Zillow Group, Inc.

Hello, and welcome to Zillow's second quarter 2024 earnings call. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Brad, you may begin.

Thank you. Good afternoon and welcome to Zillow Group's second quarter 2024 call. Joining me today to discuss our results are Zillow Group's co-founder and co-executive chairman, Rich Barton, newly appointed CEO, Jeremy Waxman, and CFO, Jeremy Hoffman. During today's call, we will make forward-looking statements about our future performance and operating plans based on our 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 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. We will now open the call for the remarks followed by live Q&A. With that, I will turn the call over to Rich.

Thanks, Brad. Good afternoon and good evening to everyone dialing in to hear our second quarter 2024 results. We delivered another strong quarter in an ongoing challenging real estate macro environment, exceeding our outlook for revenue and EBITDA as we continue to successfully execute on our growth strategy. Today, we also announced Jeremy Waxman has been promoted to Chief Executive Officer of Zillow Group, and I will serve as Co-Exec Chair of the Board of Directors alongside my co-founder, Lloyd Frink. I have been CEO and or Chairman since the day Lloyd and I seed-funded the company in 2004 and will remain engaged. My role, however, will shift to supporting and counseling Jeremy Waxman and the leadership team rather than daily operational leadership. Before talking about Jeremy and the team, let me talk about the state of the company. The short version is that Zillow business is in great shape financially, strategically, operationally, and organizationally. We are executing well and are consistently outperforming the broader residential real estate industry as we methodically ship great software and services to digitize and integrate home buying, selling, financing, and renting. empowering consumers and partners alike. We have done this inside the Zillow branded Housing Super App, the integrated consumer and partner experience we are rolling out in markets across the country. And we continue to increase the breadth of our market coverage and the depth of transaction penetration within those markets. I am pleased with where we are in this effort and the opportunity we see for many years of growth ahead. We have also increasingly leveraged our brand trust and massive audience to diversify our revenue streams. We've leaned hard into the obvious and adjacent rentals and purchase mortgage opportunities, both of which are now exciting growth businesses for Zillow. Rentals now account for one-fifth of total company revenue, and Zillow Home Loans purchase mortgage origination volume grew more than 100% year-over-year again this quarter. Rentals has plenty of room to run, and the mortgages opportunity for us is wide open and large. Additionally, we have built and acquired and integrated a quietly exciting set of products and services that we offer to the broader industry, brokers, MLSs, and the whole of the professional agent community. We are investing in broad industry-wide adoption of our suite of increasingly integrated digital content and workflow tools, including incredible products like our showing time home touring solution, follow-up boss agent CRM, dot loop forms and document management, and showcase 3D interactive listings. Our conviction is that a rising digital tide lifts all boats. A more digital industry using our software is better for consumers, better for our partners, and ultimately better for Zillow Group. We have unique ambition here and unique talent and resources to conjure it into reality. And through all of this innovation and expansion, the leadership team has maintained real cost discipline that is delivering improvements in EBITDA margins. Executing well against big, complex, interconnected opportunities requires amazing talent who have a clear strategy, high accountability, and high trust in one another. Which leads me to Jeremy Waxman, our new CEO, and the person we organized most of the company around three years ago when we promoted him to COO. He has been supported by an exceptional team and has successfully positioned the company to go after these multiple large opportunities, as I have laid out. Jeremy is a familiar voice to you all on this call, but allow me to share some of his history. He has an engineering degree, which is not required here at Zillow, but it's nice. He also got his MBA many years ago, which the engineers don't hold against him. We found Jeremy at Microsoft in 2009 when Zillow was very small and recruited him into a product and marketing role. Throughout his time at Zillow, Jeremy has worn many hats. His responsibilities have steadily gained scope, spanning product, marketing, and operations. He has been a key strategic partner throughout his tenure, advising Lloyd and me on major strategy and product decisions. Early on, he helped pioneer mobile real estate shopping with the launch of the Zillow app. Later as CMO, he was critical to leading Zillow's consumer marketing strategy, establishing a high bar and a branding framework for what has become a rare loved and trusted household brand. His tenure as COO the past three years with all product, engineering, design, marketing, sales, IT, and go-to-market business operations reporting to him has been a time of particularly impressive innovation for Zillow, which has put the company back on an accelerating growth path following pandemic dislocation from which the industry has yet to recover. Jeremy operationalized Zillow's housing super app strategy while maintaining strong cost discipline, diversifying our revenue base, and growing the rentals and mortgages businesses. He successfully championed the follow-up boss and showing time acquisitions, helping us deliver on our goal to provide agent partners and the broader industry with the best software solutions to power their businesses. He also organized, elevated, and recruited talent that makes up Zillow's world-class R&D organizations and increasingly critical sales and marketing operations. Jeremy's product-forward, consumer-first leadership, operational experience, and technology orientation make him right and ready to be CEO of Zillow now. I am confident in his judgment and his leadership, and I am excited to support him as he leads Zillow's next chapter. And with that, I'll now hand the mic over to Zillow Group's new Chief Executive Officer, Jeremy Waxman.

