Q3 2021 Zillow Group Inc Earnings Call
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, a recording of the call will be available later today during.
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 earnings release, which can be found on our investor Relations website as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures.
In addition, please note we will refer to our Internet media and technology segment as our IMT segment.
We'll now open the call with remarks, followed by live Q&A and with that I'll turn the call over to rich.
Thanks, Brad good afternoon.
Everyone.
We appreciate you joining us today.
This afternoon, we announced financial results for the third quarter, and most notably our decision to wind down our Zillow offers operations, which will unfortunately involve a reduction in our workforce of approximately 25% over the next few quarters.
Decision was not taken lightly, especially considering the hard work and commitment from the Zillow offers team.
But ultimately we determine that further scaling up zillow offers is too risky.
Two volatile too volatile to our earnings and operations.
Too low of a return on equity opportunity in too narrow in its ability to serve our customers.
A tough but necessary determination.
Before getting into the results for the quarter I'd like to explain our logic.
As you've heard numerous times for me on these calls our vision is to help people unlock life's next chapter.
We are uniquely well positioned to deliver on this vision given our audience, our brand and are profitable and growing core business.
And service of this vision, we are innovating on products and services that allow us to evolve from a search and find company to one that is directly helping our customers transact and move we call. This zillow two <unk> and its firmly remains our vision today.
We've made many investments towards <unk> to point out one of the biggest being Zillow offers is a way to provide a compelling product offering for home sellers.
When we decided to take a big swing on Zillow offers three and a half years ago. Our aim was to become a market maker.
Not a market risk taker and this was underpinned by the need to forecast the price of homes accurately three months to six months into the future.
We use historical data and countless stimulation test. This belief, we said unit economics targets that required us to stay within plus or minus 200 basis points and breakeven holding ourselves accountable to these levels publicly with you all.
Yes and.
In our short 10 year operating Zillow offers we've experienced a series of extraordinary events.
A global pandemic attempt.
Temporary freezing of the housing market and then a supply demand imbalance that led to a rise in home prices at a rate that was without precedent.
We have been unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible with Zillow offers unit economics on a quarterly basis swinging from plus 576 basis points in Q2, two unexpected minus 500 to minus 700 basis points in Q4.
Put simply our observed error rate has been far more volatile than we ever expected possible and makes us look far more like a leveraged housing trader then the market maker, we set out to be.
We could blame this outsized volatility.
On <unk> Black Swan events tweak our models based on what we've learned and press on.
But based on our experience to date, it would be naive to assume unpredictable price forecasting and disruption events will not happen in the future.
Because of the price forecasting volatility. We've also had to reconsider what the business would look like at a larger scale.
We have offered sellers a fair market price from the start but we've also been clear that the business only becomes consistently profitable at scale.
With the price forecasting volatility we have observed and now must expect in the future. We have determined that the scale would require too much equity capital create too much volatility in our earnings and balance sheet and ultimately result in a far lower return on equity than we imagined.
We have also experienced significant capacity and demand planning challenges exacerbated by an admittedly difficult labor and supply chain environment.
A combination of these factors has caused a meaningful backup in our processing of homes in the pipeline, which we announced two weeks ago.
We judge future significant volume volatility to be a tough impediment to ramp a scaled operation and any interruptions in the supply chain like we've recently experienced will result in increased holding times further increasing our exposure to volatility and lowering our return on equity.
A final factor in this wind down decision is that to date, we have been able to serve only a limited number of customers.
We've been able to convert only about 10% of the serious sellers, who asks Brazil zillow offer and we have tended to disappoint the roughly 90% we didn't sell to us.
Given our hard earned a position at the top of the seller funnel with $220 million plus average monthly unique users and the popularity of this estimate there are better broader less risky more brand aligned ways of enabling all of our customers who want to move.
So these are the essential components of our wind down logic.
Our price forecasting accuracy was far more volatile than we planned for and was further exacerbated by unpredictable black Swan type events.
And that volatility contributed to operational volatility and cash flow and balance sheet volatility that is beyond the tolerance level that we're comfortable with moving forward.
Lastly, we believe this is an opportunity to refocus and more broadly address a wider audience of customers with more asset light solutions.
Of course, the natural question is what's next.
Before I get there it's worth highlighting how strong our core business is.
Thrived, while reported profits into our <unk> operation.
Over that investment period, we expect IMT segment revenue to increase 57% from a reported $1 2 billion in 2018 to $1 $9 billion in 2021 at the midpoint of our outlook range.
Further we expect IMT segment adjusted EBITDA increased by nearly three five times from $240 million in 2000 $18 million to $833 million in 2021 at the midpoint of our outlook range.
