Zillow Group, Inc. Class C (Z) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon. My name is Chuck, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group Fourth Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brad Berning, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Chuck. Good afternoon, and welcome to Zillow Group’s fourth quarter 2020 conference call. Joining me today to discuss our Q4 results are Zillow Group’s Co-Founder and CEO, Rich Barton; and CFO, Allen Parker. During the call, we will make forward-looking statements about our future performance and operating plans based on our current expectations and assumptions. These statements are subject to risks and uncertainties, and we encourage you to consider the risk factors described in our SEC filings for additional information. We undertake no obligation to update these statements as a result of new information or future events, except as required by law. This call is being broadcast on the Internet and is accessible on our Investor Relations website. A recording of the call will be available later today. During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to as EBITDA. We encourage you to read our shareholder letter and 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 & Technology segment as our IMT segment. We will now open the call with brief remarks followed by live Q&A. And with that, I’ll turn the call over to Rich.

You’re on mute, Rich. That’s now in the dictionary. Sorry about that. Thanks, Brad. Good afternoon, and thank you all for joining our first call of the New Year. February marks a big milestone for Zillow, our 15-year anniversary. We were motivated at the beginning by the same dream that motivates us now, reinventing a disjointed and friction-filled process to make it easier for people to move. While we have made tremendous progress and our position is strong, we are in many ways just getting started. A year ago on this same call, I deemed 2019 a tumultuously remarkable year. In hindsight, I clearly had no idea what tumultuous meant. There’ll be plenty of studies on COVID’s impact on society, business, politics and real estate in the years ahead. But today, I’ll focus on Zillow’s impressive results in 2020 and some of our key accomplishments. First and foremost, we saw engagement across our mobile apps and websites in 2020 at levels we would not previously have thought possible. Zillow surfing has broken through to a whole new level of pop culture given that Saturday Night Live did a funny and racy sketch about it this past weekend with guest host Dan Levy in the lead. Fantasizing about real estate is not new. Our survey results and traffic has always indicated that people love looking at real estate and want to move. What has changed is that more of those people now have the freedom to move. Many Americans untethered from their commutes and offices have begun to reevaluate how and where they want to live. This cultural trend, which we have been calling the great reshuffling, along with our continued technology improvements, resulted in 9.6 billion visits to our mobile apps and websites over the course of 2020. That is 1.5 billion more visits than in 2019. We took advantage of this rush of top of funnel engagement and executed well across Zillow’s suite of products and services. We accelerated the growth of our flagship buy-side business, Zillow Premier Agent, partnering with real estate agents across the country to produce the strongest results we’ve ever seen, reporting a 35% revenue growth year-over-year in Q4. Our burgeoning sell-side business, Zillow Offers, proved durable through some bad weather. We paused home buying to manage risk during the early days of the pandemic, but exited 2020 with our quarterly acquisitions pace returning to Q4 2019 levels. We augmented these buy and sell-side businesses with excellent execution in our adjacent services. Our financing arm, Zillow Home Loans, nearly tripled its originations revenue in 2020 compared to 2019. We expanded Zillow Closing Services to 25 markets in less than 12 months, and a vast majority of our customers are now choosing to close with us when purchasing a home from Zillow Offers. This execution resulted in total revenue growth of 22%, which when combined with a disciplined approach to managing costs, resulted in more than $300 million in incremental EBITDA profit generation across the company as compared to 2019. Our team drove these business results in 2020, while quickly adjusting to a new way of working with 90% of our workforce doing their jobs remotely. While many companies across the country are evaluating their go-forward policies about remote work, Zillow is onto the next play as legendary Duke basketball coach, Mike Krzyzewski likes to say. Having internalized, we are already successfully operating as a cloud headquartered company. This location flexible work model has a myriad of benefits. Our employees, like so many others across the country who are participating in the great reshuffling, now have the flexibility to wrap their work around their lives rather than vice versa. And it allows us to recruit from almost anywhere and increase diversity in our workforce. We believe this will be a significant competitive advantage as we grow and it is already yielding exciting results. Of course, there are challenges to not being in the office together, but that is temporal. In a post-COVID world, our workplace design goal is to maximize flexibility for our high demand talent. We will have awesome offices for those who want or need to come in. At the same time, we must ensure a level playing field for all team members, regardless of their physical location. There cannot be a two-class system, those in the room being first class and those on the phone being second class. We are entering the most interesting and innovative period for workplace design in our lifetimes, and our people and facilities teams at Zillow are out in front. To wrap this year in review, I must say how proud I am of what our whole team has accomplished on the scariest of rollercoaster rides that was 2020. And I would like to thank them here for their commitment and resilience. As we look ahead, I’ll start with the housing market. Our Zillow economists have made bold predictions for an even stronger housing market this year. They’re projecting a near record of 6.8 million home sales for 21% growth, plus double-digit home price appreciation. We, of course, do not have a crystal ball, and our mission does not depend on the cyclical vagaries of the housing market due to the mega shift