Zillow Group, Inc.

Good afternoon. My name is Sam and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Zillow Group first quarter 2022 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Please note, this event is being recorded. I would now like to turn the conference over to Brad Burning, Vice President, Investor Relations. Brad, please go ahead.

Thank you. Good afternoon and welcome to Zillow Group's first quarter 2022 conference call. Joining me today to discuss our results are Zillow Group's co-founder and CEO, Rich Barton, and CFO, Alan Parker. During today's call, we'll make forward-looking statements about the housing market and 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 refer to our internet media and technology segment as our IMT segment. We'll now open the call with remarks followed by live Q&A. And with that, I will turn the call over to Rich.

Thank you, Brad. And hello to everyone joining today. There is a lot going on out there, financially, politically, emotionally. In these volatile times, we are especially proud of our company and brand, one that helps people find their home, a place of comfort and safety. Before we get into our results for the quarter, I'd like to spend a little time talking about the housing market, given it's on everyone's mind. There is a dispersion of real estate forecasts among publishing economists that range from 5.5 million to 6.5 million existing home sales for 2022, compared to 6.1 million in 2021. This results in a transaction growth rate range of negative 10%, to positive 7%. A common thread across these forecasts is uncertainty for the housing market. We continue to see low levels of inventory down 23% year over year in March. New for sale listings were less strained in March, up 36% from February levels, but still down 9% year over year. Average page views per listing were at a record high in Q1, which results from low inventory, yes, but also signals a strong intent to move. These dynamics drove home values up an astonishing 21% year over year in March, despite rising interest rates, which, of course, exacerbate affordability challenges. So while we know people are still eager to move, market conditions are making it increasingly difficult. The net result of all of these factors is that total consumer transaction value growth trends are meaningfully softening, and even the most respected prognosticators have disparate views of what will happen next. Despite this turbulent housing market, Zillow's position as the leader at the top of the real estate funnel stands firm with 2.6 billion visits in Q1. including a 38% unique visitor growth year-over-year in rentals, according to Comscore. And as for results in Q1, we delivered revenue and EBITDA within or above our outlook across our business. Further, with the rapid and successful wind down of homes inventory, Zillow has become a company with a nimble balance sheet, a large cash position, and a core business that produces strong positive cash flow. We reduced our exposure to housing inventory risk on our balance sheet to approximately 500 million and reduced related asset backed debt by $2.6 billion in the quarter. Of the approximately 20,000 homes we needed to sell when we first announced the wind down, we are down to approximately 100 homes that are not under contract today. We've also recognized better sales prices than anticipated as a result of the aforementioned high home price appreciation. While home price volatility was to the upside during this wind down period, we are mindful of what might have resulted from unanticipated moves to the downside. We felt confident in November and we feel more confident today than no longer being a principle in the iBuying business was the right decision for Zillow. given our desire to serve the full breadth of our audience and the attractive margin profile of our core business. We ended the first quarter with $3.6 billion in cash, $500 million higher than the previous quarter, including the impact of a $348 million share repurchase throughout Q1. We will exit Q2 with no asset-backed debt related to our iBuying business and an expected net cash position of approximately $2 billion before considering potential cash use towards a new $1 billion share buyback, which our board has just authorized. We move forward with confidence, knowing that Zillow is well capitalized to navigate through this market cycle and return excess capital, which was originally built up for a capital consumptive iBuying business, while simultaneously maintaining the flexibility to innovate on the attractive growth opportunities we see for the long term. Before I dive further into our first quarter highlights, I would like to take a moment to appreciate the magnitude of change that has occurred at Zillow over the past six months and how well our team has operated through this transitional period. We have nearly fully wound down the iBuying business we had built up over the previous three years, and we have reoriented the company around our broader housing super app vision, all while generating strong cash flows from the core business. We have also been innovating our products, services, and business models as we drive towards our 2025 targets of $5 billion in revenue and 45% EBITDA margin. To achieve those targets, we are executing on a product roadmap that is oriented around increasing engagement, increasing transactions, and increasing revenue per transaction. As we talked about last quarter, the path to achieve those targets and begin to build out the Housing Super App vision