Zillow Group, Inc. Class C (Z) Q4 2024 Earnings Report, Transcript and Summary

Hello, and welcome to Zillow Group's Fourth Quarter 2024 Financial Results Call. [Operator Instructions] Also as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Brad, you may begin.

Thank you. Good afternoon, and welcome to Zillow Group's Fourth Quarter and Full Year 2024 Call. Joining me today to discuss our results are Zillow Group's 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 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 updated investor presentation, shareholder letter and earnings release all of which can be found on our Investor Relations website, as they contain important information about GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures. We will open the call with remarks followed by live Q&A. And with that, I will now turn the call over to Jeremy Wacksman.

Thank you, Brad, and good afternoon, everyone. Thank you for joining us today. We're excited to share our fourth quarter and full year 2024 results with you. Zillow is delivering value to movers and real estate professionals with our products and services, and that's translating to strong performance across our business. We have the leading brand in residential real estate with the largest and most engaged audience, a significant total addressable market, and we are executing well on our differentiated housing super app strategy. We believe all of this positions us to deliver sustainable, profitable growth for our shareholders. As you'll hear more about in a moment, we met our stated goals for 2024 and expect to continue our momentum in 2025. This momentum includes being on track to meet our goal of 6% share of customer transactions by the end of this year. The results we're reporting today demonstrate how we are executing and seizing our opportunity to transform and digitize residential real estate. As with everything we do at Zillow, our approach begins with the movers we serve. Over the past 20 years, we've built our top of funnel advantage by releasing a steady drumbeat of products, services and software tools designed to delight and empower customers throughout their moving journey. From the Zestimate and our vast two-sided marketplace of homes for sale or rent to Zillow Showcase and improvements to both in-person and virtual touring, to natural language search and Zillow Home Loans BuyAbility, helping people find the right home for them and their budget. As a result, Zillow has the largest audience in both for sale and rentals, with 4x the app engagement of the next company in our category, a lead we've widened this past year. About 2/3 of the real estate audience uses Zillow somewhere along their journey, more than twice any other company in category, and 80% of that traffic is coming to us directly and organically. Increasingly, we are better able to identify high intent movers within our large audience and connect them with high-performing real estate professionals. Ultimately, leading to more people transacting with us and our partners, resulting in greater revenue. And as we continue to leverage our cost structure, expanding EBITDA margins show up alongside our consistently strong revenue performance, and ultimately, we believe it will drive sustainable GAAP profitability. Now on to our fourth quarter and full year 2024 results. We reported total Q4 revenue of $554 million, up 17% year-over-year, above our outlook range, and I'm proud to share that we met our target of double-digit revenue growth for full year 2024, up 15% year-over-year to $2.2 billion despite a persistently challenged housing market that saw only 6% total transaction value growth for the year. We also met our target for expanded EBITDA margin for 2024. As we invested strategically over the course of the year, we maintained cost discipline, expanding our EBITDA margin by 200 basis points, all of which sets us up well for 2025. This quarter, we've also released a new investor presentation available on our Investor Relations website. In that presentation and in the bulk of my remarks today, we'll provide an update on how we've been executing our strategy and why we are confident in our ability to achieve our goals in the future and transform U.S. residential real estate. Importantly, we believe we have a clear path to $5 billion in revenue and 45% EBITDA margin in a normalized housing market, which Jeremy Hofmann will dive into further during his remarks. As you'll see in the investor presentation, we are now articulating our revenue in 2 major categories: for sale and rentals. The for sale category includes revenue from residential and mortgages, which we manage together to best serve the buyers and sellers who work with us. The vast majority need both a great real estate agent to represent them and a great mortgage. And we are building our products and managing our teams more closely together as a result, and want to ensure that the way we're talking to you about our business reflects how we manage it. Our for sale revenue in Q4 was up 15% with 11% growth in residential revenue and 86% growth in mortgages revenue. For rentals, 2024 was a seminal year, and we finished strong in Q4 with revenue up 25% year-over-year. We increased the number of multifamily properties on Zillow to 50,000, up from 37,000 at the end of 2023. Across the business, we are pleased with our execution in Q4 and throughout 2024, and are excited about the foundation we've laid for future growth. Now I'd like to dive a bit deeper on the progress we're making, starting with for sale. Our current opportunity and focus areas across for sale is to capture more of the potential revenue represented by buyers and sellers already engaging in our funnel. The majority of eventual transactors dream and shop on our apps and sites at some point in their moving journey. And 1 in 4 of those raises their hand to connect with an agent through Zillow, and yet only a single-digit share of customer transactions are currently completed through Zillow and our partners. To capture this significant opportunity in our for sale category, we are focused on a few key areas. First and foremost, we are building the experience we know buyers, sellers and industry professionals want, one that is easier, streamlined, tech-enabled and integrated in Zillow's housing super app. On Zillow, movers can choose their agent, choose how they sell their current home and book a tour as easily as they book a restaurant reservation. With Zillow Home Loans, buyers can shop based on what they can afford with the BuyAbility feature and get digital pre-approval. And for real estate professionals, Zillow helps agents understand their clients' needs, manage tours, see how they're performing, win listings with Zillow Showcase, help clients learn about their financing options and handle title and closing through dotloop and increasingly Spruce. And in select markets, both parties are now able to communicate and collaborate directly in the Zillow app enabled by Follow Up Boss, an industry-leading agent customer relationship management system we acquired at the end of 2023. Second, we are laser-focused on connecting high-intent buyers on Zillow with our excellent partners, increasing the conversion of shoppers into transactors and increasing our share of transactions as a result. Continuously reducing friction for these high-intent buyers has helped us meaningfully outperform the residential real estate market over the past 3 years, and we see future drivers of conversion across multiple areas of our business going forward. For example, today, our real-time touring product is nationwide and 1/3 of our connections come through real-time touring. We're routing these connections to some of the top agents and teams across the country. 