Q4 2021 Zillow Group Inc Earnings Call
Speaker 1: We have just completed the third year of the original targets and are expecting to soon be run rating the two billion IMT segment revenue targets and we are already well above our original IMT segment EBITDA targets of 600 million or 30 percent larger.
Speaker 1: As we wind down iBuying operations, the original home segment and related Zillow home loans at tax-related targets are no longer relevant.
Speaker 1: With that, I'll take a moment to walk through the 2025 financial model that we've included in the investor deck published on the IR website today.
Speaker 1: Our long-term growth model shows how we plan to deliver Zillow's new 2025 financial projects. The model is quite simple. Industry customer transactions times transaction share times average revenue per customer transaction for our PA, VHL and VCS services.
Speaker 1: added to other services and marketplaces revenue that include rentals, new construction, mortgage marketplace and real estate industry service.
Speaker 1: It's important to note that we are assuming no growth in overall existing home sales from 2021 levels and only 3% annual home price appreciation for the industry.
Speaker 1: This is not a macro call we are making on our outlook. It is merely the approach we took to look at how we can drive strong secular growth.
Speaker 1: Simply put, we expect to grow our share of customer transactions from 3% to 6%, which should drive over 700,000 customer transactions annually. We have a good understanding of our customers' key pain points and are focused on executing better connections, touring, mortgage approvals, and expanding seller service.
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Speaker 1: By better meeting their needs, we expect our customers to remain engaged deeper into our funnel, which should double our market share and also drive higher revenue per transaction via the expanded services.
Speaker 1: This model implies 24% revenue payor yielding our 2025 targets of $5 billion in annual revenue and $2.25 billion in EBITDA, which equates to 45% EBITDA margin.
Speaker 1: We expect margins to scale with our revenue while we continue to invest prudently where we see opportunities to drive growth.
Speaker 1: As we look forward, our priorities remain focused on innovating and executing on behalf of our customers and partners.
Speaker 1: We plan to grow our customer engagement through a compelling dream and shop experience.
Speaker 1: deliver a more integrated customer transactional experience to drive customers to choose to transact with us and our partners, invest in sustainable top-line growth opportunities across the company, including new integrated services that are more scalable, less subject to earnings volatility and more capital efficient. And lastly, manage our cost structure and improve productivity to drive a profitable, scalable and positive cashflow company. And with that operator, we'll open the line for questions.
Speaker 2: Thank you. At this time I would like to remind everyone in order to ask a question, please press star then one on your telephone keypad. We'll pause for a minute to compile a Q&A roster.
Speaker 2: Our first question comes from Brian Nowak of Morgan Stanley . Brian , the line is yours.
Speaker 3: Great. Thanks for taking my questions guys. I have a couple about the multi-year targets. The first one said the 24% annualized growth on the new $5 billion target. It's pretty healthy growth. I guess Rich, I'd be curious to hear first about how you think about some of the keys to execution the next couple years to sort of realize that type of growth and how should we think about the slopes of the next couple years growth relative to the call the next four.
Speaker 3: And then the second one is, if I do some math around the transactions, it looks like you already have a decent amount of seller side transactions on the platform. Can you just talk to us again, remind us about where are you on monetizing seller leads and how big of a part is that in the long-term targets? Thanks.
Speaker 4: Well, maybe I'll set the table and then, Alan, you can serve the real food on this one. We did drop a whole bunch of new stuff on you all this quarter.
Speaker 4: I tell you, we had a lot of fun putting together these 2025 long-term targets, as well as putting together this, you know, I think it's a.
Speaker 4: tight decks that maybe many of you are looking at right now that really gets to answering Brian exactly what you're talking about.
Speaker 4: But from a table setting perspective, it's really important.
Speaker 4: to the new stuff we've said is we've made it a little crisper just what we mean by such a huge engaged audience.
Speaker 4: Okay, we have always talked about the 200 million or so unique users. We've put a little bit finer point on that by focusing on the app, by saying we get about 4 million daily app users, which is three times the size of our nearest competitor. And the key to growth really is nothing more complicated than converting more of those 4 million daily app users into transacting customers.
Speaker 4: OK, another kind of really interesting and eye opening data points that I talked about in my script was that we actually have 1.4 million of the actual home buyers last year raised their hand to connect with.
Speaker 4: And yet, we've only ended up with 3% customer transaction share. We said 360,000 transactions.
Speaker 4: So the big long lever is converting users into transactions, into customer transactions.
Speaker 4: We're better at it. We're going to be better at driving. We have a history of driving that transaction penetration. No question. And innovation in both product and business model has been what that's about. But we have a lot more experience now because we have been, you know, in the guts of the business buying and selling thousands of homes. We built a bunch of stuff to support that. And that puts us in a terrific position to now build what we're calling this housing super app, which will act as the integration and dashboard of bringing these disparate components of the process all together in one place in a really interesting way.
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Speaker 4: I'll pass it over to Alan by highlighting that the 2025 targets
Speaker 4: assume that we take that 3% transaction share to 6% transaction share, and given all the stuff we're doing, especially say in the closer term.
Speaker 4: in terms of touring and financing with mortgages, we think that is achievable and exciting.
Speaker 1: And thanks for asking the question Brian . So I guess I'll start with the 2025 financial targets was an opportunity for us to add some more transparency about the the opportunity that's ahead of us that we're excited about as well as clarify the strong position we currently are in.
Speaker 1: And so if you think about that path to $5 billion and 45% EBITDA.
Speaker 1: You know, as we've talked about, it's driven by this expectation that broader integrated offerings are going to drive both more transactions and higher revenue per transaction than where we are today.
Speaker 1: And from a modeling perspective, and starting with the 12.2 customer TAM, both the buy side and sell side, we talked about the 360,000 transactions we've participated in today and just growing that share of 3% to six.
Speaker 1: In addition to that, it's taking the revenue for transaction we get today of around $4,100.
Speaker 1: and growing that to $5,200 a transaction. And we think that comes from having more customers using more of our services in an integrated way. In addition, I'll just call out that those 2025 targets include our other marketplace and industry software solution businesses growing from 609 million in 2021 to 1.2 billion in 2025.
