Zillow Group, Inc.

Good afternoon. My name is Eileen and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group first quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brad Burning, Vice President, Investor Relations. Please go ahead.

Thank you, Eileen. Good afternoon and welcome to Zillow Group's first quarter 2021 conference call. Joining me today to discuss our Q1 results are Zillow Group's co-founder and CEO, Rich Barton, and CFO, Alan Parker. During the call, we'll 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 filings for additional information. We undertake no obligation to update these statements as a result of new information or future events, except as required by law. This call is being recorded on the internet and is accessible on our investor relations website. A recording of the call will be available later today. During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to as EBITDA. We encourage you to read our shareholder letter and our earnings release, which can be found on our investor relations website, as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures. In addition, please note, we will refer to our internet, media, and technology segment as our IMT segment. We will now open the call with brief remarks, followed by live Q&A. And with that, I will turn over the call to Rich. Thank you, Brad. Good afternoon, everyone, and thank you for joining our first quarter 2021 earnings call. We are in a much better place compared to one long year ago, and I'm so grateful and impressed that these miraculous COVID vaccines are now widely available across the country. I hope that you and yours are beginning to find some normalcy after such a trying year. In a typical year, spring begins the traditional home buying season, but we know that this past year was anything but typical. Home buying never really slowed down. The great reshuffling, driven by changes in what we want and need out of our homes, has fueled continued interest in moving. And we expect this moving demand to continue as we all adjust to a safer world ahead. Our research team recently published a survey-based mover report, which we have hyperlinked to from the shareholder letter. It's a great read when you have the time. The report indicates that the pandemic has indeed caused people to rethink where they live and concludes that approximately 8 million existing homeowner households that have been on the sidelines may enter a real estate market already beset by unrelenting demand. Additionally, 8.9% of consumers plan to purchase a home in the next six months. near a 20-year high per the Conference Board's April Consumer Competence Survey. The reaction we got from our own employee base when we told them last March that we intended to have a more flexible workplace policy for the long term is an interesting case study in how remote work catalyzes the great reshuffling. We found 30% more employees moved in the year following our announcement compared to the previous pre-pandemic year. This time last year, we had employees in 25 states. Now they are in all 50. This is obviously a small sample, but it shows how the great reshuffling might play out as people get certainty about their company's post-COVID workplace plans. Zillow was an early embracer of a more flexible long-term workplace model, so we are a few steps ahead in firming up our plans. But we expect that other companies will adopt more physical location flexibility to varying degrees, simply because it's hard to take back something that employees have been given and valued. That cultural shift will free up more restless households to list and move, and Zillow will be here to serve as their trusted partner and resource. Beyond the continued reassessment of where we all lay our heads at night, the housing market is underpinned by demographic and economic tailwinds that will persist for the foreseeable future. Millennials are moving up, baby boomers are downsizing, and in between, people of all generations are rethinking their lives. Despite recent shocks, mortgage rates are expected to be quite constructive for the foreseeable future and are near all-time lows versus historical levels. It appears that housing turnover should accelerate from the historically low rates of the past several years, along with an easier digital transaction. All of these trends point to more liquidity and household formation long term, which creates a healthy backdrop for the housing market and the business in which we operate. Of course, the most powerful and important shift driving our business is the title shift moving consumers real estate dreaming, searching and transacting from offline to online. Just as they have in many other parts of their lives, consumers have experienced the greater convenience of a digital technology-enabled home search and some the magic of a digital transaction. They will only expect further advancements in the future. Moving on now to some business results from another strong quarter here at Zillow Cloud HQ. First and foremost, all of this energy around moving has created a Zillow wave of sorts, and our customers are surfing it every day. Just last week, Time named Zillow one of the 100 most influential companies for, in their words, quote, making an extraordinary impact on the world, end quote. A little grand perhaps, but definitely a nod to the vast reserve of brand goodness that we have been building up over 15 years. An uptick in pop culture recognition this past year has helped accelerate our traffic. In Q1, 221 million average monthly unique users visited our sites and apps, which represents an increase of nearly 30 million average monthly unique users versus this time last year. This is a level that we previously would not have thought possible and should provide the fuel for years of customer growth into the future. Our top of funnel engagement with our customers translated into excellent results across Zillow's suite of products and services. Our flagship buy-side business, Zillow Premier Agent, once again generated the strongest results we've ever seen, reporting 38% revenue growth year over year in Q1. Our