Thanks, Rich. Having spent the past 15 years at Zillow, I can honestly say taking on this role is the honor of my career. I love this company and I love this team. And I believe deeply in the digital future of real estate we're building for the benefit of buyers, sellers, renters, agents, the broader industry, and our shareholders. Zillow has a huge audience, a partner network comprising some of the best agent teams in the business, and tech and product prowess that is unmatched in residential real estate. With an increasingly diversified and growing business, we are primed to capitalize on the strength of the Zillow brand and capture a meaningful slice of the $30 billion accessible TAM in real estate, a slice that more closely reflects our reach in the category. And our results show we're making great headway. I'm excited to share that Zillow had another strong quarter, reporting better than expected revenue growth across the business. Q2 revenue was $572 million, up 13% year over year, which marks the eighth consecutive quarter our total revenue results have outperformed the residential real estate industry. We delivered double-digit year-over-year revenue growth and demonstrated cost discipline while continuing to invest to deliver solid EBITDA margin expansion year over year. Q2 residential revenue grew 8% year-over-year to $409 million. Rentals continued its strong growth with $117 million revenue in Q2, up 29% year-over-year. Multifamily revenue is up 44% year-over-year, driven by strong growth in our multifamily property count, with 44,000 properties at the end of Q2, up from 40,000 at the end of Q1. We also continue to make strong progress in mortgages, with Q2 revenue of $34 million, up 42% year-over-year, and purchase mortgage origination volume growing 125% year-over-year. These successes come despite a persistently challenging mortgage rate environment, as evidenced by our estimate of total industry purchase loan origination volume being down mid-single digits year-over-year in Q2. We continue to believe our most important investments are in tech innovations that improve the customer experience, which has helped us earn and maintain our strong brand position and massive engaged audience of movers. In Q2, we reported 231 million average monthly unique users across the Zillow ecosystem of apps and sites. As you'll remember from previous calls and our February investor presentation, about 80% of our users come to us organically, and they're using our app three times more than anyone else in the category. Another way to measure traffic and brand strength is through Comscore, which is widely viewed among internet brands as a reliable, transparent, third-party source because it aims to capture the number of unique visitors while de-duping cookies. According to Comscore, Zillow Group's apps and sites had 116 million average monthly unique visitors in Q2. We're pleased with the progress we're making to transform and digitize the moving experience on behalf of buyers, sellers, renters, agents, and the broader industry. Since 2022, we've been building the digitally integrated transaction experience and testing it in our enhanced markets across the country. Through this year, we've been increasing our breadth of coverage across more markets and our depth of penetration in those markets as we drive towards sustainable, profitable growth. As of the end of Q2, we're in 19 enhanced markets, expanding to 36 by the end of August, well on our way to achieving our goal of 40 by the end of 2024. As we've said, Zillow is the housing super app, and we are continually adding updates and improvements to it, guided by our five for sale growth pillars, touring, financing, seller solutions, enhancing our partner network, and integrating our services. Our for-sale growth pillars mark the pathway to meeting our goals to increase customer transaction share to 6% by the end of 2025. We are also focused on building up rentals, which currently represents 20% of our revenue and is growing rapidly. First up is touring. Integrating our touring solutions into our buyer flow is meaningfully improving our ability to identify high intent customers and connect them with our premier agent partners. We've seen that those touring connections convert at three times the rate of other actions on Zillow. Last month, we nearly doubled the number of markets with real-time touring, and we're seeing positive early results from being better able to connect higher-intent customers with our premier agent partners. In fact, we have already achieved our end-of-year target of approximately 20% of our connections coming from real-time touring, as well as improved transaction conversion. As one of the many improvements we're making to this part of the customer journey as a leader in touring software, last quarter we introduced a touring agreement that instills more transparency into the process. The early indicators of success we saw in our pilot gave us the confidence to integrate it into Zillow's touring experience. And just last week, the agreement became part of the request a tour flow on Zillow for nearly 80% of our tour connections. We plan to roll it out to remaining Tor connections in the coming months. Facilitating consumer-friendly agreements earlier in the funnel is not only an opportunity for us to help educate consumers and agents navigate the industry rule changes, but it also helps us identify higher intent customers, send more qualified connections to our premier agent partners, and drive conversion rates. I'll now move on to financing. We have been working to integrate Zillow Home Loans more seamlessly with our Premier Agent Partner Network and throughout the customer journey. Overall customer adoption rates in our nine most mature enhanced markets have reached the mid-teens, and nearly 60% of our Zillow Home Loan originations are represented by a Premier Agent Partner. To further capture buyers' attention, we've also launched innovative tools through Zillow Home Loans to help them more accurately understand what they can afford. In Q2, we introduced a feature called Buyability, which gives buyers a personalized, real-time estimate of the home price and monthly payment that fit within their budget. Powered by mortgage rates through