Speaker 1: As we think about the slope, we provided guidance for Q1.
Speaker 1: We think that this model is driven off of our ability to control and drive secular growth.
Speaker 1: by serving the customer and integrating better with our partners, and I think there are some more near-term things and some longer-term things as we innovate. That's kind of the innovation path, and we'll continue to share as we can, you know, how that slope may play out. But right now, I think what we'd say is we feel really comfortable based on position we're in today with our brand, our audience, our partner network.
Speaker 1: our current standing with the number of you know the 1.4 million buyers who utilize our site today and the financial position we are in and the business model that can generate positive cash flow to execute well on the 2025 target.
Speaker 4: I guess I served some of the dinner in there and we overlapped. But there were two other things in there. You were talking about the slow down in Brian's question and that is kind of implicit in it is kind of where are we in the S-curve of penetration. Where are we in the S-curve of market share.
Speaker 4: and is the the path from here to 2025 convex linear concave what is it you know here my expectations are that once we get to the six percent
Speaker 4: given this giant gap between the 6% and our usage and engagement numbers, which are, you know,
Speaker 4: two thirds of the industry of actual buyers are using using this site. I would expect it is my expectation that we will be continuing to invest for growth in a prudent way at that point. And so I expect continued growth. I don't know what that means about the implications of the curve but you know I hope it's I hope it's linear or better.
Speaker 4: And then on the sell-side transaction question, yeah, I think you can kind of connect dots based on what we shared and get at what our estimated sell-side transactions that we are monetizing today is. It is a non-trivial chunk of our 360,000 customer transactions that we estimate. And mainly that is because,
Speaker 4: People who are coming to buy homes with Zillow and with our partners, at least half of them are also selling their home and a whole bunch of them do end up selling with our Premier Agent partners. And so we already access the sell side of the market. Now, we want to enhance that and drive share there with more products and the super app. But we already have a terrific foothold today. All right. That was a long question, a long answer, Brian . I'm sorry, but thanks for the question.
Speaker 2: Our next question comes from Brad Erickson of RBC Capital Markets. Brad, please go ahead.
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Speaker 5: I think just have a couple there. So you mentioned now a few times that you're engaging with this quarter of all by stat, uh, last year versus market share at about 5%, I guess.
Speaker 5: Can you just give a little more color on how either, you know, MVP or flex may be contributing there as you look to reduce that leakage and any sense of the mix between the two models? And second.
Speaker 5: I guess a little related to the first. On the seller leads that you're looking to drive, you mentioned some of the, you've talked about before, some of the calls to action that you're looking to implement on the site. Just curious to hear maybe a bit more about how you might serve to sort of tease out that signal of potential sellers and any maybe early proof points as to how that's going. Thanks.
Speaker 1: You want me to start with the MVP flex transaction Rick?
Speaker 1: Thanks Brad. I'll take the first part. I was I was trying to. So I guess how I would describe it Brad is that we feel like we have a very strong premier agent partner network both across our MVP and our flex model.
Speaker 1: um you know flex in and of itself is not
Speaker 1: a driver for transactions but it is a driver for better alignment between ourselves our customers and our partners we feel. And so you know we will continue to innovate and iterate on on ways to align our partners.
Speaker 1: with our products and services and our customers in ways to generate more transactions, higher conversion and more revenue per transaction.
Speaker 1: We're very pleased to where we are both on the MVP and flex model. And I wouldn't call one or the other out as the biggest driver of the journey to the 2025 targets. But I think the key is alignment. And as Rich mentioned the more integrated transaction with tools that serve our customers well and also serve our partner network.
Speaker 4: And on your second part, Brad, look, what we have come to fully realize is something that I guess we should all intuitively understand.
Speaker 4: I don't know how to put it, like Ford for the Super Bowl ads that they have coming up is not going to make an advertisement that says sell your current car.
Speaker 4: What they're marketing on the Super Bowl ad is the dream of the new car with the red bow on it in the driveway.
Speaker 4: The housing equivalent of that, it holds. People, the inspiration and aspiration of the move is the new place, the greatest.
Speaker 4: seller lead opportunity we have is in helping people dream about the new house. OK. And we have a really fantastic position in that that we're already converting into some self-sustained business today. Now we also understand that solving this kind of painful but necessary.
Speaker 4: part of the super app, part of the moving process of selling your house.
Speaker 4: is a big deal and having good solves for that with creative new solutions.
Speaker 4: is an important area of innovation, and we are fully embracing that. As you well know, we ran a big giant experiment with iBuying, so we know a whole lot more about that now. So we'll pitch a big tent.
Speaker 4: over that and are innovating and working with partners to make sure we have compelling offerings to solve that particular problem.
Speaker 2: Our next question comes from John Colantoni of Jefferies. John , please go ahead.
Speaker 5: Thanks for taking my questions. I wanted to start with the housing market. Maybe you could just walk us through what you're seeing today from a macro perspective and how your outlook for the housing market over the next three years ties into your 2025 targets.
Speaker 5: And second, you outlined plans to increase the 1.4 million home buyers who tried to connect on Zill last year, which is already an impressive figure. One of the initiatives you mentioned is developing asset-light seller solutions by leveraging your learnings from iBuy. Given the seller side has been more elusive for Zill in the past, can you provide any specifics around the products that you're planning to roll out that will help bolster seller connections? Thanks.
Speaker 4: You want me to. I'll start with the macro stuff and you. And maybe Brad jump in if I get it different when I get it wrong. You know I realize that.
Speaker 4: We're in a particularly interesting macro environment given the high level of uncertainty. OK.
Speaker 4: We are well aware that it's more uncertain than usual, but our economist...
Speaker 4: forecast strong macro and strong housing market this year following up a very strong market in 2021. In fact I think.
Speaker 4: number of transactions since 2006, Brad, am I right?
Speaker 4: Am I getting a nod? Correct, yes. Alright, correct. Thank you. I don't want to get that wrong. It didn't certainly feel like that last year, did it? Because inventory was so low and inventory continues.
