to 5 years could.
Could you just articulate the pathway of what you need to do now.
The achieved the full vision of that goal.
Then I had a quick follow up.
Hey, Brent.
Thanks, Yes, yes. The Zillow offers is back on track.
Which is which is nice.
In terms of the kind of constraints to the plan going forward.
And then achieving the ultimate dream year.
I guess I would classify them in 3 categories.
1 ourselves.
2 consumer awareness and 3 capital the biggest 1 and most important 1 constraint is ourselves and by that I am.
Just saying it's execution like we're growing this thing as rapidly as we can in a really quickly in an operationally complex way and we're tuning it simultaneously. So it is a it is a.
It is a challenge we've got to focus on increasing automation, we've got to get better and better of pricing.
We have to reduce costs all of the same time. So there is a.
Execution of constraint of our challenge that I do I believe and I'm confident we're up for but that's the biggest the consumer awareness when I talked about a little bit.
In my prepared remarks.
<unk>.
It is not insurmountable at all it is a relatively straightforward marketing.
Challenge to have such a compelling consumer proposition.
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 the.
These hundreds of millions of people that come to Zillow looking at the estimates many of which are as estimate offers now.
So we have a we're up to that challenge on on capital.
You heard Alan talk in a very legally scripted way do too.
The SEC regulations about where we are on that offering right now, but we're really excited by the progress we are making on cheapening deepening and lengthening our access to capital. So while it is a really important the constraint is kind of the fuel for the ship.
We're looking very good on access on securing access to that fuel.
And on getting long winded you asked it.
A bit of of kind of ultimate opportunity and Tam question I confess to.
Being quite excited by how well Zillow offers is doing in such a hot seller's market.
Which has me for 1 ton of.
Probing at the net the perimeter of my kind of penetration of <unk> expectations here.
On.
And thinking about.
We don't know of course, but just how much of the market will end up.
Moving towards.
The buying of Zillow offers solution I don't know, but im.
Comparatively more confident now than I was even a quarter of go so even a quarter ago. So it feels good to me.
Tam is a good question, but it is the question for later, we're so underpenetrated right now.
Less of them way less than 1% of home transactions that we can kind of begin to explore that in more detail later, just because it's such a really does anyway. Thanks for the questions on.
Thank you.
The next question comes from the Ron Josey of JMP Securities. Please go ahead.
Great. Thanks for taking the question and rich just wanted to say I really appreciate your podcast of this quarter on how I built this and I wanted to ask a little bit more on the early on Zillow, 2 <unk> and the launching of Zillow. The 360 day nowhere in the early stages and I think you said miles to go but we also talked about 40% of purchase originations are sourced by Zillow offers and so we're starting to see.
This integration happened on the real World and so maybe talk just about what needs to happen for all of these integrations, maybe the bigger picture from a value can we know the consumer value prop, but just the bigger picture of the roadmap of how.
<unk> integrates with offers that integrates with mortgages et cetera, and then since 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 Ron Yes on the garage thing was there was fine. It was there was a bit of of death March though I think the interview went for like 4 hours and equipped it down to an hour.
The kind of exhausted by the end of the thing, but it was fun.
Okay. So yes, I mean.
Clearly <unk> is going.
And going accelerating as you as you noted and you also noted that kind of interestingly so as everything else.
Alright and.
It's not just the market that's doing that.
For us.
The is cooking really nicely and has plenty of room of Premier agent business rentals is growing nicely mortgages is going and Zillow closing services is growing really nicely.
Wow.
It just turns out.
It's not a surprise at the debt we made but it just turns out debt all of these businesses are interrelated because it really is they're all just part of 1 transaction.
I've come to think of them as different doors into the same room.
That room is on.
I want to move.
Make it easier please.
So our ability to increasingly package integrate and offer these mix-and-match on mix and match menu of services is clearly working.
On the numbers the numbers tell the story there so that anecdotal.
Data point, we gave you that you just cited the 40% of purchase mortgages of originating with the zero door.
Is 1 of the kind of.
On specifics, we're sharing the kind of give some light on that we also have had some early success with our zillow. The 360, which is the new package that offers the discount that we're that we're playing around with the not showing real promise.
Zillow closing services attach is going well.
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.
$1.9 billion of trailing 12 months quantum gross profit, that's big and it's growing quickly.
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 are able to invest all of that money in these things the debt.
The lovely scale economy will begin to turn on its 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 without having internal competition. That's all just 1 transaction.
On a go forward basis, you asked what are we watching it and I would say that.
We're focused on the normal typical transactional e-commerce like drivers, Okay that your experience with your ecommerce companies very different from the old Zillow very similar to your ecommerce companies, how many trends 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.
Hey.
And we have an eye on the overall customer of package profitability rather than optimizing for any of these individual ones. So that's 1 of the key reasons, we like it we like the comparability too.
Our guidance ramp implies the ramp our guidance implies the ramp in gross profit right.
But 5 for 1 of them quite as you can hear I'm quite excited by the potential.
The 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.
Driving higher which will multiply the leverage we see the growth leverage we see and we now have organized the company, we're organizing our filings and segment reporting where we're getting organized around these new E. Commerce transactional metrics. So anyway had tons of interesting stuff ahead in my opinion.
