Q2 2023 Zillow Group Inc Earnings Call
Good afternoon, My name is Alex and I'll be your conference operator today.
At this time I would like to welcome everyone to digital the group's second quarter conference call all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you'd like to ask the question Jonas time simply crushed thoughtful about number one on your telephone keypad.
You would like to withdraw your question press Star two keys.
This event is being recorded.
I'd like to turn conference over to front planning Vice President strategic Apache and Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to Zillow group's second quarter 2023 conference call. Joining me today to discuss our results are Zillow group's co founder and CEO Rich Barton.
So Jeremy Hoffman and CFO Jeremy Wacksman.
During today's call, we will make forward looking statements about our future performance and operating plans and the housing market based on current expectations and assumptions.
These statements are subject to risks and uncertainties and we encourage you to consider the risk factors described in our SEC filings for additional information we undertake.
No obligation to update these statements as a result of new information or future events, except as required by law.
This call is being broadcast on the Internet and is accessible on our Investor Relations website.
Recording the call will be available later today.
On the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we referred to as EBITDA. We encourage you to read our shareholder letter and our earnings release, which can be found on our Investor Relations website as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical.
non-GAAP financial measures, we will now open the call with remarks, followed by live Q&A and with that.
That I will turn the call now over to rich.
Thank you Brad and thank you Elliot.
Good afternoon, everyone. Thanks for dialing in today.
We're excited to share our second quarter results and speak to the progress we've made on our growth strategy. Since we last spoke in May.
You've heard me say many times that 2023 is a crucial year, Brazil as the year progresses, we're pleased with what we've accomplished thus far.
Second quarter revenue of $506 million surpassed the high end of our outlook by $27 million and returned to slightly positive year over year growth.
And EBITDA of 111.
$11 million surpassed the top end of our outlook by $30 million. This outperformance compared to our outlook continues to be driven by a combination of.
The progress we've made since Reorienting the company in early 2022.
Our focused on cost management and relative macro tailwind as we navigate the ongoing poor housing market.
As we gain to the results with you. This quarter, we are particularly pleased that our residential revenue outpaced the broader real estate market decline of 22% by 1900 basis points, marking four consecutive quarters of outperformance.
And as you will recall from the Investor deck, we shared in early 2022, we believe approximately 25% of all actual U S. Homebuyers sought a premier agent partner in the previous year, yet, we estimated that only 3% of home buyers and sellers ultimately transacted with us.
A major opportunity gap to be bridged.
We framed our solution to focus on growing customer transaction share.
The Zillow housing Super App.
Our big strategy Beth with the Super App is that customers and partners alike want and need a much more digital convenient and integrated housing transaction that zillow is likely the only company in the industry with the technical skills, the audience reach and partner network to pull it off.
We are clearly making progress on this long runway of growth strategy.
We will continue to invest and prioritize for a steady drumbeat of features and services for both customers and partners, which should set us up for long term profitable growth.
Our Super App investment manifests five growth pillars, we talk about frequently with you all but it also shows up in the core day to day work, which is as a result of having our 6000 employees Orient around the same goal to increase our share of customer transactions.
Since we have made transactions such an important focus for us we have learned a great deal about our customer experience far beyond what we ever knew when we were purely a lead Gen focused company.
We've spoken before about the significant investments in improving our customer funnel.
We're making numerous incremental improvements in an effort to capture more customer demand and connect more of that demand to our partner network, which has resulted in better than expected connections in premier agent.
Additionally, we continue to see significant value in giving more customers the option to tour homes as the key call to action on our apps and sites, which is also driving this relative outperformance.
One additional boon to US first time homebuyers make up a larger relative share of buyers in the market today. This benefits us because we have a richer mix of first time homebuyers.
Before someone is the first time homebuyer, they are often a renter.
Over $11 million rental households, moving each year, we continued to invest in zillow rental marketplace to integrate and streamline the experience, while driving customer preference for zillow rental products.
We are building a comprehensive marketplace of rental listings and integrating and experienced the guidance ranges all the way through completing their rental transactions and supporting subsequent interactions with their landlords or property manager.
Rentals revenue grew 28% year over year.
This growth was driven by organic efforts signing up more multifamily properties and attracting more single family listings with limited marketing dollars.
In may of last year Zillow regained its spot as the number one most visited rentals platform. According to Comscore.
And we have widened our lead since then putting us in a strong position for future revenue growth.
We intend to differentiate our marketplace on quality of experience building out a one stop suite of landlord tools to attract unique supply while simultaneously investing to deliver a more seamless housing super app experience for rental customers and partners.
All of the positive performance, we've seen across our business. This quarter is supported by our healthy top of funnel relative to the weak housing market and consistent organic traffic to our apps and sites.
From our earliest days, we prioritize the product itself is the most critical part of the marketing mix delivering product innovations that empower and serve our customers.
Our product centric approach has served us well driving favorable word of mouth marketing and strong brand recognition.
Currently more than 80% of our traffic comes directly to us which is rare and good.
Another critical belief, we have that underlines our housing Super App strategy is the importance of our mobile App is the key interface to our customers.
We were an early mobile developer back when the iPhone was released in 2007 and have been investing ever since.