from offline to online. But we believe that residential real estate will continue its risk trajectory. The millennial generation is entering prime home buying years and mortgage rates are historically low. On top of those macro factors, the past year has members of all generations rethinking, where they live with a new lens of flexibility and possibility as the great reshuffling continues to take hold. Some of you are concerned about low inventory persisting, despite historically low inventory, 2020 closed with 5.6 million existing home sales, the highest level since 2006. Low inventory and high volume of sales seem at odds until you consider how quickly homes are selling. Average time on market was 17 days in December, a full 25 fewer days than in December of 2019. In addition to being a hot market, agents and customers adopted technology and tools for safety, convenience, and simply to compete, and higher prices pull more inventory onto the market, of course. So, like a warehouse using lean operations to transition to just-in-time inventory management, the housing market became more streamlined. Current home inventory levels therefore can be addressed with something like the safety refrain from a flight attendant. The oxygen will flow even if the bag does not appear to be to fully inflate. Amid what we believe will be a very healthy housing market backdrop, we expect 2021 will be a pivotal year for Zillow. I’ve spent some breadth here in the past two years, talking about our transition from Zillow 1.0, a media-focused business, into Zillow 2.0, a transaction-focused business. Today, I believe that we have the pieces in place, the vision, the team, the technology solutions and customer products and services to execute on Zillow 2.0 now. We will undoubtedly keep innovating and adding products and services on the long road to customer one-click trade in Nirvana, but our entire company is now relentlessly focused on transactions and ready to scale from here. To do that, we are investing aggressively in technologies and services that make it easier for our customers to make that transition. As part of our quest to make our customers’ experiences better today, we announced our intent to acquire ShowingTime, an industry-leading real estate showing software provider that facilitated over 50 million in-person home tours in 2020 for $500 million. ShowingTime technology already expands into the broader real estate industry and we intend to grow its adoption across the industry moving forward to the benefit of all industry participants and customers. The additional ShowingTime to our suite of real estate technology solutions allows us to accelerate a widely-adopted solution for scheduling home tours. We see this as similar to the work we did to build our connections platform a few years ago and wider acceptance of this technology has the added benefit of improving the experience for the broader industry as well as for our Premier Agent partners as our platform grows. We envision a future experience that begins on our mobile app, where a customer can immerse herself in a home via our 3D home technology, looking in-person tour through ShowingTime with an agent, get pre-qualified through Zillow home loans, work with a Premier Agent to buy the home and close the transaction with Zillow Closing Services. We have spent the last year bringing out Zillow Offers, bringing our Zillow Offers and Premier Agent businesses closer together to orient around customer success and customer choice. While I know you all think of these businesses as distinct, our customers arrive at Zillow, simply trying to move. It is our job to deliver for them in any way that we can, be it through our own services or with our best-in-class partners. Our customers are hungry for the seamless experience that we can now provide. In programs we’ve begun to run across the country, we see evidence that a suite of Zillow services appeals to people. Take retired elementary school teacher, Terry Lee, after 44 years in her Atlanta home, she felt intimidated by the prospect of making repairs and selling, especially with the health risks posed by COVID-19. Her son, an avid user of Zillow suggested she call us. She accepted the Zillow Offers, used the Premier Agent to help her shop, then financed and closed using Zillow services. Now, she at the townhouse and convenient walkable neighborhood, having integrated Zillow experience made them move convenient. They were all part of the same team she said, I didn’t have to remember to remind someone did you let so-and-so know everybody knew. We dropped the link to a short video of Terry’s firsthand story in the shareholder letter. It’s not nearly as alluring as the SNL bit, but it’s really a fantastic encapsulation of where we are headed. Testimonials like Terry’s are what get us so excited about the opportunity in front of us. So, long as we are able to deliver delightful customer experiences, it’s a win for everyone involved. Terry sold her previous home, is living in our new home. Our Premier Agent partner completed a successful transaction and we participated in economics across our multiple services without spending incrementally to find Terry as a customer for the additional services. Our low customer acquisition cost advantage is integral to our Zillow 2.0 strategy. For example, this year, many customers in Zillow Offers markets will see that there’s estimate is alive initial offer from Zillow Offers. This will begin to realize the big hairy audacious goal we set 15 years ago when we launched the Zillow of putting an actual price on every rooftop. As this estimate begins to move from fantasy to reality, we are one small, but important step closer to delivering on that Beehag. Marketplaces are healthier and more liquid with transparency. Lastly, as I zoom out, and think about opportunity. We are in a unique position to build an iconic company and brand that transforms one of the country’s largest most complex and most important industries. Our large audience, the breadth of our services across real estate transactions, our profit streams and profit potential, our strong balance sheet, our experienced leadership team and our long-term orientation, all combined to put us in pole position. The advantages we’ve worked hard to build over the last 15 years will help drive us forward for the next 15. Our talented team here is making it happen. But I also want to thank you our investors, who have given us the space and support to move to the next exciting chapter in the story of Zillow. I’ll now turn it over to Allen. You’re on mute, Allen.

