Zillow Group, Inc. Class A (ZG) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Zillow Group's Second Quarter 2017 Earnings Call [Operator Instructions]. As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. RJ Jones, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good afternoon, and welcome to Zillow Group's Second Quarter 2017 Financial Results Conference Call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer and Kathleen Philips, Chief Financial Officer. During the call, we will make forward-looking statements regarding future financial performance and events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee these results. We caution you to consider the risk factors described in our SEC filings, which could cause actual results to differ materially from those in the forward-looking statements made on this call. The date of this call is August 8, 2017, and forward-looking statements made today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events, except as required by law. During the call, we will discuss GAAP and non-GAAP measures. We encourage you to read our financial results press release, which can be found on our Investor Relations website, as it contains important information about our reported and non-GAAP results, including reconciliation of non-GAAP financial measures. In our remarks, the non-GAAP financial measure adjusted EBITDA is referred to as EBITDA, which excludes other income, depreciation and amortization expense, share-based compensation expense, acquisition-related costs, interest expense and income tax benefit. This call is being broadcast on the Internet and is available on the Investor Relations section of Zillow Group's website. A copy of management's prepared remarks has been posted to the Quarterly Results section of our Investor Relations website. A recording of the call will be available later today. We will open the call with prepared remarks, followed by live Q&A. In addition to taking questions from those dialed into the call, we will answer questions asked via Sli.do. We encourage you to visit www.slido.com where you may submit questions by entering the event code #ZEarnings. You may also vote on which submitted questions you want us to answer. I will now turn the call over to Spencer.

