Zillow Group, Inc. Class A (ZG) Q1 2024 Earnings Report, Transcript and Summary

Good afternoon. My name is Elliot, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group First Quarter 2024 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 First Quarter 2024 Conference Call. Joining me today to discuss our results are Zillow Group's Co-Founder and CEO, Rich Barton; COO, Jeremy Wacksman; and CFO, Jeremy Hofmann. During today's call, we will make forward-looking statements about our future performance and operating plans based on current expectations and assumptions. These statements are subject to risks and uncertainties, and we encourage you to consider the risk factors described in our SEC filings for additional information. We undertake no obligation to update these statements as a result of new information or future events, except as required by law. This call is being broadcast on the Internet and is accessible on our Investor Relations website. A recording of the call will be available later today. During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we will refer to as EBITDA. We encourage you to read our shareholder letter and 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.

Thanks, Brad. Good afternoon and good evening for those on the East Coast. Thanks for dialing in to hear our first quarter 2024 results. We saw strong revenue numbers that flowed through to the bottom line, helping us outperform our outlook on revenue and EBITDA as we successfully execute on our growth strategy. We continue to upgrade and scale our housing super app, and we've seen further proof points in our Enhanced Markets that support a continued push on both breadth of market coverage and depth of penetration within those markets for our integrated digital moving solutions for consumers, their agents and their loan officers. Today, I'll remind us about what makes Zillow different, and what makes me so confident in our growth plan. Jeremy Wacksman will then give a progress report on our growth pillars with a deep dive into our burgeoning Rentals business. Next, Jeremy Hofmann will discuss the numbers in more detail, and then we'll open things up for Q&A. Beginning with our quarterly results, we reported better-than-expected revenue growth across the business. Q1 revenue of $529 million grew 13% year-over-year. Total revenue growth once again outperformed the residential real estate market. Rentals continued its strong growth, with $97 million in revenue in Q1, up 31% year-over-year. We continue to grow our multifamily property count, with 40,000 properties at the end of the quarter, up from 37,000 at the end of December. We are well positioned for future Rentals revenue growth as we detail in our new Investor Relations deck that is a deep dive on our Rentals business. We published this new deck along with earnings today, and we'll discuss it in more detail later in this call. In an ongoing tough rate environment, we also continued to make strong progress in Mortgages with Q1 revenue of $31 million, up 19% year-over-year, and purchase mortgage origination volume growing more than 130% year-over-year. So in a hostile housing market and a noisy industry environment, why is Zillow outperforming? The simple answer is that Zillow is wholly focused on solving real consumer problems with software in a giant industry that has historically had very little R&D investment. Digitally replatforming and integrating a huge disparate local industry where transactions are relatively infrequent is an audacious undertaking. No other company is really even attempting it. We are advantaged, primarily, because we are a product and technology company first and are able to attract and retain the especially talented people who know how to build, market and support great software products. This enables us to focus completely on delighting our consumers and their valued partners in pursuit of the dream of using technology to make moving simple and joyful. Our product prowess over the years has put Zillow in the enviable position of having a large engaged audience who come to us organically, an audience who love, trust and rely on our brand. This product-led organic marketing growth story is rare, but it is common for the great ones. Those are the products and brands we admire the most. Attracting a large organic audience has also given Zillow the space to experiment with business models. Those who followed us for a long time know how aggressive and innovative we have been, methodically converting our sticky audience into revenue. We have built a substantial growing, diverse and EBITDA-profitable business, yet we still monetize only a small share of our audience. Our massive unconverted audience will drive years of growth ahead for Zillow as we grow into our rightful transaction share, continue to adjust our business models and add and integrate new business lines. We have been pro-consumer, practical and nimble, and we will continue to be so. The first era of Zillow involved amassing a large organic engaged consumer audience for whom we were providing valuable information via great sites and apps. Several years ago, we realized that our dream of digitizing the move and accessing the really big TAM in the category would involve getting much more directly involved in the transaction itself, applying software to every step of the workflow, refreshing our partner network to those who were higher performing and interested in automation and scale and building out or acquiring key components of the move process ourselves all the way from listings, photography and creation through tour booking, agent workflow, pre-approval, mortgage origination, document routing and closing. End-to-end. To serve as an aspirational and consumer-focused north star, we created a product strategy that we call the Zillow housing super app, the experience that would integrate the whole of the complex, scary, expensive moving process. The Zillow super app is working well. Jeremy Wacksman will soon walk you through a detailed report of our growth pillars, but we see very good progress across the board on each pillar: touring, financing, seller solutions, enhancing our partner network, integration and rentals. Amidst all of the fear, speculation and noise, a steady focus on execution is what's working for us, delivering for our customers and partners. In terms of the noise, though, let me give some color commentary on what has transpired since our last quarterly call. The long-running class action suit against NAR and select brokerages thankfully arrived at a proposed settlement in mid-March. And the judge, just last week, granted preliminary approval of that settlement. The substance of the settlement is what we characterized as a very reasonable middle path forward for the industry, where commissions are negotiated and communicated between sellers and buyers and both parties are better educated. This is a positive evolutionary step for the industry. It is not a revolution, as some who believe they might profit from chaos and disruption are proclaiming. Clear and negotiable compensation fits quite well with our published consumer advocacy marketplace principles of free access to listings, independent representation and negotiable compensation as outlined at advocacy.zillowgroup.com. There will continue to be sensational-seeming news surrounding this settlement, no doubt, given there remains several steps in having NAR and the industry put the settlement requirements into practice. And real estate is generally a hot topic for hot takes, given it is a $2 billion to $3 trillion industry, employing millions of people in all 50 states and is most Americans' most valuable and most cherished asset. However, Zillow is well positioned to assist with and benefit from this evolution. So why do we expect to benefit from this evolution? For three reasons. First, we have the most and highest intent customers in residential real estate. Zillow is the most trusted brand with the largest, most engaged audience. This is a hard-earned position that we built over the past 18 years. And our top of funnel advantage today has never been stronger. Zillow is searched more on Google than the category term real estate, and 3x more than the next brand in the category. 80% of our traffic is organic, and our app usage is more than 3x anyone else in the category. We have more than 217 million average monthly unique users across the Zillow ecosystem of apps and sites and 109 million total unique visitors according to comScore, a third-party data tracker that allows for comparison across sites. We've built and maintained such a strong brand position because of our relentless focus on delivering exceptional tech innovations and customer experiences, which we believe are our most important investments. Regardless of how the industry evolves, our brand and audience will thrive. The second reason we expect to benefit from the industry evolution? We work with the most productive agents in real estate. Of the approximately 1.5 million real estate license holders, many handle only 1 or 2 transactions a year. These are not our Premier Agent partners. 80% of all real estate transactions across the U.S. are done by the top 20% of agents or teams. And today, nearly 4 in 5 Zillow Premier Agent partners fall into that top tier. Since 2015, we have shrunk our active partner base by roughly 60%, while at the same time, our Premier Agent revenue has grown by more than 2.5x. Orienting our business around the best agent teams, those who provide superior customer experiences, have proven ability to scale and make the most money to invest alongside us, positions us well for potential shifts within the profession. If and as more hobbyist agents drop out of the industry, the upsized beneficiaries of this shift to professionalism will be our Premier Agent partners. Third reason we benefit. Zillow provides exceptional technology to make agents more efficient at their jobs and do more transactions. Zillow is the leading product innovator, with features like Real Time Touring, Listing Showcase and a digital pre-approval pilot launching within the next couple of weeks that will further delight customers and create high intent, real buyer connections for our Premier Agent partners. Additionally, we have invested heavily in broad adoption foundational industry software solutions like our Follow Up Boss CRM, ShowingTime touring software, our Showcase 3D Home technology, Aryeo real estate photographer SaaS and dotloop document signing and writing. Over the past 10 years, between our own tech and dev budget and the acquisition capital we've deployed for industry software, we've spent $4.3 billion cumulatively investing in technology for the real estate industry. Agents who work with our high intent customers and use our industry software tools are the best positioned to accelerate their share in every version of an industry evolution from here. So the short answer for why Zillow benefits from the evolutionary changes we see coming from the NAR settlement? We have the most and highest intent customers in real estate. We work with the most productive agents and we provide them exceptional technology to make their lives more efficient. Before handing it to Jeremy Wacksman, let me repeat for the whole of the great Zillow team in front of our investors, I'm impressed with the results you are achieving in your focused and relentless innovation for customers and partners in pursuit of a seamless digital and joyful moving experience for all. We are all in a really tough housing market and a distracting industry environment, yet our hands are steady on the wheel as we drive Zillow's business and the industry forward. Okay. Jeremy?

