Zillow Group, Inc.

Good afternoon. My name is Sam and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group second 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 and Strategy. Please go ahead.

Thank you, Sam. Good afternoon and welcome to Zillow Group's second 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 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. Recording the call will be available later today. During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we will 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'll now open the call with remarks, followed by live Q&A. With that, I turn the call over to you, Rich.

Thank you, Brad. Good afternoon, everyone. I hope you and your families are enjoying some summer along with your work. The Blue Angels are tearing holes in the sky here around Seattle today in preparation for the Indy 500 of jet hydrofoil races on Lake Washington. I know you all know it, Seafair. That's this weekend, so they're practicing. If it gets loud in the background, it's not because I'm watching Top Gun. Anyway, thanks for joining us on this busy, busy earnings day. I'm happy to have the opportunity to share Zillow's progress with you. But first, I'd like to zoom out and examine the state of the housing market. As we previewed last quarter, the housing market is rebalancing after a pandemic fueled couple of years that were characterized by low interest rates, strong customer demand, and historically low inventory levels. We're in a very different market today. Affordability has become very challenging for buyers. The compounding of unprecedented home price appreciation over the past few years and a rapid increase in mortgage rates has resulted in new mortgage payments relative to income spiking back to near 2006 peak levels. This rapidly changing affordability picture has impacted home shoppers' ability to find an affordable and an acceptable option, driving buyer sentiment to a 20-year low. Reduced buyer demand has cooled the previously red hot seller's market. Across the industry, we are seeing price growth meaningfully soften on pending sales and new mortgage applications, with for sale inventory levels rising as homes spend more time on the market. Ultimately, when combining all these factors, the housing industry total transaction dollar volume was flat year over year in Q2. while various leading indicators deteriorated. Despite demand indicators stabilizing in July compared to June, we expect second half 2022 total industry transaction volume to meaningfully contract year over year. Despite a challenging housing environment that we cannot control, we are as confident as ever in what we can control, executing on a strategy and a product roadmap that we believe will drive outsized transaction share gains, outsized revenue per transaction, and profitable growth over time. Earlier this year, we introduced a product roadmap and a set of 2025 financial targets that are oriented around increasing engagement increasing transactions, and increasing revenue per transaction. The path to achieving those targets and beginning to build out our vision involves product initiatives within five growth pillars. Financing, touring, seller solutions, integrating our services, and enhancing our partner network. Today, we are reporting inline consolidated results that demonstrate Zillow is on firm ground and well-positioned for long-term growth. Our core IMT segment met the low end of our revenue expectations while exceeding the midpoint of our EBITDA guidance as we effectively invested in our growth pillars while actively managing costs. Our solid footing is underpinned by a cash balance of $3.5 billion as of the end of Q2. An increase from 3.1 billion at the end of 2021. even after nearly $600 million in stock repurchases over the first half of this year. Our balance sheet is healthy, and we produce operating cash. We are well equipped for the challenges an uncertain macro environment can throw at us and have the ability to invest in our long-term vision and strategy. On top of that, we are a leader in a huge industry. We have a big, strong, trusted brand, and we have a large, passionate, and engaged audience. Apartment and house hunting is aspirational and entertaining as well as practical. Just last week, Google Play named Zillow one of the, quote, 10 apps that defined a generation, end quote, alongside such iconic app brands as Uber, Venmo, Instagram, and Zoom. This recognition complements what we observe in the traffic numbers. that our brand is a part of people's everyday lives. Dreaming and shopping on Zillow, Trulia, and StreetEasy doesn't stop because of a poor housing macro outlook. Our business model is ultimately driven by transactions, yes, but it is our relationship with our customers between transactions that is and always has been our advantage. Given the macro outlook, I am relieved we are no longer carrying the capital and asset risk of iBuying on our balance sheet. The wind down of this business exceeded our expectations in terms of both the speed of home sales on our small remaining inventory and the profit outcomes for these sales. We paid down all outstanding iBuying debt in Q2, substantially completed the associated workforce reduction, and are now at the tail end of the wind down. Alan will provide more details later in the call, but I'd like to briefly speak about how we are shoring up our employee base given what's happening in the macro and labor market for tech talent. The drop in stock price, which we've all felt, has resulted in actual compensation being much lower than planned and on higher compensation for the many Zillow employees who receive a meaningful portion of their compensation in equity. And, despite what you may hear, it is a highly competitive job market for tech and