As a result, nearly half of our business today or in our lovely Zillow, App, where people dream shop buy sell rent and finance.
This has made us the leading real estate App and site in the U S. According to Comscore.
The direct branded relationship we have with our customers will serve us well into the future.
We spoke last quarter about how we're thinking about AI as its potential to influence how people use digital services to accomplished countless tasks in their lives.
While the initial wave of splashy headline is playing an AI hopes and fears have waned a bit our belief and its importance to our future has not.
We are energized about AI has potential to drive efficiencies and improve the experience of our customers our premier agent partners, our loan officers and our employees.
Understanding the opportunity here, we've deployed several work streams across the company to improve the experience of all four of these key constituencies.
Today, we are in the rapid exploration phase and we already see how AI will be fundamental.
In accelerating our business.
Before I talk through the progress we've made in the last quarter on our product roadmap allow me to re articulate articulate the Golar <unk> housing Super App strategy.
To increase engagement.
Customer transactions and revenue per customer transaction by investing across five growth pillars.
Turing financing seller solutions, enhancing our partner network and integrating our services.
The expected output of this strategy is to grow our share of customer transactions from 3% to 6% by the end of 2025.
We continue to emphasize that 2023 is a year of execution.
Through mid year I am pleased to report that we have been steadily rolling out products and services across our five growth pillars, and integrating them to create an increasingly seamless experience for customers and partners alike.
To begin our product roadmap update I'll start with financing. This remains an important investment for us for obvious reasons.
Nearly 80% of homes purchased are financed with a mortgage.
40% of all homebuyers start their journey shopping for a mortgage.
80% of those don't yet have an agent and almost all of those mortgage seekers use <unk>.
We are building the foundation for a substantial first party direct to consumer purchase mortgage origination business seamlessly integrated with our extensive premier agent partner network.
We've spoken about the two ways in which customers connect with Zillow home loans.
Property <unk> and financing first.
I'll start with financing first.
The as the entry point for Zillow home loans, which is when customers start their moving journey by getting prequalified before they are connected to an agent.
We are making good progress on integrating our mortgage mortgage experience into the Zillow app, helping customers better understand what they can afford and to easily get preapproved before they meet a premier agent partner. Additionally, we are continuing to refine our ability to better connect our transaction ready customers to one of our DHL loan officers as quickly as possible.
<unk>.
Lastly, we are building tools for our loan officers to make their experience easier when working with customers. All of this work is resulting in higher loan officer efficiency and a better overall customer experience.
I'll now ask which over to the property first entry point, which is when our Zillow home loans lead comes back to us from a from a premier agent partner, who is working with the home shopping customer we had previously sent them.
Here, we are focused on building great technology for our Premier agent partners and DHL loan officers to bolster efficiencies and ensure a quality transaction experience equally important we are focused on building a deep relationship between our DHL loan officers and our Premier agent partners. So that together they can provide the best.
<unk> service to our shared customers.
Consistent with last quarter, we are seeing roughly one in three primary agent partners and our enhanced markets connect customers to Zillow home loans up from roughly $1 five in Q4 2022.
Suffice it to say, we are working hard on our financing growth pillar.
And deep integration of Zillow home loans into our customer and partner experiences.
I am pleased to share.
That as a result of all our efforts we are reporting 73% year over year growth in purchase loan origination volume and 30% growth sequentially from Q1.
All in the context of a lousy mortgage market.
Okay.
I'll now speak about Turing, which continues to be one of our big bets because our data shows that movers, who requested tour convert to buyers at three times the rate of other actions on Zillow.
This past quarter, we've continued to iterate and improve our real time touring products showing time.
We began by shipping new software across the industry that enable the real time touring functionality. We then began to train our premier agent partners lighting up real time touring on a market by market basis, allowing eligible buyers to get it to a confirmed quickly with much less friction.
I am pleased to share that we've now rolled out real time touring and all six of our enhanced markets, including Charlotte and Durham.
Further to accelerate the rollout of real time touring we've begun launching outside of our enhanced markets, including to four additional locations this quarter.
As we are continuing to invest in product improvements to enhance the experience.
For example agents now have expanded self service tours management capabilities at their fingertips, including the ability to reschedule review subsequent tours in the showing time App and book multi property tours.
These incremental improvements contribute to a meaningful upgrade from the antiquated game of three legged phone tag is still being used by many customers and agents to schedule home home tours.
Real time touring combined with other initiatives in our enhanced markets is improving our funnel and driving meaningful improvements to our ability to connect higher intent customers to our premier agent partners contributing to the enhanced market outperformance that Jeremy will discuss in more detail shortly.
Now I'll move onto the final pillar of our product roadmap updated seller solutions.
We are working to provide sellers and listing agents with tech enabled products and services that make it easier for people to move.
Last fall, we began talking about a product we're developing to differentiate listing agents on zillow through branding and higher quality listings that look unlike anything else that exists in real estate today.
I am pleased to share then in June we launched listing showcase by showing time plus in select markets.
We're excited about this product for a number of reasons.
First by targeting sellers and listing agents directly we are expanding our serviceable addressable market, increasing our opportunity to grow customer transaction share and diversifying our business model.
Second it's great for consumers.
Buyers and sellers alike.