involves product initiatives within five growth pillars, touring, financing, expanding seller services, enhancing our partner network, and integrating our services. We are working with a sense of urgency on innovating and integrating products within these pillars, testing and driving our key input metrics. And while we know the revenue and profit outputs won't manifest right away, we are seeing early traction in the initiatives we've launched this quarter. Touring is central to both increasing engagement on Zillow and increasing the number of transactions that we drive. We've made some key business and product improvements since you last heard us in February. As a reminder, we believe touring is the key point of sale moment in real estate and an action that converts at three times the level of any other action buyers take on Zillow. And interestingly, with touring, there are major innovations ahead in both the virtual home tour and the physical home tour. Our goal is to marry these experiences over time on Zillow and throughout the real estate industry. Let's first talk about the virtual touring experience we are creating with our 3D home tours. I'm sure most people here have experienced the frustration of swiping through a carousel of pictures on a for sale home and feeling lost trying to stitch everything together into a mental model of that home in your mind's eye. With our new 3D home tour floor plan technology, customers can travel through an entire home as if they were touring the home in person. This new tool turns on the lights for our customers and partners by contextualizing all the disjointed information about a home. Photos, floor plans, spatial perspective, into one interactive and immersive digital touring experience. Outside of how incredibly cool this feature is, it's also a powerful mechanism to help us identify high intent movers in our funnel. It's great for buyers, sellers, and agents. Agents using Zillow's 3D Home Tour benefit from a cost-effective way to showcase and share listings and generate more leads. Internal data has shown that homes on Zillow with a 3D tour were saved by buyers 53% more frequently than homes without. And listings on Zillow with a Zillow 3D home tour got on average 81% more views than listings without. We believe this is the kind of content customers want and we are leading the way. Transitioning to the physical world, Our pursuit of making the home buying process easier touches the IRL in real life tour as well. Like many other aspects of the process, the experience of scheduling an in-person tour has historically been fragmented and cumbersome. We bought Showing Time, the leading online scheduling platform for home showings, last fall to improve this process, both for Zillow and for the broader real estate industry. with our goal to make scheduling a home tour as easy as making a restaurant reservation online. This quarter, in four markets, we enabled a new feature called real-time availability, which lays the groundwork for exposing the availability for home tours for all agents using our showing time platform. We have unsurprisingly seen strong support from the industry for this feature, with nearly 100% of brokerages enabling real-time availability in the markets we've launched. At first blush, this may feel like a simple feat, but up until now, no other company has been able to tackle this nagging industry-wide problem. Of course, now that we have enabled the feature, we will need agents and homeowners to upload their schedules to make showing times, real-time availability complete. But you can see how the feature becomes a key building block to make scheduling and taking a home tour far easier than today's manual coordination of four different calendars across the seller, the seller's agent, the prospective buyer, and the buyer's agent. Beyond our product improvements in virtual and physical touring during the quarter, we made progress on moving more of our overall mix of connections on Zillow towards touring, driving an increase of approximately 400 basis points of tours as a percentage of overall connections. As I said before, we believe touring is the key point of sale moment in real estate. So this shift helps improve conversion rates by allowing us to see the higher intent buyer signal that comes when someone requests a tour. This quarter, we announced that we are also upgrading StreetEasy, our leading real estate shopping and rental app in New York City. As with our work on tours, one of the new features on StreetEasy will focus on marrying the virtual and physical experience of real estate shopping. To cater to the way that New Yorkers apartment hunt and their desire for on-demand experiences in every aspect of their lives, We just announced that we will soon launch Streetscape, a new feature that uses augmented reality to place StreetEasy's comprehensive listing data into a home shopper's real physical space on the streets of the city. Using the StreetEasy app, New Yorkers will be able to use the camera on their phone to scan a street to reveal floating icons in front of residential buildings, then click on the icons to quickly learn more about the building and amenities, discover available units, view photos, floor plans, take virtual tours of the building's units. It's sort of like a QR code for a building. There will no longer be a need to search out a building's address or its available listings. Answers will be right at a home shopper's fingertips in real time with StreetEasy's Streetscape. We are pleased with the progress we are seeing on our