All right. Thank you, Rich. As rich discussed, Zillow Group delivered another strong quarter, which drove record full-year 2020 revenue and EBITDA on a consolidated basis. We reported Q4 consolidated revenue of $789 million and EBITDA of $170 million, both exceeding the high end of our outlook range. Our Q4 results contributed to the strong 2020 annual results with consolidated revenue growing 22% and EBITDA of $343 million expanding from $39 million in 2019. Q4 IMT segment revenue of $424 million grew 33% year-over-year, as we continue to see accelerated growth across most of our IMT marketplaces. IMT segment EBITDA was $203 million in Q4 or a 48% of IMT segment revenue. Strong revenue growth combined with year-over-year declines in operating costs translated into 132% year-over-year EBITDA growth in Q4. Premier Agent revenue grew 35% year-over-year in Q4, driven by record Q4 customer satisfaction rates and record Q4 connections of higher intent customers to a growing number of high performing partners with continued strong agent retention rates. Excluding the impact of revenue timing changes we discussed in prior earnings calls, the Premier Agent revenue growth rate would have been 27% year-over-year in Q4, accelerating from 20% in Q3. During Q4, Zillow Offers benefited from operational improvements, stronger than expected home price appreciation across the country, a strong customer value proposition and faster sales philosophy. Homes segment revenue of $304 million exceeded the high end of our outlook with home purchases returning to Q4 2019 levels. Our Q4 Zillow Offers unit economics of 668 basis points before interest was above the plus or minus 200 basis point guardrails we set for ourselves while working to scale the business. The outsized unit economic results were impacted by the stronger and faster housing market recovery than we initially assumed in addition to the expected benefit of predominantly high mix of recently acquired homes following the first-half air gap. Q4 unit economics also showed meaningful operational progress in improving our cost per home sold. Combined, we saw all three operational cost line items improved nearly 250 basis points compared to Q3. We are continuing to target our underwriting goal of plus or minus 200 basis points going forward. Our Mortgages segment revenue increased 190% year-over-year in Q4 to $61 million, and Mortgages segment EBITDA was $14 million compared to the midpoint of our prior outlook of $2 million. The revenue and EBITDA outperformance was primarily volume driven with mortgage origination revenue growing nearly seven times year-over-year, and gain on sale – gain on sale margin staying stronger for longer than we assumed. Turning to our outlook. For the first quarter, at a consolidated level, we expect revenue to be $1.1 billion at the midpoint of our outlook and EBITDA to be between $114 million and $138 million. In our IMT segment, we are forecasting 27% year-over-year revenue growth in Q1 at the midpoint of our outlook range. Within the IMT segment, we expect Premier Agent revenue to be between $314 million to $322 million, up 31% year-over-year at the midpoint of our outlook, given by strong top-of-funnel traffic and connections as we enter Q1. We expect Q1 IMT EBITDA margin to be 42% at the midpoint of our outlook. Q1 is also expected to benefit from the timing of certain seasonal advertising and marketing programs that are targeted to launch later this year. While we believe it remains prudent to continue to provide quarterly guidance, I would like to repeat what I said last quarter. We are focused on growing EBITDA dollars compared to the full-year 2020 levels. We do not expect to expand EBITDA margins from the high levels in the second-half of 2020, which benefited from cost controls, put in place during the uncertainty of the pandemic. However, we will continue to drive operational rigor across the business to deliver operating leverage over time while focusing – while also focusing on investing to drive sustainable growth. In Q1, we expect our Homes segment revenue to increase sequentially to $608 million at the midpoint of our outlook as we ramp up purchase and resell activity levels that are being driven by strong demand and our customer value proposition. We remain focused on applying learnings and operational rigor to drive growth. We expect our Mortgages segment revenue to be between $59 million to $64 million in Q1. We plan to continue to capture the strong refinance demand to invest in building the factory to scale our operations as the purchase business is built out over time. As a result, we expect Mortgages segment EBITDA to be between a loss of $3 million and a profit of $1 million. We are also excited about the future addition of ShowingTime’s industry-leading technology to our suite of solutions to help innovate and simplify online tour scheduling for agents, buyers, and sellers. The outlook we provided today does not include any potential benefit from ShowingTime. We believe ShowingTime will deliver significant benefits to the industry, our customers, our partners, and Zillow overtime. We expect the impact on financial results to be relatively small in the near term. We ended the quarter with $3.9 billion in cash and investments, which puts us in a strong position to fund our vision for Zillow and make strategic long-term investments both organically and inorganically. As we look forward in the New Year, our priorities are focused on execution of our vision to help our customers unlock life’s next chapter now that we have the core pieces in place. Moving past the necessities of 2020, the following 2021 priorities are focused on innovating and executing on behalf of our customers and partners. We will grow our customer base and engagement through a compelling dream and shop experience. We will invest in sustainable top-line growth opportunities across the company. We will reduce cost structure and improve productivity and transaction services, and we’ll drive profit growth through operational discipline. And with that, operator, we’ll open the line for questions.

