Zillow Group, Inc. Class A (ZG) Q2 2023 Earnings Report, Transcript and Summary

Good afternoon. My name is Elliot, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group's Second Quarter 2023 Conference Call. [Operator Instructions] Please note this event is being recorded. And I would now like to turn the conference over to Brad Berning, Vice President, Strategic Affairs and Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Zillow Group's Second Quarter 2023 Conference Call. Joining me today to discuss our results are Zillow Group's Co-Founder and CEO, Rich Barton; CFO, Jeremy Hofmann; and COO, Jeremy Wacksman. During today's call, we'll make forward-looking statements about our future performance and operating plans and the housing market based on current expectations and assumptions. These statements are subject to risks and uncertainties, and we encourage you to consider the risk factors described in our SEC filings for additional information. We undertake no obligation to update these statements as a result of new information or future events, except as required by law. This call is being broadcast on the Internet and is accessible on our Investor Relations website. Recording of the call will be available later today. During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to as EBITDA. We encourage you to read our shareholder letter and our earnings release, which can be found on our Investor Relations website, as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures. We will now open the call with remarks followed by live Q&A. And with that, I will turn the call now over to Rich.

Thank you, Brad, and thank you, Elliot. Good afternoon, everyone. Thanks for dialing in today. We're excited to share our second quarter results and speak to the progress we've made on our growth strategy since we last spoke in May. You've heard me say many times that 2023 is a crucial year for Zillow. As the year progresses, we're pleased with what we've accomplished thus far. Second quarter revenue of $506 million surpassed the high end of our outlook by $27 million and returned to slightly positive year-over-year growth. And EBITDA of $111 million surpassed the top end of our outlook by $30 million. This outperformance compared to our outlook continues to be driven by a combination of progress we've made since reorienting the company in early 2022, our focus on cost management and relative macro tailwinds as we navigate the ongoing poor housing market. As we [ gain to ] the results with you this quarter, we are particularly pleased that our residential revenue outpaced the broader real estate market decline of 22%, by 1,900 basis points, marking 4 consecutive quarters of outperformance. As you will recall from the investor deck we shared in early 2022, we believe approximately 25% of all actual U.S. homebuyers sought a Premier Agent partner in the previous year, yet we estimated that only 3% of homebuyers and sellers ultimately transacted with us, a major opportunity gap to be bridged. We framed our solution to focus on growing customer transaction share, the Zillow housing super app. Our big strategy bet with the super app is that customers and partners alike want and need a much more digital, convenient and integrated housing transaction and that Zillow is likely the only company in the industry with the technical skills, the audience reach and partner network to pull it off. We are clearly making progress on this long runway growth strategy. We will continue to invest and prioritize for a steady drumbeat of features and services for both customers and partners, which should set us up for long-term profitable growth. Our super app investment manifests in 5 growth pillars we talk about frequently with you all. But it also shows up in the core day-to-day work, which is a result of having our 6,000 employees orient around the same goal: to increase our share of customer transactions. Since we have made transactions such an important focus for us, we have learned a great deal about our customer experience, far beyond what we ever knew when we were purely a lead gen-focused company. We've spoken before about the significant investments in improving our customer funnel. We are making numerous incremental improvements in an effort to capture more customer demand and connect more of that demand to our partner network, which has resulted in better-than-expected connections in Premier Agent. Additionally, we continue to see significant value in giving more customers the option to tour homes as the key call to action on our apps and sites, which is also driving this relative outperformance. One additional boon to us, first-time homebuyers make up a larger relative share of buyers in the market today. This benefits us because we have a richer mix of first-time homebuyers. Before someone is a first-time homebuyer, they are often a renter. With over 11 million rental households moving each year, we continue to invest in Zillow's rental marketplace to integrate and streamline the experience while driving customer preference for Zillow's rental products. We are building a comprehensive marketplace of rental listings and integrating an experience that guides renters all the way through completing their rental transactions and supporting subsequent interactions with their landlord or property manager. Rentals revenue grew 28% year-over-year. This growth was driven by organic efforts, signing up more multifamily properties and attracting more single-family listings with limited marketing dollars. In May of last year, Zillow regained its spot as the #1 most visited rentals platform according to comScore, and we have widened our lead since then, putting us in a strong position for future revenue growth. We intend to differentiate our marketplace on quality of experience, building out a one-stop suite of landlord tools to attract unique supply while simultaneously investing to deliver a more seamless housing super app experience for rentals customers and partners. All of the positive performance we've seen across our business this quarter is supported by a healthy top of funnel relative to the weak housing market and consistent organic traffic to our apps and sites. From our earliest days, we prioritized the product itself as the most critical part of the marketing mix, delivering product innovations that empower and serve our customers. Our product-centric approach has served us well, driving favorable word-of-mouth marketing and strong brand recognition. Currently, more than 80% of our traffic comes directly to us, which is rare and good. Another critical belief we have that underlies our housing super app strategy is the importance of our mobile app as the key interface to our customers. We were an early mobile developer back when the iPhone was released in 2007 and have been investing ever since. As a result, nearly half of our business today are in our lovely Zillow app, where people dream, shop, buy, sell, rent and finance. This has made us the leading real estate app in sight in the U.S. according to comScore. The direct branded relationship we have with our customers will serve us well into the future. We spoke last quarter about how we're thinking about AI as its potential to influence how people use digital services to accomplish countless tasks in their lives. While the initial wave of splashy headlines playing on AI hopes and fears have waned a bit, our belief in its importance to our future has not. We are energized about AI's potential to drive efficiencies and improve the experience of our customers, our Premier Agent partners, our loan officers and our employees. Understanding the opportunity here, we've deployed several work streams across the company to improve the experience of all 4 of these key constituencies. Today, we are in the rapid exploration phase, and we already see how AI will be fundamental in accelerating our business. Before I talk through the progress we've made in the last quarter on our product road map, allow me to rearticulate the goal of Zillow's housing super app strategy to increase engagement customer transactions and revenue per customer transaction by investing across 5 growth pillars: touring, financing, seller solutions, enhancing our partner network and integrating our services. The expected output of this strategy is to grow our share of customer transactions from 3% to 6% by the end of 2025. We continue to emphasize that 2023 is a year of execution. Through midyear, I am pleased to report that we have been steadily rolling out products and services across our 5 growth pillars and integrating them to create an increasingly seamless experience for customers and partners alike. To begin our product road map update, I'll start with financing. This remains an important investment for us for obvious reasons. Nearly 80% of homes purchased are financed with a mortgage. 