Good afternoon. My name is Jordan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group Fourth Quarter 2021 Conference Call. [Operator Instructions] Please note, this event is being recorded. Thank you.

I would now like to turn the conference over to Brad Berning, Vice President of Investor Relations. Please go ahead..

Thank you, Jordan. Good afternoon, and welcome to Zillow Group's Fourth Quarter 2021 Conference Call. Joining me today to discuss our results are Zillow Group's co-Founder and CEO, Rich Barton; and CFO, Allen Parker.

In addition to our typical materials, today, we also published an investor presentation which is available on the Investor Relations website. This deck will provide additional color to much of what we are talking about today.

During today's call, we'll be making 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. 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.

In addition, please note, we will refer to our Internet, Media & Telecom Technology segment as our IMT segment. We will now open the call with remarks followed by live Q&A. And with that, I will turn the call over to Rich..

one, we'll be leveling up that critical touring experience with ShowingTime to make it easier for movers to tour homes and connect with our partners. Two will be an increased focus on preparing these customers to be transaction-ready through intuitive and digitized financing offerings.

And three, we will develop seller solutions by leveraging learnings from our iBuying experience to stand up new more asset-light services.

As we take all of the energy potential from buyers on Zillow and open up broader seller solutions and financing opportunities, we expect to increase the number of people who raise their hand to transact with Zillow and open up access to the 6.1 million sell-side customer transactions that mirror the 6.1 million buy-side transactions that we've been focused on to date.

We will couple these product improvements with an enhanced partner agent network and how we interact with, support and improve the experience for our partners as well as our mutual customers.

Here, we will continue to focus on working with high-performing agents who have demonstrated stellar customer service, a proven ability to close and an appetite to grow with us as partners as we expand.

One of the great benefits of these product and service improvements is they have an eye towards integration, which is a win for the customer, a win for our partners and a win for Zillow because it will drive more transactions and more revenue per transaction.

One prominent way to do this will be integrating Zillow Home Loans into the shopping experience to better serve our customers. Today, nearly 90% of all homebuyers finance for the mortgage, and many of them want to get prequalified before finding an agent.

By offering intuitive and reliable pre-approval and prequalification services earlier in the shopper's journey, we hope to keep customers engaged in our funnel and improve their overall experience.

Getting prequalified with financing is a strong signal of a mover's serious intent to buy a home, and referring a customer that already has financing is more valuable and efficient for our Premier Agent partners as well.

We see expanded seller services and closing services as key to the integration we expect to provide and are hard at work cooking up what's next based on our learnings from having now bought and sold thousands of homes.

When we put all of these ingredients into the pot, we see an opportunity to meaningfully increase the number of customers who raise their hands to work with us and the number of customers who ultimately transact with us.

We know that the size of the prize is large when we become the central integrator, connecting pieces of the fragmented process and turning dreamers into transactors within the Zillow Housing Super App ecosystem.

We expect all of these efforts to translate into $5 billion in annual revenue by the end of 2025 with strong gross profits that will allow us to invest in the opportunities that we'll have in front of us, while also translating into healthy 45% EBITDA margins for our shareholders.

Before I hand it over to Allen, I want to acknowledge that the past few months have been challenging for us all, Zillow employees and investors alike. Innovation is a bumpy road and really proud of our history of innovation, and I have 100% confidence in our ability to accelerate innovation in the months and years ahead.

Our company was built on big swings and we're going to continue taking them. We take big swings on products, on technologies, on business models and even on the future of how our employees work. Big swings are as core to Zillow as is Zestimate, and they are part of what makes our company so special.

Finally, a really wild and wonderful characteristic of being Zillow is that we throw a much longer shadow than we are tall. In the last year, we have experienced the upside and the downside of capturing the hearts and minds of so many. People care about our brand and their homes deeply.

There is something particularly gratifying and motivating, knowing that we are solving a problem that is so near and dear to people, so meaningful, and because of that, everyone is watching.