[Operator Instructions] Your first question comes from the line of Heath Terry with Goldman Sachs. Please go ahead.

Great. Thank you so much. Rich, obviously, just really kind of curious in terms of how you think about sustainability in terms of the growth and margin expansion that you’re seeing here, I mean, 600 basis points obviously puts you in areas that you haven’t really seen in a while. Just really kind of interested now you and Allen and the team are thinking about the macroenvironment’s contribution to this and how important that’s going to be going forward, as well as the traction that you’re getting with Premier Agent and just how much you can continue that from here?

Hey, Heath. Hey, I look forward to being on your Goldman Zoom stage tomorrow.

We look forward to having you.

It shouldn’t – no travel required, Zoom Magic. I know Allen, you just did a whole bunch of talking, but maybe, you want to start out this answer. And I know…

Yes. Why don’t I start with PA growth and how we’re thinking about it and IMT margins, and then I’ll let you handle the more macro housing if that works. Thanks for the question. So, listen, in Premier Agent, we continue to focus on the customer and the input would yield a great result for both the customer and our partner agents. So, we’re optimizing to connect high-intent customers with high-performing agents. And the output we’re seeing is higher CSAT, higher connections volume, where we’re linking high-intent customers with great partners, strong retention, and the business results that we see reflected in our Q4 results and our Q1 outlook. On an apples-to-apples basis, we’ve seen accelerating sequential growth of 20% in Q3 to 27% in Q4, and now 31% at the midpoint of Q1 outlook. We like where we are, we feel it’s still early days and we’re not going to hesitate to invest the long-term growth in areas such as technology and marketing, but we feel really good about the current situation and the position we have with respect to PA. With respect to the margins, I’ll just cover that real quickly. Our outlook implies a 42% margin at the midpoint, that’s down from the second-half margins we saw in the second-half of 2020. Our Q1 guidance, I discussed, includes the benefit from the timing of certain investments that are going to occur later in 2021 as compared to prior years, but our focus is on profitable growth. So near-term, we do not expect margin expansion off the higher second-half 2020 levels. And again, those have benefited from some of the cost controls we put in place based on the uncertainty of the pandemic, but rather we expect EBITDA dollar growth of the full-year of 2020 levels. And again, we’re very pleased with how the team is executing and we like where we are. Rich, I don’t know if you want to cover more macro.

Sure. Yes. Thank you for covering the hard stuff that has real numbers and comments in it, and leaving the hand-wavy stuff to me, Allen. Yes, I mean, on the housing market and sustainability Heath, I mean, there’s certainly a lot we could talk about and say. But I guess, the first thing I’d say is the big thing that’s happening, that’s driving our business and will do so in the long-term is not the cyclicality in the housing market itself, all right? It is the bigger trend, which is movement of all things offline to online. And real estate, while many thought, it might be an exception 20 years ago to the fundamental e-commerce rule clearly is not. And we are – customers are moving online, which is fantastic. And we as the leaders are the outsized beneficiary of that. I mean, we’ve been there the longest time with the biggest brand. And so that’s the biggest thing facing us. And one other thing, I guess, is that we have all this kind of potential energy and the top of funnel with all this shopping traffic we have that is not being monetized today. And so we’ve got a lot of growth to happen just in increasing conversion and engagement within our phone. Okay. Now going down into the actual dynamics of the housing market. right now, we have – certainly have a lot to say. our Econ team has published a pretty aggressive forecast for 2021. But we – as I said, we don’t have a crystal ball, obviously, that doesn’t stop – hasn’t stopped me in the past from prognosticating. So, let me take a – let me look at a few topics here. One, let’s talk about the tailwinds. I guess the second is inventory velocity. And then the third is kind of pent-up listings demand. On the tailwinds one, there is the technology tailwind that I’ve already talked about. This is the offline/online shift, and that is a big one. and that’s just – that’s blowing and that’s sped up during COVID, but it’s not going to stop blowing. We’ve got a long way to go. The real estate tailwind that’s kind of been catalyzed mainly by the pandemic, freeing people from their commutes and freeing them to move and rethink their homes, that’s a real one. And I believe that that’s going to play out over a long period of time, too. It takes a long time for people to decide to move, and it takes a long time for companies though they are catching up. It’s going to take a long time for companies to grapple with the fact that in order to compete for the best talent, they have to give that talent flexibility. So, this is going to happen. I think this is going to play out over a long period of time, too. That’s that kind of great reshuffling point. there’s some really interesting demographic things that are setting up to drive sustainable growth as well around millennials buying – having babies and buying homes right now and low mortgage rates for the foreseeable future. We don’t have a crystal ball there, but it’s setting up pretty well. All of those things make us our econ team, but also me believe that this is a pretty durable macro growth set up for the housing industry. A quick note to talk about, I mean, I did it in my prepared remarks, but this inventory volume velocity point is a pretty important one. I think a lot – I find myself explaining to a lot of people at the company and outside the company, who read shocking headlines about galactically historically low inventory and they think it’s over for the housing market. It’s going to freeze. It’s going to stop. We’re not going to have any inventory. That, of course, only makes sense if you don’t look at how quickly things are selling, right? So, having homes sit on the market for 25 fewer days than they did a year ago in December 17 days total is fairly shocking. That is the headline for this market right now is velocity. And so I have no doubt that Econ 101 comes into play with supply and demand. And as home prices appreciate as home prices rise, of course, more supply is going to come into the market. That’s just the way markets work. I’m highly confident in that one. I also think from a pent-up listings perspective, I think that we’ve seen 15 years of people wanting to move and not moving since the global financial crisis for various reasons. I also believe there may be a little kind of COVID-related anxiety to list your house right now. That as we get post-vax, we may see some of that loosen up as well, but those are more minor. I’m really sorry for taking up so much airtime, everybody, but it’s important stuff.