nascent sell-side business, Zillow Offers, continued to accelerate out of the pause we instituted in the pandemic, generating over $700 million in revenue and surpassing our internal expectations on revenue, EBITDA, and unit-level economics. The success from our buy-side and sell-side offerings, when combined with solid execution from our adjacent services and supporting businesses, translated into total revenue growth of 54% sequentially and total company EBITDA of $181 million for the quarter. With that number in context of Zillow's history, it represents 90% of our full year 2018 EBITDA, which was just prior to the commencement of our heavy investment in our Zillow 2.0 vision. We are now beginning to register the benefits of the investments we have made across our product innovations for buyers and ventures, as well as our major ventures into Zillow offers, Zillow home loans, and Zillow closing services. This increased profit generation after such a meaningful investment period gives us confidence that the bets we are making across the business are creative and we are allocating our time, our people and our capital appropriately for the longterm. Speaking of our people, Fortune named Zillow one of its 100 best companies to work for based on our own employees' feedback about working at Zillow in 2020, including how trustworthy, caring, and fair they felt Zillow has been during the pandemic, which forced most into Zoom land. As we reimagine the future of our workplace, we are grateful for our flexible and talented workforce. While our employees are doing well and our quarterly results are strong, we are oriented to the multi decade journey in front of us. The journey to digitize and simplifies a huge industry, delivering more and more movers gracefully to their next homes. Pursuit of these growth opportunities deserves continued appropriate reinvestment of profits. As part of that journey, we recently launched a new advertising campaign with the tagline to move is to grow. We think it wonderfully captures the essence of why moving is both exciting and daunting. and how we at Zillow are increasingly able to help our customers navigate this crossing. The campaign supports the expedition we are on as a company as well. Just as we've been reorienting our employees and mission around transactions, we have the exciting task of reeducating our customers on who the new Zillow is and what we can do for them. Every signal we see based on data and customer feedback is that customers expect and demand a more seamless experience. This is Zillow 2.0. A great example of our customers' enthusiasm for ease is the reaction to our recent announcement that many homeowners in Zillow offers markets now can see that their Zestimate is a live initial offer from Zillow. The announcement press alone drove record-breaking interest in the service with requests coming in at levels we've never seen before. We believe we are onto something with the Zestimate offerings. The continuing challenge and opportunity going forward will be to translate customer interest into transactions. Now that we have many of the ingredients for our end-to-end home transaction through Zillow's services and products, we are upgrading our giant leaky customer funnel and converting more browsers into customers. We are motivated every day to ensure we deliver our customers excellent integrated experiences on par with simpler, smaller e-commerce transactions in other parts of their lives. To reiterate, it is still early days in these efforts, and there is so much work to be done as we begin to scale. Across Zillow, we estimate that our 2020 gross profit was larger than any other player in the residential real estate technology category. But our buy-side premier agent business and sell-side Zillow offers businesses still represent less than 2% of the total annual residential real estate industry service fees. We are proud of our business, but we have an ocean of opportunity in front of us. Each customer who uses Zillow to move has a story. One we're sharing today is about first-time home sellers Jessica LaRue Briscoe and her husband, Sean. They turned to Zillow when they were anxious about a move from Colorado to Texas, where they wanted their two-year-old son to grow up near their families. Zillow connected Jessica to an agent partner, Adam Unger, and he walked her through the selling process. It was all new to her, and she was scared and dubious. I'm going to take a gamble on you, she told him. Adam's experience and professionalism kept their worries at bay, and Jessica and Sean felt informed and prepared throughout their move. I really feel like we were able to be connected with the best real estate agent for us because we went through Zillow, Jessica said. The happy ending to their story is that their son is now spending time in Texas with Jessica's grandparents who are in their 90s. We are motivated every day by customer and partner success stories like Jessica, Sean, and Adam's. Like our ad campaign says, to move is to grow. And we're seeing that here at Zillow with our employees, our customers, and with our industry partners. As for our investor partners, we appreciate the support as we go on this journey with you. With that, I'll turn it over to Alan. Thank you, Rich. As Rich discussed, Zillow Group delivered another strong quarter, reporting Q1 consolidated revenue of $1.2 billion and EBITDA of $181 million, both exceeding the high end of our outlook range. Q1 IMT segment revenue of $446 million grew 35% year-over-year as we continued to see accelerated growth in Premier Agent and strong growth in rentals. IMT segment EBITDA was $209 million in Q1, or 47% of IMT segment revenue. Accelerating revenue growth combined with year-over-year declines in operating costs translated into 143% year-over-year EBITDA growth in Q1. Premier agent revenue grew 38% year-over-year in Q1. The accelerated growth was primarily driven from connections growing faster than traffic. as well as our focus on providing outstanding service and optimizing to connect high-intent customers with high-performing partner agents. Growth in Zillow offers continued