Thank you, Rich, and good afternoon, everyone. It's been an exciting few years at Zillow, and we're pleased with the progress we're making on our strategy to transform the way people buy, sell, rent and finance homes. Since 2022, we've been building the integrated transaction experience and testing it in our Enhanced Markets. Now, we are pressing on the accelerator to increase our breadth of coverage across more markets and our depth of penetration in those markets as we drive towards sustainable profitable growth. Zillow's housing super app is the container into which we're continually adding updates and improvements, guided by 5 for-sale growth pillars: touring, financing, seller solutions, enhancing our partner network and integrating our services. Our for-sale growth pillars marked the pathway to meeting our goals to grow customer transaction share from 3% to 6% by the end of 2025 and grow our revenue alongside that transaction share growth. I'll kick off our growth pillar update with touring and how we are integrating the anticipated rule changes coming from the NAR settlement into our customer experience. Touring is a critical focus area for us for two reasons. First, historically, the process of booking a home tour has been burdensome. Second, when a customer raises their hand to tour a home they've been looking at on Zillow, it's a strong signal of a serious intent to transact. Our touring products, powered by ShowingTime, are meaningfully improving our ability to connect high-intent customers to our Premier Agent partners. As you may recall, touring connections convert at 3x the rate of other actions on Zillow. We're pleased to share that Real Time Touring is rolling out to an additional 34 markets by the end of May, which will bring us to a total of 124 markets. As we outlined in February, as we expand Real Time Touring, we expect it will account for approximately 20% of connections by the end of the year, and we are on track to deliver. One key provision of the proposed NAR settlement calls for more prominence of buyer-agent agreements introduced at the time of the physical tour. Such agreements can help educate buyers about what services they're paying for, which is a good thing, and they have the added benefit of helping identify high-intent buyers. In fact, we've been advocating for these agreements in our home state of Washington and across the country. By facilitating the use of consumer-friendly agreements earlier in the funnel, we see an opportunity to improve conversion rates. As an example, in Connecticut, where buyer-agency agreements are required before taking a buyer on a tour, we've observed 20% higher conversion rates compared to our national average. We are testing buyer-agreement product flows now within Zillow. And just this week, we launched a pilot of a consumer-friendly buyer agreement in our touring experience with a few hundred Premier Agent partners. Offering solutions digitally on Zillow is a natural and logical addition to the end-to-end experience we're providing customers and agents. Meanwhile, we are also enabling nearly limitless virtual touring that will continually get closer and closer to reality with our proprietary technology powering 3D home tours and Showcase Listings. Leveling up physical touring alongside our investment in virtual touring is a great combination for the industry, benefiting all participants. I'll now move on to financing, another critical focus area for us, because serving more high-intent customers with financing drives conversion and increases our addressable market. By integrating Zillow Home Loans with our Premier Agent partner network, we are providing a more seamless experience for customers, agents and loan officers. Our efforts to integrate financing throughout the customer journey have accelerated purchase mortgage growth, with $601 million in purchased loan origination volume in Q1, a more than 130% year-over-year increase despite a persistently challenging mortgage rate environment. We expect continued purchase mortgage growth as we expand integration with Premier Agent partners and roll out more Enhanced Markets. Across the combined 13 Enhanced Markets we had at the end of Q1, Zillow Home Loans continues to see double-digit adoption rates, which contributes to growing revenue per transaction year-over-year. These signals reinforce our confidence that our strategy is working, and I'm pleased to share that this month, we are expanding to a total of 19 Enhanced Markets, and we are on track to reach our target of 40 by the end of the year. On the sell side of the transaction, we continue to ramp up solutions that not only make selling a home easier, but also create real value for sellers and their agents. I'll spend a minute on Listing Showcase specifically. Listing Showcase is our AI-powered product that elevates agents' brand presence on Zillow and provides a better shopper experience through our homegrown rich media and floor plan technology. It's unlike anything else available today. We continue to be excited about Listing Showcase and the progress we are making across the country. Showcase listings drive higher engagement on Zillow compared to similar non-Showcase listings. More views, more shares and more saves. But even more importantly, homes that list with Showcase are selling faster and for more money. Showcase listings typically sell for 2% more than similar non-Showcase listings on Zillow, a bonus of $9,000 on the average home. Homes listed with Showcase are also 20% more likely to secure an accepted offer within 14 days. What's more, we've observed that agents who use Listing Showcase are winning 20% more listings, making it an attractive offering for real estate professionals. Listing Showcase is currently available to agents in every market, and we are actively working to reach 5% to 10% listing coverage, which represents a $150 million to $300 million annual revenue opportunity, and we believe there is potential for future growth beyond that. We are working to increase engagement with the best agents on both sides of the transaction, which leads me to our next growth pillar update, enhancing our partner network. As Rich highlighted earlier, Premier Agent partners represent the best of the industry, and we help them provide even better service to our shared customers to grow both their business and ours. We're excited that we continue to see transaction share gains across our 13 Enhanced