Q3 2024 Zillow Group Inc Earnings Call

Welskall. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Brad, if you may begin.

Brad: Thank you. Good afternoon and welcome to Zilla Group's third quarter, 2024 call. Joining me today to discuss our results are Zilla Group's CEO, Jeremy Wacksman and CFO, Jeremy Hofmann.

Brad: During today's call, we will make forward looking statements about our future performance and operating plans based on current expectations and assumptions.

These statements are subject to risk and uncertainties and we encourage you to consider the risk factors described in our SEC following 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 Inter-Vester Relations website, recording of the call we'll be available later today.

During the call, we will discuss gap and non-gap measures, including adjusted EBITDA, which we refer to as EBITDA.

Brad: We encourage you to read our shareholder letter in earnings release, which can be found on our investor relations website, as they contain important information about our gap and non-gap results, including reconciliation of historical non-gap financial measures.

Brad: We will now open the call with remarks followed by live Q&A. And with that, I will turn the call over to Jeremy Wacksman.

Jeremy Wacksman: Thank you, Brad, and good afternoon everyone. Thank you for joining us during a busy time of year. We're excited to share our third quarter of 2024 results with you.

Wizzillows leading brand, deep technology expertise, and strong financial foundation, we are successfully seizing our incredible opportunity to transform and digitize residential real estate on behalf of consumers, agents and the broader industry.

Jeremy Wacksman: As you will hear again today, we are in a strong position, executing our strategy well and delivering solid results.

In Q3, we grew revenue by 17% and outperform the residential real estate industry, all while demonstrating cost discipline as we steer towards sustainable profitable growth.

As with everything we do at Zillow, our approach begins with the customers we serve, movers, agents, and real estate industry professionals.

Jeremy Wacksman: We invest in providing products and services that offer a superior end to end transaction experience.

Jeremy Wacksman: Discreate a top-of-funnel advantage that helps us identify and connect high-intent movers with high-performing partners. And alongside our software tools, destroys increased connection rates and conversion rates, resulting in greater revenue.

Jeremy Wacksman: and as we continue to leverage our cost structure, our contis-tint revenue outperformance shows us as expanded Eva Demargens.

Jeremy Wacksman: Those outcomes bolster our continued confidence in our strategy.

Jeremy Wacksman: Before I die further into our results, I'll remind you why we believe Zillot is best positioned to succeed in our ever evolving industry.

Jeremy Wacksman: As we have said consistently throughout the past year, our perspective is grounded in Zillos consumer advocacy principles.

We believe in easy and free access to all available real estate information and listings.

Jeremy Wacksman: Independent Representation for Biers and Sellers, and Transparency regarding age and compensation and consumers right to negotiate it.

Jeremy Wacksman: We launch Dillow with a promise to turn on the lights in real estate because we believe everyone benefits from transparency. An open free marketplace is good for sellers, good for buyers, good for agents, and makes for the robust industry we have here in the US.

Jeremy Wacksman: and as the industry has undergone its recent very healthy evolution toward more transparency, we are confident that Zillow and Agents who work with us will benefit.

Jeremy Wacksman: This is clear to us for three reasons.

Jeremy Wacksman: First, Dillow has the most in-high-sintent movers.

Jeremy Wacksman: More than 2-thirds of US home buyers use it all today, about 80% of our users come to us organically, and we have 3 times more app users than anyone else in the category.

Jeremy Wacksman: We've built and maintained a strong brand position by staying focused on what the customer wants and needs.

Jeremy Wacksman: Delivering impressive and delightful tech innovations that improve their moving experience.

Jeremy Wacksman: This quarter, for example, we've launched helpful new features, like comprehensive climate risk data, tools to help agents, loan officers and mover stream line their communications, and upgrades to our AI-powered natural language search.

Jeremy Wacksman: The second reason is that we partner with top agents and teams across the country, those that offer superior customer service and real value for movers, a deep understanding of the industry and their local market and a proven ability to scale.

Jeremy Wacksman: These are the agents who are the most successful at growing their business alongside us and are poised to take customer share.

Jeremy Wacksman: Third, we expect to benefit as the industry evolves because we provide exceptional text solutions to make moving more efficient, not just for movers, but for agents, brokers, loan officers, and other real estate professionals as well.

Jeremy Wacksman: We believe a rising digital tide lifts all boats.

Jeremy Wacksman: Zillos independent software solutions like showing time, dot loop, bridge interactive and follow a boss are already used by hundreds of thousands of professionals across the residential real estate industry.

Jeremy Wacksman: Our opportunity is to expand the breath of those offerings and stitch them together, powering the industry to be more transparent, faster and more integrated.

Jeremy Wacksman: Considering all the professionals we are already serving today with our digital workflow, tools and foundational technologies, we believe this represents a significant opportunity for Zillow to better serve customers and drive transactions within Zillow's ecosystem.

Jeremy Wacksman: It solutions like these combined with our many products and services for movers that together make Zillow a housing super app, giving buyers, sellers, agents and the industry the seamless, integrated and tech-enabled experience they demand and deserve.

Jeremy Wacksman: Now onto our third quarter 2024 results.

Jeremy Wacksman: I'm excited to share that we reported total revenue of $581 million in Q3, up 17% year-over-year, exceeding our revenue outlook and outperforming the residential real estate industry.

Jeremy Wacksman: Q3 residential revenue grew 12% year every year to 45 million.

Jeremy Wacksman: Renselsman men have continued with 123 million in revenue in Q3 up to 24% year of year.

Jeremy Wacksman: The multi-family rentals revenue is up 38% year over year, driven by growth in our multi-family property count.

Jeremy Wacksman: We're also making strong progress in mortgages. Q3 revenue was 39 million, accelerating to 63% year of year growth, compared to 42% growth in Q2, with our purchase loan origination volume up 80% year of year.

Jeremy Wacksman: We are delivering strong revenue performance while growing our engaged audience of users. For Q3, we reported 233 million average monthly unique users across Zillus ecosystem of apps and sites, according to our internal metrics.

Jeremy Wacksman: and 116 million average month a unique visitors in C3 Corps in the comms corps.

