Zillow Group, Inc. Q2 FY2023 Earnings Call

Good afternoon. My name is Elliot and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group's Second Quarter 2023 Conference Call. Please note this event is being recorded. And I would now like to turn the conference over to Brad Berning, Vice President, Strategic Affairs and Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Zillow Group's second quarter 2023 conference call. Joining me today to discuss our results are Zillow Group's Co-Founder and CEO, Rich Barton; CFO, Jeremy Hofmann; and COO, Jeremy Wacksman. During today's call, we'll make forward-looking statements about our future performance and operating plans and the housing market 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. The 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. We will now open the call with remarks followed by live Q&A. And with that, I will turn the call now over to Rich.

Thank you, Brad and thank you, Elliot. Good afternoon, everyone. Thanks for dialing in today. We're excited to share our second quarter results and speak to the progress we've made on our growth strategy since we last spoke in May. You've heard me say many times that 2023 is a crucial year for Zillow. As the year progresses, we're pleased with what we've accomplished thus far. Second quarter revenue of $506 million surpassed the high end of our outlook by $27 million and returned to slightly positive year-over-year growth. EBITDA of $111 million surpassed the top end of our outlook by $30 million. This outperformance compared to our outlook continues to be driven by a combination of progress we've made since reorienting the company in early 2022, our focus on cost management and relative macro tailwinds as we navigate the ongoing poor housing market. As we share the results with you this quarter, we are particularly pleased that our residential revenue outpaced the broader real estate market decline of 22% and by 1,900 basis points, marking four consecutive quarters of outperformance. As you will recall from the investor deck we shared in early 2022, we believe approximately 25% of all actual U.S. homebuyers sought a Premier Agent partner in the previous year, yet we estimated that only 3% of home buyers and sellers ultimately transacted with us, a significant opportunity gap to be bridged. Our solution focuses on growing customer transaction share via the Zillow Housing Super App. Our big strategy bet with the super app is that customers and partners alike want and need a much more digital, convenient, and integrated housing transaction, and that Zillow is likely the only company in the industry with the technical skills, audience reach, and partner network to pull it off. We are clearly making progress on this long runway growth strategy. We will continue to invest and prioritize a steady drumbeat of features and services for both customers and partners which should set us up for long-term profitable growth. Our super app investment is reflected in five growth pillars we regularly discuss, but it also shows up in the core day-to-day work which results from having our 6,000 employees oriented around the same goal: to increase our share of customer transactions. Since we have made transactions such an important focus, we have learned a great deal about our customer experience, far beyond what we ever knew when we were purely a lead generation-focused company. We've spoken before about the significant investments in improving our customer funnel. We are making numerous incremental improvements in an effort to capture more customer demand and connect more of that demand to our partner network, which has resulted in better-than-expected connections in Premier Agent. Additionally, we continue to see significant value in giving more customers the option to tour homes as the key call to action on our apps and sites, which is also driving this relative outperformance. One additional boon to us is that first-time homebuyers make up a larger relative share of buyers in the market today. This benefits us because we have a richer mix of first-time homebuyers. Before someone is a first-time home buyer, they are often a renter. With over 11 million rental households moving each year, we continue to invest in Zillow's rental marketplace to integrate and streamline the experience while driving customer preference for Zillow's rental products. We are building a comprehensive marketplace of rental listings and integrating an experience that guides renters through completing their rental transactions and supporting subsequent interactions with their landlord or property manager. Rentals revenue grew 28% year-over-year. This growth was driven by organic efforts, signing up more multifamily properties, and attracting more single-family listings with limited marketing dollars. In May of last year, Zillow regained its spot as the number one most visited rentals platform according to comScore, and we have widened our lead since then, putting us in a strong position for future revenue growth. We intend to differentiate our marketplace based on the quality of experience, building out a one-stop suite of landlord tools to attract unique supply while simultaneously investing to deliver a more seamless housing super app experience