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

Thank you, Lauren. Good afternoon, and welcome to Zillow Group's Third 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. A recording of the call will be available later today. During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to as EBITDA. We encourage you to read our shareholder letter and 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 over to Rich.

Thank you, Brad, and thanks, Lauren. Good afternoon, everyone. We appreciate you dialing in today to hear our third quarter 2023 results. I'm looking forward to sharing the progress we've made on our growth strategy as we yet again meaningfully outperformed the industry by making steady executional progress, converting traffic into transactions. Before I get to our results and an update on our 5 growth pillars, it's important that I address the high level of media attention and speculation surrounding several ongoing industry lawsuits and what the implications may be for the broader residential real estate industry and for Zillow in particular. The short version is, we strongly believe Zillow is well positioned to thrive regardless of how it all plays out. I'll explain our logic. But first, let me be clear on the marketplace principles that underlie Zillow's stance. With respect to free, fair and transparent access to real estate information, we are strong supporters. With respect to the importance of independent representation, we are strong supporters. And finally, with respect to transparent and negotiable agent commissions, we are strong supporters. From where we stand, it seems clear that these principles are in the best interest of mover consumers, agents and the industry as a whole. Consumers and agents should have access to all listings and consumers should be empowered with information about listings and how agent commissions get paid. We believe this is the best way forward. Now regarding litigation news. We expect the Sitzer/Burnett lawsuit that made headlines yesterday in which a jury ruled in favor of plaintiffs and awarded approximately $1.8 billion in damages, will likely be tied up in court for years. Defendants in that case, such as the National Association of Realtors and certain real estate franchisors have already indicated that they intend to…

Thanks, Rich, and hello, everyone. I am pleased to discuss details about our Q3 results as well as our outlook for continued total revenue growth in a very tough macro environment. In my comments today, I will also discuss our agreement to acquire Follow Up Boss as well as how we are currently thinking about share-based compensation, or SBC within the framework of our overall cost structure. In Q3, we delivered continued positive year-over-year revenue growth, up 3% to $496 million and $24 million above the midpoint of our outlook range. On a GAAP basis, net loss was $28 million, representing 6% of our revenue. Q3 EBITDA of $107 million resulted in a 22% EBITDA margin. Our revenue outperformance combined with effective cost management drove $30 million of EBITDA outperformance above the midpoint of our outlook range, demonstrating the high incremental margin business we have today. Residential revenue was $362 million, outperforming the high end of our outlook range, down 3% year-over-year. Our residential revenue performance was 1,100 basis points above the industry decline of 14% according to data from the National Association of Realtors. Our internal calculations, which count the number of residential home sales in every market across the country, suggest that the industry was down slightly more in Q3 than even in our numbers indicate. In Q3, we believe our relative outperformance was primarily driven by things that we are doing to grow and less by relative macro factors. Our ongoing investment in our top-of-funnel and mid-funnel experiences continue to drive improvements in our overall lead volumes when compared to the industry. Rentals revenue growth accelerated in Q3, with revenue increasing 34% year-over-year to $99 million, primarily driven by our multifamily revenue, which grew 42% year-over-year in Q3. Growth in our Rentals marketplace is being driven by…

[Operator Instructions] Our first question comes from Brad Erickson from RBC.

So one for Rich. First, I appreciate the thoughts about the lawsuits and potential changes going on in the industry. Maybe if we could talk through an outcome where the buyer's agent remains but commissions get pressured more significantly. Maybe talk about some of the effects and impacts the business might see under that scenario? And then I have a follow-up for Jeremy, if I could?

Okay. So kind of the middle path scenario. So why don't I try to do a little bit more free-form restatement of what I said in my scripted comments first, Brad, and kind of set the answer up. And then I might toss it over to Jeremy Wacksman, to answer your middle path question specifically, which we feel good about our position in the middle path scenario. But overall, I just want to reiterate that our kind of the short version of how we think this plays out and any changes that might come is that we're positioned really, really well for all weather, okay? And that is based on some fundamental marketplace principles that we believe in. One, free and fair, transparent access to real estate information and listings. That is how we were founded, turn on the lights. We believe a well-lit game is cleaner and more equitable. The second principle is independent representation. People deserve and need independent representation. We've seen double siding in the industry, which is clearly a conflict and is at certain times more expensive to do the transaction. We do support DIY, the people who want to do DIY and we have a pretty healthy DIY physical marketplace. But in most instances, movers want and need counsel, and we think that takes the form of a buyer's agent. And then finally, transparency and negotiability of commissions, which some markets have been moving towards and we think other markets are going to begin to move more quickly towards because of these legal actions. So how will this play out? I said this already. It's likely that the legal process is likely to take years. It's highly complex. It's politically fraught, there are millions of potential employees and people affected in every state. As I…