80% of the agents we work with are in the top 20% of producers in the U.S., and we're enabling real estate professionals to do their jobs even more efficiently and effectively with tools like Follow Up Boss. We recently integrated more Zillow data into Follow Up Boss, making it an even more powerful tool for agents to identify the highest intent buyers and sellers and serve their clients better. In our Enhanced Markets, the geographic areas where the integrated housing super app experience is most fully realized, more than 80% of our connections are being managed through Follow Up Boss. Third, we are focused on integrating Premier Agent with our Zillow Home Loans offering because, again, most buyers need both an agent and a mortgage and they want their experience with both to feel seamless. We are executing this integration well, with consistent customer adoption rates in the mid-teens across our most seasoned Enhanced Markets. And we're seeing Zillow Home Loans drive conversion, as buyers transact through Zillow at an 80% higher rate after connecting with both Zillow Home Loans and our Premier Agent partner versus with the Premier Agent partner only, which further proves our integration thesis. Driving adoption of our Premier Agent and Zillow Home Loans offerings together has, in turn, increased our purchased loan origination volume by 2.6x over the past year, and as purchase mortgage origination volume has begun to scale, growth in our mortgages revenue has accelerated, up 86% year-over-year to $41 million in Q4, as purchase loan origination volume increased by 90%. This success comes even amid ongoing challenges in the rate environment. Fourth, we are expanding our addressable market by developing and scaling seller services because 2/3 of buyers are also sellers. We are excited by the success we're seeing with Zillow Showcase, which elevates agent's brand presence on Zillow and provides a better shopping experience through our homegrown, AI-powered, rich media and floor plan technologies. Showcase listings sell faster and for more money than similar non Showcase listings on Zillow meeting sellers' top two priorities. Showcase listings typically sell for 2% more than similar non-Showcase listings on Zillow, a bonus of more than $9,000 on a home sold at the average home sales price. Showcase is also helping agents win 30% more listings, making it an attractive offering for real estate professionals. We made Zillow Showcase available nationwide in 2024. And by the end of the year, it was on 1.7% of new U.S. listings. We aim to reach 5% to 10% of all U.S. listings in the intermediate term, which we believe represents a revenue opportunity of $150 million to $300 million. Fifth, we are consistently looking for ways to add new services to make Zillow experience more integrated and increase our revenue per transaction along the way. Each step of the move comes with corresponding Zillow Group products and services, meaning each step represents an additional driver of potential revenue per transaction for us through buyer and seller referral fees as well as revenue from loan originations, Showcase listings and title and closing. We're pleased with the progress we're making as all of these efforts come together in our Enhanced Markets, our go-to-market motion that we have been methodically scaling for the past few years. Enhanced Markets covered 21% of all connections in Q4 2024, and we expect to increase their share of connections to more than 35% by the end of 2025, as we continue our land and expand strategy, going deeper in current markets and adding more markets. As we keep working across the business to increase connection and conversion rates, we expect to continue to drive share growth relative to the total industry transaction value for in our for sale revenue. We've seen newer Enhanced Markets behave similarly to our earliest markets in terms of share gains, which gives us confidence our strategy is working and our success is repeatable. Looking beyond 2025, we expect 75% of all Zillow transactions to be in the Enhanced Market experience in the coming years. Now on to rentals, which had a remarkable year, gaining more property listings, more traffic and more revenue than ever. In rentals, we are eyeing an estimated $25 billion total addressable market. To give you a sense of the scale of this opportunity, almost every mover starts out as a renter and about 3x as many movers are looking to rent versus looking to buy or sell, yet, unlike with for sale homes, many more rentals turn over every year, and there is no single marketplace where a mover can see all available homes for rent. We've spent the past several years building a highly differentiated two-sided marketplace with a comprehensive suite of 1.9 million active rental listings as of the end of 2024. By assembling a sustainable long tail rental platform with small and single-family properties, then building on that by accelerating our multifamily property listings, Zillow is rapidly becoming the one-stop nationwide marketplace renters and landlords have sorely needed. That has earned us the largest consumer rentals audience with an average of 29 million unique visitors every month, a widening lead over the next company in the category and the #1 preference among renters, and we are applying the same product expertise and relentless consumer focus we've shown in the for sale experience to fixing the fragmented rental experience. Renters on Zillow can shop, tour, apply, sign a lease and pay rent securely on participating listings. And property managers can list book tours, screen applicants, create leases and sign them electronically and collect rent payments all on the Zillow platform. These efforts to create a more seamless and convenient experience on both sides of the rental process are paying off as we attract more renters and more multifamily and single-family property listings, yielding increased revenue. Having built a unique rental platform with the largest rental audience, we're now focused on scaling revenue across the marketplace. We expect multifamily properties to be the main driver of growth here. Today, 50,000 multifamily properties are on our platform, up from 37,000 at the end of 2023, and there is room to expand with an estimated 140,000 total multifamily properties across the country. To that end, today, we announced a partnership with Redfin to provide all of the multifamily listings on their sites, further expanding the reach of multifamily properties that advertise with us and giving renters on Zillow access to more apartment listings over time. Zillow Rentals growth has been buoyed this year by our successful partnership to distribute multifamily listings on realtor.com as well as by our multifamily advertising campaign, both exciting developments that we kicked off in 2024. While our marketing spend has been relatively modest, we strengthened our traffic advantage in the rentals category in 2024 according to Comscore data. As I said, 2024 was a seminal year for Zillow Rentals, the growth we saw last year and expect this year supports our belief that Zillow Rentals is well on its way towards the $1 billion-plus revenue opportunity we see in front of us. To close, we are pleased with the progress we made in 2024, which has set us up well for strong execution in 2025 and beyond. We stand in a fortunate position because we have the leading brand in real estate, we have significant growth opportunities in both for sales and rentals, we are executing on a strategy that is working well, and we are doing all of this while maintaining cost discipline, which we expect to drive strong GAAP profitability over time. It's a unique and exciting time to be at Zillow, and I am proud of the team's efforts to get us here. With that, I'll turn the call over to our CFO, Jeremy Hofmann.

