Q2 2019 Earnings Call
Good day and welcome to the Zillow Group second quarter 2019 earnings Conference call.
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Thank you good afternoon, and welcome to Zillow group's second quarter 2019 financial results Conference call.
Joining me today to discuss our results are still Gibbs co founder and CEO Rich Barton.
CFO , Alan Parker, Zillow brand, President and co head of Zillow offers Jeremy Waxman.
And president of media and marketplaces, Greg Schwartz.
During the call we will make forward looking statements regarding future financial performance operations and events, although we believe the expectations reflected in the forward looking statements are reasonable we cannot guarantee. These results. We caution you to consider the risk factors described in our SEC filings, which could cause actual results to differ materially from those in the forward looking statements made on this call.
The date of this call is August seven 2019 and forward looking statements made today are based on assumptions as of this date, 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 through the Investor Relations section of Zillow group's website.
A recording of the call will be available later today.
During the call, we will discuss GAAP and non-GAAP measures.
We encourage you to read our financial results press release, which can be found on our Investor Relations website. As it contains important information about our GAAP and non-GAAP results, including reconciliation of historical non-GAAP financial measures.
In our remarks, the non-GAAP financial measure adjusted EBITDA is referred to as EBITDA, which excludes other income depreciation and amortization expense share based compensation expense acquisition related costs interest expense and income taxes.
We have posted our quarterly shareholder letter and financial tables on our Investor Relations website.
We will open the call with brief remarks, followed by live today.
I will now turn the call over to rich.
Thanks, RJ greetings, everyone. Thanks for joining us today.
A few weeks ago, my wife, and daughter were in DC and their trip happened to coincide with the Fiftyth anniversary of the Apollo 11 Moon landing.
They strolled out onto the mall that evening and discovered that the whole 555 feet of Washington Monument was being used as the screen for projecting images and video from that historic day.
Tens of thousands of people we're watching.
The pictures. They Texted me, we're a reminder of what wondrous goals, we humans can achieve through cooperation cleverness and big Dreams.
And our own slightly more mundane way with Zillow group are dreaming about our own moon landing.
We are in the early stages of a bold expansion from solely a residential real estate media company and to the trillion dollar Tam opportunity of streamlining and enabling the real estate transaction itself.
It would be hard to find a more complicated snarled of a consumer experience than selling and buying a home and all of the messy swirls around that transaction.
We are finally, bringing modern technology to this giant business and the possibilities and our progress our exciting.
There are many increasingly coordinated efforts underway across the company to drive this expansion.
But the Big news thing is it low offers.
July marked the one year anniversary of when we sold our first Zillow owned home and I'm really pleased to share today that we reported nearly $250 million in revenue for our homes segment in Q2.
I want to commend our whole team not just as offers teams I'm going from zero to $1 billion run rate to a $1 billion a year run rate in revenue just in one year.
The demand signal, we are seeing for Zillow offers continues to impress us.
During the quarter requests from sellers to receive a cash offer nearly doubled to almost 70000.
In the same period, we purchased more than 1500 homes up 71% from Q1.
And we sold close to 800 homes nearly twice the number of homes as last quarter and more than four times, what we sold in all of 2018.
In Q2, we stepped on the gas launching seven markets a rate that we plan to match in Q3.
On Monday, we launched Nashville, bringing our total lives Zillow offers markets to 15, giving another group of consumers, a new way to sell their home without hassle and uncertainty.
We're also increasing the number of markets, we expect to be into 26, adding Jacksonville, Cincinnati, Oklahoma City, and Tucson to our plans by early to mid 2020.
With every new market, our team learns and applies the insights lessons and data to move faster and gain efficiencies as we scale.
In addition to participating directly in market, making with Zillow offers we're pushing down funneled towards the transaction in our premier agent business.
We are transitioning our lead generation model into one built on partnerships and which we deliver high touch customer service and seamless transactions, where success is shared and mutually rewarded.
The partnerships, we're building with local brokers and agents teams in connection with Zillow offers reflect the goodness that comes from aligning the zillow customer with the highest performing and client focus professionals in every market.
Were applying these lessons to the future of Premier agent.
During our Q1 call, we announced plans to expand our premier agent flux model to ZIP codes in Connecticut and Colorado.
Under flex agents pay no upfront costs and only pays low a success fee when they close a transaction with as the lead.
While still early the signals we're receiving in these initial test markets are favorable our agent syndicate, they're receiving quality high intent connections and Zillow consumers report high levels of engagement from their flex agents.
Given these positive indicators, we have decided to expand the flex test in Q4 to two of our established Zillow offers markets Phoenix and Atlanta.
We believe testing in these markets will allow us to increase our insights and learnings while also experimenting with other lead monetization programs that can work in conjunction with Zillow offers and premier agent.
The evolution of our business is an industry partnerships.
Coincides with a tectonic shift in the industry at large.
Driven by technology.