key growth pillars and are hard at work on our product roadmap across each pillar. Touring, financing, expanding our seller services, enhancing our partner network, and integrating our services. As we move forward, we will continue to highlight key business and product innovations we are making to begin to fulfill our Housing Super App vision, an ecosystem of connected virtual and physical solutions designed to empower customers and partners throughout the real estate process, start to finish. Fulfillment of this vision will not happen right away, but we are on our way. Stepping back, as we said last quarter, our evolved strategy has an increased focus on our mid-funnel efforts as we look for opportunities to increase engagement, transactions, and revenue transaction from where we are today. It's important to note that our strategy and 2025 targets are grounded in the opportunity in the US housing market, which we shared last quarter. As a refresher, we know that in 2021, 6.1 million existing homes exchanged hands in the country. For every home exchange, there are two customer transactions, one on the buy side and one on the sell side, which result in 12.2 million customer transaction PAM. Of the 6.1 million buy side customer transactions that occurred last year, we estimate that 4.1 million of those actual buyers were on our sites and apps, which accounts for about two-thirds of all buyers in the U.S. Of that, we estimate that roughly 1.4 million actual homebuyers asked to connect with the Zillow Premier Agent last year. That means about one quarter of all buyers in the U.S. last year clicked the button to connect with us. This tells us that Zillow is the place for high intent movers to find their next home. Of those 1.4 million high intent movers, we estimate that about 360,000 customers ended up transacting with Zillow partners. Overall, we estimate that our buy side 2021 market share was roughly 5%, and our overall customer transaction share was roughly 3%. This is a meaningful share, but not in the context of our audience engagement and brand. As part of our targets laid out last year, we have set our sights on increasing our share of customer transactions from 3% to 6% by 2025, with lots of runway beyond that. Helping this large subset of our audience move from one home to the next represents a significant opportunity for Zillow. We intend to grow engagement with the roughly 4.1 million home buyers who use Zillow by leveraging our tech and product innovation and investment to deliver personalized, immersive content and curated experiences like our 3D tours and floor plan experience and intuitive tools to understand affordability early in a customer's journey. At the same time, we expect to continue to improve our core experience of search and find. We also plan to grow both the roughly 1.4 million homebuyers who clicked the button to connect with us last year and the roughly 360,000 homebuyers and sellers who transacted with us. We expect to do this by continued focus on touring and an increased focus on preparing these customers to be transaction ready through intuitive and digitized financing offerings. And we are also developing seller solutions by leveraging learnings from our experience as an iBuyer to stand up new asset light services. We expect to increase the number of people who raise their hand to transact with Zillow and increase penetration on the 6.1 million sell-side customer transactions that mirror the 6.1 million buy-side transactions that we've been focused on to date. Our Zillow Housing Super App vision is central to this strategy, a place for all of these connected experiences to come together. In the Housing Super App ecosystem, we will empower customers with data, a network of best in class partners, and a suite of connected solutions so that transacting with Zillow will be an easy choice. The solutions within it will be a combination of services and data that we build, buy, and partner with. High quality solutions that integrate easily within the app. Our solutions will target high intent movers who are signaling they're ready to take the next step in their shopping journey. transitioning from dreamers to transactors. It will also help bring these high-intensity customers to our partners to help them scale their businesses, all while serving our mutual customers with the services they need. As Alan will dive into, Zillow is well-positioned and we are on the balls of our feet with our knees bent playing through this uncertain macro environment. We see a great deal of opportunity in front of us, which asks for investment. But we also recognize that we control the levers of our investment spend should adjustments become necessary in the future. We have meaningfully de-risked the business and are moving forward with an ironclad balance sheet, a healthy cash flow generative core business, and the industry leading brand and audience. This gives us the confidence and flexibility to navigate whatever choppiness the short term may bring with our eyes up on the long term growth opportunity, which is large and exciting, given how lightly we monetize our traffic brand and engagement today. We love our mission to give people the power to unlock life's next chapter. We are in the midst of unlocking our own exciting next chapter for Zillow. We are really grateful to everyone who's on this journey with us, employees, partners, customers, and shareholders. Thank you. I will now pass the mic over to Alan, who is feeling a bit under the weather, so give him a little space today. Thanks. Alan?

