Zillow Group, Inc. Class A (ZG) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Zillow Group First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to RJ Jones, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Zillow Group’s first quarter 2019 financial results conference call. Joining me today to discuss our results are Zillow Group’s Co-Founder and CEO, Rich Barton; CFO, Allen Parker; Zillow Brand, President and Co-Head of Zillow Offers, Jeremy Wacksman; and President of Media & Marketplaces, Greg Schwartz. During the call, we will make forward-looking statements regarding future financial performance, operations 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 May 9, 2019 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. This call is being broadcast on the Internet and is accessible through the Investor Relations section of Zillow Group’s website. A recording of the call will be available later today. 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 GAAP and non-GAAP results, including reconciliation of historical 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 taxes. We have posted our quarterly shareholder letter and financial tables on our Investor Relations website. We will open the call with brief remarks, followed by live Q&A. I will now turn the call over to Rich.

Thanks, RJ, and thanks to everyone for joining today. Before we open for questions, I wanted to share a few thoughts. As I reflect on the quarter, I’m reminded of a fantastically cheesy and popular TV show from the ’80s called the A-Team about a former special forces unit became mercenaries for good and we take on daring rescue missions and despite long odds with somehow pull it off. Each episode, just as the tide was turning, cigar in mouth, Colonel Hannibal Smith played by George Peppard would turn to the camera and say, I love it when a plan comes together. Well, our daring plan to transform the real estate transaction for the super-empowered smartphone wielding uberized consumer is in fact coming together, or at least it’s beginning to come together. It’s still early days, but Zillow Offers is working. You’ll see in this quarter’s results that are Home segment, where’s Zillow Offers resides meaningfully outperformed the high end of our guidance with revenue of $128.5 million. And we are publishing Home segment guidance range for next quarter of $230 million to $245 million, up from zero a year ago. We are leaning into early success and are accelerating our investment in Zillow Offers. Today, we are announcing plans to enter another six markets by the end of Q1 2020, bringing our total announced markets to 20. In Q1, we received more than 35,000 seller request and that demand is rapidly accelerating. We now receive one request every two minutes, which is nearly $200 million in potential transaction value per day. During the quarter, Zillow sold 414 homes and purchased 898 homes up dramatically from our Q4 transaction volume. To support Zillow Offers rapid growth and expansion, we’re investing to scale this business as we build a world class operating platform. We are currently pricing homes to breakeven at the unit level and expect profitability and unit economics will improve over time as we gain efficiencies with scale. Longer term, we are also expected to benefit from other adjacent businesses, such as title and escrow, insurance, moving and other services we might explore. In fact, in the second quarter, we are planting seeds for title and escrow services tied to Zillow Offers, which is another fundamental yet fragmented piece of the transaction we intend to streamline. We’ve also been making solid progress in our mortgage business. Last month, we rebranded the recently acquired mortgage lenders of America as Zillow Home Loans. We’ve been focused on integrating this loan origination business into our operations, while building out a digital mortgage technology platform. In the future, we will more tightly integrated Zillow Home Loans with our Zillow Offers consumer experience. This will take some time, but I’m encouraged by progress today. It’s incredibly pleasing to me to see how well the whole of the Zillow Group team is performing to enable such rapid growth on our new bets. Zillow Offers is growing so quickly because it is standing on the shoulders of a huge real estate shopping audience, anchored by this estimate, that has been built up over 14 years. And it is supported by profits from the Premier Agent marketplace that have made us look more courageous than we really are as we invent the future. Our Premier Agent marketplace performance is improving as planned. Consumer data that we monitor indicates that transactions and conversion are increasing and agent feedback about the recent changes has been positive. We’re also continuing to test new models that are tied to transactions versus leads. In June, we will expand our flex pilot and convert multiple zip codes in Colorado and Connecticut to 100% flex. As a reminder, in flex, agents do not pay us upfront for advertising exposure. Instead, they pay Zillow a success fee only when they close a deal with the Zillow consumer. This is an important test as it aligns incentives and rewards with our agent partners to deliver superior service and close more transactions. While our initial flex test have been positive, we are being methodical in our approach. I came back as CEO mid-quarter and this was the first full quarter for our CFO, Alan Parker. While there has been a lot of change at Zillow group of late, we’re settling into a new rhythm as our leadership changes and market expansion are generating a level of excitement and energy that comes from being a startup again. But a startup with 14 years of experience and the size and scale to confidently embark on this new mission to transform the transaction. I’m really proud of the way the team is executing. Despite the bear spying at the empty garbage cans in our backyard, one must only look in the front yard to see something astounding happening. I know we still have much to prove to you before the fog is fully clear on Zillow Offers. We must show you that we are not just buying dollars $0.95. The unit economics of Zillow Offers are justifiably under the microscope. But even at small startup scale the economics show promise. Of course, we will gain efficiencies from here as we gain depth and density in markets. This will be done while we simultaneously and rapidly roll out new markets. So we will try to be as transparent as possible to get your questions answered. And remember, investments in our Homes segment are funded through our profitable core operations, as well as revolving credit facilities that are backed by the home assets themselves and are non-recourse to the company. We also must show you that we can profit from the multiple adjacent businesses that surround the real estate transaction. It’s early, but I have high expectations here. Further, I believe that the really big win comes from integrating these disparate costly and complicated components into one integrated transaction experience. We are rapidly reorienting Zillow Group’s talented team to make this dream a reality. We have miles to go before we sleep, but the journey has begun and results so far are encouraging. RJ said this at the top, but in addition to Allen, our CFO recently from Amazon back in the conference call room by popular demand are Jeremy and Greg, two of the folks who actually lead the Homes and IMT businesses here to answer your questions. Questions, RJ. Gary, sorry.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tom Champion with Cowen. Please go ahead.