Listing showcase offers sellers a differentiated listening experience that rises above the rest, giving buyers richer tech enabled insights into the homes layout and features finally, it's giving agents across the industry not just premier agent partners, an opportunity to elevate their professional brand to help them win more business.
It's early days, but we are optimistic.
Initial feedback and demand has been strong from listing agents across the industry, who are eager to learn.
And try out this innovative new offering.
We are planning to rollout more markets over the course of this year and we will provide more details in the coming months.
We've also made progress on our other selling solutions offerings, our partnership with open door, which allows sellers on village you request a cash offer from open door is live in 25 markets as of today compared to the two markets. We launched initially in February .
As I think about the progress we're making in the business I am pleased with how we have managed even as so much remains out of our control.
Mortgage rates are staying higher for longer than previously expected and continue to be volatile, resulting in would be sellers hesitating to move due to their attractive legacy low rate mortgages.
This is having a more pronounced effect on sales volumes during the typically strong summer moving season <unk>.
Demand has held up better than supply driving inventory to record lows and supporting prices despite affordability headwinds.
With low existing home inventory, new construction is a bright spot, adding new supply to help meet some of the demand and growing the overall housing stock.
Our new construction marketplace experienced strong growth again in Q2.
Additionally, the rental market is adding record levels of new supply, new supply, which has lowered occupancy rates and driven landlord demand for rental advertising contributing to 28% year over year growth in rentals revenue for us this quarter.
The housing market.
Outlook continues to be frustratingly foggy and we can only plan for it to take time to normalize vol.
Volumes remained stubbornly low, but we continue to have confidence that this is not some new normal and that we will get back to approximately 6 million units a year over time.
To close I'll reiterate how pleased I am with our progress this year, we're navigating well through a tough housing macro environment that is not in our control maintaining our focus on what we can control steady progress across our growth pillars, and prudent cost management as we work towards driving profitable growth for our business.
With that I will now pass the line over to Jeremy Hoffman, who many of you already know from his six year tenure at Zillow, which saw him rapidly increases leadership scope to include Corp Dev strategy.
Is this operations Investor Relations government relations and now all of finance as CFO .
Welcome to the microphone Jeremy.
Thanks, rich great to be on the call with you all and looking forward to connecting in the coming weeks and months.
Given this is my first earnings call I want to set the table for what I am going to cover first I will go into additional details about our Q2 results and our Q3 outlook for continued strong relative outperformance versus the real estate industry than.
And then I want to provide new transparency on our cost structure and how we plan to manage costs going forward, including share based compensation with our intent to be a profitable growth company.
I will provide some clarity on our capital management strategy, including plans for further improvement to the quality of our already strong balance sheet.
In Q2, we delivered total revenue of $506 million $41 million above the midpoint of our outlook.
Revenue outperformance drove $40 million of EBITDA outperformance as well.
Our costs were in line with our expectations and we were able to flow revenue stream directly to EBITDA showing the high incremental margin business that we have today.
Total revenue returned to positive year over year growth, albeit slightly so compared to the $504 million, we did a year ago on.
On a GAAP basis net loss was $35 million in Q2, and net loss as a percentage of revenue with 7% EBITDA.
EBITDA of $111 million resulted in a 2018% EBITDA margin.
Residential revenue was $380 million down 3% year over year outperforming the high end of our outlook range.
Our residential revenue performance with 19 100 basis points above the industry decline of 22%. According to data from the National Association of Realtors.
Our relative outperformance continues to be driven by delivering better than expected number of customer connection to our premier agent partners and favorable tailwind relative to the industry that rich discussed earlier.
We estimate that over the past few quarters approximately half of our outperformance has been driven by actions taken by us and approximately half has been from a relative macro influence.
As rich discussed our ongoing investments in our top of funnel mid funnel experiences are paying off.
<unk> revenue increased 28% year over year.
<unk> traffic grew 15% year over year to 31 million average monthly rentals unique visitors per comscore.
Industry, leading rentals traffic drove 21% year over year growth in the number of multifamily properties on our apps and sites.
We also continue to see industry tailwind with occupancy rates declining from historically high levels, highlighting the need for landlords to advertise their baked it in rental properties with US mortgages revenue was $24 million with purchase loan origination volumes growing 30% sequentially from Q1, and 73% year over year.
Further total origination revenue returned to positive year over year growth.
We lapped the slowdown in refinance activity from early 2022.
In Q2, we delivered a 50% increase in loan officer productivity compared to Q4 2022 based on the number of locked loans.
We're adding new tools and capabilities for customers aging and our loan officers that we expect to drive further efficiency improvements in the quarters ahead.
Given this progress we plan to increase our number of loan officers in the coming months, while we closely monitor operational efficiencies.
New construction revenue growth was also strong during Q2, increasing 18% year over year as customers turn to new construction homes, given the limited existing home inventory.
Earlier. This week, we also announced that <unk> will be the exclusive provider of new construction lifting content on Wednesday, and we look forward to serving our mutual customers.
With the largest selection of new construction communities of all real estate web site in the U S. We expect our new construction marketplace to benefit from increased connections with prospective shoppers.
EBITDA expenses totaled $395 million in line with our Q2 outlook with cost of revenues slightly higher than expected primarily due to higher revenue.