for rentals customers and partners. All of the positive performance we've seen across our business this quarter is supported by a healthy top-of-funnel relative to the weak housing market and consistent organic traffic to our apps and sites. From our earliest days, we prioritized the product itself as the most critical part of the marketing mix, delivering product innovations that empower and serve our customers. Our product-centric approach has served us well, driving favorable word-of-mouth marketing and strong brand recognition. Currently, more than 80% of our traffic comes directly to us, which is rare and favorable. Another critical belief we have that underlines our housing super app strategy is the importance of our mobile app as the key interface for our customers. We were an early mobile developer back when the iPhone was released in 2007 and have been investing ever since. As a result, nearly half of our business today operates through our beautiful Zillow app, where people dream, shop, buy, sell, rent, and finance. This has made us the leading real estate app in the U.S. according to comScore. The direct branded relationship we maintain with our customers will serve us well into the future. We spoke last quarter about how we're thinking about AI and its potential to influence how people use digital services to accomplish countless tasks in their lives. While the initial wave of splashy headlines playing on AI hopes and fears have waned a bit, our belief in its importance for our future has not. We are energized about AI's potential to drive efficiencies and improve the experience of our customers, our Premier Agent partners, our loan officers, and our employees. Understanding the opportunity here, we've deployed several work streams across the company to improve the experience for all four of these key constituencies. Today, we are in the rapid exploration phase and we already see how AI will be fundamental in accelerating our business. Before I talk through the progress we've made in the last quarter on our product roadmap, allow me to rearticulate the goal of Zillow's housing super app strategy: to increase engagement, customer transactions, and revenue per customer transaction by investing across five growth pillars: touring, financing, seller solutions, enhancing our partner network, and integrating our services. The expected outcome of this strategy is to grow our share of customer transactions from 3% to 6% by the end of 2025. We continue to emphasize that 2023 is a year of execution. Through midyear, I am pleased to report that we have been steadily rolling out products and services across our five growth pillars and integrating them to create an increasingly seamless experience for customers and partners alike. To begin our product roadmap update, I'll start with financing. This remains an important investment for us for obvious reasons. Nearly 80% of homes purchased are financed with a mortgage; 40% of all homebuyers start their journey shopping for a mortgage; 80% of those don't yet have an agent; and almost all of those mortgage seekers use Zillow. We are building the foundation for a substantial first-party direct-to-consumer mortgage origination business, seamlessly integrated with our extensive Premier Agent partner network. We've spoken about the two ways in which customers connect with Zillow Home Loans: property first and financing first. I'll start with financing first, as the entry point for Zillow Home Loans, which is when customers start their moving journey by getting prequalified before they are connected to an agent. We are making good progress on integrating our mortgage experience into the Zillow app, helping customers better understand what they can afford and easily get preapproved before they meet a Premier Agent partner. Additionally, we are continuing to refine our ability to connect our transaction-ready customers to one of our ZHL loan officers as quickly as possible. Lastly, we are building tools for our loan officers to make their experience easier when working with customers. All of this work is resulting in higher loan officer efficiency and a better overall customer experience. I'll now switch over to the property first entry point, which is when our Zillow Home Loans lead comes back to us from a Premier Agent partner who is working with a home shopping customer we had previously sent them. Here, we are focused on building great technology for our Premier Agent partners and ZHL loan officers to bolster efficiencies and ensure a quality transaction experience. Consistent with last quarter, we are seeing roughly one in three Premier Agent partners in our enhanced markets connect customers to Zillow Home Loans, up from roughly one in five in Q4 2022. Suffice it to say that we are working hard on our financing growth pillar and a deep integration of Zillow Home Loans into our customer and partner experiences. I'm pleased to share that as a result of all our efforts, we are reporting 73% year-over-year growth in purchase loan origination volume and 30% growth sequentially from Q1, all in the context of a challenging mortgage market. I'll now speak about touring, which continues to be one of our big bets because our data shows that movers who request a tour convert to buyers