Hi, good afternoon, and congrats on the nice results. My questions are on the Home segment. So maybe best for Jeremy. So 1Q transactions in revenues beat our expectations and came in above the high end of the range. I’m hoping you could maybe unpack that outperformance and what were maybe the one or two or three key drivers. And then 2Q guide implies another very healthy step up. Any context here on how to think about what is driving that growth and maybe how to think about the balance of the year for modeling purposes? Any comments on that would be really helpful. Thank you.

Yes. Hey Tom, this is Jeremy. On the guide, I mean, it’s still so early. We’re going a quarter at a time here and so we’ll try and give you visibility as we go. You can kind of look at our market entry pace that we hit now and draw some lines from that as we try and continue to open markets there. In terms of what’s driving the beat, it’s really consumer demand, both on the acquisition side in terms of people wanting to service and then us just finding our footing on the market and bringing those homes back to our large audience on Zillow. We continue to just be very strong consumer demand. I think we crossed 100,000 requests since we’ve launched now. We’re seeing one every two minutes and that’s just in the nine markets that we’re in to-date.

The next question comes from Justin Patterson with Raymond James. Please go ahead.

Great, thank you. And Rich, thanks for leading off with an A-Team quote, I think we all need that this afternoon. This one is for Allen, just really wanted to talk about the difference on EBITDA this quarter versus your guidance. And then it looks like you updated the full year outlook, would love to understand what’s better driving those changes around EBITDA? Thank you.

Yes. Thanks, Justin. This is Allen. Why don’t I start with Q1? So we did perform better by about $25 million versus the high end of our outlook on EBITDA, and I describe it in three categories. About 50% of the beat came from what I’ll call non-recurring. There was a legal settlement of favorable ruling related to pending legal settlements that allowed us to adjust our accrual. We had an accrual for this matter of about $4.1 million at 12.31 and based on the latest status and the ruling, we were able to take that a cool down to an immaterial amount. And the second piece of those non-recurring was related to as we reviewed our processes around the new hire process, we’ve made it explicit that some – certain payments that are made early are actually earned over a period of time of initial employments. And based on that change, we’re able to recognize that costs over that initial period of employment versus recognizing it right away. And so that’s kind of a timing thing but did provide a benefit in the quarter and for the year and that is part of the outlook. It’s including the outlook that we have. And then the other 50% just real quickly to touch on it, about 25% in Q1 of the $25 million beat was just some ad spending rolling from Q1 to Q2, so that’s really just timing, and the remaining 25% was just us gaining traction on Zillow discretionary spend improvements, including integration costs as we look at the integration in MLOA. And again, that’s also now reflected in the outlook for the full year.

The next question is from John Campbell with Stephens, Inc. Please go ahead.

Hey guys, congrats on a solid quarter.

Thanks, John.

Just one quick question from me, on the Flex program. Could you guys provide a little more color on how that testing has gone thus far? And maybe if you could shed a little light on what your plans are maybe over the longer-term?

