Zillow Group, Inc. Class C (Z) Q1 2023 Earnings Report, Transcript and Summary

Good afternoon. My name is Hannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group First Quarter 2023 Conference Call. [Operator Instructions] Please note, this event is being recorded. 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 First Quarter 2023 Conference Call. Joining me today to discuss our results are Zillow Group's Co-Founder and CEO, Rich Barton; CFO, Allen Parker; and COO, Jeremy Wacksman. During today's call, we will 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. 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. We will now open the call with remarks followed by live Q&A. And with that, I will turn the call over to Rich.

Thank you, Brad. And thank you, Hannah. Good afternoon, everyone. Thanks for dialing in today. We are excited to share our first quarter results and the progress we've made on our growth strategy since we last spoke in February. As I noted during our last earnings call, 2023 is critical for Zillow, and I'm pleased with how we've started the year. Total revenue of $469 million and EBITDA of $104 million surpassed the top end of our outlook. This outperformance is due to a combination of progress that we've made since reorienting the company in early 2022, along with favorable relative tailwinds in a tough housing environment. Since the beginning of 2022, we have made significant investments in improving our customer funnel, capturing more customer demand and connecting more of that demand to our strengthening partner network, resulting in increased conversion rates in Premier Agent. We have focused on many improvements in our customer funnel experience by offering clear call to action that quickly and efficiently help solve customer needs. These numerous incremental changes collectively have been adding up to make a real impact on our business. The most tangible example we made over the last year is providing easier ways for buyers to request home tours on Zillow apps and sites. This has resulted in less drop-off in our funnel, which is a key driver behind improved expected lead volumes of higher-intent customers, which does not yet even account for the benefits I'll discuss shortly from real-time touring. Overall, it has been nice to see our focus and investments begin to pay off, with our year-over-year residential revenue outpacing the broader real estate market by 1,300 basis points and an expectation that we will see continued relative gains in Q2. Beyond our revenue gains relative to the industry, we are also pleased with the profit leverage in our business model. Our EBITDA outperformance for the quarter is a nod to how nicely revenue outperformance can flow through to the bottom line when we prudently manage costs. We couple these results with a strong balance sheet, ending the quarter with $3.4 billion in cash and investments even after buying back $86 million of stock in Q1. Interestingly and unexpectedly during the quarter, we have felt the first tremor of what we believe to be a coming earthquake in the broader technology landscape with the introduction of OpenAI's ChatGPT. We believe the arrival of conversational, generative AI may well be a platform shift on par with the introduction of the graphical user interface or the touch interface on the first smartphones. Artificial intelligence, machine learning, computer vision and the use of data have been core to Zillow since our founding. Our AI journey began in 2006 with the invention of the Zestimate, which required massive amounts of data and the machine learning algorithm, albeit one that looks quite primitive versus what we have deployed today. What started with AI and Zestimate expanded to more parts of the product in the years that followed : advancements with our new Neural Zestimate, computer vision-powered rich media experiences, AI-generated immersive floor plans and natural language search queries are 4 more recent examples of how these capabilities show up in our products and services today. The launch of ChatGPT and now new Bing and Bard have brought AI out of the basement and into the light for all of us to interact with. We recognize that it is in its infancy, that it is evolving incredibly fast and that it is fraught on many levels. However, we are excited and confident in our ability to harness its power to drive growth. We believe this technology will improve our customer and partner experiences, meaningfully increase the productivity of our employees and the velocity of our output and ultimately drive growth for both Zillow and our partners' businesses. We are well positioned for this opportunity, not only because we have understood and been early adopters of important new platforms as they emerged, like we did with iOS and Android, but also because we have the brand, the audience, and the access to large, proprietary, relevant data sets as well. There is another valid worry out there about how ChatGPT might disrupt the physics of the way people search, find and navigate the web itself. At Zillow, we are experimenting aggressively to understand this new paradigm. OpenAI's ChatGPT has a limited-release alpha plug-in program that enables select app developers to have API-level platform access. We launched an alpha-version Zillow plug-in yesterday, which operates in a small sandbox but with which we will learn and iterate rapidly. Again, I am confident that Zillow is well positioned for whatever disruption may come not only because we are leaning in hard, but because we own our own customer demand. The #1 core value at Zillow is that the customer is our North Star. Starting with the Zestimate, we have released a drumbeat of magical product innovations, which empower, entertain and engage our customers throughout their home shopping journey. That has freed us to predominantly market Zillow via good old word of mouth, boosted by great PR and brand marketing. We have always believed that the product itself is the most important part of the marketing mix. This has worked well for us. Our brand has grown to become the best-known and trusted name in real estate. Zillow is the leading real estate app and site in the U.S. according to comScore. While we recognize and respect that SEO and SEM have a real and important place in the marketing mix, we have always been keenly aware that any vertical site's overdependence on SEO and SEM makes it strategically fragile. Today, over 80% of our traffic comes to us directly. This is rare and very good. The direct-branded relationship we have with our customers will help us well into the future. As you all know, a few years ago, we embarked on a new frontier to digitize the real estate transaction itself, to convert and monetize small but increasing percentage of the 200 million average monthly unique users on our asset sites, turning them into transactors. Our growth investments are focused on improving the transaction experience so that we might not only help people search and find homes but also help them buy, sell, finance and rent and ultimately get into the next home with more ease, more transparency, more efficiency than ever before. We've been laying the groundwork for our transaction strategy for quite some time and believe this is how we both differentiate and continue to grow our business and our brand, by being the destination for buyers', sellers' and renters' end-to-end housing transaction needs. This strategy of shifting our focus and efforts down funnel to the transaction is manifest in what we call our housing super app vision, an integrated end-to-end experience to help our customers move. Our goal is to increase engagement, customer transactions and revenue per customer transaction by investing across 5 growth pillars: touring, financing, seller solutions, enhancing our partner network and integrating our services. The expected output of this strategy is to grow our share of customer transactions from 3% to 6% by the end of 2025. On our road map, 2023 is about execution, steadily rolling out products in constrained geographies across our 5 growth pillars and integrating them to create a seamless experience for our customers and partners. We are obviously excited about all the tech-enabled solutions we're building to improve the gnarly process of moving, but we are clear-eyed about the importance of connecting that technology to our critical partners in the physical world as well as the physical homes and apartments that are