Jeremy Wacksman: As your call, Comscore is widely viewed among Internet brands as a reliable, transparent third-party source, because it aims to capture the number of unique visitors while viewping cookies.

Jeremy Wacksman: Our success is the result of solid execution on our growth strategy.

Jeremy Wacksman: On the four-sale side of our business, we're anchored by efforts in integrating our services, financing, touring, seller solutions and enhancing our partner network.

Jeremy Wacksman: These investments are propelling us toward our goal to increase customer transactions shared a 6% by the end of 2025.

Jeremy Wacksman: We're also focused on expanding our rentals marketplace, which currently represents more than 20% of our revenue and is growing rapidly.

Jeremy Wacksman: The seamless transaction experience we've been building out on Zillow, the housing soup wrap, is most fully experienced by customers in our enhanced markets.

Jeremy Wacksman: We wrote out 43 enhanced markets thus far, surpassing our goal of reaching 40 by the end of this year.

Jeremy Wacksman: Heading into 2025, we expect to deepen our penetration in the existing markets and expand into more markets.

Jeremy Wacksman: We've been pleased with the progress we're making across the enhanced markets with this land and expand strategy and we continue to expect enhanced markets to cover 20% of our connections by the end of this year.

Jeremy Wacksman: As of Q3, more than 80% of enhanced market connections are being managed through follow-up boss and industry leading customer relationship management system we acquired about a year ago.

Jeremy Wacksman: Follow a boss is used by many real estate agents and teams and manages 25 million leads each year.

Jeremy Wacksman: Our efforts to upgrade and integrate it are a key part of the Housing Suprapa Experience we're building.

Jeremy Wacksman: For example, in Q3, we introduce new features including piloting and app messaging to allow agents to communicate with buyers on Zillow.

Jeremy Wacksman: and in-app options to connect buyers directly to a loan officer with Zilla Hummons and new and improved client insights, allowing agents to tailor their services to an individual client's needs and interests.

Jeremy Wacksman: When the customer, agent, loan officer and other services are all connected to a common platform, movers have a more seamless experience and real estate professionals can work more efficiently and serve their clients better.

Jeremy Wacksman: Overall, we're excited that our efforts in enhanced markets are beginning to deliver results.

Jeremy Wacksman: In February, we told you our first foreign hands markets had seen share gains of more than 50% since the beginning of 2023.

Jeremy Wacksman: that in August, we told you it had risen to more than 80%.

Jeremy Wacksman: Now, it has doubled since the beginning of 2023, and we are seeing similar trends in the enhanced markets we've launched since.

Jeremy Wacksman: As we land and expand in more enhanced markets, and keep working across the business to increase connection and conversion rates, we expect to see share growth relative to the Industry Total Transaction Value, or TTV, in our residential and mortgages revenue.

Jeremy Wacksman: As you can see in the chart in our shareholder letter, our revenue per TTV has increased meaningfully over the past two years, a great proof point that our investments are having an impact on our business.

Jeremy Wacksman: Moving on to financing.

Jeremy Wacksman: We are building a substantial, direct-to-consumer, purchase mortgage origination business integrated with our agent-partner network to offer the many mortgage seekers on Zillow financing options at the right point in their moving journey.

Jeremy Wacksman: 40% of all homebuyers start their home shopping journey looking for a mortgage. And more than 80% of those buyers don't yet have an agent.

Jeremy Wacksman: So when a high intent customer comes to Zillow, whether they're starting with financing or starting by touring a property and being connected with a great agent, we can help.

Jeremy Wacksman: Providing a more seamless experience for movers, agents, and loan officers helps identify high-intent customers in our funnel and drives conversion and revenue growth.

Jeremy Wacksman: Most notably, our efforts are accelerating mortgage growth. Origination revenue is beginning to scale, with purchase loan origination volume up 80% year-over-year in Q3, and mortgages revenue up 63% year-over-year to $39 million.

Jeremy Wacksman: In enhanced markets we've been in for more than six months, customer adoption rates for Zillow home loans are in the mid-teens, with newer markets trending similarly.

Jeremy Wacksman: At the same time, we're seeing higher transaction conversion rates for agent partners working with customers who choose Zillow Home Loans, as we help agents and loan officers better serve customers together when they're ready to transact.

Jeremy Wacksman: We're also seeing an impact from our efforts to make booking a home tour as seamless as booking a restaurant reservation online.

Jeremy Wacksman: As we work to help more Zillow visitors transact, touring remains a critical focus area for us, both so we can identify high-intent buyers, and so we can solve a process that's historically been full of friction, busy work, and back and forth.

Jeremy Wacksman: In 2021, we acquired Showing Time, the industry leader in home touring technology, which facilitates 5 million showings a month across the country.

Jeremy Wacksman: Bringing showing time onto Zillow's tech-enabled platform has uniquely positioned us to remove the friction in touring, helping high-intent buyers tour homes with ease, and freeing up agents time to focus on value-added services for movers.

Jeremy Wacksman: Our investments here are delivering improved connection rates, and today, more than 25% of our connections are coming through the digitized, improved, real-time touring experience, which is contributing to residential revenue outperformance.

Jeremy Wacksman: Meanwhile, our consumer-friendly touring agreement is helping agents adopt the new requirements stemming from the National Association of Realtors Settlement and is connecting them with higher intent buyers who are more likely to take a tour.

Jeremy Wacksman: While agents aren't required to use our TORI agreement, it is available for more than 90% of our TORI connections and is tailored by state.

Jeremy Wacksman: Our touring agreement process is automated, digital, and easy to use, setting a gold standard for the industry. This is an example of how we've adapted alongside the industry in a way that is positively evolving our business.

Jeremy Wacksman: We're also investing in seller solutions that not only make selling a home easier, but also create real value for sellers and their agents.

Jeremy Wacksman: We're particularly excited about Zillow Showcase, which we made available nationwide beginning this year.

Jeremy Wacksman: As you'll remember, Zillow Showcase elevates agents' brand presence on Zillow and provides a better shopping experience through our homegrown, AI-powered, rich media and floor plan technologies.

Jeremy Wacksman: There is truly nothing else like it on the market.