Thank you for joining the call today. We had another quarter of record results. Total revenue for the second quarter of 2017 grew 28% year-over-year to $267 million, which exceeded the high end of our guidance range by approximately $5 million. Q2 GAAP net loss was approximately $22 million. EBITDA for the quarter was nearly $40 million or 15% of revenue, well ahead of expectations. We're very happy with the first half of the year. Six months into 2017, the new auction-based pricing model in our Premier Agent business is gaining traction with the most productive agent advertisers. All of our emerging marketplaces are performing at or above our expectations. Our pace of product innovation has quickened to the fastest release cadence that our team has ever achieved. As we enter the back half of the year, we're continuing to build upon our foundation for growth and steadily expanding our margin over time. We continue to excel across all 4 of our strategic priorities. Our audience is growing in size and engagement. Traffic to Zillow Group brands' mobile apps and websites reached more than 178 million average monthly unique users in the second quarter of 2017, an increase of 6% year-over-year. In May, we reached an all-time record of more than 182 million unique users, which was up by more than 10 million unique users from the same period last year. Further down the funnel, visits reached nearly 1.7 billion during the second quarter, up 17% year-over-year. As a reminder, the visits metric helps us evaluate progress towards our goal of increasing engagement with our audience. Users who visit frequently have a greater intent to buy, sell or rent a home, which ultimately means more high-quality leads for our agent advertisers. Our next priority is to grow our Premier Agent business. In the second quarter of 2017, revenue for Premier Agent exceeded expectations and grew 29% year-over-year. This revenue growth was supported by traffic increases, combined with demand from agent advertisers, which lifted market pricing in our most important markets. We're in the early stages of healthy marketplace dynamics taking hold as a result of the rollout of our auction-based pricing model. Pricing overall is trending as planned, in line with our experiences from the markets that were in our 2016 pilot. Since the Zillow brand launched over a decade ago, we've been a destination for sellers who come to Zillow to look at their homes and their Zestimate. Agents know that, and they've been asking for products that help them connect with those potential sellers. With that in mind, we created Seller Boost last year. This year, we're experimenting with a product called Zillow Instant Offers. The product, which we're testing on a small scale in 2 markets, allows sellers to receive a comparative market analysis from a Premier Agent, alongside nonbinding offers from multiple institutional homebuyers. We've heard from listing agents participating in the test that Instant Offers is a great way for them to get listing leads. There are several startups and real estate brokerage websites experimenting in this space, but Zillow is the only one that has designed a product to keep the agent involved in every part of the transaction, most notably, by giving them the opportunity to secure new listing agreements. Ultimately, Zillow Instant Offers has the potential to deliver the highest intent, highest quality listing leads at scale to our Premier Agents. Despite the growing consumer demand for faster and easier processes, buying or selling a home will remain an infrequent and high-stakes transaction. An agent's role as trusted adviser is incredibly valuable and permanent. That's why we'll continue to support our industry partners by providing them with the tools they need to deliver an incredible consumer and customer experience for their clients. The best, most productive agents across many brokerages use Zillow Group advertising and services. We continue to invest in developing innovative technology that helps our Premier Agents improve lead conversion, manage listings and close deals more efficiently. This year, we'll spend more than $300 million building products that attract consumers to connect with agents and developing marketing software and technology solutions for real estate professionals to maintain our position as the leading technology partner for all agents, brokerages and MLSs. Our third strategic priority is to grow our emerging marketplaces of mortgages, rentals, new construction and New York City. Our mortgages marketplace once again outpaced industry activity in the second quarter with 14% year-over-year revenue growth. The majority of our mortgage product users continue to be home purchase loan shoppers who are less deterred by fluctuations in interest rates than refinancing shoppers. Rentals is the fastest growing of our marketplaces. During the second quarter of 2017, rentals revenue grew 64% year-over-year. An average of 34 million monthly unique rental users visited Zillow Group brands' mobile apps and websites during the second quarter of 2017. We continue to grow rental traffic by adding innovative features while bringing on more inventory from multifamily apartment buildings. An example of product innovation for our rentals marketplace is the Renter Profile, which provides landlords and property managers with valuable information to determine if an applicant meets their qualifications. More than 9 million renters have created Renter Profile accounts on Zillow, and Renter Profile makes it easier for landlords to connect with qualified tenants. We are rapidly becoming the most valued partner to the rental industry, and we're excited about the potential for this marketplace. In our New Construction marketplace, positive momentum is growing as more homebuilders realize the benefits of advertising with Zillow Group. Last quarter, we launched a new product called Builder Inform, which is available to developers who participate in Zillow Group's exclusive Promoted Communities advertising product. The Builder Inform dashboard provides our new construction partners with unique data and valuable insights to help them make more informed decisions about where to build, what to build and how to price new homes. This one-of-a-kind resource is only available from Zillow Group, and the response from homebuilders has been very positive. In our New York City marketplace, we recently implemented 2 changes to our offerings in the country's most valuable housing market that we believe will improve the home shopping and rental experience for both consumers and real estate professionals. On the home buying side, the second quarter was the first full quarter with Premier Agent on StreetEasy. Now, as consumers find properties that they're interested in touring, they can easily contact a local agent to represent them as a buyer. Before Premier Agent, interested buyers in New York only had the option of contacting the listing agent that represents the seller. The reception of Premier Agent by real estate professionals and brokers seeking to build their business with homebuyers has been strong. Monthly recurring Premier Agent revenue in this market in June 2017 was nearly double the size it was when we launched in March 2017. Leading brokerages and agents in New York recognize the benefit of empowering consumers with a choice as well as the opportunity to build the buy-side of their business and have committed to partnering with StreetEasy. On the rentals side in New York, we launched another change this month -- last month when we introduced the New York City Rental Network, a program that solidifies our commitment to providing consumers with the most accurate and current database of New York rental listings. During the second quarter, the New York City Rental Network attracted more than 14.7 million rental visits across all Zillow Group brands in the core urban New York area and delivered 2.1 million leads to rental professionals. Over the last few years, StreetEasy has invested enormous product marketing and support resources in building a reliable, consumer-friendly platform with valuable data, content and quality listings. In order to continue fueling innovation, technology and resources to support a robust rental marketplace, we now charge agents a small fee per listing per day to advertise their rental listings in New York across StreetEasy, Zillow, Trulia and HotPads. This has had the immediate and desired effect of eliminating stale or fraudulent listings, which significantly improves the user experience in a city known for being one of the most challenging markets for renters to find an apartment. In addition, agents receive all of the leads from their exclusive listings. Since rentals listings in New York are on the market for an average of around 25 days, the cost to advertise on StreetEasy is only a small fraction of the typical commission rental agents earn, and the rental shopping experience is improved dramatically for consumers and agents. Our fourth priority is attracting and retaining the best talent and maintaining Zillow Group's unique company culture focused on innovation. We've been fortunate and successful at attracting top talent to Zillow Group, which gets reflected by the frequent accolades we receive identifying us as a top place to work. We strongly believe that if you treat employees with respect, encourage dissent, value diversity and care about our people as both contributors and human beings, it will show itself in our results. And those results are further reflected in our innovative product offerings, some of which I mentioned earlier. One of Zillow Group's goals has always been to establish itself as the industry's trusted technology partner. Home shoppers today want easier, less stressful and more integrated experiences available to them that provide transparency and control. We want to make it possible for agents from all brokerages, brokerages themselves and our MLS partners to leverage technology to provide those experiences to their clients in a way that ensures their growth and long-term success. With that, I'll turn the call over to Kathleen.

