Zillow Group, Inc.

Good afternoon. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group second 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, press the star key followed by two. Please note this event is being recorded. Thank you. I would now like to turn the conference over to Brad Burning, Vice President of Investor Relations. Please go ahead.

Thank you, Andrea. Good afternoon and welcome to Zillow Group's second quarter 2021 conference call. Joining me today to discuss our Q2 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 risks and uncertainties, and we encourage you to consider the risk factors described in our SEC filings for additional information. We undertake no obligation to update these statements as a result of new information or future events, except as required by law. This call is being broadcast on the Internet and is accessible on our Investor Relations website. 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 telecom segment as our IMT segment. We will now open the call with remarks, followed by live Q&A. And with that, I turn the call over to Rich.

Thanks, Brad. Hello, everyone. I hope you're all enjoying the summer, wherever you may be. I am Zoom connecting once again from Zillow CloudHQ. We had another strong quarter for Zillow with our consolidated business, as well as each segment meeting or beating our outlook ranges. We've begun to show good execution on Zillow 2.0, our dream of building a seamless integrated experience for our customers and partners. I will talk more about that in just a moment, but first I will top line some quarterly highlights. On the buy side, premier agent revenue grew 82% year over year and 50% compared to two years ago. Our goal on the buy side of the real estate transaction is to connect high-intent customers with high-performing partners, and our performance was driven by strong execution against this goal, as well as continued housing industry tailwinds. We continue to improve the quality and quantity of connections we send to our partners by enhancing how our customers shop on Zillow, with a particular focus on touring. In addition, once a customer raises her hand to work with a Zillow Premier Agent we are constantly refining how quickly we introduce that customer to her agent, which makes all the difference in such a competitive buyer environment. On the partner side, we continue to focus on building a network of high performing agents who are aligned with us on providing a high quality experience to our customers as they move to a new home. On the sell side, Zillow offers continued to accelerate in Q2 with a record 3,805 homes purchased. We sold 2,086 homes, generating a record $777 million in revenue on our home segment, surpassing our internal expectations for both revenue and EBITDA. Importantly, the Zillow Offers value proposition of a fast, fair, flexible, and convenient close has proved more than durable, even in this sizzling hot seller's market. It's a nod to just how dreadful and dreaded the prospect of selling, buying, and moving is to people. Likely, this is not a surprise to any of you. In our surveys of homeowners who want and need to move, when we present the Zillow Offers concept, the largest objection is, there must be a catch. I'm pretty happy to market to that objection. As we discussed on our last call, we entered Q2 with strong customer interest in Z.O., which accelerated throughout the quarter and into Q3. Alan will get into more details, but as we said on our Q1 call, we saw significant customer demand at the beginning of Q2 that we expected would drive revenue growth on a lagged basis in Q3, which is now leading to our strong Q3 outlook. And we continued to see strong growth in customer demand as we entered Q3 that we expect will favorably impact revenue in future quarters. With that in mind, we are focused on making progress automating key workflows in support of building a large-scale operation. Also, as we discussed last quarter, we recognize that our Zillow offers unit economics are above our plus or minus 200 basis point guardrails as we build and scale the business, a trend that continued in Q2 despite our efforts. We expect these unit economic trends to normalize over time as we iterate, continue to learn, and as home price appreciation inevitably slows. We've been testing price elasticity in this hot housing market, and we saw rapid conversion gains throughout the quarter as we improved our offer strength. We believe these tests will serve us well across future market conditions as we strive to be a market maker across housing cycles. We expect the homes we are scheduled to purchase will trend towards our plus or minus 200 basis point target over the course of the second half of the year. Additionally, earlier this week, a Zillow offer subsidiary launched and priced a securitized debt offering, which is expected to close next week. Alan will provide more details on this later in the call. As the Zillow offers business continues to accelerate, we are seeing lift to our Zillow home loans with approximately 40% of purchase originations in Q2 sourced from Zillow offers. In total, our Q2 purchase originations grew by 90% year over year as we continue to build a mortgage factory that serves both purchase and refinance transactions. An example of this is our new self-service mortgage pre-qualification offering, which automates the process and makes it more