Hello, and welcome to Zillow's Second Quarter 2024 Earnings Call. [Operator Instructions] Also, as a reminder, this conference is being recorded today. [Operator Instructions] Brad, you may begin.

Thank you. Good afternoon, and welcome to Zillow Group's Second Quarter 2024 Call. Joining me today to discuss our results are Zillow Group's Co-Founder and Co-Executive Chairman, Rich Barton; newly-appointed CEO, Jeremy Wacksman; and CFO, Jeremy Hofmann. During today's 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 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 for the remarks followed by live Q&A. With that, I will turn the call over to Rich.

Thanks, Brad. Good afternoon and good evening to everyone dialing in to hear our second quarter 2024 results. We delivered another strong quarter in an ongoing challenging real estate macro environment, exceeding our outlook for revenue and EBITDA as we continue to successfully execute on our growth strategy. Today, we also announced Jeremy Wacksman has been promoted to Chief Executive Officer of Zillow Group, and I will serve as Co-Exec Chair of the Board of Directors, alongside my co-founder, Lloyd Frink. I have been CEO and/or Chairman since the day Lloyd and I seed funded the company in 2004 and will remain engaged. My role, however, will shift to supporting and counseling Jeremy Wacksman and the leadership team rather than daily operational leadership. Before talking about Jeremy and the team, let me talk about the state of the company. The short version is that Zillow business is in great shape financially, strategically, operationally and organizationally. We are executing well and are consistently outperforming the broader residential real estate industry as we methodically ship great software and services to digitize and integrate home buying, selling, financing, and renting, empowering consumers and partners alike. We have done this inside the Zillow-branded housing super app, the integrated consumer and partner experience we are rolling out in markets across the country. And we continue to increase the breadth of our market coverage and the depth of transaction penetration within those markets. I am pleased with where we are in this effort and the opportunity we see for many years of growth ahead. We have also increasingly leveraged our brand trust and massive audience to diversify our revenue streams. We've leaned hard into the obvious and adjacent Rentals and purchase Mortgage opportunities, both of which are now exciting growth businesses for Zillow. Rentals now account…

Thanks, Rich. Having spent the past 15 years at Zillow, I can honestly say taking on this role is the honor of my career. I love this company and I love this team, and I believe deeply in the digital future of real estate we're building for the benefit of buyers, sellers, renters, agents, the broader industry and our shareholders. Zillow has a huge audience, a partner network comprising some of the best agent teams in the business and tech and product prowess that is unmatched in residential real estate. With an increasingly diversified and growing business, we are primed to capitalize on the strength of the Zillow brand and capture a meaningful slice of the $30 billion accessible TAM in real estate, a slice that more closely reflects our reach in the category. And our results show we're making great headway. I'm excited to share that Zillow had another strong quarter, reporting better-than-expected revenue growth across the business. Q2 revenue was $572 million, up 13% year-over-year, which marks the eighth consecutive quarter our total revenue results have outperformed the residential real estate industry. We delivered double-digit year-over-year revenue growth and demonstrated cost discipline while continuing to invest to deliver solid EBITDA margin expansion year-over-year. Q2 Residential revenue grew 8% year-over-year to $409 million. Rentals continued its strong growth with $117 million revenue in Q2, up 29% year-over-year. Multifamily revenue was up 44% year-over-year, driven by strong growth in our multifamily property count, with 44,000 properties at the end of Q2, up from 40,000 at the end of Q1. We also continued to make strong progress in Mortgages, with Q2 revenue of $34 million, up 42% year-over-year and purchase mortgage origination volume growing 125% year-over-year. These successes come despite a persistently challenging mortgage rate environment as evidenced by our estimate…