40% of all homebuyers start their journey shopping for a mortgage. 80% of those don't yet have an agent. And almost all of those mortgage seekers use Zillow. We are building the foundation for a substantial first-party direct-to-consumer purchase mortgage origination business, seamlessly integrated with our extensive Premier Agent partner network. We've spoken about the 2 ways in which customers connect with Zillow Home Loans: property first and financing first. I'll start with financing first, the -- as the entry point for Zillow Home Loans, which is when customers start their moving journey by getting prequalified before they are connected to an agent. We are making good progress on integrating our mortgage experience into the Zillow app, helping customers better understand what they can afford and to easily get preapproved before they meet a Premier Agent partner. Additionally, we are continuing to refine our ability to better connect our transaction-ready customers to one of our ZHL loan officers as quickly as possible. Lastly, we are building tools for our loan officers to make their experience easier when working with customers. All of this work is resulting in higher loan officer efficiency and a better overall customer experience. I'll now switch over to the property first entry point, which is when our Zillow Home Loans lead comes back to us from a Premier Agent partner who is working with a home shopping customer we had previously sent them. Here, we are focused on building great technology for our Premier Agent partners and ZHL loan officers to bolster efficiencies and ensure a quality transaction experience. Equally important, we are focused on building a deep relationship between our ZHL loan officers and our Premier Agent partners so that together, they can provide the best possible service to our shared customers. Consistent with last quarter, we are seeing roughly 1 in 3 Premier Agent partners in our enhanced markets to connect customers to Zillow Home Loans, up from roughly 1 in 5 in Q4 2022. Suffice it to say, we are working hard on our financing growth pillar and on deep integration of Zillow Home Loans into our customer and partner experiences. I'm pleased to share that as a result of all our efforts, we are reporting 73% year-over-year growth in purchase loan origination volume and 30% growth sequentially from Q1, all in the context of a lousy mortgage market. I'll now speak about touring, which continues to be one of our big bets because our data shows that movers who request a tour convert to buyers at 3x the rate of other actions on Zillow. This past quarter, we've continued to iterate and improve our real-time touring product, ShowingTime. We began by shipping new software across the industry that enabled real-time touring functionality. We then began to train our Premier Agent partners on lighting up real-time touring on a market-by-market basis, allowing eligible buyers to get a tour confirmed quickly with much less friction. I'm pleased to share that we've now rolled out real-time touring in all 6 of our enhanced markets, including Charlotte and Durham. Further, to accelerate the rollout of real-time touring, we've begun launching outside of our enhanced markets, including to 4 additional locations this quarter. As we are continuing to invest in product improvements to enhance the experience, for example, agents now have expanded self-service tour management capabilities at their fingertips, including the ability to reschedule or view subsequent tours in the ShowingTime app and book multi-property tours. These incremental improvements contribute to a meaningful upgrade from the antiquated game of 3-legged phone tag still being used by many customers and agents to schedule home tours. Real-time touring, combined with other initiatives in our enhanced markets, is improving our funnel and driving meaningful improvements to our ability to connect higher-intent customers to our Premier Agent partners, contributing to the enhanced market outperformance that Jeremy will discuss in more detail shortly. I'll now move on to the final pillar of our product road map update, seller solutions. We're working to provide sellers and listing agents with tech-enabled products and services that make it easier for people to move. Last fall, we began talking about our product we're developing to differentiate listing agents on Zillow through branding and higher-quality listings that look unlike anything else that exists in real estate today. I'm pleased to share that in June, we launched Listing Showcase by ShowingTime+ in select markets. We're excited about this product for a number of reasons. First, by targeting sellers and listing agents directly, we are expanding our serviceable addressable market, increasing our opportunity to grow customer transaction share and diversifying our business model. Second, it's great for consumers, buyers and sellers alike. Listing Showcase offers sellers a differentiated listing experience that rises above the rest, giving buyers richer, tech-enabled insights into the homes layout and features. Finally, it's giving agents across the industry, not just Premier Agent partners, an opportunity to elevate their professional brand to help them win more business. It's early days, but we are optimistic. Initial feedback and demand has been strong from listing agents across the industry who are eager to learn and try out this innovative new offering. We are planning to roll out more markets over the course of this year, and we'll provide more details in the coming months. We've also made progress on our other selling solutions offerings, our partnership with Opendoor, which allows sellers on Zillow to request a cash offer from Opendoor, is live in 25 markets as of today, compared to the 2 markets we launched initially in February. As I think about the progress we're making in the business, I'm pleased with how we have managed even as so much remains out of our control. Mortgage rates are staying higher for longer than previously expected and continued to be volatile, resulting in would-be sellers hesitating to move due to their attractive legacy lower-rate mortgages. This is having a more pronounced effect on sales volumes during the typically strong summer moving season. Demand has held up better than supply, driving inventory to record lows and supporting prices despite affordability headwinds. With low existing home inventory, the new construction is a bright spot, adding new supply to help meet some of the demand and growing the overall housing stock. Our new construction marketplace experienced strong growth again in Q2. Additionally, the rental market is adding record levels of new supply, which has lowered occupancy rates and driven landlord demand for rental advertising, contributing to 28% year-over-year growth in rentals revenue for us this quarter. The housing market outlook continues to be frustratingly foggy, and we can only plan for it to take time to normalize. Volumes remain stubbornly low, but we continue to have confidence that this is not some new normal and that we will get back to approximately 6 million units a year over time. To close, I'll reiterate how pleased I am with our progress this year. We're navigating well through a tough housing macro environment that is not in our control, maintaining our focus on what we can control, steady progress across our growth pillars and prudent cost management as we work towards driving profitable growth for our business. With that, I will now pass the line over to Jeremy Hofmann, who many of you already know from his 6-year tenure at Zillow, which saw him rapidly increase his leadership scope to include corp dev, strategy, business operations, investor relations, government relations and now all of finance as CFO. Welcome to the microphone, Jeremy.