No, thanks for that, Rich. Thanks, Allen. Really appreciate it.

The next question comes from the line of Lloyd Walmsley with Deutsche Bank. Please go ahead.

Thanks, guys. I have two. first, just, can you talk about some of the drivers for the unit economics improvements in the homes segment? How much of that is the home price appreciation versus efficiency gains versus the benefit of the newer cohort and give us a sense for how we should think about this going forward, given just the magnitude of the improvement we saw. And then secondly, can you give us the update on some of your tests around partner leads, what you’re seeing there and how much you think you may be scaling that this year versus continuing to be in experimental mode? Anything you can share there would be great.

Great. Thanks, Lloyd. All right. So, why don’t I start with unit economics, as we reported Q4 unit economics were – approximately 670 basis points of profit for home before interest as compared to Q3 results that were a loss of 90 basis points, so that’s an improvement at 760 basis points quarter-over-quarter. Swaying was not unexpected as Q3 reflected the impact of us selling off the tail of the pre-pandemic inventory, as opposed to Q4 reflecting the benefit of early sales of post-pause purchase cohorts. But there are two other factors that I’d like to call out. And Rich has touched on some of those. So, the HPA trends and sales velocity performed a lot stronger than our underwriting assumptions and contributed to a pretty significant portion of the 500 basis points improvement that you see in our acquisition costs, where our acquisition costs as a percentage of the average sale price went from 91.1% to 85.9%. So that’s mixed, but a lot of that is the macro trends. The other – the other three cost lines; renovations, holding costs and selling costs, which improved 250 basis points over Q3 include in these improvements, some real operational improvements that are durable. We’re constantly learning and improving over time, which results in continual improvements in our customer value – proposition value of our offers. So, that’s we’re glad to be back up and running. And as we learn, we’re able to provide more value proposition to our customers. We do expect some of the pricing spread to be temporal over time, but we will continue. We still see continue to see opportunities for improvement across all four of the cost components. I expect this metrics going to continue to be a little bumpy as we continue to come out of the air gap and the post-pause. but the direction I’ll give is we’re still maintaining the plus or minus 200 basis point guardrails. And we’re going to continue to have those as guardrails as we grow and scale. And as we continue to learn, we’ll be able to provide real cost improvements that will benefit our ability to provide value in our customer offers. I hope that helps. And then with the second question, I guess, I’ll move to it on some of the bundled services, we’re in early stages building out a suite of services, but we like the initial results we’re seeing. We feel like we built out the core pieces and are moving deeper into the transaction. We’ve expanded Zillow Closing Services to 25 markets during 2020 and as we called out, the vast majority of our customers are now choosing to use our Closing Services when they buy a home through Zillow Offers. But we’re not just thinking about Zillow Closing Services. There’s some programs that we’ve begun to run across the country, still early stages. And when customers are exposed to our suite of services, there is a meaningful uptick in demand and there’s increased value per transaction. This is not a surprise to us at still early stages, but we feel strongly that our thesis of Zillow 2.0 is correct. And I’ll close with just saying, as we see this increased evidence that providing a seamless, integrated real estate experience to our customers is welcomed, we can use that, we can use our low cost of customer acquisition to compete, I guess, an industry that’s still largely single point solution providers that have higher CAC.

Got it. That’s helpful. Thank you.