Our optimal partners are the best of the best agent to combine their local expertise and professional smarts with advanced proprietary software technology to anticipate and deliver on the high expectations of our shared customers in todays on demand always on world.
We're already moving in this direction, we're using data and customer feedback to select our broker partners and Zillow offers markets and our machine learning algorithms are already helping to identify the flex agents, most likely to close deals with the highest satisfaction levels.
The future of these partnerships is key to our seamless real estate transaction experience vision.
As you'll note in our quarterly letter the Q4 flex expansion into Zillow offers markets is expected to shift some revenue and EBITDA from 2019 into future periods, which Alan will discuss in more detail.
[noise], we confidently make the short term tradeoffs to accelerate our learnings about the long term potential of flux.
But it's still early.
We're spending this amount of time talking about flex with you because it is part of our strategic move towards the transaction and because it will affect revenue recognition and some expense recognition.
Our core Premier agent business continues to perform well.
We're seeing positive feedback from agents and consumers on the new lead validation a distribution process, which is driving more connection and higher customer satisfaction.
Let me switch gears to mortgages.
It's been less than a year since we acquired mortgage lenders of America, which we rebranded as Zillow home loans during Q2.
Our strong Q2 performance reflects our fulfillment of the pipeline that originated on the legacy Amello a platform.
As we transition from L. away to Zillow home loans, we're building new proprietary technology to streamline and integrate home loans as our payments platform for Zillow offers.
We're already testing the initial version of our digital mortgage software, but the full rule rollout is taking a bit longer than expected.
As we continue to build out the test.
To build out and test our own platform, we've slowed loan officer hiring until we feel we have the technology and operational infrastructure Foundation that we need to scale, which you'll see reflected in our updated outlook.
This in no way affects our excitement about the future of this segment.
Loan originations are an essential part of our ability to deliver an integrated transaction experience for our customers.
We're making solid progress and the long term expectations for Zillow home loans business and other transaction transaction related adjacent season remains unchanged.
So.
We are on our way with our own exciting little Moon mission to transform streamline and integrate the shelter transaction.
Zillow isn't a hard earned but lucky position relative to this massive opportunity.
No other company and real estate comes close to our brand awareness, our audience size technology data science industry partnerships and operational know how to get it done.
No. Other company has all of the vertical businesses required to provide consumers with a seamless integrated transaction experience woven together with technology and operations.
We have the best team of adventures and everyday we add people to the mission with more smarts and new skills to enable success.
We are also lucky to have a group of supporters on the ground you our investors, who support and believe in the dream, but who hold us accountable.
We treat your investment in our team and mission with respect and thank you for your support.
I'm now going to turn the microphone over to Alan.
Thanks Rich.
I'm going to quickly summarize a few key financial results.
Overall, we met or exceeded our revenue expectations for all segments in EBITDA was generally in line with our expectations for each segment in Q2, we reported revenue of nearly 600 million, that's up 84% year over year and exceeded the high end of our outlook much of this growth in revenue was driven by our home segment, which was nearly 250 million growing 94% sequentially and as rich noted is continuing to outperform expectations.
Internet media and technology are I am tea segment revenue grew 6% year over year to nearly 324 million and exceeded our Q2 guidance range.
Premier agent revenue was in line with our expectations at 232 million up 50 basis points compared to a very strong Q2 2018.
Before we take your questions I want to take a moment to provide some comments on our outlook and highlight one item you'll see in our results this quarter as well as update you on my priorities as CFO I'll start with the outlook.
Zillow offers momentum is expected to continue demand for this service from consumers is strong and we have accelerated our roll out into new markets throughout the year.
We are anticipating home segment revenue to grow 44% sequentially at the midpoint of the guidance range for Q3.
We have updated our eye empty and premier agent full year 2019 revenue guidance ranges.
At the midpoint of the guidance range, we expect I empty revenue growth of 5% in 2019 and Premier agent revenue growth of 1% for the year.
Our changes in outlook are primarily driven by the expected impact of our decision to expand the flex test.
This means that a portion of previously expected premier agent revenue from markets, where we are expanding our test is now expected to shift from Q4 in the future periods to correspond to the closing of Zillow attributed transactions.
The impact of the flex test on Q3, and full year 2019, EBITDA Inter I emptied segment is twofold.
First flow through to EBITDA from a portion of Premier agent revenue that will shift from Q4 into future periods as I just described.
Second we expect to recognize additional commission expense in Q3 and full year 2019, do the shortened estimated life related to the existing capitalize sales commissions additional details of the accounting treatments related to flex are included in our shareholder letter.
These adjustments do not have any reflection on the health of our premier agent marketplace, which is stabilized.
As rich mentioned some of the integration of Zillow home loans and development of our mortgage software will require more time than we originally anticipated. So we have slowed the pace of hiring loan officers until we have the operations and infrastructure in place to support scaling.
As a result, we've adjusted our full year outlook accordingly.
These changes position us well for 2020.