Thanks, Rich. Great to be on the call with you all and looking forward to connecting in the coming weeks and months. Given this is my first earnings call, I want to set the table for what I am going to cover. First, I will go into additional details about our Q2 results and our Q3 outlook for continued strong relative outperformance versus the real estate industry. Then I want to provide new transparency on our cost structure and how we plan to manage costs going forward, including share-based compensation, with our intent to be a profitable growth company. Last, I will provide some clarity on our capital management strategy, including plans for further improvement to the quality of our already strong balance sheet. In Q2, we delivered total revenue of $506 million, $41 million above the midpoint of our outlook. This revenue outperformance drove $40 million of EBITDA outperformance as well. Our costs were in line with our expectations, and we were able to flow revenue through directly to EBITDA, showing the high incremental margin business that we have today. Total revenue returned to positive year-over-year growth, albeit slightly so compared to the $504 million we did a year ago. On a GAAP basis, net loss was $35 million in Q2, and net loss as a percentage of revenue was 7%. EBITDA of $111 million resulted in a 22% EBITDA margin. Residential revenue was $380 million, down 3% year-over-year, outperforming the high end of our outlook range. Our residential revenue performance was 1,900 basis points above the industry decline of 22%, according to data from the National Association of Realtors. Our relative outperformance continues to be driven by delivering better-than-expected number of customer connections to our Premier Agent partners and favorable tailwinds relative to the industry that Rich discussed earlier. We estimate that over the past few quarters, approximately half of our outperformance has been driven by actions taken by us, and approximately half has been from relative macro influence. As Rich discussed, our ongoing investments in our top-of-funnel and mid-funnel experiences are paying off. Rentals revenue increased 28% year-over-year. Rentals traffic grew 15% year-over-year to 31 million average monthly rental unique visitors per comScore. This industry-leading rentals traffic drove 21% year-over-year growth in the number of multifamily properties on our apps and sites. We also continue to see industry tailwinds with occupancy rates declining from historically high levels, highlighting the need for landlords to advertise their vacant rental properties with us. Mortgages revenue was $24 million, with purchased loan origination volumes growing 30% sequentially from Q1 and 73% year-over-year. Further, total origination revenue returned to positive year-over-year growth as we lap the slowdown in refinance activity from early 2022. In Q2, we delivered a 50% increase in loan officer productivity compared to Q4 2022 based on the number of locked loans. We are adding new tools and capabilities for customers, agents and our loan officers that we expect to drive further efficiency improvements in the quarters ahead. Given this progress, we plan to increase our number of loan officers in the coming months, while we closely monitor operational efficiencies. New construction revenue growth was also strong during Q2, increasing 18% year-over-year as customers turn to new construction homes given the limited existing home inventory. Earlier this week, we also announced that Zillow will be the exclusive provider of new construction listings content on Redfin, and we look forward to serving our mutual customers. With the largest selection of new construction communities of all real estate websites in the U.S., we expect our new construction marketplace to benefit from increased connections with prospective shoppers. EBITDA expenses totaled $395 million, in line with our Q2 outlook with cost of revenue slightly higher than expected, primarily due to higher revenue and select operating expenses slightly lower as a result of favorable headcount and advertising expenses. It is worth noting that share-based compensation expense this quarter was $130 million, up from $103 million in Q1. Approximately $17 million of the sequential increase was driven by the impact of departing personnel as well as the impact of our March 2023 annual employee grants. We ended Q2 with $3.3 billion of cash and investments, down slightly from Q1, which includes the benefit of net cash provided by operating activities as well as the impact of $150 million in share repurchases during the quarter. Convertible debt was $1.7 billion at the end of Q2. Turning to our outlook for Q3. We expect total revenue to be between $458 million to $486 million, implying a year-over-year decline of 2% at the midpoint of our outlook range. We expect residential revenue to be between $339 million to $359 million, down 6% year-over-year at the midpoint of our outlook range as compared to our estimate for an industry transaction dollar decline between 15% and 20% year-over-year in Q3. Note that we expect a total industry decline of 17% at the midpoint of the range to nominally improve compared to the Q2 decline of 22%. Homeowners locked into their current mortgage rates are having an impact on the normal seasonality of move-up buyers who typically move between school years. Despite the challenging macro environment of higher for longer mortgage rates, we expect to continue to outperform the industry in Q3. We expect the investments we have made in our funnel will continue to deliver benefits in Q3 while experiencing less relative macro tailwinds versus previous quarters. For Premier Agent, we estimate revenue will decline between 4% to 9% year-over-year. As the macro backdrop remains choppy, we continue to focus on the inputs we can control, adding value to our customers and shipping great products and services. Despite the tough macro existing home sales environment, our customer connections with Premier Agents have been nearly flat year-over-year for the combined past 2 months. That said, we do remain cautious that buyers will find it difficult to buy homes with such low inventory levels, and our outlook reflects this dynamic. For Q3, we expect EBITDA to be between $67 million to $87 million, implying a 16% margin at the midpoint of our outlook range. Consistent with the outlook that we provided at the end of Q1, we expect Q3 EBITDA expenses to be flat compared to Q2. We are announcing today that we closed on the acquisition of Aryeo, a leading software provider to real estate photographers across the country. Aryeo's platform, capabilities and network of third-party real estate photographers will help enable us to scale ShowingTime+'s Listing Showcase product. Separately, in late June, we announced the sunsetting of Zillow Closing Services as it did not have the tech forward and integrated product