Yes, I’ll take that one, it’s Greg. Thanks for the question. Yes, we know that Premier Agent businesses has stabilized nicely, we’re focused on expansion in Flex. We’re hitting the second round of testing, which we just announced this week, which we’ll launch in June. It’s in Colorado, Connecticut, and the big change there is focused on our most established highest performing Premier Agent teams brokers and agents. The prior round of testing was testing the pipes and the software with newer customers. So we’re looking for very strong performance this next round of Flex testing. And the big gain is it starts to allow us to look at the pipeline, the performance of leads and then direct that volume to the highest performing folks. So we should see a nice transaction benefit that with a post pay approach allows us to reclaim incremental profits seamlessly. So that’s the story there.

The next question comes from Brad Berning with Craig-Hallum. Please go ahead. Mr. Berning, your line is open on our end, is it muted on yours?

Sorry about that. Good afternoon, guys. One follow-up on the Zillow Homes segment, when you guys are talking about 100,000 quotes maybe you can talk about what portion of some of these initial markets that you’re seeing of used home sales are calling to get a quote from you, what portion of those you’re buying, and have you made any progress on the seller lead generation side of the equation yet?

Sure, this is Jeremy. On those sort of market buy box, we’re pretty broadly penetrated in the markets we’re in. We walk into each market and we rapidly expanded to get the operations online and opportunity for Zillow Offers is pretty broad. If you think about the number of homes we were touch in every market, it’s around half the country that’s in our buy box. So we’re talking to most homeowners in the markets we’re in that are in that medium price range and in around. And on seller listings, it’s still early. We’re focused very much on trying to figure how to have the right conversation with the customer whether they sell to us or less traditionally with one of our great Premier Agents, but we’re focused on ideating on the right product there with our agent partners in our Zillow Offers markets and that’s just a handful for now.

Jeremy, it sounds like Brad was asking about the funnel conversion metrics too.

Sure, and on the request that we see, I think we talked about last quarter, we’re still only buying 3% to 4% of the homes we see, and that’s mostly our choice. We’re mostly looking for the right type of home and where we can make the strongest offer and we’ll grow that and we’ll grow that conversion as we grow Zillow Offers.

The next question is from Maria Ripps with Canaccord. Please go ahead.

Great, thank you for taking my question. Rich, can you provide any more depth around the Premier Agent marketplace stabilization and what are some key metrics you’re looking at besides agent churn?

Hey Maria, thanks. Why don’t I kick that to Greg to answer?

Yes, little breath in, yes, every morning, every night. Yes, so after Premier Agent the launch, or we repositioned as Premier Agent fuller, made a bunch of the changes in giving more of those nurtured leads. So we increased the volume of leads to our customers and then we focus on improving the quality of connections – of live connections by phone. And the customer feedback on connections had been what we hoped for, now that we’ve had a little incubation time of those connections, which is, gosh, there’s still to convert really nicely. So, that’s one piece. The quality of the connections and had it achieved what we’d hoped for and the feedback is quite strong for better Premier Agent. So that’s one piece. The second is now the stuff that we break up, the gross sales volume is something we of course, follow in the net retention, and that stuff is all hitting the forecast we provided you for 2019, no changes to the forecast. But the stabilization we were hoping for has arrived and as you know is the SaaS business, do you dig a little hole, you have to fill it in until you grow. So the same growth forecast in the third and fourth quarter that we led you to is what we’re sticking with.

The next question is from Ron Josey with JMP Securities. Please go ahead.

Great, thanks for taking the question. Maybe just a follow-up on Flex, and Rich a bigger question for you, I guess. Just on Flex, I think Greg you talked about expanding the Colorado and Connecticut. In the letter you talked about some impacts to revenue in 2Q in 2019 from deferred. Can you just talk about how we should think about and how you think about what the impact is, because I think the full year Premier Agent revenue were still sort of still pretty good in fact unchanged, maybe at the high end, increased at the low end. And then Rich, you talked about on homes like efficiencies from here as you get from depth and density, can you just talk about where you see those efficiencies, we look at I guess your first figure around home acquisition cost, renovation cost, holding cost, any insight there would be helpful. Thank you.

Hey, Ron. This is Allen Parker. I’ll take the first part of your question with respect to the impact of these flex tests on our PA revenue. So with respect to the two markets that we’re going to go into our current guidance is and you’re right, we left the top the same and we actually took the bottom up a little bit on revenue. It’s included in that number, and it’s not significant for the size of these two.