Jeremy Wacksman: Showcase listings are driving higher engagement compared to similar non- showcase listings on Zillow. More views, more shares, and more saves.

Jeremy Wacksman: Most important, however, is that showcase listings are selling faster and for more money than similar non-showcase listings on our site.

Jeremy Wacksman: Zillow Showcase is already on nearly 1.5% of new for sale listings nationwide, putting us on our way to achieving our intermediate term goal of 5-10% listing coverage on Zillow.

Jeremy Wacksman: As we've said before, we believe a rising digital tide lifts all boats, which is why we continue to look for ways to improve and expand our offerings for the benefit of the broader residential real estate industry.

Jeremy Wacksman: whether through buying, building, or partnering. For example, last month we acquired Virtual Staging AI, a company whose technology helps sellers, agents, and photographers create digitally staged listing images in seconds.

Jeremy Wacksman: Finally, I'll update you on our continued progress in rentals.

Jeremy Wacksman: As you know from our investor presentation six months ago, we've spent the past several years building a highly differentiated two-sided marketplace with a comprehensive suite of listings.

Jeremy Wacksman: combining multifamily properties with unique long-tail properties which we define as fewer than 25 units but primarily comprises single-family homes.

Jeremy Wacksman: As a result, Zillow is rapidly becoming the nationwide marketplace renters and landlords have sorely needed. And as we've said, we're in the best position to fix the fragmented rental experience because our many years of success building great products for our massive audience of movers on the for sale side.

Jeremy Wacksman: Renters on Zillow can shop, tour, apply, sign a lease, and pay rent securely.

Jeremy Wacksman: And property managers can list, book tours, screen applicants, create leases, and sign them electronically, and collect rent payments, all on one convenient platform, Zillow.

Jeremy Wacksman: These efforts to create a more seamless and convenient experience on both sides of the rental process are paying off, yielding growth in traffic, multifamily property count, and revenue.

Jeremy Wacksman: Our multifamily advertising campaign and our ongoing partnership to share rental listings with realtor.com are also helping boost our success by contributing to increased customer awareness of Zillow rentals. In Q3, our total average monthly rentals unique visitors were up 20% according to Comscore.

Jeremy Wacksman: We continue to expect multifamily to be the main engine of rentals revenue growth.

Jeremy Wacksman: We now have 47,000 multifamily properties on Zillow, having added close to 10,000 year-to-date, and multifamily revenue is up 38% year-over-year.

Jeremy Wacksman: As it stands today, with the combination of both long-tail and multifamily properties, we have the most rental listings in the country and, consequently, the most users. With steady growth under our belt, we believe Zillow Rentals is well on its way toward the billion-dollar-plus revenue opportunity we see in front of us.

Jeremy Wacksman: Across the entire business, I'm proud of the progress we're making to improve the experience of getting home.

Jeremy Wacksman: We have a much-loved and trusted brand, with the largest, most engaged audience of movers, a partner network made up of some of the best and most productive agents and teams in the country, a solid financial foundation, and deep tech expertise that allows us to invest in software solutions to benefit movers and the entire industry.

Jeremy Wacksman: Our business is increasingly diversified and we've continued to outperform the industry while maintaining strong cost discipline.

Jeremy Wacksman: Looking ahead, we're focused on capturing a more meaningful share of the $30 billion accessible TAM in residential real estate, while continuing to deliver on behalf of our customers and shareholders.

Jeremy Wacksman: Thank you, as always, for being on this journey with us. And on that note, I'll hand the mic over to CFO Jeremy Hofmann.

Jeremy Wacksman: Thanks, Jeremy. And good afternoon, everyone. As you just heard, we delivered excellent results in Q3, and we are well positioned to continue doing so as we execute on our strategy.

Jeremy Hofmann: Our Q3 2024 results exceeded expectations for revenue in EBITDA, with revenue up 17% year over year to $581 million, which was $28 million above the midpoint of our outlook range.

Jeremy Hofmann: Executing on our strategy drove double-digit year-over-year growth across each of our revenue categories, including residential, rentals, and mortgages.

Jeremy Hofmann: We outperformed the broader residential real estate industry by approximately 1,500 basis points as the housing market grew 2% this quarter, according to NAR.

Jeremy Hofmann: Additionally, we estimate that the total purchase loan volume for mortgage buyers, which is more aligned with our customer base for Premier Agent, declined low single digits in Q3, underperforming the overall housing market.

Jeremy Hofmann: On a gap basis, Q3 net loss was $20 million, representing 3% of our revenue.

Jeremy Hofmann: EBITDA was $127 million for the quarter, resulting in a 22% EBITDA margin.

Jeremy Wacksman: The combination of our revenue outperformance and effective cost management delivered better than expected EBITDA results in the third quarter.

Jeremy Wacksman: Residential revenue grew 12% year over year to $405 million, outperforming our outlook range.

Jeremy Wacksman: Our premier agent revenue benefited from continued conversion improvements as more buyers and sellers transacted with the Zillow agent partners.

Jeremy Wacksman: We also had a strong quarter of growth in Zillow Showcase, which now represents nearly 1.5% of all new for sale listings in the country.

Jeremy Wacksman: Additionally, our new construction marketplace and the software solutions from ShowingTimePlus and FollowUpBoss performed well.

Jeremy Wacksman: The combination of these factors led to better-than-expected results.

Jeremy Wacksman: Rentals revenue grew 24% year-over-year in Q3 to 123 million dollars, driven primarily by our multifamily revenue, which grew 38% year-over-year.

Jeremy Wacksman: We increased the number of multifamily properties on our apps and sites by 34% year-over-year, reaching an all-time high of 47,000 multifamily properties as of the end of Q3, up from 44,000 properties at the end of Q2.

Jeremy Wacksman: Total listings across our entire rentals marketplace were up 15% year over year to an industry-leading 1.9 million listings in September.

Jeremy Wacksman: With steady growth under our belts, we believe Zillow Rentals is well on its way toward the billion dollar plus revenue opportunity we see in front of us.