Thank you, Rich. And hello, everyone. We continue to be excited about the prospects of our strategic direction. We believe building innovative products and services to help a broader set of customers navigate buying and selling homes will deliver better customer experiences, help our partners work with higher intent customers to grow their businesses, and drive sustainable long-term shareholder value. I'm going to take a brief moment to provide an update on the progress of winding down our iBuying operations, and then I'll discuss our quarterly results and Q2 outlook. We remain focused on executing on our plans to wind down our iBuying operations, and despite some choppiness in the macro environment, we exceeded both our internal expectations and external outlook for the home segment. We reported home segment revenue of 3.7 billion for Q1, exceeding our outlook range of 2.6 to 2.9 billion provided in early February. The revenue outperformance benefited primarily from higher resale velocity. Better than expected pricing drove Q1 home segment EBITDA of 23 million, better than our outlook of a loss of 20 million at the high end of our range. There were approximately 1,280 homes in inventory at the end of the quarter and approximately 100 homes that are currently not yet under contract to be sold. We expect the sale of our remaining inventory to be substantially complete in Q2 with operations and a small amount of inventory extending into Q3. We now believe that the total cash flow generated from the wind down process of our iBuying inventory and operations will be approximately $450 million after considering selling the inventory, paying off the asset-backed related debt, including financing costs, losses on inventory, gains realized or expected, wind down costs, and net operating EBITDA losses. The faster than expected wind down resulted in us paying off are I buying asset-backed debt completely at the end of April, and the note holders will be repaid fully in mid-May. The better-than-expected cash from the wind-down process, compared to our initial expectations of breakeven, contributed to our excess capital to be able to return to shareholders in our $1 billion share buyback. Now, moving to our core business results. Despite the ongoing turbulent housing market that Rich discussed, we again delivered results in line or above our outlook ranges on revenue and EBITDA as we focus on executing against our 2025 targets. IMT segment revenue was 490 million, growing 10% year over year. Our IMT segment revenue was slightly above the 487 million midpoint of our outlook range. Premier agent revenue grew 9% year over year and outperformed industry growth of 4% in Q1 as we continued our focus on making better connections between high intent customers and high performing agents. While we are clearly not immune from the macro in the near term, our work on discovering higher intent customers and working with an increasing mix of higher performing agents has led to higher lead conversion rates. This gives us confidence that we can offset some of the housing market headwinds as they develop. As Rich discussed earlier, in Q1, we made progress on moving towards a higher mix of touring, which helps improve conversion rates by allowing us to see the higher intent buyer signal. We expect the planned integration with showing time to further improve the touring customer experience and meet more customers' touring requests. We are also investing to improve the showing time experience for the entire industry. As we mentioned in our Q1 outlook, we saw a wider range of potential outcomes for premier agent revenue from the slower housing activity late in Q4. This trend largely played through in Q1 with new for sale inventory listings down double digits on a year-over-year basis. Despite that, Our customer and agent activity levels continued to indicate there remained strong underlying customer demand that drove continued strong home price appreciation. Rentals revenue was down 5% year-over-year and flat sequentially, which was in line with our expectations. We continued to see pressure from high occupancy rates, which dampened demand for rentals advertising. IMT segment EBITDA was $209 million for Q1, our 43% of revenue, exceeding our outlook of $201 million and 41% of revenue at the midpoint. The outperformance was driven by a combination of better than expected operating efficiency as well as lower than anticipated advertising and marketing spend. Mortgage's segment revenue of $46 million was near the midpoint of our Q1 outlook range, as refinancing loan originations slowed following the rapid increase in interest rates during the quarter. Gain on sale margins compressed more than expectations as the drop in demand for refinance loans resulted in excess industry capacity. Mortgage's segment adjusted to EBITDA was a loss of $12 million. At the upper end of our outlook, as we managed operating expenses, as purchase origination volumes dropped sequentially, in connection with the wind down of our iBuying operations. Before I turn to our outlook for Q2, I would like to reiterate that the resale of inventory from our capital intensive iBuying business is nearly complete. And we believe that Zillow is in a strong position to pursue our 2025 initiatives. We feel confident that our traffic, brand, balance sheet, and positive cash flow generating core business will provide us the flexibility to navigate the challenging housing market. We ended Q1 with 3.6 billion in cash and investments, an increase of 500 million from 3.1 at the end of Q4, inclusive of the impact of 348 million in share repurchases during Q1. We have approximately 100 million remaining under the current 750 million share repurchase authorization, And our board of directors has approved an additional $1 billion share repurchase authorization. This reflects our belief that under various ranges of housing market scenarios, we expect to remain profitable and positive cash flow, with positive cash flow. Turning to our outlook for the second quarter. In our IMT segment, we expect flat year-over-year revenue growth in Q2 at the midpoint of our outlook rate. Within the IMT segment, we expect premier agent revenue to be between 335 and 350 million, down 2% year over year at the midpoint of the outlook range. While we continue to focus on connecting high intent customers to all of our partners, our Q2 premier agent revenue outlook is largely informed by the macro trends that we are seeing with lower year over year growth in new for sale listings, home appreciation that is increasing average transaction prices, but also contributing to affordability challenges along with higher mortgage rates. We realize these macro issues are making it harder for customers to transact, and they also affect our partner network. Within the overall IMT revenue outlook, we note that in rentals, while we are not guiding to specific revenue figures, We are expecting sequential revenue growth in Q2 due to seasonality. Additionally, we are also seeing early signs that low rental vacancies may be subsiding. We expect Q2 IMT segment EBITDA margin to be 38% at the midpoint of our outlook. While we have taken some costs out of our initial Q2 plan, we are making a strategic decision to continue to invest in our key initiatives in Q2 as planned despite this deceleration in real estate industry growth trends. We are continuing to monitor the macro environment, and we control the levers on our core business and pace of investments to enable us to prudently manage costs. We expect our mortgages segment revenue to be between 31 and 39 million in Q2, which is down sequentially from Q1. Our Q2 outlook reflects slower refinance activity due to higher mortgage rates and lower gain on sales spreads due to the competitive industry environment, partially offset by sequential growth in purchase mortgages as we redirect the focus of our operations. As we are now past the impact of the iBuying wind down on purchase mortgage leads, we have started to rebuild our pipeline and expect modest purchase mortgage growth in Q2. We expect mortgages segment adjusted EBITDA to be between a loss of $18 million and a loss of $13 million based upon current capacity, expected market conditions, and additional investments and operations to integrate mortgages with our other products and services. In Q2, we expect our home segment revenue to be $450 million and adjusted EBITDA to be a loss of $15 million at the midpoint of our outlook rate. We also expect to complete the wind-down of our iBuying operations during the second half of this year. So as we look forward, our priorities remain focused on innovating and executing on behalf of our customers and partners. We plan to grow our customer engagement through a compelling dream and shop experience, deliver a more integrated customer transactional experience to drive customers to choose to transact with us and our partners, Invest in sustainable top-line growth opportunities across the company, including new integrated services that are more scalable, less subject to earnings volatility, and more capital efficient. And lastly, manage our cost structure to improve productivity to drive a profitable, scalable, and positive cash flow company. And with that, operator, we'll open the line for questions.