Yes. And then, I’ll take the second piece on homes unit economics.

I didn’t ask for that. Thank you, Jeremy.

No worries. Scale efficiencies have come across all of those items in the cost line, so it’s going to come across buying and selling costs, but as well as it’s going to come across renovation efficiencies and rehab return. It’s going to come across clothing and faster holding. So pretty much all the line when you get to scale and density, you’ll see us improve leverage there.

The next question is from Nat Schindler with Bank of America Merrill Lynch. Please go ahead.

Yes. Hi guys, thanks for taking my question. Just looking at charts on Page 5 and 6 on the home unit economics. I see on chart five, you really pointed out the interest expense being a little bit more than 1% on a per home basis, do you consider that to be a good folder or that it will likely stay somewhere around that number long-term? And is that inclusive of – is that only inclusive of the homes that actually sold in the quarter on a – that’s on a per home basis or is that divided by the homes sold if there are some home sitting on the market for longer. And then I have a follow-up based on chart six, the chart on the next chart in here. Thank you.

Okay. This is Allen Parker, maybe I’ll take the first part of that. Yes, so on a per home basis it’s coming out to be about 129 basis points of revenue for the home value. And when you think about the current facilities, we have two and we discussed in the queue there are about 6% interest, and our leverage right now – effective leverage is about 76% of the home value. And so based on our turns this is probably something we’d expect, but there’s going to be a lot of decisions to make as we think about ways that we’re going to get capital or finance the assets over time, and what we can do to reduce whole period. So there’s quite a few variables there, but we think this is reasonable based on what we would have expected at this stage and then we’ll continue to track it and I did want to just call out, but yes, in this calculation, this is the interest related to the homes actually sold.

Okay. And then just going on further down on the next chart when you do the at scale kind of calculation, you are using EBITDA, and since you’re always going to be leveraging these homes and as you get above that really should take our interest rate. So you take out that 130 bps basically. And you’re really looking at – should we really think of this business as kind of a 70 bps to kind of a little less than 2% business at scale?

Yes. I think what we said before is we’re shooting for 100 to 200 basis points of EBITDA less interest at scale. So that would imply that at the low end the two, we have to have better turns and so our interest rates will be slightly lower. But so if you take the 200 to 300 before interest or add EBITDA, prior to adjacencies and think about around 100 basis points of interest at scale that’s what we think is a long-term model.

The next question is from Jason Helfstein with Oppenheimer. Please go ahead.

Thanks. As we’re trying to think about the fixed cost as you scale it out, is it fair to think about it on a per-market basis. So as you add each market, there is a certain amount of fixed costs for homes in mortgages. So if there’s any kind of color or way you can help us thinking about that. And then the investment cost for Title and Escrow, where will they show up in the model. Thanks.

Yes, this is Jeremy. I’ll take the first part of that. You can think about – as we get to scale on the platform each market will have a relatively modest fixed cost open. I think we’ve talked about a couple dozen folks in each market with a lot of the functions being centralized on the platform. Obviously, we’re early days from that now. But that’s what this will look like at scale.

And then on the mortgage business, our model is a consumer direct model with our overwhelming majority of our staff in a call center or a few call centers, so there won’t be much of a footprint or cost specific to markets.

And Title and Escrow, we’re just kicking off, it will be reported in the Home segment, but it’s so early and the fact that we are just giving guidance one quarter out, there’s really not much of significance included in the 2Q guidance.

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

Hi, thank you, and good afternoon. So my question also relates to the scaled margin opportunity in Homes, so that 2% to 3% EBITDA margin. So obviously recognizing a lot’s going to change and there’s certainly a lot of opportunity to leverage fixed costs. But I wanted to focus on the selling costs and the leverage there that you mentioned. So I’m just curious, do you expect things will look meaningful different in the future in terms of how those kind of third party agents are involved in the transactions. And I guess the question to be blunt is over time, does this look more like a brokerage type structure where maybe you actually employee agents, shift some of those variable commission costs to kind of a fixed point of leverage or is that kind of too extreme with maintaining things on the IMT side? Any thoughts there would be great. Thank you.