Thank you, Spencer, and hello to everyone joining us on today's call. Let's dive into our financial results. Total revenue for the second quarter increased 28% year-over-year to a record $266.9 million from $208.4 million in the same period last year. Marketplace revenue, which accounts for 93% of total revenue, was $248.6 million for the second quarter, an increase of 30% year-over-year. As a reminder, our marketplace category includes Premier Agent, Other Real Estate and Mortgages revenue. Premier Agent revenue increased 29% year-over-year to $189.7 million in the second quarter. Premier Agent revenue was positively impacted by growth in visits, which increased the number of impressions we could monetize. Premier Agent revenue per visit grew 10% year-over-year, which we attribute in part to our new auction-based pricing platform. Top-performing agents and teams continue to increase their spending with us as they realize the benefits of advertising on our platform. For example, revenue from same agent advertisers, or those who have been on our platform for more than 1 year, grew by more than 49% compared to the prior year. New sales to existing advertisers made up 52% of total bookings in the second quarter. The number of Premier Agent accounts spending more than $5,000 per month grew by 107% year-over-year and increased 92% on a total dollar basis during that period. On our last earnings call, we shared that the Consumer Financial Protection Bureau had requested additional information from us as part of its evaluation. That evaluation is now complete. We have been invited to discuss a possible settlement and informed that if those discussions do not result in a settlement, the CFPB intends to pursue further action. We believe that our co-marketing program has, and continues to, allow agents and lenders to comply with the law while using our product. Getting back to our financial results for the quarter. Other Real Estate revenue grew 45% year-over-year to $37.9 million. Other Real Estate revenue primarily includes Zillow Group Rentals, New Construction, dotloop as well as revenue from the sale of various other advertising and business software solutions and services for real estate professionals. Mortgages revenue reached $20.9 million in the second quarter, which represents a 14% increase year-over-year. Average revenue per loan information request increased 56% year-over-year. In our Display category, revenue was $18.3 million, an increase of approximately 9% over the same period last year, driven by stronger-than-expected brand sales initiatives and increased traffic. Shifting now from revenue to our expenses. Total operating expenses were $283.4 million in the second quarter. Our cost of revenue during the quarter was $20.3 million or 8% of revenue. Sales and marketing expense was $131.2 million or 49% of revenue. As in prior years, our advertising spend is the highest in the second quarter, in line with the seasonality of the real estate industry. Our second quarter advertising expense typically accounts for approximately 1/3 of our annual advertising budget. Advertising expense in the third quarter will look more like Q1, and the fourth quarter will be the lightest. Technology and development costs in the second quarter were $78.5 million or 29% of revenue. General and administrative costs in the second quarter were $53.3 million or 20% of revenue. Note that we've recorded an estimated liability of $4.1 million during the second quarter of 2017 in connection with our ongoing litigation matter with VHT, which continues to be the subject of appeals. We ended the quarter with more than 3,000 employees across all of our offices and approximately $600 million in cash and investments. Now turning to our outlook for the remainder of 2017. We are updating our full year revenue outlook to a new range of $1.055 billion to $1.065 billion, which represents 25% year-over-year growth at the midpoint of the range. We also are updating our full year EBITDA outlook to a range of $220 million to $230 million or 21% margin at the midpoint of the range. For detailed third quarter and full year 2017 guidance, I encourage you to review our press release that was issued this afternoon and is available on our Investor Relations website. We delivered strong results for the first half of 2017. As we continue to execute on our long-term strategic priorities, we look forward to our progress toward achieving revenue growth and steady margin expansion over time. With that, we will now open the call for questions.

[Operator Instructions] Our first question is from the line of Ron Josey of JMP Securities.

Spencer, I want to talk maybe a little bit bigger picture on Instant Offers and given the benefits you highlighted on the sell side, the sell-side agents with CMAs. Do you think Instant Offers can go nationwide or perhaps you're focusing on the top 20 markets that you talked about last call? And then given it's live in 2 test markets today, in Vegas and Orlando, what do you think is needed to basically go to more markets? And how important is this to your overall sort of sell-side opportunity?

Thanks, Ron. Well, generating listing leads has been a key strategic priority of ours going back a couple of years, and it's been coming to more focus last year when we launched Seller Boost as a separate ad product, which, of course, is bundled with core PA but is sold sort of as an additional add-on on top of Premier Agent. You're right, the way we've constructed Instant Offers today, it seems to be a really successful potential way to generate listing leads, which we know are always much more valuable than buyer leads. The test in these 2 markets has only been up for about 2-or-so months, and so we're still learning more. I'm not -- don't have anything to say yet about whether it might expand more broadly than those 2 test markets. But it's important to understand that we're the only ones who are experimenting in this field in a way that keeps the agent in the center of the transaction. Far from dis-intermediating anyone, we're actually putting the agent right, front and center on the listing side trying to generate listing leads, which is really important to Premier Agents.

Our next question is from Mark Mahaney of RBC.

Two questions, please. Is there a timing related to the Consumer Financial Protection Bureau? They -- when you need to make a decision on settlement or whatever the alternative is. And then back on the pricing changes, the marketplace pricing changes that are part of the Premier Agent program, is there an update you can give, like you gave last quarter, in terms of the top 20 markets now, to what percentage or what number of markets have seen what sort of lift in terms of the yield per ZIP?