we believe customers and partners need, having originally been built for our iBuying effort. That said, integrating the real estate transaction to make buying and selling simpler for customers remains our core strategy. We are actively exploring other title and escrow solutions, and we'll follow up when we have more details to share. Next, as I discussed in my introduction, I want to dive deeper into providing new transparency on a few topics. I will start with our cost structure. Given the uncertain macro environment and the associated challenges with accurately forecasting revenue, we want to be more explicit with investors regarding how we plan to manage our cost structure moving forward. We evaluate costs in 3 categories: fixed, variable and advertising. Our fixed cost run rate is approximately $1.1 billion annually. Over the past 18 months, we have forward invested and believe we are currently around the right level of fixed cost to execute on the opportunities we see ahead. Looking ahead, we do not expect to materially expand our current fixed cost structure as we scale our current growth initiatives. Our variable cost run rate is approximately $400 million annually. While we expect variable costs to grow as we scale our business, we intend to drive operating leverage over time as we expand new product areas, and we'll continue to seek unit economic efficiencies across the business. We continually look for efficiencies in our variable cost structure, a muscle we have been building for a while now. To that end, I wanted to share a few examples. I already mentioned that Zillow Home Loans loan officer productivity improved 50% from Q4 of last year. We have also improved our Premier Agent cost per connection by 29% since 2020. Last, our cost per floor plan annotation on our virtual touring technology has dropped by 78% since the beginning of 2022. These are just 3 of many examples we have of ensuring that we are getting more and more efficient with our variable cost base. Next is advertising. We believe we have been effective users of advertising dollars for a long time and have dialed up and down spend depending on the environment and opportunities we see to build awareness and drive growth. We will continue to assess advertising levels with that same lens, separate and distinct from the rest of our fixed cost base. Another important part of our cost structure is share-based compensation, which we manage on a cost per employee basis while closely monitoring dilution. We recognize that share-based compensation as a percentage of revenue has been high recently as macro housing weakness is pressuring revenue at the same time we are forward investing to drive future growth. Going forward, as we manage our fixed headcount and deliver on our strategic revenue growth plans, we expect to leverage our share-based compensation to enable investors to see GAAP profitability over time. Additionally, we would expect those same factors to result in a higher share price that would also further limit dilution. We believe deeply in aligning our employees' incentives with our shareholders, recognizing the importance of managing dilution along the way. Now turning to our capital structure. We have a strong balance sheet with cash and investments of $3.3 billion and net cash of $1.6 billion as of the end of Q2. We also have $1.7 billion of convertible senior notes, which include our 2024's and 2026's that are callable when our stock price exceeds $56.56 per share for a specified period of trading days. To the extent our Class B share price rises above those levels, we may redeem those notes. If we do, it is our expectation that we will settle the $1.1 billion principal amount on the notes due in 2024 and 2026 in cash and settle any conversion premium in shares of Class C capital stock. Based on what we know today, we do not expect to engage the convertible markets to refinance any of our outstanding notes. Instead, we expect to be in a position where we have no outstanding debt on our balance sheet as these notes mature or become callable. We also announced today that our Board has approved an additional $750 million capital repurchase authorization, bringing our total available authorization to just over $1 billion, when combined with our $264 million existing authorization. In aggregate, we have repurchased $1.5 billion worth of shares and authorized $2.5 million worth of shares since the inception of our buyback program in late 2021. Going forward, we will continue to carry some cash for risk management purposes, some cash for potential inorganic and organic investment dry powder and opportunistically consider share repurchases from operating cash flow. Now I'm going to give an update on our transaction share in our enhanced markets. In early 2022, we shared our strategy to capture what we continue to believe is a significant opportunity to drive growth by moving down funnel and focusing on the housing transaction itself. This included our plans to increase our share of customer transactions and revenue per transaction. We believe we are making good progress and have the right products in the pipeline to be successful. As evidence, while we called out the industry decline of 22% in Q2, our national connection volumes are nearly flat year-over-year on a combined basis over the past few months. Furthermore, in our 4 enhanced markets, we are seeing significant year-over-year connections growth. And while we are still in early days with product rollout, I am pleased to share that in Q2, we saw 50% year-over-year customer transaction share growth in Phoenix and Atlanta, which are our most mature enhanced markets. To date, we believe this outsized performance is being driven by a combination of partner selection, early success in real-time touring and financing and buoyed by the relative macro tailwinds we are seeing across the business. We think this is a good proof point that gives us confidence to roll out more enhanced markets, which we announced today. As more data becomes available, we will continue to share. It is important to call out that while we are working on our big future growth drivers, we have delivered meaningful revenue outperformance compared to the industry for the last 4 quarters and expect to do so again in Q3, evidence that we are gaining share after a challenging first half of 2022. As you have all heard from us before, 2022 was a year where we restrategized and reorganized around our housing super app vision. 2023 is a year for us to release new products and test in various markets, setting us up for further scaling in 2024 and 2025. Halfway through the year, we are pleased with how 2023 is progressing with a lot of work to do ahead. As we look forward, my top priority as CFO is to ensure that Zillow is a profitable growth company, resulting in outsized value to our shareholders. And with that, operator, we'll open the line for questions.