available for sale or rent. Rich, smart integration within our ecosystem is crucial to our housing super app vision, be it connecting with the Premier Agent partner that tours homes with you after you book it with ShowingTime or working with the Zillow Home Loans officer who secures your mortgage. We are bringing this seamless, connected experience to various markets throughout the country with our first 4 in Raleigh, Denver, Atlanta and Phoenix. I'll kick off our product road map progress report with touring. Stepping into the home, whether virtually through a 3D -- a Zillow 3D home interactive floor plan, where our computer vision technology makes it feel like you're walking through the home; or in person when you are actually physically touring the home with your Premier Agent partner, brings the shopping experience to life. So when we talk about touring, we're talking about the point-of-sale moment when dreamers turn into customers. This means capturing the attention of the users who are currently dreaming and scrolling at the top of the funnel and providing them with a tangible step into the real-life home shopping experience of touring a home. This is one of our big bets and a critical piece of our product road map because our data shows that movers who request a tour convert to buyers at 3x the rate of other actions on Zillow. And making improvements to the home tour process is critical to achieving the seamless, connected experience we envision. Enabled by ShowingTime's integration with Zillow, real-time touring allows eligible buyers to get a tour confirmed in less than an hour with much less friction in the process. In February, we shared early results we were seeing with real-time touring in Atlanta. Connection rates were higher, and customers were more likely to work with our Premier Agent partners. That trend continued in Q1, leading to more tours being fulfilled and early indications of higher transaction rates. I'm pleased to share we have now rolled out real-time touring in our other 3 enhanced markets: Raleigh, Denver and Phoenix. Combined with the other initiatives we're driving in our enhanced markets, real-time touring is improving our funnel, driving meaningful improvements in our ability to connect higher-intent customers to our Premier Agent partners. Beyond our improvements in touring, we are continuing to enhance our partner network. As we've discussed, our Premier Agent partners are critical to delivering integrated service and, therefore, growth. What's good for our customers is good for our agent partners. Helping customers find and win their homes also helps agents grow their businesses. We are holding ourselves accountable to connect higher-intent customers to our partners and are holding our Premier Agent partners accountable to higher-performance standards as well. Across all 4 enhanced markets, we meaningfully consolidated our partner network with a focus on Premier Agent partners, who convert leads into transactions best, who treat our customers best and who are motivated to grow their businesses alongside us. And we are seeing the operational benefits from working with a tighter set of partners. First, we're able to work more closely to deliver a brand-aligned experience to our shared customers. And second, it has allowed us to quickly test new products and services and evaluate in real time how things are going before we scale. Most importantly, we are seeing improvements in customer satisfaction and engagement as we connect customers with our strongest partners in each market. For our next product road map update, I'll cover financing. This is an important investment for us because 87% of homes purchased are financed for the mortgage, 40% of all homebuyers start their journey shopping for a mortgage, and 80% of those don't yet have an agent. We told you before that we've turned our attention towards building the foundation for a substantial first-party, direct-to-consumer purchase mortgage origination business. Our top priorities include building overall awareness for Zillow Home Loans, building a better digital mortgage experience, bolstering our loan officers' tools and capabilities and working closely with our Premier Agent partner base to build integrated processes. And we're making progress on all fronts. You may recall last quarter, we spoke about the 2 broad ways in which customers connect with Zillow Home Loans, property first and financing first, so named based on whether our customer entered their transaction journey through a property inquiry or through a mortgage inquiry. I'll start with property first, 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. We are now seeing roughly 1 in 3 Premier Agent partners in our enhanced markets introduce customers to Zillow Home Loans, up from roughly 1 in 5 last quarter. Continue to drive conversion here, we focused on making it much easier for Premier Agent partners to connect customers with Zillow Home Loans, which makes for a more seamless connection process that generates a better customer experience. First, it provides our customers optionality. For customers who may have sought financing advice elsewhere, Premier Agent partners can give them the choice to speak with a Zillow Home Loans officer if they want to seek a second opinion. Second, our Premier Agent partners can connect a customer to a Zillow Home Loans officer with confidence because they can choose the loan officer who specializes in their market and who can provide a more knowledgeable, personalized financing experience. Let's now switch over to financing first, the other entry point, which is when a customer starts their moving journey by getting prequalified before they are connected to an agent. We've made some very good progress here. We've begun turning the dial on a number of different strategies to build overall awareness of Zillow Home Loans, including recently rolling out an update on the Zillow app to put financing at the forefront of the customer experience. We've rolled out a central hub for financing on the navigation bar at the bottom of the app, which gives the customer multiple options, including a "calculate what you can afford" tool and a direct connection to Zillow Home Loans via a get prequalified button. We began rolling this out in early April and expect it to be available to customers nationally by the end of Q2. We've also shipped an affordability search filter that gives home shopper the ability to customize the home details page, only showing them homes that fit within their monthly mortgage payment budget. These are 2 examples of how we're putting financing at the forefront, working to improve awareness of Zillow Home Loans and shipping features of the housing super app as we strive to solve our customers' complicated problems. As we've said before, we think there is a big prize for us in purchase mortgage originations and extending Zillow's umbrella over mortgages is a critical part of our transformation. As a result of all of our efforts across our mortgage investments, purchase loan origination volumes in Q1 doubled year-over-year. So I feel quite good about progress against that which we can control. But of course, we continue to live in a very challenging housing macro environment with no clear indications of a turn. Transactions continue to be low. High demand to move supports a stable pricing environment, but high rates has somewhat locked sellers into their existing low-rate mortgages. Though we see record combined new home and new apartment inventory on the way, it will take quite some time to balance demand with supply and to normalize the market. And while we may see rates come down at any time, we are certainly not counting on it. Meanwhile, we are well capitalized, generating positive operating cash flow and, heads down, making progress on our growth plan, converting traffic into transactions with the help of our rapid product innovation and our increasingly intertwined relationships with our terrific partners and loan officers. To close, I am pleased with how we started the year, as evidenced by our solid Q1 results. That said, we have a lot of work to do to drive outsized gains in our share of customer transactions moving forward, and our team is focused on delivering on our product road map in service of our customers. We appreciate you all being on the journey with us and look forward to connecting with you in the days and weeks ahead. With that, I'll pass it over to Allen. Allen?