Jeremy Wacksman: Mortgage's revenue growth accelerated in Q3, up 63% year-over-year to $39 million, with purchase loan origination volume growing 80% year-over-year to $812 million.

Jeremy Wacksman: Our mortgage strategy is leading to more buyers choosing financing through Zillow Home Loans.

Jeremy Wacksman: As expected, we are also seeing our purchase loan origination volume growth more closely aligned with mortgages revenue growth.

Jeremy Wacksman: This means our purchase mortgage revenue is now the main growth driver of our overall mortgages revenue category.

Jeremy Wacksman: Our disciplined cost management resulted in Q3 EBITDA expenses of $454 million, roughly in line with our outlook, and allowed our Q3 revenue upside to flow to the bottom line.

Jeremy Wacksman: Additionally, our Q3 share-based compensation expense of $108 million was down year-over-year, and we are on track for these full-year 2024 expenses to decline from 2023 levels.

Jeremy Wacksman: As we execute in our growth strategy, we are successfully driving operating leverage.

Jeremy Wacksman: Looking ahead, as we continue to grow revenue, we expect this leverage to play out in both expanding EBITDA margins and sustainable, profitable growth over time.

Jeremy Wacksman: We ended Q3 with $2.2 billion of cash and investments, down from $2.6 billion at the end of Q2, primarily due to the maturity and settlement of our 2024 convertible debt in September, which included aggregate cash payments of $610 million.

Jeremy Wacksman: This was partially offset by Q3 net cash provided by operating activities of $171 million.

Jeremy Wacksman: As of the end of Q3, we had $918 million of outstanding convertible senior notes.

Jeremy Wacksman: In December of this year, we will settle the $499 million of our outstanding convertible senior notes due in 2026.

Jeremy Wacksman: We issued a Notice of Redemption for these notes on October 8th, and we plan to repay the principal in cash and issue shares to satisfy any conversion premium.

Jeremy Wacksman: We have outstanding CAP call hedges related to these notes, and we expect any dilution from settling the 2026 notes ultimately to be offset by settlement of the CAP calls upon unwind or at maturity.

Jeremy Wacksman: Because the CAP calls have additional value, as our Class C share price appreciates up to approximately $81 per share, we don't expect to settle the CAP calls at this time, and we will continue to monitor and evaluate the economics of unwinding prior to maturity.

Jeremy Wacksman: After our Q4 debt settlement, we will have only the $419 million of senior convertible notes due in May 2025 outstanding.

Jeremy Wacksman: Our current expectation is that we will also settle the principal balance of these notes in cash and any conversion premiums and shares of Class C capital stock.

Jeremy Wacksman: Once these notes are retired, we expect to be convertible debt-free in Q2 2025.

Jeremy Wacksman: As we look in aggregate, 2024 has been an important year for our capital allocation strategy.

Jeremy Wacksman: $1.2 billion of cash has or will soon be returned to shareholders via the settlement of our convertible senior notes.

Jeremy Wacksman: We have also had $301 million of share repurchases at a weighted average price of roughly $42.

Jeremy Wacksman: We are pleased with our execution this year. From the end of 2021 to today, we have repurchased approximately $2 billion of stock at a weighted average price of roughly $45.

Jeremy Wacksman: Our balance sheet is rock-solid and we believe the share repurchases we've made since the end of 2021 have been a great use of capital as we execute on our growth strategy and drive share price appreciation over time.

Jeremy Wacksman: Turning to our outlook for Q4, we expect total company revenue to be between $525 million and $540 million, implying a year-over-year increase of 12% at the midpoint of our outlook range.

Jeremy Wacksman: We expect residential revenue to be between $364 million and $374 million.

Jeremy Wacksman: Our residential revenue outlook for Q4 is driven by the normal seasonality of our premier agent revenue as well as the continued strength of revenue contributions from Zillow Showcase, Showing Time Plus, new construction, and follow-up loss.

Jeremy Wacksman: We expect that the housing market will continue to bounce around at current levels, implying modest year-over-year growth in the fourth quarter.

Jeremy Wacksman: While there continues to be pent-up desire to move, affordability remains a challenge. Our Q4 outlook takes this into consideration.

Jeremy Wacksman: We expect our rentals revenue to grow in the mid 20% range year-over-year in Q4 as we benefit from our execution on building our two-sided marketplace.

Jeremy Wacksman: Our multifamily rentals revenue is expected to grow faster than our overall rentals revenue, as we see the benefits of continued property expansion, our national rentals brand awareness campaign, and our partnership with Realtor.com.

Jeremy Wacksman: For mortgages, we expect revenue growth to be in the mid 60% range year over year.

Jeremy Wacksman: For Q4, we expect EBITDA to be between $90 million and $105 million, equating to an 18% margin at the midpoint of our outlook range, up approximately 300 basis points year-over-year.

Jeremy Wacksman: This implies EBITDA expenses will decrease from $454 million in Q3 to an estimated $435 million in Q4.

Jeremy Wacksman: The majority of the sequential decrease in EBITDA expenses from Q3 to Q4 is expected to be driven by seasonally lower advertising spend.

Jeremy Wacksman: Additionally, we expect our annual fixed cost run rate will continue to be approximately $1 billion, consistent with where we stood at the end of 2023.

Jeremy Wacksman: We are on track to deliver our original 2024 full-year target of double-digit revenue growth with EBITDA margin expansion.

Jeremy Wacksman: At the midpoint of our Q4 outlook ranges, our total company revenue in 2024 would be up 14%, and our total company EBITDA margin in 2024 would be 22%, which implies approximately 200 basis points of margin expansion versus 2023.

Jeremy Wacksman: Before we close, I would like to take a moment to highlight the results we're seeing from the investments we've made over the past two years in our for sale strategy.

Jeremy Wacksman: As you'll recall, we look at revenue per total transaction value, or TTV, on a trailing 12-month basis as a comprehensive indicator of relative growth against the residential real estate industry.

Jeremy Wacksman: When we combine our residential and mortgages revenue categories, which in aggregate represent our for-sale revenue, our revenue per TTV in Q3 was up 800 basis points year-over-year and more than 2,000 basis points since the beginning of 2023.