Markets on a revenue per total transaction dollar basis. And now, a couple of quarters after we closed our acquisition of Follow Up Boss, we're even more excited about the opportunity for further conversion gains from here. In addition to our five for-sale growth pillars, I want to turn the spotlight on to Rentals. Rentals is a fast-growing business that represents nearly 1/5 of our total revenue, with a lot of opportunity in front of it. To bring our great progress in Rentals out of the shadow of our for-sale efforts, we've released a stand-alone investor presentation that provides a better understanding of what we've built, where we are headed and why we are so well positioned to build a comprehensive two-sided marketplace that is unlike anything else in the industry today. Like we do with all parts of Zillow, we start our Rentals journey from the perspective of the consumer, in this case, the 17 million annual renters in the U.S., which is 3x more movers than on the for-sale side. When renters search for a rental, they want the process to be enjoyable, trustworthy and easy. But instead, it's fragmented and frustrating. That's because no single platform provides a comprehensive marketplace with anywhere near complete coverage of available rental inventory. There is no MLS for Rentals. This forces renters to shop across different platforms, each with varying levels of accuracy, transparency and selection, and encounter dead ends when searching for inventory. That fragmentation is the big problem and the big opportunity. Renters and property managers want and need one centralized place where they can see all the rental listings available. This is an incredibly simple and obvious concept, but an incredibly hard challenge. It's a challenge Zillow is best positioned to solve because of our success over many years of building great products for our massive audience of movers on the for-sale side. The early years of Zillow Rentals made clear that our customers wanted to come to us to shop for rentals, so in 2018, we turned our focus and ramped up our investment to build it out and create the richest, most complete Rentals marketplace. We started with long-tail rentals, which we define as less than 25 units, but primarily comprises single-family homes because data and interest in single-family was a core strength of Zillow. Because these properties were hard to find, this offered an opportunity for us to build a unique inventory asset. It may also come as a surprise to you, but long-tail rentals are actually the majority of inventory in the rentals market. Long-tail rentals are a classic go-to-market problem: small, fragmented and local. You simply cannot efficiently deploy a sales force to go out and find all the supply. Because Zillow was already the most trusted name in residential real estate, many of these long-tail property managers were already familiar with us and asking for these solutions. Many of them may only own 1 or 2 homes, so they're looking for a product that gets their listings in front of the most potential tenants and makes renting out their properties easier. Today, our long-tail product experience is unmatched. On Zillow, renters can search, book tours, apply for properties, sign a lease and pay their rent securely and apply for renters' insurance. Similarly, long-tail property managers on Zillow can list, book tours, screen applicants, create leases, sign them electronically and collect red payments. It's a true end-to-end solution that's highly useful to both renters and property managers alike. These investments in great products starting in 2018 powered Zillow to the top traffic ranking in rentals and made us the preferred brand for renters. Today, Zillow is the most searched Rentals marketplace, according to Google Trends, search nearly 1.5x more than the next company in the category, and we have the leading rentals traffic with very limited marketing spend. After our success in long-tail, in 2022, we turned our attention to the more commodity supply subsegment of rentals: multifamily, big apartment buildings with 25 or more units. This is the easier-to-reach segment investors have historically thought of as the Rentals category, with professional property managers who have marketing and software budgets to help them acquire renters and manage buildings. Since we turned our focus to the multifamily space, we have driven a 30% compounded annual growth rate in our multifamily properties from 27,000 to 40,000 at the end of Q1 and a more than 30% CAGR in our multifamily revenue on the back of just $15 million total marketing dollars spent on Zillow Rentals. Combining unique long-tail listings with more commodity multifamily listings allows consumers a more seamless experience where they can see all types of available rental listings in one place and gives Zillow a highly differentiated Rentals marketplace experience, in which we are now ramping up our investments. In addition, many movers are dual track shopping: shopping for a home to buy while also considering their rental options. Zillow's integrated shopping experience and singular brand excel here. As it stands today, we estimate that Zillow has more than 50% of all rental listings in the country, more than any other site, and many of them are unique to Zillow. But that still accounts for only 60% of all long-tail listings and 35% of multifamily listings across the country. So we are investing in our Rentals products, services and sales to drive further growth. For example, in March, we entered into a strategic partnership with Realtor.com to provide all the multifamily listings on their site, and we recently launched our first national marketing campaign after a successful pilot last year in a few markets, which tested well, to grow our audience. As with other parts of our business, 2024 is a year to scale up our breadth and depth in Rentals to drive continued growth in listings, both long-tail and importantly, multifamily. With the largest audience of renters on the market, a 42% revenue CAGR since 2015 and a $1 billion-plus revenue opportunity in front of us, Zillow Rentals is digitally organizing a large, fragmented local marketplace highly valued by all participants. One quarter into the year, we are pleased with our execution and controlling what we can against a noisy external backdrop. And with that, I will now pass the microphone to Jeremy Hofmann, who will provide a closer look at our results.