Zillow Home Loans and available to check regularly in the Zillow app. Our efforts have accelerated purchase mortgage growth, with $756 million in purchase loan origination volume in Q2, a 125% year-over-year increase. We expect continued purchase mortgage growth for Zillow home loans as we launch more enhanced markets and continue to improve our go-to-market integration with our premier agent partners. For our seller solutions update, I'll focus on Zillow Showcase, a unique offering unlike anything else available today that not only makes selling a home easier, but also creates real value for sellers and their agents. Zillow Showcase elevates agents' brand presence on Zillow and provides an enhanced shopping experience through our AI-powered, homegrown, rich media and floor plan technology. Showcase listings drive higher engagement compared to similar non-showcase listings on Zillow, more views, more saves, and more shares. But even more importantly, homes that list with Showcase are selling faster and for more money. Showcase listings typically sell for 2% more than similar non-showcase listings on Zillow, a bonus of more than $9,000 on a home sold at the average home sale price. Homes listed with Showcase are also more likely to secure an accepted offer within 14 days. And what's more, we've observed that agents who use Zillow Showcase are winning 20% more listings than similar agents on Zillow. These results have made it an attractive offering for real estate professionals. Zillow Showcase is available to agents in every market after launching nationwide earlier this year. Even though it's early days, we're pleased to share that more than 1% of all new listings nationwide are now using Showcase. We are on our way to our goal of 5% to 10% listing coverage, which represents a $150 to $300 million annual revenue opportunity, and we believe there is potential for future growth beyond that. This takes me to our next update, enhancing our partner network. Our premier agent partners represent some of the best, most professional agents in real estate who we believe are poised to take share in the evolution the industry is experiencing. Recall that not every real estate agent is a Zillow premier agent partner. In fact, since 2015, we've shrunk our active partner base by roughly 60%, while our premier agent revenue has grown by more than two and a half times over the same timeframe. We've oriented Premier Agent around some of the best agent teams, those that we believe provide superior customer service, understand the industry and their local market, have a proven ability to scale, and make the most money to invest alongside us. The top 20% of agent teams handle 80% of transactions, and nearly four in five Zillow Premier Agent partners are in that top tier. We are supporting our partners by providing them with some of the best digital tools and solutions. For example, we're really pleased with the early results eight months after our acquisition of FollowUpBoss, one of real estate's leading customer relationship management systems. More than 70% of our connections in enhanced markets are being managed through FollowUpBoss. And those substantial adoption rates set the stage for us to build and improve features and services that help those partners gain share. And finally, integrating our services, where the for sale growth pillars come together in the Zillow Housing Super App experience. Providing high intent customers with valuable solutions, working with some of the best agents, and providing those agents with some of the best tools has paid off for us. In our first four enhanced markets, we've seen revenue growth per total transaction value increase by more than 80% since the beginning of 2023. compared with the more than 50% growth we reported back on the February call. And as we expand, we are consistently seeing signs of repeatable success. In the 13 enhanced markets we were in at the end of Q1, we are seeing gains in revenue per total transaction value. We see an opportunity to increase conversion and revenue per total transaction value even more from here as we launch the remaining enhanced markets this year. Now turning our focus to rentals. Last quarter, we released an investor presentation and talked through the massive opportunity in front of us. Today, there is no nationwide marketplace containing all rental listings, resulting in a fragmented experience for renters. We are building a two-sided marketplace with a comprehensive suite of listings, both multifamily and long-tail, that enables renters to more easily shop, tour, apply, sign a lease, and pay rent securely, all on one convenient platform, Zillow. Having more rental listings in multifamily properties and ramping up our marketing have both helped drive customer awareness of rentals on Zillow. In June, our total rental unique visitors were up more than 20% year-over-year according to Comscore, widening our margin as the leading online rentals brand with the largest audience and number one preference among renters. We expect multifamily to be the primary driver of our rental's revenue growth, and we made great progress in Q2. Zillow now has 44,000 multifamily properties, 38% more than a year ago. And our exclusive partnership with Realtor.com is further boosting exposure for our multifamily listings, helping our partners reach even more renters. We have a lot of work ahead, but with multifamily revenue up 44% year over year, we are on our way with a billion dollar plus revenue opportunity in front of us. Before handing it over to Jeremy Hoffman, I want to congratulate the exceptional Zillow team on our eighth consecutive quarter of total revenue outperformance. It's their dedication and expertise that continue to drive our business forward as we work to deliver exceptional products and services for consumers, agents, and the broader industry. Our successes to date give me a great deal of confidence in our future. We're on track to meet our expectations for 2024 to deliver double-digit revenue growth and modestly expand our EBITDA margins. And we believe we are on our way to strong gap profitability over time that benefits all of us as shareholders. Thank you for being on this journey with us. I will now pass the line over to Jeremy Hoffman.