Thanks, Mark. I'll start on the CFPB. Things are -- we expect things are going to move pretty quickly with the CFPB. We're going to be commencing settlement discussions over the next few weeks. In fact, I'm headed to D.C. for the first meeting tomorrow. So we anticipate that to be a pretty fast process. If we are not able to reach a settlement, this turns into a regular litigation matter in federal court with discovery, procedural motions and the like, which, as you well know, can take quite a bit of time. But the CFPB settlement portion, we don't anticipate that to be very long or drawn out. In terms of pricing and MBP, we're not providing an update to the metric we used in Q1, which was essentially designed to compare pricing prior to MBP, with pricing at the end of the first fully rolled out quarter of MBP. We don't think at this point that, that is a relevant way of looking at the pricing. What we can tell you is that MBP, in our view, continues to perform well. It's trending as expected based upon our expectations with the nationwide rollout as well as our experience with the pilot. We like what we're seeing with it and are excited about it. I will remind you, as we've said a number of times before though, it will take time to reach full maturity of the marketplace, so we're still going through that process.

Operator, we'll take one or two questions from Sli.do. I think one question, are there plans to further monetize the sell side of the real estate transaction beyond Seller Boost such as through featured listings? And the answer is, at the present time, no. In fact, what -- let me just define what featured listings are. Featured listings are where an agent or broker would pay us to essentially remove the buyer agent list from those listings and have all the leads go to the listing agent. We think, generally speaking, it benefits the consumer to have choice to be able to choose whether they want to connect with a Premier Agent who would represent them as the buyer or connect with the listing agent whose, first and foremost, fiduciary responsibility is to prioritize their real client, which is the seller. So, in general, we don't -- we're not interested in expanding featured listings for the reason that it's -- we don't think it's very consumer-friendly. The next question I'll take from Sli.do and then we'll go back to the call was, how large of an impact has StreetEasy been to Zillow's Premier Agent revenue? I think we've put in the prepared remarks that MRR in those, I think, 89 ZIP Codes in New York has basically doubled in over -- quarter-over-quarter. To put in perspective the size of the opportunity in New York, remember, New York is about 5% of the U.S. residential real estate market based on commissions or advertising dollars or transaction volume or kind of any metric you look at, it's around 5%, by far, the biggest city in the country. And we're more excited than ever about our potential in New York given the collection of brands that we have there, from StreetEasy to Naked Apartments to HREO and the Hamptons, Zillow, Trulia, HotPads, our audience size really dwarfs the competition in New York. Okay. I think we'll go back to the call, operator, for the next question, please.

Our next question is from Michael Graham of Canaccord.

Just on the rollout, you mentioned that -- I'm just trying to figure out when the rollout of self-serve will sort of be fully implemented and the marketplace will be fully functioning. I imagine when you go into a new ZIP Code or as you just start to roll it out in new geography, some of the agents are still sort of paying under prior arrangements, and then at some point, they roll off of those. And is there a point in time when we can think about the whole platform being on that new sort of pricing basis? And then related to that, can you just sort of relate your sales and marketing line and sales commissions that you're paying to your sales force? What does the leverage look like on that line item as self-serve becomes bigger in the mix?

Sure. So to clarify market-based pricing, it's fully rolled out in all ZIP Codes. We did that all at once in Q4 of 2016. So when we talk about the maturation of market-based pricing, what we're talking about is the marketplace dynamic building up within the system. There certainly is an element of agents becoming familiar and comfortable with the market-based pricing system. But to be clear, all of our pricing is operating that way already and has been since the end of the year. And then in terms of sales commission and leverage over time, our belief and expectation is that as market-based pricing -- the self-service aspects of it become more predictable and more used by agents, that our sales team is rightsized and that, essentially, the same number of salespeople with the same commission base will be able to generate more revenues. So there will be leverage there. In terms of horizon for full rollout of market-based pricing, I mean -- I'm sorry now, I'm saying rollout. Full maturation of market-based pricing in terms of the marketplace dynamics taking hold, our expectation is that's probably about a 12- to 18-month process from full implementation at the end of 2016.

I'll bang through a couple off of Sli.do. There was another New York question regarding the Real Estate Board of New York's effort to revamp the citywide MLS. Do you expect your rental listings to come back onto StreetEasy? They effectively already have. The decline in our rental listings count when we switch from free to paid inclusion was expected, desired and on forecast. And we're feeling very good about our listings quality and quantity on both the for-sale and the rental side in New York. Another question from Sli.do was, let's see, can you talk a little bit about the efficacy of controlling the agent chain, i.e., do owned agents such as Redfins, I think by owned, the question probably means like employee agents such as Redfins, earn comparably to your high-value Premier Agents? So let me unpack -- there's a lot going on in that question. Firstly, a good Premier Agent should earn an order of magnitude more in compensation than a salaried employee at a discount brokerage. Top Premier Agents earn hundreds of thousands, in some cases, millions of dollars a year. Top team leads -- top Premier Agent team leads earn millions of dollars a year, some more than that. And certainly, employee agents at discount brokerage do not earn that type of compensation. But more generally and more strategically, it's very important to understand how different what Zillow Group is doing from what Redfin or any brokerage is doing. The Redfin IPO serves as a reminder of the massive opportunity in U.S. residential real estate, a huge addressable market here. But Redfin is a brokerage and Zillow Group is a media company. Brokerages should be, and are, concerned about Redfin. Redfin's ascent, Redfin's war chest has brokerages like Keller Williams, like RE/MAX, like Berkshire Hathaway HomeServices and others very concerned, as they should be, because Redfin now has the resources to compete in their markets against other brokerages. What Zillow Group is trying to do though is different. We're trying to attract a huge audience and connect that huge audience with the best agents in their market, regardless of brokerage. And those brokers realize that partnering with Zillow Group and, in particular, buying Premier Broker, which is our advertising product, is a great way for them to compete and stay relevant to their buyers' agents and compete with other brokerages in their market. Okay. The next question from Sli.do, I'll give to Kathleen. It was about Other Real Estate revenue year-over-year growth decelerating from the prior quarter.