So we start so what the what's next conversation from a position of strength because of how the core business has performed.
As we move forward forward, we remain focused on the same key areas all with the end goal of helping turn dreamers into movers.
First and foremost we're going to continue to create engaging experiences that attract people to our apps and sites and drove on a daily basis.
Most prominently we believe our ability to continually improve this estimate to be fundamental and foundational to our top of funnel audience and brand advantage.
As those that dream with us start to shop with US we will continue to evolve our capabilities to make our shopping experience more digital and less friction filled.
Now Thats showing time is officially part of Zillow Group Zillow group, we will go to work on solving another pain point for home shoppers and agents. The cumbersome process is scheduling a tour.
Turing opportunity is spirit's really similar to the opportunity we pursued with our connections program back in 2018.
Removing friction and streamlining communication between home shoppers and agents was one of our first steps towards a better and more integrated home shopping experience, we expect showing time will help us enable another.
Coupled with a frictionless shopping experience must be capable partners in.
<unk> operators and seamless tools and technology to service our customers.
For our Premier agent business that means continuing to work with high performing partners to convert that convert our high intent shoppers and new movers.
Brazil of home loans, and Zillow closing services that means continuing to enable integration on our moving platform.
<unk> hundred 60, as an example of the potential Golden path for our customers a seamless move through shopping connecting selling buying financing and closing a single place for all customers moving needs.
The change necessitated by today's announcement is the evolution of how we will help a customer sell her current home before today. The selling option was overly focused on Zillow offers and was able to serve only a small number of our available customer set going forward. We will have the ability to plug in multiple more scalable solutions to offer better.
Our choice.
Instead of a sole focus on solving the sellers pinpoint by purchasing from her ourselves as the primary through Zillow offers we will expand our view and explore our marketplaces selling solutions that give her certainty and convenience all while addressing the broader opportunity.
And solving for her move however, we plan to focus on solutions that are asset and capital light for our Zillow.
We can still offer choice simplicity speed and convenience will be open minded about our exploration and to providing these cell solutions ourselves <unk> through partners, both are interesting and rather than having to buy her home to help her sell we are now simply going to help herself.
We are confident our current and future technology platform and tools will enable us to deliver an increasingly integrated digital and seamless experience by our own services and through partners.
We continue to be in a competitively advantageous position due to our audience, our brand and our healthy and profitable core business we.
We see opportunity in using our learnings from Zillow offers our tools and our capabilities to broaden our seller focus beyond only I buying further we look forward to using these same tools and services to increase conversion and attach rate in our large home buyer funnel.
For perspective.
Zillow overall still only participates.
In a mid single digit market share of transactions today, despite being used by almost every shopper dreamer renter financer and mover in the country.
The opportunity continues to be very large to drive growth with higher conversion and to increase the depth number and integration of the services we offer our customers.
Before I close and hand, it over to Alan I'd like you all to know.
Our personal this is for me.
I am founder and first money in Brazil are 16 years ago, and then the largest individual shareholder.
I, just thankfully remember brainstorming to come up with the name of the company with my co founder Lloyd and then buying Zillow dot com for $8 and 95 on Godaddy all those years ago.
It weighs heavily on me that our strategic decision to wind down the Zillow offers operation after three and a half years involves having to let about 25% of our great colleagues go over the coming quarters.
I'm, sorry for how difficult and disruptive this will be I am grateful to them.
They have worked hard and will be missed.
We are committed to providing a smooth transition for those affected.
The decision was tough, but absolutely necessary given the capital risk and volatility that is now obviously inherent to the Zillow offers high volume business.
After careful assessment of volatile earnings instead of doubling down on a single capital constrained risk heavy solution.
We will focus on the broader problem, helping people move and we continue the mission of having solutions that can be accessed by everyone moving not just a narrow set of folks who have to negotiate with us as the primary buyer, leaving most unsatisfied when we can't come to terms.
We are lucky to have a strong and growing core marketplace business from which to invest moving forward.
We are lucky to have a courageous team who have helped us on our journey and a strong culture of innovation that encourage us taking big swings, but also is clear eyed when we miss.
We are lucky to have a deep untapped well of opportunity for innovation in our massive user base.
Partner network and trusted brand.
And finally.
As a shareholder I am Lucky to have fellow investors, who will appreciate both the necessity.
And the opportunity in this decision.
Thank you.
I will now turn the call over to Alan for his comments Alan.
Rich.
You've heard a lot about zillow offers but we should not lose sight of the strong core business results. We continued to produce in Q3.
Zillow group reported Q3 results for IMT and mortgages segments as well as premier agent revenue within or above our previously provided revenue and EBITDA outlook ranges.
