Zillow Group, Inc. Class A
Q4 2021 Earnings Call Transcript

Published: 10 Feb 2022

[Operator Good afternoon. My name is Jordan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group Fourth Quarter 2021 Conference Call. [Operator Instructions] Please note, this event is being recorded. Thank you. I would now like to turn the conference over to Brad Berning, Vice President of Investor Relations. Please go ahead.Brad Berning Thank you, Jordan. Good afternoon, and welcome to Zillow Group's Fourth Quarter 2021 Conference Call. Joining me today to discuss our results are Zillow Group's co-Founder and CEO, Rich Barton; and CFO, Allen Parker. In addition to our typical materials, today, we also published an investor presentation which is available on the Investor Relations website. This deck will provide additional color to much of what we are talking about today.During today's call, we'll be making 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.During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to as EBITDA. We encourage you to read our shareholder letter and our earnings release, which can be found on our Investor Relations website as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures. In addition, please note, we will refer to our Internet, Media & Telecom Technology segment as our IMT segment. We will now open the call with remarks followed by live Q&A. And with that, I will turn the call over to Rich.Rich Barton Thank you, Brad. Hello, everyone. I hope you and your families are safe and healthy despite volatility, stubborn COVID variants, mixed macro signals in the geopolitical environment, I'm feeling grounded and excited by what's happening at Zillow and the opportunity in front of us. Today, we're going to walk through the next steps for Zillow as we grow our core business, innovate to make it easier for people to move and provide a progress report on the wind-down of our Zillow-owned homes inventory.First, on the inventory wind-down. We are selling homes faster than we anticipated at better pricing levels than we projected. We have now sold or entered into agreements to sell or dispose of more than 85% of our inventory, which Allen will speak about more. The wind-down process is running smoothly, efficiently, and we expect it to generate positive cash flow. We felt confident in November and we feel even more confident today that exiting iBuying and eliminating housing market balance sheet risk to our company and our shareholders was a great decision while giving full respect to the affected employees.Moving forward, we know our customers better than we ever have before because we've been in the trenches with them buying and selling thousands of homes. We developed valuable software services and support that persist. And we've been freed up to turn our formidable R&D capabilities and capacity toward innovating for a much broader set of mover customers than the narrow focus that iBuying allowed. As we look to the future, we have the building blocks in place, and now it's about stacking them in new impactful ways to solve more problems for more customers and partners.I'd like to emphasize that the problem we are solving is not new to us. Throughout these past 16 years, our mission has been to give people power, power to the people, to unlock life's next chapter and to move. So even now, the real estate industry continues to be archaic, primarily off-line and fragmented. Throughout Zillow's history, beginning with Zestimate, Zillow has turned on the lights with data and information and empowered customers in a way that began to transform the industry.But it wasn't happening fast enough. So 3 years ago, we shifted strategic focus from a purely ad-based business model to 1 that expanded our focus down-funnel to the transaction itself. This marked our transition from Zillow 1.0 to 2.0. Over the past 3 years, we have focused on helping customers navigate the real estate transaction in an easier, simpler way with our suite of tech-enabled solutions and an ever-improving partner network.We all know that moving is complicated, time-consuming and full of loops and hoops to jump through in a disjointed and opaque process. Anyone who has been through a move knows how challenging it can be to research, shop, select, finance, appraise, close and have to connect all these separate vendors and spend time taking down information and managing the process yourself. Sometimes you do all of this and still end up losing out on your dream home, especially in this competitive market.On top of the time and energy we expended on this taxing process, all of these pieces add up to between $26,000 and $40,000 of extra expense on an average priced home. Moving is exhausting and expensive. And to us, it's painfully clear that customers deserve and control. Our opportunity is to create the housing super app, an integrated digital experience in which Zillow connects all of the fragmented pieces of the moving process and brings them together on 1 transaction platform, empowering customers with data, a suite of Zillow-owned solutions at their fingertips and a network of best-in-class partners to make it easier for them to move, start to finish. Our customers will be able to do everything within the Zillow ecosystem. That's