Thanks, Jeremy, and hello, everyone. As you heard from Rick and Jeremy, we are pleased with how we are executing on our strategy, and our results once again demonstrate that our strategy is working well. I will start with our Q1 2024 results, which exceeded expectations across the business for revenue and EBITDA. Revenue growth accelerated in Q1, up 13% year-over-year to $529 million, which was $26 million above the midpoint of our outlook range. The broader residential real estate industry grew 4% in the quarter, according to data from NAR, meaning that we outperformed the category by 900 basis points. Each of our revenue categories across Residential, Mortgages and Rentals contributed to our outperformance. On a GAAP basis, Q1 net loss was $23 million, representing 4% of our revenue. EBITDA was $125 million for the quarter, resulting in a 24% EBITDA margin, a year-over-year margin expansion of 200 basis points. The combination of our revenue outperformance and effective cost management delivered the improved year-over-year EBITDA results despite a macro housing environment that remains constrained. Our Q1 Residential revenue of $393 million outperformed our outlook range, and revenue growth accelerated to 9% year-over-year. Premier Agent benefited from the ongoing investments in our top and mid-funnel experiences that drove improvements in our overall connection rates. Additionally, our growth was driven by accelerating growth in our new construction business, growth in ShowingTime+ as we began our nationwide rollout of Listing Showcase, with additional contributions from Follow Up Boss. Rentals revenue grew 31% year-over-year in Q1 to $97 million, primarily driven by our multifamily revenue, which grew 46% year-over-year. Our Rental strategy is working well, and our team is executing on growing the number of multifamily properties on our apps and sites, which reached an all-time high of 40,000 multifamily properties as of the end of Q1. Total listings across our entire Rentals marketplace were up 20% year-over-year to an industry-leading 1.8 million listings in March. Mortgages revenue of $31 million in Q1 was up 19% year-over-year, with purchase loan origination volume growing more than 130% year-over-year to $601 million. Our mortgage strategy is to help more of our customers get financing through Zillow Home Loans, which continues to drive our growing share of purchase originations, even in a difficult macroeconomic environment, evidenced by total industry purchase loan originations being down 10% year-over-year per our internal data. EBITDA expenses in Q1 totaled $404 million, flat sequentially from Q4 and at the midpoint of our implied outlook range as a result of our ongoing focus on cost management. Cost of revenue, which is included in EBITDA expenses, increased $31 million or 34% year-over-year, primarily due to an increase in website development costs as we continue to test and release new products as well as increases in mortgage loan processing costs due to higher purchase loan origination volume. We ended Q1 with $2.9 billion of cash and investments, up from $2.8 billion at the end of Q4, primarily driven by net cash provided by operating activities. As of the end of Q1, we had $1.6 billion of outstanding convertible debt. We repurchased $9 million of shares during Q1, and we were opportunistic in the month of April, repurchasing an additional 2.1 million shares for $91 million. Collectively, we have repurchased a total of $100 million of shares year-to-date. Turning to our outlook for Q2. We estimate the residential real estate industry total transaction value will be roughly flat year-over-year, which is down sequentially from the 4% year-over-year growth we saw in Q1. We expect total company revenue to be between $525 million and $540 million, implying a year-over-year increase of 5% at the midpoint of our outlook range. For Residential, we expect revenue to be between $372 million to $382 million. Our Residential revenue outlook for Q2 is down sequentially based on two headwinds. The first is that first-time homebuyer activity has underperformed the overall mortgage buyer market year-to-date. A good indicator of first-time homebuyer activity is the MBA's FHA Mortgage Purchase Application Index. Because our customer base leans toward first-time homebuyers, this is an index we watch closely. Over the past 6 weeks, we have seen the Index underperform the overall Mortgage Purchase Index by over 800 basis points. The second is recent moves in interest rates. We have seen some headwinds as Premier Agent partners take a wait-and-see approach as interest rates have spiked by more than 50 basis points over the last few weeks, and first-time homebuyers are a lower percentage of the overall home buying mix. Moving to Rentals. We expect our Rentals revenue to grow in the mid-20% range year-over-year as we continue to benefit from the strength of our execution, a favorable industry backdrop driving property manager demand for advertising and the launch of our first national rentals brand awareness campaign. Within Rentals, we expect multifamily revenue to grow faster than the overall business as we add more properties, sell more subscription packages and benefit from the investments we are making in our renter experience. For Mortgages, we expect accelerated year-over-year revenue growth in the high 20% range. We remain on track to further integrate Premier Agent and Zillow Home Loans with our planned Enhanced Markets expansion. As capacity is built within these Enhanced Markets, we expect to send more of our mortgage leads to Zillow Home Loans directly as well as drive engagement with more consumers on our apps and sites to grow our origination volumes. We expect origination revenue to become both a larger portion of Mortgages revenue and a larger driver of the category's revenue growth going forward as a result. For Q2, we expect EBITDA to be between $85 million and $100 million, equating to a 17% margin at the midpoint of our outlook range. This implies EBITDA expenses will increase from $404 million in Q1 to an estimated $440 million in Q2, which is what we expected in our full year plan. Roughly 85% of the increase is being driven by a combination of a seasonal uptick in our brand marketing spend and increased marketing spend to accelerate our Rentals growth strategy. The balance of the increase is coming from staffing of variable head count for sales given the growth we expect in Rentals, Listing Showcase and Zillow Home Loans throughout 2024. Moving on to the full year. I want to reiterate that we expect double-digit revenue growth for 2024, primarily driven by our growth pillars, with modest EBITDA margin expansion for the year. Our announced Rentals brand campaign is something we had factored in when we initially provided this framework in February. Based on our Q1 results and our expected Q2 performance, we expect to outpace our internal plan for both revenue and EBITDA in the first half of 2024. On the cost side, we continue to believe our fixed investments are at the right level, which should result in our fixed costs growing modestly with inflation and our variable costs growing ahead of revenue initially as we ramp up new hires to be fully productive. Advertising spend is a lever we treat as separate and distinct from the rest of the cost base and one we will pull, depending on the growth opportunities we see in front of us. Clearly, Rentals is an opportunity we think deserves amplified marketing dollars, and we are excited about what the campaign will bring for our future growth. To close, it is clear we are executing on our strategy. We are seeing growth across Residential, Rentals and Mortgages. We are also seeing great results from our growth pillars and our Enhanced Markets that will continue to roll out throughout this year. We are on track to grow revenue double digits and expand margins, all against a macro backdrop that is worse than many forecasted. And with that, operator, we'll open up the line for questions.