Thanks, Jeremy, and congratulations. I'm really excited for you and for us as you lead us through this next chapter for the company. I will start with our Q2 2024 results, which exceeded expectations for revenue and EBITDA. Revenue in Q2 was up 13% year-over-year to $572 million, which was $39 million above the midpoint of our outlook range. Our strategy is working, and we are seeing our investments drive outperformance across each of our revenue categories, including residential, rentals, and mortgages. For the quarter, we outperformed the broader residential real estate industry growth of 3%, according to data from the NAR. Additionally, we estimate that the total purchase loan volume for mortgage buyers, which is more aligned with our customer base for Premier Agent, was down mid-single digits year-over-year in Q2 and underperformed the overall market. On a gap basis, Q2 net loss was $17 million, representing 3% of our revenue. EBITDA was $134 million for the quarter, resulting in a 23% EBITDA margin, a year-over-year margin expansion of more than 100 basis points. The combination of our revenue outperformance and effective cost management delivered the improved year-over-year EBITDA results. Q2 residential revenue grew 8% year-over-year to $409 million, outperforming our outlook range. Our premier agent revenue benefited from the ongoing investments in our top and mid funnel experiences that drove improvements in our overall connection rates. And we also saw better than expected conversion rates. Looking at our relative performance, the investments we have made since the beginning of 2022 throughout our funnel have paid off. Over the last two years, we have increased our ability to connect customers with partner agents by over 2000 basis points. This has led to residential revenue in Q2 growing 4% when compared to the same period in 2022, or more than 2000 basis points better than the industry, which is down approximately 20% over the same time period. Rentals revenue grew 29% year over year in Q2 to $117 million, primarily driven by our multifamily revenue, which grew 44% year over year. We are executing well on our rental strategy to develop a two-sided marketplace with the most comprehensive set of rentals listings. We saw the number of multifamily properties on our apps and sites grow 38% year over year, reaching an all-time high of 44,000 multifamily properties as of the end of Q2. Total active listings across our entire rentals marketplace were up more than 16% year over year to an industry-leading 1.9 million listings in June. Mortgage's revenue growth accelerated in Q2, up 42% year-over-year to $34 million, as revenue growth begins to more closely align with Zillow Home Loans growth. ZHL purchase loan origination volume grew 125% year-over-year to $756 million in Q2. Our mortgage strategy to provide consumers greater financing choice with greater ease from a brand-name trust is leading to more customers choosing financing through Zillow home loans. EBITDA expenses in Q2 totaled $438 million, in line with our outlook as a result of our ongoing focus on cost management. We ended Q2 with $2.6 billion of cash and investments, down from $2.9 billion at the end of Q1. Positive net operating cash flow was more than offset by $88 million of repurchases of convertible senior notes due in 2025 and the repurchase of $292 million of our shares at a weighted average price of roughly $42. As of the end of Q2, we have $1.5 billion of outstanding convertible debt, which includes $608 million that is due in September of this year and $419 million that is due in May of 2025. We expect to settle the principal balances in cash and any conversion premiums in shares of Class C capital stock. After backing out our convertible debt, we had a net cash and investments balance of $1.1 billion at the end of the quarter, which gives us continued financial flexibility going forward. Turning to our outlook for Q3, we expect residential revenue to be between $375 million and $385 million. Our residential revenue outlook for Q3 is driven by the normal seasonality of Premier Asian, as well as continued strong contributions from our Showing Time Plus, New Construction, and Follow-Up Boss product offerings. We expect rentals revenue to grow in the mid-20% range year-over-year in Q3. We expect multifamily revenue to grow faster than rentals revenue overall as we benefit from our sales execution, our national brand awareness campaign, and our partnership with realtor.com. For mortgages, we expect a similar year-over-year revenue growth rate to what we reported in Q2 2024. we remain on track to further integrate Premier Agent and Zillow Home Loans with our planned enhanced market expansion in Q3. We expect total revenue to be between $545 million and $560 million in Q3, implying a year-over-year increase of 11% at the midpoint of our outlook range. This compares to our estimates for the residential real estate industry total transaction value to be in the mid-single-digit year-over-year growth range for Q3. We expect EBITDA to be between $95 million and $110 million in Q3, equating to a 19% margin at the midpoint of our outlook range. This implies EBITDA expenses will increase from $438 million in Q2 to an estimated $450 million in Q3. The sequential increase in EBITDA expenses is driven by an uptick in our brand marketing spend related to our rentals brand campaign. We expect EBITDA costs to decline sequentially from Q3 to Q4 as marketing spend decreases in line with typical seasonal media spent. Moving to the full year, I want to reiterate that we expect to drive double-digit revenue growth for 2024 with modest EBITDA margin expansion, primarily driven by our growth pillars. Our annual fixed cost run rate is approximately $1 billion, consistent with where we stood at the end of 2023. We continue to believe our fixed investments are at the right level, which should result in our fixed costs growing modestly with inflation. Consistent with previous quarters, our various variable costs are expected to grow ahead of revenue initially as we ramp new hires to be fully productive. Advertising spend is a lever we view as separate and distinct from the rest of the cost base and one we will pull depending on the growth opportunities we see in front of us. We are demonstrating the benefit of pulling this advertising lever in our rentals marketplace given growth we are seeing in traffic and revenue, and we are pleased with the early results. To close, it is clear we are executing on our strategy. We are growing across every part of our business. We are seeing great results from our growth pillars in our enhanced markets that will continue to roll out this year, and we are on track to grow revenue by double digits and expand margins in 2024. And with that, operator, we'll open the line for questions.