Thanks, Jeremy, and good afternoon, everyone. As you just heard, we delivered another quarter of strong results in Q4, and we are well positioned to continue doing so as we execute on our strategy in 2025 and beyond. Our Q4 2024 results exceeded expectations for revenue and EBITDA with revenue up 17% year-over-year to $554 million, which was $21 million above the midpoint of our guidance range. The broader residential real estate industry grew 13% year-over-year in Q4, as reported by NAR, and grew 15% in Q4, according to industry data tracked by Zillow that is publicly available on our site. We are now presenting our revenue in 2 major categories: for sale and rentals. The for sale category includes residential and mortgages revenue to better reflect how we manage the business. For sale revenue grew 15% year-over-year in Q4 to $428 million and rentals revenue grew 25% year-over-year in Q4 to $116 million. On a GAAP basis, Q4 net loss was $52 million, representing 9% of our revenue. EBITDA of $112 million for the quarter resulted in a 20% EBITDA margin. The combination of our revenue outperformance and effective cost management delivered better-than-expected EBITDA results in the quarter. Going further into our results, For sale revenue grew 15% in Q4 year-over-year. Within the for sale category, residential revenue grew 11% year-over-year to $387 million, outperforming our outlook range. Residential revenue benefited from continued conversion improvements as more buyers and sellers transacted with Zillow Premier Agent partners, continued expansion of Zillow Showcase which now represents 1.7% of all new for-sale listings in the country as well as contributions from Follow Up Boss, ShowingTime+ and our new construction marketplace. Within the for sale category, mortgages revenue growth accelerated in Q4, up 86% year-over-year to $41 million with purchased loan origination volume growing 90% year-over-year to $923 million. Our mortgages strategy is leading more buyers to choose financing through Zillow Home Loans, which is the main growth driver of our overall mortgages revenue. In rentals, our revenue grew 25% year-over-year in Q4 to $116 million, driven primarily by our multifamily revenue, which grew 41% year-over-year. We increased the number of multifamily properties on our apps and sites by 35% year-over-year, reaching an all-time high of 50,000 multifamily properties as of the end of Q4, up from 47,000 properties at the end of Q3. Our multifamily revenue is now nearly $300 million on an annual basis and comprises the majority of our rentals revenue. As a reminder, 80% of our multifamily revenue is generated in a paid inclusion subscription model. Total listings across our entire rentals marketplace were up 15% year-over-year to an industry-leading 1.9 million active listings in December. We continue to execute our Zillow Rental strategy and see a clear path for growth to the $1 billion-plus revenue target ahead of us. Our disciplined cost management resulted in Q4 EBITDA expenses of $442 million. Excluding $7 million of expenses related to severance payments that were not contemplated in our Q4 outlook, our EBITDA expenses would have been $435 million, in line with our outlook. The severance costs were primarily related to actions we took to reposition skill sets within our residential sales force for a more integrated sales approach to agents going forward. We ended Q4 with $1.9 billion of cash and investments, down from $2.2 billion at the end of Q3, primarily driven by the settlement of our 2026 convertible debt in December, which included aggregate cash payments of $499 million. This was partially offset by net cash provided by operating activities of $122 million, which was up from $86 million in Q4 2023. We ended the quarter with $419 million of convertible debt outstanding that we expect to settle before the end of Q2. Once this occurs, we will be convertible debt free. We have a strong net cash position of $1.5 billion at the end of Q4. Turning to full year 2024. Our steady execution throughout the year translated into double-digit revenue growth of 15%. Of note, the existing housing market grew 5% in 2024 according to NAR and 6% according to Zillow, which means our revenue outperformed by 1,000 basis points and 900 basis points, respectively. When we evaluate our performance, we focus on our ability to outperform the market and take share on annual and multiyear periods, and we were pleased with how we performed in 2024. Our for sale revenue grew 12% in 2024 with the residential revenue growing 10% and mortgages revenue growing 51%. Rentals revenue grew 27% in 2024 as we grew our multifamily properties by 13,000 over the course of the year, which drove 42% multifamily revenue growth for the full year. Our strong revenue growth was combined with disciplined cost management. We held our fixed costs to approximately $1 billion, which meant that our fixed costs as a percentage of revenue declined from 48% to 44%. We were able to control our costs while continuing to invest for future growth. In particular, we grew our rentals and Zillow Showcase sales forces and added loan officers in Zillow Home Loans throughout the year given the attractive growth profiles of those opportunities. We also accelerated our advertising efforts in rentals. The combination of strong revenue growth, strategic investments and disciplined cost management resulted in EBITDA margin expansion of 200 basis points to 22% in 2024. Turning to our outlook for Q1. We expect total revenue to be between $575 million and $590 million, implying a year-over-year increase of 10% at the midpoint of our outlook range. We expect for sale revenue growth to be in the mid-single digit year-over-year, driven by residential growth of low to mid-single digits and mortgages revenue growth of approximately 30%. Of note, we pulled forward a number of closed loans in late December that impacted January, resulting in outperformance in Q4 versus our expectations. Mortgages revenue is expected to grow 50% plus in aggregate, when looking at both Q4 2024 and Q1 2025 together. Our guidance reflects our expectation of a more challenged housing market in Q1, which we expect to be relatively flat. Pending existing home sales trends in December and January were muted, which we expect will result in lower year-over-year growth of closed transactions for