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

I guess two for me. One, obviously, it sounds like the Residential business has slowed down here. You mentioned the full year guide, though, hasn't really changed. So I guess, steeper second half ramp implied. Clearly, you guys are investing in Rentals, and that was baked in. But I think relative to last quarter, maybe just talk about your confidence in that second half ramp. And besides Rentals, what else is kind of instructing that confidence on maintaining the guidance?

Yes. Thanks, Brad. It's Jeremy Hofmann. I'll take that one. I think similar to what we've said in the past, we don't over focus on quarter-to-quarter fluctuations, just given how fluid macro has been and will continue to be. What gives us confidence is we're outperforming our internal plan. We expect to do so with what we guided for the second quarter and expect to do so for the first half of the year on both revenue and EBITDA. And when I look at our strategy and what we're executing across, we feel really confident that the second half is going to accelerate and will grow double digits against the flattish housing market. And that comes from a few factors. So I think first, more contributions from our Enhanced Markets will come in the second half as they come online, and that's all back half weighted. We're seeing continued share gains and positive signals in the 13 Enhanced Markets to date. Jeremy hit that earlier, but across revenue per total transaction value and customer adoption rate. So we feel good there. Mortgages, we expect to continue to accelerate. Showcase is rolling out nationwide and accelerating. And then obviously, Rentals is growing quite nicely, and we expect that to continue as well. So that's what gives us the confidence around the reacceleration that we expect to see in the second half.

Got it. That's helpful. And then just secondarily on the regulatory front, specifically around the buyers' agreement. You mentioned that arrangement and the product you announced, I guess it was yesterday, leading to maybe higher conversion rates. I think there's some investor concern out there where there's still going to be some friction, maybe higher up in the funnel. Can you kind of talk about how you manage that part of it and maybe why it's not a headwind relative to kind of how the old way used to work?

Yes. Brad, it's Jeremy Wacksman. Yes, as I said earlier, I mean, we see this as a great opportunity. What we're testing is post connection, right? So after a consumer has already requested, or in the Real Time Touring case, booked a tour, can we help educate them and provide them a really consumer-friendly digital education agreement? And we see that as better educating the customer and also expectation setting the customer for when they meet the agent as what to expect from the agent, both in that initial relationship but in what they might expect in a buyer-agency agreement generally. And any time we can help educate a customer, that typically leads to a higher quality customer for our agents. We've seen that as we've built things like touring and Real Time Touring. And I gave the example earlier, in states that have been using agreements earlier in the funnel, you typically see higher conversion rates. The Connecticut example is a good one. It's 90% of buyers are using buyer-agents and the conversion rates are higher. So I think important to frame it in the context of this is down in the funnel once the customer has already raised their hand, really declared their intent. We've worked with them to make sure we're getting them to the right place. They've had this magical book a tour experience, and they're getting ready to go. And this is an additional education opportunity. It's not friction.