Now I'd like to discuss an item that impacted the home segment cost of revenue included in our Twoq, Our Q2 results.
We recorded an inventory valuation adjustment for an immaterial amount during the quarter.
This adjustment represented less than 1% of our inventory balance at period end and was the primary driver of the increase in our homes segment cost of revenue as a percentage of revenue in Q2 compared to Q1.
Like any company that maintains physical inventory, we expect to incur these adjustments going forward as a regular course of business.
This is and this is anticipated as part of managing our portfolio of homes and the adjustment is well within our expectations.
As of the end of Q2, only about 4% of homes held in our inventory we are greater than 60 days past their underwritten whole time with the vast majority of those homes under contract to be sold.
Finally.
Turning that this time of transformation at Zillow group my priorities as CFO are clear.
I remain focused on establishing processes and mechanisms in support of three things.
Scaling our new businesses execution within our eye empty segment in order to fund investments in our new segments, along with the additional growth opportunities.
And implementing discretionary cost discipline and operational excellence across the company as we scale.
It's exciting to be in the middle of such a significant evolution, both at the company and within the industry.
And as we execute on our strategy to fundamentally change the home transaction for consumers. We are confident our long term targets remain well within our reach with that operator, we'll open the line for questions.
Thank you.
We will now begin the question and answer session.
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Our first question comes from Angela well of Macquarie. Please go ahead.
Hey, guys its Ben Schachter.
Just wanted to talk there's there's a lot of issues near term to discuss but really let's focus on the long term and the buyer market specifically just wanted to understand how you're framing the long term Tam specifically for the marketplace of buying and selling homes and how that's changed or evolved overtime and then related to that how are you thinking about the size of the long term Tam for all these ancillary businesses.
Mortgage title insurance et cetera. Thanks.
Yes. This is Jeremy I'll take that one.
I mean long term at scale. We think this is a really really big market and that's why we're investing so aggressively thats why were accelerator market Ross we've announced the market.
I think our buybacks as we talked about today would cover half the homes in the country around if we were available everywhere and we seek to reach and expand the types of homes evolve over time and ultimately at scale when you're offering something like though offers this really should be the way every homeowner starts thinking about selling not just requesting an offer from us, but eventually looking at a standing offer we can make to them as a way to think about their selling options, whether with us or not so we have given a three to five year target. That's around 60000 transactions a year run rate that's a $20 billion business. That's just 1% of market transactions today, we clearly see the opportunity as far far bigger than that that's a that's a step along the way and when we're able to deliver a service like this to those consumers that opens up on top of the Zillow offers business. All these adjacent opportunities so mortgage and title and escrow inside the transaction itself as well as the knock on services that you might get around the transaction.
Our next question comes from John Campbell of Stephens. Please go ahead.
Hey, guys just wanted to touch back on the flex pricing or we've obviously I think we've heard a lot of positive feedback from agents or just kind of doing the pilots that seems like a pretty big opportunity. If you guys who were happy to see you kind of lean on it but my question first could you guys talk a little bit more about the revenue impact. How you know how is that accounted for in the backlog and then any sense for the kind of estimated conversion rates in the early stages of the pilots and then secondly are you guys starting to kind of mix in any of the sell side are listing leads into into flex yet.
Okay, Hey, it's Craig I'll pick that up.
The business part of that and then Alan will take you through the modeling.
So.
Plus you're right is is looking pretty promising.
We've got some leading indicators right. So it takes some time.
To mature a real estate lead so the leading indicators you're asking about that we're getting to hear his first customer satisfaction. Our consumers are really pleased with the experience. They are getting by working with these criminal agents. That's that's increasing Interflex program. The second is the important appointment rate to consumers actually want to meet and do they suggest we meet with the real estate agents. The premier agents that we match them to that to important leading indicator to downstream transactions.
That's looking really positive in these industries state tests, where we're doing right now in Connecticut in in smaller of Colorado, That's looking pretty good and then are we getting our preparations to engage in these.
And we measure that by our the touching and interacting with these consumer connections.
Interwrap and nearly every nearly every one of these connections is being touched in or Premier agent App and that is a very unique thing for real estate. So so far the leading indicators are really good from the small scale test and I'll, let Alan talk about did you talk sometimes that Greg I did okay.
Okay.
And this is Alan Parker with respect to the impact on revenue.
As we called out in the shareholder letter the impact of.
Accelerate or increasing the number of tests in the Phoenix and Atlanta area.
Has the effect of taking revenue. We previously thought we would recognize in Q4 and pushing that out in the future periods. So our outlook.
Now reflects the impact of increasing the size of our flex testing and so when you think about that range. It's the primary it's a significant change our primary change to our revenue outlook is related to this flex testing and not only does it affect revenue as we push out from Q4 to future periods that revenue falls through to EBITDA and then we also have to accelerate our capital I'd sales Commission costs.
Accelerate the amortization, which has an impact of increasing costs.