the industry in Q1 compared to Q4 2024. We expect our rentals revenue to grow approximately 30% year-over-year in Q1 as we benefit from our execution on building our two-sided marketplace. Our multifamily rentals revenue is expected to grow faster than our overall rentals revenue as we see the benefits of continued property growth. For Q1, we expect EBITDA to be between $125 million and $140 million, equating to a 23% margin at the midpoint of our outlook range. This implies EBITDA expenses will increase sequentially from $442 million in Q4 to an estimated $450 million in Q1, with the increase entirely related to seasonal payroll taxes. Turning now to full year 2025. We expect to expand our enhanced market experience from 21% of connections today to 35% plus of connections by year-end. We also expect to make progress towards our Zillow Showcase intermediate-term goal of 5% to 10% share of listings and to increase the number of multifamily rental properties on Zillow. We expect this will translate to low to mid-teens revenue growth for the company for the full year 2025. We expect the housing market to continue to be subdued in 2025 and expect the industry to grow in the low to mid-single digits. This outlook includes our expectations related to our rentals partnership agreement with Redfin that we announced today to be the exclusive provider of multifamily rental listings on Redfin's sites. As part of the agreement, we will make a $100 million upfront payment to Redfin. We expect the partnership will roll out throughout the course of 2025 and have a larger financial impact in 2026 and beyond. As we execute on our strategy, we will maintain our cost structure framework, including continuing to control our fixed cost base to drive leverage. In 2024, we held our fixed cost base flat, leading to 400 basis points of operational leverage and resulting in EBITDA margin expansion of 200 basis points year-over-year. We expect our fixed cost base of approximately $1 billion to grow with inflation, and we believe it is the right investment level as we execute on our growth strategy. For variable costs, we will continue to invest for growth, primarily in rentals as well as additional loan officers and Zillow Home Loans, as we expand our enhanced markets footprint. We expect our variable cost base to grow ahead of revenue in 2025 with these initiatives, but grow more in line with revenue over time as various initiatives scale and mature. We will continue to be opportunistic with our advertising spend, dialing it up or down depending on where we see opportunities across the business. When we combine our expected revenue growth and cost discipline, we expect EBITDA margins to expand again for the full year 2025. Controlling our fixed costs also drives leverage on share-based compensation expense, given 90% of this expense relates to fixed head count employees. In 2025, we expect that we will reduce share-based compensation expense by at least 10% year-over-year down from $448 million in 2024. As a result of strong revenue growth and continued cost discipline, we expect to have positive GAAP net income for the full year 2025, an important milestone for the company. Looking beyond 2025, we see a large multiyear growth opportunity ahead of us. As we think about our financial profile in a mid-cycle housing environment, in which existing homes sold returns to $6 million per year, we see a clear path to $5 billion in annual revenue. To go from the $2.2 billion in revenue that we generated in 2024 to $5 billion in a mid-cycle housing environment, there are three key drivers. First, within for sale, we believe there is a $1 billion incremental organic revenue opportunity as we expand our current offerings nationally, even if the housing market stays flat from here. We estimate the combination of our Enhanced Market experience growing to 75% of all Zillow transactions, coupled with reaching the midpoint of our intermediate term Showcase revenue target of $150 million to $300 million would translate into 16 basis points of total transaction value share in our for sale revenue or roughly 50% growth from today's levels. Second, in rentals, our execution on multifamily revenue has put us on a clear path to a $1 billion-plus annual rentals business, more than an incremental $500 million from the current run rate revenue base. Last, we expect that when the housing market returns to mid-cycle levels with normalized housing turnover of 6 million annual existing home sales, it could represent $1.3 billion of incremental revenue across our for sale category. Under our current cost structure, we expect that $5 billion in revenue would translate to a 45% EBITDA margin and strong GAAP profitability. To complete the full financial picture beyond revenue and costs, we are pleased with our capital management strategy. Since we started our share buyback program in 2021, we have repurchased nearly $2 billion of shares at an average price of $45 per share. In 2024, we also made significant progress reducing our convertible debt levels, settling both our 2024 and 2026 senior convertible notes, which reduced our debt by $1.2 billion. We have also made acquisitions to accelerate our growth over the last several years. We acquired ShowingTime, which allowed us to launch real-time touring and is now 33% of all of our connections. We also acquired Follow Up Boss, an industry-leading CRM for our partners in the industry, which now represents more than 80% of our connections in our Enhanced Markets. Additionally, we acquired VRX, VSAI and Aryeo to scale Zillow Showcase with both first-party and third-party photographers and enhance our listings experience. Finally, we acquired Spruce, a tech-enabled title and closing business that will be the next service we introduced into our Enhanced Markets over time. Each of these acquisitions has supported our strategy and we will continue to pursue opportunities when we find ways to accelerate organic growth. To close, we are successfully executing on our strategy and are excited about the opportunity ahead of us. We are growing across our business with investments in place to drive future growth. Our revenue is accelerating while we are disciplined on costs, and we expect to expand margins again in 2025, while generating positive GAAP net income. And with that, operator, we'll open the line for questions.