Premier agent revenue growth of 20% year over year remained strong IMT segment.
Segment EBITDA margin of 43, 1% was better than expected our mortgages segment revenue grew 30% year over year to $70 million exceeding our outlook range.
Moving into more detail Q3, IMT segment revenue was $480 million growing 16% year over year and 43% on a two year stacked basis compared to Q3 of 2019.
Our IMT segment revenue growth continued to benefit from our Premier agent business, we continue to execute on making better connections between our high intent customers and high performing agents driving higher monetization.
Turning to other revenue within our IMT segment, our rentals business decelerated, primarily due to a difficult comparison in Q3 as a result of abnormal seasonality in 2020.
Rentals revenue also underperformed our expectations as we incurred headwinds related to high rental occupancy rates, which temporary advertising demand.
IMT segment, EBITDA was $207 million in Q3 exceeding our outlook.
<unk> segment EBIT margin outperformance was driven by increased operating efficiency as well as less than previously planned second half overall zillow brand marketing spend.
Mortgages segment revenue increased 30% year over year in Q3 to $70 million and mortgages segment EBITDA was a positive $5 million compared to the midpoint of our outlook range of a loss of $9 5 million.
Total loan origination volume was up 115% in Q3 year over year and up 25% sequentially from Q2, driven by growth in our loan origination business.
Loan origination volumes was up 119% and refinance loan origination volume was up 113% year over year.
Now to address a few more details in our homes segment in Zillow offers business.
We reported Q3 homes segment revenue of $1 2 billion.
Below our outlook range of one four to $1 5 billion.
We reported Q3 homes segment EBIT loss of $381 million.
Below our outlook range impacted by $304 million of an inventory write down.
The revenue Miss was primarily driven by capacity constraints as we overestimated our ability to quickly scale operations. In addition to industry wide renovation labor supply constraints. This resulted in a shift in home closings into Q4 that were previously expected to close in Q3.
For clarity I want to provide some additional details behind the inventory valuation process and the recognition and timing of losses.
For inventory on our balance sheet at period end, we compare our cost basis, our purchase price of inventory and other capitalized inventory cost to the estimated net realizable value or estimated future selling price of those homes less estimated cost to sell.
This resulted in the recognition of a 304 million inventory write down included in homes segment cost of revenue in Q3.
We expect to recognize additional inventory losses in Q4 of approximately $240 million to $265 million. These.
These estimated losses, primarily relate to homes that were under contract to purchase as of the end of Q3 that we expect to acquire during Q4 and that we expect to resell for less and purchased.
The Zillow enterprise remains in a strong position with more than sufficient liquidity to weather the impact of home purchases and Zillow offers in Q4.
We ended the quarter with $3 2 billion in cash and investments we expect the net effect of the wind down of Zillow offers to be at least cash flow neutral in the aggregate.
We believe the wind down will leave us in a strong position to invest in more scalable customer solutions that are less capital intensive as we execute our zillow two <unk> vision and make strategic long term investments. Our expectation is that we will be a positive earnings and positive cash flow company with a revised product.
Strategy once the wind down is complete.
In addition to what I've just discussed.
We expect the following in relation to our wind down plan.
As disclosed in the form 8-K, we filed earlier. This afternoon. In addition to the inventory losses, we expect to record in Q4, we expect to record additional pretax charges of approximately <unk> approximately $175 million to $230 million related to wind down the wind down of Zillow offers operations primarily in Q4.
<unk> in the first half of 2022.
These charges are expected to include certain employee retention and termination costs cost to exit contractual obligations, including borrowing and lease arrangements and.
And write off of long lived assets.
We expect unit economics to be between negative 500 to negative 700 basis points before interest expense in Q4 as informed by our Q3 inventory write down in Q4 outlook.
As a result of homes already under contract, but not yet purchased as the as of the end of Q3, we expect to continue to grow our inventory balance during Q4, and then expect inventory to begin to decline in future periods. We.
We expect to sell most of the remaining homes inventory primarily by the end of Q2 2022 with a small number of homes remaining thereafter.
This implies that we will invest cash in inventory during Q4 as our inventory balance grows and we'll begin to see cash flow back to zillow as our inventory levels decrease through the first half of 2022.
Turning to our outlook for the fourth quarter.
In our IMT segment, we expect 13% year over year revenue growth in Q4, and 50% growth over Q4 2019 at the midpoint of our outlook range.
Within our IMT segment, we expect premier agent revenue to be between $354 million to $362 million up 14% year over year and up 53% over Q4 2019 at the midpoint of our outlook we.
We expect Q4, IMT EBIT margin to be 42% at the midpoint of our outlook roughly flat sequentially from 43% in Q3.