At this time, if you would like to ask a question, please click on the Raise Hand button, which can be found on the black bar at the bottom of your screen. When it is your turn, you will receive a message on your screen from the host allowing you to talk, and then you will hear your name called. Please accept, unmute your audio, and ask your question. We will wait one moment to allow the queue to form. Our first question comes from Ronald Josie from the city.

Great. Thanks for taking the question, this new – making sure you can hear me okay, guys. Rich, Jeremy, Jeremy, can you hear me? We got you, Ron. We got you. All right, cool. So congrats on the new roles, Jeremy specifically and Rich, back to Chairman. You mentioned in your conversation up front just how Zillow is in great shape financially, strategically, operationally, organizationally. and why now is the right time. At the same time, the industry is going through a change. So just a little more insights on why now would be helpful. And then more importantly, I guess, when we have enhanced markets now in 36 markets by the end of August, 40 by the end of the year, I think accounting for around Call it 40% of total connections. You know, we get a lot of questions around the benefits of enhanced markets. So can you take a step back and just remind us on the benefits of enhanced markets as we get to that call at 6% of transactions? I'd love to hear more about what you're seeing in some of the markets. And then given the structural change in the industry, you know, how does enhanced markets sort of impact that or benefit from it? Thanks, guys, and congrats again.

Thanks, Ron. So maybe I'll take the first bit, Jeremy Waxman, and you can come in on the second. Yeah. Does that sound good? Yeah. Okay. Yeah, I mean, it's incredibly impressive to me, Ron, how well we are executing as a company, despite all of the kind of stormy weather that constitutes the real estate macro. I mean, we're just posting terrific numbers. We have... For three years now, since Jeremy Waxman was promoted to CEO, running most of the company and all the lines of business, we have talked about our housing super app strategy and our rental strategy and our mortgages strategy. And I would say you all as investors have been like, OK, show me that that is actually going to work as a way to digitize and integrate this transaction and create a really big long term growth opportunity. And I would say now that strategically we have kind of de-risked the concept of what we're building here. We have a long way to go to execute and fulfill what I see as our ultimate right of market share and claiming that and growth. But strategically, we are in really good shape. And that is in no small part due to Jeremy Waxman's leadership over the last few years getting this all together. And so that is why the time is right. Jeremy is ready. The company is ready. And, Ron, personally, I am ready as well. I am not going anywhere. I'm not doing anything else. But I'm really excited to be moving to a role of – coach and advisor rather than the daily field general. Thank you. But maybe I'll have our new chief executive officer, Jeremy Waxman, answer the second part of your question.

Absolutely. Thanks, Ron. On enhanced markets. Just a reminder, since you asked, the metrics there, it's market share, and we measure that in terms of revenue per total transaction value. And then it's also revenue per transaction. So num transactions and revenue per transaction gets you to that. And 36 markets by the end of August. on our way to 40 by the end of the year, in each of those markets, we're not serving 100% of customers. So I think we gave a stat earlier this year, that's going to be about 20% of all customers will get that experience. And that experience allows them to get real-time touring and a touring experience, Zillow home loans as a financing option if they choose it. And then most importantly, the enhanced partner network, the hand-picked set of partners that Jeremy Hoffman talked about in his prepared remarks, that really deliver a great job, provide great customer service, run professionalized businesses for the modern internet consumer. So that's what the enhanced market experience is. As we bring that to more and more customers, we are seeing in the markets we're in revenue per total transaction value gains. And we expect those gains to contribute to more of our residential and total company revenue as we get to that 20% of customers and then into next year, more of those customers. So, you know, the land and expand strategy is working well. We're really excited to accelerate to 36 markets by the end of August and be at 40 markets by the end of the year.

Thank you, Jeremy. Thank you, Rich.

Our next question comes from Brad Erickson from RBC. Your line is open, Brad. Feel free to unmute. All right. Why don't we return to... We'll come back. So we'll go to Nick Jones from Citizens JMP.

Great. Thanks for taking the questions. Congratulations, Jeremy. I have two questions. First, can you maybe double click on the rentals business? 44% growth in multifamily is impressive. Can you maybe speak to the key drivers behind the success? How are the conversations evolving? with the multifamily operators, giving you the confidence to go, you know, to kind of spend after that $1 billion revenue opportunity you've hung out. And then the second question may be on traffic volumes. You know, you called out three times more app users, I think, as the competitive environment heats up around residential. Folks are increasingly focused on some of these engagement metrics. Can you maybe speak to that or remind us of the benefits of the app as opposed to web traffic or mobile web? Thank you.

Yeah, thanks. Thanks, Nick. Thanks for the questions on rentals. Yeah, as I said, a little bit my prepared marks and we shared for those that were on in February, a more detailed investor presentation on our rental strategy. You know, we're so excited about a rental strategy because it's really unique and it really solves the consumer problem. Right. What renters want is to find all the inventory. There is no one place for inventory. There is no MLS for rentals. So they end up having to shop everywhere during a really compressed time frame. It's super stressful. And so we set out years ago to try and assemble as much of the inventory as possible. Both multifamily, the big buildings we all know, and long tail, the millions of homes and small businesses. unit properties that are out there for rent that turn over infrequently by a long tail of owners. And we've done that. We now have the most listings. We still don't have them all. Every year we try and go after more and we're growing our listing count. But we have the most inventory of anyone out there. And that has yielded us the most audience, the biggest audience of renters, right? So Zillow's rental network is the largest audience. It just grew 20% year over year this last month. And it continues to grow because renters want that product. And so that two-sided marketplace now gives way to the monetization growth you're seeing coming from multifamily. And so that's the stats I gave in my prepared remarks, 44,000 buildings on Zillow now up from 40,000 last quarter. That's driving the 29% revenue growth you're seeing, which 44% revenue growth in multifamily. That's coming from that property count and that engagement with the advertisers. So that's what gets us so excited. It's this really great win-win marketplace where the consumer is getting a better and better experience as the supply comes online. And that then in turn drives the demand and makes the product better for the renters and vice versa. So that's why you've heard Jeremy Hoffman talk about using advertising as a lever to help stimulate demand, to help continue to make that marketplace spin. And that's what gives us the excitement, not just in Q2's growth and in the guide for rentals, but in the $1 billion plus business opportunity we see in front of us. And then on traffic, yeah, I mean, we have talked long about how the most important part of audience is the engagement with that audience. And I talked in my prepared remarks, you can measure cookies and devices and people many ways. But what matters is, do people know who you are? Do they use you to shop? Do they find delight in your services? And Zillow has long demonstrated. believe that the best way to drive audience is great products, great innovative products amplified by marketing. And you see that in the mix of our traffic, right? 80% of our audience comes to us brand direct. They come to us because they know who we are and they choose to use us. And app usage is a good measure of that, right? And so that's why I talked about the app being used three times more than the others in the category. It's just a great measure of really healthy, deep engagement. If you're buying a home, if you're actually trying to shop, you're going to use an app. And you're going to use a desktop website that ties to that app. And you're going to use us as a shopping experience. And you're going to use an agent that you find from us. And that's going to lead you down the funnel to these transactions. So that's why for us, brand engagement and health of traffic is so important. It is the start of this transaction strategy we're on. And as we talk a lot about, our goal is to take all that great app usage engagement with audience and turn that into more transactions, right? Our goal of 6% transaction share comes from taking this 60, 70% audience share we have and getting more of them to use us and use our Housing Super app to actually buy, rent, finance, or sell their home. Thanks.