Thank you. We will now begin the Q&A session. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause here for just a moment to compile the Q&A roster.

Good job, Alan.

Our first question is from John Colantoni of Jefferies. John, your line is open.

Thanks for taking my questions. So just wanted to start with second quarter guidance for premier agent. So the underlying assumption is that there's some headwinds from a low for sale inventory and affordability challenges because of rising mortgage rates. which all makes sense, of course. But, you know, given both of those are likely to remain challenges for, you know, at least the remainder of 2022, should we assume that premier agent revenue growth should be more muted for the remainder of the year, or are there some transitory headwinds that you'd point to in the second quarter?

You want to really start with that?

I can start, and you can jump in. So what I'd say is you're right, that when you look to our guide, which is at the midpoint down about 2% year over year, and it's about at the midpoint 6% down sequentially from Q1, it reflects what we're seeing in the macro and how that is affecting our customers and how we would work with our partner agents. you know, this is really a macro story. There's a lot of uncertainty out there. We're not guiding past Q2. There's a lot, you know, our goal as we think to the 2025 is to obviously do things to continue to attract high intent customers and get them with high performing agents. And we're continuing to make progress on those things, but they're likely to, you know, arrive new New features are likely to arrive over time. So I would just say, based on our visibility, which is Q2, these macro headwinds are affecting our revenue, you know, given the guidance range. They're all factored into the guidance range that we're giving, which is the negative 2% growth midpoint.

Not sure I need to add anything on that, Rod. Go ahead, John.

Okay, just also just wanted to hit on second quarter IMT EBITDA margin guidance. Looks like coming down around 500 basis points sequentially from the first quarter. Just wanted to ask whether that's a function of some upfront spending to kind of build the infrastructure and tech behind the Super App experience. you know, that should moderate over time. You know, and maybe you could kind of just talk about directionally how we should think about the spending that you'll be doing behind that initiative over time. Thanks.

Yeah, I'll start with that. You know, what I would say is that if you look at the guide and and the Margin rates that comes down to about 38%. This is in line, the expenses are in line with our plan. In fact, we've taken them down slightly from our initial plan. So there's not anything in it that's an increase or a surprise from our initial guidance. We've actually brought it down slightly. But it does incorporate us continuing with the investments that we think we need. to make progress on the initiatives to build for the 2025 targets. We don't see a significant increase in those rates or those, you know, expense trends as we look to the full year. There's going to be some vacillation as we fill the team, but we believe that the expenses incorporated in the guide are consistent with what we need to drive for our 2025 targets. We continue to monitor the macro, and we control the levers. But for now, there's a lot of near-term chop that, you know, is causing, you know, our guide on the revenue to be down. But we still have high conviction on the thesis that's driving our 2025 targets. And for now, we expect, you know, our spend incorporated in that Q2 guide to be consistent with us

achieving those targets. Appreciate the color.