And again, like, there’s an end of one on your – on that question that I think the video is two minutes. I do encourage you to click on that from the shareholder letter of that, that Terry Lee testimonial. Anyway, that’s just – it kind of brings it to life.

Cool. We’ll check it out. Thanks.

The next question comes from the line of Ron Josey with JMP Securities. Please go ahead.

Great. Thanks for taking the call. And I guess, we answered a lot about 2.0, but maybe just a little bit more, Rich, just talking about all the different services that our offers out there between Offers, Premier Agent, Home Loans, Closing Services. Just can you talk about what we might expect for Offers going to more geographies or more locations? Same thing for Closing Services, do we expect that all 50 states as 2.0 becomes a reality? And then I’d also love to understand a little bit more around just the progress in Flex as the Premier Agent business continues to just do so well. Thank you.

Hey, Ron. Sorry, I was on mute. Well, a lot of the – Lloyd got in the big question and Allen got in the answer on a lot of the kind of that energy and evidence we’re seeing around the beginnings around bundled, seamless transaction, being what customers want. So we get it, of course, it’s our strong intuition. It makes a ton of sense. And now the world is going to one-click, why not real estate, like that’s where we’re headed. And so the fact that we have invested big in every one of these ancillary services, and now we can begin to stitch them together in a way that a lot of the folks that just provide point solutions can’t or will struggle with is like a this is a big strategic bet we’re making. It has the added benefit of having terrific kind of ecosystem economics from a customer acquisition cost perspective as well. So we’re really running hard at that. On the Zillow Offers stuff, it’s still really, really small. It’s just beginning to look big, but it’s still really, really small. We’re way less than 1% of the market right now with this. But in Zillow Offers is the seeds of the future of a streamlined transaction, which is why you’re seeing us do so much innovating and integrating and testing on that product right now. And that is spilling over into bringing a much more accountable transaction, partner quality, integrated mindset to our Premier Agent and IMT businesses as well. That is what led to Flex to your question, okay? And we really love the way Flex has lined up to be a win-win-win by focusing our compensation on customer success, which is getting into a new home, right? So we’ve seen really good traction there and that’s brought a whole new kind of quality assurance, transaction responsibility, responsibility for the customer itself. It’s brought that mindset to that business and you can see it in the numbers, look what’s happening and look at our guidance for next quarter. It’s really coming together nicely.

That’s great. And maybe just one follow-up on offers. Any thoughts on buy box as its appreciation continues to go up on homes. Thanks again.

Allen, you want to – Allen’s on mute.

All right. Thanks, Ron. Yes, I guess what I’d say is, we continue as we came out of the pause, we had a relatively conservative buy boxes. We brought our processes back. We continue to assess where we can add value to customers and at what ranges. So I think it’s going to vary by market. And we’ll continue to, as I said, iterate learn and adjust as appropriate. So we’re excited about the acquisition pace that we have been able to achieve in Q4 and the momentum that we’re bringing into 2021. Buy box is just one of those ways, but we continue to look at where we can provide value for our customers.

Thanks, Allen. Thank you, Rich.

Yes.

The next question comes from the line of Ryan McKeveny with Zelman & Associates. Please go ahead.

Hi, Rich and Allen. Congratulations on the great results. And Rich, I really enjoyed the commentary you gave around the inventory versus velocity and new listings and very much in agreement with you there and that’ll tie into the second part of my question. So two-parter coming up. First question on iBuying, I guess there’s some debate around whether just the overall strength and competitiveness of the housing market today is a headwind against the concept of iBuying just given kind of how quickly homes are able to be sold traditionally. And I think your results speak for themselves in terms of the purchase activity in the quarter, the rise in inventory. So clearly there’s still plenty of interest from sellers. But I’m curious if you’re seeing any different consumer behavior, any difference in the demographic around those who are actually choosing the iBuyer offer today versus kind of pre-pandemic. And second piece of the question to the extent that sellers are preferring to list traditionally rather than take that iBuyer offer. Are you able to – kind of back to the comment around just the listing side of things, pent-up listings, are you able to look at that as a gauge of just overall pent-up listing demand and kind of perspective sellers coming to the market? And last point, sorry, maybe it’s a three-pointer. Curious if you can just give an update on how you’re doing around monetizing the seller leads or the partner leads that might be coming from those there, excuse me, declining the initial iBuyer bid. Thank you.

