Zillow Group, Inc. Q4 FY2021 Earnings Call

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. 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.

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.

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. 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 offline 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 three years ago, we shifted strategic focus from a purely ad-based business model to one that expanded our focus down-funnel to the transaction itself. This marked our transition from Zillow 1.0 to 2.0. Over the past three 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. To us, it's painfully clear that customers deserve 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 one 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 from 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 total addressable market 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, 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 being 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 that make up a formidable investment in R&D, reflecting our belief in the opportunity ahead. In 2021, we quadrupled 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 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 that the transaction conversion rate of a customer who requests a tour on Zillow is three times 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 one-third 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 3.5 times 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, one on the buy side and one on the sell side, which results in a 12.2 million customer transaction total addressable market. 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 two-thirds 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 one-fourth 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 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 three 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, we will have 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 hands 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 their 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 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 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 I'm 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 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've 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. 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.

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 respectfully 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 of 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 the end of Q3 will more than cover the realized losses on inventory, operating costs and the cash portion of restructuring costs 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 rental 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're 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. 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 projections. The model is quite simple: industry customer transactions times transaction share times average revenue per customer transaction for our PA, ZHL, and VCS services, added to other services and marketplaces revenue that includes rentals, new construction, mortgage marketplace, and real estate industry services. It's important to note that we are assuming no growth in overall existing home sales from 2021 levels and only 3% annual appreciation for the industry. This is not a macro call we are making on our outlook. It is merely the approach we took to look at how we can drive strong secular growth. Simply put, we expect to grow our share of customer transactions from 3% to 6%, which should drive over 700,000 customer transactions annually. We have a good understanding of our customers' key pain points and are focused on executing better connections, touring, mortgage approvals and expanding seller services. By better meeting their needs, we expect our customers to remain engaged deeper into our funnel, which should double our market share and also drive higher revenue per transaction via the expanded services. This model implies a 24% revenue CAGR, yielding our 2025 targets of $5 billion in annual revenue and $2.25 billion in EBITDA, which equates to a 45% EBITDA margin. We expect margins to scale with our revenue while we continue to invest prudently where we see opportunities to drive growth. As we look forward, our priorities remain focused on innovating and executing on behalf of our customers and partners. We plan to: grow our customer engagement through a compelling dream and shop experience; deliver a more integrated customer transactional experience to drive customers to choose to transact with us and our partners; invest in sustainable top-line growth opportunities across the company, including new integrated services that are more scalable, less subject to earnings volatility, and more capital efficient; and lastly, manage our cost structure and improve productivity to drive a profitable, scalable, and positive cash flow company. And with that, operator, we'll open the line for questions.

Our first question comes from Brian Nowak of Morgan Stanley.

I have a couple about the multi-year targets. The first one, so the 24% annualized growth on the new $5 billion target, pretty healthy growth. I guess, Rich, I'd be curious to hear, first of all, how you think about some of the keys to execution in the next couple of years to sort of realize that type of growth? And how should we think about the slope to the next couple of years' growth relative to the, call it, the next four? And then the second 1 is, if I do some math on the transactions, it looks like you already have a decent amount of seller-side transactions on the platform. Can you just talk to us again, remind us about where you are on monetizing seller leads and how big of a part is that in the long-term targets?

Okay, Brian. Let me start by giving an overview, and then Allen can provide more details. We've introduced a lot of new information this quarter. We had a great time developing our long-term targets for 2025 and creating a concise presentation that addresses your questions, Brian. It's important to clarify what we mean by our large engaged audience. We've consistently mentioned around 200 million unique users. However, we’ve refined that by concentrating on our app, reporting about 4 million daily users, which is three times more than our closest competitor. The key to growth is simply turning more of those 4 million daily app users into paying customers. Another noteworthy point I mentioned is that last year, 1.4 million homebuyers reached out to us for assistance, but we only achieved a 3% share of customer transactions, which amounts to 360,000 transactions. Therefore, increasing our user-to-transaction conversion is critical. We’ve historically been good at enhancing our transaction penetration through innovation in our products and business models. With our extensive experience in buying and selling thousands of homes, we've developed the necessary support systems. This positions us well to build what we’re referring to as a housing super app, which will integrate and streamline various components of the home buying process in an engaging way. As for the 2025 targets, they include an increase of our transaction share from 3% to 6%. Given our current projects, particularly in tours and mortgage financing, we see this as both attainable and exciting.