[Operator Instructions] Our first question will come from Ron Josey with Citi.

I guess a question for both Jeremys. So the first one is just on Enhanced Markets. And I think, Jeremy, you talked about 35% of connections by the end of the year with Enhanced Markets on the way to 75%. Talk to us how you get there, the path to getting that 75%? And any early benefits and not so early, but what are the benefits that you're seeing thus far with the transition to Enhanced Markets? And then with the Redfin deal, very clear on the opportunity with rental that you laid out on the call. But I wanted to hear a little bit more just on the strategic rationale with the partnership, the benefits to it. And then Jeremy, if you can talk about the payments and the distribution, what it means for the balance sheet? I guess.

Yes. Thanks, Ron. Jeremy, why don't I start and you can chime in with some of the deal specifics. On Enhanced Markets, you're right, we talked about ending last year at 21%. And then our goal is to get to 35% of customers by the end of this year. The big drivers of that for us is methodically scaling to additional partners, right, agent partners and teams and capacity of those partners as well as scaling our loan officer capability and integration with those partners. And you can see how we've done it over the last couple of years and the results we gave out a bit in the refreshed investor deck. We're seeing mid-teens Zillow Home Loans adoption rates in those enhanced markets that are older than 6 months. That's continuing as we've gotten more of those markets to bigger maturity. And then you're also seeing inflections in revenue per TTV after that 12 months of rolling out. It takes time to land and expand. And most importantly, it's really important, we've talked about this for a while that each agent partner and team as they train their agent group. They get introduced to the new way of working to real-time touring to Zillow loan officers and Zillow Home Loans, so they can -- we can collectively serve the customer. So we've learned a lot, and we've gone and found lighter weight-ways to scale and still see great performance, and that's why we're so excited to go from 21% in connections to 35% by the end of '25. That's also why we gave you all a bit of a mile marker on where are we trying to get to, and we said we'd like to get to 75% of customer connections. We don't know what the upper limit is yet, but we felt like that was a really good guide post just to help signal to you all. Our goal is to get the majority of our customers into this experience, the better experience for buyers and sellers. It's better for our agents. It's higher-quality customers. They look to grow their business with those higher-quality customers as well. So that's on Enhanced Markets. And then, Jeremy, do you want to take the deal?

Yes, I can start on the deal terms and then he asked around strategic rationale as well, so maybe I'll hand it back to you on that one. Yes. So Ron, the deal terms, we're making $100 million payment upfront. It's a 5-year term with two, 2-year extensions as well. So that's what we've announced publicly. Mechanics for it, we will pay Redfin for leads generated from their network. They'll be supportive on the sales front through the transition of new properties on to Zillow. And then I think we're just -- Jeremy will hit more of this, but we're really excited about the opportunity to work more closely with them to deliver value to consumers and deliver great ROI to multifamily partners. So that's where we are at the moment. With respect to financial impact, we expect the partnership to ramp over the course of 2025, and we'll see the full financial benefits in '26 and beyond. And then if I step back before I hand it to Jeremy, we think we have an opportunity for a great partnership here and any great partnership has to be a win for both companies, and we think we're well set up here for that dynamic.

I mean, I would echo a lot of with what Jeremy said. We're very excited about the partnership with Redfin. We're very similar mission companies. We're trying to digitize the industry and turn on the lights. This agreement is really a great win-win. It strengthens the value of partnering with Zillow for property managers on the network, right? It expands the reach of the network, and we expect the marketplace overall to benefit as those advertisers can now get access to Zillow, to Redfin's network and, of course, to Realtor.com, our existing partner. And it's just a great next step in our strategy, right. We've talked for a long time and Jeremy talked about it, in his remarks and so did I, this unique rental strategy we have to organize as much of the supply as we can because there's no national database of all rentals, and that is the biggest problem renters face, right? Every renter has a compressed time frame, a high stress time to find a rental, and they are endlessly scouring the planet for available inventory. And so we know that strategy works. It's why you see the audience lead we have today and the widening audience lead in brand preference. It's why you've seen such rapid organic scale in property growth into our network. And that -- that has, in turn, reinforced the marketplace and driven revenue growth. So now when you add in Redfin later this spring, we just see that as the next step of growth, and we're really excited about it.

Our next question comes from Ryan McKeveny with Zelman.

I wanted to start on the 2025 outlook for positive GAAP net income for the full year and revisit some of that breakdown between fixed variable advertising and SBC. So the fixed cost sounds very straightforward. I guess on the variable side of things, in the investor deck, you've got the slide showing that was 25% of revenue in '24, up from 24% in '23. I guess is that 100 bps growth that we saw in '24 a decent guidepost for 2025 on the variable cost? I guess that's part one. And then on the advertising piece, I know you described it as kind of opportunistic. The step-up this year, I think, was largely attributed to the efforts on the rental side. I guess I'm just curious where you sit today, how you're thinking about the advertising piece into '25 relative to that expense category in 2024?