Select operating expenses slightly lower as a result of favorable head count and advertising expenses.
It is worth noting that share based compensation expense this quarter was $130 million up from $103 million in Q1.
Nearly $17 million of the sequential increase was driven by the impact of the party personnel as well as the impact of our March 2023 annual employee grants.
We ended Q2 with $3 3 billion of cash and investments down slightly from Q1, which includes the benefit of net cash provided by operating activities as well as the impact of $150 million in share repurchases during the quarter.
Convertible debt was one seven.
$7 billion.
At the end of Q2.
Turning to our outlook for Q3, we expect total revenue to be between 458 million to $486 million, implying a year over year decline of 2% at the midpoint of our outlook range.
We expect residential revenue to be between 339 million to $359 million down 6% year over year at the midpoint of our outlook range.
As compared to our estimate for an industry transaction dollar decline between 15% and 20% year over year in Q3.
Note that we expect a total industry decline of 17% at the midpoint of the range to nominally improve compared to the Q2 decline of 22%.
Homeowners locked into their current mortgage rates are having an impact on the normal seasonality of move up buyers, who typically move between school years.
Despite the challenging macro environment of higher for longer mortgage rates, we expect to continue to outperform the industry in Q3.
The investments we have made in our funnel will continue to deliver benefits in Q3, while experiencing less relative macro tailwind versus previous quarters.
Premier agent, we estimate revenue will decline between 4% to 9% year over year.
The macro backdrop remains choppy, we continue to focus on the inputs, we can't control, adding value to our customers and chicken great products and services.
Despite the tough macro existing home sales environment, our customer connections with Premier agent has been nearly flat year over year, but the combined past few months.
That said, we do remain cautious that buyers will find it difficult to buy homes with such low inventory levels at our outlook reflects this dynamic for Q3, we expect EBITDA to be between 67% to $87 million <unk>.
Implying a 16% margin at the midpoint of our outlook range.
Let's start with the outlook that we provided at the end of Q1, we expect Q3 EBITDA expenses to be flat compared to Q2.
We are announcing today that we closed on the acquisition of <unk>, a leading software provider to real estate photographers across the country.
<unk> platform capabilities and network of third party real estate photographers will help enable us to scale showing time pluses listing showcase product separately in late June we announced the sunsetting of Zillow closing services as it did not have the tech or an integrated product, we believe customers and partners need.
Having originally been built for our <unk> effort.
That said integrating their real estate transactions to make buying and selling simpler for customers remains our core strategy.
We are actively exploring other title and escrow solution and we will follow up when we have more details to share.
Next as I discussed in my introduction I want to dive deeper into providing new transparency on a few topics I will start with our cost structure.
Given the uncertain macro environment and the associated challenges with accurately forecasting revenue, we want to be more explicit with investors regarding how we plan to manage our cost structure moving forward.
We evaluate cost in three categories fixed variable and advertising.
Our fixed cost run rate is approximately $1 $1 billion annually.
Over the past 18 months, we have forward investing and believe we are currently around the right level of fixed costs to execute on the opportunities. We see ahead. Looking ahead, we do not expect to materially expand our current fixed cost structure as we scale our current growth initiatives.
Our variable cost run rate is approximately $400 million annually.
While we expect variable cost to grow and scale our business, we intend to drive operating leverage over time as we speak.
<unk> new product areas, and we will continue to seek new unit economics efficiencies across the business.
We continually look for efficiencies in our variable cost structure, our muscle we had been building for a while now.
And I wanted to share a few examples.
I already mentioned that Zillow home loans loan officer productivity improved 50% from Q4 of last year.
We have also improved our premier agent cost per connection by 29% since 2012.
Yeah.
Our cost per floor plan annotation on our virtual touring technology has dropped by 78% since the beginning of 2022.
These are just three of many examples we have of ensuring that we are getting more and more efficient with our variable cost base next.
Next in the advertising, we believe we have been affected users of advertising dollars for a long time and have dialed up and down spend depending on the environment and opportunities, we see to build awareness and drive growth we.
We will continue to with that advertising levels with that same lens.
And distinct from the rest of our fixed cost base.
Another important part of our cost structure is share based compensation, which we manage on a cost per employee basis, while closely monitoring deletion.
We recognize that share based compensation as a percentage of revenue has been high recently as macro housing weakness is pressuring revenue at the same time, we are forwarding that thing to drive future growth going forward as.
As we manage our head count and deliver on our strategic revenue growth plans, we expect to leverage our share based compensation to enable investors to see GAAP profitability overtime. Additionally, we would expect those same factors to result in a higher share price that would also further limit dilution.
We believe deeply and aligning our employees incentives with our shareholders recognizing the importance of managing dilution along the way.
Now turning to our capital structure, we have a strong balance sheet with cash and investments of $3 3 billion and.
And net cash of $1 6 billion.
As of the end of Q2.
Also have $1 7 billion.
<unk> senior notes, which include our 2024 and 2026 gens that are callable when our stock price exceeds 50 656 per share for a specified period of trading days.
That's our class C share price rises above those levels, we may redeem those notes.
If we do it is our expectation that we will settle the $1 1 billion principal amount on the notes due in 2024 and 2026 in cash.