efficient for our customers. All of these efforts came together this quarter to deliver a total company revenue of $1.3 billion, up 70% year over year. And importantly, our newly provided gross profit measure, which I will talk to more in a moment, was $538 million in Q2, up 92% year over year and 79% from the same period two years ago. Now on to what's happening around us. We believe there is strong, durable support for the housing market. Historically, work and location have been inextricably bound together. The pandemic has joltingly and dramatically unbundled work from location for many, creating a new flexibility by enabling people to optimize for work and location separately and simultaneously. Moving to the big city is no longer a requirement for many job seekers, and that shift will inevitably disperse talent and economic opportunities. This untethering of location from work feels deeply important to me for the future of work and life, and by implication, housing, what we've been calling the Great Reshuffling. It is also why we at Zillow lean in hard and early on the cloud HQ idea as the future of work, as you can read about in today's New York Times front page business section article by Sarah Kessler featuring Zillow Vice President Megan Reibstein, one of our many folks who cut the cord from our old Seattle HQ and moved to Asheville, North Carolina, to be near and support her family. On the recruiting side, year to date, we have had 153,000 candidates apply for a job at Zillow, which we believe has been fueled in part by the possibilities of our permanent location flexible policy. This is one of the factors we see driving the housing market for some time. The other important factors being millennials entering their prime home buying years and low interest rates. Stepping back, we have always had audacious goals, guided by our strong urge to empower people vis-a-vis the expensive, confusing, emotionally and financially fraught process of buying and selling a home. Our initial dream was to build the most trusted and vibrant home-related marketplace and to solve a big problem in real estate, the lack of transparency in home shopping, to turn on the lights. This dream started with both the Zestimate, our killer algorithm that put a price on every rooftop in America, and Zillow.com, one marketplace where everyone could search and find homes with data easily at their fingertips. Something not possible prior to Zillow. This transparency and convenience became the accelerant for establishing Zillow's brand in real estate and making it the most popular place to dream and shop. With an average of 229 million monthly unique users coming to our mobile apps and websites in Q2, including our great adopted sister brands, Trulia and StreetEasy. Zillow brand became synonymous with real estate empowerment, but the fundamental transaction continued to be painfully stuck in the 50s, resisting the gravity of digitization. So our dream and ambition moved from the top of the consumer funnel down to the bottom of the funnel to the transaction itself. We, of course, recognize that our huge brand in traffic, as well as our DNA as software engineers, many of us grew up at Microsoft in the 90s, would advantage us relative to this large and daunting challenge. So our expanded dream is to reengineer, streamline, and digitize the moving process, or as you've heard me call it many times, Zillow 2.0. We believe customers want speed, simplicity, integration, and value, fairly safe consumer desires in which to invest, in my opinion. To deliver on this dream, our strategy has been to build an integrated set of real estate products and services, both owned and operated and with professional partners, that can be mixed and matched to make it radically easier for all the dreamers and shoppers on Zillow to transact and move to their next chapters. We are executing nicely on this ambitious growth strategy and progressing well towards each of the three- to five-year growth objectives that we communicated two and a half years ago when we announced Zillow 2.0. In our IMT segment, our stated three to five year objective was $2 billion in revenue up from $1.2 billion for 2018. And we are on track to deliver. Additionally, our current run rate has already exceeded our original three to five year objective for IMT segment annual EBITDA of $600 million and a 30% margin. And our home segment is performing well just by completely shutting down purchases in the early phases of the pandemic. and building operations during the most rapid change in home prices ever recorded. As I said above, we are now back on track with our original objective to purchase 5,000 homes per month and to generate annualized revenue of $20 billion within the original three- to five-year timeline. For Zillow Home Loans, we are also on course to achieve our stated goal of 3,000 mortgages originated per month within the original timeframe we set. Today, we are seeing more and more signals from our customers that validate our integration thesis and growth strategy. Home shoppers and buyers who once just thought of Zillow as a place to search and find are starting to understand and take advantage of the reality that we now offer so much more. As one example, we are building a program called Zillow 360 that enables our customers to sell their current home to Zillow offers, buy their next home with a premier agent, and finance it with Zillow