Sure. Thanks, Spencer. So as a reminder to everyone, Other Real Estate revenue consists of Rentals, New Construction, Naked Apartments, dotloop and then some Other Real Estate agent products and services. We're forecasting an outlook of 47% year-over-year growth there, which we view still as being extremely healthy. The bulk of that revenue is coming from the rentals business, which is still our fastest-growing marketplace. And we're excited about many aspects of the rentals business, including the new New York City paid listings product. We have the largest audience online and leading products for renters and landlords that connect them and create value for both sides of the chain there. The -- if you want to look solely at the numbers as a deceleration, I would point to the fact that rentals growth has been remarkable, was growing 100% year-over-year. And eventually, you're starting to play with law of large numbers, and that year-over-year growth rate is naturally going to decline. But the rentals business, I can assure you, is extremely healthy, as are all of the other marketplaces and products that are included in Other Revenue.

I think we'll go back to the call for a couple of questions, operator, please.

Our next question is from Kerry Rice of Needham & Company.

Most of my questions have been answered, but I wanted to ask a little bit about dotloop and the strategy there beyond just kind of doc signings and contracts. Do you -- can you talk a little bit about more what you plan to do or maybe offerings you can leverage with dotloop?

Sure. Thank you, Kerry. We have a really exciting product road map for dotloop, which tries -- well, hopefully we won't just try, hopefully we'll succeed, to make the transaction paperless, joyful, seamless and put that productivity suite in the hands of the nation's most productive real estate agents so they can convert leads into transactions at a really high rate. So what does that mean? It means increasingly selling dotloop into brokerages and into MLSs to gain adoption of it. It means dramatically improving the feature set and the forms coverage inside of dotloop so that it works better in more jurisdictions. It means continuing to bundle dotloop's functionality into the Premier Agent app so that the tens of thousands of agents that use the country's leading real estate CRM, the Zillow Group Premier Agent app, have access to dotloop's functionality. If we're successful at all of that, what it means is that the millions of leads that we send to Premier Agents are going to convert to commissions at a much higher rate, and then market-based pricing will work its magic and the CPM for our advertising or the effective CPL for our leads will rise as lead conversion improves. So dotloop is at the strategic center of what we're doing as a company as it's an important software suite that helps improve agents' efficiency and lead conversion. Next question, please, operator.

Our next question is from John Campbell of Stephens Inc.

This is Hayden Blair in for John. So I like the Premier Agent revenue per visit metric, and I just have 2 quick questions about it. The first is, I guess, when you're looking to grow that metric, is the same focus still on converting traffic to leads and leads into transaction for your agent advertisers? Or is there some other area that you can focus on to grow that effectively? And then, I guess, the second question on that is if you looked at each of your marketplaces individually, which do you think ultimately has the largest advertiser revenue per visit potential over time?

That's a good question, Hayden. On the first one, I mean, there are things that we can do kind of on a temporary basis, you might say, to increase Premier Agent revenue per visit. But over the long term, what really affects that number is, as you say, lead conversion and, really, commissions generated out the bottom of our funnel from visits originated at the top of the funnel. So we could run sales promotions or discounts or incentivize the sales team with extra commissions overages, and that would have the short-term effect of increasing Premier Agent revenue per visit. But over the long run, it's about how many people that visit our website that buy houses with Premier Agents that advertise with us and how much commission does that generate and then how much do agents pay us for the right to connect with those consumers. So that's why things like dotloop or the Premier Agent app or other initiatives that we discussed around lead conversion are so important. In terms of revenue per visit across our marketplaces, I would venture to guess that Mortgages has the highest potential of revenue per visit, but I don't tend to look at the business that way. But if I were just sort of brainstorming here, I think the answer would be Mortgages. RJ, what do you...

I agree. I agree. Absolutely.

Our next question is from Brian Nowak of Morgan Stanley.