Sure. This is Jeremy. I’ll take that one. So when you think about the cost leverage, it is important thing about across all this, so buying and selling is one, but closing and transaction cost and that’s why we talked about Title and Escrow a bit here and then holding costs and turns, those all add up to the leverage of scale. As it relates to selling specifically, we absolutely expect to see better leverage there on the work that we ask whether it’s employees or partners to do as we scale. We currently are using our great agent partners in every one of our transactions and we plan to continue to do that. But you can imagine, as we’re scaling to hundreds of listings in each market, the work we often do, you can scale that work across many more listings and we can drive efficiencies in the work we’re paying for.

The next question is from Lloyd Walmsley with Deutsche Bank. Please go ahead.

Hi, this is Greg on for Lloyd. One, within the channel we’ve been hearing that a couple of agent teams are starting to dismantle just because of a lack of a volume advantage. So I guess, are you guys seeing something similar, and if so, how is that affecting the Premier Agent business? And second, notice that there is a redesign to the mobile app and the desktops. And also you guys included a couple of new features to help agents with the lead flow. So I guess can you talk about the redesign and some of the new features and how that’s impacting the business?

Yeah. It’s Greg. I’m happy to grab it. So even if they’re going strong, we’re actually seeing opposite movement from what perhaps you have observed in the channel, which is we are seeing the differentiation, standardization, the service commitment that teams bring is increasingly important, especially if their volume concentrates for Zillow Offers and to our Flex tests. So we think teams are a growth strategy for us and certainly what we’re seeing. We’ve done, yes, we’ve done recently booked mobile app gets that experiences with a beautiful photo driven into enabled experience. It’s been well received by consumers and very carefully tested. As it pertains to new features in our CRM or Premier Agent app, the Premier Agent app has been a quite and very significant success for us. The vast majority of the leads we generate are actually touched in the app. It’s probably the most used also the compare to call it the most used CRM in the industry, and it’s become really critical to our agents success in converting and we will continue to invest in it, because we think we can help them drive real efficiencies in their activities and power them with differentiated data.

The next question comes from Brad Erickson with Needham & Company. Please go ahead.

Thanks. A couple of follow-ups, I guess. One, Jeremy when you call up the 3% to 4% conversion rate on the inbound requests for offers and I recognize that can move a lot higher. Do you view that as kind of the opportunity set for seller leads ultimately or do you expect to be able to refer seller leads to say more of a majority of the inbound leads you’re receiving ultimately. And then I guess secondarily, given how many you’re getting so far I think you said something like one every two minutes, it would seem like you’d have significant demand for PAs to get in front of those opportunities like now, today. Why do you think that hasn’t happened yet?

Yes, this is. Jeremy. I’ll take that and Greg, maybe chime in. So the conversion opportunity is definitely the whole 100 right, not the 3% or 4%. And there’s just a different phases based on what their question is for us, whether they’re actually getting off or whether they’re getting to a final offer for us or whether they’re not eligible. So, yes, we do think that the opportunity for both Zillow listings and Zillow Offers to grow is the fact that everyone showing up asking about how to help Zillow House and either offers or a great Premier Agent [indiscernible] that is what we’re testing today with our agent partners.

I would add one more thing, consumers are falling in love with the Zillow Offers experience. So it takes a little bit of invention and magic to take someone just fall in love with an offers experiencing and get them over a Premier Agent. And Jeremy and my team both these teams are working really hard to figure out what that compelling offer is to get a consumer do it. That’s why it’s not in this year’s financial plans is we have some invention to do because they want an offer, and they want to transact with us. So channel changing them and we’ll get there, just not ready to put it in paper yet.

The next question is from Ygal Arounian with Wedbush Securities. Please go ahead.

Hey, guys, thanks. On Zillow Offers, so you guys know your – got a lot of questions about getting to scale, but to you noted building work of world-class operating platform for national scale. I was wondering if you could dig into that a little bit and highlight some of what that means, some of the things you’re doing to help you get the scale. And then you also noted the 7% average rate on offers. I was wondering if you could talk about in various markets where there might be more or less competition, how that differs. And if you think over time as competition increases pricing on these – on offers would play an important role or not? Thanks.