Speaker 4: to be low, but that doesn't mean there can't be a lot of transactions. And while our economists are forecasting that, we are taking, you know, Alan and his team are certainly taking the more uncertain than usual into account. It's driving.
Speaker 4: The strength is this kind of millennial tide that's rising. They are really this demographic.
Speaker 4: tide is rising on the industry. And that coupled with you know supply that's not rising as fast is making this you know we think they're continuing to be a strong you know a strong market. Did I say that OK. Alan Brown.
Speaker 1: Yeah, and I'll just add on top of that, that as you mentioned, Rich, you know, our Q1 guide reflects some of that macro uncertainty that Rich talked about in the short term, the lower new sale listings, high occupancy rates and rentals and lower builder inventory are all reflective
Speaker 1: in and informed our Q1 guide, but we continue to see strong demand signals on our site and strong interest from our partners with very low churn. And so, you know,
Speaker 1: The opportunity, we feel well positioned as we look at this opportunity and this path to the 2025 targets to focus on the customer, improving our partner network and providing them tools in that, we believe that the 2025 targets are appropriately aggressive but achievable through a lot of the things that Rich talked about.
Speaker 1: Just to get on the macro and how it affects our 25 targets I just want to reiterate that you know our 2025 financial targets are based on flat industry transaction assumptions. So no increase in industry transactions and low single digit HPA assumptions. So our model and the KPIs that we built really are based on our opportunity to innovate.
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Speaker 1: and integrate our services and drive secular growth based on the strong foundation that we have. Okay, but what Alan said about, you know, low single
Speaker 4: you know three percent uh hpa home price appreciation and flat transactions that's not a macro call we're making we're just that's just for modeling purposes that's that's what we've done so that's not our macro call i mean that that three percent compares to what nine percent kager since 1971
Speaker 4: Or is that total industry? Anyway, you know, one more thing. Sorry, I'd be remiss if I didn't say amidst all this macro conversation.
Speaker 4: which I understand is important for you know a read through to all of our businesses in the economy. I get it. But really the big shift that we are on the leading edge of is the shift.
Speaker 4: in a in a giant industry the largest perhaps in the U.S. of moving from the offline non-digital way of doing things to the online digital way of doing things with us as the leader in that. And that actually is really the most important lever and shift from from a macro perspective to our long term results.
Speaker 2: My next question comes from Mark Mahaney with Evercore ISI. Mark, the line is yours.
Speaker 6: outlook and uh... lovely idea swinging for the fences rich
Speaker 6: and Alan and laying out these long-term markers. I look at the assumptions that are in there and the one that strikes me as most aggressive.
Speaker 6: is that 6% share of transactions, I know it's up 3%, but that's a doubling of the share from what you had in
Speaker 6: and twenty once maybe just double click on that a little bit uh... feel the other assumptions don't seems aggressive that one does seem aggressive uh... maybe we need some context is that where that if it was three percent in twenty one where what where was before or if you look at all of the different things you could do to increase that going from three percent to six percent what do you think of the easiest things to do and what would be the hardest things to do just just on that particular metric if i think that's pretty key to this uh... five billion uh... outlook
Speaker 4: Hey, Mark. Maybe I'll start and Alan, you guys jump in. When you break it down into the components, it feels doable to me, Mark, and I'm a big believer in
Speaker 4: you know in beehives I don't even know if I call this be a big area they just call it is it it it is. No doubt not him and okay but but you know these goals end up being self-fulfilling because of the creativity they tend to release internally with all the smart people we have and given the resources we have I'm calm I'm confident but.
Speaker 4: You know, two rather low, you know, bits of hanging fruit. We talked about a bit on conversion here is getting on top of and really taking advantage of our position with.
Speaker 4: home touring and building a digital home tour reservation system.
Speaker 4: Right now it's super complicated to schedule a home tour. And so, you know, a good deal of home tour request demand goes unfulfilled. And so, you know, what the
Speaker 4: data point on that. Is that right? It's 23% of our tours only that we're fulfilling today. We have meaningful opportunities to upside those. And the other point just to throw in to hit here is we get about double the conversion rate on a tour of our other leads.
Speaker 5: growing the mix of touring is pretty significant to help drive conversion rate. I think in my script, I said three times the conversion. Right. I'm not, I'm not sure, but I'm sorry. Correct. You're correct. Yeah. Okay. So three times the conversion, uh, uh, when we actually connect a partner with, uh, with, uh, a customer, um, on a tour.
Inventory by the end of Q2 2022 with a small number of homes remaining thereafter.
Speaker 4: you know that it doesn't take too much imagination to see how us wiring up that into the Zillow Super App experience could drive increased conversion rate to transaction. Another one is financing. You know I did you know mortgages. I talked already quite a bit about that. But we had our guns and mortgages all trained towards iBuying. So all the work we've really been doing for the last couple of years with
We have updated our expected <unk> wind down restructuring costs to 175 million to $205 million in aggregate compared to the 120 175 to 230 million we previously expected.
$71 million was recognized in Q4 and the remainder we expect to be realized in 2022.
We expect the approximately $800 million of cash equity that was in the inventory at end of Q3 will more than cover the realized losses on inventory operating cost and the cash portion of restructuring costs of the wind down.
Speaker 4: Zillow home loans and building our own mortgage operation was in service to I buying and a lot of it was actually pretty interesting. And we have this factory. We had not been focused on the bigger lever and the bigger opportunity which is basically distributing a mortgage product directly to our customers and via our premier agent partners.
As a result, we now expect the net effect of the wind down of <unk> operations to be cash flow positive in aggregate slightly better than our prior outlook of at least cash flow neutral at the end of Q3.
I would like to sincerely. Thank our dedicated employees, who have been executing the wind down process.
Speaker 4: In this time period we are confident that we will be able to develop our fantastic partner network into a distribution network for our mortgage that will then be just integrated into the super app in a way that puts the mortgage in its proper place which really is kind of a you know painful, but important support.
Moving to the core business results, we'll start with IMT revenue, which was $483 million growing 14% year over year and 51% on a two year stack basis, which accelerated compared to the 43% two year growth in Q3.