at three times the rate of other actions on Zillow. This past quarter, we've continued to iterate and improve our real-time touring products. We began by shipping new software across the industry that enabled real-time touring functionality. We then began to train our Premier Agent partners to activate real-time touring on a market-by-market basis, allowing eligible buyers to get a tour confirmed quickly with much less friction. I'm pleased to share that we've now rolled out real-time touring in all six of our enhanced markets, including Charlotte and Durham. Further, to accelerate the rollout of real-time touring, we've begun launching outside of our enhanced markets, including four additional locations this quarter. As we continue to invest in product improvements to enhance the experience, for example, agents now have expanded self-service tour management capabilities at their fingertips, including the ability to reschedule or view subsequent tours in the ShowingTime app and book multi-property tours. These incremental improvements contribute to a meaningful upgrade from the outdated method of phone tag still being used by many customers and agents to schedule home tours. Real-time touring, combined with other initiatives in our enhanced markets, is improving our funnel and driving meaningful improvements to our ability to connect higher-intent customers to our Premier Agent partners, contributing to the enhanced market outperformance that Jeremy will discuss in more detail shortly. I'll now move on to the final pillar of our product roadmap update, Seller Solutions. We're working to provide sellers and listing agents with tech-enabled products and services that make it easier for people to move. Last fall, we began talking about our product we're developing to differentiate listing agents on Zillow through branding and higher quality listings that look unlike anything else that exists in real estate today. I'm pleased to share that in June, we launched listing showcase by ShowingTime+ in select markets. We're excited about this product for several reasons. First, by targeting sellers and listing agents directly, we are expanding our serviceable addressable market, increasing our opportunity to grow customer transaction share and diversifying our business model. Second, it's great for consumers, buyers, and sellers alike. Listing showcase offers sellers a differentiated listing experience that rises above the rest, giving buyers richer tech-enabled insights into the home's layout and features. Finally, it's giving agents across the industry, not just Premier Agent partners, an opportunity to elevate their professional brand to help them win more business. It's early days, but we are optimistic. Initial feedback and demand have been strong from listing agents across the industry who are eager to learn and experiment with this innovative new offering. We plan to roll out to more markets over the course of this year and will provide more details in the coming months. We've also made progress on our other selling solutions offerings; our partnership with Opendoor allows sellers on Zillow to request a cash offer from Opendoor, which is live in 25 markets today, compared to the two markets we launched initially in February. As I reflect on the progress we're making in the business, I am pleased with how we have managed even as so much remains out of our control. Mortgage rates are staying higher for longer than previously expected and continue to be volatile, resulting in potential sellers hesitating to move due to their attractive legacy lower-rate mortgages. This is having a more pronounced effect on sales volumes during the typically strong summer moving season. Demand has held up better than supply, driving inventory to record lows and supporting prices despite affordability challenges. With low existing home inventory, the new construction is a bright spot, adding new supply to help meet some of the demand and growing the overall housing stock. Our new construction marketplace experienced strong growth again in Q2. Additionally, the rental market is adding record levels of new supply, which have lowered occupancy rates and driven landlord demand for rental advertising, contributing to 28% year-over-year growth in rentals revenue for us this quarter. The housing market outlook continues to be frustratingly unclear, and we can only anticipate that it will take time to normalize. Volumes remain stubbornly low, but we continue to have confidence that this is not some new normal and that we will return to approximately 6 million units a year over time. To close, I'll reiterate how pleased I am with our progress this year. We're navigating well through a tough housing macro environment that is beyond our control, maintaining our focus on what we can control, steady progress across our growth pillars, and prudent cost management as we work towards driving profitable growth for our business. With that, I will now pass the line over to Jeremy Hofmann, who many of you already know from his six-year tenure at Zillow, which saw him rapidly increase his leadership scope to include corporate development, strategy, business operations, investor relations, government relations, and now as CFO. Welcome to the microphone, Jeremy.