product talent, which means it's unsettlingly easy for a skilled employee to get a significant compensation bump and an equity reset simply by switching jobs. Our people create the great products and services that have grown a huge successful brand and will fuel our future growth. Practically speaking, it would be more expensive to recruit and replace valuable employees tomorrow than it will be to retain folks today. Attrition and churn is an insidious barrier to growth, and by minimizing avoidable barriers, we are in a better position to achieve our goals. With that considered, we have made the decision to issue an off-cycle RSU grant to partially top up total compensation, particularly for those in the most competitive job categories. We will also reprice a small portion of the total outstanding stock options, those that are far out of the money. Alan will get into how we expect this off-cycle comp action to impact our financials, but it will likely result in about 2% dilution spread over a couple of years. Most of us on this call have felt the pain of a rapid and large stock drop in our stock price. I am a large shareholder personally and have felt this firsthand and will note that neither I nor our executive chairman and co-founder Lloyd Frank nor our board of directors is included in this special comp action. The board and I have approved these equity initiatives because it is smart business and it recognizes the importance of retaining talent and aligning their compensation with the long-term interests of shareholders. and I hope you'll agree with and understand our decision. Alan will talk more about capital management, but I'll note here that we will repurchase shares under our existing share buyback program in the near term to cover the potential future dilution from this compaction, all while continuing to be opportunistic about additional potential share repurchases. Now, on to future growth and what we're doing to fuel our go-forward business and our vision for the Housing Super App. We have turned the page strategically and operationally to focus our efforts on building a single platform of integrated digital solutions that will serve more customers in our funnel. And we are making investments in these future growth initiatives. Why? Because we see big opportunity. While almost everyone starts their real estate journey using Zillow products and services, we monetize only about 3% of real estate transactions. That gap represents huge potential energy potential growth opportunity for us to expand, share. And our strategy to get there is sound. Each pillar in our product roadmap, financing, touring, seller solutions, enhancing our partner network, and integrating our services is important to building the ecosystem we envision and sets us up to reach our goals of increasing engagement, increasing transactions, and increasing revenue per transaction. Implicit in execution of this strategy is a healthy top of funnel, which we are growing, even in this unpredictable housing market. In Q2, Zillow Group absence sites had 234 million average monthly unique users, up 2% year over year, with visits up 5% year over year. The number of monthly active users on our Zillow mobile app remains three times the size of our closest competitor. And this quarter, our rentals traffic has once again grown up 31% year over year with 27 million average monthly unique users per com score. The health at the top of the funnel is a powerful differentiator that comes from years of building great products for our customers. And it gives us confidence in our long-term growth thesis, regardless of the short-term challenges that arise from the uncertain housing market. We're also making strides towards providing a suite of seller services in our ecosystem. Today, we are announcing we struck an exclusive multi-year partnership with Opendoor. This partnership gives Zillow customers the ability to get a cash offer on their home, connecting the premier real estate brand and audience with the premier iBuyer brand and operations. In addition to the direct economic opportunities associated with this partnership, there are numerous strategic benefits for us. First, when fully rolled out, we will be able to service sellers across more than 50 markets in the U.S. This expands our addressable market and allows us to create a suite of seller services over time to complement Opendoor's cash offer program. Second, as we build out complimentary seller offerings, we will be able to connect premier agents with interested sellers that are looking to sell their home the traditional way. Third, we will be able to offer a bundle for sellers who are also buyers, which opens up meaningful opportunities for us across agent transactions and adjacent services like mortgage and title and escrow. Now I'll get more specific on how we expect the customer experience to work as we roll out the partnership. we'll offer customers the ability to get a cash offer on their home details page on Zillow, which we know is a compelling call to action and provides us a high-intent seller signal. Once a customer shows interest in getting a cash offer, a licensed Zillow advisor will be available to talk each customer through a variety of selling options, including the cash offer from Opendoor. For customers who choose to sell directly to Opendoor, Zillow will receive a referral fee. For customers who decide they want to sell traditionally, we will connect them with the Zillow Premier Agent Partner. For customers looking to sell their existing home and buy a new home, we will offer a package where they can buy their next home with the Zillow Premier Agent, finance with Zillow Home Loans, and close with Zillow Closing Services while selling their existing home to Opendoor. Throughout this future customer experience, Zillow