Our IMT segment revenue came in slightly above the $481 million midpoint of our guidance driven primarily by Premier agent revenue at the low end of our outlook range and better than expected results in our rentals business.
Speaker 4: stepping stone along the way to the new house. We just want it to be integrated right into the super app.
Speaker 4: I don't know if that, I mean, there is a lot more to driving that to that 6%, but those are two of the big ones. Yeah. And the only thing that I just, I guess, reiterate.
<unk> revenue grew 13% year over year, which outperformed industry growth of 4% and posted accelerating two year stack growth of 52% compared to 49% two year growth in Q3.
Speaker 1: You talked about some of the features and services that we think are going to improve conversion. But starting with this, you know, 25 percent of homebuyers are ready, you know, asking to speak to an agent. And so those being customers that have raised their hand, you know, is a great starting point. And that's only, you know, being one in four right now.
Beyond the <unk> variant and severe cold weather resulted in low lower new for sale listings in late Q4, which had a slight impact on our results, but remain within our expected seasonal range and outlook.
Rental revenue was flat year over year, but better than we anticipated. Despite continued pressures from high occupancy rates, which dampens demand for rentals advertising, we saw stronger than expected customer interest and application and success and renters leasing properties.
Speaker 1: gives us confidence that these services and improved features and integration should give us quite a bit of leverage as we go through and grow this transaction count.
Rental has also faced a difficult second half comps due to a strong 2020 results. Following the initial impact from COVID-19 related volatility a year ago.
Speaker 2: Our final question comes from Ryan McKeveney of Zellman & Associates. Ryan, please go ahead.
IMT segment, EBITDA and margin were $220 million and 46% for Q4, respectively.
Speaker 6: Hey, thanks, Rich and Alan, and I appreciate all the detail, all the new stuff, and Rich, I agree with you. Shout out to.
Speaker 6: designers and marketing folks and data folks, the content of the deck is very good.
Seeding, our outlook of $200 million and 42% at the midpoint.
Speaker 6: appreciate that. But back to my question. So I've got two on the long-term opportunity. First one, somewhat similar to others, so focusing on this movement from 3% market share to 6% market share. Maybe I'll ask a bit more in terms of how we can look at the past to possibly help think about the future. So slide 7, you show 360K transactions in 2021 on 1.4 million connections, so about a 25% conversion rate.
The outperformance was driven by increased operating efficiency as well as lower than anticipated advertising and marketing spend.
For 2021, IMT segment, adjusted EBITDA was $853 million or 45% of IMT segment revenue, representing more than 2100 basis points of margin expansion over 2019.
We are continuously driven operating efficiencies by prioritizing and streamlining internal processes and recognizing the efficiency of marketing I.
Speaker 6: Can you share any insight on how that conversion rate from connection to consumer or to customer compares to maybe the last, you know, two, three, four or five years? You know, I'd imagine both the number of connections as well as the conversion rate has improved over time, but maybe seeing a bit of a trend line there on how things have trended will help us, you know, bridge to what to expect in the future.
I would also like to call out that our high gross margins enabled us to invest in innovating on behalf of our customers partners and our platform customers to drive future growth, while delivering industry, leading EBITDA within online real estate.
Mortgages segment revenue of $51 million came in at the high end of our Q4 outlook range as refinancing loan originations did not flow as much as expected while gain on sale margins compressed within our expectations.
Speaker 1: Yeah, yeah. You know, I guess what I'd say is that when we made the decision in 2018 to go deeper into the transaction,
Segment, adjusted EBITDA was a loss of $14 million near the midpoint of our outlook as we expected lower profitability due to lower purchase volume from unwinding, our <unk> operation.
Speaker 1: Um, we, you know, that was the start of us.
Speaker 1: you know, taking a harder, harder look at how can we drive transactions and success for our customer through the transaction. And, and maybe the, the proxy I'll use is connections. But since 2019, we've seen our ability to drive connections and conversion, you know, through our partner agent base grow. I don't have the, I guess the analog to or the
I would like to reiterate that Zillow financial position remains strong and flexible we ended the quarter with $3 1 billion in cash and investments slightly less than $3 2 billion at the end of Q3 after the impact of our $302 million in share repurchases in December largely offset by earnings from our IMT segment.
The wind down leaves us in a strong position to invest in more scalable customer solutions that are less capital intensive as we execute on our vision and make strategic long term investments.
Speaker 4: the compared to the 1, 4, 360. But we have seen growth as we started to focus on ensuring our customers were connected with an agent were served well. And I think you know heard about us talk about connections high intent customers and the things we've done.
Our expectation is that we will continue to be a positive earnings and past positive cash flow company with a revised product strategy.
Turning to our outlook for the first quarter and our IMT segment, we expect 9% year over year revenue growth in Q1 at the midpoint within an outlook range of 7% to 11% and 47% two year growth.
Speaker 1: to drive that in closed transactions versus the more ad based or, you know, lead based gin that we had been prior to 19. I don't know, Brad or Rich, would you have anything to that? I just don't have the data. Well, it's taken a lot. I guess what I'd say, Ryan, is it
Within the IMT segment, we expect Premier agent revenue to be between 358 to three $368 million up 9% year over year and up 50% over Q1 2020 at the midpoint of our outlook.
Speaker 4: Like strategically you've been hearing us talk about Zillow 2.0 and the move towards the transaction for a few years. Right. And we it's taken us this long to get to a point where we could even find the transaction to count.
Our wider than normal IMT MPA Q1 outlook revenue ranges are informed by the following.
Speaker 4: given the diversity of our business model. And so a big reason we don't have a good historical comp for you on that is that we don't have historical comps. We have worked really hard to come up with this estimate so that we can, you know, to communicate to you all for sure, but this is how we want to manage our business and our strategy internally, all right? So this is super important for us to get right internally. But, you know, as
We saw a slower housing activity late in Q4 and have also seen a slow start to new for sale inventory listings in Q1 <unk>.
Despite that our customer and agent activity levels indicate strong customer demands, which is consistent with the conference boards December consumer survey, indicating plans to buy a home during the next six months, we're at record levels and recovered sharply from lower levels at the end of September .