Within all of that meaningfulness is a massive business opportunity to help people move using our housing super app to help them unlock life's next chapter and to help our partners grow their businesses.

As I said earlier, our foundation and positioning are strong, and we are so much smarter, more experienced and more battle-hardened now than we were a year ago. As many of you know, I'm the largest individual shareholder and co-founder of Zillow in addition to being CEO. For the past 16 years, I thought about Zillow every day.

I care about the long-term meaning of the Zillow brand and the value of our company in a way that couldn't be more personal. And I'm continuously awed by the sheer size of the opportunity and the relative immaturity of technologies advance into residential real estate, such a large, incredibly important and endlessly entertaining industry.

Thank you for your continued support. I enjoy being on the journey with you. I'll now pass the line over to Allen..

grow our customer engagement through a compelling dream and shop experience; deliver a more integrated customer transactional experience to drive customers to choose to transact with us and our partners; invest in sustainable top line growth opportunities across the company, including new integrated services that are more scalable, less subject to earnings volatility and more capital efficient; and lastly, manage our cost structure and improve productivity to drive a profitable, scalable and positive cash flow company.

And with that, operator, we'll open the line for questions..

[Operator Instructions] Our first question comes from Brian Nowak of Morgan Stanley..

I have a couple about the multiyear targets. The first one, so the 24% annualized growth on the new $5 billion target, pretty healthy growth.

I guess, Rich, I'd be curious to hear, first of all, how you think about some of the keys to execution in the next couple of years to sort of realize that type of growth? And how should we think about the slope to the next couple of years' growth relative to the, call it, the next 4? And then the second 1 is, if I do some math on the transactions, it looks like you already have a decent amount of seller-side transactions on the platform.

Can you just talk to us again, remind us about where are you on monetizing seller leads and how big of a part is that in the long-term targets?.

Okay, Brian. Well, maybe I'll set the table and then Allen, you can serve the real food on this one. We did drop a whole bunch of new stuff on you all this quarter.

I tell you, we had a lot of fun putting together these 2025 long-term targets as well as putting together this, I think it's a pretty tight deck that maybe many of you are looking at right now that really gets to answering, Brian, exactly what you're talking about.

But from a table-setting perspective, it's really important to the new stuff we've said as we've made it a little crisper just what we mean by such a huge engaged audience, okay? We have always talked about the 200 million or so unique users.

We put a little bit finer point on that by focusing on the app by saying, we get about 4 million daily app users, which is 3x the size of our nearest competitor.

And the key to growth really is nothing more complicated than converting more of those 4 million daily app users into transacting customers, okay? Another kind of really interesting and eye-opening data points that I talked about in my script was that we actually have 1.4 million of the actual homebuyers last year raised their hand to connect with us, all right? And yet we've only ended up with 3% customer transaction share.

We said 360,000 transactions. So the big long lever is converting users into transactions, into customer transactions. We're better at it. We're going to be better at -- we have a history of driving that transaction penetration, no question. And innovation in both product and business model has been what that's about.

But we have a lot more experience now because we have been in the guts of the business buying and selling thousands of homes.

We've built a bunch of stuff to support that, and that puts us in a terrific position to now build what we're calling this housing super app, which will act as the integration and dashboard of bringing these disparate components of the process altogether in 1 place in a really interesting way.

I'll pass it over to Allen by saying the 2025 -- highlighting that the 2025 targets assume that we take that 3% transaction share to 6% transaction share. And given all the stuff we're doing, especially, say, in the closer term, in terms of touring and financing with mortgages, we think that is achievable and exciting..

Yes. Thanks, Rich. And thanks for asking the question, Brian. So I guess I'll start with, -- the 2025 financial targets was an opportunity for us to add some more transparency about the opportunity that's ahead of us that we're excited about as well as clarify the strong position we currently are in.

And so as we think about that path to $5 billion and 45% EBITDA, as we've talked about, it's driven by this expectation that broader integrated offerings are going to drive both more transactions and higher revenue per transaction than where we are today.