[Operator Instructions] Our first question today comes from Lloyd Walmsley with UBS.

It's [ Katie ] on for Lloyd today. Just a quick question on the Opendoor partnership. Last quarter, Open announced that your partnership has been launched in 5 markets. I know you guys said 2 in Feb. Now we're at 25. Is there any update on the rollout and progress you're seeing so far? Any color you guys can give us there?

This is Jeremy Wacksman. I'll take that one. Yes, as Rich talked about earlier, we're now live in 25 markets, up from the 2 in February. And on top of that, in our seller solutions growth pillar, we just announced and have launched Listing Showcase by ShowingTime+ in our select markets. So we're really pleased with the expansion and coverage of our seller solutions. As Rich talked about, increasing our service addressable market to the sell side and sellers who become buyers as well as accessing more types of agents, not just from your agents and listing agents, across those solutions. So more to come in the future quarters, but we're pleased with the continued progress there.

We now turn to Brad Erickson with RBC.

I just had a couple. So first, you obviously talked a lot about the share gains in the letter and here in the prepared remarks. Just for what we're seeing right now, I guess, just in the report and the guide, can you just unpack that a little bit more in terms of the factors that you're viewing as maybe sustainable versus maybe not as sustainable or at least out of your control? That's the first one. And then second, you called out accelerating the rollout of real-time touring. Just curious what that does to the mix of leads that you're sending out or if it changes at all. And just curious if that's something we could see contribute to those share gains here going forward. Just talk about the effect of the mix of touring leads that has on the PA business.

Yes. Thanks, Brad. It's Jeremy Hofmann. I'll take the first one and then hand it to Jeremy Wacksman for the second one. On the outperformance, I think, similar to prepared remarks, it's roughly 50% in our control that is driving the outside share gains and 50% relative tailwinds. On our side, it's a ton of little actions that add up with a funnel that's as big as ours, and then we're getting benefit from touring as a prominent call to action. So the more touring that folks see on the sites and apps, the more than it makes up more of our connections, the better off we are and are seeing our performance as a result of that. On the macro side, it is the fact that there's more first-time homebuyers as a mix of all homebuyers. So those are sort of the dynamics that we see at play. Like I said in the prepared remarks, I think we expect the macro to be less helpful in Q3, but we are still projecting 1,100 basis points of outperformance at the midpoint. So that gives you a sense for the -- how we feel about the investments we're making and the ability for us to keep improving our funnel. So that's that one, and then I'll hand it to Jeremy for the other.