We now turn to John Campbell with Stephens.

Just back to the new Zillow touring agreement, that's a pretty clever development. Congrats on getting that to market. I want to touch on two items related to that. So first, if there are agents that are unwilling to adopt that new touring agreement, will those agents simply lose the ability to get tour requests through ShowingTime? And then secondly, just more broadly, how important do you feel the role of touring is for your journey of moving from 3% of transactions to 6%?

Yes, this is Jeremy. I'll hit both. It's optional, right? So it's not something that Zillow is required to do. That's why I said we see it as opportunity. It's an educational step. At some point in the experience, the agent is going to have a conversation with the customer about services and start an agreement in our relationship. We're trying to help facilitate that. So we don't expect any fall-off or friction because it is an optional experience. And that said, we're prototyping and testing. We'll learn a lot as we work with our first couple of hundred agent partners and customers, and we'll iterate from there. So -- and then to your second question, we see touring as, again, as we've talked about for a while, it's the #1 thing customers want to do. That's why we're so excited about it. That's why it's one of our growth pillars and one of the drivers of the performance gains we've seen in our Enhanced Markets to date and the overall share gains we expect to see as we roll out to more markets. That is both physical touring, which we've talked about here, and virtual touring, right? So getting customers a deeper sense of home, helping them figure out what they want to go see in person helps higher-quality customers be more educated, informed when they raise their hands, that helps our agents win more of those customers when they meet them and drive transaction share. So we're excited about the opportunity the changes the evolution Rich talked about provide. This is one of the first ways in which we're trying to leverage and help make those marriages between consumers and agents happen.

Okay. That's helpful. And then one more to tack on here on Matterport. I mean, obviously, it looks like it's heading to one of your competitors. I know you're not going to probably comment on pending transaction or maybe what that ripple effect, call it, for the market. But maybe if you could just talk to your own 3D tour capabilities and how you feel that stacks up?

Yes. We are really excited about our own homegrown 3D tech. We're excited about virtual touring generally. We support Matterport today. It's a small percentage of listings today, and our 3D technology is on a small percentage of listings today. And that virtual touring capability is going to continue to grow as consumers discover, love it and as we all improve our own technologies. So we're really happy with our homegrown effort. And as you know, that is what powers Listing Showcase and all of the really unique interactive floor plan, AI-generated listings I talked about earlier that drive a ton more buyer engagement and are helping listings go pending and sell faster and sell for more money. So we love the investment that we're making here, and we really see this as where the consumer experience is going. But it's early, and all of us are small. And retraining the consumer to allow more touring in the virtual world, we think, complements the physical touring investments we're making. Again, back to the earlier conversation, helping consumers find what they want to buy, helping them dream and shop more online and their app and getting them into the hands of our great agent partners.

We now turn to Ron Josey with Citigroup.

Rich, I wanted to ask on the Rentals business, only because clearly it's a big strategic priority and the deck was very helpful, and on a $400 million run rate currently, and I think the view is to get to that $1 billion, if I read the deck correctly, in revenue. So I wanted to maybe focus more on multifamily growth, and we talked about, I think, 35% penetration of the, call it, those that are available properties to 40,000 properties today. Just talk to us about the life cycle for getting these multifamily properties onto the platform, the importance to Rentals for first-time buyers? And then maybe as a quick follow-up to that, how Rentals -- it's been a big business for Zillow for a while, creates a deeper relationship with Zillow over, call it, the entire housing process of a person. And I have a quick follow-up.

Ron, guys, maybe I'll start out with a little bit of a strategy answer and then Jeremy Wacksman, maybe talk about -- or Jeremy Hofmann will talk about the multifamily question that Ron asked. Yes, we -- I really love the Rentals play as you know, Ron. It is a textbook example of a two-sided digital marketplace opportunity. It's the kind of opportunity that our Board Director, Bill Gurley, who many of you know, who's really a thought leader on digital marketplaces, would really love. It turns out that I've been roughly involved in -- intimately involved in building several kind of successful digital marketplaces since the dawn of the Internet as well, and it makes me excited. So let me just tick through why. One, it's hyper-fragmented and locally distributed inventory on the supply side of the marketplace. Likewise, it's really fragmented on the renter or the demand side of the marketplace, okay? Also, there is volatile pricing and volatile availability, which promotes market monitoring, so high engagement from both sides of the marketplace. Additionally, there is heavy shopper interest in content as both practical and for entertainment as part of the shopping process, which lends itself well to a digital marketplace. Very high gross margin, which we all, as investors love. And finally, marketplaces have a positive network effect, which is more supply begets more demand, which begets more supply. So we're seeing all of those things in action here in our rental marketplace. We knew from the beginning that acquiring demand at a really reasonable price, basically near 0 marginal expense, is key to making these kinds of marketplaces work, and that keeping the supply side inventory acquisition costs very low is going to be key as well, and we feel very good on both of those. On the demand side, it's pretty simple. Zillow Rentals has kind of ridden the long and lovely coattails of the greater Zillow with our 200 million-plus monthly uniques, and lots of them also interested in buying a home as well as renting. So we've been able to leverage that. And on the supply side, it took us many years of kind of toiling in the dark in the long-tail where most of the rental inventory is in single-family homes in the long-tail, but now after toiling for many years, we estimate we have about 60% of those, and they're unique. These are almost all listings that will only be showing up inside of Zillow Rentals, which is fantastic. So more recently, I'll hand it off to Jeremy here, we turned our guns to the kind of more obvious and more commodity apartments in tall buildings in cities market, the multifamily market. This is the market segment with real marketing budgets and professional managers. We have 40,000 buildings now. It's growing really rapidly. We love that. Why don't I -- so I'll conclude by saying, yes, we've got the supply -- the expense of the supply side nailed and the inventory now kind of lit up, and we've certainly got the demand side in a terrific spot, and we're -- I'm personally excited to begin to really lean into this. Jeremy, you want to chat a bit about multifamily?