And from a modeling perspective and starting with the 12.2 million customer TAM, both the buy side and sell side. We talked about the 360,000 transactions we participate in today and just growing that share of 3% to 6%. In addition to that, it's taking the revenue per transaction we get today of around $4,100 and growing that to $5,200 a transaction.

And we think that comes from having more customers using more of our services in an integrated way. In addition, I'll just call out that those 2025 targets include our other marketplace and industry software solutions businesses growing from $609 million in 2021 to $1.2 billion in 2025. As we think about the slope, we provided guidance for Q1.

We think that this model is driven off of our ability to control and drive secular growth by serving the customer and integrating better with our partners. And I think there are some more near-term things and some longer-term things as we innovate, that's kind of the innovation path. And we'll continue to share as we can how that slope may play out.

But right now, I think what we'd say is we feel really comfortable based on the position we're in today with our brand, our audience, our partner network, our current standing with the number of -- the 1.4 million buyers who utilize our site today and the financial position we are in and the business model that can generate positive cash flow to execute well on the 2025 targets..

I guess I served some of the dinner in there and we overlapped.

But there were 2 other things in there, you were talking about the slope, Allen, in Brian's question, and that is kind of implicit in it, its kind of where are we in the S curve of penetration, where are we in the S curve of market share? And is the path from here to 2025 convex, linear, concave, what is it? Here, my expectations are that once we get to the 6%, given this giant gap between the 6% and our usage and engagement numbers, which are 2/3 of the industry, of actual buyers that are using the site, I would expect -- it is my expectation that we will be continuing to invest for growth in a prudent way at that point.

And so I expect continued growth. I don't know what that means about the implications of the curve, but I hope it's linear or better.

And then on the sell-side transaction question, yes, I think you can kind of connect dots based on what we shared and get at what our estimated sell-side transactions that we're getting -- that we are monetizing today is. It is a nontrivial chunk of our 360,000 customer transactions that we estimate.

And mainly, that is because people who are coming to buy homes with Zillow and with our partners, at least half of them are also selling their home, and a whole bunch of them do end up selling with our Premier Agent partners. And so we already access the sell side of the market.

Now we want to enhance that and drive share there with more products and the super app, but we already have a terrific foothold today. All right. That was a long answer, sorry, but thanks for the question..

Our next question comes from Brad Erickson of RBC Capital Markets..

Just have a couple there. So you mentioned now a few times that you're engaging with this quarter of all buy staff last year versus market share at about 5%.

I guess, can you just give a little more color on how either MVP or Flex may be contributing there as you look to reduce that leakage and any sense of the mix between the 2 models? And second, I guess a little related to the first.

On the seller leads that you're looking to drive, you mentioned some that -- you've talked about before some of the calls to action that you're looking to implement on the site.

Just curious to hear maybe a bit more about how you might serve to sort of tease out that signal of potential sellers and any maybe early proof points as to how that's going..

Do you want me to start with the MVP Flex transaction, Rich? Thanks, Brad. I'll take the first part of the question..

Sorry, I was on mute, yes..

Okay. So I guess how I would describe it, Brad, is that we feel like we have a very strong Premier Agent partner network both across our MBP and our Flex models. Flex, in and of itself, is not a driver for transactions, but it is a driver for better alignment between ourselves, our customers and our partners, we feel.

And so we will continue to innovate and iterate on ways to align our partners with our products and services and our customers in ways to generate more transactions, higher conversion and more revenue per transaction. So we're very pleased with where we are, both on the MBP and Flex model.

And I wouldn't call one or the other out as the biggest driver of the journey to the 2025 targets. But I think the key is alignment. And as Rich mentioned, the more integrated transaction with tools that serve our customers well and also sort of our partner network flow..

And on your second part, Brad, look, what we what we have come to fully realize is something that, I guess, we should all intuitively understand.

