Zillow Group, Inc. Class A
Q1 2020 Earnings Call Transcript

Published:

  • Operator Good afternoon and welcome to the Zillow Group First Quarter 2020 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, Investor Relations. Please go ahead.Brad Berning Thank you, Cheryl. Good afternoon and welcome to Zillow Group’s first quarter 2020 conference call. Joining me today to discuss our Q1 results are Zillow Group’s Co-Founder and CEO, Rich Barton and CFO, Allen Parker.During the call, we will 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 in our Investor Relations website. A recording of the call will be available later today.During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to as EBITDA. We encourage you to read our shareholder letter and our earnings release, which can be found on our Investor Relations website as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures. In addition, please note we refer to our internet, media and technology segment as our IMT segment. We will open the call with brief remarks followed by live Q&A.And with that, I will turn the call over to Rich.Rich Barton Thanks Brad. Hi, everyone. I wonder if this is starting to feel familiar to you too. Brad, Allen and I are once again broadcasting from our homes, where we are based for the foreseeable future along with thousands of Zillow Group employees and continuing work on our mission to give people the power to unlock life’s next chapter.Although what we see physically day-to-day, it’s pretty static and repetitive, we are all navigating a world in flux. According to MIT, about half the U. S. workforce is now working from home and they are not just working from home, they are teaching their kids, eating each meal, conducting their social lives all from home. Whether they are dreaming about an extra room for an office, a bigger yard, a less dense neighborhood, or for many of you maybe, a new second home, there is evidence that the experiences uncorked new aspirations and hopes of what home can be and needs to be. With each passing day, it becomes clear that we are not going back to the way things work. Collectively, we are turning the page.The past 2 months have been marked by health and economic of people across the globe amid the jolting stories of lives, jobs and businesses lost, we are grateful to be able to share not just strong Q1 results, but evidence of the housing market’s resilience and an encouraging readiness, perhaps pent-up restlessness among people who are shopping on Zillow. When we talked last on our pop-up call on March 23, we had seen visits to Zillow fall nearly 20% from the prior year. Since then there has been a full rebound and shopping activity on Zillow Group has returned to double-digit year-over-year growth, along with an upswing in requests for our customers to connect with the Zillow partner agent at rates exceeding mid-March levels.From a balance sheet perspective, the foundation we laid in the last year put us on a really solid ground, then our swift actions to temporarily pause Zillow Offers home buying and reduce expenses by cutting marketing spend, discretionary spend and pausing most hiring helped us preserve and build cash. During our last call, we reviewed our mid-quarter balance sheet with you. It has strengthened since that call with $2.6 billion in cash and investments at the end of Q1. January and February were very strong months across all our businesses and we are a great counterbalance to the pullback we experienced in March.In all, the first quarter delivered strong results as we met or beat our outlook delivering record results across many measures, thanks to both strong execution and expense management. Our return to underlying double-digit IMT segment revenue growth and significant EBITDA margin expansion underscores the strength of our core business. In Premier Agent, we have found meaningful success with our strategy of connecting more and higher-intent customers with our high-performing agents, which was illustrated by record performance in January and February. When our partners were most fearful in March, the hashtag better together discounts, better together as one of our core values, plus the hashtag, these discounts we provided to our Premier Agents helped these small business operators and buoyed retention rates through the most uncertain and volatile period. Without being naïve, I will say that better together showed our partners how much they mean to us and that they appreciate it. This will pay dividends.We continue to sharpen our skills in Zillow Offers and we demonstrated significant progress this quarter bought by applying early learnings and getting smarter. Our sales velocity broke records in February and March even as we adapted operations to comply with social distancing requirements. We did this without sacrificing unit economics as we continue to operate within the guideposts we set. We deliberately reduced our inventory through continued execution of buyer contracts ending the first quarter with about 1,800 homes in inventory, a decrease of 1,000 homes from the end of 2019. Our decision in March to pause home