Thanks, Jeremy, and congratulations. I'm really excited for you and for us as you lead us through the next chapter for the company. I will start with our Q2 2024 results, which exceeded expectations for revenue and EBITDA. Revenue in Q2 was up 13% year-over-year to $572 million, which was $39 million above the midpoint of our outlook range. Our strategy is working, and we are seeing our investments drive outperformance across each of our revenue categories, including Residential, Rentals and Mortgages. For the quarter, we outperformed the broader residential real estate industry growth of 3%, according to data from the NAR. Additionally, we estimate that the total purchase loan volume for mortgage buyers, which is more aligned with our customer base for Premier Agent, was down mid-single digits year-over-year in Q2 and underperformed the overall market. On a GAAP basis, Q2 net loss was $17 million, representing 3% of our revenue. EBITDA was $134 million for the quarter, resulting in a 23% EBITDA margin, a year-over-year margin expansion of more than 100 basis points. The combination of our revenue outperformance and effective cost management delivered the improved year-over-year EBITDA results. Q2 Residential revenue grew 8% year-over-year to $409 million, outperforming our outlook range. Our Premier Agent revenue benefited from the ongoing investments in our top and mid-funnel experiences that drove improvements in our overall connection rates, and we also saw better-than-expected conversion rates. Looking at our relative performance, the investments we have made since the beginning of 2022 throughout our funnel have paid off. Over the last 2 years, we have increased our ability to connect customers with partner agents by over 2,000 basis points. This has led to Residential revenue in Q2 growing 4% when compared to the same period in 2022 or more than 2,000 basis points…

[Operator Instructions] Our first question comes from Ronald Josey from Citi.

So congrats on the new roles, Jeremy specifically, and Rich, back to Chairman. You mentioned in your conversation upfront just how Zillow is in great shape financially, strategically, operationally, organizationally and why now is the right time. At the same time, the industry is going through a change. So just a little more insights on why now would be helpful. And then more importantly, I guess, when we have Enhanced Markets now in 36 markets by the end of August, 40 by the end of the year, I think accounting for around call it, 40% of total connections, we get a lot of questions around the benefits of Enhanced Markets. So can you take a step back and just remind us on the benefits of Enhanced Markets as we get to that, call it, 6% of transactions? I'd love to hear more about what you're seeing in some of the markets. And then given the structural change in the industry, how does Enhanced Markets sort of impact that or benefit from it?

Thanks, Ron. So maybe I'll take the first bit. Jeremy Wacksman, you can come in on the second. Yes. I mean it's incredibly impressive to me, Ron, how well we are executing as a company despite all of the kind of stormy weather that constitutes the real estate macro. I mean, we're just posting terrific numbers. We have -- for 3 years now, since Jeremy Wacksman was promoted to COO running most of the company in all the lines of business, we have talked about our housing super app strategy and our Rentals strategy and our Mortgage strategy, and I would say you all as investors have been like, okay, show me that, that is actually going to work as a way to digitize and integrate this transaction and create a really big long-term growth opportunity. And I would say now that strategically, we have kind of derisked the concept of what we're building here. We have a long way to go to execute and fulfill what I see as our ultimate right of market share and claiming that and growth. But strategically, we are in really good shape, and that is in no small part due to Jeremy Wacksman's leadership over the last few years getting this all together. And so -- that is why the time is right. Jeremy is ready. The company is ready. And Ron, personally, I am ready as well. I'm not going anywhere. I'm not doing anything else, but I'm really excited to be moving to a role of coach and adviser rather than the daily field general. Thank you. But maybe I'll have our new Chief Executive Officer, Jeremy Wacksman, answer the second part of your question.

Absolutely. Thanks, Ron. On Enhanced Markets, just a reminder, since you asked. The metrics there, it's market share, and we measure that in terms of revenue per total transaction value, and then it's also revenue per transaction, right? So [ num ] transactions and revenue per transaction gets you to that. And 36 markets by the end of August on our way to 40 by the end of the year, that -- in each of those markets, we're not serving 100% of customers. So I think we gave a stat earlier this year, that's going to be about 20% of all customers will get that experience, and that experience allows them to get Real Time Touring in a touring experience, Zillow Home Loans as a financing option if they choose it, and then most importantly, the enhanced partner network, the handpicked set of partners that Jeremy Hofmann talked about in his prepared remarks that really deliver a great job, provide great customer service, [ run ] professionalized businesses for the modern Internet consumer. So that's what the Enhanced Market experience is. As we bring that to more and more customers, we are seeing, in the markets we're in, revenue per total transaction value gains, and we expect those gains to contribute to more of our Residential and total company revenue as we get to that 20% of customers, and then into next year, more of those customers. So the land and expand strategy is working well. We're really excited to accelerate to 36 markets by the end of August and be at 40 markets by the end of the year.