And that is -- I don't know if -- like, Ford for the Super Bowl ads that they have coming up is not going to make an advertisement that says, sell your current car, okay? What they're do -- what their marketing on the Super Bowl ad is the dream of the new car with the red bow on it in the driveway. The housing equivalent of that, it holds.

People -- the inspiration and aspiration of the move is the new place. The greatest seller lead opportunity we have is in helping people dream about the new house, okay? And we have a really fantastic position in that, that we're already converting into some sell-side business today.

Now we also understand that solving this kind of painful but necessary part of the super app, part of the moving process of selling your house is a big deal and having good solves for that with creative new solutions is an important area of innovation, and we are fully embracing that.

As you well know, we ran a big giant experiment with iBuying so we know a whole lot more about that now, and we’ll pitch a big test over that and are innovating and working with partners to make sure we have compelling offerings to solve that particular problem..

Our next question comes from John Colantuoni of Jefferies..

Wanted to start with the housing market. Maybe you could just walk us through what you're seeing today from a macro perspective and how your outlook for the housing market over the next 3 years ties into your 2025 targets.

And second, you outlined plans to increase the 1.4 million homebuyers who tried to connect on Zillow last year, which is already an impressive figure. One of the initiatives you mentioned is developing asset-light seller solutions by leveraging your learnings from iBuying.

Given the seller side, it's been more elusive for Zillow in the past, can you provide any specifics around the products that you're planning to roll out that will help bolster seller connections?.

Okay. Hey, John. You want me to -- Allen, I'll start with the macro stuff and maybe Brad, jump in if I get it -- if and when I get it wrong. I realize that we're in a particularly interesting macro environment, given the high level of uncertainty, okay? We are well aware that it's more uncertain than usual.

But our economists forecast strong macro and strong housing market this year, following up a very strong market in 2021.

In fact, I think highest trends at number of transactions since 2006, Brad, am I right? Am I getting a nod?.

Correct, yes..

All right, correct. Thank you. I don't want to get that wrong. It didn't certainly feel like that last year, did it, because inventory was so low and inventory continues to be low, but that doesn't mean there can't be a lot of transactions.

And while our economists are forecasting that, we are taking -- Allen and his team are certainly taking the more uncertain than usual into account. What's driving the strength is this kind of millennial tide that's rising.

They are really -- this demographic tide is rising on the industry and that coupled with supply that's not rising as fast is making this, we think, continuing to be a strong market.

Did I say that okay, Allen, Brad?.

Yes. And I'll just add on top of that, that as you mentioned, Rich, our Q1 guide reflects some of that macro uncertainty that Rich talked about in the short term. The lower new sale listings, high occupancy rates and rentals and lower builder inventory are all reflective in and formed our Q1 guide.

But we continue to see strong demand signals on our site and strong interest from our partners with very low churn.

And so the opportunity, we feel well positioned as we look at this opportunity in this path to the 2025 targets to focus the customer, improving our partner network and providing them tools, and that -- we believe that the 2025 targets are appropriately aggressive but achievable through a lot of the things that we just talked about.

Just to get on the macro and how it affects our '25 targets, I just want to reiterate that our 2025 financial targets are based on flat industry transaction assumptions, so no increase in industry transactions and low single-digit HPA assumptions.

So our model and the KPIs that we built really are based on our opportunity to innovate and integrate our services and drive secular growth based on the strong foundation that we have..

Okay. But what Allen said about low single-digit 3% HPA home price appreciation and flat transactions, that's not a macro call we're making. We're just -- that's just for modeling purposes. That's what we've done. So that's not our macro call. I mean, that 3% compares to what, 9% CAGR since 1971 or is that total industry? Anyway, 1 more thing, sorry.

I'd be remiss if I didn't say amidst all this macro conversation, which I understand is important for a read-through to all of our businesses in the economy, I get it.

But really the big shift that we are on the leading edge of is the shift in a giant industry, the largest perhaps in the U.S., of moving from the offline non-digital way of doing things to the online digital way of doing things with us as the leader in that.