Thanks, Rich. In Q1, we delivered results above our outlook for both revenue and EBITDA. Residential revenue also outperformed the tough housing industry, and we expect that trend to continue into Q2. Residential revenue was $361 million, down 14% year-over-year, outperforming the high end of our outlook range and the industry total transaction dollar decline of 27%, according to data from the National Association of Realtors. The relative outperformance was driven by a combination of the strength of our brand, a better-than-expected number of customer connections provided to our Premier Agent partners from the investments we have made that Rich already discussed and favorable tailwinds relative to the industry that we've discussed before. New construction revenue was also strong during Q1, growing 16% year-over-year as customers turned to new construction given tight housing inventory. Rentals revenue increased 21% year-over-year as rentals traffic on Zillow grew 16% year-over-year to 29 million average monthly unique visitors in Q1 per comScore despite industry headwinds in multifamily demand. Our industry-leading rentals traffic helped us drive accelerated year-over-year growth in the number of multifamily partners on our apps and sites when compared to Q4 2022. We also continue to see industry tailwinds with occupancy rates declining from historically high levels. And lower rental customer demand, combined with new supply coming onto the market, drove an increased need for advertising for landlords. Mortgages revenue was $26 million, with purchase loan origination volumes growing 9% sequentially and more than 100% year-over-year. We continue to make progress building our Zillow Home Loans purchase mortgage business. We began to assign our centralized team of loan officers to specific geographic areas and enhance the ability for Premier Agent partners and their buyers to choose their loan officer. We also made changes to our apps and sites to show Zillow Home Loans to more customers. Given this progress and to meet customer demand, we plan to increase our number of loan officers in the coming months while we closely monitor operational efficiencies. Our EBITDA expenses totaled $365 million in Q1, roughly flat from $362 million in Q4 and meeting the midpoint of the range implied in our outlook for Q1. We grew planned investments in our key growth initiatives with active cost management of other discretionary and nonpeople-related costs, such as direct advertising and marketing expenses, which were down both sequentially and year-over-year. On a GAAP basis, net loss was $22 million in Q1, and net loss margin was 5%. EBITDA was $104 million, above the midpoint of our outlook range by $48 million in Q1. EBITDA margin was 22%. This outperformance demonstrates the inherent profit leverage in our business model and how quickly revenue outperformance can flow through to the bottom line. We ended Q1 with $3.4 billion of cash and investments, flat from the end of 2022, which includes the benefit of net cash provided by operating activities as well as the impact of $86 million in share repurchases during Q1. Convertible debt was $1.7 billion at the end of Q1. Turning to our outlook for Q2. We expect total revenue to be $451 million to $479 million, implying a year-over-year decline of 8% at the midpoint of our outlook range. We expect residential revenue to be in the range of $341 million to $361 million, down 10% year-over-year at the midpoint of our outlook range as compared to our estimate for an industry transaction dollar decline between 18% and 28% year-over-year in Q2. This implies 4 consecutive quarters of outperformance relative to the industry. For Premier Agent, we estimate revenue will decrease 9% to 13% year-over-year. We expect the investments we have made in our funnel will continue to deliver benefits into Q2. As the macro backdrop remains choppy, we continue to focus on the inputs we can control, adding value to our customers and shipping great products while actively managing costs. For Q2, we expect EBITDA to be in the range of $61 million to $81 million, implying a 15% margin at the midpoint of our outlook range. Our outlook implies a planned increase in EBITDA expenses from $365 million in Q1 to a range of $390 million to $398 million for Q2, driven primarily by a sequential increase in marketing and advertising expenses, which is the largest driver. This is a combination of typical seasonal spending in Q2 and a pull forward of previously planned second half marketing as we are ready to test additional initiatives in our enhanced markets earlier than expected. We also have a small amount of advertising that we pushed from Q1 to Q2. In addition, we expect a modest increase in planned hiring investments as we continue to support our growth strategy. Part of the increase includes some hiring timing that was moved from Q1 to Q2 and staffing up to support product and market launches during the remainder of the year. We also expect to add variable resources for increased activity levels, such as hiring of additional loan officers, evidence that our growth strategy is gaining traction. Taken as a whole, we believe Q2 EBITDA expenses will be close to the run rates we expect in the second half based on what we know today. We are currently willing to look through the macroeconomic environment as we balance prudent investments while constantly seeking operating efficiencies across the business. We are making progress on reducing friction in our funnel, and we feel good about the progress we are making towards our growth pillars. We believe investing against our growth targets while managing costs is the right thing to do to drive customer transaction share and grow revenue per transaction. We have a high incremental margin business, where we expect to see operating leverage as we grow revenue across the housing industry cycle. In closing, we remain in a strong position to invest against our strategy to better serve more customers, resulting in share growth and more revenue per transaction. As we look forward, our priorities remain focused on innovating and executing on behalf of our customers and partners. We plan to continue to grow our customer engagement through: a compelling dream and shop experience; deliver a more integrated customer transaction experience to drive customers to choose to transact with us and our partners; invest in sustainable top line growth opportunities across the company, including new integrated services that are more scalable, less subject to earnings volatility and more capital efficient; and manage our cost structure and improve productivity, including continued prioritization of our investments that we expect will drive a profitable, scalable and positive operating cash flow company. And with that, operator, we'll open the line for questions.