In other IMT, we continue to expect headwinds in rentals from the continued low industry vacancy rates in our new construction because of builders low inventory levels. We.
Speaker 4: As Alan pointed out the history of the company is about slowly but surely driving conversion rates from user into customer. And now we have what we think it should be a pretty good denominator for that.
We expect Q1, IMT EBITDA margin to be 41% at the midpoint of our outlook. This margin reflects the investment level, we believe is necessary to drive innovation and execution towards our 2025.
Speaker 6: That makes sense. Thank you. Quick second question. Rich, a big picture one for you.
We expect our mortgages segment revenue to be between <unk> $44 million to $49 million in Q1, which is down sequentially from Q4.
Speaker 6: you can repurchase stock as you have been, invest in R&D. I guess to focus a bit more on the M&A side of things, I guess I wonder, how do you think about the opportunity or the possibility to be more active with PropTech investments, you know, either directly investing in, you know, early stage PropTech startups or outright acquiring companies? You know, I'm almost thinking is there an opportunity to be somewhat of an incubator? I'm sure you see a lot of interesting tech early in the days as things get started and just wonder, you know, how you think big picture about, you know, that opportunity or just the M&A opportunity to tack some good tech on over time? Yeah, I mean, it's an opportunity. I would call, looking at Zillow, our
Our Q1 outlook reflects slower industry refinance activity from the recent move in interest rates consistent gain on sales spreads and slower growth in purchase originations impacted by the wind down of our high buying operations.
As a result of lower sequential revenue and continued investments to grow mortgage originations, we expect our mortgages segment EBITDA to be between a loss of $17 million and a loss of $12 million as we focus on preparing customers to be transaction ready through intuitive and digitize mortgage offerings, we are working to integrate mortgages.
Across our platform with a focus on purchase originations.
Speaker 4: Yeah I mean it's an opportunity I would call looking at Zillow our history is that consistent but opportunistic acquire acquire. OK. When we see when we see opportunities to really accelerate what we're trying to do strategically we will take advantage of that. And the showing time acquisition last year is a.
We expect these efforts to make progress over the course of this year.
In Q1, we expect our homes segment revenue to be $2 75 billion and adjusted EBITDA to be a loss of $37 5 million at the midpoint of our outlook range.
Given the wind down of our <unk> operations and the path forward. We see we think it is prudent to initiate new financial targets for year end 2025.
Speaker 4: You know, it was a good example of that a couple of years ago when we acquired mortgage lenders of America to get a, you know, get to not have a cold start on our mortgage operation. That was another one. You know, Jeremy Hoffman, who runs our Corp dev group in addition to strategy and IR, is probably the most popular guy in PropTech.
Before doing so we wanted to remind you of where we stand on our February 2019, three to five year targets.
We have just completed the third year of the original targets and are expecting to soon be run rating. The 2 billion IMT segment revenue targets.
Speaker 4: So, you know, we talk with, do run tests with, partner with all of these companies in the space. We don't have an explicit incubation venture capital, you know, kind of corporate venture capital endeavor. We do have a lot of opportunity in that regard. We don't necessarily think we need to invest because when things want to trade, everything kind of lands on our doorstep first anyway.
And we are already well above our original IMT segment, EBITDA targets of $600 million or 30% margin.
As we wind down high buying operation the original home segment and related Zillow home loans attached related targets are no longer relevant.
With that I'll take a moment to walk through the 2025 financial model that we've included in the Investor deck published on the IR website today.
Speaker 4: And I don't want to sound too opportunistic that way. We have really good relationships with these companies and we think there's a lot of cool innovation happening. That's great, very helpful. Thank you.
Our long term growth model shows how we plan to deliver zyla as new 2025 financial projects.
Model is quite simple industry.
Customer transactions.
<unk> transaction share trying to average revenue per customer transaction for our PVA DHL and Vcs services.
Speaker 4: All right. Hey, thank you all for showing up. It is, as I said, as I said at the end of my prepared remarks, it's a really, really fun and entertaining, endlessly interesting industry. Real estate is maybe not quite as entertaining as Netflix, but not too far off. We were really psyched to be on the journey with you and we'll talk to you soon. Thanks.
Added to other services and marketplaces revenue that include rentals, new construction mortgage marketplace and real estate industry services.
It is important to note that we are assuming no growth in overall existing home sales from 2021 levels and only 3% annual home price appreciation for the industry.
This is not a macro call we are making on our outlook. It is merely the approach we took to look at how we can drive strong secular growth.
Speaker 2: This concludes today's conference call, you may now disconnect.
Simply put we expect to grow our share of customer transactions from 3% to 6%, which should drive over 700000 customer transactions annually.
We have a good understanding of our customers' key pain points and are focused on executing better connections touring mortgage approvals and expanding seller services.
By better meeting their needs, we expect our customers to remain engaged deeper into our funnel, which should double our market share and also drive higher revenue per transaction via the expanded services.
This model implies 24% revenue CAGR, yielding our 2025 targets of $5 billion in annual revenue and $2 $2 5 billion in EBITDA, which equates to 45% EBITDA margin.
We expect margins to scale with our revenue, while we continue to invest prudently, where we see opportunities to drive growth.
As we look forward our priorities remain focused on innovating and executing on behalf of our customers and partners. We plan to grow our customer engagement through a compelling dream in shop experience.
Deliver a more integrated customer transactional experience to drive customers to choose to transact with us and our partners.
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 lastly, manage our cost structure and improved productivity to drive a profitable scalable and positive cash flow company and with that operator, we'll open the line for questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then one on your telephone keypad.
We will pause for a minute to compile a Q&A while still.
Our first question comes from Brian Nowak of Morgan Stanley Brian The line is yours.
Great. Thanks for taking my question guys I have a couple about the multiyear targets. The first one said the 24% annualized growth on the new $5 billion target.
Healthy growth I guess rich I'd be curious to hear first of all.
How do you think about some of the key is to execution. The next next couple of years to sort of realize that type of growth and how should we think about the slope through the next couple of years growth relative to the call. It. The next four and then the.