Thanks, Rich. Great to be on the call with you all and looking forward to connecting in the coming weeks and months. Given this is my first earnings call, I want to set the table for what I'm going to cover. First, I will go into additional details about our Q2 results and our Q3 outlook for continued strong relative outperformance versus the real estate industry. Then I want to provide new transparency on our cost structure and how we plan to manage costs going forward, including share-based compensation, with our intent to be a profitable growth company. Last, I will provide some clarity on our capital management strategy, including plans for further improvement to the quality of our already strong balance sheet. In Q2, we delivered total revenue of $506 million, $41 million above the midpoint of our outlook. This revenue outperformance drove $40 million of EBITDA outperformance as well. Our costs were in line with our expectations and we were able to flow revenue through directly to EBITDA, showcasing the high incremental margin business that we have today. Total revenue returned to positive year-over-year growth, albeit slightly, compared to the $504 million we reported a year ago. On a GAAP basis, net loss was $35 million in Q2 and net loss as a percentage of revenue was 7%. EBITDA of $111 million resulted in a 22% EBITDA margin. Residential revenue was $380 million, down 3% year-over-year, outperforming the high end of our outlook range. Our residential revenue performance was 1,900 basis points above the industry decline of 22%, according to data from the National Association of Realtors. Our relative outperformance continues to be driven by delivering a better-than-expected number of customer connections to our Premier Agent partners and favorable tailwinds relative to the industry that Rich discussed earlier. We estimate that over the past few quarters, approximately half of our outperformance has been driven by actions taken by us and approximately half has been from relative macro influence. As Rich discussed, our ongoing investments in our top-of-funnel and mid-funnel experiences are paying off. Rentals revenue increased 28% year-over-year. Rentals traffic grew 15% year-over-year to 31 million average monthly rental unique visitors per comScore. This industry-leading rentals traffic drove 21% year-over-year growth in the number of multifamily properties on our apps and sites. We continue to see industry tailwinds with occupancy rates declining from historically high levels, underscoring the need for landlords to advertise their vacant rental properties with us. Mortgages revenue was $24 million, with purchase loan origination volumes growing 30% sequentially from Q1 and 73% year-over-year. Further, total origination revenue returned to positive year-over-year growth as we lap the slowdown in refinance activity from early 2022. In Q2, we delivered a 50% increase in loan officer productivity compared to Q4 2022 based on the number of locked loans. We are adding new tools and capabilities for customers, agents, and our loan officers that we expect to drive further efficiency improvements in the quarters ahead. Given this progress, we plan to increase our number of loan officers in the coming months while we closely monitor operational efficiencies. New construction revenue growth was also strong during Q2, increasing 18% year-over-year as customers turn to new construction homes given the limited existing home inventory. Earlier this week, we also announced that Zillow will be the exclusive provider of new construction listings content on Redfin, and we look forward to serving our mutual customers. EBITDA expenses totaled $395 million, in line with our Q2 outlook with the cost of revenue slightly higher than expected, primarily due to higher revenue, and select operating expenses slightly lower as a result of favorable headcount and advertising expenses. It is worth noting that share-based compensation expense for this quarter was $130 million, up from $103 million in Q1. Approximately $17 million of the sequential increase was driven by the impact of departing personnel and the impact of our March 2023 annual employee grants. We ended Q2 with $3.3 billion of cash and investments, down slightly from Q1, which includes the benefit of net cash provided by operating activities, as well as the impact of $150 million in share repurchases during the quarter. Convertible debt was $1.7 billion at the end of Q2. Turning to our outlook for Q3. We expect total revenue to be between $458 million to $486 million, implying a year-over-year decline of 2% at the midpoint of our outlook range. We expect residential revenue to be between $339 million to $359 million, down 6% year-over-year at the midpoint of our outlook range, as compared to our estimate for an industry transaction dollar decline between 15% and 20% year-over-year in Q3. Note that we expect a total industry decline of 17%, and at the midpoint of the range to nominally improve compared to the Q2 decline of 22%. Homeowners locked into their current mortgage rates are impacting the normal seasonality of move-up buyers who typically move between school years. Despite the challenging macro environment of higher for longer mortgage rates, we expect to continue to outperform the industry in Q3. We expect the investments we've made in our funnel to continue to bear fruit in Q3 while experiencing less relative macro tailwinds than in previous quarters. For Premier Agent, we estimate revenue will decline between 4% to 9% year-over-year. As the macro backdrop remains inconsistent, we continue to focus on the inputs we can control, adding value to our customers and shipping great products and services. Despite the tough macro existing home sales environment, our customer connections with Premier Agents have been nearly flat year-over-year for the combined past two months. That said, we do remain cautious that buyers will find it difficult to buy homes with such low inventory levels, and our outlook reflects this dynamic. For Q3, we expect EBITDA to be between $67 million to $87 million, implying a 16% margin at the midpoint of our outlook range. Consistent with the outlook that we provided at the end of Q1, we expect Q3 EBITDA expenses to be flat compared to Q2. We are announcing today that we closed on the acquisition of ARIA, a leading software provider to real estate photographers across the country. ARIA's platform capabilities and network of third-party real estate photographers will help enable us to scale ShowingTime's listing showcase product. Separately, in late June, we announced the sunsetting of Zillow Closing Services, as it did not have the tech-forward and integrated product we believe customers and partners need, having originally been built for our iBuying effort. That said, integrating