Yes. Ryan, it's Jeremy Hofmann. I'll take that. You're right on we're targeting GAAP profitability for the year. The way in which we do that is pretty straightforward, which is we need to continue to meaningfully outperform the housing market and grow revenue. We need to hold our fixed cost base flat, let it -- it can grow with inflation, but really even fight against that. And then stock-based comp is a big lever as well. 90% of our stock-based comp charge sits with fixed head count employees, so we can get leverage as we hold those fixed costs in line. And obviously, it becomes less and less a percent of revenue as we're growing revenue. With respect to variable and marketing, no further guidance at the moment. But we feel like we have a real opportunity to expand margins while we continue to invest for growth in rentals and Zillow Home Loans. And as we expand margins, we think GAAP profitability is achievable in '25.

Got it. That's helpful. And I guess a follow-up, maybe somewhat related to cost structure over time. But maybe just the ways AI can benefit the business, whether it's the search experience or elsewhere. I guess maybe just curious if you could share some thoughts on how you're generally thinking about the influence of AI on the business over time?

Yes, happy to. We're really bullish on the potential of AI for our customers, for our partners, our agents and for our employees. We have long been innovators around AI, really since our founding, many folks forget that the very first product Zillow launched back in 2006, the Zestimate of 2006-era AI, machine learning, automated valuation model. And we've been investing in AI experiences all the way up through our search experience and our rich media, our computer vision work on Zillow Showcase, these super listings and this homegrown tech we've built. So when generative AI really came to the forefront, we've been running at it, trying to figure out how it's going to change how we all work and all consume real estate. And one of the things we've learned in our early days is the opportunity to make the workforce more efficient is a big one over time. And that applies, of course, to all of us as employees in terms of learning how we do our work and doing our work better and getting to more customers more efficiently internally, but it really applies to the professional service providers in our industry, right? The #1 thing a buyer and a seller need is great advice, great guidance, great support. And the #1 thing our professionals do is spend time in the back office doing busy work and not providing that service because that's how they have to try and win their next client. And so if we can take away and automate and provide guidance and support and proactive tools to help them become super agents and super loan officers, that's going to help them do their best job, showcase what they do well, win more business for themselves, for sure, but just make the marketplace more efficient. So those are the things we're investing in in the short term. You've seen us bring to market some innovations in Follow Up Boss trying to help agents automate their conversations and their follow-ups with their customers. We're doing that for loan officers as well. And we're innovating and experimenting on how do we do that with customers. So I mean, it's still very, very early days. We'll be talking about this for years to come, but we get really excited to think about how AI can really be this huge phase shift for the software and the technology in the category.

Our next question will come from Brad Erickson with RBC.

Can you guys hear me?

Yes. We got you, Brad.

Yes. So a couple of questions. First, can you just hit for Q4, the revenue growth was a little bit below the market that you reported just kind of why that was? And then in the guide for Q1, why does that apparently revert to share gains? That's question number one. Question number two, you're starting out this year with a lot more Enhanced Market, call it, horsepower than you did have last year at this time. And I guess, market share gain-wise, it seems like you're kind of roughly baking in maybe a similar amount year-over-year. So I guess there's kind of decent logic there as to why that market share delta should expand. Is that the right expectation? Or maybe if you could guide us a little bit more on that, that would be great.

Yes, Brad, it's Jeremy Hofmann, I can take those. So just on the first question, you've heard this from us many times, regardless of the quarter, but we just don't overfocus on the quarterly fluctuations. The housing market definitely got softer at the end of last year into starting this year. And I think that's reflected in the guide, particularly given the weak -- the weaker pending sales activity in December and January. So I think with that said, we're expecting revenue to grow at 10% at the midpoint across the company versus flattish for the housing market, which implies roughly 1,000 basis points of outperformance. And we expect to grow as a company low to mid-teens in '25 against the housing market that we think grows low to mid-single digits for '25. So I think overarchingly, feel like it's another year of -- we're set up for another year of good outperformance. We did it in 2024. We expect to do it again in '25, and we'll do it while expanding margins and generating positive GAAP net income. So we're definitely excited about where we are and how the year is setting up. I think on the Enhanced Markets side, I'd say we continue to see strong growth in the oldest Enhance Markets, right? The first 4 Enhanced Markets are up greater than 100% relative to the housing market since the beginning of '23. And we're seeing repeatable success across all subsequent Enhanced Markets. So the early to mid-funnel metrics look good versus older markets. We're seeing consistent mid-teens adoption in Zillow Home Loans as we've scaled. And the growth inflection typically occurs more than 12 months after a market launch. So last year's expansion really helps contribute to this year's growth and so on. It takes time for us to land and expand. It takes time for us to ensure the ZHL integration is going well. I think all of that sets us up for sustainable growth not just in 2025, but well beyond. We think this really is the consumer experience of the future. And Jeremy put out -- we think that 75% of the customer experience over time is a good mile marker for you all to think about what mature looks like, and that gives us what we think is a $1 billion of incremental revenue even against the flat housing market. So all in, I think on the Enhanced Markets side, it's going well. It's going to continue to roll out, and we're going to be methodical, but we think we take share along the way.

Our next question comes from Mark Mahaney with Evercore ISI.

Okay. I just want to ask about the cost structure going forward. I know you made a couple of comments just maybe long term in the next 2 or 3 years when you think about your head count levels and your overall, I guess, fixed expenses like your confidence in being able to keep head count growth relatively modest and your confidence in a 2 to 3 year outlook and being able to keep these costs relatively close to the current fixed cost base? Just talk about that, please.