Settle any conversion premium in shares of class C capital stock.
Based on what we know today, we do not expect to engage the convertible markets to refinance.
Our outstanding debts.
Third we expect to be in a position, where we have no outstanding debt on our balance sheet as these notes mature or become callable.
We also announced today that our board has approved an additional $750 million capital repurchase authorization, bringing our total available authorization to just over $1 billion when combined with our $264 million existing authorization in aggregate, we have repurchased one 5 billion.
A shares and authorized $2 $5 billion worth of shares since the inception of our buyback program in late 2021.
Going forward, we will continue to carry some cash for risk management purposes, some cash for potential inorganic and organic investments dry powder and opportunistically consider share repurchases from operating cash flow.
Now I'm going to give an update on our transaction share and our enhanced markets.
In early 2022, we shared our strategy to capture what we continue to believe there's a significant opportunity to drive growth by moving down funnel and focusing on the housing transaction itself.
This included our plans to increase our share of customer transactions and revenue per transaction.
We believe we are making good progress and have the right products in the pipeline to be successful at.
Evidence, while we called out the industry decline of 22% in Q2, our national connection volumes are nearly flat year over year on a combined basis over the past few months.
Furthermore, in our four enhanced markets, we are seeing significant year over year connections growth.
And while we are still in early days with product rollout I am pleased to share that in Q2, we saw 50% year over year customer transaction share growth in Phoenix, and Atlanta, which are our most mature enhanced markets.
To date, we believe that outsized performance is being driven by a combination of partner selection early success in real time, scoring and financing and buoyed by the relative macro tailwind we are seeing across the business. We think this is a good proof point that gives us confidence to roll out more enhanced markets, which we announced today at <unk>.
More data becomes available we will continue to share.
It is important to call out that while we are working on our big future growth drivers, we have delivered meaningful revenue outperformance compared to the industry for the last four quarters and expect to do so again in Q3, evidenced that we are gaining share after a challenging first half of 2022.
As you've all heard from us before 2022, where the year wherever you re strategize and reorganized around our housing Super App vision.
2023 of the year for us to release, new products and tests in various markets setting us up for further scaling in 2024 and 2025.
Halfway through the year, we are pleased with how 2023 is progressing with a lot of work to do ahead.
As we look forward my top priority as CFO is to ensure that zillow is a profitable growth company, resulting in outsized value to our shareholders.
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 Press Star then the number one on your telephone keypad.
So just a moment to compile the Q&A roster.
Our first question today comes from Lloyd Walmsley with UBS. Your line is open.
Hi, there it's Katie on for Lloyd today, just a quick question on the open door partnership last quarter opening announced that your partnership with <unk> launch in five markets. I know you guys said two in fab now. We're at 25 is there any update on the rollout in progress Youre seeing so far or any color you guys can give us there.
Yeah.
Hey, this is Jeremy Wacksman I'll take that one yes as rich talked about earlier, we're now live in 25 markets up from the two in February .
And on top of that in our seller solutions growth pillar, we just announced and have launched listing showcase by showing time plus in our select markets. So we're really pleased with the expansion and coverage of our solar solutions as rich talked about.
Increasing our service addressable market to the sell side and sellers, who become buyers as well as accessing more types of agents not just from your agents and listing agents across our solutions so more to come in the future quarters, but we're pleased with the continued progress there.
Great. Thanks.
We now turn to Brad Erickson with RBC. Your line is open.
Yes, Thanks, I just had a couple.
First.
You, obviously talked a lot about the share gains in the letter and here in the prepared remarks.
But what we're seeing right now I guess just in the report and the guide can you just unpack that a little bit more in terms of the factors that is doing is maybe or sustainable versus maybe not as sustainable or at least out of your control.
The first one and then second.
You called out the accelerating the rollout of real time touring just.
Curious what that does to the mix of leads.
Sending out or if it changes at all and just.
Curious if that's something we can see contribute to those share gains here going forward just talk about the effect of the mix of touring week that has on the business. Thanks.
Yeah, Thanks, Brad as Jeremy Hoffman I'll take the first one and then hand it to Jeremy Wacksman for the second one.
On the outperformance I think similar to prepared remarks, it's roughly 50% in our control that is driving the outsized share gains and 50% relative tailwind on our side.
One of little actions that add up with a funnel that's as big as ours and then we're getting benefit.
From touring as a prominent called action so the more touring that folks see on their sites and apps.
More than it makes up more of our connections the better off we are interestingly our performance as a result of that on the macro side.
It is the fact that there is more first time homebuyers as a mix of all homebuyers. So those are sort of the dynamics that we see at play like I said in the prepared remarks, I think we expect the macro to be less helpful. In Q3, but we are still projecting a 100 basis points of outperformance at the mid point. So that gives you a sense for the how we feel about the investments we're making.
And the ability for us to keep improving our funnel. So that's that one and then I'll hand, it to Jeremy for the for the other yes.
Yeah, and Brian on real time touring.
As rich said, we have been.
Over time, increasing tour exposure on Zillow nationally, while also building real time touring and our enhanced markets and so both of those things contribute to our part of the share gain thats in our control.