Yes, happy to. Yes. Thanks, Brad. I mean in a world where there are fewer dollars to go around, I mean, I think similar to what Rich said, we feel really well positioned, and we love our strategy. And I think the investments that we are making in tech and in the transaction itself and helping more customers becomes even more valuable for the most productive agents. As a reminder, our strategy is to partner with the best teams and agents, and as such, our partner base are those that are likely going to gain share from the part time or the less productive agents and the participants in the marketplace that might find themselves even more challenged in a world like that. And then it's to hand those partners higher-intent customers, right? Rich talked a lot about our super app strategy, that is about driving higher intent, higher-quality customers, buyers and sellers in the process of transacting to those partners, right? And so touring, our financing experience, our seller services are all doing that and then helping those partners become more productive, close more deals and be able to be more efficient in a world powered by software. So we get pretty excited about the value and services we provide. And if there's a void in the industry because the dollars are challenged and the other providers are challenged, we get excited about our ability to fill that because we feel really confident the partner strategy we have would really grab share here.

Our next question comes from John Campbell from Stephens.

I just want to echo the last question. I think, Rich, nice job addressing the lawsuits upfront. I've been frankly surprised to hear the level of investor concerns, but I think you did a good job of framing it up, so we agree with your take there. But going forward, I mean, investors are clearly going to still try to size up all these various scenarios. I'm hoping maybe you guys can help in that process, specifically around the paid inclusion model, in those overseas markets like maybe what you're seeing on average or maybe a range of revenue per listing? And then I know with your current listing today, Rich did say it's going to be kind of fragmented potentially. But if you look at just your all-in listing today, what that looks like today? I know with the trough kind of inventory environment, it's probably a little bit lighter than it's been in the past. So maybe talk about what it is today? And maybe what it looked like, I don't know, 5, 6, 7 years ago?

Okay. Sure, John. Why don't I, why don't we, help me out, Jeremy and Jeremy, if I mess up. Why don't I start with the second part, the listings question. For all its [indiscernible] and flaws and all the complaints we make [indiscernible] cooperative, at least the way it's worked in the past, maybe it doesn't work this way going forward. But at least the way it's worked in the past, it's offered up a really good level playing field, a relatively level playing field, equal access transparent marketplace for us to access kind of for sale by agent listings in the marketplace. And so because we're connected to these MLSs, we have a full view of the for-sale inventory in the market. And ever since we have had MLS listings, that hasn't changed over time. On top of all of that, let's call it, commodity listings information that we have, we add to it a whole bunch of non-commodity listings information in the form of for-sale by owners that are oftentimes proprietary to our sites in a different markets as well as quite a number, a large number of rental listings that oftentimes are unique to our marketplace. And so combined, that alloy creates a relatively unique listings asset that is only strengthening over time. In the event that fragments, as I said, the world gets kind of messy and difficult for regular consumers and partners alike. But Zillow, of course, like we've done in the past, will run off and secure the most inventory in the world. We will get it. Now how the business model works in that situation? Is it, we have several -- we have a lot of experience with paid inclusion business models, okay? And it will likely move to a paid inclusion business model. I don't know how to answer your specific rate question. You're saying, what would the rate look like in that world versus the rate that the industry is taking now other than to point you with the market cap per capita of the leading real estate portals in the U.S. versus, say, Australia or another market. And you'll see pretty quickly that the amount of value, at least in the form of market cap that's being captured by those companies is meaningfully higher than what we've been able to achieve is the leading portal here in the U.S. We see that obviously as potential upside. But once again, we want to monetize in this industry in a way that is win-win-win. We want to win for consumers, we want to win for our partners, and we want to win for ourselves. We think the most durable business model is where all 3 of those parties win. Did I leave anything out?