Thank you, Rich, and thank you for the question, Brian. I'll begin by discussing our 2025 financial targets as a way to provide more transparency about the exciting opportunities ahead of us and to clarify our current strong position. As we aim for $5 billion in revenue and 45% EBITDA, this goal is based on the expectation that our broader integrated offerings will lead to increased transactions and higher revenue per transaction compared to where we are now. Starting with a total addressable market of 12.2 million customers for both buying and selling, we currently participate in 360,000 transactions and aim to increase our market share from 3% to 6%. Additionally, we hope to raise our revenue per transaction from approximately $4,100 to $5,200. We believe that achieving this will involve more customers using a greater variety of our services in an integrated manner. I would also like to highlight that our 2025 targets include growth in our other marketplace and industry software solutions, from $609 million in 2021 to $1.2 billion in 2025. As we consider the trajectory, we have provided guidance for Q1, emphasizing that our model relies on our ability to foster secular growth by serving our customers and enhancing integration with our partners. There are both short-term and long-term factors at play as we innovate, which we will continue to share regarding how this growth may unfold. Currently, we feel confident about our position, supported by our brand, audience, partner network, and the 1.4 million buyers using our site, alongside our strong financial position and business model that can generate positive cash flow to achieve our 2025 targets.

I mentioned earlier that there was some overlap in our discussion. Regarding the slope in Brian's question, it's about understanding our position in the market penetration and market share S curve. We're interested in whether the journey to 2025 is going to be convex, linear, or concave. My expectation is that once we reach the 6% mark, considering the significant gap between that percentage and our current usage and engagement numbers—where two-thirds of actual buyers are utilizing the site—we will continue to invest in growth wisely from that point onward. Therefore, I anticipate continued growth. I'm not sure what that means for the implications of the curve, but I hope it trends linearly or better. As for the sell-side transactions, you can draw connections based on what we've shared and understand our estimated volume of sell-side transactions that we are currently monetizing. This is a significant segment of the 360,000 customer transactions we estimate. This is primarily because a substantial number of individuals purchasing homes through Zillow and our partners are also selling their own homes, and many of them end up selling through our Premier Agent partners. We already have a solid presence on the sell side of the market, but we aim to improve that and increase our share through additional products and the super app. Thank you for the question, and I apologize for the lengthy response.

Our next question comes from Brad Erickson of RBC Capital Markets.

You mentioned that you're engaging with a significant portion of the buy side compared to last year, with market share around 5%. Can you elaborate on how either MVP or Flex might be helping reduce leakage and the distribution between those two models? Additionally, regarding the seller leads you're aiming to generate, you've previously shared some calls to action planned for the site. Can you provide more details on how you plan to identify potential sellers and any early indicators of progress in that area?

Do you want me to start with the MVP Flex transaction, Rich? Thanks, Brad. I'll take the first part of the question.

Sorry, I was on mute, yes.

Okay. So I guess how I would describe it, Brad, is that we feel like we have a very strong Premier Agent partner network both across our MVP and our Flex models. Flex, in and of itself, is not a driver for transactions, but it is a driver for better alignment between ourselves, our customers, and our partners, we feel. And so we will continue to innovate and iterate on ways to align our partners with our products and services and our customers in ways to generate more transactions, higher conversion, and more revenue per transaction. So we're very pleased with where we are, both on the MVP and Flex model. And I wouldn't call one or the other out as the biggest driver of the journey to the 2025 targets. But I think the key is alignment. And as Rich mentioned, the more integrated transaction with tools that serve our customers well and also sort of our partner network flow.

In response to your second part, Brad, we’ve come to understand something quite intuitive. For instance, Ford's Super Bowl ads won't promote selling your current car. Instead, they focus on marketing the dream of having a new car with a big red bow in the driveway. The same concept applies to housing; the inspiration and aspiration lie in the new place. Our best opportunity to generate seller leads is by helping people envision their new home. We're already making progress in that area, converting it into some sell-side business today. We also recognize that addressing the challenging yet necessary aspects of the super app related to selling a house is crucial, and we're dedicated to developing creative solutions for that. As you know, we conducted a significant experiment with iBuying, which has provided us with valuable insights, and we're planning to conduct further tests while collaborating with partners to ensure we offer compelling solutions to tackle this problem.

Our next question comes from John Colantuoni of Jefferies.