Yes. And Brad, on real-time touring, as Rich said, we've been, over time, increasing tour exposure on Zillow nationally while also building real-time touring in our enhanced markets. And so both of those things contribute to our part of the share gain that's in our control. And so on the national, that's just about removing friction in the funnel, getting more customers interested and aware of a tour and then when they want to book a tour, making that easier for them. And then in real-time touring specifically, that is now in our enhanced market that we announced. It's coming to more markets. That's really about creating that reservation-like system for a buyer to remove entire steps in the funnel and be able to book a tour when they want to go see it more often. And we continue to improve that product as well, right? We're expanding our product offerings. Agents can now expand their self-service tour management capabilities. Rescheduling and viewing and then booking subsequent tours are all features we're adding. So these are all things that we're hearing feedback from customers and partners that has been on our product road map that we're excited to get into market. So we're improving the product while also scaling and rolling out the product to more customers and partners.

Our next question comes from Ron Josey with Citi.

Maybe I wanted to get in -- a little bit more on just expanding the number of markets. I think you talked about Charlotte and Durham, North Carolina. Talk about just the process of expanding that -- expanding newer markets, how we think about newer markets going forward. And then, Jeremy, I heard earlier, I think you said loan officer delivered 50% increase in productivity versus 4Q '22. Just any insights on that would be helpful.

Yes. This is -- on the first one on enhanced markets, I mean nothing further than what we announced today, which is we're adding 2 more markets to our enhanced markets and rolling those out now. So Charlotte and Durham. And the other thing I think Rich talked about was also bringing real-time touring to 4 markets beyond those. So while we're not bringing the entire enhanced market playbook to those next 4 markets, real-time tour is coming first. And we're doing that because as we've talked to you all about before, we want to expand these capabilities as we can. And as we are getting the playbook and the technology right for real-time touring, we're able to bring that to more partners and try more things versus the entire enhanced market playbook. So that's on the touring part. And then remind me your second question.

Loan productivity.

Yes. I mean it's a combination of a couple of things. One, it's about just continuing to help find higher-intent customers. As Rich talked about, we have so many mortgage shoppers on our site because 40% of all homebuyers want to start with that question, but they're all in different stages. And so helping those folks as they raise their hand and start to ask questions with things like our personalized payment experience and our prequalification system, helping find the right customers and get the right customers to our loan officers is one big piece of it. And then just tools in the factory, releasing products and services so that our loan officers can more efficiently work with our customer, working in fewer systems, being able to do more digitally real time while on the phone with the customer and not having to call them back. All those things help them be a better consultant, a better adviser, and that leads to conversion gains, but also just leads to productivity and efficiency gains.

Our next question comes from Mark Mahaney with Evercore ISI.

Okay. Two questions, please. And I'm sorry if you already touched on these. But talk about the puts and takes to getting EBITDA margins. Once we get back into growth mode, hopefully, at some point, the macro and company-specific, hopefully, will get back into that sustained growth mode, getting the EBITDA margins for the business as a whole back up to 30%, 30% to maybe 40%. So the biggest drivers there, what you can control, what you can't? And then if I could just stick on the enhanced markets. And is there any evidence yet -- maybe it's too soon, but is there any evidence in those enhanced markets that you're actually gaining share of transactions in those markets? I'm trying to figure out whether there's something we can extrapolate to the rest of the country, if you're successful in those markets.

Yes, Mark, it's Jeremy Hofmann. I can answer your first one and probably take your second as well. On the first one on EBITDA margin drivers, yes, we feel good about our ability to get to those levels as we drive revenue and leverage our cost structure over time. I think we are making progress in a number of places and believe that we have a highly leverageable cost base. So as we drive revenue, we believe that will flow through. And you saw that in the performance this quarter, right? We outperformed substantially on revenue, and it flowed through to EBITDA. So feel really good there about our ability to drive that over time. And then on the share gains question, I mentioned in my prepared remarks, but I'll say it again here. We -- in Q2, we saw 50%, 5-0 percent, year-over-year customer transaction share gains in Phoenix and Atlanta, which are our 2 most mature, enhanced markets. So it's obviously early days. There's a lot more markets to come from here. We're going to be methodical about rolling those out. But it is a great proof point to say, hey, the strategy feels like it is working early days.

Our next question comes from Ryan McKeveny with Zelman & Associates.

A question on the residential outperformance versus the industry. I'll ask it a bit different way than Brad's question before. So if we isolate the half of the outperformance that is kind of secular to the benefits of the changes you've made or some of the newer initiatives, I know you don't speak to the exact breakdown between transactions on the buy side and the sell side, but can you talk to us about how that incremental penetration is trending between those categories, buy side, sell side? And I guess is it happening in both areas? Or are 1 of the 2 aspects driving things more so than the other at this point in time?