In Q3, and the rest of 2019 for those two new markets.
So it's this is rich it's you know the accounting for this is unfortunate.
But not.
Why were making these decisions were making these decisions because this is a better customer experience.
And it's a better but it's at least in our testing so far it looks to be a better business model.
And so we are making these decisions because we think it's the right thing for customers and for the business for the long term.
Our next question comes from Mark Mahaney of RBC capital markets. Please go ahead.
Hey, guys. This is Mike Chen on for Mark.
I was just wondering if you could expand a little bit about about flex and in Phoenix, and Atlanta and the shareholder letter you mentioned.
About the bleed monetization opportunities in programs that you're working on.
So any color on how that dynamic would work between Zillow offers and premier agent. Thanks.
Yes.
So.
You're right, we're optimizing to Phoenix, and we're optimizing to another really strong so offers market of course Atlanta.
If you think that it allows us to do.
It allows us to experiment.
With additional lead lead types and leave distribution and leave distribution part is Super important. We've just launched what we're calling the performance pacing algorithm that HPA and what that is is using an autonomous model to make optimal matches between buyers and real estate agents that are able at that moment.
And familiar with that particular type of home in that particular area and we expect to see some pretty significant conversion gains from that as were called the quality of those agents factors into the room to you bet the algorithms driven by expertise in the market.
Past transaction history, and then customer experience scores see sat scores.
And then if they're engaged at that moment it accessible to us. So we're going to see some pretty awesome wins in customer experience, which we believe will throw flow through to gain and transaction volume and conversion rates again. The tests, we're doing in a few smaller metros in Connecticut in Colorado or low scale. That's the reason why we're going to do is to strongsville offers markets. So we can get a big strong signal.
To work off of and we're feeling pretty good.
Got it thank you.
Our next question comes from Brian Mccann Zelman. Please go ahead.
Hi, Thanks, so much.
Second question on the on the valuation adjustment inventory.
And then I guess, just thinking about the kind of possible adjustments going forward.
Can you talk about that process of kind of managing called so called tail or the relative underperformers.
In inventory I guess those homes that are kind of taking longer than the underwritten hold times and.
Outside of just kind of commentary on that that process that you look at.
I'm curious if you look at the finished goods inventory on the balance sheet. So I think it was 279 million in the queue.
Is there a way to break apart.
What percentage of that was acquired maybe Q1 19 versus two to 19, just to kind of a better sense of that.
Aging process within the inventory.
There would be very helpful. Thank you.
Hey, this is Jeremy I'll take that so I mean, a couple of things you're right.
It's a way to think about the tail and its a good marker of how we think about price in that portfolio.
As we price there's me distribution of homes in each market and across it will offer some are going to outperform and they had some are going to take a little longer and the tail and so you will see the value adjustment as a reflection of that Alan gave you a stat less than 4% of our inventory is late by 60 days as a kind of way to think about the sizing of it that's probably the best way for you to actually think about the age too we're not breaking out the age of inventory by segment or sorry by market or by timeframe.
Okay, and I guess the follow up I mean, so the 60 days past underwritten hold time of the 4% I mean is there a way to frame what percent is kind of any time late relative to the hold period or maybe said another way what.
What is the average underwritten hold period.
Yes, I mean, the I mean the.
The best way to think about that as it's going to vary by market by price point, that's why relative to underwriting is probably the cleanest metric and thinking about the value adjustment as a reflection of of any changes to the inventory on balances the way will reflect that our underwriting will have a unique.
Target.
Appreciation costs and whole time for each home and then the pricing will balance our portfolio in a market and across the markets to solve for our financial performance results. So each home is unique.
And what it is and what's expected to do and then obviously, what we see it flow through and actually do.
Our next question comes from Lloyd Walmsley.
Bank. Please go ahead.
Hey, this is Greg blockers on for Lloyd two if I may So I think Alan had mentioned that a majority of the Premier agent Guide down was attributed to the flex, but just curious.
What was what were some of the other factors that were the cause there and then I guess continuing on flex since it seems like things are going better than expectations and it's a better business. This decision.
How should we think about this in the context of the long term I am TV guide that you provided and I guess, if things are going better than expected why not raise this long term guide for I am too. Thanks.
Yes, so with respect to the we took the top end down from 930 to 915.
As I mentioned significantly all of that was due to the revenue effect of flex and move in Q4 into future periods. So theres not really much of anything to call out there all of the the key input metrics for the Premier agent business continued to stabilize and we're excited about that.
And so there's no real story other than flex with respect to Premier agent Eni empty.
And I'm sorry, the second part of your question how does it affect our long term to redefine how do we feel about the I am too through yes, so three to five year targets remain.
We still feel very confident as I mentioned in my opening remarks that they're well within reach.
Yes, we don't think we were you know.
What was the I Mt. Three to five year guide 2 billion $2 billion with $600 million of EBITDA field percent, yes, it still feels appropriate.