The second one is if I do some math around the transactions. It looks like you already have a decent amount of seller side transactions on the platform can you just talk to US again remind us about where are you on monetizing seller leads that how big of a part is that in the long term targets. Thanks.
Okay, Brian Hey, thanks.
Well maybe.
Maybe I'll set the table and then Alan you can serve sort of the real food.
This one we did drop a whole bunch of new stuff on you all this quarter.
I'll tell you we had a lot of fun, putting together these 2025 long term targets as well as putting together this.
I think it's a pretty tight tight deck that maybe many of you are looking at right now that really gets to answering Brian exactly what youre talking about.
But from a from a table setting perspective, it's really important too.
The new stuff, we've said as we've made it a little CRISPR, just what we mean by such a huge engaged audience.
Okay.
We have always talked about the $200 million are so unique users, we put a little bit finer point on that by focusing on the app by saying, we get about 4 million daily App users, which is three times the size of our nearest competitor.
And the key to growth really is nothing more complicated than converting more of those 4 million daily app users into transacting customers.
Okay, another kind of.
Really interesting and eye opening data points that I talked about in my script was that we actually have one 4 million of the actual homebuyers last year raised their hand to connect with us.
And yet we've only ended up with 3% customer transaction share you said 360000 transactions. So the big long lever is converting users in two transactions into customer transactions.
We're better at it we're going to be better at it.
The history of driving that transaction penetration no question in innovation in both product and business model has been with us about where we have a lot more experience now because we have been.
In regards to the business buying and selling thousands of homes, we built a bunch of stuff to support that and that puts us in a terrific position to now build what we're calling this this housing Super App, which will act as the integration and dashboard of bringing these disparate components of the process altogether in one place in a really.
Interesting way.
I'll pass it over to Alan by saying the 2020, highlighting that the 2025 targets.
Assume that we take that 3% transient transaction share to 6% transaction share and given all the stuff, we're doing especially say in the closer term.
In terms of touring and financing.
With mortgages.
We think that is achievable and and exciting.
Yes, thanks rich.
And thanks for asking the question, Brian So I guess I'll start with.
The 2025 financial targets was an opportunity for us.
To add some more transparency about the opportunity. That's ahead of us that we're excited about as.
As well as clarify the strong position. We currently are in.
And so as we think about that that path of $5 billion and 45% EBITDA.
As we've talked about it's driven by this expectation that broader integrated offerings are going to drive both more transactions and higher revenue per transaction than where we are today.
And from a modeling perspective, starting with the $12 two customer Tam.
Both the buy side and sell side.
We've talked about the 360000 transactions, we participate in today and just growing that share a 3% to six.
In addition to that it's taking the revenue per transaction, we get today of around $4100 and growing at $5200 a transaction and.
And we think that comes from having more customers using more of our services in an integrated way.
In addition, I will just call out that that those 2025 targets.
<unk>, our other marketplace and industry software solution businesses growing from $609 million in 2021 to $1 2 billion in 2025.
As we think about the slope, we provided guidance for Q1.
We think that this model is driven off of our ability to control and drive secular growth.
By serving the customer and <unk>.
Integrating better with our partners.
I think there are some more near term things and some longer term things as we innovate that's that's kind of the innovation.
Pat.
And we will continue to share as we can how that slope may play out, but right now I think what we'd say is we feel really comfortable based on position. We're in today with our brand our audience our partner network.
Our current standing with a number of the $1 4 million buyers, who utilize our site today and the financial position, we are in and the business model that can generate positive cash flow to execute well on the 2025 targets.
I guess I served some of the dinner in there and we overlap but there were two other things in there and you were talking about the slowdown in Brian's question and that is kind of an implicit in it is kind of where are we in the S curve.
<unk> penetration where are we in the S curve of market share in and.
And is that the path from here to 2025 convex linear concave what is it.
My expectations are that it once we get to the 6% given this giant gap between 6% and our usage and engagement numbers, which are <unk>.
Two thirds of the industry.
Fuel buyers are using using the site I would expect it.
It is my expectation that we will be continuing to invest for growth in a prudent way at that point and so I expect continued growth I don't know what that means about the.
The implications of the curve, but.
I hope, it's I hope, it's linear or better.
And then on the sell side transaction.
<unk>.
You can kind of connect dots based on what we shared.
<unk> at what our estimated sell side transactions that we're getting that we're monetizing today is.
It's a it is a nontrivial chunk of our 360000 customer transactions that we estimate are mainly that is because.
People, who are coming to buy homes with Zillow and with our partners at least half of them are also selling their home and a whole bunch of them do end up selling with our premier agent partners and so we already access the sell side of the market now we want to enhance that and drive share there with more.
Products and the Super App, but we already have a terrific foothold today alright that was a long question long answer Brian I'm, sorry, but thanks for the question.
Okay. Thank you both.
Our next question comes from Ericsson of RBC capital markets. Please go ahead.
Hi, Thanks couple there. So you mentioned a few times that you are engaging with this quarter of all by that last year versus market share at about 5% I guess can you just give a little more color on how either.
BP or flex may be contributing there as you look to reduce that leakage in any sense of the mix between the two models.
And second I guess little related to the first on the seller leads when you are looking to drive you mentioned some that we've talked about before as some of the calls to action that youre looking to implement on the site just curious to hear maybe a bit more about how you might serve to sort of tease out that signal of potential sellers in any.
Maybe early proof point as to how that's going thanks.
You want me to start with the MVP flex transaction rich.
Thanks, Brad I'll take the first part of the question.
Okay.
So I guess, how I would describe it Brad is that we feel like we have a very strong from your agent partner network.
Both across our MVP and our flex models.
<unk>.
<unk> in and of itself is not a driver for transactions, but it is a driver for better alignment between ourselves our customers and our partners, we feel and so.
We will continue to innovate and iterate on on ways to align our partners.
With our products and services and our customers in ways that generate more transactions higher conversion and more revenue per transaction. So.
We're very pleased with where we are both on the MVP and flex model and I wouldn't call one of the other out as the biggest driver.
The journey to the 2025 targets, but I think the key is alignment.
And as rich mentioned, the more integrated transaction.
With tools that serve our customers well and also some of our partner network.
And on your second part.