the real estate transaction to make buying and selling simpler for customers remains our core strategy. We are actively exploring other title and escrow solutions, and we'll follow up when we have more details to share. Next, as I discussed in my introduction, I want to dive deeper into providing new transparency on a few topics. I will start with our cost structure. Given the uncertain macro environment and the associated challenges with accurately forecasting revenue, we want to be more explicit with investors regarding how we plan to manage our cost structure moving forward. We evaluate costs in three categories: fixed, variable, and advertising. Our fixed cost run rate is approximately $1.1 billion annually. Over the past 18 months, we have forward invested and believe we are currently at the right level of fixed cost to execute on the opportunities we see ahead. Looking ahead, we do not expect to materially expand our current fixed cost structure as we scale our current growth initiatives. Our variable cost run rate is approximately $400 million annually. While we expect variable costs to grow as we scale our business, we intend to drive operating leverage over time as we expand into new product areas and continually seek unit economic efficiencies across the business. We are always searching for efficiencies in our variable cost structure, a skill we have been building for a while now. To that end, I wanted to share a few examples. I already mentioned that Zillow Home Loans loan officer productivity improved 50% from Q4 of last year. We've also improved our Premier Agent cost per connection by 29% since 2020. Lastly, our cost per floor plan annotation on our virtual touring technology has decreased by 78% since the beginning of 2022. These are just three of many examples we have of ensuring that we are getting increasingly efficient with our variable cost base. Next is advertising. We believe we have been effective users of advertising dollars for a long time and have adjusted spend depending on the environment and opportunities we see to build awareness and drive growth. We will continue to assess advertising levels with that same perspective, separate and distinct from the rest of our fixed cost base. Another important part of our cost structure is share-based compensation, which we manage on a cost per employee basis while closely monitoring dilution. We recognize that share-based compensation as a percentage of revenue has been high recently, as macro housing weakness is pressuring revenue, at the same time we are forward investing to drive future growth. Going forward, as we manage our fixed headcount and deliver on our strategic revenue growth plans, we expect to leverage our share-based compensation to enable investors to see GAAP profitability over time. Additionally, we would expect those same factors to result in a higher share price that would also further limit dilution. We believe deeply in aligning our employees' incentives with our shareholders, recognizing the importance of managing dilution along the way. Now turning to our capital structure. We have a strong balance sheet with cash and investments of $3.3 billion and net cash of $1.6 billion as of the end of Q2. We also have $1.7 billion of convertible senior notes which include our 2024 and 2026 that are callable when our stock price exceeds $56.56 per share for a specified trading period. To the extent our Class B share price rises above those levels, we may redeem those notes. If we do, it is our expectation that we will settle the $1.1 billion principal amount on the notes due in 2024 and 2026 in cash and settle any conversion premium in shares of Class C capital stock. Based on what we know today, we do not expect to engage in the convertible markets to refinance any of our outstanding notes. Instead, we expect to be in a position where we have no outstanding debt on our balance sheet as these notes mature or become callable. We also announced today that our Board has approved an additional $750 million capital repurchase authorization, bringing our total available authorization to just over $1 billion when combined with our existing authorization of $264 million. In aggregate, we have repurchased $1.5 billion worth of shares and authorized $2.5 billion worth of shares since the inception of our buyback program in late 2021. Going forward, we will continue to maintain some cash for risk management purposes, some cash for potential inorganic and organic investment opportunities, and opportunistically consider share repurchases from operating cash flow. Now I'm going to give an update on our transaction share in our enhanced markets. In early 2022, we shared our strategy to capture what we continue to believe is a significant opportunity to drive growth by moving down funnel and focusing on the housing transaction itself. This includes our plans to increase our share of customer transactions and revenue per transaction. We believe we are making good progress and have the right products in the pipeline to be successful. As evidence, while we called out the industry decline of 22% in Q2, our national connection volumes are nearly flat year-over-year on a combined basis over the past few months. Furthermore, in our four enhanced markets, we are seeing significant year-over-year connections growth. While we are still in the early days with product rollout, I am pleased to share that in Q2, we saw a 50% year-over-year customer transaction share growth in Phoenix and Atlanta, which are our most mature enhanced markets. To date, we believe this strong performance is driven by a combination of partner selection, early success in real-time touring and financing buoyed by the relative macro tailwinds we are seeing across the business. We think this is good evidence that gives us confidence to roll out more enhanced markets, which we announced today. As more data becomes available, we will continue to share. It is important to point out that while we are working on our big future growth drivers, we have delivered meaningful revenue outperformance compared to the industry for the last four quarters and expect to do so again in Q3. This evidence shows that we are gaining share after a challenging first half of 2022. As you have all heard from us before, 2022 was a year when we restrategized and reorganized around our Housing Super App vision. 2023 is a year for us to release new products and test in various markets, setting us up for further scaling in 2024 and 2025. Halfway through the year, we are pleased with how 2023 is progressing, though we have much work ahead. As we look forward, my top priority as CFO is to ensure that Zillow is a profitable growth company, resulting in outsized value for our shareholders. And with that, operator, we'll open the line for questions.