Yes, this is Jeremy. I’ll take both. So on platform you can think about that as a couple of buckets, one is kind of workforce management and tools to enable all of operations in the operator scale. So everyone who touches one of the homes in the field and central office. There needs to be scaled tools and technologies that allows us to run these operations – this operation more efficiently than we are today. And then you can also think of it as kind of pricing and big data. So we’re collecting every day more data to make our models more efficient and more real time and their feedback to drive not just a more accurate price but a faster customer experience. That’s how you might want to think about the platform. On the fee and are we seeing sort of variableness by market or for competitors. It’s still so early. We are not seeing much in terms of cross shopping, I mean our biggest competitor here is just the traditional way of listing and whether that’s the right path for each customer. Obviously, the fee varies widely because we’re solving for what we think it will take to sell your house. And so 7% was what the average was, but it varies every house and so different price stands, different neighborhoods will have different estimates of what it will take to sell and how long and at what price and that’s what the split up would be.

The next question comes from Brent Thill with Jefferies. Please go ahead.

Thank you. We saw the illustration to shareholder letter showing the path to 2% to 3% margins at scale within the Homes business. Can you just give us a sense of how long you think it takes to get the scale or how many markets or homes that would entail?

Yes, this is Allen. I think I’d say is longer than three to five years, because I think our view is our long-term target of getting to the 5,000 homes, purchased a month and a $20 billion rev run rate, but 200, 300 basis points that we say to scale likely exceeds that point. But again we’re learning all the time, and the great thing is, Jeremy, just talked about, we’re focused on the inputs, we’re focused on building the mechanisms to drive great operations, and we’ve got a customer signal that’s really strong. So, all of those things have to continue and execution we control and the customers signal keeps getting stronger as we enter the market. So, we’re optimistic, but I can’t put a timeline on.

This is Rich. To a certain extent it’s a function of growth. To the extent, we are continuing to see rapid growth and future growth opportunities. We will continue to make smart investment decisions on a go-forward basis, which might put off achieving the scale model.

The next question is from Deepak Mathivanan with Barclays. Please go ahead.

Hey guys, thanks for taking the questions. Two questions. So, first on the Homes business, last quarter you ended with about little over 400 homes – sorry, 500 homes in your inventory and just in the first quarter of this year you sold closer to 400. I mean, it seems like there’s a few homes older than 90 days. Can you talk about the inventory aging trends there? And then on the EBITDA loss for Homes business in 2Q, can you parse out between contribution profit and then fixed cost. Just a quick one on the PA business as well. You guys had a sizable advertising spend on the Premier Agent business last year, but clearly now the messaging and the creatives that have changed to a more holistic basis. How should we think about the advertising spend allocation between the IMT business and then homes and mortgages business this year? Thanks.

This is Jeremy. I’ll take the first of what I counted three questions. So on inventory aging, you’re right, and you’ll see our inventory grow as we scale, because every month we are going to buy more than the homes we had bought in current months to sell. And as we grow and we get to more aged inventory, you’ll see us manage that on a cohort basis. So for any given cohort homes we buy, we are pricing that cohort to account for both the head of overperformeres that sell faster and that’s how you will start to see as homes take longer to sell. So we’ll treat each cohort carefully and revenue manage it as a portfolio, but you’ll see that total inventory balance grow as we’re continuing to push for sale.

Yeah. And this is Allen. I just add to that – that in addition, as any company that has inventory and manages inventory, we have processes in place to ensure that we’re adjusting – assessing our inventory values and marking them down to lower cost or market and to date we have not had to make an adjustments. However, as Jeremy mentioned, as we grow, it’s likely in the ordinary course of business that we will have to make such an adjustment.

And then maybe I can just quickly take your second Deepak. We don’t breakout the split, but I think what I’d just highlight is in Q1, our EBITDA for Home segment was negative 27% of revenue, and if you look at our Q2 guidance, it implies the range of negative 20% to negative 23% of revenue. So you can see that as we grow and even as we enter new markets, we’re going to continue to get leverage and then our fixed cost will not grow as fast as our top line. And on the marketing question, I mean, we don’t give out an allocation to the segments, I mean you can – so a vast majority of the spend is driving all segments right now to get to look at our new ad campaign, it talks about all segments, in fact our leaders talk about, one of our – talk about offers, mortgages and PA, but we aren’t disclosing the breakdown of sort of media rate or specifics.

The next question is from Shyam Patil with SIG. Please go ahead. Your line is open on our end, is it muted on yours? [Operator Instructions] The next question is from Mark May with Citi. Please go ahead.