the dream we're building towards.Accompanying this dream is a significant addressable market. Housing-related transaction fees were roughly a $300 billion industry in 2021. This includes residential real estate, rentals, mortgage, title and escrow. It does not include more speculative future potential in adjacent services like renovations, home insurance, moving services and appraisals. The TAM is large. And currently, we are a very small part of it despite our outsized audience and trusted brand. We are well positioned to capitalize though, but doing so requires relentless innovation in both product and business model.So why do I feel so good about this? Well, we have an unbelievably solid foundation from which to innovate and a great track record of growth in our core business. No company in our category has a stronger claim to hearts and minds at the top of the funnel, with nearly 200 million unique users flocking to our sites and apps every month. The strength of our brand is unmatched with Zillow searched more on Google than the term for real estate.Similarly, no other company has our track record of technology innovation in the housing industry. Over the past 15-plus years, we have steadily grown the size and quality of our team of engineers, designers, product managers, data scientists and analysts and many more that make up a formidable investment in R&D, reflecting our belief in the opportunity ahead. In 2021, we 4x-ed our software releases into production versus our releases in 2015, and we are investing in our ability to further accelerate our pace of innovation for customers and for partners.We have also done well using acquisition as an accelerant. Late last year, we closed our purchase of ShowingTime, the industry's leading for-sale home touring reservation system. ShowingTime receives tens of millions of touring requests a year, and last year, it facilitated 63 million home tours. We acquired ShowingTime because we recognize how critically important tours are to the shopping experience. People come to Zillow to look at homes and the next logical step in the moving process is to tour them. Tours are where much of the magic happens. It's the point-of-sale moment for agents, and it's a powerful mechanism for identifying high-intent movers and helping them get to the next step of their moving journey. Our opportunity is to transform a manual phone call-based reservation system into a digital one, with software making touring more integrated and simpler for all agents and customers in the industry.We believe in and are investing in software that underpins an increasingly digital industry as a whole, with the firm belief that a rising tide lifts all boats, including our own. ShowingTime's platform will help convert more shoppers into transactors. In fact, our internal data shows us that the transaction conversion rate of a customer who requests a tour on Zillow is 3x higher than any other connection point our customers have with our partner agents.So buyers who request a tour with a Premier Agent partner are more likely to buy a home with that partner. We assume this conversion boost from a tour is similar for the industry as a whole, much of which uses ShowingTime, as I said. Yet, we see so much opportunity to increase both the quality and quantity of tours that are facilitated throughout the industry. As a proxy, today, we are fulfilling less than 1/3 of tours requested on Zillow. The combination of ShowingTime and new product releases should drive better touring experiences and higher conversion rates across the industry and for Zillow moving forward.We have big ambitions across our business, which I'll take you through next. But before I do so, I want to highlight how strong our business is today. We reported positive fourth quarter results, which Allen will speak more about. In our IMT segment, from 2018 to 2021, revenue increased 57% and adjusted EBITDA increased from $240 million to $853 million, about 3.5x growth. Our strong gross profit generation in IMT, coupled with our healthy cash position of $3.1 billion, gives us the flexibility to invest in R&D and innovation, accelerate business development and drive growth moving forward.Since our iBuying wind-down announcement, a consistent question we've gotten asked has been, where does growth come from now? Brad mentioned that we posted an updated investor deck on our website, which I encourage you to peruse when you have time. But while I have your attention, I want to outline where I expect growth to come from moving forward.First, let's ground ourselves in the U.S. housing market. In 2021, 6.1 million existing homes exchanged hands in the country. For every home exchanged, there are 2 customer transactions, 1 on the buy side and 1 on the sell side, which results in 12.2 million customer transaction TAM. Buy-side shopping much like the house tour is where consumers are super engaged and energetic. Moving is about life's next chapter and the next home is the aspiration. Helping movers dream and shop is our historical power alley and the wellspring of our massive audience and engagement.