Okay. That’s testing my note-taking ability, Ryan. Thanks. The team has been working on analogies to get people to focus on this time on market and velocity concept. So they’re going to love to hear that you appreciated those analogies and I know you guys write a lot about this, so steal away. So maybe I’ll start Allen with the first question, which I’ll basically restate as is ZO still attractive in such a hot market. Well, it’s working. Look, our acquisitions were up year-over-year in Q4 for the first time since COVID started. So I mean, the answer to your question is unknowable. I’m sure there are a bunch of puts and takes. Clearly, this is such a head slapping really obvious, better, easier, more convenient way to do things than the old way that I don’t think the interest in the product is going to change a whole lot based on the hot or cold markets, I really don’t, but it’s unknowable. And then there may be some COVID-related hesitancy that makes ZO more attractive right now. But honestly we don’t really know, but we’re looking at the trends. We’re looking at how we’ve reopened these markets. We are excited by those line items on the cost side that Allen ticked through, showing some leverage so that we can offer even better pricing to sellers and thus increase the size of the market. So we like what we’re seeing there. On your second question, I guess the thing I’d point to as the best gauge to pent-up demand to sell or pent-up demand to move, I guess they’re sort of one and the same, is engagement. I mean, what was the sparkler I threw out there? 9.6 billion visits we had in 2020, up 1.5 billion. I think was like 19% up year-over-year. That to me, I don’t have a lot of more anecdotal or survey based stuff to give you color, but I don’t think we really need it. We can look at the ferocity with which people are attacking their home, searching and dreaming and be pretty comfortable that we’ve got ways to – we’ve got some pent-up demand. On your third question, I just re-point to Allen’s answer from one or two questions ago and say we’re really excited by the early signals that we’re seeing in an integrated bundled offering. It’s just makes so much sense and we’re seeing all kinds of early evidence too. That’s kind of confirmatory to our somewhat audacious strategic bet that we’re making here on integration.

Thanks, very helpful. Thanks so much.

The next question comes from the line of Ygal Arounian of Wedbush Securities. Please go ahead.

Hey, guys. Thanks for taking the questions. I guess I have a couple of follow-ups from the questions that have been asked. But first on the last one, a hot market and how iBuying or Zillow Offers fits into that. It sounds like you haven’t necessarily done anything with the fee that you ask on that. How do you think about moving – have you lowered it at all to drum-up some of the demand, or has it been there kind of naturally with kind of average fee that you’ve been asking for historically there? And then on the kind of – on the end-to-end bundled service, I was listening to some of the executives from the traditional brokerages and players in the space at a conference a few weeks ago. And so maybe I’ll ask it from the opposite point of view, they all kind of continue to view the world as being a platform that’s giving options versus having everything in-house and having your own mortgage broker and selling your own products, but actually giving the consumer choice and you believing that the consumer wants choice across the way. Obviously, that’s not your stance. And we’d love to hear why you think that’s not the right stance that giving people choice.

Okay. Allen, you maybe want to take the first bit on the fee, and I’ll try to address the no-choice question.

Sure, sure. Thanks for the question. This is Allen. Yes. I think, I just would point out in responding to that, that fee is just one of the components of the offer that we make to a customer, who’s interested in possibly selling through Zillow Offers, selling to us. And the fee is dynamic. And so when I talk about our unit economics and the pricing spread, being a little more temporal and our guardrails being plus or minus 200. we’re constantly adjusting dynamically all of the elements of the offer, and we’re testing how we communicate those elements of the offer to any customer, who are to any potential seller. So, it’s transparent and clear on what it costs and, Rich even calls out the dynamic estimate as an offer, eventually are starting. But so what I would say is that our business model and the way our model works with respect to the seller is extremely dynamic and takes into account these macro conditions. What did occur in Q4 somewhat was that the market out ran some of our initial assumptions and we’re catching up. So, we’re constantly learning that’s we have a feedback loop as we have each one of these data points. And so I would expect that offer to be competitive, but constantly, informed by all of the factors that are out there with respect to velocity, HPA and so on and so forth. If that helps and then Rich, did you want to talk on as delivering the customer choice?

Yes. I mean, it’s a fun one. But I’ve been sitting here trying to think how I would answer, what customers want – customers want convenience. It’s pretty – it’s a pretty bad bet to bet against convenience, speed, price, integration in any business. Okay? And especially, customers want simplicity in one click when it’s something they don’t care a ton about. They just need to get done. I’ll use Amazon to buy most – everything, but there are a few things that I really care about that I know I need to go to a specialty e-commerce retailer to go find, because they’re my particular areas of interest, I’m deciding not to say what those are, because I don’t want to be judged. But by and large, having it all behind one click and with Prime Delivery on Amazon works really well, and that same kind of idea certainly holds true, we think, in real estate. What people want us to do is get into their new house, everything else is an obstacle. Okay? Everything else is an obstacle. And I’m not saying we need to bundle, so that we can somehow take advantage of them on pricing of the spot things that’s not what we want to do. We want to bring price down as much as we possibly can. But the prime thing we want to do is integrate this, make it super easy and convenient and maybe, joyful at some point. So that people can just get to their better place. Anyway, that’s from all the years that we’ve spent with building consumer products, this feels intuitively correct. There will absolutely be the specialty point solutions for all kinds of stuff that people care about and want to shop for, and certain kinds of professionals that have specific expertise that people seek out. There’s no question that’s going to happen. Our bet is that for the middle of the bell curve of the market, integration is really important.