Our next question comes from Brad Erickson from RBC. We'll come back. So we'll go to Nick Jones from Citizens JMP.

Great. Congratulations, Jeremy. I have 2 questions. First, can you maybe double-click on the Rentals business? 44% growth in multifamily is impressive. Can you maybe speak to the key drivers behind the success? How are the conversations evolving with the multifamily operators giving you the confidence to kind of spend after that $1 billion revenue opportunity you've hung out? And then the second question may be on traffic volumes. You called out 3x more app users. I think as the competitive environment heats up on residential, folks are increasingly focused on some of these engagement metrics. Can you maybe speak to the -- or remind us of the benefits of the app as opposed to web traffic or mobile web?

Yes. Thanks, Nick. Thanks for the questions. On Rentals, yes, as I said a little bit in my prepared remarks, and we shared for those that were on in February a more detailed investor presentation on our Rentals strategy, we're so excited about our Rentals strategy because it's really unique, and it really solves the consumer problem, right? What renters want is to find all the inventory. There is no one place [ full of ] inventory. There is no MLS for rentals. So they end up having to shop everywhere during a really compressed time frame. It's super stressful. And so we set out years ago to try and assemble as much of the inventory as possible, both multifamily, the big buildings we all know, and long tail, the millions of homes and small unit properties that are out there for rent that turn over infrequently by a long tail of owners. And we've done that. We now have the most listings. We still don't have them all. Every year, we're trying to go after more, and we're growing our listing count. But we have the most inventory of anyone out there, and that has yielded us the most audience, the biggest audience of renters, right? So Zillow's rental network is the largest audience. It just grew 20% year-over-year this last month, and it continues to grow because renters want that product. And so that two-sided marketplace now gives way to the monetization growth you're seeing coming from multifamily. And so that's the stats I gave in my prepared remarks. 44,000 buildings on Zillow now up from 40,000 last quarter, that's driving the 29% revenue growth you're seeing, which 44% revenue growth in multifamily, that's coming from that property count and that engagement with the advertisers. So that's what…

Our next question, we'll return to Brad Erickson from RBC.

A couple of questions just on the -- I have to ask the obligatory commission question. Just first, just latest and greatest views on kind of the changes coming and any noticeable observations yet? And kind of what feedback are you getting from your PAs as we head into August 17? And then second, I guess if we assume that any effect of the regulatory changes may vary a lot up and down kind of the spectrum of the market, talk about how you view Zillow's exposure, particularly to the degree that there is any change with commissions.

Yes, Brad. It's Jeremy Hofmann. I'll take that one. I think we can't really speak to broad commission trends just because 80% of our Premier Agent base is in that top 20% of all producers. So we're working with the top agents versus a broad swath of professionals. That said, across our business, we've seen commission rates stay in a pretty tight band over the past 3 years. 2024 is down a few basis points versus 2023, but in line with 2022 levels. And I think just stepping back, we've been pretty consistent here for a while. We believe we and our partners are the outsized beneficiaries of these changes coming in the industry. We have the most customers. We work with the best partners. We provide the most technology. And we expect our PAs will deliver and get paid because they provide great service. And they and we, we think, will be share takers in any future evolution or dispersion of the industry. So that's how we're seeing it. That's been very consistent for a while now, and nothing has really changed our minds on that based on the latest things that we can see.

Our next question comes from Mark Mahaney from Evercore.

Two things. One, I just want to wish you, Rich, the best at whatever you're going to do operationally going forward. So just congrats on all the success with the company over the years, and best luck to Jeremy in the new CEO role. I just want to ask one question about the customer transaction share. So I know the goal has long been to get to the 6%. And could you just quantify, are there lead markets where you think you're -- are there any lead markets now where you think you're within spitting distance of that, of the different Enhanced Markets that you're in? I know you provided some data around, but I just wanted to focus just on that number. Are there other markets where you think you're within 1 point or 1.5 points of that?