So on the National Thats, just about removing friction in the funnel.
Getting more customers interested in aware of a tour.
And then when they want to bucket towards making that easier for them and then in real time touring specifically that is now in our enhanced market. Then we announce is coming to more markets. That's really about creating that reservation like system for a buyer to remove entire steps in the funnel and be able to book a tour when they want to go see them more often.
And we continue to improve that product as well right. We're expanding our product offerings agents can now expand our self service to our management capabilities rescheduling and viewing and then bookings. Subsequent tours are all features we're adding so these are all things that we're hearing feedback from customers and partners that has been on our product road map that we're excited to get into March.
So we're improving the product while also scaling and rolling out the product to more customers and partners.
Got it thanks.
Our next question comes from Ron Josey with Citi. Your line is open.
Great. Thanks for taking the question maybe.
Maybe I wanted to get into a little bit more on just expanding the number of markets I think you've talked about Charlotte and Durham, North Carolina talk about just the process of expanding that spending newer markets how.
How do we think about newer markets going forward and then Jeremy I heard earlier I think you said loan officer delivered 50% increase in productivity versus <unk> 22, just any insights on that would be would be helpful. Thank you.
Yes. This is the first one on enhanced markets.
I mean, nothing further than what we announced today, which is we're adding two more markets to our enhanced markets and rolling those out now so Charlotte and Durham and the other thing I think rich talked about was.
Also bringing real time touring to four markets beyond those so while we're not bringing the entire enhanced market playbook to those next four markets real time, Tony is coming first and we're doing that because as we've talked to you all about before we want to expand these capabilities as we can and as we are getting the playbook and the technology right.
For real time touring we're able to bring that to a more partners and try more things versus the entire enhanced marketing playbook. So thats on the train and then remind me your second question loan.
I'm, sorry, yes, one productivity, yes, I mean, it's a combination of a couple of things one it's about just continuing to help find higher intent customers as rich talked about we have so many mortgage shoppers on our site because 40% of all homebuyers want to start with that question, but theyre all in different stages, and so helping those folks as they re.
Their hand and start to ask questions with things like our personalized payment experience and our Prequalification system.
<unk> find the right customers and get the right customers to our loan officers as one big piece of it and then just tools in the factory.
We're releasing products and services so that our loan officers can more efficiently work with a customer working and fewer systems being able to do more digitally real time on the phone with the customer and not having to call them back all those things help them be a better consulting a better advisor and that leads to conversion gains, but also just leaves the productivity and efficiency gains.
Great. Thank you.
Thanks, Sean Our next question comes from Mark Mahaney with Evercore ISI. Your line is open.
Okay two questions, please and I'm, sorry, if you've already touched on these but.
I'm talking about.
The puts and takes to getting EBITDA margins once we get back into growth mode and hopefully at some point.
<unk> and company specific hopefully we get back into that sustained growth mode.
Getting the EBITDA margins for the business as a whole back up to.
30%, 30%, maybe 40% so the biggest drivers there what you can control what you can and then if I could just stick on the enhanced markets and is there any evidence yet maybe it's too soon but is there any evidence in that those.
Hence markets that youre actually gaining share of transactions in those markets trying to figure out whether there is something we can extrapolate to the rest of the country. If you are successful in those markets. Thanks.
Yes, Mark it's Jeremy Hoffman I can answer your first one and then probably take your second as well on the first one on EBITDA margin drivers, yes, we feel good about our ability to get to those levels as we drive revenue and leverage our cost structure over time I think we are making progress in a number of places.
And believe that we have a highly leveraged bolt cost base. So as we drive revenue, we believe that will flow through and you saw that in the performance. This quarter right, we outperformed substantially on our revenue and it flowed through to EBITDA. So feel really good there about our ability to drive that over time and then on the share gains question.
I had mentioned in my prepared remarks, but I'll say it again here.
In Q2, we saw 55 zero percent year over year customer transaction share gains in Phoenix, and Atlanta, which are our two most mature enhanced markets. So it's obviously early days there is a lot more markets to come from here, we're going to be methodical about rolling those out but it is a great proof point to say hey, the strategy feels like it.
It is working early days.
Thank you Jeremy.
Our next question comes from Ryan <unk> with Zelman <unk> Associates. Your line is open.
Hey, thanks, so much guys.
Question on the residential outperformance versus the industry I'll ask it a bit of a different way than bretts question before so if we isolate to the half of the outperformance that is kind of secular it's the benefits of the changes you've made or some of the newer initiatives. I know you don't speak to the exact breakdown between transactions on the buy side and the sell side.
But can you talk to us about.
How that incremental penetration is trending between those categories buy side sell side and I guess is it happening in both areas or are one of the two aspects.
Driving things more so than the other at this point in time.
Yes.
I think on buy side versus sell side I mean, we don't tease it out specifically, especially in the incremental which I think is what your question is about but.
Primarily most of our transactions to date, our buy side right and so.
The share gains you're seeing the relative outperformance youre seeing is all mostly coming from the buy side and you've heard that from rich and Jeremy that's one part.
Friction removal and higher quality customers get into higher quality partners in one part relative macro tailwind with the buyer mix.
That said, we are really excited about our ability to gain.