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 2/3 of all buyers in the U.S. This seems remarkable but shouldn't surprise us, given how it tracks the unique user and app tracking data we all look at across the category. What may surprise you all is that roughly 1.4 million actual homebuyers asked to connect with a Zillow Premier Agent last year. Wow. That means about 1/4 of all buyers in the U.S. last year clicked a button to connect to a Zillow Premier Agent. This tells us that we are the preeminent 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 us. That number is primarily buyers but we do have some customers today who connect with a Premier Agent and end up selling their existing home with our partner as well. Overall, we estimate that our buy-side market share today is roughly 5%, and our overall customer transaction share is roughly 3%. We worked hard over 15-plus years to achieve this 3% transaction penetration and we are proud of what we've accomplished today. But oh my, do I see an opportunity to increase our share of customer transactions from 3% to 6% in 2025 and meaningfully higher than that longer term by vastly improving our customer experience and funnel.Let's take each of these critical numbers and break down what we are doing to improve the fidelity of our funnel and customer experience from beginning to end. First, we are going to grow engagement with the roughly 4.1 million homebuyers who use our product. We will do this by leveraging our tech and product innovation and investment to deliver personalized and immersive content and curated experience like -- experiences like 3D tours integrated with interactive floor plans and intuitive tools to understand affordability early in the customer journey. At the same time, we will continue to improve our core experience in Zestimate search and find and other expanded services.Next, we plan to grow both the roughly 1.4 million actual homebuyers who raised their hands to connect with us last year and the roughly 360,000 home buyers and sellers who transacted with us. We expect to do this in 3 ways:]

one, we'll be leveling up that critical touring experience with ShowingTime to make it easier for movers to tour homes and connect with our partners.Two will be an increased focus on preparing these customers to be transaction-ready through intuitive and digitized financing offerings. And three, we will develop seller solutions by leveraging learnings from our iBuying experience to stand up new more asset-light services. As we take all of the energy potential from buyers on Zillow and open up broader seller solutions and financing opportunities, we expect to increase the number of people who raise their hand to transact with Zillow and open up access to 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.We will couple these product improvements with an enhanced partner agent network and how we interact with, support and improve the experience for our partners as well as our mutual customers. Here, we will continue to focus on working with high-performing agents who have demonstrated stellar customer service, a proven ability to close and an appetite to grow with us as partners as we expand.One of the great benefits of these product and service improvements is they have an eye towards integration, which is a win for the customer, a win for our partners and a win for Zillow because it will drive more transactions and more revenue per transaction. One prominent way to do this will be integrating Zillow Home Loans into the shopping experience to better serve our customers. Today, nearly 90% of all homebuyers finance for the mortgage, and many of them want to get prequalified before finding an agent.By offering intuitive and reliable pre-approval and prequalification services earlier in the shopper's journey, we hope to keep customers engaged in our funnel and improve their overall experience. Getting prequalified with financing is a strong signal of a mover's serious intent to buy a home, and referring a customer that already has financing is more valuable and efficient for our Premier Agent partners as well.We see expanded seller services and closing services as key to the integration we expect to provide and are hard at work cooking up what's next based on our learnings from having now bought and sold thousands of homes. When we put all of these ingredients into the pot, we see an opportunity to meaningfully increase the number of customers who raise their hands to work with us and the number of customers who ultimately transact with us. We know that the size of the prize is large when we become the central integrator, connecting pieces of the fragmented process and turning dreamers into transactors within the Zillow Housing Super App ecosystem. We expect all of these efforts to translate into $5 billion in annual revenue by the end of 2025 with strong gross profits that will allow us to invest in the opportunities that we'll have in front of us, while also translating into healthy 45% EBITDA margins for our shareholders.Before I hand it over to Allen, I want to acknowledge that the past few months have been challenging for us all, Zillow employees and investors alike. Innovation is a bumpy road and really proud of our history of innovation, and I have 100% confidence in our ability to accelerate innovation in the months and years ahead. Our company was built on big swings and we're going to continue