Yes. I think on buy side versus sell side, I mean we don't tease it out specifically, especially in the incremental, which I think is what your question is about. But primarily, most of our transactions to date are buy side, right? And so the share gains you're seeing, the relative outperformance you're seeing is all mostly coming from the buy side. And you heard that from Rich and Jeremy, that's one part friction removal and higher-quality customers, getting to higher-quality partners and one part relative macro tailwinds with the buyer mix. That said, we are really excited about our ability to gain and see more share gains as we layer in seller solutions as well, right, both between our multiple selling offerings, experience for our customers, right, introducing them to an Opendoor offer if they're interested or a Premier Agent partner if they want and Showcase -- Listing Showcase which we just launched this quarter, which Rich talked a bunch about as well. So we expect share gains and customer transactions to come from both over time even though right now, we're seeing the benefits of our own efforts and macro efforts primarily on the buy side.

That's helpful. And for Jeremy Hofmann, congrats on the new role. And yes, appreciate the extra color, especially around the cost structure. I guess teasing it out a little, so the fixed cost run rate around kind of the right levels at this point. Is that to suggest that on the mortgage side of the business, kind of the infrastructure, the fixed costs associated with the mortgage lending operation is in a pretty good spot today to scale over time? Or could that remain a potential area of investment, whereas maybe some of the other segments see some more cost rationalization? Yes, just curious how that overall comment might tie directly to what's going on in the mortgage side of things.

Yes. Ryan, it's a good question. On the fixed cost side, we do feel pretty good about the amount of infrastructure we have in place for mortgage. That's to say over the next couple of years. And of course, as it grows, we'll see. But based on the current plan, we feel pretty good about the fixed cost. On the variable side, we will grow costs there because that means we're hiring loan officers, but that's obviously a good thing so long as we're manufacturing loans profitably. But on the fixed side, yes, we feel pretty good on the mortgage side. And then on the overall business, I'd say, we feel like the fixed cost investment we've made to date should serve us well for the current growth initiatives we have.

We now turn to Tom White with D.A. Davidson.

Maybe first one for Jeremy H. First off, congrats on the new role. The cost structure commentary, again, super helpful. On the variable expenses, you gave some examples of kind of recent efficiencies and progress. Could you maybe update us on what parts of Zillow's business today represent kind of maybe the biggest opportunity to drive further efficiencies and variable expenses? And then maybe one for Rich on Zillow Closing Services being sunsetted. Just curious to hear you talk about maybe how you envision Zillow disrupting kind of the title and escrow space. Clearly, there would appear to be opportunities to make it a more transparent, better experience for customers, but just be curious to see how you view Zillow participating there.

Yes. So I'll take the first one. Good question. I think we're looking for efficiencies all over the business, our most mature businesses to the ones that are newest. I would say the biggest opportunities for us on the variable efficiencies are the newest products over time, right? So between mortgage, seller services, those should get leverage as we scale. But those are the places where we are most focused ensuring we're getting efficiency as those products come into life. And then I'll push to Rich on the second question.

Only because you asked me directly, Tom. I haven't spoken yet in the Q&A. So thank you for including me. Yes. So we sunsetted ZCS now because we don't think title and escrow is important as part of the transaction but because we built that thing for Zillow Offers and for our iBuying business, and it wasn't -- it just wasn't the right solution for us with what we have envisioned now. I think Jeremy Hofmann, in his prepared remarks, talked a bit about how we think it's an important thing and to watch this space. We're working on alternatives right now. So watch this space. Anything to add, Jeremy Wacksman?

No.

Our next question comes from John Campbell with Stephens.

Jeremy, I would like to echo as well, congrats on the promotion, and the OpEx disclosures are very helpful. You guys have obviously torched your guidance in recent quarters. I'm thinking that you've probably set the stage here again. But the EBITDA, that's always going to hinge on obviously the top line. So I just maybe wanted to double-click on the Premier Agent guidance, mainly the industry forecast. It looks like you guys are baking in a down 15% to maybe down 20% year-over-year. It looks like the NAR is calling for down 7%. Fannie and MBA, it looks like they averaged down 8%. So you guys are a little bit out there. I think that year-over-year decline also is implying that the market would drop a good bit sequentially off of what kind of already feels like trough levels at this stage. But my question here is, are you seeing something internally there that might signal softer trends from here? Or is that just a conservative approach against, I guess, the continuation of market uncertainty?

Yes, it's a good question. We guided based on the best information that we have. And I think existing home sales and inventory just being as low as they are right now puts us in a spot that we have to make the best information available that we have. We have internal economists that look at this every day. So really given the best information that we have. What we're most focused on, I would say, is ensuring that we continue to outperform the industry. So we're feeling quite good about the ability to outperform the last 4 quarters, and we're guiding to outperform 1,100 basis points at midpoint to midpoint in PA versus the industry for Q3 as well.

We now turn to Brian Fitzgerald with Wells Fargo.

Maybe a quick follow-up to Mark and Ron's questions on enhanced markets. Can you remind us what kind of things you're looking at or you're looking to see in locations to expand as an enhanced market? And then as your new products are aging in your first enhanced markets, are you seeing any changes in usage or agent behavior? Any dynamics to call out with respect to kind of enhanced market cohorts, if you will.