Thanks, so much very helpful.
The next question comes from Brad Erickson of RBC capital markets. Please go ahead.
Hi, Thanks, So I guess the question for Alan Alan you talked about the accelerating investment across the IMT business I guess within that.
Theres a lot of moving parts, but maybe just talk about how sustainable the IMT margins are feeling certainly through the second half of the year on then maybe beyond the 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.
Yeah, Hey, Brian Thanks for the question.
Well I'll start.
Just to reiterate debt.
We said before we believe the margins that we saw in the second half of 'twenty and continuing into the first half of 'twenty 1 for IMT.
Are indicative of the.
The inherent underlying margins are steady state business.
But we're still very early in our journey.
And we see opportunities to invest into growth.
We participate only in a small percentage of transactions relative to our audience and the industry.
Yeah.
Our Q3 outlook implies 37% EBITDA margin at the midpoint, which is down 875 basis points sequentially.
We expect our Q4 investment levels to be consistent with Q3 factor.
Factoring in the Q4 revenues to experience historically, a little weaker seasonality as compared to Q3.
But fairly consistent in the Q4.
I would note that the 37% margin there is still up significantly over 2019 for the year levels, which were 23, 8%.
And up from our 3 to 5 year objectives of 30%.
So while we're increasing our investment levels in the second half of 'twenty..1 we continue to generate leverage across the segment as we've made progress.
Even during the pandemic.
In terms of areas of investment are aware, we're thinking of of investing I called out some tangible examples in my prepared remarks.
The priority, we have is to drive better customer experience.
Broader integrated product offerings, and continued scalability through operational rigor and automation across the businesses.
It gets back to Rich's point.
The consumer is going to demand an e-commerce solution for the industry and we are well positioned to serve that.
We do expect these investments to deliver strong ROI via gross profit growth and we believe it is prudent given our focus on the customer and driving transactions to make these investments it's the <unk>.
Right thing to do to continue to invest here.
Got it thanks.
The next question comes from Brian Nowak of Morgan Stanley. Please go ahead.
Thanks for taking my questions guys.
I wanted to sort of drill a little bit into the PVA growth.
In the quarter, there's a lot of discussion around sort of the the macro housing market and certainly that will of deceleration in transactions impact growth maybe talk to us about what you saw on growth in price per impression or transaction growth. You mentioned earlier rich. So what are you seeing in sort of the underlying auction.
Dynamics driving the growth and then what are your sort of incorporating in the guide from a transaction or a price per transaction perspective, just so we can sort of understand the macro assumptions underlying the business right now.
Yeah, So maybe I'll start rich and you can follow on okay.
Thanks for the question Brian.
First I'll say I've been really impressed by our team'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.
We've said that a few times. So our Q3 guide implies revenue growth of 19% year over year at the midpoint.
But 48% growth over the 2 year stack compared to Q3 dollars 19.
We have demonstrated our ability to improve and grow our higher intent connections by enhancing how our customer shops zone with a particular focus on Turing.
We believe this is the next opportunity and it's part of our enlist quest to improve the integrity of our funnel.
And improve customer.
Customer experience for our consumer customers looking to move and buy a house.
On the customer raises their hand.
On 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 that makes all of the difference in such a competitive buying environment. So again, what I'd say is.
A lot of the factors that we look to that are driving growth our ability to take our customers that are in the funnel.
Based on the actions they take take the high intent customers provide them on the great performing agents.
Quickly to help them get to the home that they want to buy.
And again, we're continuing to.
Introduce our customers to higher performing agents as well.
As we go through our agent base, who share the same goal as us which is helping our mutual customer either next zone.
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 and a big opportunity. While we have of large audience was still a very small percentage of the transaction share rich I don't know if you would add anything.
Hey, Brian Yes, I mean, so recent macro stuff in the industry like skinny inventory for.
Of homes, coupled with the Super rapid.
Sales cycles.
And skinny rental inventory as well.
Is obviously factoring into our business in some way and factoring into our our guidance.
I think we're lucky though in that the really big trend that sits above all of the throne rule of them. All for US here is this kind of big shift of of offline to online. That's what's that's the big lever kind of the old way the new way in analog to digital and where we're really a great beneficiary there.
As the digital leader, we see that as the dominant trend and there are some.
Kind of.
Smaller shorter wavelength cyclical things going on in the in the industry right now that 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 <unk>.
Big tailwind as being demographics from millennials low interest rates and the great reshuffling.
As as good durable positive housing market macro.
Wins on the P. A guide and particularly the Youre asking I'll also say that yes, the PAA transaction and revenue guide is important but it is.
It is just 1 of many transactions that are happening now in happening in an increasingly.
The integrated way, so I'd be remiss without pointing out that looking at kind of transactions. Overall is the is what tells the big.
The Big story on the really good news.
For us going 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 the new.
Hello can you hear me.
Yes, we can.
It's Mark Mahaney, sorry, I think we got our Cotai mark fixed up sorry about that rich.
I like the the gross profit maximization optimization.