Jeremy Wacksman: This is the culmination of investments we have been making over the past couple of years to improve our customer experiences so that we can identify high-intent movers and connect them with high-performing agents.

Jeremy Wacksman: This has helped us drive more connections and convert more buyers and sellers to transact with us and our partners.

Jeremy Wacksman: We are also beginning to benefit from the early stages of scaling our newer products to more markets, most notably with Zillow Home Loans, which has grown purchase loan origination volume by over 3x from the beginning of 2023 to now.

Jeremy Wacksman: We expect continued success in 2025 as we expand into more enhanced markets and provide more services within those markets, including offering more of our unique software solutions such as Zillow Showcase and Follow-Up Boss.

Jeremy Wacksman: On the cost side, we understand it is important for us to demonstrate to our investors that the investments we've been making to increase top-line growth will result in expanding margins.

Jeremy Wacksman: As we have been saying for some time, we believe we are at the right fixed investment level to achieve our 2025 transaction share target and expect fixed investment costs to grow modestly with inflation.

Jeremy Wacksman: Our fixed costs remain just under a billion dollar annualized run rate in Q3, growing only 4% year-over-year and decreasing as a percentage of revenue by 500 basis points year-over-year, despite three acquisitions, Aereo, Follow-Up Boss, and Spruce.

Jeremy Wacksman: Looking at variable costs, we have intentionally increased these costs as a percentage of revenue during 2024, as we invest in our rentals and Zillow Showcase sales teams, as well as additional ZHL loan officers to support future expected growth.

Jeremy Wacksman: For marketing and advertising, we have been clear that we make discreet decisions to dial our efforts up or down based on the opportunities we see.

Jeremy Wacksman: The most obvious opportunity we've had on the marketing front has been for our rentals marketplace and we have invested in a national campaign this year.

Jeremy Wacksman: This investment in Q2 and Q3 has noticeably expanded Zillow brand awareness for apartment seekers and we are pleased with the early results.

Jeremy Wacksman: To close, it is clear we are executing on our strategy and we are very excited about the opportunity ahead of us.

Jeremy Wacksman: We have a beloved brand with the largest, most engaged audience of movers.

Jeremy Wacksman: a partner network made up of some of the best and most productive agents and teams in the country.

Jeremy Wacksman: a solid financial foundation, and unmatched tech expertise to tackle the hard problems necessary to digitize this analog industry.

Jeremy Wacksman: As I look forward, we are growing across every part of our business with investments in place to drive future growth. We are disciplined on our costs, and we expect to drive sustainable, profitable growth on our way to strong gap profits over time.

Jeremy Wacksman: And with that, Operator, we'll open the line for questions.

Speaker Change: Thank you. At this time, if you would like to ask a question, please click on the Raise Hand button, which can be found on the black bar at the bottom of your screen. When it is your turn, you will receive a message on your screen from the host allowing you to talk, and then your name will be called. Please accept, unmute your audio, and ask your question.

Jeremy Wacksman: We will wait one moment to allow the queue to form.

Jeremy Wacksman: Our first question will come from John Colantoni from Jeffries. Please go ahead.

John Colantoni: All right, thanks for taking my questions. I'm a multi-parter on real-time touring. Can you give us some perspective on how lead conversion for real-time touring is comparing to other types of connections?

John Colantoni: And I believe real-time touring generally lends itself to agents transitioning to the flex model. So I'm curious.

John Colantoni: If you could detail how agents, how many agents, are transitioning to FLEX.

John Colantoni: in markets you ruled out, real-time touring, and if that transition is providing additional tailwinds to revenue, given you're now more directly monetizing the commission through a product that has a higher lead conversion. Thanks.

Jeremy Wacksman: Thank you.

Speaker Change: Hey John, this is Jeremy Waksman.

Speaker Change: on real-time touring

Speaker Change: We haven't broken out real-time touring versus other touring types, but we have for a while talked about how the touring customer in general converts.

Speaker Change: to transaction at about a three X the rate.

Speaker Change: and...

Speaker Change: The other color I can give is real-time touring.

Jeremy Wacksman: is going to be north of 25% of our connections.

Jeremy Wacksman: at the end of the year. That's been our goal, and we're going to be ahead of that. We did talk a bit in the prepared remarks about seeing conversion improvements generally. Touring is obviously a piece of that.

Jeremy Wacksman: conversion generally as a component.

Jeremy Wacksman: In terms of payment model and kind of business model mix, real-time touring actually is available across both. And again, it just goes back to our strategy of.

Jeremy Wacksman: trying to help.

Jeremy Wacksman: identify higher-intent customers. Real-time touring does a pretty big job of that. And then trying to help land them with our best agent partners. As a reminder, you know,

Jeremy Wacksman: We work with lots of agents, but they represent the top end of the industry. The top 20% of the industry is the majority of our premier agent base. So we're really pleased as we're able to identify and hand them higher intent customers. You're seeing the benefits of that play out in conversion.

Speaker Change: Thanks, Jeremy.

Speaker Change: Our next question will come from Brad Erickson with RBC Capital Markets.

Brad Erickson: Hi, thanks for taking the question. I guess I have two. First, on the kind of regulatory changes, I'm just curious, you guys have obviously rolled out...

Jeremy Wacksman: Kind of a light version of the mandated buyers agreements for agents. Just curious if you're seeing any structural changes.

Jeremy Wacksman: to conversion where, you know, particularly those markets where that's kind of a brand new practice. And just curious if that's maybe at all affecting your market share on everything. And then second, just on the Zillow showcase,

Jeremy Wacksman: Can you just remind us, you gave the overall share of new listings, I know, in the prepared remarks and everything, but just remind us where you've kind of seen your market share of total listings or new listings go in some of the more mature markets, like the individual markets, if you could. Thanks.

Speaker Change: Sure, so let me take Zillow Showcase first, and then maybe we'll do it in reverse order.

Jeremy Wacksman: It's now nearly one and a half percent.

Jeremy Wacksman: share of new listings. We just rolled it out nationwide earlier this year, and so the growth while has some dispersion in markets. We haven't given out any kind of market mix details. I will say across the board, we continue to be really impressed that the product market fit holds as we grow that scale. So that higher engagement that we talked about, you know, 80% more page views, 75% more saves, 75% more shares, those stats.