[Operator Instructions] Our first question comes from the line of John Campbell with Stephens.

A question here on touring, and then I had a quick follow-up on mortgage. You guys have talked pretty consistently about the touring leads, converting it at 3x the rate. You guys have obviously moved more and more of that mix towards touring in recent quarters. But with a little bit more time under the belt, I'm curious how those touring lead conversions are looking in the test markets. Rich, you talked to more leads and a higher rate of connections. But specifically for those under Flex, could you maybe talk to the degree of uplift in actual conversions you're seeing? And would you characterize it as maybe modest improvements or something closer to step function improvements?

John, this is Jeremy Wacksman. I'll take that one. Yes, as Rich talked about, in general, the touring customer converts at a higher rate to transaction than a nontouring customer. And in our enhanced markets, where we're piloting this real-time touring, right, this ability to really kind of book your tour nearly instantly, we see less friction, which plugs the holes in the funnel and increases both the customers' ability to get the tour when they want. It also increases the ability for those customers to connect with our Premier Agent partners, and they report higher propensity to work with those Premier Agents. So all those things lead to a higher tour fulfillment rate. If you ask those customers, do they get to see the home when they want to see it, they're able to more often. And they end up liking working with the agents they're working with more often. So all of those mid-funnel metrics are really good indicators of higher transaction rates. As you know, transaction cohorts take a long time to mature. That's why we're giving you all kind of early indicator data on what historically looks like higher transaction rates. And as we get that data in those markets, we'll share more.