Okay. Thanks.
Our next question comes from Ron Josey JMP Securities. Please go ahead.
Great. Thanks for taking the question just wanted to ask on two things really first on just Premier agent retention I think you said in the letter a return to historic norms can you just update us on on how you're doing with acquiring perhaps those agents. It might have been lost during the transition last year and and then just overall just conversion rates with with P.A. forward and then on homes.
Just with service fee I think getting to 7.5% in the quarter I think for that sort of compares maybe 7%. Prior just talk about what's driving that fee I know, it's a range, but is it may be going into newer markets consumers, perhaps willing to pay more for the convenience and any sort of insights on the fee would be helpful. Thank you very much.
Yes, hey, its Greg ill pick up the first half of that so yeah as we noted on our.
On Premier agent, we run forecast, so weve returned to exactly where we thought we would be now so we're pleased about that.
The real driver of this and again the normal retention we're right on it is this bet we made on connections that up.
Fewer higher quality connections between these great real estate professionals and consumers that need to be served.
That was the big bet, we made it flowed through.
You know our Premier agents are now covering high quality live connections were pleased about that the other big bet. We made in both of these are important for our flex transition as best of Zillow. The best available that was we would make us a selective group of the finest real estate professionals found anywhere.
We'd have a measure that incredibly high scale millions and millions of consumer element to consumer feedback now on this thing and a reminder of best of Zillow is it's a five star.
On rating system that happened multiple times during.
The relationship between consumer and professional in and we're holding agents are from rate is too high standards, So thats fully implemented and positions us wonderfully.
For flex in that's been our focus today on returning customers.
These folks come and go based on their lives.
Because these are small business people.
And so we've always been pretty consistent once these connections were recognized as valuable with FLC slowing flowing back to us. So we feel pretty good about that but the team is focused on flex and what's ahead.
Do you want take the second half of that there was a financial question there it was.
Home the Barnett Jeremy I mean, yes, it is its market and buybacks and how mix. So we're getting into more markets.
Each market and even zipped within market and home types have.
Different underwriting.
Inputs rights from carry holding cost to taxes and fees and those those will get rolled up into the fee. So you will see that vary as we go especially as opening more markets.
And as we spread.
Got it thank you.
Our next question comes from Jason Helfstein of Oppenheimer. Please go ahead.
Hi, This is Jason Hoffman on for Jason Helfstein.
I was you're entering all these I buyer markets, how should we think of inventory and economics are trending throughout the rest of the year, we saw a slight uptick from one Q2, Q, but how should we think about that.
Threeq and Fourq.
If you don't mind, Yes. This is Jeremy said the unit economics were targeting.
Continues to be the same so plus or minus 200 basis points.
Return before interest.
And so you saw a similar performance between Q1 and Q2 and.
Well within that range and you will see us we expect to continue to perform at that level and this is Alan Park I was going to say in terms of economics overall.
We have talked about we expect to see trending improvement in our EBITDA margin as a percentage of revenue.
That may not be linear, but if you look at our range.
We were at negative.
22.7 in Q2.
And we have a range of negative 18.9 to negative 23 in Q3 based on our guidance ranges.
Thank you.
Our next question comes from Jason Deleeuw of Piper Jaffray. Please go ahead.
Great. Thanks for taking the question just wondering on the seller fee how much of a factor is that on the home seller acceptance rate and then Theres also been more talk about I buyers offering the instant offer and then plus a traditional agent kind of listing price what they think the home solar forget through traditional sale for the house. How important do you think that would be to the eye buying process and is that something that zillow is taking a look at thank you.
Yes. This is Jeremy so I mean consumers are super sensitive to the fee. So as the fee varies youll see acceptance rate change, but thats relative to their alternative right. So when we're pricing in the fee many of those costs our cost they would incur no matter, how they sold and having that conversation that might explain that to them is something that we're still working through and they're still learning as they get into the selling process. So.
When fee moves it moves, but it's about what does it move relative to in terms of their alternatives and then Greg I'm going to take the lifting sure.
So at least has been a topic of some interest.
We think we have a good long term opportunity and developing a business adjacent to Zillow offers.
But there is some adventure to happen here of course is confined just there's still offers footprint which is still.
A pretty compact footprint.
In the thing we have to get.
Sorted out.
Enter product iteration is folks covet is beautiful amazing Zillow offers instant experience and we have to figure out how to cross sell them when they don't fit or buy box typically cross sell them into into listing with a premier agent, we're working our tails off on that and there's promise, but its not this year.
Our next question comes from Brent Thill of Jefferies. Please go ahead.
Thanks. This is Alex channel on for Brent just based on the color you provided in the letter it seems as if recent premier agent feedback has been positive for the full year guide still implies just just 2% growth. So if you could just remind us what you think the Tam is for that business that would be helpful and how much runway you think is still available in the PA business. Thanks.
Yes. So this is Alan Parker I'll take that I mean, I guess, what I would say is that.