will be the primary in the primary advisory role, helping our customers choose the best option for them, while growing our business in the capital-light manner we described when we exited being an iBuyer primary. Offering more products and services to more of our customers is a core tenet of our long-term strategy, and this partnership is a significant step in that direction. Finally, as we have said before, solutions within the Zillow ecosystem will be a combination of ones we build, partner on, or buy, focusing on solutions that meet our high standards and serve our customers with products and services they need. This partnership with Opendoor is a great example of the many opportunities available to us in building out an ecosystem of end-to-end customer solutions and our commitment to making it easier for customers to transact in real estate. We see this partnership as a significant win for customers, for Zillow, and for Opendoor, and we are excited to roll out the experience in the coming months. Next up on our roadmap is touring, which is a key moment in the real estate process that is historically logistically challenging for buyers, sellers, and their agents. It also indicates high customer intent and is the point of sale for buyer's agents. We discussed last quarter that we are beginning to enable real-time availability of tours through showing time for our agent-facing interfaces, and the early adoption signals were positive. Today, we are happy to say that we rolled out this capability across the country with more than 250 markets now enabled with real-time availability of tours on showing time. including a new integration on StreetEasy that allows agents to access Showing Time directly on New York City sales listings. Now, four months after introducing real-time availability, 74% of listings in markets where it's enabled are participating. This means that for all participating homes, the true calendar for buyer tours will soon be available on Showing Time partner websites. The ease that real-time availability has brought to tour scheduling to date is a win for all involved, and it enables agents to quickly help high-intent customers find and win their next home. Separately, many incremental improvements we've made to Zillow's apps and sites have contributed to driving growth in the share of connections that come from tour requests to nearly 50%, up from less than 33% this time last year. Our future goal is to create a frictionless touring experience for buyers and sellers themselves, not only for their agents, by integrating the showing time functionality on our customer-facing apps and sites, making it as easy for a shopper to book a home tour as it is to book a restaurant reservation online. Last on our product roadmap for this quarter is financing. We believe we have an opportunity to be a substantial purchase mortgage originator, given the many millions of customers who inquire about financing on Zillow on an annual basis. We have major work to do up and down the stack and out towards partners, but at the top of the funnel, we have begun to make the changes to our apps and sites designed to capture and convert a portion of the huge mortgage shopping signal we have into Zillow home loans. As a result, re-approvals for purchase mortgages doubled from January to June, and our purchase origination volume grew 58% sequentially in Q2. The absolute numbers are still small, but these are good signals for the opportunity in front of us as we build out our digital mortgage offerings. Importantly, when we lead with mortgage as our initial customer offering, we have found that a vast majority of customers do not yet have an agent. This gives us confidence that we can offer our customers both a great mortgage experience on Zillow and introduce them to a trusted primary agent partner who is happy to meet a buyer who already has financing lined up and understands what she can afford. Of course, we are early in our journey from a small call center focused mortgage business originally built to support the financing needs for iBuying customers to a large digital purchase originator serving millions of customers. As we transition, we need to build digital tools for customers that are native in our absent sites, technology to support customers across our platform, as well as efficient tools for loan officers and agents to serve these customers with a high level of transparency and integration. between all parties. The early indicators are promising, but we won't scale without having the key foundational components in place to enable us to scale profitably on the margin. We are making a significant investment in our financing growth pillar via Zillow Home Loans, as it is a critical enabler for the integrated transaction experience we believe future movers will demand and get. Customers are already coming to Zillow for mortgage advice. They inherently trust our brand and are looking to understand what they can afford before they take a tour and meet their premier agent. As you can tell, I am excited about our current initiatives, but I'm also excited about the new products, features, and services yet to be announced during the remainder of 2022. We will continue to update you all as we progress. Before I hand it over to Alan, I recognize the past few years in housing have been unpredictable, uncertain, and unlike anything we've seen before. But we are making progress on our growth investments, and when I look at the strength of our brand, our audience, our proven profitable business model, and cash flow, I am confident we can alter the way people transact in real estate across the U.S. for the better, which we expect will deliver outstanding long-term results for our company, our employees, and our shareholders. With that, I'll turn it over to Alan.