Yes. Thanks, Mark. I'll -- on the market share gains, I said in my prepared remarks, the way we're measuring that is revenue per total transaction value growth. And in the first -- in the oldest Enhanced Markets where we have the most data and we have good year-over-years, which we've given you an update on earlier this year, we said we were up 50% year-over-year. That growth has accelerated to 80% year-over-year in those first 4. And then in the 13 that we've been in since Q1, we don't have year-over-years yet, but the early trend line is gains in revenue per total transaction value across those 13. So that curve looks similar to us. As we get into next year, we'll have year-over-years on more markets. So that's what gives us confidence that as we take this recipe, this housing super app integrated experience to more partners in each market and to more markets, we'll see that same trend line of share in revenue per total transaction value grow the way we're seeing it in our 4 original markets.

And Mark, I'll just pile on a bit. It's Jeremy Hofmann. Jeremy Wacksman said it, we were at 50% in the first 4 markets. We grew revenue, in 2023, 50% versus total transaction value, and we're now at 80% through 18 months of that. So you're seeing a consistent steady growth. And then on top of that, we saw really good results in our oldest markets, which we put in the investor deck we did in February, where in Phoenix and Atlanta over a, call it, 2-year period, we saw 80% and 90% transaction growth during that period of time, which is effectively -- is close to double. So those are the types of proof points that make us feel quite good and why you see us accelerating the way that we have, going from 19 to 36 pretty quickly, is just because we keep seeing really solid results that we think sets us up quite well for continued future growth.

Our next question comes from Ryan McKeveny from Zelman.

Congrats, Jeremy and Rich. Nice job on the quarter. I wanted to ask, from a macro perspective, around first-time buyers. So there's been periods in the past where that was called out as a tailwind. Last quarter, it was mentioned as a headwind within the guidance, and obviously, you strongly outperformed that. So is your sense that this quarter's results came in where they were in spite of a drag that did exist from that first-time buyer dynamic? Or did something maybe change beneath the surface where that just didn't turn out to be the headwinds you might have expected? And kind of part 2 of that is just any views on this dynamic into the third quarter and kind of what's embedded within the guidance there?

Yes, sure, Ryan. I'll take it. It's Jeremy Hofmann. I think the Mortgages market was challenged in Q2. We called that out in the May call, and it persisted. So we think that it was down mid-single digits year-over-year versus 3% up for the housing market. So there was a headwind there. We just happened to perform quite well throughout it. And that's a great story for us. It's one that we feel quite good about, and that's a function, really, of us outperforming across the business. I think we've really performed well. On the Residential side, we had a soft pocket in late March and early April when rates spiked but then they normalize, and as a result, our MBP marketplace got healthier throughout the quarter, both on new sales and lower churn. And then additionally, the conversion across Premier Agent, both MBP and Flex, was stronger than we anticipated, and that flowed through right to revenue. And then on the rest of the Residential side, Showcase is growing nicely, the New Construction marketplace is growing nicely and Follow Up Boss is outperforming what we expected in early days of the acquisition. And then you have Mortgages and Rentals, obviously. Jeremy has talked a bit about that already, but Rentals was up 29%, multifamily was up 44% and then ZHL grew 125%. So really, when we look across all of the business in Q2, it felt quite good regardless of what's going on in the first-time homebuyer market. And then I'd be suffice to say, like on the EBITDA front, we're pretty proud of the consistent ability to accurately forecast and hold ourselves accountable on costs. As we tell the team, when we're in a market like this, revenue is harder to forecast, which makes it even more important to be really good on the cost line. And for Q2, we expected $440 million of costs, we came in at $438 million. So when we outperform on the revenue front, it all flowed through to the EBITDA line.

That's very helpful. And also on the Mortgage piece, so obviously some momentum under the surface there, sequentially and year-over-year growing nicely. I know there are some moving pieces with the very significant growth in purchase origination volume, but some of the offset on the Marketplace side. Can you just remind us where the Marketplace stands at this point, both strategically in terms of where that fits in, maybe in terms of loan products or differences against ZHL? And just kind of how you think of that mix between ZHL and Marketplace moving forward?