Yes. I mean it's Jeremy Hofmann. I'll just [indiscernible], Rich. The hard part is building the unique content that we've built over time. So that's a combination of for-sale listings, new construction listings, rentals listings, for sale by owner listings. That's the really hard part. That's what we've been after for 15, 16, 17 years. Changing business models and doing a paid inclusion business model is not the challenging piece of the puzzle. It's getting all the unique content, getting all the eyeballs, and that's where we've really, really excelled. So in a world in which we go the way of international markets, we feel really well positioned as a result.

Our next question comes from Lloyd Walmsley from UBS.

Two, if I can. First, just sticking with this shifting -- potentially shifting industry structure and the classifieds model potential. Can you just help us understand maybe the path where the MLS structure devolves, setting the stage for that, you think a more middle pass scenario would sustain the MLS structure such that it doesn't change? Like what specific chain of events do you all see breaking that structure to enable this? And then I guess, listing, secondly, Listing Showcase seems like a pretty good template from where the model could move if the model structurally changes or even if it doesn't, it seems like that's an interesting product with a lot of potential. Can you just give us an update on kind of uptake agent feedback there? And how meaningful could that be maybe in a moderate scenario change and then in a more dramatic scenario, like where does that fit in?

Okay. Thanks, Lloyd. Maybe I'll begin, Jeremy Wacksman, and then hand it over to you. Lloyd, I guess what I'd say is we just don't think it's likely that like taking a giant hammer to the hundreds of MLSs around the country and how that legislatively, regulatorily or legally would happen would be a pretty difficult thing. And so I guess there's a ton of value provided by having an integrated marketplace where most consumers and partners can see everything on the market. And while many of the industry participants may have forgotten that benefit, we believe that if, as things begin to fragment, they will remember that benefit. So anyway, we see this as unlikely. So I honestly don't want to give it a ton more airtime other than to say, if it happens, we're really well positioned. On the Showcase thing, that is a big giant new TAM that we're going after, and I'll hand it over to Wacksman to chat about how that's going and the potential we see.

Yes. I mean we continue to receive really great feedback about Listing Showcase from both consumers using the product and agents who have been part of our [indiscernible] and kind of early MVP rollout. As Rich mentioned, we're now live in 17 markets, and we're hard at work, building out the feature set to enable us to scale. And that includes things like being able to offer it more flexibly, different geographies have different density, different teams and individual agents have bigger and smaller businesses and how do we enable a go-to-market that can serve all of them. I think as we talked about earlier this year, a big key to scale is ensuring that agents can bring their own photographers if they want. We provide a fantastic media service that captures all this great rich media. Rich talked about this interactive floor plan that is just such a unique and differentiated listing experience. It takes really well curated and trained media to do that, but enabling those photographers to do that when agents have a great photography workflow. And the acquisition we did at Aryeo earlier this year, is really to help scale that. So building out those capabilities is really the key to scale. You're right that there are some commonalities between agents focusing on how to market their listing for their seller and the international comp conversation. But we really think about Listing Showcase as much about helping listing agents grow their business. right? What listing agents tell us and what early users of Showcase have told us is, this helps them win more listings. And that's how the product is discussed and used is when I'm sitting at the kitchen table, this is something I offer that other agents can't offer. This is why you should list with me. And so that economic value, in addition to helping the seller showcase their home, the best helps the agent showcase themselves, and so we get excited about really helping grow the listing side of our business through tools like that. We'll continue to update you as we make progress, but stay tuned for kind of expansion into more markets into next year.

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

Within the commentary you gave in the letter on touring, you mentioned real-time touring is expected to be live and covering about 10% of total connections in the year. I'm curious, are you able to give a similar stat on the share of connections that are happening at the 9 enhanced markets? I assume similarly a small piece of the pie that are enhanced at this point. But any specifics you can share on that?

Ryan, just to make sure the question you're asking is how much of our enhanced markets is in, the connections are in real-time touring?

More so just kind of how much coverage are the enhanced markets today of the total pie? You're talking about accelerating the growth, opening more enhanced markets in 4Q and into '24. And I'm just trying to think about almost like how low is the base today in terms of the enhanced market to think about the opportunity going forward to expand that?