Okay. That's helpful. And then on mortgage, obviously, that's an important long-term growth driver for you guys. It's also an important cog for the super app. But granted, you're still very early stage, you're still in that build-out mode, so the strategy still might be in formation. But longer term, I'm curious how you're going to look to capitalize on the sizable CAC advantage. At the highest level, are you looking to maybe use that to kind of run at industry average margin with in-line pricing -- or, excuse me, with lower pricing and just basically take share? Or is that something where you can maybe see a higher-than-average margin and mortgage with just better pricing?

Yes. It's a great question on mortgage in the long term. And as Rich also talked about, very early and very focused on getting the machine, the factory, the partners and the customer experience all right and all working well together. You're right to point out, we do believe we have a great CAC advantage in mortgage. The 2 hardest things, I think, for a stand-alone mortgage company to work through are how to acquire customers and how to find a great referral network of agent partners. And those are the 2 advantages that we have at Zillow with our fantastic brand and audience. As Rich talked about, many customers on Zillow today are starting with that financing question, and so starting to explore ways to connect them with our own offering as well as have our agent partners refer those customers back to us who want to start with a property inquiry. So you're correct in that, that CAC advantage, which, in some cases, is 25% of industry cost, is one for us. I think it's too early to say how we might look to structure the business long term. I guess the only comment I'll make is that as we've been growing this business carefully with our great loan officers, our great agent partners, the feedback we get is what folks care most about is closing on time and having a great and high level of service. So of course, they want great value. But as we're building the technology and the people operations to make this go, the real value to a customer and to their agent is, is the loan going to close on time, do I have transparency on when that's going to happen, and do I get a great level of service. And so that's really what we're focused on. And we think if we can deliver that, that's a great business with great margins.

The next question is from Ryan McKeveny with Zelman.

And congrats on the results. I also wanted to dig in a bit on real-time touring. So the commentary in Atlanta and the other test markets obviously sounds encouraging, and the bigger-picture idea of 3x conversions is obviously important. I guess what should we be thinking about in terms of how quickly or how widespread you plan to roll out real-time touring beyond just the test markets, assumingly eventually getting to a point across the country? Is this -- I guess just any time line or way you would frame how we should think about moving beyond just kind of the test phase for these enhanced markets to something more widespread?

Yes. This is Jeremy. I'll take that one, too. Nothing to share yet other than, as Rich talked about, we're really excited that we went from 1 market to 4 markets in the last quarter. And of course, as we continue to see these signals of better customer experience, better funnel performance and also better agent feedback, we're excited to figure out how can we bring that to more customers and more partners and more markets. I will just caution, the complexity of that and the reason we're doing this market by market is because it is a new workflow. So to the customer, it maybe looks invisible, that you click this button on Zillow and something better happens and there's less friction, but it's an entirely different way for an agent team to connect with those customers than what they've done before. And so that's why we've been very methodical in working closely with these great, optimized partners we're working with to help them figure out how to retrain their agent teams to go meet these customers where they are. So part of the benefit of it is the less friction on the digital side. Part of the other benefit is the less friction on the operational side. And making sure we get that right with each partner is something we're really focused on.

Got it. No, that's great. And second question maybe for Allen. I think you alluded to this in your commentary on the OpEx and mentioning the uplift with some hiring into 2Q. I guess, generally, as you do go from, let's say, test markets to the broader footprint, either with touring or just the other initiatives, generally speaking, should we expect OpEx to kind of be on an incremental trend up as more of these new initiatives are rolled out? Or do you reach a point where effectively the OpEx or the cost base you guys have just gets incrementally leveraged?

Did I lose you?

No. We hear you, Allen.

Okay. Yes. Thanks, Ryan. So what I described is we gave some guidance kind of on our EBITDA OpEx to tick up in Q2. And we believe the guide we have for Q2 is pretty representative of what we expect in run rate as we close out the year. Obviously, as we see success and to the extent mortgage would be a great example, if volume were to tick up, there would be some variable resources that we'd hire to support that volume. But that would come also with the increase in revenue. So I think in terms of modeling, what I would say is we're having to tick up from Q1 to Q2. We expect that run rate, based on what we know today, to be relatively consistent as we close out the year. And as we make progress on these -- as we make progress on our initiatives, again, we'll continue to look for ways to fund them. And I would expect some variable costs, but I would expect variable profits or revenue to come with that.

The next question is from the line of Jamesmichael Sherman-Lewis with Citi.

This is Ron. I don't know if you can hear me okay.

Yes, we got you, Ron.