Our first question today comes from Lloyd Walmsley with UBS.

It's Katie on for Lloyd today. Just a quick question on the Opendoor partnership. Last quarter, Opendoor announced that your partnership has been launching in five markets. I know you guys said two in February. Now we're at 25. Is there any update on the rollout and progress you're seeing so far? Any color you guys can give us there?

This is Jeremy Wacksman. I'll take that one. Yes, as Rich talked about earlier, we're now live in 25 markets, up from the two in February. On top of that, in our Seller Solutions growth pillar, we just announced and have launched listing showcase by ShowingTime+ in select markets. So we're really pleased with the expansion and coverage of our seller solutions. As Rich talked about, we're increasing our serviceable addressable market to the sell-side and sellers who become buyers, as well as accessing more types of agents, not just from your agents and listing agents, across those solutions. So more to come in the future quarters, but we're pleased with the continued progress there.

I just had a couple. The first, you obviously talked a lot about the share gains in the letter and here in the prepared remarks. Just for what we're seeing right now, I guess, just in the report and the guide, can you just unpack that a little bit more in terms of the factors that you're viewing as maybe a sustainable versus maybe not as sustainable, or at least out of your control? That's the first one. And then second, you called out the accelerating the rollout of real-time touring. Just curious what that does to the mix of leads that you're sending out or if it changes at all? And just curious if that's something we could see contribute to those share gains here going forward. Just talk about the effect of the mix of touring leads that has on the PA business.

Yes. Thanks, Brad. It's Jeremy Hofmann. I'll take the first one and then hand it to Jeremy Wacksman for the second one. Regarding the outperformance, I think, similar to prepared remarks, it's roughly 50% in our control driving the outside share gains and 50% relative tailwinds. On our side, it's a combination of many smaller actions that add up with a funnel that's as vast as ours. We're benefiting from touring as a primary call to action, so the more touring that folks see on the sites and apps, the more it drives our connections and enhances our performance. On the macro side, there are more first-time homebuyers as a mix of all homebuyers. These are the dynamics we're observing. Like I said in the prepared remarks, we expect the macro environment to be less helpful, but we continue to project 1,100 basis points of outperformance at the midpoint. That gives you a sense of how we feel about the investments we're making and our capability to keep improving our funnel. So that's that one, and then I'll hand it to Jeremy for the second part.

Yes. And Brad, on real-time touring, as Rich stated, we've been increasingly exposing tours on Zillow nationally while also building real-time touring in our enhanced markets. Both of those factors contribute to the share gain that's under our control. Nationally, this means removing friction in the funnel, motivating more customers to seek and book tours, and when they want to schedule a tour, making that easier for them. In real-time touring specifically, it's now available in our enhanced markets, which are expanding to more locations, creating a reservation-like system for buyers, enabling them to book a tour more frequently. We continue to refine that product as well. We're expanding our product offerings, including self-service capabilities for agents, which allows them to reschedule and view subsequent tours seamlessly. These enhancements are all based on feedback from customers and partners, and they are central to our product roadmap that we are eager to bring to market. As a result, we are improving our product while scaling and deploying it for more customers and partners.

I wanted to discuss further the expansion into new markets. You mentioned Charlotte and Durham, North Carolina. Can you elaborate on the process of entering these new markets and your thoughts on future expansions? Additionally, Jeremy, I recall you mentioned earlier that the loan officer achieved a 50% increase in productivity compared to Q4 '22. Any insights on that would be appreciated.

Yes. This is Jeremy Wacksman. On the first point about enhanced markets, I won't add anything further than what we announced today; we're adding two more markets to our enhanced markets and rolling those out now: Charlotte and Durham. The second point, I think you mentioned loan productivity.

Loan productivity.

Yes. I mean, it's a combination of a couple of things. One, it's about continuously helping find higher-intent customers. As Rich talked about, we have many mortgage shoppers on our site because 40% of all homebuyers want to start with financing questions, but they're all at different stages. Helping those individuals as they express interest through our personalized payment experience and prequalification system, while ensuring we connect them with the right loan officers, is a major piece of it. On the tools front, we're rolling out products and services that empower our loan officers to operate more efficiently with customers, reducing reliance on multiple systems, and conducting tasks digitally in real-time, all while on the phone with the customer without necessitating callbacks. These elements are improving their effectiveness as consultants and advisers, leading to both conversion and productivity gains.