Sure. Thanks, Brian. The things we're looking for in our enhanced markets are -- I mean, ultimately, the outputs are customer transaction share. And the indicators to that, I think we've talked to you all about before in the funnel, are reducing the friction and so customer engagement and customer agent engagement and work with rates between those 2. And so these things take a long time to mature. Transactions take a long time, but we watch those kind of mid-funnel indicators on both the customer side and the agent side. And as Jeremy Hofmann talked about, we're really pleased that we're seeing significant customer transaction share growth in our 2 oldest enhanced markets even as we're early in seeing the benefits of the rollout of a bunch of those capabilities. So again, the increased focus on partner quality and really aligning ourselves with partners that work more deeply with us across these product experiences, the rollout of real-time touring, the rollout of Zillow Home Loans and the rollout of seller solutions across all those things, we think, is a recipe for success in the share growth you're seeing. And that's why we have confidence is going to continue. And then in terms of what we think about going forward, that's why we've started to bring those to more markets even at the same time while we're continuing to improve and mature the products themselves. We're not done building the things we're talking to you all about. We are building and deploying at the same time. And so the capability improvements for both customers and our Premier Agent partners and our loan officers will continue, as you heard a bit from Rich and Jeremy about.

Our final question today comes from Dae K. Lee with JPMorgan.

First one for Rich. A question on the AI. It sounds like you guys are exploring all of the options right now. But when you're looking at it from a near-term perspective, what excites you the most, and from a longer-term perspective? And then another question on the enhanced market. How does enhanced market kind of fit in with your 6% transaction and share target by 2025? Does it need to be rolled out more broadly to all of your markets? Or is it something that can be added in a smaller number of markets [indiscernible]?

Dae, we -- I think we got the second question, but you're -- we're having trouble with your audio a little bit. We didn't quite get the first question. Can you repeat it?

Hopefully, this time it is better. First one was on AI. It looks like you guys are exploring all options. But when you look at the opportunity from a near-term perspective, where are you most excited about? And thinking for a longer-term perspective.

Yes. Okay. Got it. Got it. All right. I'll take that and then maybe kick it to Jeremy Wacksman for the enhanced market, can we go faster, question. I mean look, we see real opportunity. I mean I think a lot of the excitement and imagination has been sparked at kind of the ultimate user interface opportunity with generative AI and moving towards a conversational UI and then how might that change the kind of historic physics of the Internet. And that's fascinating to us and obviously very important. I do think though that, that is also going to be one of the longest lead time behavioral change ones. So we're exploring that aggressively and are quite interested in making sure we feel like we are really well situated from an audience brand and unique data perspective and leaning into it such that we don't somehow miss the boat and miss the memo on the change. So we feel good there, but that's probably a longer lead time one. The stuff that we're seeing in the short term really is like engineer productivity, marketer productivity. A little slower will be legal and accounting. We're seeing -- we're already seeing some productivity gains for people on phones. So sales folks, partners, loan officers. It is early days, but I think we'll probably see more progress more quickly on the engine room stuff than the exposed stuff. All right. So hopefully, that helps you. And then Jeremy Wacksman, maybe hit the [ wind-up ] faster. I want to know that, too.

How enhanced markets contribute to our ultimate share goals. And the way I think about it is it's a combination of national progress and local progress, right? And that's what you've seen from us the last couple of quarters. You've seen relative outperformance overall nationally, which largely has not been from the benefits of the enhanced market and the growth pillars in our enhanced markets. And then now you're starting to see the results and the progress we can get market by market. And so as we scale our enhanced market recipe to more markets, that will become a bigger contributor to our overall national footprint. But again, that doesn't mean we're not going to continue to keep working on improvements nationally and things that we don't need to take to enhanced markets. So we really think about it as a combo of both. And that's why we're excited about the progress we've seen in the enhanced markets, the ability to bring some of these components to more markets and then as we mature the offerings and work with our partners, the share gains to continue.

And it feels like a long runway of opportunity. It feels like durable opportunity to us that we are attacking methodically. We kind of did a major reset in organization last year in 2022. And now you're seeing us both develop and engineer and launch new stuff across the board in enhanced markets and nationally. So this is kind of our year of execution, and we're posting really good relative results. It's a terrible macro, housing macro, and we can get really bummed out about that. But we internally are quite excited by our relative performance and the share gains we're seeing in our enhanced markets. The 1,900 basis points of outperformance for our residential revenue line item, purchased mortgage business up 73% year-over-year in a c*** mortgage market. We keep rolling out this real-time touring, this real-time touring feature set that is really quite a game changer. And even rentals, like we're seeing 28% year-over-year growth. So internally, we -- it's tough weather outside, but internally, I, for one, am really pleased at what I'm seeing. And I'm quietly, reservedly, guardedly optimistic and excited as I look into the future, yes. I was assuming that was the big wrap.

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

All right. I just did my big closing remark. Great chatting. Great chatting with you all. Thanks for making the time. We look forward to chatting with you soon. Have a good day.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.