Great. So Rich, I had a question. Good to talk to you all again. I just wanted to ask a little bit more about the higher conversion rates that were mentioned in the letter. And I know we talked about touring and mortgages and whatnot. But you also mentioned mid-funnel investments that have been driving those higher conversion rates since reorienting the company. Can you just help us unpack those a little bit more in terms of what's driving those higher conversion rates? And then maybe as a follow-on question to Rich or Allen, great to see that 1 in 3 PA partners introduced a customer to Zillow Home Loans. But maybe talk just about the plan to go after that 80% of shoppers that don't have an agent. And I get that maybe the app is a way to do that, but any other plans would be helpful.

Ron, this is Rich. I think the -- probably, Jeremy, you're best positioned to address the higher conversion mid-funnel question, and then we'll talk about the second part. Yes.

Yes. Yes, I'm happy to take the first one. Yes. I mean Rich talked a little bit in his prepared remarks around just overall reducing funnel friction. Just as a way to tease out, I think, all of the consumer improvements and technology improvements we've made on our sites and apps independent of real-time touring -- we spend a lot of time talking about our growth pillars with you all. But there are many folks hard at work at Zillow just improving the customer experience for customers using our sites and apps outside of those markets and the partner experience and the software and the processes. And so that's things like exposing more folks and being more clear on the call to action on our websites and apps with what is a touring request, what is a financing request and what is a question that they want to ask. That's things like the software to ensure that customers more quickly can get connected with a partner when they want to ask that question and getting the right data from them to make sure that handoff and that live transfer to the agent goes well. So all these little things are very small, but they add up to very meaningful improvements in the number of customers that ultimately get connected and get a question answered, get what they want and then, ultimately, the quality of those connections to our agent partners. So I think that's -- it's more just teasing out all those relative improvements to the national experience juxtaposed against these very specific growth levers that we also are obviously very excited about.

Yes. And on the mortgage question, Ron, I mean we see it as a huge progress to go from 1 out of 5 Premier Agents in our enhanced markets referring or sending a ZHL potential customer back to us after we sent them the customer originally. Growing to 1 out of 3 is a pretty big win. Obviously, we have a lot of room to go. Ultimately, it will show up in the number of purchase mortgages we complete. But I think the answer to your question about how do we increase penetration, well, we're up 100% year-over-year. I hope we can continue at that pace. That's pretty good. But it's probably the answer -- maybe Jeremy could chime in. But it's more probably 100 more little things on funnel improvement, 100 more things, like Jeremy had just talked about, in terms of touring. I gave a couple of examples in my script of seemingly basic but really important stuff around insertion of Zillow Home Loans into the Zillow app itself in a really natural and prominent and logical way. That's just step 1. We see a long road of improvement ahead of us. And I, for one, will tell you my expectations are quite high.

Yes. And I mean maybe the only thing I'll add is just some comments Rich made earlier. I mean our priority for growing and scaling the overall mortgage business are building the overall awareness for Zillow Home Loans. The majority of our customers on our website, who ask a financing question, have no idea that we offer a mortgage. Building that better digital mortgage experience, Rich gave a couple of examples of that, we have this very fortunate position where folks who know they need and want a mortgage are spending all their time on Zillow shopping. And in helping them understand their affordability and their financing questions and getting those answered on their way towards taking a tour or getting prequalified is a unique opportunity for us. And then building a great platform for loan officers, helping them be efficient and provide and deliver great service for those customers. And then lastly, connecting that customer with an agent partner and having that experience be integrated. Because when you are buying, you're working with your agent and you're working with your loan officer to make your decision and actually get your transaction done. So it sounds simple to work across those 4 things, but it does require really great technology and process to be built across all 4 of those things to be able to take it from a smaller number of people to a far larger number of people. So we're just constantly working on all 4 of those, and we'll turn the dial as we make progress on them.

Our next question is from Brad Erickson with RBC.

So maybe 1 or 2 more on tours. Just based on all the positive indicators going on already mentioned, how would we see tours in this case start to translate to revenue in terms of, I guess, agents finding more value and conversion from those leads and then obviously wanting to pay more? Because I guess with the 3x conversion comment you've always given, that kind of implies that agents already pay more for those leads or would. Maybe that's right or not. But if you could just talk about the mechanics and the -- kind of the process of getting paid more on that higher conversion and sort of how you see that evolving, with real-time touring in particular.

Yes. This is Jeremy. I'll grab that. I mean you're right. On the one hand, as we are able to get more touring customers to agents, they are paying for those already more, especially in the Flex post-pay model. And then in theory, they're paying more for that in terms of increased ROI in their market-based pricing spend. And that's a little bit of the outperformance last quarter. And the guide for continued outperformance is about being able to help give more touring customers to our agent partners. And then real-time touring on top of that is more of an accelerant, right? So again, even with all that goodness in folks who want to take a tour as their starting point and the benefits that gives to Zillow and to our partners, the majority of those tours don't get fulfilled when the customer wants to take it, right? That's part of why we've made such a huge investment. I mean it's a great customer introduction, but it's still hindered with tons of friction and the agent having to jump through hoops to get the customer at the time they want to go see the home and make all that happen. And so if we can remove all that friction, it just sets the agent up to do what they do best, and that's why we talk so much about reducing the friction in the process leading to higher work-with rates, which are all of these early indicators of increasing transactions on top of that. So on the one hand, you're right. More touring customers is better. And then more real-time touring within that is even better, and so it's really the benefits of both that will show up in the revenue over time.