Thank you, John. Our next question is from Egal Arunian of Wedbush. Egal, your line is open.

Hey, good afternoon, guys. Sticking with PremierAgent, maybe we could just talk a little fundamentally about how agents think about ROI in um you know times in in more tougher times um and you know with with with the guidance um and then tying that together to the comments last quarter about you know the the goals to to take incremental share feels like that's not happening um in 2q we think about the overall market which is um challenged but maybe when you take transactions plus hpa that quarter inspiration um Just had to think about that, and then I have one more follow-up on PA.

You were breaking up a little bit, but I think your question is how do we think about ROI?

Yeah, how do we think about ROI in these times, in these kinds of times?

Yeah. I mean, I guess, you know, we – We did outperform the market in terms of PA revenue in Q1. And, you know, as we've talked about, you know, the macro, as we described, has an impact not only on our customers but on our agents. But we're very aware of this impact, and we continually monitor it to ensure we're optimizing and managing to the best outcome for our customers, our partner agents, and for ourselves. We have experience in managing through this volatility. We still have extremely strong traffic and brand. And we are, as we've mentioned, continuing to make progress on driving higher intent customers and connecting them with high performing partners. So what I would just say is that the Q2 guide reflects the macro impacts on our business and incorporate the way we think about managing that business and optimizing it to support our agent partners and to continue to drive those customers who want to transact to high-performing agents.

Okay, that's helpful. Sorry if I missed this on the prepared comments, but during the quarter, you guys made a move in Denver and Charlotte, right, to go fully flexed? And then you could share on why you made that decision, why those markets, and then how you think about, you know, doing that. Is that something you would do, you know, in other markets, in all markets? Just the kind of plans around that. Thanks.

Yeah, why don't I start? Thank you for the question. Why don't I start, Rich, and you can jump in. Raise your hand if you want to break down. I'm happy to. okay um so the markets that we we made adjustments in that came out were raleigh and denver so um i just wanted to correct that but uh you know we are extremely and firmly focused on this vision to build this super app for a mass market of movers um and we've talked about the five pillars that that we consider um driving um and how we get there so launching Raleigh and Denver as two dedicated test markets allows us to have this clean slate for research and development to test and iterate. This is a targeted approach to help us get a read on what works and what doesn't and to figure out what effectively scales while minimizing disruptions across our entire partner network. These were flipped to a flex model because this post-paid model works better for this testing environment because we have more visibility into our partners' processes, and it minimizes their financial risk as we introduce and test and refine our new experiences. So what we learn from these markets, we're going to, we expect to use across all of our markets, across a broad set of customers, across both monetization models. So this is really just our ability to test, iterate, and learn. It's, you know, we expect and tend to have kind of a hybrid mix of modernization models going forward. And this wasn't any kind of indication about, you know, flex versus MPP. So our focus is delivering high intent movers. It drives more value to our partners, regardless of the modernization model. This just set us up to have two great test environments along with the other markets.

Let me jump in, Egal, and editorialize a little bit. um yeah it's ironic i was kind of chuckling that raleigh and denver is r d um that is what's going on here you know um what you're seeing unfortunately it broke into the public and you know it's created some questions that like like you're asking normally this wouldn't have broken into the public um but of course it involves partners so David Casimiris, M.D.: : Things do get out this I think you and our investors should take as a sign of us making progress against the five pillars. David Casimiris, M.D.: : we're really working hard to enhance our partner network and to try out all kinds of new stuff in order to get to the super APP and integrate this transaction and having a post pay model. in these test markets, you know, lowers the barrier to participation on the part of partners. It makes it a lot easier to participate and lets us iterate rapidly. So really, you know, I wouldn't get too hung up on this being Flex or MBP or whatever. This is us basically working hard against the five growth pillars, you know, to enhance the partner network, integrate finance, come up with interesting seller solutions, you know, and to integrate all these services. That is what's going on here. And it will, you know, we will continue to run, as we push towards a super app and experiment with these models, we will continue to run, you know, interesting experiments in different cities. So you will see more of this. And, you know, anyway, so take it as a good sign of progress.

All right, thanks for the caller. Thank you, Igor. The next question is from Tom Champion of Piper Sandler. Tom, your line is open.