Our outlook includes our plans to continue to invest in staffing and technology in Q4 to drive or to point out vision, including things like touring bundling products, such as <unk> hundred 60, expanding <unk> photos and floor plans along with continuing to invest in integrating zillow two <unk> products.
Separately, we closed our acquisition of showing time on September 30.
As will be included in our IMT segment results beginning in Q4.
We are beginning to integrate showing times platform and are excited about the opportunity to better serve our customers and partners. We plan to invest further in innovating showing time solutions to better serve the entire industry.
In Q4, we expect our homes segment revenue to be between $1 9 billion.
We expect homes segment that would be $1 9 billion and EBITDA to be a loss of $348 million at the midpoint of our outlook range as I mentioned earlier, we expect to record an additional loss in Q4 of between 240 and $265 million primarily related to the homes under contract to purchase as of the end of Q3 that.
We expect to purchase in Q4.
During Q4, given our resale capacity constraints, we expect our inventory balance to grow and then decline beginning in Q1 of 2022.
We expect there could be a wide array of results in Q4 for our homes segment as we work to free up operational and renovation capacity and pursue various resale strategies as we seek to protect the value of our assets and optimize our wind down while respectfully managing our people.
We expect our mortgages segment revenue to be between 47% to $52 million in Q4, which is down sequentially from Q3 or Q4 outlook reflects slower industry refinance activity from the recent move in interest rates slight compression in gain on sales spreads and slower growth in purchase originations impacted by the wine.
Down of Zillow offers operations.
As a result of lower sequential revenue and continued investments to grow mortgage originations, we expect mortgages segment EBITDA to be between a loss of $16 million and $11 million in Q4.
While we are in the midst of 2020 planning we wanted to share that we are focused internally on continuing to drive secular growth faster than the industry.
We do want to highlight that during 2021, our premier agent business has outgrown the industry in each quarter and expect the business to continue to do so in our Q4 outlook.
While there are near term cyclical pressures.
On some of our other marketplace businesses, we are hard at work with initiatives to drive growth regardless we.
We are also well positioned with our strong traffic in our other IMT marketplaces to benefit as rental and new construction supply and demand imbalances normalize and when these advertising pressure subsides.
We have a large audience, but a significant growth opportunity with only approximately mid single digit market share of industry transactions.
Progress on improving connections and showings as well as the customer dream shop buy sell rent and finance experiences are among the numerous tangible initiatives. We are delivering to continue to drive secular growth to connect more high intent customers with a growing mix of high performing partners.
As we look forward my priorities remain focused on innovating and executing on behalf of our customers and partners and I look to ensure an orderly wind down of Zillow offers operations right.
Right size, our cost structure and improve productivity to drive a profitable scalable and positive cash flow company.
Drive prioritization to invest in sustainable topline growth opportunities across the company, including new integrated services that are more scalable less subject to earnings volatility and more capital efficient and with that operator, we'll open the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We will now pause for just a moment to compile the Q&A roster.
Our first question today comes from Brad Erickson with RBC capital markets.
Yeah.
Hi, Thanks, So a couple of questions one.
Guys rich you'd explain things in the shareholder letter and on TV, a few minutes ago, but I think people really want to understand just the mechanics, maybe a bit better of what went wrong here, particularly in the bidding so let's start there.
And then I have a follow up.
Yeah, Hey, Brad.
Thanks for the question.
Sure.
We were fundamentally.
We have been unable to predict future pricing of homes to a level of accuracy that makes this a makes us a safe business to be in.
Haven't modeled.
This kind of.
Pricing market, nor supply market to even be possible when we when we got the business going.
And.
You know we've seen all of this volatility in both directions right now in the wrong direction.
And then we're still at a scale that is small compared to what it needs to be and so as we put our minds in the state of Alright, We've got these.
These new assumptions that we'd be naive not to assume will happen again in the future we pumped them into the model.
And the model cranks up a business that.
<unk> has a high likelihood at some point of.
You know.
Yeah.
Putting the whole company at risk not just the business.
But in the more normal case just.
It causes a ton of volatility in earnings which is not a great look.
For a public company.
That's that's.
Basically that's what it boils down to there is there is there are capacity issues et cetera that we can that we can talk about that we've had internally and externally on the backdrop of a really tight.
Right environment, what it boils down to is our inability to have confidence in pricing in the future and enough confidence to put our own capital at risk and we don't have to.
Got it and then I guess the follow up is you mentioned looking to expand solutions to work with sellers in different ways.
Despite no longer doing <unk>. So I guess the question is can you just.
To expand on some of those tools that you might engage with for.
For those sellers with this new shift in strategy.