Got it. Maybe just one follow-up related to that then. Are you saying then that you're also -- I recognize the real-time touring, rolling it out in 4 markets, et cetera, and going presumably nationwide over time. But are you also seeing a mix of touring leads within the broader business? Is that what you're saying? Or am I not understanding that right?

Yes, that's correct. And we've talked about that before. Increasing just the overall share of connections or leads to our agents that are tour types of connections is something we have been working on for the last number of quarters. And so you've seen those gains in our performance, and we will continue to work on that. Again, it all goes back to that customer choice of: am I trying to ask a question; do I want to just go see the home; do I want to go see the home virtually, as Rich talked about; or do I need to answer a financing question first. And so as we get better at helping identify what the customer is trying to do and serve them up the right experience, that increases the number of folks that go through each door as well as increases the quality of the folks that go through each door.

The next question is from the line of Vincent Kardos with Jefferies.

This is Vincent on for John Colantuoni at Jefferies. I have a follow-up on real-time touring as well. Is there any color you're able to provide on the impact specifically from real-time touring in your test markets that you're seeing on the cost per transaction, the rate at which Premier Agents introduce clients to Zillow Home Loan officers or the ultimate mortgage attachment rate to buyers?

This is Jeremy. I mean I don't think anything beyond what we've given. I mean cost-wise, it's not really different. I mean I guess you could argue at scale and with mature technology, it might be a little more efficient because there's less hoops and less steps to go make the tour happen. That's one of the big benefits of the ShowingTime platform, right? When listing agents are using ShowingTime to manage their listings, they're more efficient, and their communications with all the buy-side agents that they need to work with to get that home sold is more efficient. So you could imagine a world of more efficiency generally on the overall kind of cost of a tour or cost of a listing. We don't really think about that way on our customer experience. And then in terms of adoption rates, I mean the only thing I'll say there is, in general, if we're able to make the connection between the buyer and the agent happen more often, when a buyer gets what they want, we see the buyers say they want to work with that agent and have a great experience with that agent more often. And that then you would expect would lead to higher success rate, working in transaction with that agent referring them to other services and having that integrated transaction. So nothing to share at this early stage. But that's why we're so focused on reducing that friction and increasing that success rate. Is because if we can make that happy connection happen and those folks end up working together, that's where the transaction goodness flows from.

Got it. Got it. And then one more quick one on the financing side of the business as well as these Premier Agents, is there anything you're able to tell us at this point about kind of what you've seen as mortgage rates have started to stabilize a little bit in kind of the 6.3% to 6.4% range over the past month or 2 here?

Are you seeing -- Brad, maybe? Are you seeing anything? I mean my commentary on the macro has it kind of more of the same. Brad, are you seeing anything -- how have our e-com forecasts for, say, transactions for the year changed recently? Not much, right?

Yes, not much. I think you saw out of the March quarter, we were talking about around $4.4 million, $4.5 million. For the full year, I think we're looking at like $4.3 million now. So there's been some modest changes, but relatively modest as we bounce around at these levels.

Which are low. I mean they're low levels. We've said for a couple of quarters now that we think over the next 10 years, there are going to be 60 million home transactions. And our eyes are focused on that. We're investing for that, and we want to have a meaningful and increasing percentage of those transactions happen in our sphere, so that we can monetize it and we can deliver value via the super app and many other means. So...

The next question is from Tom White with D.A. Davidson.

Maybe just a couple on the enhanced partner network initiative. Can you -- what's the response been, I guess, with kind of other, for lack of a better word, nonenhanced agents in the markets where you've kind of rolled it out, including agents that maybe were Premier Agents but might not make the cut to be kind of enhanced? Just curious kind of how that dynamic is going, whether they're still getting leads. And then just a housekeeping question. The marketing spend that you called out that had originally been planned for the second half but pulled forward, can you maybe quantify that a bit for us?

Well, maybe, Jeremy, maybe you start and then Allen finish?

Yes, be happy to. Yes. So on the enhanced markets, I mean, it's important to remember that our strategy for a while has been to try and enhance who we work with, right? The Best of Zillow program, all of our work on kind of higher-quality agent partners and agent teams and all of our training that we do with our agents nationally, we have been preaching quality and working with them on quality experiences and how to work with our customers generally. And so the enhanced markets, where we're being even more directed and even more prescriptive and really, where we've consolidated around a fewer set of partners so we can more cleanly test more of these integrated experiences, just feels like a heightened version of that. So the overall feedback which -- of we want to work with the best, and we want to make sure you all can help us with our shared customer is not new, and so I think that helps with the conversation. Of course, as you align yourselves and make decisions, and we're always optimizing the partner network, you're going to have conversations that are great, and you're going to have conversations with folks where it's not working out as well. But that's really on the margin. And like I said, I think it's because this has kind of been our strategy for a while now, and you're just seeing a more accelerated version of it in these 4 markets.