I have two. Just the first one on sell direct and buying the ads on Facebook, I'd be curious to hear about any color on the percentage of agents that are -- you're buying ads for on Facebook, uptick in ARPU or just kind of any learnings on that business and what you really have to do to scale that going forward. And then on the rentals side, the rentals growth continues to be pretty impressive. Could you just talk qualitatively about the 2 or 3 areas where you still need to invest to really push the rentals growth faster for longer?

Sure. Thanks, Brian. So on Premier Agent Direct and our Facebook partnership, we found it to be a valuable add-on for agents that want to buy, essentially, brand advertising to grow their farm territory, to grow awareness in the community that they work. It's not directly lead-generating the way buying Premier Agent impressions is or the way buying Seller Boost advertising is on the listing side, but it's an effective way to build brand. And, in fact, it's the most -- we think it's the most effective way to build brand Premier Agent Direct is -- because of the data layer that we provide on top of Facebook, it's more effective and efficient than buying advertising directly from Facebook. On rentals, there are a couple of areas of focus for us. Number one, we're trying to grow building counts and building participation through sales, through the growth of the sales team and just deeper penetration into existing accounts, and clearly, that's driving a lot of revenue growth. Number two, we're building out a lot of functionality that benefits renters and landlords. I gave one example in the script about Renter Profile, but there are a lot of other things in the works that are trying to make the rental transaction more seamless and more joyful, less stressful for the renter and for the landlord. And then finally, one of our points of differentiation in our rentals marketplace is that we tend not to just focus on apartment buildings, but we also focus on the long tail of single family rentals, which we think differentiates us in the eyes of renters because that tends to be inventory that's not widely available on apartment rental websites. We'll go to one or two from Sli.do and then back to the call, if there are more on the call. So from Sli.do, let's see, can you talk about the year-over-year deceleration in total visits and what we should expect going forward? How much growth could the rollout of Instant Offers contribute to the average spend per agent? So, let's see, those are 2 questions. Let's -- I'll focus on Instant Offers and average spend per agent. I mean, it's way too early for us to speculate how Instant Offers might impact average spend. For now, we're funneling the copious listing leads to a handful of hand-selected Premier Agents in each of these 2 markets. It's not being sold separately, it's not being bundled into Seller Boost as part of the test, it's being just kind of hand-delivered to a handful of Premier Agents who are providing us with terrific data about their ability to convert those leads into listings. Long term, who knows? It's too early to speculate. Visits, year-over-year visits, you know -- let's see. How should I think about this? I mean, clearly -- we've always known, of course, that unique users -- there is some cap to what a reasonable number of unique users are. I don't think we know what it is yet, but at some point, there will be some sort of maximum unique users. But what has always mattered to our funnel and to our business results has been commissions that we can generate out the bottom of that funnel, and that's why we've been focused on visits, that's why we've been focused on lead conversion. The visits this quarter were up, I think, 17-ish percent year-over-year versus, I think, 18% year-over-year in the prior quarter. So it's -- I'm quite pleased that off of such a huge number, 1.7 billion, that we are still growing visits as quickly as we are. And much more importantly, leads and commissions out the bottom of the funnel are growing even faster. The next question from Sli.do was, could Redfin be an innovator's dilemma? Example, they win customers with discount brokerage and then retain them for all listings, which could dis-intermediate Zillow and Trulia. So undoubtedly, one of Redfin's goals is to obviate the buyer's agent. I think they have stated quite publicly that they aim to acquire more listings inventory in given markets and then have no buyers' agents on the other side of those listings, and that is a threat to organized real estate. And that's why -- that's one of the many reasons why brokerages are so concerned about Redfin. It's my view that it is valuable for buyers to have their own representation for the same reason why, in an M&A transaction, the buyer and the seller seek their own investment banking council. And in a commercial transaction, both parties seek their own legal counsel. And so -- but nonetheless, Redfin is trying to get rid of buyers' agents, and we'll see how that goes. As I said previously though, we are focused on doing something different. We are brokerage-agnostic is the way for you to think about us. We're trying to take all these hundreds of millions of people that visit billions of times a quarter and connect them with agents -- the best agents in each of their market, regardless of the brokerage. And that's where the beauty of market-based pricing comes in, because the market is determining who the best agent is. Why? How? Because of lead conversion, which allows them to spend the highest CPM to generate -- to acquire the impressions and acquire the lead. So we're not beholden to employee agents, and we're not beholden to any specific brokerage. Instead, we're agent -- I'm sorry, we're brokerage-agnostic. But I've said too much. Next question. Operator, next question on the call, please.

We'll take a question from Mark May of Citi.

One, just housekeeping. Did -- I may have missed it, but did you provide the contacts growth rate in the quarter? I think you have in the past. And then I think it was Spencer, you mentioned earlier the importance of lead conversion. It just got me thinking off the cuff. Are you able to match the information that you receive from the contact lead form with, like, public records of home sales to do your own estimation of lead conversion rates? And if so, do you have some estimate in terms of, I don't know, market share or conversion rate or something along those lines for Zillow using that approach?