Yeah, Okay. So we're most.
I don't want to say all its probably not all but it's certainly most sellers in the market even when they are at the very early stages of selling maybe well call. It dreaming transitioning to selling they show up in our apps.
They look at Theres estimate they start talking to people they start looking at comps and consuming information we have.
A lot of very interesting highly engaged touch points.
With with these customers and we've learned a whole lot about.
About transitioning that light touch into a conversation and doing Zillow offers we've learned a ton about that.
And so whether the front door is through this estimate or through a request for prequalification or looking for an agent.
Or just wanting advice.
We have a lot of ways to take our customer conversation from a kind of a shallow one two an advisory conversation and we look forward to being able to now refocus more broadly on that.
That set of customers rather than basically having one.
Really really having the organization and all our profits from our core business focused on that one thing to sell in the store, we will add one thing to sell in the store.
In our <unk> operation this is going to free us up from having to think so narrowly we think that these are still interesting solutions, but it frees us up from having to think so narrowly and we can capitalize on.
<unk>.
A broader opportunity.
Got it thanks.
Yes, Thanks, Bob.
Yeah.
Our next question comes from Ryan <unk> with Zelman.
Okay. Thanks for taking my questions.
I wanted to focus again on kind of the what's next for Brazil. So.
If I just think about the evolution to Zillow, two <unk> and the efforts to build a more integrated experience. Obviously the last few years <unk> has been a big piece of that longer term vision of getting this estimate effectively to a live bid and Brad's question, you mentioned being committed to creating that integrate experienced still solving pain.
Doing so as a capital light.
Just asked slightly differently I mean big picture Zillow has always been.
Mainly it platform that's monetize the buy side and I think a lot of people looked at <unk> and said this is opening up that sell side opportunity. So maybe it's the same question twice, but.
How does this play out on the sell side going forward. What's next in that regard what's the strategy to really drive. This so it's not just for you to be a buy side monetization vehicle and really capture what what should be a significant opportunity on the sell side.
Yes, thanks for the question Ryan.
I won't just give the same answer but it's it's.
There is a much more interesting scope.
Of an answer and your focus on unlocking the sell side.
As we're all land or I'll start and then Alan or anyone can jump in but.
Well look our our our dream of.
Basically, making the transaction a lot easier breaks down into four sellers, who are moving breaks that down into a whole lot of pinpoint components, okay and.
And those those pain points that we're trying to use our technology to solve for.
Start with simply shopping on the site and looking at listings and one of the one of the big things that we have invested.
A lot of people.
R&D in is making that shopping experience much more immersive three D digital floor plans and giving shoppers a much more realistic and a sense for what the home has legs. So we have a big investment there and that kind of that kind of came from this effort.
Just closed the showing time acquisition.
Which is a way for us to look at creating a touring reservation system. This is another big pain point for movers and shoppers when they just trying to arrange to go see homes in the flesh.
And with showing time, we have an opportunity to turn that into a much better experience and give us a chance to actually sell some things to those customers who are in that process, which is which is a really interesting opportunity.
Next the mover the seller might want a pre qual.
The next mortgage or get a mortgage.
Next we want to route documents and new closings in and.
Title and escrow all integrated into the same fluid experience. So we have invested in those are just a few of the steps, but we've because of our because of Zillow offers and our focus on the sell side of the market that you are talking about we have invested in each one of those components.
With our technology, and we have an opportunity to stitch these things together.
In a way that very few were going to have the opportunity.
To to do it so the seller.
The Rubik's cube of unlocking the seller.
Is.
Is it really interesting is it really interesting challenge.
It turns out that a whole bunch of buyers or sellers too. So there is a pretty heavy overlap between buyers and sellers and we firmly believe focusing on.
The transaction will.
We'll provide a ton of growth for us yes.
I'll just touch on that most sellers or buyers.
One of their friction points is freeing up equity in their current home, obviously I buying provided an opportunity for that with us as a counterparty purchasing the home, but there are a lot of other <unk> opportunities for us to look at ways to free up that equity and help that seller move into their next home.
That are less capital intensive and can provide that seller with possibly more value as they list their home, but with similar certainty or at least less friction. So we believe that there will be quite a few different calls to action to help sellers as they dream into that next phone but.
Just Scott are not the counterparty of us negotiating.
With that seller only and as rich mentioned only about 10% of those sellers actually took our offer.
Got it okay. Thank you and my second question I, just wanted to clarify what youre, saying about the overall kind of macro home price environment. So.
Most of the measures that are out there of Corelogic case, shiller or any of the home price indices generally it seems to be an environment, where price is still going up, albeit at a much slower pace than what had been happening so I guess.