With the guidance that we gave.
The implied at the top end of the guidance the implied growth rate for Premier agent. In Q4 is about just under 3%, but that is impacted by this flex adjustment that we described I think that.
We expected with this recurrent revenue in the churn that we saw last year that we would have to build that back up we would see more significant growth.
Had we not done the flex transaction.
As rich mentioned, it's the way we recognize revenue.
But in terms of long term Tam and growth I would just look to our long term targets, we still believe that within three to five years I empty. It can be a 2 billion dollar business at a 30% EBITDA margin in the freight the frame to apply to this is we're moving to a transaction model, we're doing movies or transaction model with the finest real estate professionals in the land and we've got a much larger tam to address with the with with this new Flex program as we get to it. So there's there's there's a bunch of upside on that on that because we just we just got to get everything lined up and we got to get some full data back from these higher scale tasks. In these in these two important geo markets and then there will be to it.
Thank you.
Our next question comes from Brad Berning of Craig Hallum. Please go ahead.
Good afternoon, just to follow up a little bit more further on that thought process, maybe you can touch a little bit upon the flex Tam of how you see it versus kind of the traditional advertising premier agent Tam and what does the margin profile on flex likely look at versus the historical kind of PA business, just kind of curious if you could help us think that through.
Yes, I'll talk to you about like the topline economics of it have been and then Alan can hit the margin profile if he wants to.
The way to think about this is we have been limited by the advertising budgets, which is by the advertising budgets of the credit cards of these great small business people. These agents.
We've had to pay upfront.
We've had to pay upfront take the financial risk and so they were looking for pretty strong economics and return and even when they were wildly profitable multiples profitable.
They de risked those decisions when prices went up on them when we move towards when we move to flex.
Let's be clear the economics.
The take on an average transaction improves for our company. So we take a bit more.
Because we're we're capitalizing the transaction.
And we think by providing better lead distribution or connections to the REIT professionals and a better experience with the best of Zillow, where we can drop folks that aren't providing amazing experiences to consumers will drive well more transactions. The economics on a per transaction basis improved for US you know weve talked about this roughly roughly to 35% referral fee.
As the industry standard, we'll see where we settle in.
So thats, great and then will drive more transactions. So this would have really good good leverage for us and it aligns us with the incentives for both consumers and those real estate and it doesn't appear on the income statement once again I'll bring up customer satisfaction the gear.
It's a better.
We think it's a better customer experience.
This way and.
That matters that is a that is an input to growth.
Yes.
And with respect to the margin profile, we're not currently giving any guidance outside of our current outlook. We've got a lot to learn about flex.
But again as rich mentioned, we're super excited about a lot of the elements starting with the customer and we think the rest will work itself out to the positive and I would just still directly to our long term targets.
With respect to the curves over the next three to five years.
Our next question comes from Tom Champion of Cowen. Please go ahead.
Hi, good afternoon guys.
Maybe one more on flex I'm just.
Curious if you could close the loop on why Phoenix, and Atlanta, and why it's important that those were.
Offers markets as well can you can you just clarify that men.
Maybe switching gears to offers.
Really impressive market's growth and transaction volumes I'm, just curious if you could share any thoughts around.
Scale and maybe volumes were.
Individual markets become profitable any comments around that would be really helpful. Thank you.
Yes, I'll pick up the first is Greg why Phoenix Atlanta.
The brand is pretty hot there, we've got great agents working with us there.
And partnered with us there.
And you.
Were interesting on the seller lead opportunity and a buyer lead opportunity there easier it's a more controlled laboratory.
For testing Yep, you bet. So thats why those two important markets in there in the large enough markets that is going to give us strong enough signal and.
And on the signal is the struggles were seeing from from the data that we've had these leading indicators are based on.
A few midsize metro's in Connecticut in Colorado, and these two big these two big areas will give us a really strong signal.
Jeremy you have been on on offers and kind of how we think about markets as we go.
Yes, we're scaling quickly and we're adding more and we're just now starting to come up on even being able to see year over years on the first couple of markets. So it's still early and it's going to be a while before we can really think about sort of market composition.
And market by market dynamics.
The only thing I can say is obviously scale as an input to that long term target on profitability too. So the scale platform that we get both in each market and across the markets and be able to grab the data get the best demand signal.
Provide stronger offers and drive costs down or what are we going to drive the whole business, that's going to be true in our big markets and thats going be sure across the platform.
Our next question comes from Brian .
Morgan Stanley . Please go ahead.
Thanks for taking the questions I have two just to.
Throw another one that flex so I just kind of want to make sure. We understand so if you look at sort of your initial markets, where you're testing. This are you, saying that your your per home transaction monetization. So the revenue you're generating per home that I was actually sold to the platform. It is actually better through reflects than the old PA just to kind of to clear that up.
And then on this we understand how it trends over time, and then you talked about sort of the idea that you will be able to send more leads and more home sales to higher quality agents.