acquisition for Zillow Offers was due to concerns about our ability to safely and legally conduct acquisition activities, which Fed concerns of a market halt.While in crisis mode, we were very focused on inventory reduction to reduce enterprise risk. Inventory reduction is no longer our goal. We are actively planning to unfreeze Zillow Offers home buying. Internally, we call this Project [indiscernible] although our time present in the carbonite will be shorter than [indiscernible] was. We expect to begin home buying within the next few weeks. There are number of factors we are considering that will influence the timing of the impasse, including one, the health and safety of our employees, customers and partners; two, local orders and public health concerns; three, local housing market sectors; and four, confidence in our ability to price and transact. Stay tuned.During our last update, I walked through a severe stress test scenario for our business that demonstrated our ability to make it through a sustained market freeze. The lens we were paring through was foggy at the time, but the fog is cleared to a large extent. We still don’t have perfect visibility, but the inputs are improving. The real estate market is predominantly open. And it’s clear that we have passed peak here. In our Q4 report in February, we talked about key priorities for the year that focused on executing growth and scaling our business. While we plan to return to these, we have adjusted our priorities for the age of COVID. These are:
    one, protect the enterprise, including protecting the health and safety of our people customers and partners; two, reduce costs; three, accelerate technology to deliver seamless and now more virtual real estate shopping and transaction experiences faster to the future as our team likes to say; four, enhance our relative competitive position to lead the industry to real estate to point out.Overall, I’d say we feel very good about where we are and the key advantages that give us the flexibility and solid footing to be both bold and nimble. One piece of evidence is Zillow Group’s agility is the adaptability with which our team responded to working from homes starting March 10. We have recently announced most employees will have the option to continue working remotely through at least the end of the year. We did this in order to give our employees the visibility and flexibility to make important life decisions like did I renew my lease in the city or move closer to my family without fear of losing their jobs. That and we have been impressed by how productive people have been given the circumstances. Our valuable people have been truly appreciative of this flexibility and this policy sets us up well to potentially take advantage of a whole new way to work post-COVID.Turning to the future, we feel pretty darn good. We have seen all our metrics bounce off the bottom. Some metrics at the top of the funnel exhibits have more fully recovered and are up more than fully recovered – and are up double-digit percentages year-over-year indicating to us even higher demand to move or at least fantasize about moving than before. The bottom of the funnel metrics took a bigger hit, but we are pleased to have largely maintained our Premier Agent monthly recurring revenue pace. We are lucky that it’s possible to shop for homes and close transactions without much human contact. That said, we are still watching antiquated processes like in-person appraisals, filings and closings cause unnecessary friction in real estate during this crucial time. If interested, check out my tweet from this morning showing Dawn Lyon, our Corporate Relations Chief, signing her refi paperwork this past weekend with a ballpoint pen and ink stamping thumb prints, why? Time for a change.Our proprietary 3D tours and floor plans appointment based virtual tours, physical self-tours, e-signings and remote closings are providing necessary solutions for social distancing today. Adoption is accelerating. Agents used Zillow’s proprietary tech to create 525% more 3D home tours in April than in February. As customers embrace this new normal for virtual shopping and selling we can allow agents to focus their manual high-touch services on high intent qualified buyers who have already looked around, narrowed the field and are ready to make an offer. I just heard a great story of this coming to life from our Premier Agent, Chris Spiker, a member of our agent advisory board who said his team recently helped a Washington DC area buyer who is facing the end of her lease, but works night at the ICU at Walter Reed Medical Center. It is an extremely heart-wrenching busy and dangerous time for this buyer to be at work, but our partner agent was able to use virtual tours and showings to help her narrow her choices on her schedule to when under contract last weekend on a new home near the hospital with a backyard fire pit that will give her a place to wind down after her shift.Another great example of how this is unfolding before our eyes is our recent Zillow Offers customers Estevan and Stacy Garza who shopped for 2 years before they