To take a step back to the macro side of things.
You talked a lot about the volatility in the unit margin swing.
I just want to make the.
Make the question how much of that is related to again, the forecasting side of things potentially being too optimistic versus a very volatile swing in actual prices within the broader housing market at this point. Thanks. Thanks again it was forecast.
Forecasting volatility run.
Is the is the short answer.
Okay.
And the way I would describe it Ryan is that.
As we came into the first half of the year and then into the second half.
And we.
Made the decision to.
Go ahead and grow given our Q1 performance, we made a decision that we needed to.
Our acquisition pace, and we and our models are forecasting process I should say at that time.
Was not keeping up with that rapid rate of HPA increase that was occurring.
And as we went into the second half of the year.
Still continues to increase and we believe that there is still a strong market, but the rate of increase.
<unk> declined significantly. So there was this volatility that rich talked about that was way outside of the normal distribution you would expect.
And Thats, where I think our pricing forecasting accuracy.
Was less than we had expected the volatility was higher maybe its another way of saying it.
And so we still believe that the.
I can talk more about the write down but the assets are valuable b, the market's still strong, but we ended up.
With that volatility.
Green to prices that are going to be higher than what we expect to sell those houses four less selling costs.
Understood. Thank you for the clarification makes sense. Thanks.
Okay.
Our next question comes from Brent Thill with Jefferies.
Thanks.
Rich you're blessed with a really high margin <unk> business and many have asked the sustainability of that margin profile going forward can you talk to.
What this environment does it if anything to that the margin profile of that of that core.
Core business as we head into 'twenty two.
But Steve I am going to start with that and you can just please please I don't think so so as we reported.
Coming out of the pandemic in the second half of 2000.
In 'twenty and then coming in the first half of 'twenty, one we've seen margins.
That had been in.
In the <unk> 46, 47% range and the midpoint of our outlook. This year 44 is our margin rate for IMT.
42 is the margin rate for this quarter, we think the $42 43 margin rates are durable.
Tight margins.
And that's that's win.
Level of investment that still allows us to do some of the things I talked about in my prepared remarks.
In terms of Turing and continuing to drive higher intent customers to high performing agents.
When I look at the IMT business and I look at the growth opportunities.
Again, we participate in a very small number of transactions.
We continue to make progress on connecting these customers to high performing agents and improving conversion and so theres a lot of opportunity for growth. We believe we can leverage that growth, which is why I feel comfortable that some of those.
Margin rates are durable going forward.
<unk>.
I do think we will reserve the right over time to invest because we're long term focused not just short term focused.
But these margin rates of 40% to 42 and.
In that range I believe of durable margin rates for this business and I believe that the topline as we mentioned we believe can continue to grow faster than the industry.
All set.
Great and can I follow up one with rich just last quarter. We all heard you kind of commit and say you had increasing.
Got you.
Support for the business in that every quarter that Pat you had more conviction and then all of a sudden the record scratches this quarter and we understand that things change, but what was it versus last quarter to now that really change your perspective.
Is there one or two events that triggered or or just I think I'm just trying to reconcile what you said last quarter, what just happened.
And sorry to go back and dwell on that but I want to make sure we truly understand what what you're what you're meaning there.
Extraordinary volatility in our earnings in this big markdown on a relatively low volume of units coupled with.
It's running into.
Internal and external capacity and labor constraints basically brought into high relief and forced us to recognize the inherent risk that exists in the eye buying operations.
It's.
It's almost as simple as that.
Hi.
We could have we could have tight.
We can we could we could solve our forecasting problems in most markets for sure and we can solve our operations problems.
But what we can't solve is what the model is going to tell us about how much capital we need to raise deploy and risk in the future in order to achieve a scale that we think is necessary to offer a fair price to customers for their homes.
And in a competitive way.
We have been offering a fair price now while we while we've learned the business, but in order to get the scale economies, we have to get a lot bigger so that you know.
The score has changed a lot this quarter, but if we're 10 times 20 times the size we are now.
It's Richard.
It just doesn't it doesn't compute and what that is.
What happened and Luckily our calculus is is is different.
We built Zillow offers on top of an incredibly strong core business that has grown tremendously while we've been.
Taking a big swing on Zillow offers.
And it's that strong core business that gives us such a such a.
An enviable position in the upstream and the customer.
The customer funnel.
That's what happened.
It's not actually all that complicated logically it is complicated emotionally because of the people ramifications of our decision to wind it down so that's where that's where it gets me.
Yeah. Thank you for the color.
Our next question comes from Mark Mahaney with Evercore ISI.
Two questions. Please first do you think that there is any change in.