And see more share gains as we layer in seller solutions as well both between our multiple selling off offerings experience for our customers introducing them to an open door offer if theyre interested or premier agent partner, if they want and showcase listing showcase which we just launched this quarter, which rich talked a bunch about as well so we expect.
Share gains in customer transactions to come from both.
Over time, even though right now we're seeing the benefits of our own efforts and macro efforts primarily on the buy side.
That's helpful and for Jeremy Hoffman, Congrats on the new role and.
Yes, I appreciate the extra color, especially around the cost structure I guess.
Using it out a little so the fixed cost run rate around kind of the rate levels at this point.
Is that to suggest that on the mortgage side of the business kind of the infrastructure of the fixed costs associated with the mortgage lending operation is in a pretty good spot today to to scale over time or could that remain a potential area of investment, whereas maybe some of the other segments.
Some more cost rationalization.
Yeah, just just curious how that overall comment my tie directly to what's going on in the mortgage side of things.
Yeah, Brian it's a good question.
On the fixed cost side, we do feel pretty good about the amount of infrastructure, we have in place for mortgage.
That is to say over the next couple of years and of course as it grows we will see but based on the current plan, we feel pretty good about the fixed cost on the variable side, we will grow costs, there because that means our hiring loan officers, but that's obviously a good thing so long as we're manufacturing loans profitably, but on the fixed side, yeah, we feel.
Pretty good.
Mortgage side and then on the overall business I'd say, we feel like the fixed cost investment we've made to date should serve us well.
The current growth initiatives, we have.
Sounds good thank you.
Yes.
We now turn to Tom White with D. A Davidson your line is open.
Great. Thanks for taking my question, maybe first one for Doug Jeremy H first off congrats on the new role.
The cost structure commentary again super helpful. On the variable expenses you gave some examples of.
Recent efficiencies in progress could you maybe update us on what parts of <unk> business today represent kind of maybe the biggest opportunity to drive further efficiencies and variable expenses and then maybe one for rich on Zillow closing services.
Being sunset. It just curious to hear you talk about maybe how you envision zillow.
Disrupting kind of the the title and escrow space clearly there would appear to be opportunities to make it a more transparent better experience for customers, but just curious to see how.
Do you view Zillow.
Participating there thanks.
Okay.
Yes, so I'll take the first one.
Good question I think we're looking for efficiencies all over the business. Our most mature businesses. So the ones that are newest I would say the biggest opportunities for us on the variable efficiencies are the newest products.
Over time right. So between mortgage seller services those should get leverage as we scale, but those are the places where we are most focused ensuring we're getting efficiency.
As those products come into into life and that all pushed to rich on the second question.
Only because you asked me directly Tom.
And I haven't spoken yet in the Q&A. So thank you for including me.
Yeah, So we sunset a dcs now because we don't think title and escrow is important as part of the.
The transaction, but because we built that thing for Zillow offers.
And it.
Before I buy in business and it wasn't just wasn't the right solution for us.
With what we have envisioned now.
I think Jeremy Hoffman and his.
In his prepared remarks talked a bit about how we think it's an important thing and to watch. This space. We are working on alternatives right now so.
So watch this space.
Anything to add Jeremy Wacksman no.
Alright, great. Thanks.
Thanks, Tom.
Thank you.
Our next question comes from John Campbell with Stephens. Your line is open.
Hey, guys, good afternoon, and Jeremy I would like to echo as well congrats on the promotion and the Opex disclosures are very helpful. So thanks for that.
You guys have obviously torched your guidance in recent quarters I'm thinking that you've probably set the stage here again, but the EBITDA, that's always going to hinge on obviously the top line. So I just maybe wanted to double click on the premier agent guidance.
Mainly the industry forecast it looks like you guys are baking in a down 15 to maybe down 20% year over year. It looks like the <unk>, calling for down seven Fannie and MBA. It looks like the average down eight. So you guys are a little bit out there I think that year over year decline also is implying that the market would drop a good bit sequentially off of what kind of already feels like.
Trough level at this stage, but my question here is are you seeing something internally there.
Might signal softer trends from here or is that just.
Terms of approach against I guess, a continuation of market uncertainty.
Yes, it's a good question.
We guided based on the best information that we have.
And I think existing home sales and inventory just being as low as they are right now puts us in a spot that we have to make the best information.
Available that we have we have internal economists that look at this every day, so really given the best the best information that we have what we're most focused on I would say is ensuring that we continue to outperform the industry. So we're feeling quite good about the ability.
Outperformed the last four quarters, and we're guiding to outperform 1100 basis points at midpoint to midpoint NPA versus the industry for Q3 as well.
Okay. That's very helpful. Thank you.
We now turn to Brian Fitzgerald with Wells Fargo. Your line is open.
Thanks, guys maybe.
Quick follow up to Mark in Ron's question as an enhanced markets.
Can you remind us what kinds of things youre looking at or you're looking to see in locations to two two.
To expand.
As an enhanced market and then as your as your new products are aging in your first enhanced markets are you seeing any changes in usage or Asian behavior any dynamics to call out with respect to kind of.
Asked market cohorts, if you will.
Sure. Thanks, Brian .
The things we're looking for in our hands markets are.