found their dream home at Zillow Offers owned home outside of Phoenix last month. The timing intersected with stay-at-home orders and social distancing requirements and the Garza said that sale would not have happened without the flexibility and piece of mind that came with buying a non-owner occupied home from Zillow, which allowed the inspector and appraiser to easily do their jobs. Now, Estevan said they can take a deep breath and enjoy their beautiful new home.The virtual tools home shoppers need for safety today, will become their expectations for convenience tomorrow. Our focus now is not just on managing our way through this crisis we are also moving faster to the future. Our vision of Zillow 2.0 is becoming a reality even sooner than we have had planned. Like we discussed with you during our pop-up successfully navigating storms requires the ability to know when to pullback and tap the breaks and when to hit the accelerator. We are beginning to see our passing lane. Make no mistake we are clear-eyed about the public health and economic crisis on the ground and are doing what’s right to actively support our employees, partners and communities and we are mindful of how important it is for the company to have extra buffer for the uncertain future, but we are also not blind to the opportunities being unlocked to accelerate a new era for real estate. We are not alone in this endeavour. We are leaning into lead, working closely with our partners and industry leaders to move the entire category forward and ensure that no matter what happens in our world we can assure our customers that real estate is always on to help them move safely into life’s next chapter. We are ready. Our customers are ready. Time is now. Thank you for your partnership and support of us in these unique times.I will now turn over the call to Allen to walk you through Q1 results and Q2 outlook and then we will take your questions.Allen Parker Thank you, Rich. I am going to summarize the few key financial results from the first quarter before discussing our outlook for Q2. Overall, we are pleased with our Q1 results as we met or exceeded our revenue and EBITDA outlook both in total and for each of our segments despite headwinds in March because of the coronavirus pandemic. We reported Q1 consolidated revenue of $1.1 billion, up 148% year-over-year. The outperformance in revenue was due primarily to strong sales execution in our home segment. Our enhanced resell strategy accelerated home sales to the highest velocity realized in our Zillow Offers business since inception and did so without sacrificing unit economics.Our consolidated EBITDA outperformance was driven by stronger than expected leverage from operational rigor in all three of our segments. It was great to see IMT segment revenue, including our Premier Agent revenue return to double-digit year-over-year growth in Q1 while substantially expanding IMT segment EBITDA margin. We accelerated revenue growth for the IMT segment and for Premier Agent revenue from 6% year-over-year growth in Q4 to 11% year-over-year growth in Q1.IMT segment revenue was $331 million in the first quarter at the high end of our outlook even with the impact from discount provided to our partners. We estimate that a delayed revenue headwind from the previously announced flex testing reduce our Premier Agent Q1 year-over-year revenue growth rate by approximately 460 basis points. IMT EBITDA margin expanded more than expected improving by 540 basis points year-over-year, which includes approximately 160 basis points of net benefit from unplanned costs and revenue actions in response to the coronavirus outbreak. It’s also important to note that this quarter faced a 290 basis point headwind from favorable one-time benefits in Q1 2019 EBITDA margin. The underlying inputs that we see in our IMT businesses give us confidence that when we exit this current period of economic uncertainty, we are well positioned to come out competitively stronger.Homes segment revenue increased $641 million year-over-year to $770 million exceeding our outlook. Average return on homes sold before interest expense was a profit of $140 per home or 4 basis points as a percentage of revenue. This is up from a loss of 48 basis points in Q4 2019 and within our expected range of plus or minus 200 basis point guardrails we have provided. As we have said in the past, we expect unit economics to fluctuate within this target range and we are pleased with our Q1 results, especially in light of the circumstances. Home segment EBITDA loss of $75 million was also better than our outlook as both gross profit and operating costs were better than expected.We continue to make progress on building out our mortgages segment. Despite unprecedented volatility in interest rates that pressured our margins on the resale of mortgage loans, our experienced mortgages team delivered better than expected EBITDA due to nimble product and operational focus. As we have stated on previous earnings calls, my focus as CFO continues to be establishing processes and mechanisms in support of three key priorities. Those priorities are