Yes, Mark, it's Jeremy Hofmann, thanks for the question. We like the setup of the cost structure at the moment. We think we're well invested for our growth strategy. If we continue to get leverage -- in the fixed cost base, you can obviously see it expand margins. So I think we feel good there. Nothing too specific over the next 2 to 3 years, but I think the 2025 guide should help inform you in terms of how we're thinking about cost structure for '25. And then the mid-cycle targets imply a $5 billion revenue path and 45% EBITDA margins, and we feel quite comfortable with both of those and feel like we're on a really nice slope to go get there.

Our next question comes from Nicholas Jones with JMP Securities.

Two. One on kind of 2025 outlook. Can you maybe speak to how are agents behaving today as you roll out all these new solutions? You've kind of outlined this kind of suite of products in the deck. Are agents being more discerning and if transaction volume were to maybe pick up, they potentially get more opportunistic in taking on new solutions? Or is it the opposite, I guess, just what have you learned kind of talking to agents and their willingness to adopt all these new solutions as you roll them out nationally? And then kind of the follow-up is based on that dynamic, does that kind of make it easier to accelerate enhanced markets roll out over time? Or is the loan business and hiring folks kind of a gating factor and as we think about it longer term?

Yes, great questions. We are hearing, I would say, great support and partnership from our agent partners. As a reminder, in the Enhanced Market experience, we really focus in on the top producers and top professionals in the industry, 80% of the agents we work with are in the top 20% of all, right? So these are folks that have built systems, scale, staff, discipline around digital-enabled real estate experiences with us. And so when we bring them new things, of course, it's a change in their workflow, but it's an opportunity for growth and a lot of them lean in. And you've seen that with everything from real-time touring, where we brought them an entirely new lead type and they had to change how they engage with customers from Zillow to Zillow Home Loans, and they started to learn a new motion with us on how to talk to their customers about financing, differently than maybe they were doing before to Follow Up Boss. And now, as Jeremy said, 80% of our customers in these markets are talking to agents through Follow Up Boss and starting to build this great 3-way experience between Zillow, the customer and the agent all powered by our software. So we find that agents typically lean in when it yields higher-intent customers, more customers, more efficiency. And I think to your question where you're trying to figure out where does it go, when we get back to mid-cycle, we hope and expect that these are the agents that are best positioned to gain share. And I think you can kind of look at the uncertainty around all the regulatory changes last year with the lawsuits and settlements as an example of that. There was a lot of fear and uncertainty about how things were going to go. And we talked about how having the best agents, they're the ones that lean in. They're the ones that retrain their staff. They're the ones that take advantage of these changes and better educate buyers on why they should sign a great buyer's agreement, why they're worth their money, and they use that to hold price or gain share, right? So we love the strategy because we think it doesn't just benefit the customer, right? These are better digital experiences for the buyer and seller it also -- that, in turn, benefits the agent, right? That helps land more of those customers with the best professionals and those are the folks that are -- that stand to gain the most share, whether the market stays at lower levels or if and when the market gets back to higher levels. So I think that's how we feel about agent sentiment. On rollout, I know you all spent a lot of time trying to think about how to model this. You've heard Jeremy say, you've heard me say, we're going to be very methodical here. Things like the Zillow Home Loans integration, things like the software training and tools, it's really important to get these things right because if you put yourself in an individual agent's shoes on one of our teams, they're doing maybe a handful of deals a year, and it has to go really well for them. And when we're asking them to do something differently, they have to get comfortable with it, and learn to love it. We have to earn their business and their trust. And once we do, we've earned the right to then continue to compete for more business and be a great business partner for them. But that's just very methodical, right? That's very agent by agent, team by team. It's what's driven our Enhanced Market strategy, and it's why we're continuing to just methodically march from what was 21% of connections last year to we initially expect 35% of connections by the end of this year, on our way to 75% or more.

Our next question comes from John Colantuoni with Jefferies.

So just starting with the full year outlook, just wanted -- it looks like you're expecting faster growth relative to the first quarter. So just maybe walk through the drivers of that improving outperformance relative to your expectation for the housing market as the year progresses? And second, in the rental segment, it looks like your first quarter outlook implies an acceleration relative to the fourth quarter. I imagine Redfin has something to do with it, but maybe walk through the key drivers of the acceleration in the rental segment.

Yes, John, so I can take both of those. I think on the full year comment, you're right that it implies some acceleration. And that's just through a function of more enhanced markets being opened, deeper expansion into existing enhanced markets, ramp in Zillow Showcase, ramp in Zillow Home Loans and then continued execution on rental side. So we just think that continues to build over the course of the year. And then on the rentals one, it actually does not include the Redfin partnership. We expect that to really launch throughout the course of the spring and then steadily through the bulk of 2025. I think the acceleration you're seeing in rentals at this point is just some of the fruits of our labor that we put in place in '23 and '24. The combination of property growth. So we were at 37,000 properties, at the end of '23. We were at 50,000 properties at 12/31/24. So that's obviously been really helpful organically. The marketing campaign is working quite well. The partnership with Realtor.com we're pleased with. If we just look across the business, we're executing quite well. And again, the key here is deliver more value to renters and really be a great ROI partner to the multifamily community as well.

Our next question comes from Tom Champion with Piper Sandler.