Jeremy Wacksman: hold across markets as we grow availability. And we're continuing to see homes sell faster and for more money. So 2% more, which is about $9,000 on average for a home. And we continue to see agents who use it, as we talked about in the remarks, win more listings. They're winning about 20% more listings.

Jeremy Wacksman: than similar agents who are not using Zillow Showcase.

Jeremy Wacksman: We're still really early, you know, we just went nationwide earlier this year and we see a long runway ahead of us. We talked about a 5 to 10 percent total active listing goal over time, and I think as we get to that level, Brad, I think we'll have more maturity in markets to talk about the matching nations across price points or geographies, but right now it's still really early.

Jeremy Wacksman: And then on the buyer's agreement,

Jeremy Wacksman: They're even more educated on what to expect, both in the initial tour and then in what to expect in the relationship if they choose to move forward.

Speaker Change: Got it. That's great. Thanks.

Speaker Change: Our next question will come from Ron Josie with Citi. Please go ahead.

Ron Josie: Great, thanks for taking the question. Jeremy, I wanted to ask a little bit more just about residential revenue and 3Q is another quarter where revenue growth outperforms the broader industry and I wanted to understand just the drivers of this outperformance and obviously enhanced markets now in 43 markets, showcase listings we just talked about, any insights on what's driving just the better overall outperformance would be helpful.

Speaker Change: I think, and then another sort of maybe bigger picture question on the overall go-to-market strategy. I think we saw a new head of agent sales was hired back in July. I want to understand just how premier agent sales might interact with showcase listing sales and just the overall and also the software and services sales team and just understand the go-to-market strategy overall going forward. Thank you.

Speaker Change: Thanks, Ron. It's Jeremy Hofmann. I'll take the first one and then I'll pass it to Jeremy Wacksman for the second one. I think across the business, we performed quite well in Q3.

Speaker Change: within residential, the drivers are a few fold. So one...

Jeremy Wacksman: PA just benefited from continued conversion improvements. You know, we've been investing pretty heavily in honing our funnel for a while at this point. And we're just seeing the benefits of those, particularly as we go into more enhanced markets and we get more contributions from real-time touring. And then beyond that, we had another strong quarter growth from Zillow Showcase, which is now, you know, nearly 1.5% of all new listings in the country. And that was all supplemented by the new construction marketplace continues to perform well. And the software solutions we're providing from Showing Time Plus and Follow-Up Boss are being well-received too. So it really has been across the board and something we're quite pleased with.

Jeremy Wacksman: And then Jeremy, you want to hit the second one? Yeah, on the new sales leader.

Jeremy: Yes, that is the start of maybe more integration and scale for our sales organization to offer

Jeremy: just a more seamless go-to-market to our agent community. And so you should expect to see us scale some of our products across that larger sales force and start to bring them to market in a more integrated fashion. To date, we've been doing that in...

Speaker Change: pockets and places, but our goal over time is to have, you know, one face to the industry to represent all of our products. That will most notably show up in kind of our market-based pricing and showcase offerings, but over time you can imagine that'll scale beyond that.

Speaker Change: That's great. Thank you guys.

Speaker Change: Our next question will come from Mark Mahaney with Evercore ISI. Please go ahead.

Mark Mahaney: Okay, great. Thanks. I'm going to ask two things. I'm going to follow up on Brad's question about these NAR settlement changes. Can you just talk about what you've seen in the market so far? I guess we're three or four months into this. From your perspective, has greater friction occurred in the market or has it been…

Speaker Change: largely immaterial so far. And then your comments also on stock-based compensation, you know, being down year over year. What's your goal with stock-based compensation kind of going forwards, you know, the next two years? I ask that from a perspective of trying to figure out when you get the kind of sustained gap, you know, profitability and stock-based compensation will be one key lever for that. So just talk about how you plan to manage that going forwards. Thank you.

Speaker Change: Great, thanks Mark. Jeremy Hofmann, I'll take both of those. So I think on the NAR settlement impact

Speaker Change: We can't speak to broad commission trends just because 80% of our primary agent base is in that top 20% of all producers. So we're really working with top agents versus a broad swath of folks in PA. And for our agents across our PA business, we've seen commission rates stay in a tight band. Obviously, Q3 performance was quite strong. Being able to grow the total company revenue 17%,

Speaker Change: 12% across residential and pretty substantially outperforming the category. We were really pleased.

Speaker Change: Beyond that, I'd say we've been pretty consistent here for a while. We believe we and our partners are the outsized beneficiaries of any changes in the real estate industry.

Speaker Change: You know, we have the most customers, we work with the best partners, and we provide the most technology. So we expect our PAs will deliver value and get paid because they provide great service, and that we and they are sharetakers in really any evolution or dispersion of the industry. So that's how we're feeling on that front. And then the second question around stock-based compensation, we plan to leverage it going forward. So just as a reminder, our fixed cost base is in about the $1 billion range on an annualized basis.

Speaker Change: and 90% of our stock-based comp sits within that bucket. So as we are controlled on the fixed cost front and grow revenue, we will get more and more leverage on the SBC line that will drive to greater gap profitability over time.

Speaker Change: Okay, thank you.

Speaker Change: Our next question will come from Nicholas Jones with JPM Securities. Please go ahead.

Nicholas Jones: Great, thanks for taking the questions. I guess some follow-ups on Zillow Showcase.

Nicholas Jones: As you roll this out, can you kind of speak to the demand you're seeing in market for the product? And I guess, what are you learning about how you're pricing it today and potentially where that can go against kind of the intermediate or longer term targets you have for that business? Thank you.

Speaker Change: Price, which is variable by home price and geography, lands well with agents and teams. The big challenge is helping them work through their workflow and operations to scale listings across them. So we have folks who have a listing at a time. We have folks who are teams that have hundreds of listings on their team and across their agent force. And just working with them to operationalize the change, it's new media, it's new media capture, it's a new client sales experience with sellers. That's what we're working through. And doing that with different size types of teams across the country is something we'll continue to learn and mature as we go. We continue to see great results from it. I talked about the stats earlier. It continues to remain really engaging with buyers and with sellers.