Wanted to start with the housing market. Maybe you could just walk us through what you're seeing today from a macro perspective and how your outlook for the housing market over the next 3 years ties into your 2025 targets. And second, you outlined plans to increase the 1.4 million homebuyers who tried to connect on Zillow last year, which is already an impressive figure. One of the initiatives you mentioned is developing asset-light seller solutions by leveraging your learnings from iBuying. Given the seller side, it's been more elusive for Zillow in the past, can you provide any specifics around the products that you're planning to roll out that will help bolster seller connections?

Okay. Hey, John. I'll start with the macro stuff and maybe Brad can jump in if I get anything wrong. I realize that we're in a particularly interesting macro environment, given the high level of uncertainty. We are well aware that it's more uncertain than usual. However, our economists are forecasting a strong macro environment and a strong housing market this year following a very strong market in 2021. In fact, I think we saw the highest number of transactions since 2006, right, Brad? Am I getting a nod?

Correct, yes.

Thank you. I want to make sure I'm accurate. Last year didn't feel that way because inventory was extremely low, and it remains low, but that doesn't imply a lack of transactions. Our economists are indeed factoring in the heightened uncertainty. What's fueling this strength is the increasing influence of millennials. This demographic shift is impacting the industry, and combined with supply that isn't keeping pace, we believe this will continue to be a robust market. Did I express that clearly?

Yes. I want to add that our Q1 guidance takes into account the macro uncertainty mentioned earlier. The decline in new sale listings, high occupancy rates, and reduced builder inventory are all reflected in our Q1 guidance. However, we are still experiencing strong demand signals on our site and significant interest from our partners, with minimal churn. We believe we are well positioned to pursue opportunities on the path to our 2025 targets by focusing on the customer, enhancing our partner network, and providing them with tools. We consider our 2025 targets to be ambitious yet attainable through the strategies we've discussed. To clarify how the macro environment affects our 2025 targets, I want to emphasize that our financial projections are based on flat industry transaction assumptions, meaning no growth in industry transactions and low single-digit home price appreciation assumptions. Our model and the key performance indicators we've established are rooted in our potential to innovate and integrate our services, driving sustainable growth based on a strong foundation.

Okay. What Allen mentioned regarding low single-digit 3% home price appreciation and flat transactions is not a macro prediction we are making; it is simply for modeling purposes. That figure compares to a 9% compound annual growth rate since 1971. Additionally, I want to emphasize that amid all this macro discussion, which is relevant for understanding our businesses and the economy, the significant change we are experiencing is the transition from traditional offline methods to online digital approaches, with us at the forefront. This transition is crucial for our long-term results from a macro perspective.

Our next question comes from Mark Mahaney with Evercore ISI.

I want to revisit the 2025 outlook because I appreciate the ambition you and the team have set with these long-term goals. One assumption that stands out to me as particularly bold is the 6% share of transactions. While it is an increase from 3%, it represents a doubling from what you reported in 2021. Could you elaborate more on that? The other assumptions don't seem as challenging, but this one does. It would be helpful to understand the historical context of that 3% figure from 2021 and what strategies you see as the easiest and hardest to implement to achieve that growth from 3% to 6%. This metric seems crucial to achieving your $5 billion outlook.

Mark, I'll begin, and Allen, feel free to chime in. When we break it down into its parts, I find it quite attainable, Mark, and I firmly believe in ambitious goals. I'm not sure I would classify this as a big hairy audacious goal. It is certainly bold, but these objectives often become self-fulfilling due to the creativity they inspire among our talented team, along with the resources at our disposal. I'm optimistic. One relatively easy win we discussed is improving our conversion rates by capitalizing on our position in home touring and creating a digital home tour reservation system. Currently, scheduling a home tour is quite complicated, which leads to a significant amount of home tour requests going unfulfilled. I'm not sure what the specific statistic is on that, Brad.

Yes, we are currently fulfilling 23% of our tours, and there are significant opportunities to increase that number. Additionally, we achieve about double the conversion rate on tours compared to our other leads, so enhancing our tour offerings will be crucial in improving our conversion rate.

I think in my script, I mentioned the conversion three times, Brad. I'm not sure, but

Sorry, correct. You're correct, Rich.