Yes. I mean I think the answer is similar to the framework you gave around it being a two-sided marketplace. We have been building the overall organic traffic and listings for the renter experience, and that's driven the demand side broadly. Now we're focusing in on increasing demand, more specifically in multifamily, and you're seeing that both in our partnership with Realtor.com and in our advertising campaign following a really successful test last year. And that's on the demand side of Rich's two-sided marketplace. And then the supply side is bringing those high-intent renters to the professionals Rich talked about and increasing our sales efforts to go help those folks connect with our renters and get what they need from their advertising dollars. So it is really about the flywheel Rich talked about, and it's just the focus in on multifamily on both the demand side and the supply side that we're now turning more focus and energy to.

We now turn to Mark Mahaney with Evercore ISI.

Okay. Let me try a few, please. The Q2 guide, you don't have this kind of outpacing of real estate industry total transaction value that you've had pretty consistently for a while. Maybe you covered this before, but if not, could you please go through that? Why wouldn't you outpace? And then on the Showcase new listings, can you just talk about what kind of traction you're seeing with that? I know you covered a little bit in the shareholder letter, but reactions you've had to the pricing models that you rolled out at the beginning of the year?

Yes. Thanks, Mark. It's Jeremy Hofmann. I'll take the first one on the guide. Yes, we called out a few factors that are headwinds right now. One is first-time homebuyers are just struggling in this market. And we lean that way, so we're feeling that a bit. And then additionally, just when rates spike like this as quickly as they did over the past few weeks, our Premier Agent partners just tend to be in a more of a wait-and-see environment. So we're feeling both of those at the moment. This is not dissimilar from what we felt this time 2 years ago, where PA partners took a bit of a wait-and-see approach when rates spiked and then ultimately, we worked through it. So like I said earlier, not necessarily too focused on the quarter-to-quarter fluctuations, and just reiterating that we think revenue reaccelerates in the back half of the year to get us to that double digits revenue growth against the flattish housing market. We continue to feel good there for a variety of reasons, just the way that we're executing across Residential, Mortgages, Showcase and Rentals as well. And then, Jeremy, maybe I'll pass to you.

Yes. I can hit Listing Showcase. Yes, I mean, as I said earlier, we're really excited that the increased engagement from the buyers continues, right? So more page views, saves and shares as we get showcased out there more and more. We're also now seeing seller benefit, which I talked about. So homes are selling faster, 20% more likely to accept an offer in 14 days, and they're selling for more money, 2% more money. And most importantly, agents who are using with Listing Showcases are winning more listings. So all that says to us that as we've been rolling this out and scaling this up and offering in more locations, we're seeing a really good product market fit, both with -- we knew with buyers, we're now seeing with sellers and with sellers' agents. And that's why we're so excited about the intermediate-term goal we've talked to you all about and getting ourselves to 5% to 10% total active listings because then we think there's potentially more to do once this gets to that state.

Do you have markets where that coverage is materially higher, like a lead market where it's materially higher than 5% to 10%?

Not yet. I mean, we've talked to you all about it for a while now, but it's important to remember it's only been live for a couple of quarters, and it's only been live nationally since February. So team has grown, as Jeremy talked about. We have staffed up sales folks to start to hit more coverage and talk to agents in more places. But as much as we're excited about it, as much as we see a really exciting product here, it is still really early in our journey.

We now turn to Ryan McKeveny with Zelman & Associates.

On Follow Up Boss, you mentioned in the letter being even more excited about the opportunity for conversion gains. I guess if you could provide kind of two sides of an update. One would just be initial receptiveness and maybe retention of legacy Follow Up Boss customers post the acquisition. And then secondarily, I know it's only been a handful of months, but where does integration stand with the PA business? And anything to call out about any benefits to conversion rates thus far? Or is that more opportunity as we move forward?

Yes. Thanks, Ryan. I think on initial reception, we've been really pleased with the retention of the core customers of Follow Up Boss as we've gotten through closing and integration and starting to work together now for a couple of quarters. And we're really pleased to just see the continued positive agent feedback on the Follow Up Boss product. I still get anecdotes all the time, talking to agents, about how much they love it and how much they're excited about our ability to help the Follow Up Boss team grow and invest more in this team-focused CRM that they've built their business on. So we continue to be pleased with the post-close post-acquisition performance of the Follow Up Boss agent base. And then on your second question, I would say it's still a lot of opportunity. I mean I think you heard both me and Jeremy talk about in the prepared remarks, they're starting to ship things for all advertising partners. Or sorry, all agent partners, and we're also starting to think about ways to help Premier Agent partners use Follow Up Boss to better convert their business, both -- they're Zillow customers, but they're entire customers. So not too much more to share in terms of road map, but a whole lot of excited folks internally in both the Follow Up Boss team and our Zillow consumer and Zillow agent teams ideating and working together on how can we help our agents use technology to convert more customers and deliver better service. And we see a long road ahead for that initiative.