Yes. Thanks for the clarification. I mean the enhanced markets, the 9 that we're just now in, right? And so prior to this quarter, the 6 that we rolled out, it's a small percentage of overall connections, I want to say, in the teens maybe. And then what Jeremy Hofmann was alluding to is, obviously, a real-time touring experience is not going to be available on 100% of customers. Not every customer requests a tour and then not every customer agent relationship fits the eligibility criteria. So that's a bit why we gave the color that as we ramp into, I think, 90-odd markets into '24, we expect that will cover about 10% of our customers. And again, it's not simple math. Different markets have different eligibility, different density, different ability to serve. We've talked a lot about the reason we're going market by market is because you're rolling out a new workflow for agents and teams and you're training them on a new experience to deliver for the customer, ends up being great and we get great feedback from those agents because they're now meeting the customer where they want to be met, that appointment set is really when they want to get versus a request, as Rich talked about. And so the customer is happier and the work with rate, the number of times the agent can work with the customer goes up. And so those are all great indicators of transaction share gains and happier customer agent relationships. But it's not just this linear path of lighting up on more pages on the website, it is kind of market by market.

Got it. Okay. That's very helpful. And then one question on Mortgage. Maybe part of it is just reiterating that, I think you said for 4Q that you'd see or expect to see revenue growth. But is that implying that your origination growth, roughly 90% this quarter, the revenue piece down slightly year-over-year, and you called out the mortgage marketplace declines are kind of the offset there. I guess are we reaching the point where origination growth should similarly translate to revenue growth? Like you said it is expected to begin in 4Q and then presumably going forward, if origination growth is, or if origination volume is growing, generally, revenue should grow going forward?

Yes, Ryan, it's Jeremy Hofmann. I'll take that one. I think it's fair to think about the originations business becoming more and more of the Mortgages line item. So it is taking up more revenue at this point and the marketplace is decreasing. With respect to '24 and beyond, yes, our expectation is the mortgage, the VHL originations revenue will be the bigger piece of the pie, but unquestionably, marketplace is still part of the mix. So it's not perfectly direct.

Our next question comes from John Colantuoni from Jefferies.

This is Vincent Kardos on for John. Sticking on the mortgage topic here. So last quarter, I know you flagged a 50% improvement in loan ops or productivity versus 4Q of last year and then this quarter, you grew your originations by almost 90%, 35% sequentially, but also hiring a bunch of more loan officers. Maybe you can help us think a little bit about how much of the growth there came from adding officers versus any productivity as you saw in the quarter? And then maybe talk about how much runway you see for officer productivity given the current housing backdrop and then maybe how that could change once we get a better rate relief going forward?

Yes. Thanks for the question. It's Jeremy Hofmann. I think we are really pleased with the way that we are growing the purchase mortgage origination business, no question about it, up 88% in a market like this. This challenge is quite impressive. I would say the ramp in loan officers, we still see opportunities for us to get more productive. We're pleased with the productivity today, and we're obviously hiring loan officers as a result, but we think there's more to do as time goes on and we get to scale.

Yes. And maybe just to add to that a bit. I think you should expect to see both, but you should expect to see us grow loan officer count as we scale origination volume into next year, but you should also expect us to see increases in productivity and efficiency, both on the customer experience, we've talked a lot in prior quarters about the huge opportunity we have with all of the customers that are coming to Zillow, asking for financing questions and how can we help meet them where they are. There's those that are ready to get a loan right now. There's those that are not. How do we help get them all an answer as well as the customers coming from our great Premier Agents who know best when to ask them to get financing questions answered to go right and offer on a home. So lots of potential productivity gains there. And then there's also lots of great factory improvements that we're hard at work building and that's a lot of the investments we've been making to just help our loan officers, our processors and our team get more efficient at being ready to handle the scale of volume that we want to bring. So short answer is you should expect to see both from us and both should contribute to growth into next year.

Our next question comes from Ronald Josey with Citigroup.

I wanted to ask on Rentals. We saw Listings grow 45% year-over-year, revenue reaccelerated, multifamily traffic is growing. Just talk to us about the change that's happening here in Rentals and the strategy here longer term? And then a quick follow-up for the team just on Listing Showcase. Are these buyers new to Zillow or existing, meaning I know we're monetizing, call it a newer side of the transaction on the seller side, but are they new or existing? And then any early feedback would be helpful.