Thanks for my questions. I had two, please. Maybe just a follow-up on the last question and your answer. Just I wanted to clarify in terms of thinking about the cohorts head and tail and some of the homes that might work, some of them, maybe down to your expectation. Did you say that you haven’t yet had to write down the value of any homes? I just wanted to be clear – it maybe if that’s not the case can you give us a sense for what portion of the homes that you’ve purchased life to date that maybe did not meet your sort of criteria in terms of average markup or resell or holding period, and if in fact there haven’t been any that you’ve had a solid loss. I just was trying to clarify that. And then in terms of that we’ve had existing home sales kind of soft here for awhile. Just curious what impact, if any, you’ve seen on the Premier Agent side of the business in terms of active paying accounts on Zillow and/or the average spend per lead per agent, as a result of kind softer existing home sales market. Thanks.

Yes, this is Jeremy. I’ll take the first. And maybe Allen can clarify. I think Allen was talking about the accounting treatment. No, in any of our cohorts, we’re selling homes a little bit above what we underwrote and that we’re having to drop price and sell them for less than others. So it’s not about pricing. We’re really, really pleased actually with how tight we are to underwriting. The vast majority of our homes are actually performing within bps what we underwrote to which is really impressive to see for how early we are in the operation inside these markets. I think Allen was talking specifically around do we hit a tax in accounting in which we have to actually account for inventory markdown and we haven’t hit that yet. And we probably won’t provide, because it won’t be material to the business. I think that’s what Allen was saying there.

We believe it will happen in the future. I think globally in the ordinary course of business that we’ll likely do some of these markdowns. And Mark, just to be clear, the lower cost of market assessment would come, for example, at 331, we would look at all of the 993 homes in inventory, focusing likely on the aged ones and determine whether the expected price we expect to sell for is lower including sales cost, the cost to sell is lower than the carrying value, and if so, we would have to take a mark down. And what I was trying – what I indicated was we have not yet taken a markdown for that event.

Got it.

Hey, Mark, it’s Greg. On the Premier Agent business with relatively low interest rates still hanging around and decent growing choices among homes – Premier Agent business is buyer driven, so buyers are having a suddenly easier experience finding something to move into. So that business hasn’t seen macro headwinds in this period. The fourth quarter is when it was tough from a macro perspective. Things look real solid right now.

Thank you.

The next question is from Heath Terry with Goldman Sachs. Please go ahead.

Great. Thank you very much. Just wanted to dig a little bit into the guidance. Bringing the EBITDA guidance out the way you did, I know you called out some of the non-recurring items and stock-based comp in the quarter, anything that we should be thinking about sort of in the forward guidance whether non-recurring items or other things sort of underlying the improvement and the profitability outlook. And then on – with the re-branding of the mortgage business, any more color on the progress that you’re seeing in integrating with home offers and what sort of uptake you’re getting in mortgages along with that part of the business?

Yes. So this is Allen. I’ll take the first part of your question. So again we exceeded Q1 guidance, our top end of guidance was $25 million, and for the year we’ve taken up EBITDA about $35 million to $40 million. I walk through the 25. What I’d say is that besides that amount there is still a little bit more about another $8 million to $10 million related to this change and our recognition of the employee expenses that go throughout the year. And then the remainder is just based on our latest forecast and looking at some of the traction we’re getting on discretionary spend.

Hi, it’s Greg. As it pertains to mortgage revenue blast with that business. We’ve re-branded Zillow Home Loans, re-branded the new brand, and we’re a bit ahead of schedule on the software platform build, you know this is intensive operationally demanding business. We got to get a digital borrower platform out of the borrowers and loan officers. We’ve got to have a very efficient operating model with underwriting and processing. And then we have to make a lot of progress on automation to build a healthy scalable business. That is 100% our focus. It is not the time. We’re not focused on attach at this point. We are focused on building a scalable model that’s technically driven. And again we’re a little – maybe a quarter ahead of schedule. We already have the digital platform being tested by two of our origination teams, but there’s many, many, many miles to walk here. And as you know attach really isn’t significantly in the business model for this year is build the tech and the platform that’s scalable.

Showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Rich Barton for any closing remarks.

Thanks for your time today. Look, we are in the midst of a major transformation to revolutionize the real estate transaction. And as I said at the top, the plan is coming together. We know that this will take time, but we are well on our way. As investors I realize this requires more belief and imagination than required in a typical public company investment. I’m convinced Zillow Group is anything but typical. Thank you for your continued constructive support, smart critical shareholders who are owners just like us make for great partners.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.