Thanks. And if I can just ask one quick follow-up on, I guess, both of those points tied together and bringing the kind of in-house brokerage on Zillow Offers, anything you’re learning there, that’s helping drive the flywheel versus just saving costs, and thanks for the time.

Tom, we’re – with Zillow Offers and now, the brokerage that’s associated with Zillow Offers, we’re finally actually in the end user customer satisfaction customer service business. We used to be in the kind of media customer traffic business and not in the customer service business. And so that’s – I talked about it a little more on previously on the call, the spillover effect from having an owned and operated operation, where we’re actually buying and selling homes and we’re actually closing these transactions. the spillover goodness to the core business is difficult to quantify how important it is and we see it’ll drive a ton of opportunity in the core business on a go-forward basis. And as I said on the call, these businesses, ZO and PA are getting a lot closer together, because that’s happening, because of all this learning, And because we’re seeing common solutions that we’re building for ZO to be applicable to the whole in the industry as a whole, just like with the ShowingTime acquisition today. That’s one of those things that we see. And as they come closer together, they’re actually opening up even larger swaps of kind of unknown grass, just like bigger chunks of opportunity that we see given all this traffic and engagement we have. So, we’re excited.

Thanks, guys.

Our last question comes from the line Tom Champion with Piper. Please go ahead.

Thanks, guys. Good afternoon. Thanks for squeezing me in. Okay. so, your economists are saying 20% transactions growth this year, curious your sense of whether we’ll return to kind of more normal seasonality with kick selling being in the summer months. And whether that line of thinking should be incorporated into our estimates, just as you gave us the 1Q guide, but as we think through the balance of the year, would be curious your thoughts on that. And then 35% PA growth that’s really strong. What do you see as the pain points in that business today? What are kind of the product opportunities for PA going forward? And I think you said this Allen that maybe, an 8% boost from Flex in that business, if you could just confirm that. Thanks, guys.

So Rich, do you want me to kick through the PA real quick and then you can talk about the other projections that we are providing quarterly.

Yes.

Thanks, Tom. Yes. So, with respect to Flex, when you think about the 35% Q4, if you exclude the impact of some of the revenue timing changes that we’ve discussed in prior quarters, and they come on both sides, about 200 basis points of growth in Q4 came from leads that we delivered prior to Q3. So that’s roughly 200 basis points of growth in Q4, and then the remaining amount to get you to the 27% growth apples-to-apples, came from the fact that we had a comp against 2019, where we did a flip to the entire Flex region for Phoenix and Atlanta. So, that is the 800 basis point that you were calling out. With respect to pain points and so I mean, I believe that team has been operating, really well on the inputs. Our goal is to obviously, leverage our traffic and to bring high intent customers together with agents. And some of those pain points is how do you get them connected? I think our connections investment that we’ve made in the last two years, well, a little hockey to start has yielded a lot of benefits. I believe things like the ShowingTime investment and schedule a tour is another example of areas, where there’s still friction of getting customers – high intent customers and agents together. So, I believe some of this, online – offline to online and leveraging tools that we have and can build, is going to reduce a lot of those friction points. So again, that’s part of the excitement we have on helping the customer and benefiting not just the customer, but the partner agents, as well as Zillow as we link these get a customer into the house they want. So Rich, I don’t know if you want to talk anything about seasonality.

Yes. I mean, look, I’m not going to be able to give you a better view Tom, than Dr. Svenja runs our econ team. I’ve obviously looked at the forecast and looked at the drivers, and it’s all right there on the econ website for you to dig into as well and be critical of, or agree with or not. I would say though that my kind of cheap seats for armchair economists’ perspective is that these are title, these are tectonic shifts that are driving the market. And as I said, in my long-winded answer, I think they’re going to play out over quite some time. And I think they’ll probably swamp what we would consider normal seasonality in the industry this year. That’s our best guess, a lot of the tail off for other forecasts has to do with kind of misery – some of the misery stuff, Brad, stop me if you want to muzzle me. But I would say that it’s a sad thing to say, but even misery drives reshuffling and moving as well. And so I think we’re just – we’re setting up pretty – in a pretty kind of volume bullish way across the whole of the industry for at least this year is my best guess. Is that okay, Brad?

Yes, you’re good. I’m already dropped.

Okay. All right. Okay. I guess, thank you. Thanks, everybody today. That’ll be it for this quarter 2020. we won’t soon forget it. But it was a rollercoaster and – but it was a year of immense progress for our organization, both culturally, but really as we kind of ditch together on behalf of consumers a new and better way to buy and sell a home to move. Anyway, talk to everybody soon.

This concludes today’s conference call. You may now disconnect and have a great day.