Got it. That's very helpful. And then just a follow-up on the 2Q revenue guide in Residential and the comment about some partners taking a wait-and-see approach. I guess if I step back, there's the industry noise related to all the litigation and everything that's going on. There's noise on the competitive side of things, neither of which seemed to be kind of the called out headwinds. So maybe just help us think through that disaggregation of the headwinds in a bit more detail. Like is there any change on the margin coming from competitive/industry types of dynamics? Or at this point in time, is the best estimation that it's largely kind of macro-related factors at this point in time?

Yes. Thanks, Ryan. It's Jeremy Hofmann. I think we monitor our sales funnel really, really closely, and we have software that sits over top of it, monitoring agent calls and agent sentiment and just telling us what they're hearing. And the situation right now is just -- it's a temporary rate shock. We've been through that before. It happened in the spring of 2022, and we know how to navigate through it. We want to be there for our partners during this time and not necessarily going to push too hard as a result of that. And then with respect to NAR and competitive, we're just not seeing that in any data that we see. We just don't see impact from either of those. So it really has been much more macro related and macro in a way that we think is navigable. And again, coming back to the full year, we just continue to feel quite good about the ability to accelerate revenue over the course of the year and let us get through the quarter-to-quarter fluctuations just given how fluid macro is.

We now turn to Chris Kuntarich with UBS.

Two-parter on the Rental business. Just as we think about this $1 billion-plus opportunity for Rentals, last quarter, you'd frame Listing Showcases kind of a medium-term $150 million to $300 million opportunity. Should we be thinking about this also as a medium term? Or is this more of a kind of a longer-term opportunity? And the second part of the question would be just as we think about the pace of Rentals growth in '24, how should we be thinking about pricing as a lever you could potentially pull?

Yes. I'll take it. It's is Jeremy Hofmann. I think on the $1 billion-plus opportunity, I think the keyword there is sustainable. We think it's a sustainable $1 billion plus opportunity. And we've built the business that way. Rich walked through a bunch of why we like the strategy so much. But we also like it as a multi-decade type opportunity. So with respect to timing, we're not going to commit to anything there. We just believe there's a lot more for us to do. And we think what we're building is differentiated versus anybody else. And we have an opportunity to be the place where all renters come and all property managers come as well. Whether that's in the single-family or multifamily category, that's where we think the opportunity is. And done under one brand, Zillow, right? That's already known for housing. So that's what we're focused on. I just want to give you a sense for what we see over time. And then secondly, on 2024 for Rentals, the goal is really keep adding more and more properties and bringing more demand alongside. So we think of it as more of an effort that way than pushing on price. It's really -- we just see a pretty substantial opportunity in front of us, and we want to make sure we continue to add properties at the way that we have been and then also bringing the consumer demand to satisfy those properties. So the organic efforts that we have, the Realtor.com partnership, which went live today, and then this national marketing campaign we're quite excited about as well, all in the vein of how do we make sure we build something really sustainable over time? And we think we're on that path.

Our final question today comes from Dae Lee with JPMorgan.

So back to the NAR settlement, I mean, is this something that you or your partners are anticipating having a meaningful disruption around the time of implementation? Or could this be more of a change that takes a while for you guys to see?

This is Jeremy. I can hit that. I mean, I think no. I think as Rich outlined earlier, we don't see a ton of revolutionary change here. We see more evolutionary change that results in more educated and more transparent consumers, which we see as leading to higher quality, higher intent leads and connections for our partners. And I think we're seeing -- that's already started to play out in the early innings after all the news is cleared of how partners are processing connections and how they're learning to work with those consumers. And as I talked about, just take our touring pilot here as an example of leaning in on consumer education in a consumer-friendly way to help them understand what they're going to be dealing with. And in the states that have been doing that, seeing still fairly ubiquitous independent representation and higher conversion rates. So as folks like us and others roll out more buy [indiscernible] agreements, again, back to our principles, we think a more educated consumer who can understand what they're getting from their representation that they choose and understand that the compensation is fair and negotiable and can be negotiated, that leads to a better conversation with professionals. And we think that leads to our professionals, which as Rich talked about, are a small subset of the most productive agents winning more business. And so we see that anecdotally today, and we see that in some of the states that we're further ahead on this today, and we expect to see that, that continue as more folks roll out changes to deal with the evolution.

Got it. And as a follow-up, I don't know if you'll address this, though, but like what's driving the first-time homebuyer activity underperformance? I mean is it just related to the mortgage rates hike? Or is there something else happening? And -- [ 2Q volumes ] [indiscernible] activities stays at these levels?

Yes, it's Jeremy Hofmann, just to make sure I heard it. Yes, I mean, really, it is the rate shock that we felt. It's less about the absolute interest rate level, it's more the shock. And when rates spiked by 50 basis points over a couple of week period, first-time homebuyers are the folks that feel that the most, and they're underperforming pretty significantly. We don't expect that to be forever, but it is a temporal thing. And as a result, it's a bit of a headwind for us, but one that we think we can navigate through pretty seamlessly.

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

All right. Thanks, everybody. Look, it's noisy out there, and there is a lot of confusion and there's a lot of distraction. And I'll tell you, we're calm. We're driving forward. We're putting up numbers. The product is getting better and better, and we have a long road ahead of us because of all of this incredible kind of pent-up potential transaction energy that lives inside of our wonderful marketplace. So it's noisy, but we're feeling really good. Thanks for being on the road with us. We'll talk to you soon.

This concludes today's conference call. You may now disconnect.