It flexes successful over time, then do you see a world where you have more leads and more transactions going through higher quality agents. So the agent count could fall further over time, and that's kind of the way you're thinking about flex changing the business model.
Yes, so the two good questions.
Some of the economics I would point out early yet we just launched the program in those areas in June .
So.
What we believe will occur in excel and what occurs we got to we've got to let the stuff mature a little bit.
Im talking to plant a flag on that issue okay.
He said to me the take rate was going to go up I just heard that.
Recall and I took a note.
You asked me about it later.
But at the end as the N., it's still pretty small it exactly the end is pretty small, but but its looking pretty positive and it's looking like.
On a per transaction basis, it should be positive.
And then the question on agent Count.
We intend to have the selection of the most productive agents in the business connections allow them.
To pick up the phone and have a live customer who has been vetted.
Who wants to talk to them.
And.
In schedule appointment go out and see a house.
Get connected to them.
This is a really important efficiency driver for them. So we expect that the best get bigger yes, if that's the question.
We certainly expect that to occur and the team model is very well suited to this which we've invested in now.
For many many years.
A lot of wonderful individual practitioners have now become businesses hiring buyers agents hiring showing agents hiring listing agent hiring transaction coordinators on top of our platform, we expect that to accelerate.
And so the total customer count me decline early.
But the number of agents working the volume that we send downstream will probably grow and each of them will get more of their business from us. So.
But it's early.
Okay. Thanks, that's very helpful.
Yes, Thanks, Brian .
Our next question comes from Dol Iranian the Wedbush Securities. Please go ahead.
Hey, Thanks for taking the question so.
A little bit more on flex.
I just want to make sure maybe I understand all the ins and outs so in the markets that you're in.
Or is it is an opt in right now are you pushing to or is it is only flex.
What's what's kind of the mix and in those markets.
And so I understand that you are seeing some really positive signals.
Any way to give kind of ballpark framework around how many transactions have actually closed through the slacks model.
And then.
As we look out to the three to five year targets.
Understanding that you're still confident in and those numbers are more confident today.
How much of that there is a big step up in growth between this year and then the following years. That's the assumption if we get to the targets how much of that is based on flex working.
And how much of it is based on the traditional core PA.
Returning back to kind of like the double digit growth rate that you've seen.
Okay. There were a few questions in there so I'll pick off one at a time and then you'll you'll you'll help me out a little bit.
So the first question is what's the actual dynamics in the market that are live today. So how you roll it out how do we roll it out its entire market. So we get on there we put our teams on the market, we train up or customers.
They go ahead and agree to shift from a prepaid model to a postpaid model that hasn't been.
Real hard to stop billing their credit cards.
Moving to a post pay model, we typically run this changes, but for a month or two.
And we frame the same share of voice they had.
And then we let this algorithm that I mentioned the performance pacing algorithm start to scale, Oxford has the input needs from the maturing from this maturing set of data appointment rates customer satisfaction.
And then the performance pacing algorithm starts to do the allocations.
It overweight or heavy up the best performers and.
So thats how the typical market launches go that is how.
It Atlanta, and Phoenix will launch it in there's a whole lot of dialog with a premier agents before we launch and they've been very welcoming of this change. So that's that's been a highlights so far.
Question on on transactions as you know, we just want us in June .
And so with two it's too early in the maturity for me for me or the team to be comfortable sharing a metric.
So were not being coy were just it takes a while for these transactions to happen, yes hasn't we'd have to close right. It hasn't been six months, yes. The typical window right. So we're not going to plant a flag in in yet.
On what that looks like and again, it's small scale and that's what we're going to these larger scale markets you get a stronger signal.
And it's a test so it wasn't a three to five year model was not predicated on yeah. Okay. Good success or failure. This yes, we don't have enough information on the test yet to really roll in what we exactly right thinking the three to five year, we feel comfortable that the three to five year targets were and are achievable.
But we'll learn more with this and we'll come back and explain what we think the impact could be.
If its effects.
Our next question comes from Chi.
Suntrust. Please go ahead.
Hi, Thanks, a lot.
Just looking at the amount of inventory number of home so thats going on 1500.
And then I think there are a few things going on you're ramping across.
Running new markets and then there is seasonality because obviously we had in the peak season, so how should we understand.
So on a sort of like for like basis, how the inventory increase because of seasonal factors versus.
Going up because you're in one market.
Yes. This is Jeremy I mean, it's both market expansion and just raw growth, maybe even less seasonality. So yes, we're opening more markets and therefore every month is an increasing amount of volume in the business and so you're going to see that continue to build so well can inventory will continue to grow while we're scaling because we'll be buying more and every month than we were able to sell from the previous cohort and we expect that to not just continue.
But to continue across the markets that we open as well.
And then maybe maybe a related question so in the month because they are doing in.
Already.
Oh.
Zillow homes.
How much effort are you spending on brand advertising and what's the what's the plan is that is that going to ramp up or do you think you are in a good place.