I'll take the first one on leads. We haven't released a leads number for this quarter. But what I can tell you is that our funnel is really healthy all the way down. As we noted, we still have 6% growth year-over-year, with an all-time high in May of unique users is pretty fantastic given the huge base we're working on and, as we noted, the 17% year-over-year growth in visits. What we will say about [pay] leads is that they are continuing to grow at a greater rate than traffic growth. And over time, we expect that, that will normalize, but for right now, we're seeing a stronger growth rate in leads.

And, Mark, on lead conversion, yes, we can and do try to approximate lead conversion by looking at names in public record data and comparing it with names in our leads. It's an imperfect estimate. For starters, we don't have the name on our many millions of phone calls when a consumer is using Trulia and calls a real estate agent, that's a lead, and, of course, we don't know the name of that consumer. And people buy houses with all sorts of names and [indiscernible] and et cetera. So it's imperfect. Taken all together, we've always said that we think our lead conversion is in the 3% to 5% range. And yet, we know many examples of Premier Agents and Premier Agent teams that convert leads at 10% or 20%. And, of course, we know many examples of agents that convert leads at 0%. And so we think the average is somewhere in between.

Our next question is from Lloyd Walmsley of Deutsche Bank.

If I can ask two. The first would just be, you guys talk about New York Premier Agent ad revenue growing 2x in June. If you can just flesh out the marketplace dynamics, with so much new inventory opening up and existing customers getting more leads, is the revenue growth coming from same agent spend or are new agents coming into the market and kind of how you see that playing out? And then the second one would just be, can you share any sense for how meaningful mortgage co-advertising spend is in dollar terms and how you might have to change that product with the CFPB settlement? Is that something that you think would have to fundamentally change? Or could you kind of tweak it around the edges?

Thanks, Lloyd. In terms of the volume of the co-marketing spend, it's a small part of our revenue. As far as what we expect the CFPB to ask us to do with the product, we don't know. As we have said, we believe that our product has been designed to enable agents and lenders to participate in a way that's compliant with RESPA. So at this point, we don't know what the CFPB will be asking for there.

So on the New York PA question, Lloyd, yes, let me just describe the market dynamics. What -- going into March, we had Zillow Group Premier Agents who were buying impressions in New York, having their ads only served on Zillow and Trulia. And then all of the sudden, they started being served on StreetEasy. And a flood of leads started coming their way. And all of a sudden, their cost per lead dropped precipitously from, I don't know, something in the -- probably down by 90% on a cost per lead basis. I'm estimating here from memory. And so then, of course, the team starts selling. And a combination of same-agent spend increasing budget to acquire more leads, given this kind of mother lode, gold rush-type opportunity to acquire really low-priced leads, new agents coming in from other markets around Manhattan who were maybe successful Premier Agents in, I don't know, in downtown buying uptown, for example. And then Premier Broker was kind of the next shoe to drop, where a couple of the biggest brokerages in Manhattan started buying impressions as well and funneling those leads to their agents. And so a combination of those 3 things is what generated, really, a boom and boon of Premier Agent sales over the last couple of months in New York, and it continues on the for-sale side in New York as well. I don't have data to -- at my fingertips to tease out those 3 different phenomenons between Premier Broker, existing agents and new agents, but I can tell you, it's a combination of all three. I think we have a couple more questions on the call, and then we'll wrap up on Sli.do. Operator, next on the call, please.

Our next question is from Brad Erickson of KeyBanc Capital Markets.

I just had one follow-up on the market-based pricing. I guess, now that it's been out for, I guess, almost a year, can you give us any insight into the spectrum of feedback you've received from your existing agents? I mean, I guess, positively would be curious of any anecdotes you can provide regarding ROIs, et cetera. Then also, I'd be curious if any, I guess, you would call it, constructive criticism you may have received on the new pricing.

Sure. The top Premier Agents -- I mean, the types of Premier Agents that I tend to talk to, which would be somewhere in the 100 or so different clients that I email with, text with, talk with on a regular basis, tend to love market-based pricing. They go in on their own and modify up or -- and modify down in different ZIPs. They jokingly say it feels like daytrading, where they click, click, click to buy more impressions in this ZIP and click, click, click to buy more impressions in that ZIP. One of their pieces of feedback is that they would like that functionality in the Premier Agent app, which is, of course, something that we will do probably late this year or next. You can't actually buy Premier Agent impressions inside the Premier Agent app, which is an obvious opportunity. And then in terms of negative feedback on pricing, the nice thing about market-based pricing is we are just the marketplace, so the negative feedback about pricing doesn't get personalized about Zillow Group. We see the negative feedback about pricing in the price wherein it declines, where agents vote with their wallet and they say, "I'm not getting ROI in this ZIP Code." So click, click, click. Or they're on the phone with their sales rep and they mod down, as we call it, their spend in that ZIP, and the CPM comes down and then the ROI writes itself in that ZIP Code. And so it's not really -- it's not criticism, it's just the market working its auction magic in that area. Okay. RJ or [Dennis], are there more -- or operator, are there more questions on the call? One or two more on the call?