Dynamics with real estate agents was that at all a factor in in your decision and getting out of the Zillow offers do you would you expect that to have any impact on relations with <unk>.
Personal real estate agents across the industry and then secondly, just talk doubleclick on the mortgages business and the path to potential robust profitability or if there is a path and how you get there. Thank you.
Hey, Mark do you want me to start on yeah. Okay.
<unk>.
We have a greeley.
Large.
Partner network and our agents Marc as you as you know.
Sure.
We.
Have helped them really have helped the ones who partner with us.
And get on with our get onboard with our program to really drive their businesses.
You know so we have had we've had great relationships with them. We continue to you know some may see this as a sign of one thing or another but honestly, we're really focused on innovating for customers.
And bringing new customer solutions to market and as long as we're doing great things for customers. We know that partners will be there to be to be with us.
So.
That's kind of how we think about that.
The second part of the question Alan maybe I can take that Mark.
I guess, what I'd say is that we're we're glad that we have.
We have the CAGR mortgage business and mortgage marketplace business.
We built the factory over the last two and a half years or so initially off a refinancing and we showed that we can close loans on time and satisfy customers.
And we have shown our ability to be profitable with enough volume now.
We came in at 21, and the refi volume slowed down.
When the volume goes down about below a certain level, we start to see this investment we're making.
<unk>.
Our loan purchase originations business show through as investment versus profit, but as shown in Q3.
$70 million of revenue, 32% of our funded loans, where purchase that's up 600 basis points from the quarter prior.
Now 70% of those were.
Leads from the Zillow offers business.
That gives us comfort.
That financing is a very important part of the moving process and then having a financing factory that can help serve our customers in a variety of ways is a capability that we must have as we think about serving our customers as they move and that as we get volume we're able to generate.
Great profitability that you would expect from a purchase company.
I should say a mortgage origination company.
That volume growth. So we may see a little bit of Choppiness as we go into Q4 and Q1.
But there's a lot of opportunities for us to present.
And provide our customers with Prequalification and eventually preapproval and to work with our partner base.
Using our DHL as the loan origination and so we're.
Rich you can add anything but we're excited to have this capability.
That was really thorough answer I mean, maybe one one summer.
Summary point and just to remind.
Investors that we do collect a ton of mortgage interest from consumers right now because of our way up funnel position.
And we process only a small portion of that ourselves.
With Z HL and we have a marketplace for the balance of them.
You know that this is this puts us in a really really good position to innovate there.
Okay. Thank you rich thank you Allen.
Our next question comes from <unk> <unk> with Wedbush Securities.
Hey, guys.
The first question.
Understanding the difficulty in pricing and forecasting.
Youre talking about Zillow offers is really different in your pocket talk about it in the past that it's sort of a narrow part.
Of your customers.
Let me talk about some patterns really central piece to the bundled offering a central piece of <unk> 60.
That could drive partner, we are expecting it.
You just mentioned.
Portugal purchase originations on the mortgage side. So it does feel like there's a little bit of a hole here in the middle of.
Okay.
I know you talked about it but maybe like why is it not a hole in the vision with.
With all of our business now now pulled out of it.
And then the second question.
Now it gets where there will be a lot more focus on our premier agent and you've talked a lot about the high performing agents and connecting them with high converting customers.
We've got a little bit more color around that.
What's changed what's changing that's benefiting and how that will continue to benefit as we get into next year.
Sure.
Okay. Hopefully you took some notes Alan.
Did you guys. If you could just talk about the first question is again, what what's next I think yeah, yeah, yes.
We've talked about it a couple times, but maybe I'll go.
And do a little bit more subtle point Hugo.
That maybe is not as obvious I tried to say it in my script.
But.
Being in a position, where we are having to negotiate.
With sellers.
About their most.
Important asset in there like there most of the most important thing they own in their lives emotionally and financially.
And being put in a position of being the primary to negotiate with them on that and to have 90% of them approximately go do something else.
Some of them pretty miffed.
About the brand is not what we're used to it's not what we're trying to be it's not what the history of our brand.
Has been.
And so there is a there is a little bit of what's in here.
Is is high.
How what is what has been emerging.
Is that.
It's been a little bit it's been a little bit too narrow of a solution the EMS arent that big either.
But that is that is a little bit about what's going on here.
I also.
<unk> been looking for for many quarters us to draw.
Straight hard solid lines.
Two seller to seller leads from that interaction and you know we.
We've said, we're making progress we're trying things were improving but you know it hasn't been a big business driver for us so far.
Some of which because of the subtle interactions.
That I was that I was talking about.
The.
Having this be the only thing we're selling to sellers.