Look what we what we have come to fully realized is something that I guess, we should all intuitively understand.
And that is.
Okay.
To put it forward.
Forward for the Super Bowl ads that they have coming up.
Is not going to make an advertisement that says sell your current car.
Okay.
What they do what their marketing on the Super Bowl AD is the dream of the new car with the Red Red Bell on it in the driveway.
The housing equivalent does that it holds people the inspiration and aspiration of the move is the new place the greatest.
Seller lead.
<unk>, we have is in helping people dream about the new house, Okay, and we have a really fantastic position and that they were already converting into some sell side.
Business today now we also understand that solving this kind of painful but necessary.
Part of the Super are part of the moving process of selling your house is a big deal and having good solves for that.
With creative New solutions.
Is it is an important area of innovation and we are fully embracing that as you well know we ran a big giant experiment with <unk>. So we know a whole lot more about that now so we'll pitch a big tent over that and are innovating and working with partners to make sure we have compelling offerings to solve that particular problem.
Got it thank you.
Yes. Thanks.
Our next question comes from John Colon 20 of Jefferies. John Please go ahead.
Thanks for taking my questions wanted to start with the housing market, maybe you could just walk us through what youre seeing today from a macro perspective and how your outlook for the housing market over the next three years ties into your 2025 targets.
Second you outlined plans to increase the $1 4 million homebuyers, who tried to connect on Bill last year, which is already an impressive figure of one of the initiatives. You mentioned is developing asset light seller solutions by leveraging our learnings from <unk>.
Given the seller side, it's been more elusive Brazil in the past can you provide any specifics around the products that you are planning to rollout that will help bolster seller connections.
Okay, Hey, John .
You want me to Alan I'll start with the macro stuff and you've heard.
And then maybe Brad jump in if I get it if and when I get it wrong.
<unk>.
Realize that.
We are in a particularly interesting macro environment, given the high level of uncertainty okay.
We are well aware that it's more uncertain than usual.
But our economists forecast strong macro and strong housing market. This year following up a very strong market in 2021 in fact.
<unk> highest trends that number of transactions since 2006, Brad am I right.
Am I getting a nod.
Yes, alright, correct. Thank you don't want to I don't want to get that wrong. It didn't certainly feel like that last year did it because inventory was so low in inventory continues to be low but that doesn't mean, there can't be a lot of transactions.
And while our economists are forecasting that we are taking Allan and his team are certainly taking the more uncertain unusual into account what's driving.
<unk>.
The strength is this kind of millennial tide. That's rising they are really does demographic tide is rising on the industry and that coupled with.
Supply that's not rising as fast as making this we think that continuing to be strong.
A strong market.
Say that Okay Allen Brad.
Yes, and I'll just add on top of that debt as you mentioned rich. Our Q1 guide reflects some of that macro uncertainty that rich talked about in the short term.
The lower new sale listings high occupancy rates in rentals and lower builder inventory are all reflective.
And informed our Q1 guide.
But we continue to see strong demand signals on our site and strong interest from our partners with very low churn.
So.
<unk>.
The opportunity, we feel well positioned.
As we look at this opportunity and this path to the 2025 targets to focus on the.
The customer improve.
Improving our partner network.
Providing them tools and that we believe that.
The 2025 targets are appropriately aggressive, but achievable through a lot of the things that was talked about.
Just to get on the macro and how it affects our 'twenty five targets I just want to reiterate that.
Our 2020 financial targets are based on flat industry transaction assumptions, so no increase in industry transactions and low single digit HPA assumption, so our model and the Kpis that we built really are based on.
Our opportunity to innovate and integrate our services and drive secular secular growth.
Based on the strong foundation that we have okay, but what Alan said about <unk>.
Low single digit.
3%.
HPA home price depreciation of flat transactions thats not a macro call. We're making we're just let's just for modeling purposes.
What we've done so thats not our macro call.
That 3% compares to what 9% CAGR since 1971 or.
Or is that total debt is that total industry anyway.
One more thing sorry, I'd be remiss, if I didn't say.
Install this macro conversation.
Which I understand is important for.
A read through to all of our businesses and the economy I get it.
But really the big shift that we are on the leading edge of as the shift in a in a giant industry the largest perhaps in the U S of moving from the offline non digital way of doing things to the online digital way of doing things with us as the leader in that and that actually is really the most important lever in <unk>.
<unk>.
From a macro perspective to our long term results.
Thank you both.
Yes. Thank you.
Our next question comes from Mark Mahaney with Evercore ISI multiple on its yours.
Okay I'll go back to that 2025.
Outlook.
Love the idea of swinging for the fences rich.
And laying out these long term markers I look at the assumptions that are in there and the one that that strikes me is most aggressive is that 6% share of transactions I know, it's up 3%, but that's a doubling of the share from what you had in 'twenty. One so maybe just double click on that a little bit.
Other assumptions don't seem as aggressive that one does seem aggressive maybe we need some context as to where that if it was 3% and 21 way or where it was before or if you look at all of the different things you could do to increase that going from 3% to 6%. What do you think are the easiest things to do and what would be the hardest things to do just just on that particular metric because I think thats.
Pretty key to this.
<unk> 5 billion outlook, Thanks, a lot.
Hey, Mark.
Maybe I'll start.
Alan you guys you guys.
Jumping in.
When you break it down into the components. It doesn't feel it feels doable to me Mark and I'm, a big believer in.
In <unk>, because I don't even know if I'd call. This behind big hairy audacious goal. It is.
It is.
No doubt not timid, okay, but but.
These goals end up being self fulfilling because of the creativity. They tend to release internally with all the smart people, we have and given the resources, we have comp I'm confident but.
Two rather low.
Bits of hanging fruit, we've talked about a bit on conversion here is.
Getting on top of and really taking advantage of our position with.
Home touring and building a digital home to our reservation system.
Right now it's super complicated.
Schedule at home tour.
And so.
Good deal of home tour request demand goes on fulfilled I don't know what that was.
What the.
Data point on that is that brown or we might actually 20.
23% of our tours, one way that we're fulfilling today.