Reporting strategy ethos, whatever it is I'm not sure about quantum gross profit, but gross profit again, so I think thats. Good I like that and then the 1 question I had had to do with the.
The guy the guy of the guardrails of getting back to that plus plus or -200 bps that you have 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 I'm going to show a little bit of deleverage and get you back down to that negative 200 deposit of 200.
Yes, yes.
Yes, I can start rich.
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 Q2 of 'twenty and acquisition costs, that's going to be the area, where we see most of the decline as we move back into our guardrails.
<unk>.
On.
We'll likely see if the sales velocity retail velocity goes down a little we will likely see a slight uptick in holding.
The costs, but the big change is just going to be this right now we've got a 13% spread between what we sell the house for and what we acquired it for and again as the market maker that spread has been impacted by HPA.
And we expect that to go down over time and be more temporal.
Yes, it's just the price prices moving really quickly mark and it's hard to it's hard for us to keep up with it.
On the quantum of gross profit, let me argue though just make the argument I did but maybe I wasn't clear.
As normal.
It's just the big pool and that big pool of enables us to invest a ton more intact.
And the R&D than the competitor. So I mean, it's kind of a 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 that's.
That's maybe that's maybe not the way it is not not big news to you.
But we're beginning to we have begun to really focus on on internally.
Yes, no no. It makes a lot of sensors the expense.
Yeah.
The next question comes from Ryan Mchenry of Zelman <unk> Associates. Please go ahead.
Hey, guys. Congrats on the results and also on the securitization and thank you for taking my questions.
Going up a bit on marks question, just now around the guardrail to guardrail, and maybe asking a bit differently.
Where where are the the service fee is today and if you can't say directly maybe directionally how of those changed and I think implied in your commentary about testing the price elasticity and seeing the conversion on the improved off of strength effectively implies a better better fees of the customer.
I guess part 2 of this question is ultimately.
We moved 2 of housing market debt home, Chris is growing at a more normal pace as opposed to the wrath of gains we've seen.
What do you envision is that as that consumer fee.
Maybe relative to the competitive set of of traditional commission rates because I think ultimately that's what investors are somewhat grappling with on the margin profile of of buying is ultimately where the margin shakes out in a more normalized environment. So I would love to hear your thoughts on kind of the consumer fee piece of things, where that's where that has <unk>.
Trended and ultimately where that may shake out in the more normal environment. Thank you very much.
Do you want to start on.
Can yeah.
So I guess, how I would describe it 1 thanks for the question.
Is we've provided.
Kind of long at scale type profitability, we think we can get on a return on homes sold before interest of around 400 to 500 basis points, but again given the.
The penetration of the low penetration numbers of eye buying right now and the opportunity to scale the.
The guardrails that we set of the plus or -200 basis points.
We don't think about it I guess in individual components of fee versus value.
We kind of look at and what's the overall.
The transaction costs of the customer.
<unk>.
To incent them and that we can still turn into a profitable business. So I think the fees likely to continue the the vacillate and change as we test pricing 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 <unk>.
Productivity. So I guess the answer your question, we still believe.
On a standalone basis.
The 400 of 500 basis point that scale is likely a number that we would see.
As a market maker.
But it will comment a lot of different forms and then as rich mentioned.
We will also be there is as we have our customers come through various funnels on.
On Zillow.
Their ability or their willingness as we introduced multiple services to them to take those multiple services allows us to provide even sharper pricing across those services.
Because we're not having to go out and use cash to acquire each customer for each service.
Rich or Brad would you add anything.
I thought that was pretty good.
Alan really good.
We think if we can get will play with all of these different levers that we have Ryan.
With the home price depreciation appreciation net price et cetera, we'll play with it but ultimately we're trying to do is is get people an amount of dollars in their pocket that they would have gone from approximately what they would have gotten via any other way.
They would have sold that's that's the goal and we think doing of that offering of fair price, it's a terrific consumer proposition and the great business for us.
That's really helpful. Thank you. Thank you both on and 1 follow up question on the on the cost side of.
The <unk> model, so the selling cost as a percent of revenue I think this is the third quarter in a row, maybe longer that's been 3.8 per cent of revenue and I think 1 of the assumptions have been net debt using in house agents on the idea of transactions with over time, moving at selling cost lower effectively the more leverage in the model on that.
So is that still a fair expectation going forward and maybe just big picture of where are you in the process of of transitioning to the in house agents.
<unk>.
Yeah. So I think the answer to your first question, we continue to see opportunity to reduce the 3.8%.
As we build zillow brokerage services as well as continue to partner with our agents.
We are still very early in the number of markets that we have no of brokerage services in.
And so we are we are focused on scaling the business as well as zillow brokerage services, but it's still relatively early.
We roll that out.
Got it thank you very much.
This completes the allotted time for questions I will now turn the call back over to rich Barton for any closing remarks.
Okay, well thanks, everybody. Thanks for your time today I know, it's a busy earnings day.
And among the east coast, So I know its approach and cocktail hour as well.
We appreciate your continued support and confidence and I look forward. We all look forward to talking with you again really same kind of a nice day.
This concludes today's conference call you may now disconnect.