Yes. Ryan, I can take it. It's Jeremy Hofmann, and then Jeremy Wacksman may pile in as well. But I think that you're right that the bulk of the business going forward is going to be Zillow Home Loans. So you see the Mortgage category start to more accurately map to the Zillow Home Loans growth. That's not to say the Marketplace isn't important, too. It's just secondary. They're going to be -- inevitably, there are going to be times in which we can't service a customer through Zillow Home Loans, and we like having the Marketplace as a way to serve customers regardless, right? We're always about customer choice and making sure that in financing, we're providing customer choice as well. So we feel quite good about both of those businesses, but the vast majority of the focus going forward is going to be in Zillow Home Loans.

Our next question comes from John Campbell from Stephens.

Rich, congrats on helping position the business for a pretty promising set up here in the years ahead. Glad you'll be able to see it through on the Board seat. And then, of course, congrats to you, Jeremy. Well deserved. But a two-part question here. First on the Touring Agreement. You guys called out early indicators of success in your pilot. I think you also, for the last couple of years, have said the touring connections have converted at 3x the rate. I've got to believe that Touring Agreement probably boost that conversion rates. It's obviously signaling even more or greater intent. Maybe if you could talk -- go a little bit deeper into what you're seeing thus far? And then I've got one more quick one on Zillow Home Loans.

Yes. Thanks, John. Thanks for the congrats. And on touring, you're right. We continue to see touring actions convert higher than any other action on Zillow, and our expectation is the Touring Agreement will be a net benefit to conversion because it's in the flow post-introduction, and so it's just education and it's helpful qualification. And the pilot was small. We saw basically no negative to like, likely positive impact there as we started to engage consumers. And so that's what gave us the confidence to roll it out to take it to now almost 80% of connections, and we expect to get to all eventually. So I think you nailed the idea of education to the consumer, done in a consumer-friendly way, helps get that consumer more informed before they get to the tour and makes it more likely that they'll want to work with the agent. As you know, having worked with us and followed us for a long time, the lag on seeing that data and transactions is long, right? So a pilot market, a tour experience, measuring transaction rates with those agents is going to be a period of quarters and quarters and quarters, but the early indicator data gave us confidence that this is a good thing. And that's why we proceeded so rapidly to roll it out.

Okay. That's good to hear. And then on the Zillow Home Loans, I mean, obviously, refi was, I think, about half of the origination mix 2 years ago. That dropped to 1% last year. So I think it's probably a good problem you're having as far as like capacity issues. It seems like you got an exorbitant amount of demand on purchase, but I'm just curious about how you're thinking about the staffing, how you're thinking about, if there is a degree of a mini refi wave, if you feel like you can participate in that in the year or so ahead.

Yes. I mean our focus has been on purchase, not just because of where the refi market was, and I think it will remain on purchase. And that's just because of what we've talked about as our opportunity, right? You've heard us talk a lot about -- I mean, everything we've said about the integrated transaction and the benefits for the consumer. It is for the homebuyer, and our ability to go have more and more customers who either start by asking that purchase financing question or ask that go-shop question.end up getting exposure to our great agents and our great financing options. That's demand that we won't tap out of for a long time, and that's what we're methodically scaling, both in our Enhanced Markets strategy as [ they all want ] more Enhanced Markets, but also digitally to our consumers that come to the website and actually want to start with a, "What can I afford? This is a tough market," question. So we are, I think, in a privileged position to be able to go build durable growth in the Mortgage business really focused on purchase, and we're excited about how we did in Q2, and we're excited about our plans for Q3.

Our next question comes from John Colantuoni from Jefferies.

So I wanted to just start with the housing market. I was hoping you could unpack the outlook for mid-single-digit growth in residential housing transactions during the third quarter. With pending sales down 8% in June, I'm just curious if your outlook incorporates an assumption that the market bounces back a bit in August and September based on potentially recent pickup in activity. And second, it looks like your outlook for the Residential revenue segment implies a bit of underperformance for the Premier Agent business relative to your mid-single-digit housing market outlook, if you exclude the M&A tailwind from Follow Up Boss. Can you just talk about the drivers of that underperformance, and maybe if you've embedded some room for upside in that assumption?