Speaker Change: continue to see agents benefit it to win more business. That's why we remain confident in that intermediate term goal, right? Our mid or medium term target is five to 10% of total active listings, and that's a 150 to $300 million annual business for us.

Speaker Change: And, of course, we think there's potential beyond that. We want to give you all kind of a mile marker in the road. What excites us about Zillow Showcase and the tech powering it is, once a buyer and a seller experience it, they don't really want to go back to a traditional listing of just photos and text.

Speaker Change: They kind of have this expectation that that's how a listing should behave. They should be able to really immersively tour the home that way as a buyer, and a seller should be able to show off their home that way. So we get excited about the ability to drive adoption of the tech and the product far beyond the goal we've shared with you. That'll, of course, take time to retrain the industry, but you can see the potential of it in the product. And as you guys do your channel checks with our agents who've experienced it, I think you'll see the same.

Speaker Change: Our next question will come from Chris Kontarich from UBS. Please go ahead.

Chris Kontarich: Great, thanks for taking the question. Maybe just one on the market share doubling within the four oldest enhanced markets.

Speaker Change: I think if I'm looking at the right chart from an investor deck a while back, that was closer to 3.5% in January of 2023. So that implies, I guess, we're closer to 7% and above that average now.

Speaker Change: Can you maybe talk to us a bit about this oldest cohort of enhanced markets and how kind of the puts and takes we should be thinking about as it relates to using that as a case study for some of these newer cohorts of enhanced markets ramping? Thanks.

Speaker Change: I can take that as Jeremy Hofmann. What we're referring to in the shareholder letter and then also in Jeremy Wacksman's prepared remarks

Speaker Change: is that we've grown in our oldest four enhanced markets. We grew revenue per total transaction value, so the combination of residential and mortgages, grew versus total transaction value in those markets by 50% through the course of 2023.

Speaker Change: by 80% in aggregate through the end of June

Speaker Change: really good proof point for why we've continued to roll out these enhanced markets at the pace that we have. We went from 9 at the end of last year to 43 as of October and what we're seeing from a trend perspective in the earlier enhanced markets are quite consistent with the older ones, which gives us confidence to keep

Speaker Change: landing and expanding from here.

Speaker Change: Got it. Thanks for the clarification there and maybe just one on the virtual staging AI The acquisition that you'd made in early October. Apologies if you

Speaker Change: touched on this earlier, but just could you maybe talk to us about how you're thinking about letting this value and integration into Zillow Showcase, like how you may let that value accrue to the seller agents versus potentially offering different tiers of Zillow Showcase?

Speaker Change: Yeah, this is Jeremy Wacksman. I'll take that.

Speaker Change: We continue to look for ways to improve and expand our offerings, you know, for sellers and for buyers. And I just talked a bunch about Zillow Code Showcase as it exists today. Virtual staging is a fantastic capability that we're excited to bring to both sellers and agents, as well as their photographers, right, because you can digitally stage listing images in seconds. So we're not sharing any changes to go to market, other than I think you should expect us to bring that to market on listings in a broad way. You know, I'll comment, we also announced

Speaker Change: an agreement to share our Zillow 3D Home Tours and interactive floor plans to realtor.com this quarter as well. Again, just back to trying to get the technology out there and well understood by buyers and sellers as they enter the category and experience content and create this new norm and expectation for what a digital listing should look like.

Speaker Change: Got it. Thank you.

Speaker Change: Our next question will come from Michael Ng with Goldman Sachs. Please go ahead.

Michael Ng: Hey, good afternoon. Thanks for the question. I just have two. I guess the first one is just on rentals, you know, really impressive

Michael Ng: Rentals traffic growth, and it sounds like the marketing campaign that you're leaning into is working well.

Michael Ng: As we head into 2025, do you see opportunities to further expand that marketing campaign or other advertising levers that you could pull that you see as potential high returns? I'm just thinking about the OPEX outlook for next year. Thanks.

Speaker Change: Why don't I start on rentals and then maybe, Jeremy, you can talk about maybe how to think about future.

Speaker Change: Yeah, we're, as Jeremy Hofmann said, we're really pleased with the results of our demand efforts here. That is both our multifamily advertising campaign and our partnership with Realtor.com. It's really helping.

Jeremy Hofmann: develop and mature our strategy, right, which is the sustainable supply of unique listings to drive the largest audience.

Michael Ng: right? And that audience, like you mentioned, largest audience of renters in the country, up 20% year-over-year and well ahead of the competition. And that in turn as a strategy

Speaker Change: bringing high quality renters solving their major problem, which is finding as much inventory as possible, it's what's leading advertisers to want to get in front of that audience. And that's what's driving not just the revenue growth in rentals, but the multifamily revenue growth of 38% year over year. So we expect

Speaker Change: that growth to continue, you know, we saw strong growth in Q3, we expect to in Q4, and Jeremy, I don't know if you want to talk at all about how to think about 2025.

Speaker Change: the same type of strategy going forward.

Speaker Change: Great. Thank you. That's all very helpful, Culler. And my second question, I was wondering if you could speak to any risks to changes in clear cooperation. I think you made some comments in your prepared remarks, but we just love your view on where we stand today and how you're thinking about any potential changes in the future. Thank you.

Speaker Change: Thank you.

Speaker Change: happy to yeah I outlined in our prepared remarks I mean our advocacy principles have been consistent for some time they start with access

Speaker Change: Zillow was founded to help turn on the lights and provide free access to buyer-sellers in the real estate industry and changes to rules and cooperation that would pull listings off MLSs

Speaker Change: so that Zillow and others couldn't share as many of them. That's just not good for buyers or sellers. It's also not good for agents.

Speaker Change: putting listings in private networks means buyers agents can't show all the available inventory. So it's not as much of a business issue for us right now especially as the largest audience and the largest brand we will always find ways to get our share of inventory to create that experience for buyer-sellers and connect them with great agents.