Okay. Two questions, please. And I'm sorry if you already touched on these. But talk about the puts and takes to getting EBITDA margins. Once we get back into growth mode, hopefully, at some point, the macro and company-specific, hopefully, we get back into that sustained growth mode. Getting EBITDA margins for the business as a whole back up to 30%, 30% to maybe 40%. So the biggest drivers there, what you can control, what you can't? And then, if I could just stick on the enhanced markets. And is there any evidence yet, maybe it's too soon, but is there any evidence in that those enhanced markets that you're actually gaining share of transactions in those markets? Trying to figure out whether there's something we can extrapolate to the rest of the country if you're successful in those markets.

Yes, Mark, it's Jeremy Hofmann. I can answer your first one and probably take your second as well. Regarding the EBITDA margin drivers, we feel optimistic about our ability to elevate those levels as we drive revenue and leverage our cost structure over time. We are making advancements in various areas and believe we have a highly leverageable cost base. As we drive revenue, we expect it will transition directly to EBITDA. You saw that in the performance this quarter—substantial revenue outperformance has flowed through to EBITDA. So we feel optimistic about our ability to achieve the margins you mentioned over time. On the share gains question, I reiterated in my prepared remarks that we saw 50% year-over-year customer transaction share gains in Phoenix and Atlanta, which are our two most mature enhanced markets. So while it's early days, there's a lot of growth potential from here. We are methodical in our rollout of these initiatives, but it reflects that our strategy is proving to be effective even at this stage.

A question on the residential outperformance versus the industry. I'll ask it a bit different way than Brad's question before. So if we isolate the half of the outperformance that's kind of secular, which is the benefits of the changes you've made or some of the newer initiatives, I know you don't speak to the exact breakdown between transactions on the buy side and the sell side. But can you talk to us about how that incremental penetration is trending in each category buy side versus sell side? And I guess is it happening in both areas, or is one of the two aspects driving things more so than the other at this point in time?

Yes, I think on buy side versus sell side, we don't tease it out specifically, especially regarding the incremental which I think is what your question is about. But primarily, most of our transactions to date are buy side. The share gains you're seeing, the relative outperformance you're witnessing is mostly driven from the buy side. As Rich and Jeremy mentioned, we're benefiting from a frictionless experience and higher-quality customers connecting with higher-quality partners, supported by favorable macro trends with the buyer mix. That said, we are excited about potential share gains as we layer in seller solutions, both through our various selling offerings and the experiences we provide our customers by introducing them to an open door offer if they're interested or a Premier Agent partner if they want to use their services. Listing Showcase, which we just launched this quarter, will further enrich opportunities for us. We anticipate seeing increased share and customer transaction growth in both areas over time, although, for now, our efforts, and macro tailwinds appear more concentrated in the buy side.

Ryan, it's a good question. On the fixed cost side, we feel good about the amount of infrastructure we have in place for mortgage. That's to say over the next couple of years. And of course, as it grows, we'll see. But based on the current plan, we feel good about the fixed cost. On the variable side, we will grow costs there because we'll be hiring loan officers, but that's obviously a positive thing so long as we're manufacturing loans profitably. On the fixed side, we feel pretty good on the mortgage side, and then on the overall business, I'd say we believe the fixed cost investment we've made to date should serve us well for the current growth initiatives we have.

Maybe first one for Jeremy H. First off, congrats on the new role. The cost structure commentary, again, super helpful. On the variable expenses, you gave some examples of kind of recent efficiencies and progress. Could you maybe update us on what parts of Zillow's business today represent maybe the biggest opportunity to drive further efficiencies in variable expenses? And then, maybe one for Rich on Zillow Closing Services being sunsetted. Just curious to hear you talk about maybe how you envision Zillow disrupting kind of the title and escrow space. Clearly, there would appear to be opportunities to make it a more transparent, better experience for customers, but just be curious to see how you view Zillow participating there?

Yes, great question. We're looking for efficiencies throughout the business, from our most established lines to our newest products. The biggest opportunities for us in terms of variable efficiencies are indeed the newest products that are still scaling, which include both mortgage and seller services. These areas will likely leverage as we scale. For the others, we're focused on ensuring we maintain efficiency as those products launch. And then I will pass it over to Rich on the second question.

Thank you for including me. Yes. We opted to sunset ZCS now because we don't see title and escrow as critical to the transaction but because we built that initiative for Zillow Offers. It wasn't the right solution with our current vision. I think Jeremy Hofmann mentioned earlier about how we think it's an important area to watch. We're actively pursuing alternatives, so stay tuned for updates as we explore other title and escrow solutions.