Thank you. Good afternoon, guys. Just want to pick up on the last question. How are these markets different from Phoenix and Atlanta? I thought those markets were 100%. And just because of the sensitivity, how are you managing the legacy MVP relationships in those markets, Denver and Raleigh? And then maybe just one more, Rich, if you could talk a little bit about integrating showing time and increasing the amount of touring activity going forward, you know, what you're doing to facilitate that, given the benefit to transaction throughput. Any comments on that would be really helpful. Thank you.

Yeah. Hey, Tom. You guys want me to start on this one? Yeah. Nothing to do with Phoenix and Atlanta, and only incidentally has anything to do with Flex, as I described last time, Tom. You know, and you described MVP as legacy. It's just, we, we, we run multiple business models and with an eye towards optimization and getting to the customer solutions that we want and the solutions that are, are great for our partners too. So, um, you know, I, I want to try to walk back a perception that, that, you know, MB MVP is, is, is legacy and, uh, et cetera. And so, as I said before, the Raleigh and Denver. uh testing uh has to do with building out the super app and integrating the services okay and having a clean slate from which we can clean slate from which we can do that uh of course you know running the markets with revenues and profits in mind as well um okay so they really aren't connected to each other um Although, as I said before, you will see us do more things in more markets, and it may look different. It may look the same. It may look different, depending on the outcome of the experiments we're running. In terms of showing time and touring, we're working hard. I cited one sparkler in my script around a movement, a mixed shift of, I think, 400 basis points, I said. towards touring as the hand raise activity, the call to action for amongst our connections, which is a real positive because we know those customers convert at a much higher rate into transactions and revenues for us. And so, you know, what we're doing is lots of little things on the site with calls to action and design. and functionality with touring functionality that is encouraging people to reach out by a tour on Zillow app and and our other consumer customer services.

OK, thanks very much. We hope with with you.

Yeah, I talked, you know, I talked a bit about real time availability, which is early days, but that's a really exciting one. That one could be something long term that is sort of a game changer for physical home touring. That is really good. And it's linked. I didn't really say it in my script, but the virtual tour with the new floor plan tech and the 3D homes technology that we have that is super cool is not only awesome for customers, it acts as a good filter because people can visualize what a home is much more richly and accurately in the virtual space on their smartphone or at their computer, which means we get a higher signal to noise on the tour itself because people are self-filtering because of better virtual tech. Anyway, these things are interrelated, and we love that we're pushing hard on both of these fronts.

Thank you, Tom.

Next question is from Nived Khan of Truist. Nived, your line is open.

Yeah, thanks a lot. So not too hard on this topic, but just on the move to sort of 100% flex in Raleigh and Denver. I think last time you guys did this back in, I think, like two and a half years ago, it was like an impact to revenue in the next quarter because of the, you know, of the accounting. I guess this time around, there is probably not going to be an impact because you've changed the accounting since then. Is that fair assumption?

Yeah. So the impact on Q2 revenue related to Raleigh and Denver is immaterial. We recognize revenue as leads are delivered in Raleigh and Denver. And so there's not the same impact as when we flipped in Phoenix and Atlanta.

Great. The other question I had is just on the 2025 target. And can you just sort of give us your thoughts on how much does the target rely on market performance versus just sort of recruiting better and increasing its share of the overall pie?

Want me to go first, Alan? With current anticipated market headwinds, it shouldn't affect us, Navid. Of course, if there's a terrible storm that blows and the market grinds to a halt and goes on for a long time, we could change our views. But the fundamentals behind our 2025 target to $5 billion in revenue and 45% EBITDA margins really revolve around converting more connections into transactions and increasing our basket size, our dollars for transactions by integrating more and more services into that transaction. And the biggest lever is moving from 3% transaction penetration today to about 6% by 2025. That is the really big mover. The denominator matters, of course, but, you know, in most scenarios, it is really the penetration that is the big lever, not the denominator.

Understood. Thank you.

Yeah.

Thank you, Naved. The next question is from John Campbell with Stevens. John, your line is open.

Hey, guys. Good afternoon. Just got a quick question here. I don't know if you guys are willing to share this quite yet, but roughly just how much of Premier Agent is tied to FLEX now? And then, you know, based on the 2025 targets, I'm thinking FLEX likely grows as a percent of the mix. So maybe if you can talk about maybe broadly what you're expecting that mix to look like over time.