<unk> has been the realization. We've made is that that is limiting and that being able to have a larger broader menu of things to offer our sellers is what we want to be able to focus on we think we can serve a lot more people that way and you don't need to look much further than.
<unk>.
A ton of kind of venture capital.
Prop tech investment that is going into the space trying to address this same kind of problem in a more in a more asset light way. So we think theres a lot of potential here, but but.
In ways that don't.
For us to put our whole balance sheet at risk.
The second part of the yes.
Maybe I'll take the second part.
So it was about how do we feel about.
I guess higher performing agents and getting them higher intent customers what are the drivers there I believe.
Is that a fair representation of the question.
Yeah.
And obviously that it feels like that the driver of it.
Yes, so I guess, Mike talked about.
Yes.
What we look at.
When we look at the opportunities in our Premier agent business.
Sure.
Is high intent customers and there are actions that customers take which.
Are more sticky than others. For example, Turing is a great example of as we invest.
And develop.
<unk> technology, especially with showing time now part of the Zillow group.
We believe that those actions to schedule a tour.
Generate a higher intent customer that we can connect with an agent and a much more friction free basis with a higher actual facetime connection.
<unk> homes and floor plans allow our customers to engage in a variety of different homes, and then pick the ones they want and so theyre higher intent.
<unk> hundred 60, and a lot of these.
The discussions we're having about what how do we drive and integrated transaction with DHL and.
Sellers or buyers, who need financing when their buyers or need to free up equity. When there are sellers of an old home and want to buy all of these things as we think about moving forward in Zillow. Two <unk> are going to generate additional as rich mentioned partner leads that are coming off of other channels.
Our other areas of our funnel than the current channel, which right now is HCP.
Submit that we have that then turn into connection. So we continue to get better about monetizing our current traffic and transactions, but we're also investing in developing tool.
Tools and technologies that create higher intent slightly stickier actions that get our customers to agents in a way that are driving conversion up and we get paid for that either in as part of our return on the ROI.
Through MVP or through just number of transactions based on conversion rates with our flex transaction if that helps.
Would you add anything Brad or rich.
That was great.
So.
That's helpful. I appreciate the color. Thank you.
Sure.
Our last question today comes from Andrew Byrne with JMP Securities.
Hi, guys. Thanks for taking the question two please so the first just on Zillow offers it felt like it was a key on ramp for 360 can you talk about your vision for <unk> 360 through <unk> and then for a number too rich I buying to some felt like a defensive move initially to that and where did I.
<unk> fit into your vision of real estate more broadly and is this now something that's just too narrow for an over base.
Or is it simply put as you've mentioned multiple times just not the best use of Solas capital.
Whereas the end state of bye bye thanks, guys.
Hey, Andrew.
Yeah.
It's early days, Brazil.
360.
Excuse me.
Just swallowed my cough drops.
Hi, guys.
I'm back.
Yes, it's early days, Brazil at $3 60.
We have been doing a lot of testing of.
Of it.
Zillow offers has been a part of it for some.
But just just apart.
And we actually think being able to slot many different choices.
Sure.
Unlocking sellers as a part of <unk> hundred 60 is a good opportunity.
Most interestingly, we're assembling all of these other components all of these other ingredients that we built.
To make this integrated.
Experienced better but it is it's early days, we're talking about it more than that would be I think it's premature.
Anything to add on that island.
I would just say that it was it was always broader than just <unk>.
And the only source.
THL NPA. Our example in closing services are an example of services that we can bundle together. It was really a concept of bundling together more than one service and we were not always.
Didn't always have to buy bonds.
Still a concept that I think we've seen improved conversion when we've been able to offer customers integrated services in a package.
And leveraged the lower CAC as to as to their back half your question Andrew.
It's really hard to say, we can only kind of talk about this.
In the context of our calculus, the amount of risk in equity and balance sheet, we're willing to take you know.
We have been willing to take a really big swing on this but not a bet. The company swing there was a potential defensive motivation in going into it.
In the first place but.
We feel after three five years of experience with it we feel really confident.
In our offensive position without having to be the primary ourselves.
I guess, that's how I would answer that Andrew.
And is that headwind.
Okay that was it.
Operator is that correct.
Yes.
Okay, all right I'll wrap it up.
[laughter] zoom zoom life I'll wrap it up thanks, thanks, everybody for your time.
Look.
Similar to other leading technology companies that have gone before us.
We strongly believe in taking big swings and failing fast.
We have learned from our experience in Zillow offers in Q3 and are applying those learnings as we look ahead.
We continue as you can hear we continue to be excited about the opportunity we see in front of us and we look forward to speaking with you next quarter.
Okay. Operator, we can conclude the call. Thank you all very much.
This concludes today's conference call you may now disconnect.