So I mean the story for Zillow offers is that we have kind of all the demand we can handle and this big Amazing brand that we have spent decades building in concert with the IP business and the other businesses for our customers is paying great dividends as a as a place for all of our homeowners to come and start with the offer so we do a little testing here or there to try and figure out how to start to get the marketing machine, we have dialed in across these businesses, but by and large.
The traffic that we have coming is already is the source for that offers and frankly, we've been inundated with the demand every time a lineup of market and so our big goal is trying to figure how to open these markets efficiently quickly and effectively to actually satisfy that and that of course makes sense not just because we have.
194 million you use for the quarters, what we just announced something like.
Okay. So not just because we have a ton of you use a lot of those are coming because this estimate is the first stop on the way to thinking about selling your home.
And so.
We haven't had to exhibit a tremendous amount of cleverness.
In merchandising.
In fact, we havent exhibited a certain amount of that much cleverness honestly, we but we haven't had to and trying to get them to raise their hand to say they like is often.
Our next question comes from Deepak Mathivanan of Barclays. Please go ahead.
Hi, guys. Thanks for taking the question somewhat related to question the price the firewall. So on the Threeq guide for the homes business to 80 million EBITDA loss. The high end, how much of the cost saves associated with city level expansion and all the fixed costs.
Non variable cost associated with it compared to sort of your expectations for contribution margin on a per home basis.
Right after the volume that you're looking to sell and then second one also on the homes business logic Youre being active in Phoenix and way goes markets for a while.
The inventory growth start up continuing to happen out of similar based where you think market share gains is still very easily achievable. In these markets are we now at a point where.
Hi, buying market in itself has reached a reasonable level in these.
Ali adopting city, so it's going to be a little bit more market share dynamics that lays out there. Thank you.
Let's start with that so I guess I'll take the first one.
I guess the way I would describe it as.
When you think about our growth in our revenue range. The homes cost of revenue has fluctuated between 95% to 97%.
Revenue as a percent of revenue and the 97 high was in Q2 and that related to this inventory value assessment. So I think that what you'll see over time is that.
That number will move back down closer to the 95 and the rest would be the fixed costs.
So she did with building the business and infrastructure, that's not part of the cost of revenue of the home.
So I think you can use a range of around 95, it will fluctuate but that may be a good estimate at least in the near term on the variable kind of costs related to the home versus the the fixed cost to build.
Yes, and then on the second one market share gains versus steady state I mean, I think its important member just how early it is so even though the segment's been around for a couple of years and people have been.
Starting to experiment with trying to sell their home. This way the vast majority of consumers. We talked to you don't know what this is.
And as rich said, we're not really getting that clever yet about trying to teach them because frankly, we don't have to and we're we're in today with the demand people coming off our website, but there is a time, we're busy we're busy building markets, but overtime.
You will see market share gains come from more homeowners and home sellers understanding what this offering is learning about trying it out and ultimately converting to it and we are in the very very early innings of consumer awareness and understanding of this.
Well My last question comes from Heath Terry of Goldman Sachs. Please go ahead.
Hey, guys. This is out of cost cuts on Voorhees. Thanks for the questions. When we think about just the turnover in the homes business, we saw roughly a thousand homes on the balance sheet at the end of one Q.
And you guys sold roughly 80% of that in Twoq, you, you've probably seen previously talked about the 90 day threshold.
How has that evolved over time, particularly as you've entered new markets the thought process around balance sheet turnover.
And then when we talk to agents we here.
We hear a lot about the value that that particularly those who are representing homeowners.
In in markets with Zillow offers and other offer instant offers businesses the value of essentially using that as a way.
Using that as a way to.
Using that as a way to create more opportunities and more more value for the homeowner.
When we think about.
You being proactive with agents versus agent sort of coming to you in some of these newer markets. How do you think about how those relationships evolve.
Yes, Jeremy so on the whole time, I mean, I'll point, you back to our unit margin targets. So we get into more markets, we get into more types of homes were underwriting each home.
To a specific whole time and cost to sell all solving for that plus or minus 200 basis points before interest so as as markets very season, you're going to see hold times very cross that but it's really about solving for that for that unit margin and we continue to feel good and we continue to hit that hit that target as we go and feel good about that target.
In terms of I think your second question was just around.
Agents in markets, where there are things like digital offers talking about still offers an option to sell.
I think thats what your question was at least from our standpoint, we have we have a great Asian partner in each one of these markets that were working with they have that conversation as well.
And we think that choice is super important whether they end up selling to us or ultimately lifting traditionally hopefully with one of our with one of our partners.
I think that will help contribute contribute to growing awareness of what this is as I said earlier.
Most folks are starting their home their home selling journey on Zillow thinking about theres estimate and that button right next to them as a way to think about how to start.
We think becomes or were the primary way for them to get their hands and their head around what selling looks like regardless of which path to go down.
This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.
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