Speaker Change: It's more about the consumer good for the industry. You know, the U.S. real estate market is the most transparent market in the world because of policies like this. And we'd love to see those policies strengthened so we can build great businesses and consumer experiences on top of them versus weakened so that some can benefit from trying to pull what is a pretty small share of listings behind a velvet rope for their own benefit.

Speaker Change: Great. Thank you, Jeremy.

Speaker Change: Our next question comes from John Campbell with Stevens. Your line is open, feel free to unmute.

John Campbell: Thanks guys and congrats on a great quarter. I just want to stick on the 4Q revenue guidance. You guys have obviously provided some direction for you know

Speaker Change: pretty sharp continuation of growth out of rentals and mortgages, so just isolating residential.

Speaker Change: It seems like you have a fairly large subscription mix there, so I'm thinking the swing factor is probably going to be flex.

Speaker Change: From just what you guys have given, and just kind of taking the back of the napkin here, I'm thinking I'm going to have to assume that premier agent revenue is going to be down year over year. I know you guys don't report them out anymore, but maybe just directionally, if you could help us, does the guide imply a premier agent decline year over year?

Speaker Change: Yeah, thanks, John. It's Jeremy Hofmann. I would think of it as seasonality in the business from Q3 to Q4 and one over focus on that. I think overarchingly, we're pleased with our Q4 guide. 12% growth at the midpoint for the company in a continued challenged housing market, we think is quite solid. And the macro has been, and we expect to

Speaker Change: continue to remain choppy.

Speaker Change: just because affordability remains a challenge. And in the meantime, we're consistently outperforming the industry just given how many product and partner improvements we're making. And then stepping kind of further back, we're on track to deliver double-digit growth and margin expansion in both Q4 and full year 24. So assuming the midpoint of the range, we'll grow revenue 14% year over year in 2024 for the company and 22% EBITDA margins, which implies 200 basis points of margin expansion. So overarchingly feeling quite good. And then as you think about what we're doing on the residential side, which obviously Premier Agent is a huge piece of that, we're really gaining our share versus total transaction value. We were up 800 basis points.

Speaker Change: the enhanced market rollouts we're having and the success we're having there, along with things like Listing Showcase, Rentals, Follow-Up Boss, and Showing Time Plus. So, I think, overarchingly, I think we're well set up, not just in Q4, but beyond that.

Speaker Change: Okay, makes sense. And then a quick follow-up, just...

Speaker Change: on follow-up loss. It seems like the adoption uptick has been pretty sharp of late. I don't know how much of that is due to the enhanced market expansion, so maybe if you could touch on that. And then I saw that you raised a contingent consideration for follow-up loss, so it seems like you're doing really well there, so maybe if you can talk about how you've been able to change, you know, to what extent you've been able to change the follow-up loss growth trajectory.

Speaker Change: Maybe I'll hit adoption and Hoffman you can hit his second piece the

Speaker Change: Yeah, John, we are seeing really great success with Fallout Boss. And as you remember, it's really a two part strategy. One is just continuing to help the Fallout Boss team grow their efforts to attract more agent teams, having the power of Zillow behind them and helping them

Speaker Change: grow and onboard more partners broadly. That's a big part of the strategy. And then the other part of the strategy is to help get our enhanced market partners using Follow-A-Boss as we start to build really good integrations between Zillow customers and them as our enhanced market partners. And we shared, you know, 80% of connections in our enhanced markets now are flowing through Follow-A-Boss.

Speaker Change: so that you're just seeing the adoption of Follow Boss by the lion's share of those partners right alongside just healthy organic Follow Boss.

Speaker Change: growth so it's

Speaker Change: just now coming up on a year since acquisition. And we're just so pleased, both with how the team is executing on that dual charter mandate and how the integration's gone. And, you know, we continue to hear just great feedback from our agent partners on how Fall Boss is helping them power their business.

Speaker Change: Yeah, and then, John, on your second question around the contingent consideration, there's no change to expected payout. We just have a change in fair value based on the time value of money and getting closer to those payout dates. So I wouldn't overlook at that. I think what Jeremy just highlighted is what we're most excited about, and we think it's a really great piece of software that our agents are really enjoying.

John: Great. Thanks, guys.

Speaker Change: [inaudible]

Speaker Change: Our next question will come from Brian McEvaney from Zellman & Associates.

Brian McEvaney: Hey, thanks guys. Congrats on the results. Just one for me related to how you're thinking about extents growth.

Brian McEvaney: going forward. So, you know, Jeremy, you talked about the variable cost side and the investments outpacing revenue growth in 2024, obviously still resulting in margin expansion with low fixed cost growth. I know it's early to give any, you know, 2025 guidance in terms of revenue or margin, but

Brian McEvaney: If we do assume mortgage rates stay high and we're in this kind of stuck

Speaker Change: you know, slow housing market, you know, should we generally expect that trend to continue in terms of variable costs relative to revenue cost growth or are you reaching a point where some of those initiatives have scaled to the point where maybe that will no longer be the case?

Speaker Change: Thank you. Yeah. Ryan, it's Jeremy Hofmann. I'll take it. You know, you said it right. No guidance on 2025. We're quite pleased with execution this year. I think 2025, you should assume more of the same strategy and go to market, right? We're going to continue to land in new enhanced markets, expand into existing ones, and that'll drive residential revenue, drive mortgages revenue, alongside showcase.

Speaker Change: new construction, and then we keep executing in rentals as well.

Speaker Change: At the same time, we're going to continue to be disciplined on the cost side. We have been, I think, fairly consistent here that macro has been choppy. We expect it continues to be choppy, and we'll plan the cost structure accordingly. So you shouldn't expect much different in terms of how we think about our cost structure. And obviously, we'll dial up and down opportunities on the variable and marketing side, depending on what we see fit. But that fixed cost level that we've been at, we feel comfortable with to go hit our 2025 share targets.

Speaker Change: Sounds good. Thanks very much.

Speaker Change: This completes the allotted time for questions. I will now turn the call back over to Jeremy Wacksman for any closing remarks.

Jeremy Wacksman: I just want to close by saying thank you all. We really appreciate your time this quarter. Thanks for all the questions, and we'll see you all next quarter.