Our next question will return to Brad Erickson from RBC.

Hi, can you guys hear me? Yes, we got you, Brad. Technology is hard. A couple of questions just on the, I have to ask the obligatory commission question. Just first, just latest and greatest views on kind of the changes coming and any noticeable observations yet and kind of what feedback are you getting from your PAs as we head into August 17th? And then second, I guess if we assume that, you know, any effect of the regulatory changes may vary a lot up and down kind of the spectrum of the market. Talk about how you view Zillow's exposure, particularly to that, to the degree that there is any change with commissions. Thanks.

Yeah, Brad, it's Jeremy Hoffman. I'll take that one. I think we can't really speak to broad commission trends just because 80 percent of our premier agent base is in that top 20 percent of all producers. So we're working with the top agents versus a broad swath of professionals. That said, across our business, we've seen commission rates stay in a pretty tight band over the past three years. 2024 is down a few basis points versus 2023, but in line with 2022 levels. And I think just stepping back, we've been pretty consistent here for a while. We believe we and our partners are the outsized beneficiaries of these changes coming in the industry. We have the most customers. We work with the best partners. We provide the most technology. And we expect our PAs will deliver and get paid because they provide great service. And they and we, we think will be share takers in any future evolution or dispersion of the industry. So that's how we're seeing it. That's been very consistent for a while now. And nothing has really changed our minds on that. based on the latest things that we can see. Got it. Thanks.

Our next question comes from Mark Mahaney from Evercore.

Two things. One, I just want to wish you, Rich, the best at whatever you're going to do operationally going forward. So just congrats on all the success with the company over the years. And best of luck to you too, Jeremy, in the new CEO role. I just want to ask one question about the customer transaction share. So I know the goal has long been to get to the 6%. And could you just quantify, are there lead markets where you think you're, are there any lead markets now where you think you're within spitting distance of that? of the different enhanced markets that you're in. I know you've provided some data around, but I just wanted to focus just on that number. Are there other markets where you think you're within a point or a point and a half of that? Thanks a lot.

Yeah. Thanks, Mark. On the market share gains, I think I said in my prepared remarks, the way we're measuring that is revenue per total transaction value growth. And in the oldest enhanced markets where we have the most data and we have good year-over-years, which we've given you an update on earlier this year, we said we were up 50%. year over year, that growth has accelerated to 80% year over year in those first four. And then in the 13 that we've been in since Q1, we don't have year over years yet, but the early trend line is gains in revenue per total transaction value across those 13. So that curve looks similar to us. As we get into next year, we'll have year over years on more markets. So that's what gives us confidence that as we take this recipe, this housing super app integrated experience to more partners in each market and to more markets, we'll see that same trend line of share in revenue per total transaction value grow the way we're seeing it in our four original markets.

Yeah, and Mark, I'll just pile on a bit. It's Jeremy Hoffman. You know, Jeremy Waxman said it. We were at 50% in the first four markets we grew revenue in 2023, 50% versus total transaction value. And we're now at 80%, you know, through 18 months of that. So you're seeing a consistent, steady growth. And then on top of that, You know, we saw really good results in our oldest markets, which we put in the investor deck we did in February, where in Phoenix and Atlanta over, you know, call it two year period, we saw 80 and 90 percent transaction growth there. during that period of time, which, you know, is close to double. So those are the types of proof points that make us feel quite good. And why you see us accelerating the way that we have going from 19 to 36 pretty quickly is just because we keep seeing, you know, really solid results that we think sets us up quite well for, you know, continued future growth. Okay. Thank you very much.

Thanks, Mark.

Our next question comes from Ryan McKeveney from Zellman.

Hey, guys. Congrats, Jeremy and Rich. Nice job on the quarter. Thanks for taking the questions. I wanted to ask from a macro perspective around first-time buyers. So, you know, there's been periods in the past where that was called out as a tailwind. Last quarter it was mentioned as a headwind within the guidance, and obviously you strongly outperformed that. So is your sense that this quarter's results came in where they were in spite of a drag that did exist from that first-time buyer dynamic? Or did something maybe change beneath the surface where, you know, that just didn't turn out to be the headwind you might have expected? And kind of part two of that is just any views on this dynamic into the third quarter and kind of what's embedded within the guidance there?