Do you want to hit the marketing, too? Or Allen, do you want to hit that?

I'm happy to. Or Jeremy will hook you up.

Yes, Allen.

I would just say on the marketing, the majority of the tick up for marketing and advertising spend is based on seasonality. So the amounts that we're pulling from the second half, as we're ready to test around some of our initiatives in our enhanced markets, is a smaller portion of the tick up. And then there was an even smaller portion of what was pushed from Q1 to Q2. So again, the big driver here is seasonality. But we are excited that we're able to test some things earlier than expected, and so we've made those switches throughout the year in prioritizing that spend and moving it around. I don't know, Jeremy, would you add anything?

Yes. No, I think that's right.

Our next question is from Jay McCanless with Wedbush.

Sorry to press on this topic, but I don't -- still not understanding. When you talk about the better-than-expected number of connections, that -- those connections weren't from a specific app or a specific process that you have there but it's more you fix the pipeline of how those leads got to the agents. And I guess the kind of the second part of that question is, if that pipeline wasn't working before, do you feel like you may have lost some business that now you'll be gaining and helping you to grow ahead of the market?

Jeremy, it sounds like you have a reasonable -- I mean...

Yes. I mean I guess, I think, Rich, you talked about it earlier as fixing our leaky funnel, right? It's really just...

I don't like to talk about it as a leaky funnel anymore. That implies we're broke. We're like smoothing. We're getting better at converting the leads that are already in our funnel into transactions anyways.

And I think that's probably the right way to think about it to your question, Jay. It's not that we are missing something before. It's that as we make it easier for people to find what they want, both digitally before they go submit, but then also post submit, as they connect with either a Premier Agent partner or someone in the Zillow ecosystem or as the software works to follow up with them. It's all those little things to help that customer ultimately turn into the right type of connection to our partners. And so we've talked for a while now about focusing on mid-funnel. That's really what that is. It's -- we have 200-plus million folks coming to our webs and apps -- website and apps every month, and yet we're only a fraction of those folks are transacting with our partners in some form or fashion. And so being able to find the places to help nurture those folks along and convert those folks into transactions and into relationships with our Premier Agent and our loan officers, that's really what the work is. And so it's not about if you pro forma that in history with something missing, it's more about smoothing, to use Richard's point, versus fixing what was a funnel that had a lot of drop-off steps in it.

And it has all kinds of stuff we're doing way up funnel to personalize and prequalify people and get them ready to be handed off. Right through the handoff and the quality of the partner is really important as we've been -- as we've been talking about. And then after we introduce them to the partner, getting them all the way to the transaction and integrating financing and integrating touring. And anyway, it's a continuum. There isn't like some discrete handoff point, and then we wash our hands and we're done with it. No, our whole business model has been reoriented around aligning our interests from a business model perspective with the customers' interest of actually getting into their house and getting a mortgage. And that aligns it with our partner's interest, too. And so you're going to hear, like it or not, a lot more of this in the quarters to come. And as Jeremy was saying, there's just a lot of wood to chop here. Like we have so much wood to chop because we basically get a look at every mover. Almost every mover comes and uses one of our sites or apps. And we're only monetizing an embarrassingly small portion of them right now.

Understood. All right. And then the second question I had -- and kudos on the growth in new construction. And I was wondering, you said when you were given the guidance about resi being down 10% in the midpoint, probably doing better than the overall market. Is that just Zillow's residential revenue versus existing homes? Or is there a forecast around new housing growth built in there? And if so, maybe could you talk about what you're thinking the growth rates for those 2 different types of housing would be.

Want me to start on that, Rich?

Yes, yes. Sure, Brad.

So the existing home sale forecast that we talked about is -- we're talking about down 18% to down 28% in total transaction dollar volumes for Q2, and so our residential outperformance we talked about is versus that existing home market. That does not include, obviously, the new home market. The new home market is a smaller part of our overall business. So the part that more closely correlates with our business is the existing home sales, so that's why you see us reference that and correlate. And as we called out, the things that are driving the benefits that we see in Q1, we expect to continue into Q2.

This completes the allotted time for questions. I will now turn the call back over to Rich Barton for any closing remarks.

Well, great chatting with everybody. Thanks for taking the time on this busy earnings day. You can see we feel really good about a bunch of incremental improvements adding up to good relative results, good results relative to the industry. We look forward to chatting with you soon. Thanks a lot.

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