Jeremy, I'd like to echo as well, congrats on the promotion and the OpEx disclosures are very helpful. You guys have clearly exceeded your guidance in recent quarters. I'm assuming you've set the stage here again. But the EBITDA, that's always going to hinge on the top line. So I just maybe wanted to double-click on the Premier Agent guidance. Mainly the industry forecast looks like you're baking in a down 15% to maybe down 20% year-over-year. It looks like the NAR is calling for down 7%. Fannie and MBA predict down 8%. So you guys are a little bit out there. I think that year-over-year decline also implies that the market would drop a significant amount sequentially off of what already feels like trough levels at this stage. But my question here is, are you seeing something internally that might signal softer trends from here? Or is that just a conservative approach against the continuation of market uncertainty?

Yes, it's a good question. We guided based on the best information that we have. I think existing home sales and inventory being as low as they currently are puts us in a position to make the best information available to you. We have internal economists that look at this every day. Given the best information we have, our primary focus is ensuring we continue to outperform the industry. We're feeling quite confident about our ability to outperform based on the past four quarters, and we are guiding to outperform 1,100 basis points at the midpoint for Premier Agent in Q3 as well.

Maybe a quick follow-up to Mark and Ron's questions on enhanced markets. Can you remind us what kind of things you're looking at or you're looking to see in locations to expand as an enhanced market? And then as your new products are aging in your first enhanced markets, are you seeing any changes in usage or agent behavior? Any dynamics to call out regarding enhanced market cohorts, if you will.

Sure, thanks, Brian. The factors we look for in our enhanced markets include customer transaction share and the indicators that contribute to that, which include customer engagement and customer-agent engagement rates. These things typically require time to mature, as transactions tend to take a while, but we monitor mid-funnel indicators on both the customer and agent sides. Based on our early observations, we've noted significant year-over-year customer transaction share growth in our two most established enhanced markets, even as we’re still in the early days of capitalizing on the rollout of these capabilities. We're emphasizing quality partners and working with those who can engage more deeply across our product experiences, which include real-time touring, Zillow Home Loans, and seller solutions. We think this approach will contribute to the share growth we've seen, which is why we're confident in escalating the rollout in other enhanced markets while continuing to improve and refine our offerings simultaneously.

First one for Rich. A question on AI. It sounds like you guys are exploring all options right now. But when you look at it from a near-term perspective, where are you most excited about? And thinking of opportunities in the long term?

Yes, got it. We see significant opportunity here. I think the excitement and imagination have sparked from the ultimate user interface opportunity, particularly with generative AI moving towards a conversational user interface. It has the potential to alter the historic dynamics of the Internet and that fascinates us. While we are excited about it, it will likely be a longer lead-time behavioral change. We're aggressively exploring this space to ensure we are well-positioned from an audience, brand, and unique data perspective to seize the opportunity. We are optimistic about AI's potential to improve efficiency for our internal teams, marketing professionals, and even support roles like legal and accounting. We're already noticing productivity enhancements for those field teams working directly with customers, but we anticipate larger gains in the back office to take a little more time. So, it's early yet, but it's definitely an area where we're investing strategically.

How enhanced markets contribute to our ultimate share goals. The way I think about it is it's a combination of national progress and local progress. What you've observed over the last couple of quarters is our overall relative outperformance which has not solely stemmed from the enhanced market advantages or the growth pillars in enhanced markets. Now you are beginning to see the results on a market-by-market basis. As we scale our enhanced market approach to more markets, that should become a substantial contributor to our overall national footprint and success. We remain committed to simultaneously refining our national initiatives while furthering growth opportunities at the local level. Therefore, we feel enthusiastic about our enhanced market progress as well as expanding this approach beyond its current borders.

It feels like there’s a long runway ahead of us. We perceive ourselves as having a durable opportunity that we're systematically addressing. After a major organizational reset in 2022, we are now witnessing the deployment and launch of exciting new initiatives and solutions across various fronts and enhanced markets. This year has been pivotal for execution, and we're seeing favorable results despite difficult macroeconomic conditions. While the housing market is under pressure, we find encouragement in our relative performances and the share gains achieved in our enhanced markets. Our residential revenue line item has shown a 1,900 basis points outperformance with a 73% year-over-year growth in our purchased mortgage business amidst challenging market conditions. We continue to introduce our real-time touring feature, which is proving to be a game changer, and experience a robust 28% year-over-year growth in rentals. Internally, we’re genuinely optimistic about the future despite the industry's current challenges.

This concludes our questions. I will now turn the call back over to Rich Barton for any closing remarks.

I just did my closing remark. It was great talking to you all. We look forward to chatting again soon. Have a great day.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.