home loans. The customer then uses Zillow closing services to finalize the transaction and ultimately receives a discount for using the bundled package. While we still have a long way to go on scaling Zillow 360, we are seeing strong interest in higher close rates when offering packages of services to customers versus single standalone services. Looking forward, we see our ability to execute on programs like Zillow 360 as competitively differentiated. Due to the volume of visitors to our apps and sites on a daily basis, we are able to spread our low customer acquisition costs across these additional adjacent services, which allows us to pass along savings to our customers while generating returns for our shareholders. As we broaden and integrate our services, our business lines are beginning to merge in service of our end customers. In an effort to pick a long-term success measure that considers this integration, we have increasingly been focusing on total company gross profit dollars. For context, In the last 12 months, our total company gross profit was just over $1.9 billion, growing 54% compared to the prior 12-month period. Moving forward, we plan to focus on growth profit dollar growth as a key measure of success. First and foremost, the metric is increasingly how we are measuring the business internally. Instead of optimizing for gross profit dollars generated by one particular service, we increasingly find ourselves finding ourselves thinking about the total enterprise gross profit pool that is produced when we offer multiple services to our customers. We think this creates the right incentives to run our business and is much more in line with how we want our end customers to think about what we offer to them. Second, this metric levels the playing field for comparability between our seemingly disparate businesses that are actually showing up to customers under one Zillow-branded umbrella. Said another way, gross profit enables us to simplify comparisons across the various segments, including Zillow offers, where we report revenue based on the full sales price of the home. This simplification allows us to measure our operating efficiency in a more holistic and understandable way as we ultimately strive to grow total company cash flows over time. From an external perspective, our gross profit measure reminds us that we have built a differentiated platform for growth, one that is tackling all parts of the moving process with so much room to grow across all of our services. And last, as we scan across the competitive set, we look at our sizable gross profit pool as a competitive advantage to further invest in innovation with the end goal of building terrific customer experiences and driving sustainable, long-term, profitable growth. Since we launched Zillow 2.0, we have vastly broadened our services, which has allowed us to grow our gross profit dollars well beyond real estate industry growth. My expectation is that we will continue to grow our currently small market share transactions by continuing to broaden our services and increasing the number of services each of our customers use per transaction. Embedded in our ability to drive secular growth are some confident assumptions about our business and opportunity. First, consumers will demand an e-commerce experience for their real estate transactions. Second, our scale and strength of brand gives us a customer acquisition cost advantage. Third, our suite of connected offerings fit together well to serve our customers and partners. And fourth, our location flexible workforce will allow us to attract and retain a deeper and more representative talent pool from across the country to best serve our customers. A recent customer example validated all four of these assumptions. Ina and Tony of Atlanta recently wrapped up a seamless move to their new home with the help of Zillow 360. Feeling overwhelmed by the prospect of balancing closing dates with their daughter's school schedule and other commitments, Ina and Tony decided to accept an offer to sell their home to Zillow. Recognizing the ease that Zillow brought to this experience, they were intrigued when our teams told them they could buy, finance, and close their new home with Zillow too. The opportunity to align the buying and selling process so it could work on their timeline was too good to pass up. So we connected them to one of our awesome agent partners who helped them find their dream home. By this point, financing with Zillow was a no-brainer for the couple. To put icing on the cake, I found out last week that Tony was so impressed with Zillow during his move that he subsequently applied for, got offered, and then accepted a role with our Zillow offers team as an estimator. Wow. To close, as a significant Zillow shareholder, I evaluate our opportunity in three ways. Is our TAM large and untapped? Are we in a strong position to capture that opportunity? And are we able to execute? It is clear in my two and a half years back in the CEO seat that the answers to these three questions are all a resounding yes. I'm really proud of the progress the team has made. But we do have miles to go before we sleep in our new home, on a soft pillow, above a kitchen with marble countertops and a doggy door to the backyard. We truly appreciate your continued support, confidence, and investment. I will now pass the microphone over to Alan. Thank you. You're on mute, Alan.