We have a question from the line of [Shyam Patil].

I had a couple of quick ones. First, could you talk about the -- just the trends in the mortgage loan request and how we should about that going forward? And then second, Kathleen, you mentioned that the co-marketing revenue is small. Should we also think of this as being immaterial in that it's less than 10% of revs?

So on mortgage loan requests, we continue to yield far more revenue from each of our loan requests as they become much more qualified. So that's really where we're focused. In terms of trending, we're looking, I believe, at a decline of about 27% for Q2 as compared to about 38% Q1 year-over-year. I'm saying that off of the top of my head, but I believe that's correct. So it's hard to predict where rates are going, but as a reminder, even with the 14% year-over-year growth in our mortgage business, we're still growing ahead of the industry. Loan origination growth overall is negative. It's tracking as we expected it. So we are pleased with what we've been achieving on the mortgage side, but we continue to work to improve that. Co-marketing, the revenue, we just -- it's small. We don't share any specific numbers there.

Operator, is there another question on the call?

We have a question from the line of Heath Terry of Goldman Sachs.

I was wondering if you could just give us a sense. As you have gotten the experiences you have with dynamic pricing, what -- how is it impacting the way that you think about sort of seasonality in the business or seasonality in pricing, presumably, in a stronger seasonal quarter like this? You saw the benefit to pricing. Should we expect an offset to that as we get later in the year? And then, Spencer, you guys have talked about ROI in the past, and I know you referenced the work that you guys have been doing in terms of closing the loop on leads that actually close. Wondering how that has -- particularly with what's going on in pricing, how that's changed the way that you talk about ROI to agents or think about ROI for agents internally?

I'll take the first question and then pass it back to Spencer. In terms of seasonality with market-based pricing, it certainly is one factor that we are expecting will come to bear in the second half of the year based upon what we saw with the pilot markets last year. That being said, two things. One is the nationwide rollout. It's harder to predict than just the pilot. So while we expect some seasonality based upon what we saw with the testing, we can't completely predict what's going to happen now that it's out on a broad scale. And then the second piece of that being that it's performing well, it's going to take time. Whether the impact of the seasonality this year will be different than once we have a fully mature marketplace, we don't yet know. So there are a lot of factors going on. And we're working on a lot of different improvements, both to the product -- most importantly, to lead conversion, which Spencer will talk about in a second, that all come to bear. So, yes, we expect some -- hard to predict exactly what it will look like.

So on ROI and lead conversion, we started focusing on lead conversion a couple of years ago from a consumer standpoint first, because we wanted to make sure that people that went to our website and raised their hands saying, "I want to talk to a real estate agent," we want to make sure they got great service. And so one of the first initiatives we did, gosh, probably 6, 7 years ago was allow people to post reviews of real estate agents. And I think now we have over 3 million reviews of real estate agents. That was our first little foray into improving lead conversion. Then we started doing Premier Agent Concierge and the Premier Agent app, and we acquired a couple of companies in this space and, of course, we acquired dotloop. And then with the pricing switch from fixed-price to market-based pricing, lead conversion is no longer a nice-to-have. Lead conversion is no longer something academic. It's now directly related to our revenue and our consumer experience as well. And so we've doubled down on lead conversion initiatives now that we live in a market-based pricing world. And so we have a lot of exciting things coming in this regard. We made a lot of investments in 2016. Premier Agent Concierge and the Premier Agent app were 2 big ones. And it's very, very important to our ability to grow our Premier Agent business from $700-odd million to the multibillion-dollar potential that we think is out there for Premier Agent that is predicated on us getting lead conversion right. I think we'll wrap up with the last question from Sli.do, which is, what do you see from Amazon and Facebook in real estate? So, I mean, with respect to Facebook, as I've already said, our partnership there is strong, and advertisers, agents view us as an effective way to buy Facebook advertising, more effective than buying it directly from Facebook. In the case of either of these horizontal players, I do think it's very difficult for horizontal players to compete with vertical companies that are focused on the vertical and have as big a brand as our family of brands have. And I do think it's also important to understand how this ad product that we have differs from other ad products. We sell an ad product that connects the consumer with a real estate professional at the time and place that they're shopping for a specific home. That's very different from Amazon's rumored directory of real estate agents or Facebook's ad product that tries to drive traffic back to a brokerage website. So a lead generation product that's tied to a home search is quite different and I think will always be more attractive to an advertiser than a branding ad product or a product that tries to drive traffic to their website. So anyways, those are some concluding thoughts on our ability to compete with horizontal players. And thank you very much. I'm very pleased with the results. Thanks for joining the call today and look forward to updating you on our next call, which will be in November. Thank you.

Thank you, all.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.