Yes. Thanks, Ron. It's Jeremy Hofmann. I'll start on the Rentals. Yes, we're really pleased, and I'll let Jeremy Wacksman hit more of it, but up 34% year-over-year this quarter, up 42% in multifamily. And yes, it's executing on all cylinders. So multifamily properties were up 28% in Q3. Total active listings across both multifamily and single-family up 45% year-over-year. And then obviously, the traffic continues to be really strong. We're industry leading there and grew double digits there. So we're really, really happy with how we're executing. And like I said in my prepared remarks, we expect 30%-plus growth in Q4 there, too. So Jeremy, anything else you want to add there?

No, I think that's right. I think it's you hit it earlier to the largest and most engaged audience using great products and services across both multi- and single-family listings. Some macro help in terms of occupancy rates decreasing and more supply in the market means the advertisers need our high-quality customers. And so you're seeing the team execute to drive a lot of revenue growth there across the marketplace as a whole. And we get really excited about that growth continuing. And again, the Rentals business, great business, fast-growing business, a bigger part of our business, as Rich talked about, but also incredibly strategic as half of those renters are thinking about buying and half of those renters are -- some of the most affordability challenge first-time homebuyers that will be ready for VHL and our great [indiscernible] some day as the macro normalizes there. So incredibly great business, growing really fast, team is executing really well and super strategic for us long term. And then on Showcase, how many advertisers or agents, I think, was your question, how many agents are incremental. I mean it's a mix and intentionally so. And I think as we scale it beyond the initial markets, we expect to see that. It would be interesting to learn how that mix pans out. You can imagine, similar to our overall strategy when Listing Showcase helps great agents and teams grow their business, and it's a business growth driver for them, you find teams that look like our great Premier Agents today that want to use it, but you also find new customers who were less interested in the products that Premier Agent has to offer, really interested in using Listing Showcases as a way to grow their business. So we're pleased with the early mix. It wasn't -- there's not any sort of intentional target there. For us, it's really more about learning with partners this early MVP and V1 as we're building V2 and getting ready for scale.

Our final question comes from Tom Champion from Piper Sandler.

Richard, Jeremy, I'm curious if you could talk about any changes or updated thoughts on the competition? How do you think about UV growth at homes.com? And then maybe for Jeremy Hofmann, really appreciate the comments on the cost structure, very helpful. Just curious if you could talk a little bit about your thoughts around headcount growth into next year?

We're not seeing any impact really from the noise out there other than posting great results and making great progress against our growth pillars as we've been chatting about on this call. I think the way we inoculate ourselves from having to overfocus on competition is by really focusing on building awesome software for our users and our customers and our partners, software that solves real customer pain points like the interactive floor plans and 3D virtual walk-throughs and real-time booking and to come out for rental applications and more, and we are actually adding Follow Up Boss now, which is really quite a beloved CRM with a lot of customers in the agent space. So we believe that the way we win long term really is by creating, integrating seamlessly and creating the super app for customers and a super app for our partners. We like that it's hard. We like that it takes kind of MAD software skills to do it. It's worked well. Focusing on this has worked well for us so far. We've cited a bunch of data on that, but not only do we have the biggest, most engaged audience, but 80% of it comes to us directly. We anticipate that will continue to work. Maybe I'll throw to Jeremy Hofmann, that last question and then we'll close.

Yes. And just on the cost structure, I think just to reiterate what I said before, no specific guidance around 2024, but we do feel like we are at around the right levels of fixed costs for the opportunities we see ahead. And then variable costs will grow as we grow revenue, and we'll look for operational efficiencies along the way, but feel really good about what we're investing against and then also the long-term margin profile of the things that we're investing against. And then beyond that, just reiterating that marketing is a different line item for us and one that will assess based on growth opportunities. But overarchingly feeling quite good about the cost structure.

That is the end of the Q&A session. I will now hand back over to Rich Barton for closing remarks.

We really appreciate the thoughtful questions from you. We look forward to updating you as we plan on continuing to make progress along our growth pillars. Thank you very much for your continued trust and investment in Zillow. Talk to you soon.

This concludes today's call. Thank you for joining. You may now disconnect your lines.