Yeah, sure. Ryan, I'll take it. It's Jeremy Hoffman. I think... The mortgages market was challenged in Q2. We called that out in the May call and it persisted. So we think that it was down mid single digits year over year versus 3% up for the housing market. So there was a headwind there. We just happened to perform quite well throughout it. And that's a You know, that's a great story for us. It's one that we feel quite good about. And, you know, that's a function really of us outperforming across the business. I think we really perform well. You know, on the residential side, we had a soft pocket in late March and early April when rates spiked, but then they normalized. And as a result, Our MVP marketplace got healthier throughout the quarter, both on new sales and lower term. And then additionally, the conversion across Premier Agent, both MVP and Flex, was stronger than we anticipated. And that flowed through right to revenue. And then on the rest of the residential side, Showcase is growing nicely. The new construction marketplace is growing nicely. And Follow-Up Boss is outperforming what we expected in early days of the acquisition. And then you have mortgages and rentals. Obviously, Jeremy's talked a bit about that already, but rentals was up 29 percent. Multifamily was up 44 percent. And then CHL grew 125 percent. So really, when we look across all of the business in Q2, it felt quite good, regardless of what's going on in the first time homebuyer market. And then, you know, I'd be suffice to say, like. On the EBITDA front, we're pretty proud of the consistent ability to accurately forecast and hold ourselves accountable on costs. As we tell the team, when we're in a market like this, revenue is harder to forecast, which makes it even more important to be really good on the cost line. And for Q2, we expected $440 million of costs. We came in at $438 million. So when we outperformed on the revenue front, it all flowed through to the EBITDA line.

That's very helpful. Thank you, Jeremy. And also on the mortgage piece, so obviously some momentum under the surface there sequentially and year over year growing nicely. I know there are some moving pieces with the very significant growth in purchase origination volume, but some of the offset on the marketplace side. Can you just remind us where the marketplace stands at this point? point, both strategically in terms of where that fits in, maybe in terms of loan products or differences against ZHL and, you know, just kind of how you think of that mix between ZHL and marketplace moving forward?

Yeah, Ryan, I can take it as Jeremy Hoffman and then Jeremy Waxman may pile in as well. But I think that you're right that the bulk of the business going forward is going to be Zillow home loans. So you see the mortgage category start to more accurately map to the Zillow home loans growth. That's not to say the marketplace isn't important, too. It's just secondary. You know, there are going to be inevitably there are going to be times in which we can't service a customer through Zillow Home Loans. And we like having the marketplace as a way to serve customers regardless. Right. We're always about customer choice and making sure that in financing, we're providing customer choice as well. So we feel quite good about both of those businesses. But the vast majority of the focus going forward is going to be in Zillow Home Loans. Got it. Thanks a lot.

Our next question comes from John Campbell from Stevens.

Hey, guys. And, Rich, congrats on helping position the business for a pretty promising setup here in the years ahead. Glad you'll be able to see it through on the board seat. And then, of course, congrats to you, Jeremy. Well deserved. But a two-part question here. First, on the touring agreement, you know, you guys called out early indicators of success in your pilot. I think you also, you know, for the last couple years have I've said that touring connections have converted at three times the rate. I've got to believe that touring agreement probably boosts that conversion rates. It's obviously signaling even more or greater intent. Maybe if you could go a little bit deeper into what you're seeing thus far, and then I've got one more quick one on Zillow home loans.

Yeah. Thanks, John. Thanks for the congrats. And on touring, you're right. We continue to see touring actions convert higher than any other action on Zillow. And our expectation is the touring agreement will be a net benefit to conversion because it's in the flow post-introduction. And so it's just education and it's helpful qualification. And the pilot was small. We saw... basically no negative to likely positive impact there as we started to engage consumers. And so that's what gave us the confidence to roll it out, to take it to now almost 80% of connections. And we expect to get to all eventually. So I think you nailed the idea of education to the consumer done in a consumer-friendly way helps get that consumer more informed before they get to the tour and makes it more likely that they'll want to work with the agent. As you know, having worked with us and followed us for a long time, the lag on seeing that data and transactions is long, right? So a pilot market, a tour experience, measuring transaction rates with those agents is going to be a period of quarters and quarters and quarters. But the early indicator data gave us confidence that this is a good thing. And that's why we proceeded so rapidly to roll it out.

Okay, that's great to hear. And then on the Zillow home loans, I mean, obviously, refi was, I think, about half of your origination mix two years ago. That dropped to 1% last year. So I think it's probably a good problem you're having as far as capacity issues. It seems like you've got an exorbitant amount of demand on purchase. But I'm just curious about how you're thinking about the staffing, how you're thinking about if there is a degree of a mini-refi wave, if you feel like you can participate in that in a year or so ahead.

Yeah, I mean, our focus has been on purchase, not just because of where the refi market was, and I think it will remain on purchase. And that's just because of what we've talked about as our opportunity, right? You've heard us talk a lot about, I mean, everything we've said about the integrated transaction and the benefits for the consumer, it is for the home buyer. And our... ability to go have more and more customers who either start by asking that purchase financing question or ask that go shop question, end up getting exposure to our great agents and our great financing options. You know, that's demand that we won't tap out of for a long time. And that's what we're methodically scaling. both in our enhanced market strategy as we roll out more enhanced markets, but also digitally to our consumers that come to the website and actually want to start with a what can I afford? This is a tough market question. So we are, I think, in a privileged position to be able to go build, you know, durable growth in the mortgage business really focused on purchase. And we're excited about how we did in Q2 and we're excited about our plans for Q3. Indeed. Thanks for the time, guys. Thanks, John.