Ultimately the outputs are customer transaction share and the indicators that I think we've talked to you all about before in the funnel are reducing the friction and so customer engagement and customer agent engagement and work with rates between those two and so these things take a long time mature transactions take a long time, but we <unk>.
Those kind of mid funnel indicators on both the customer side and the agent side.
As Jeremy Hoffman talked about we're really pleased that we're seeing significant customer transaction share growth.
Our two oldest enhanced markets even as we're early in seeing the benefits of the rollout of a bunch of those capabilities.
So again.
Increased focus on partner quality, and really aligning ourselves with partners that work more deeply with us across these product experiences the rollout of real time touring the rollout of Zillow home loans and the rollout of seller solutions across all of those things. We think is a recipe for success in the share growth Youre seeing and that's why we have comps.
Vince is going to continue.
Then.
In terms of what we think about going forward. That's why we have started to bring those to more markets. Even at the same time, while we're continuing to improve mature the products themselves.
Not done building the things we're talking to you all about we are building and deploying at the same time and so that capability improvements for both customers and our Premier agent partners and our loan officers will continue as you heard a bit from rich and Jeremy about.
Thanks, so much I appreciate it.
Our final question today comes from Teekay Lee with Jpmorgan. Your line is open.
Great. Thanks for taking my questions two first one for rich a question on the.
Although we are exploring all options for example, when you are looking at it.
We welcome your questions on those.
From a longer term perspective.
Another question Mark.
Mark.
Martha.
Precise transaction share part of the question.
Hi.
It needs to be rolled out more broadly to all of your markets or you are talking about can be.
No.
Yes.
Hey, Dave.
I think we got the second question, but you're having trouble with your audio a little bit we didn't quite get the first question can you can you repeat it.
Hopefully this time is better.
First of all yes.
It looks like you guys are exploring all options.
Look at the opportunity from a near term perspective.
Where are you most excited about.
So for all of our current perspective.
Yes, Okay got it got it all right I'll take that and then maybe kick at the ticket is Jeremy Wacksman for the enhanced market can we go faster.
Question.
I mean look we see real opportunity.
The I mean.
I think a lot of the excitement and imagination has been sparked that kind of the ultimate user interface opportunity with generative AI and moving towards a conversational UI and then al.
Might that change the kind of historic physics of the Internet and that's fascinating.
To us and obviously very important.
I do think though that that is also going to be one of the longest lead time behavioral change ones. So we're exploring that aggressively and are quite interested in making sure. We feel like we're really well situated from an audience brand and unique data perspective.
And leaning into it such that we don't we don't somehow missed the boat.
And Mr memo on the change so we feel good there, but thats probably a longer lead time on the stuff that we're seeing in the short term really is like engineered productivity.
Marketer productivity, a little slower will be legal and accounting.
So we're seeing we're already seeing some productivity gains for people on phones, so sales folks partners loan officers.
It is early days, but I think we'll probably see more progress more quickly on the engine room stuff than on the exposed stuff.
Alright, so hopefully that helps you and then Jeremy Wacksman, maybe maybe hit the windup.
Yes, I just want to know that too.
How enhanced market contributed to our ultimate share goals and the way I think about it is it's a combination of national progress and local progress right and Thats, what <unk> seen from US last couple of quarters <unk> seen relative outperformance overall nationally, which largely has not been from the benefits of the enhanced market and the growth pillars in our <unk> markets.
And then now you're starting to see the results and the progress we can get market by market and so as we scale the as.
As we scale, our enhanced market recipe to more markets that will become a bigger contributor to our overall national footprint, but again that doesn't mean, we're not going to continue to keep working on improvements nationally and things that we don't need to take into his market. So we really think about it as a combo of both.
That's why we're excited about the progress we've seen any enhanced markets the ability to bring some of these components to more markets and then as we mature the offerings and work with our partners the share gains to continue.
And it feels it feels.
Blake a long runway of opportunity it feels like durable opportunity to us that we are attacking methodically we kind of.
We kind of did a major reset in organization last year in 2022.
And now Youre seeing is both develop and engineer and launch new stuff across the board in enhanced markets.
And and nationally. So this is kind of our year of execution and we're we're posting.
We're posting really good relative results, it's a terrible macro.
Housing macro and we can get really bummed out about that but we internally are quite excited by our relative performance in the and the share gains we're seeing in our enhanced markets. The 9800 basis points of outperformance for our residential revenue line item.
Purchase mortgage business up 73% year over year, and Ah crap mortgage market, we keep rolling out this real time touring these this real time touring.
Feature set that is really quite a game changer.
And even rentals like received 28% year over year growth so internally we.
It's tough weather outside but internally I for one.
Im really pleased at what I'm seeing and.
I am quietly reserve, Italy, guardedly optimistic and excited as I look into the future.
Alright, that's great to hear thank you.
Alright.
I was assuming that was the big ramp.
This completes the allotted time for questions I'll now turn the call back over to rich Barton for any closing remarks.
Alright, I just did I just did a big closing remark great great great chatting, great chatting with you all and thanks for making the time, we look forward to.
Chatting with you soon.
Have a good day.
Ladies and gentlemen, today's call is now concluded wed like to thank you for your participation you may now disconnect your lines.
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