taking them. We take big swings on products, on technologies, on business models and even on the future of how our employees work. Big swings are as core to Zillow as is Zestimate, and they are part of what makes our company so special.Finally, a really wild and wonderful characteristic of being Zillow is that we throw a much longer shadow than we are tall. In the last year, we have experienced the upside and the downside of capturing the hearts and minds of so many. People care about our brand and their homes deeply. There is something particularly gratifying and motivating, knowing that we are solving a problem that is so near and dear to people, so meaningful, and because of that, everyone is watching.Within all of that meaningfulness is a massive business opportunity to help people move using our housing super app to help them unlock life's next chapter and to help our partners grow their businesses. As I said earlier, our foundation and positioning are strong, and we are so much smarter, more experienced and more battle-hardened now than we were a year ago. As many of you know, I'm the largest individual shareholder and co-founder of Zillow in addition to being CEO.For the past 16 years, I thought about Zillow every day. I care about the long-term meaning of the Zillow brand and the value of our company in a way that couldn't be more personal. And I'm continuously awed by the sheer size of the opportunity and the relative immaturity of technologies advance into residential real estate, such a large, incredibly important and endlessly entertaining industry. Thank you for your continued support. I enjoy being on the journey with you. I'll now pass the line over to Allen.Allen Parker Thank you, Rich, and hello, everyone. I'm going to take a brief moment to provide an update on the progress of winding down our iBuying operations. I'll then discuss our quarterly results and Q1 outlook and will conclude with comments on our newly announced 2025 products.As previously discussed, we expected a wide range of potential results for the home segment this quarter as we work to free up operational and renovation capacity and pursue retail strategies in order to protect the value of our assets and optimize the speed of the wind-down, all while respectively managing our people. This quarter, we reported home segment revenue of $3.3 billion, well exceeding our updated outlook range of $2.3 billion to $2.9 billion provided in early December. The revenue outperformance benefited from a combination of better renovation capacity that allowed us to accelerate listings in Q4 as well as better retail velocity.With the better-than-expected resale and better prices, we had $93 million of write-down in the quarter compared to previously expected additional losses of $240 million to $265 million in Q4. This brings our total write-down to $405 million for Q3 and Q4, an improvement of $160 million compared to the midpoint of our initial estimated range. The better-than-expected write-down resulted in Q4 EBITDA loss of $206 million, $141 million better than our outlook range for a loss of $347 million at the midpoint. We continue to make good progress on winding down this business and have now sold or entered into agreements to sell and dispose more than 85% of the homes in the home segment that we expected to resell during the entire wind-down process.In January, we finished acquiring all the homes that we plan to buy. We continue to expect to sell most of our remaining homes inventory by the end of Q2 2022, with a small number of homes remaining thereafter. We have updated our expected iBuying wind-down restructuring costs to $175 million to $205 million in aggregate compared to the $175 million to $230 million we previously expected. $71 million was recognized in Q4 and the remainder we expect to be realized in 2022.We expect the approximately $800 million of cash equity that was in the inventory at end of Q3 will more than cover the realized losses on inventory, operating cost and the cash portion of restructuring cost of the wind-down. As a result, we now expect the net effect of the wind-down of iBuying operations to be cash flow positive in aggregate, slightly better than our prior outlook of at least cash flow neutral at the end of Q3. I would like to sincerely thank our dedicated employees who have been executing the wind-down process.Moving to the core business results. We'll start with IMT revenue, which was $483 million, growing 14% year-over-year and 51% on a 2-year stack basis, which accelerated compared to the 43% 2-year growth in Q3. Our IMT segment revenue came in slightly above the $481 million midpoint of our guidance, driven primarily by Premier Agent revenue at the low end of our outlook range and better-than-expected results in our rentals business.PA revenue grew 13% year-over-year, which outperformed industry growth of 4% and posted accelerating 2-year stack growth of 52% compared to 49% 2-year growth in Q3. The Omicron variant and severe cold weather resulted in lower new for-sale listings in late Q4, which had a slight impact on our results but remain within our expected seasonal range and outlook.Rentals revenue was flat year-over-year but better than we anticipated despite continued pressures from high occupancy