I guess the mortgage revenue, 86% accelerating again, it really stands out. Can you talk about what you've learned here? What are the innovations you figured out? How connected is that outperformance to Enhanced Markets? Just any details on mortgage would be really helpful. And then I'd just be curious, your view of the market, we've been kind of at this 4 million home sale level for a long, long time. That would seem to be well below the long-term base rate. So do you think pent-up demand is building? Is the market at some point headed for a kind of step function change in a catch-up?

No, Tom, I'll hit both. On mortgage, yes, we continue to be pleased with the mortgage growth. Jeremy talked about it in his prepared remarks, there's going to be ins and outs and fluctuations in seasonal quarter-to-quarter, but it's really strong growth against a really challenged market. And our Enhanced Markets strategy is really driving the bulk of that as we introduce customers to Zillow Home Loans if they want to start with financing or we work with agents and agent teams to introduce loan officers to them to partner with when they want to start by touring first. So those two paths are really what the buyer wants, right? They either want to figure out what they can afford or they want to go to start looking at homes and they ultimately end up needing a great agent to help them and they need to get a loan. And so it's just about trying to find the right way to introduce them to those great services that they can choose. And you're seeing that motion really work well in our Enhanced Markets. We put out in the investor deck, we're seeing mid-teens adoption rates across all of our mature markets now. And so that continues to give us confidence that this is a great experience for the buyer. This is, of course, a get experience for Zillow and it's a great experience for our Agent Partner as well. So we continue to be very bullish on mortgage growing right alongside our Enhanced Market strategy. It's part of what Jeremy talked about when you take the 21% to 35% of connections and you get to 75% of connections and the transactions down the road, you see this incremental $1 billion of for sale revenue again, with still today's housing market, right? And then so that leads to your second question -- I can't prognosticate when we get back to mid-cycle. I would say the biggest challenge we have in the housing market, this affordability crisis is really an availability challenge. We are not just having a bunch of sellers stuck on the sidelines locked into their mortgage and delaying listing, we also are chronically underbuilt. We're 4.5 million homes underbuilt and that's a big accumulated deficit dating back to the global financial crisis. And so lack of supply, both existing homes and new homes with strong demand yields this imbalance and yields this low transaction volume level. We are starting to see that ease a bit. You see new listings up a bit from year to year. We're still down from the pandemic, but folks will get more comfortable with high rates over time, moves have to happen. So at some point, the macro will turn around and be a tailwind for us. What we're excited about at Zillow is we're able to grow our share and outperform the category regardless, right? As Jeremy talked about, 2024 was a fantastic year for us. We hit our targets of double-digit revenue growth and adjusted EBITDA margin expansion despite this challenged housing market. And we expect that again in 2025 with low to mid-teens revenue growth, more margin expansion and positive GAAP net income for the first time despite the fact that we're seeing flattish housing market in Q1 and very small housing market growth through the year, and we don't expect macro to save us.

Our last question comes from Jay McCanless with Wedbush.

The first one I had is on -- you talked about the rentals and you're up to 50,000 properties now. I guess what was the level that you need to have to where this becomes more durable than maybe some of the benefit you received from multifamily starts and construction probably being the highest level we've seen in 40 years. I guess, what's the number of properties or listings that you'd have to make this a durable longer-term model?

Yes, Jay, I'll take that. I wouldn't necessarily equate the success we've had in rentals around starts. It's really been an organic growth story for us. And that's been a function of a long-standing strategy and a lot of investment over the years to really build out the most comprehensive set of listings on the Internet. So I would think about the growth and the opportunity from here. The more listings we can get both single-family and multifamily, the more we can attract renters, the more value we can provide to partners and it's just got this great two-sided marketplace dynamic and one that we're really excited about. I think we've performed quite well over the last few years and we see a very clear path to $1 billion-plus revenue business in rentals. So I would think of it that way versus anything macro-specific.

Maybe I'd add there. I mean, if you zoom out to the rental strategy, as Jeremy was alluding to, it is organized as much of the supply in the rentals marketplace as possible because that solves the primary problem all renters have. And that, of course, builds this great business for us, but it also everyone start it out as a renter and becomes a buyer and a seller someday. So it also helps introduce them to the Zillow brand and get them excited about us for the long-term relationship we have with them. And so you see that in our audience. You can look at the inputs to that multifamily specific revenue growth as the audience growth we have with the leading brand and audience and it's a lead that's widening in the brand preference and the fantastic ROI we drive, yes, for our multifamily partners, but also the engagement we drive with our long tail partners who more and more are just turning to the Zillow Rental network, to be their rental network, and they're providing listings to us, and we're getting them out in front of this growing audience of renters. So the flywheel that we've built, we really love as a strategy because it is really durable, and it is really unique. And now what you're seeing is just regardless of macro, a lot of advertisers wanting to get great ROI from our audience network. And that's even before we add Redfin as a partner later this year on top of what Zillow Group does and what our partner Realtor.com does. So the future is really bright for our rentals business. We talk about $1 billion target in the medium term or in the future with a $25 billion TAM out there to go attack. So yes, we're very excited about rentals.

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

Great. Thank you. Thank you all for being on this journey with us. We are proud of all we accomplished in 2024, and we look forward to speaking with you throughout 2025 as we continue to execute on our strategy. Thanks again for joining us and following our progress over the years. We are excited for what's ahead.

Thank you for joining Zillow Group's Fourth Quarter and Full Year 2024 Financial Results Call. This concludes today's conference call. You may now disconnect.