to reaccelerate in Q1. We reported home segment revenue of $704 million, which exceeded the high end of our outlook, with 1,965 home sales. Resale velocity was above our expectations. In Q1, we sold 128% of the beginning inventory of 1,531 homes, which contributed to inventory declining at the end of Q1 to 1,422 homes. Purchases increased to 1,856 homes in the quarter from 1,789 homes purchased in Q4, but not quite at the pace we planned as we continued to work on refining our models to catch up with the rapid acceleration in home price appreciation. During Q1, we continued to focus on unit costs, automation, adding capacity, and sharpening pricing models to improve offer strength as we continue to scale. Our Q1 Zillow offers unit economics of 549 basis points return before interest expense was above the plus or minus 200 basis point guardrails we've set for ourselves while working to scale the business. The outsized unit economic results were impacted by the ongoing strong housing market, which is temporal in nature. We made progress during the quarter on improving offer strength and sharpened pricing that tightened our unit economics by approximately 120 basis points from that of Q4. The durable operational improvements in overall cost per home contributed 280 basis points improvement from Q1 2020. Our mortgages segment revenue increased 169% year-over-year in Q1 to $68 million, and mortgages segment EBITDA was $6 million compared to the midpoint of our outlook range for a loss of $1 million. The revenue and EBITDA outperformance was primarily driven by mortgage loan origination volume, which was up more than eight times year-over-year, as well as our mortgage marketplace, both as a result of strong refinance activity. Beginning this quarter and going forward, we will disclose our mortgage loan origination purchase and refinance volume. In Q1, refinance loan origination volume comprised 90% of total origination volume. We continue to invest in our mortgage platform to provide a compelling experience for our purchase customers as well as integrating across our business. Turning to our outlook for the second quarter, At a consolidated level, we expect revenue to be $1.26 billion, up 64% year-over-year at the midpoint of our outlook, and EBITDA to be between $116 and $140 million. In our IMT segment, we are forecasting 66% year-over-year revenue growth in Q2 and 44% revenue growth over Q2 2019 at the midpoint of our outlook range. Within the IMT segment, we expect premier agent revenue to be between 342 to 350 million, up 80% year over year, and up 49% over Q2 2019 at the midpoint of our outlook. This is being driven by strong top of funnel traffic and connections as we enter Q2. It is important to note that during Q2 last year, we provided better together billing relief to our premier agent and other marketplace partners. Excluding the impact of this billing relief, we expect Q2 year-over-year premier agent revenue growth to be 38% and IMT segment revenue growth to be 35% at the midpoint of the respective outlook ranges. We expect Q2 IMT EBITDA margin to be 41% at the midpoint of our outlook, down sequentially from 47% in Q1. As we position ourselves to drive sustainable, profitable, long-term growth, we expect Q2 IMT EBITDA margin to reflect accelerated investments in marketing, staffing, and technology up from Q1 levels, and we expect to further accelerate investments into Q3. For full year 2021, we expect EBITDA dollar growth more in line with revenue growth rates rather than expansion from the 38% EBITDA margin we reported in 2020. in q2 we expect our home segment revenue to increase sequentially to 735 million at the midpoint of our outlook the higher than expected q1 resale velocity i mentioned previously pulled forward a portion of expected q2 home sales customer interest in selling their homes to zillow and the operational improvements we have continued to make have shown strong improvement in top of funnel as we enter q2 which gives us confidence in our ability to continue to scale the business in the periods ahead. We expect mortgage segment revenue to be between 57 to 62 million in Q2, which is down from Q1. Our Q2 guide reflects slower industry refinance activity and narrower gain on sales spreads. As we have discussed for the past couple of quarters, we do not expect the significantly high gain on sale margins from originations to be sustainable. We plan to continue to capture solid refinance demand and invest in building the factory to scale our operations as the purchase business is built over time. As a result, we expect mortgages segment EBITDA to be between a loss of $9 million and a loss of $5 million. We further strengthen our balance sheet during the quarter by initiating an at-the-market offering, or ATM, selling $551 million of capital stock. We have been and will continue to be opportunistic and prudent on any potential future share sales and have approximately $450 million remaining on the authorization. We ended the quarter with $4.7 billion in cash and investments, which puts us in a strong position to fund our vision for Zillow and make strategic long-term investments, both organically and inorganically. As a reminder, we do have a $500 million commitment to acquire showing time as we cooperate with federal regulators to work diligently toward closing the acquisition. As we look forward to the balance of the year, our priorities remain focused on innovating and executing on behalf of our customers and partners. We look to grow our customer base and engagement through a compelling dream and shop experience. invest in sustainable top line growth opportunities across the company reduce cost structure and improve productivity in transaction services drive profit growth through operational discipline and with that operator we'll open the line for questions at this time if you would like to ask a question please press star then one on your touchstone phone if you would like to withdraw your question please press star then two

We'll pause for just a moment to compile the Q&A roster. Our first question today will come from Ron Josie with JMP Securities.