Yes, we see three times the conversion rate when we connect a partner with a customer on a tour. It’s clear that integrating this into the Zillow super app experience could boost our transaction conversion rates. Another area is financing. I've discussed mortgages extensively. Our focus has been largely on iBuying, with our efforts directed toward Zillow Home Loans and establishing our own mortgage operation to support iBuying. However, we haven't concentrated on the larger opportunity, which is distributing a mortgage product directly to our customers and through our Premier Agent partners. We are confident that during this period, we can grow our partner network into a distribution network for our mortgage, seamlessly integrated into the super app. This integration is essential as it serves as an important step in the home-buying process. We aim to have it integrated into the super app properly. While there is much more involved in reaching that 6%, these are two significant factors.

Yes. And the only thing that I’d just, I guess, reiterate, you talked about some of the features and services that we think are going to improve conversion. But starting with this 25% of homebuyers already asking to speak to an agent. And so those being customers that have raised their hand is a great starting point. And that's only being one in four right now gives us confidence that these services and improved features of integration should give us quite a bit of leverage as we go through and grow this transaction count.

Our final question comes from Ryan McKeveny of Zelman & Associates.

I appreciate all the detail, all the new stuff, and Rich, I agree with you, shout-out to the designers and marketing folks and data folks, the content of the deck is very good, so I appreciate that. But back to my question. So I’ve got two on the long-term opportunity. First one, somewhat similar to others, so focusing on this movement from 3% market share to 6% market share. Maybe I'll ask a bit more in terms of how we can look at the past to possibly help think about the future. So Slide 7, you show 360,000 transactions in 2021 on 1.4 million connections, so about a 25% conversion rate. Can you share any insight on how that conversion rate from connection to consumer or to customer compares to maybe the last 2, 3, 4, 5 years? I’d imagine both the number of connections as well as the conversion rate has improved over time. But maybe seeing a bit of a trend line there on how things have trended will help us bridge to what to expect in the future.

Allen, do you want to take a stab at that?

Yes, I would say that when we decided in 2018 to deepen our involvement in the transaction, we began to examine how we could enhance transactions and success for our customers. A good way to illustrate this is through the concept of connections. Since 2019, we've noticed an increase in our ability to drive connections and conversions via our partner agent network. While I don't have specific comparisons to the figures mentioned, we have seen growth as we prioritized connecting our customers with agents and ensuring they received good service. We've discussed our focus on connections, high-intent customers, and the measures we've implemented to facilitate transactions, moving away from the more ad-based or lead-generation approach we used prior to 2019. Brad or Rich, do you have anything to add? I lack the data for further details.

It has taken considerable effort. Ryan, as we've mentioned before, our shift to Zillow 2.0 and the emphasis on transactions has been a focus for several years. It has taken us this long to even identify a transaction to count, due to the diversity of our business model. One significant reason we lack a strong historical comparison for you is simply that we don't have past data to compare against. We have been diligent in creating this estimate to effectively communicate our position, and this approach is how we intend to manage our business and strategy internally. It's crucial for us to get this right. As Allen noted, the company's history has involved gradually improving conversion rates from users to customers, and we believe we now have a solid basis for that measurement.

That makes sense. I have a quick follow-up question. Rich, looking at the bigger picture, after the Zillow wind-down, you have a considerable amount of cash which allows you to concentrate on growth, continue buying back stock, and invest in research and development. Regarding M&A, I'm curious about your perspective on being more active in proptech investments, whether through direct investments in early-stage proptech startups or by acquiring companies outright. Is there a chance for your company to act as an incubator? You likely encounter a lot of interesting technology in the early stages and I'm interested in your thoughts on the potential for this opportunity and the overall M&A possibilities to integrate valuable technology over time.

Yes, it's an opportunity. Historically, we have been consistent yet opportunistic acquirers. When we find chances to enhance our strategic goals, we seize them. The ShowingTime acquisition last year exemplifies this. A few years ago, we acquired Mortgage Lenders of America to avoid starting our mortgage operation from scratch, which was another significant move. Jeremy Hoffman, who oversees our corporate development group along with strategy and investor relations, is quite well-known in the proptech space. We engage with, test, and partner with various companies in this field. While we don't have a dedicated corporate venture capital initiative, we see plenty of opportunities. We don't believe we necessarily need to invest directly since we often receive offers first. While I don't want to come off as overly opportunistic, we maintain strong relationships with these companies and see a lot of promising innovation occurring.

I'll now turn the call back to Rich Barton.

Thank you all for joining us. As I mentioned at the end of my prepared remarks, the real estate industry is truly fun and endlessly interesting, perhaps not as entertaining as Netflix, but close. We are excited to be on this journey with you, and we look forward to speaking with you soon. Thank you.

This concludes today's conference call. You may now disconnect.