Our next question comes from John Calentoni from Jefferies.

Hey, can you hear me? Yes, we got you, John. Okay, great. Thanks for the questions. So I wanted to just start with the housing market. I was hoping you could unpack the outlook for mid-single-digit growth in residential housing transactions during the third quarter with pending sales down 8% in June. I'm just curious if your outlook incorporates an assumption that the market bounces back a bit in August and September based on potentially recent pickup and activity. And second, it looks like your outlook for the residential revenue segment implies a bit of underperformance for the premier agent business relative to your mid-single-digit housing market outlook. If you exclude the M&A tailwind from follow-up boss, can you just talk about the drivers of that underperformance and maybe if you've embedded some room for upside in that assumption? Thanks.

Yeah, thanks, John. It's Jeremy Hoffman, so I'll take it. You know, similar to what we've said in the past, we don't really over focus on the quarter to quarter fluctuations, given how fluid macro has been and will continue to be. We're pleased that we've outperformed the industry by 2000 basis points in residential over the last two years. And that's really a credit to the product experiences that we're driving, the conversion gains we're driving and the partner experiences that we're driving. At the same time, we are seeing healthy growth versus that mortgage market. So that was called out earlier in the call. That's where we tend to index. Our customer base tends to index. And those folks are struggling comparatively. So the first-time homebuyer, if you measure it by the mortgage market, is underperforming 800 to 1,000 basis points in Q2. And we think those trends probably continue into Q3. So I think we feel all in quite good about where the business is, knowing that that's out there. And I think most important is just the consistent outperformance we've had across both residential and the total company. We expect to continue to do so as we roll out our enhanced markets and see success there. Jeremy's talked a lot about that, but that's a really important piece to the future story. And we're just getting started rolling markets out. And I will kind of step back and remind you all, Q1, we were up 13% year over year. As a company, Q2, we were up 13% year over year. Our outlet calls for a revenue range of 10% to 13% for Q3. We're clearly well on our way to double-digit revenue growth in 2024 and margin expansion, and it's been a rough housing market. So we sit there and feel like the business is really well-positioned despite all that.

Great. Thanks so much.

Our next question comes from Tom Champion from Piper Sandler.

Hi, guys. Good afternoon. Hopefully you can hear me as well. Jeremy, as you take the baton as CEO, what's your top goal for the business over the medium term? What are you looking to achieve? And then maybe for Jeremy Hoffman, can you talk about the margin profile associated with enhanced markets? Does this get you closer to gap profitability? Thanks.

Yeah, I'll start, Tom, and maybe, Jeremy, you can hit margin profile. I mean, Tom, it's going to sound a little boring, but my focus and strategy is more of what we've been doing. And I think accelerating and continuing to roll out our enhanced market strategy, continuing to grow our rentals business into the opportunity we've laid out for you all, continuing to build mortgage into the big business we know it can be, and then powering all that. with the amazing software and technology we are building to help rewire the real estate industry for agents, teams, and brokers writ large. That has been our strategy we've talked to you all about for the last however many calls. You're seeing the early signs and results of that play out in the output numbers, and we're really excited to have more of this come to light so you see more of it in the output numbers in the years to come as we grow into the share target we have for you all and then grow our business beyond that. Um, oftentimes when, when there's a leadership change, there's like a, what's going to change question. And the answer is not much is going to change. We're going to focus on continuing to execute, deliver scale and accelerate this into the future.

Yeah. And then I can take the margin question. I think it's less about enhanced markets, you know, on our March to get profitability, it's really around the cost structure we've laid out. Um, so we have roughly a billion dollars in fixed costs today. We feel like we're pretty well invested there. Um, to at least get to our 2025 share targets. And so we expect that to grow kind of modestly with inflation. Variable is 25% to 30% of revenue. That will scale a little faster than revenue when we ramp up, but ultimately that's a good profile. And then the balance is in marketing and advertising. So we feel good that if we are controlled on the fixed side, we can grow revenue faster than cost. on the EBITDA front, and you're seeing that in the margin expansion you've seen throughout this year so far. And then going forward on the GAAP side, the next thing that's really important to us is getting stock-based compensation in a good spot. So we've committed to shrinking SBC total dollars year over year in 24 versus 23, and then even more so as a percentage of revenue. And it's important to remember that 90% of our SBC cost sits in that fixed bucket. So as we keep our eyes really, really focused on that, we're going to get more and more leverage on SBC over time. And that puts us on a nice path to get to gap profitability. Thank you both.

This completes the allotted time for questions. I will now turn the call back over to Rich Barton for any closing remarks.

Hey, thank you all. As you guys can see, the company is really doing well. The company is on firm footing. And as you can also see demonstrated in this call and on many calls before, Jeremy Waxman is ready to lead and the broader leadership team is ready as well. And so I'm super excited. There is a ton of clean water in front of the company, lots of opportunity to Maybe the wind will change direction and come behind us one of these days, but we certainly don't need it. But I'm sure it'll happen at some point. I want to thank you all for being on the journey with us. We'll talk to you soon.