We have meaningfully opportunities outside the us and the other point just to throw in for that here as we get about double the conversion rate on a tour of our other leads and so growing the mix of touring is pretty significant to help drive conversion rate I think in my script I said three times the conversion right.
Sure.
Correct you are correct right. Okay. So three times the conversion.
When we actually connect to partner with the with our customer.
On a tour and so.
That it doesn't take too much imagination to see how us wiring up that into Brazil, a super App experience could drive increased conversion rate to transaction. Another one is financing.
Good.
Mortgages, I talked already quite a bit about that but we had our guns and mortgages all trained towards buying so all the work we've really been doing for the last couple of years with that.
Willow home loans and building our own mortgage operation was in service to our buying and a lot of it was actually pretty interesting.
And we have this factor we had not been focused on the bigger lever in the bigger opportunity, which is basically distributing a mortgage product directly to our customers and via our premier agent partners.
This time period, we are confident that we will be able to develop.
Our fantastic partner network into a distribution network for our mortgage that will then be just integrated into the Super App in a way that puts the mortgage in its proper place, which really is kind of a.
Painful but important support.
Tapping stone along the way to the New House, we just wanted to be integrated right into the Super App.
I don't know if that.
There is a lot more to do.
Driving that to that 6% of those those are two of the big ones and the only thing that I just I guess reiterate you talked about some of the features and services that we think are going to improve conversion, but starting with this 25% of homebuyers are ready.
Asking to speak to an agent.
And so those being customers that have raised their hand.
A great starting point and that's only.
Being one and four right now.
<unk>.
Gives us confidence that these services and improved features and integration.
You gave us.
Quite a bit of leverage as we go through and grow this transaction count.
Okay. Thank you very much.
Our final question comes from Ryan, Kevin Ing of settlement and Associates, Brian . Please go ahead.
Hey, Thanks, Richard Allen.
Appreciate all the detail all the new SaaS and rich I agree with you shed out too.
The designers and marketing so data folks.
10 of the deck is very good so appreciate that.
But back to my question. So I've got two on the long term opportunity.
First one somewhat similar to others. So focusing on this movement from 3% market share to 6% market share maybe I'll ask a bit more in terms of how the how we can look at the task to possibly help think about the future. So.
Seven you show a 360 K transactions in 2021 on $1 4 million connections, so about 25% conversion rate.
Can you share any insight on how that conversion rate from connection to consumer or to customer.
<unk>, maybe the last 2345 years.
I would imagine both the number of connections as well as the conversion rate has improved over time.
Have you seen a bit of a trend line there on how things have trended who will help us bridge to what you're expecting in future.
Alan you want to you wanted to take a stab at that.
Yeah Yeah.
I guess, what I'd say is that.
When we made the decision in 2018 to go deeper into the transaction.
We that was the start of us.
Taking a harder harder look at how can we drive transactions and success for our customer through the transaction.
And and maybe the the proxy all uses connections, but since 2019, we've seen.
Our ability to drive connections and conversion through our partner agent base grow I don't have the I guess, the analogue to or the.
Compared to the 100 <unk> hundred 60, but.
But we have seen growth as we started to focus on ensuring our customers were.
Connected with an agent or served well and I think.
Heard about us talk about connections high intent customers and the things we've done.
To drive that and closed transactions versus the more AD based or.
<unk> based Jim that we had been prior 2019, I don't know Brad Rich would you add anything to that I just don't have the data while it's taken a lot I guess, what I would say Ryan is it.
Like strategically you've been hearing us talk about <unk> 2.0, and the move towards the transaction for a few years right.
And.
It's taken us this long to get to a point, where we could even find the transactions accounts given the diversity of our business model and so a big reason.
We don't have a good historical comp for you on that is that we don't have historical comps. We we are we have worked really hard to come up with this with this estimate so that we can communicate to you all for sure. But this is how we want to manage our business and our strategy internally alright. So this is super important for us to get right.
Internally.
But.
As Alan pointed out the history of the company is about slowly, but surely driving conversion rates.
From user into customer and now we have what we think it should be a pretty good denominator for that.
That makes sense. Thank you quick second question, Richard Big Picture, one for you so.
After the <unk> wind down you're left with a significant amount of cash you can focus on growth and repurchase stock as you have been investing R&D I guess to focus a bit more on the M&A side of things I guess I Wonder how do you think about the opportunity or the possibility to be more active with prop tech investments.
Either directly investing in early stage prop tech startup or outright acquiring companies.
I'm just I'm almost thinking is there an opportunity to be somewhat of an incubator I'm sure you see a lot of interesting tech early in the days.
As things get started and just wonder how you think big picture about that opportunity or just the M&A opportunity too to tax from <unk> over time.
Yes, I mean, its an opportunity I would looking at Zillow, our history is that.
Yes.
Consistent but opportunistic acquire acquire.
Acquire okay. When we see when we see opportunities to really accelerate what we're trying to do strategically we will take advantage of that and I'm not showing time acquisition last year.
It was a good example of that a couple of years ago. When we acquired mortgage lenders of America to get to get to.
Not have a cold start on our mortgage operation that was another one.
And Jeremy Hoffman, who runs our Corp. Dev group in addition to strategy and IR.
Is probably the most popular guy and prop tech.
So.
We talk with you run tests with partner with all of these companies in the space. We don't have an explicit incubation venture capital kind of corporate venture capital.
Endeavor, we do have a lot of opportunity in that regard, we don't necessarily think we need to invest because when things want to trade everything kind of lands on our doorstep first anyway.
And I don't want to sound opportunity to opportunistic that way, we have really good relationships with these with these companies and we think Theres a lot of cool innovation happening.
That's great very helpful. Thank you.
The scarlet or we need the time.
I'll now turn the.
Paul back to rich Barton.
Alright, Thank you all for showing up.
It is as I said as I said at the end of my prepared remarks, it's really really fun and entertaining endlessly interesting industry real estate is maybe not quite as entertaining as netflix, but not too far off.
We were really excited to be on the journey with you and we'll talk to you soon thanks.
This concludes today's conference call you may now disconnect.
Okay. We are in the clinic.
Yes, one more.
Yes.