rates, which dampens demand for rentals advertising. We saw stronger-than-expected customer interest in applications and success in renters leasing properties. Rentals also faced a difficult second half comp due to strong 2020 results following the initial impact from COVID-related volatility a year ago.IMT segment EBITDA and margin were $220 million and 46% for Q4, respectively, exceeding our outlook of $200 million and 42% at the midpoint. The outperformance was driven by increased operating efficiency as well as lower-than-anticipated advertising and marketing spend. For 2021, IMT segment adjusted EBITDA was $853 million or 45% of IMT segment revenue, representing more than 2,100 basis points of margin expansion over 2019. We have continuously driven operating efficiencies by prioritizing and streamlining internal processes and recognizing the efficiency of marketing.I would also like to call out that our high gross margins enabled us to invest in innovating on behalf of our customers, partners and our platform customers to drive future growth while delivering industry-leading EBITDA within online real estate.Mortgages segment revenue of $51 million came in at the high end of our Q4 outlook range as refinancing loan originations did not slow as much as expected, while gain on sale margins compressed within our expectations. Segment adjusted EBITDA was a loss of $14 million, near the midpoint of our outlook as we expected lower profitability due to lower purchase volume from unwinding our iBuying operations. I would like to reiterate that Zillow's financial position remains strong and flexible. We ended the quarter with $3.1 billion in cash and investments, slightly less than $3.2 billion at the end of Q3. After the impact of our $302 million in share repurchases in December, largely offset by earnings from our IMT segment. The wind-down leaves us in a strong position to invest in more scalable customer solutions that are less capital-intensive as we execute on our vision and make strategic long-term investments. Our expectation is that we will continue to be a positive earnings and positive cash flow company with our revised product strategy.Turning to our outlook. For the first quarter, in our IMT segment, we expect 9% year-over-year revenue growth in Q1 at the midpoint, within an outlook range of 7% to 11% and 47% 2-year growth. Within the IMT segment, we expect Premier Agent revenue to be between $358 million to $368 million, up 9% year-over-year and up 50% over Q1 2020 at the midpoint of our outlook. Our wider-than-normal IMT and PA Q1 outlook revenue ranges are informed by the following. We saw slower housing activity late in Q4 and have also seen a slow start to new for-sale inventory listings in Q1. Despite that, our customer and agent activity levels indicate strong customer demand, which is consistent with the Conference Board's December consumer survey indicating plans to buy a home during the next 6 months were at record levels and recovered sharply from lower levels at the end of September.In other IMT, we continue to expect headwinds in rentals from the continued low industry vacancy rates and in new construction because of builders' low inventory levels. We expect Q1 IMT EBITDA margin to be 41%, at the midpoint of our outlook. This margin reflects the investment level we believe is necessary to drive innovation and execution towards our 2025 targets.We expect our Mortgages segment revenue to be between $44 million to $49 million in Q1, which is down sequentially from Q4. Our Q1 outlook reflects slower industry refinance activity from the recent move in interest rates, consistent gain on sale spreads and slower growth in purchase originations impacted by the wind-down of our iBuying operations. As a result of lower sequential revenue and continued investments to grow mortgage originations, we expect the Mortgages segment EBITDA to be between a loss of $17 million and a loss of $12 million, as we focus on preparing customers to be transaction-ready through intuitive and digitized mortgage offerings, we are working to integrate mortgages across our platform with a focus on purchase originations. We expect these efforts to make progress over the course of this year.In Q1, we expect our home segment revenue to be $2.75 billion and adjusted EBITDA to be a loss of $37.5 million at the midpoint of our outlook range. Given the wind-down of our iBuying operations and the path forward we see, we think it is prudent to initiate new financial targets for year-end 2025. Before doing so, we wanted to remind you of where we stand on our February 2019 3- to 5-year targets. We have just completed the third year of the original targets and are expecting to soon be run-rating the $2 billion IMT segment revenue targets. And we are already well above our original IMT segment EBITDA targets of $600 million or 30% margin. As we wind down iBuying operations, the original home segment and related Zillow Home Loans attach related targets are no longer relevant.With that, I'll take a moment to walk through the 2025 financial model that we've included in the investor deck published on the IR website today. Our long-term growth model shows how we plan to deliver Zillow's new 2025 financial projects. The model is quite simple