Yes. Thanks, John. It's Jeremy Hofmann, so I'll take it. Similar to what we've said in the past, we don't really overfocus on the quarter-to-quarter fluctuations, given how fluid macro has been and will continue to be. We're pleased that we've outperformed the industry by 2,000 basis points in Residential over the last 2 years, and that's really a credit to the product experiences that we're driving, the conversion gains that we're driving and the partner experiences that we're driving. At the same time, we are seeing healthy growth versus that mortgage market. So that was called out earlier in the in the call. That's where we tend to index -- our customer base tends to index, and those folks are struggling comparatively. So they -- the first-time homebuyer, if you measure it by the mortgage market, is underperforming 800 to 1,000 basis points per in Q2, and we think those trends probably continue into Q3. So I think we feel all in quite good about where the business is, knowing that, that's out there. And I think most important is just the consistent outperformance we've had across both Residential and the total company. We expect to continue to do so as we roll out our Enhanced Markets and see success there, right? Jeremy has talked a lot about that, but that's a really important piece to the future story, and we're just getting started rolling markets out. And I will kind of step back and remind you all, Q1, we were up 13% year-over-year. As a company, Q2, we were up 13% year-over-year. Our outlook calls for a revenue range of 10% to 13% for Q3. We're clearly well on our way to double-digit revenue growth in 2024 and margin expansion, and it's been a rough housing market. So we sit there and feel like the business is really well positioned despite all that.

Our next question comes from Tom Champion from Piper Sandler.

Jeremy, as you take the baton as CEO, what's your top goal for the business over the medium term? What are you looking to achieve? And then maybe for Jeremy Hofmann, can you talk about the margin profile associated with Enhanced Markets? Does this get you closer to GAAP profitability?

Yes. I'll start, Tom, and maybe Jeremy, you can hit margin profile. I mean, Tom, it's going to sound a little boring, but my focus and strategy is more of what we've been doing. And I think accelerating and continuing to roll out our Enhanced Markets strategy, continuing to grow our Rentals business into the opportunity we've laid out for you all, continuing to build Mortgage into the big business we know it can be, and then powering all that with the amazing software and technology we are building to help rewire the real estate industry for agents, teams and brokers writ large. Like that has been our strategy we've talked to you all about for the last however many calls. You're seeing the early signs and results of that play out in the output numbers. And we're really excited to have more of this come to light. So you see more of it in the output numbers in the years to come as we grow into the share target we have for you all, and then grow our business beyond that. So oftentimes, when there's a leadership change, there's like, what's going to change question. And the answer is not much is going to change. We're going to focus on continuing to execute, deliver, scale and accelerate this into the future.

Yes. And then I can take the margin question. I think it's less about Enhanced Markets. In our march to GAAP profitability, it's really around the cost structure we've laid out. So we have roughly $1 billion in fixed costs today. We feel like we're pretty well invested there to at least get to our 2025 share targets. And so we expect that to grow kind of modestly with inflation. Variable is 25% to 30% of revenue. That will scale a little faster than revenue when we ramp up, but ultimately, that's a good profile, and then the balance is in marketing and advertising. So we feel good that if we are controlled on the fixed side, we can grow revenue faster than cost on the EBITDA front, and you're seeing that in the margin expansion you've seen throughout this year so far. And then going forward on the GAAP side, the next thing that's really important to us is getting stock-based compensation in a good spot. So we've committed to shrinking SBC total dollars year-over-year in '24 versus '23, and then even more so as a percentage of revenue. And it's important to remember that 90% of our SBC cost sits in that fixed bucket. So as we keep our eyes really, really focused on that, we're going to get more and more leverage on SBC over time, and that puts us on a nice path to get to GAAP profitability.

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

Thank you all. As you guys can see, the company is really doing well. The company is on firm footing, and as you can also see demonstrated in this call and on many calls before, Jeremy Wacksman is ready to lead and the broader leadership team is ready as well. And so I'm super excited. There is a ton clean water in front of the company, lots of opportunity. Maybe the wind will change direction and come behind us one of these days, but we certainly don't need it. But I'm sure it will happen at some point. I want to thank you all for being on the journey with us. We'll talk to you soon.