Yeah. This is Allen. I'll answer that, John. Yeah, we're not providing, as Rich said, you know, These are two monetization models that both result in us allowing high-intent customers to get to high-performing agents. And we participate in doing that either in adjusting the prices over time in MVP through the auction process or in the success with the Flex model. We have grown Flex. over the last year as we've expanded that across more zip codes. But, and we do believe that, you know, Flex is an alignment tool, not necessarily a step function improvement in profitability or conversion across our best performers. But it's an alignment tool, so it's likely our Flex partners, you know, will be participating more in other products and services. That's a lot of what we're going to learn. We believe that to the extent we innovate and on behalf of our customers and make a delightful experience, even some of our MVP partners will find it useful to leverage our loans and our closing services and other services. But we're not at this time. There's no fixed number. There's not anything out there that says this is where we need to be in flex in order to hit our targets. We believe both monetization models work. Both include great performing agents. Most of what we're focusing on is building the integrated, you know, super app platform that allows these services to work well together. And we expect, you know, that both partners in Flex and MVP will want to utilize those services as that value prop to their customers and that their ability to close improves.

Okay, that's a good color. Thank you, Colin.

Thank you, John. We have time for one final question, and it comes from the line of Deepak Mathivanen of Wolf Research. Deepak, your line is open.

Deepak, please proceed with your question.

Hey, sorry about that. I was on mute. You have Frank Fulbe here for Deepak. first thing I wanted to ask was whether the recent headwinds to growth are making you rethink product development and kind of what investment plans are necessary to reach your long-term targets. And then beyond that, I was just curious on the feedback you're hearing from brokerage partners and agents currently on the summer season and any expectations for kind of the broader market over the back half of the year. Thank you.

Yeah, maybe I'll start with the growth one. You know, and to reiterate, As we look at the Q2 guide, the growth in our premier agent revenue is really about this low inventory listing, this imbalance in supply and demand, and how that is impacting affordability for some of our customers. We do believe that that is temporary. This is not about our traffic or our customers that are on our sites intent to try to buy a home. There's just not that much out there. And that macro factor is affecting our ability to help customers transact. So when you look at the macro and how it affects our revenue, that informs our decision also to say that we're not slowing down on some of our investments. We're tracking this closely, and we're going to continue to monitor it. We're well positioned as a profitable company that delivers strongly cash flow. And that's important to us. But it doesn't change the thesis or our conviction for the thesis on how we can drive more transactions through technology and innovation across a broader set of services generating higher revenue transactions. So we view this as temporal. It's uncertain how long it will exist. It's affecting our revenue. But we still see the demand, and it doesn't change our growth trajectory or how we think about the 2025 targets. We'll continue to monitor it and track it, but right now we believe touring, financing, seller services, enhancing our partner network, and integrating across the Super App platform are the right five pillars that are going to drive the 2025 success.

Yeah, like we're excitable and excited, but we're prudent as well. You've seen us lean in and out of things, you know, aggressively and aggressively prudently in the past. And we continue to have that, you know, that attitude. But we do see a lot of upside. And just an indicator for you, I'll just hit it, but we did, you know, Just our board did just authorize a billion-dollar share repurchase, you know, which is a nod to how much cash we're generating, how much cash we raised in order to fund a kind of capital-hungry iBuying business and how we want to return that capital now. But it also expresses a confidence in the kind of nimbleness and inherent profitability um in our in our current business so that that should give you an indicator in terms of the summer season selling you know summer season signals i'd say they're mixed you know i actually just came from a industry conference in san antonio with a bunch of big brokers and industry players and i would say it's just it's mixed um uh people are in kind of wait and see mode everybody's kind of you know commenting on just what a weird market it is with such a high supply demand or demand supply imbalance that hasn't actually righted itself for quite some time. The industry is expecting it to do so. But, you know, the underlying dynamics, the demographics supporting more and more demand coming online are strong. And so, you know it's a it continues to be a weird market i would say people don't exactly know what to uh what to expect um it isn't all doom and gloom but it's foggy i guess is what i would say understood thanks a ton thank you for that question all right complete see a lot of time for questions i will now turn the call back over to rich barton for any closing remarks Okay, thank you. Thank you. I know it's a really super busy day and a kind of a crazy day. It is times like this when, you know, you all and we all turn from looking at revenues and income statements and we look at balance sheets. You know, what boats are seaworthy if we're sailing into some choppy waters overall. I know you're doing that across your portfolios. You know, we're really happy here at Zillow that we have a strong balance sheet. We're quite seaworthy. We're looking down through the storm, and we feel good about our opportunity and the vehicle that's going to get us there. So anyway, thank you for taking the time, and we will talk to you all again real soon. Have a good day.

That concludes the Zillow Group first quarter earnings call. Thank you all for your participation. You may now disconnect your lines.