And that actually is really the most important lever and shift from a macro perspective to our long-term results..

Our next question comes from Mark Mahaney with Evercore ISI..

Okay. I'll go back to that 2025 outlook and I love the idea of swinging for the fences, Rich and Allen, and laying out these long-term markers. I look at the assumptions that are in there, and the 1 that strikes me as most aggressive is that 6% share of transactions? I know it's up 3% but that's a doubling of the share from what you had in '21.

So maybe just double-click on that a little bit. The other assumptions don't seem as aggressive. That 1 does seem aggressive. Maybe we need some context as to where that -- if it was 3% in '21, where it was before.

Or if you look at all of the different things you could do to increase that going from 3% to 6%, what do you think are the easiest things to do? And what would be the hardest things to do, just on that particular metric because I think that's pretty key to this $5 billion outlook?.

Mark, maybe I'll start, and Allen, you guys jump in. When you break it down into the components, it doesn't feel -- it feels doable to me, Mark, and I'm a big believer in BHAGs. I don't even know if I'd call this BHAG, a big hairy audacious goal.

It is, no doubt, not timid, okay? But these goals end up being self-fulfilling because of the creativity they tend to release internally with all the smart people we have and given the resources we have, I'm confident. But 2 rather low bits of hanging fruit.

We talked about a bit on conversion here is getting on top and really taking advantage of our position with home touring and building a digital home tour reservation system. Right now, it's super complicated to schedule a home tour. And so a good deal of home tour request demand goes unfulfilled.

I don't know what the data point on that, is that, Brad? -- we might --.

Yes, it's 23% of our tours only that we're fulfilling today. We have meaningful opportunities to upside those. And the other point just to throw in for -- to hit there is we get about double the conversion rate on a tour of our other leads. And so growing the mix of touring is pretty significant to help drive conversion rate..

I think in my script, I said 3x the conversion, Brad. I'm not sure, but --.

Sorry, correct. You're correct, Rich..

Yes, okay. So 3x the conversion when we actually connect a partner with a customer on a tour. And so that -- it doesn't take too much imagination to see how us wiring up that into the Zillow super app experience could drive increased conversion rate to transaction. Another 1 is financing. I did mortgages. I talked already quite a bit about that.

But we had our guns in mortgages all trained towards iBuying. So all the work we've really been doing for the last couple of years with Zillow Home Loans and building our own mortgage operation was in service to iBuying. And a lot of it was actually pretty interesting. And we have this factor.

We had not been focused on the bigger lever, on the bigger opportunity, which is basically distributing a mortgage product directly to our customers and via our Premier Agent partners.

In this time period, we are confident that we will be able to develop our fantastic partner network into a distribution network for our mortgage that will then be just integrated into the super app in a way that puts the mortgage in its proper place, which really is kind of a painful but important support stepping stone along the way to the new house.

We just wanted to be integrated right into the super app. I don't know if that -- I mean, there is a lot more to driving to that 6% but those are 2 of the big ones..

Yes. And the only thing that I'd just, I guess, reiterate, you talked about some of the features and services that we think are going to improve conversion. But starting with this 25% of homebuyers already asking to speak to an agent. And so those being customers that have raised their hand is a great starting point.

And that's only being 1 in 4 right now gives us confidence that these services and improved features of integration should give us quite a bit of leverage as we go through and grow this transaction count..

Our final question comes from Ryan McKeveny of Zelman & Associates..

I appreciate all the detail, all the new stuff, and Rich, I agree with you, shout-out to the designers and marketing folks and data folks, the content of the deck is very good, so I appreciate that. But back to my question. So I've got 2 on the long-term opportunity.

First one, somewhat similar to others, so focusing on this movement from 3% market share to 6% market share. Maybe I'll ask a bit more in terms of how we can look at the past to possibly help think about the future. So Slide 7, you show 360,000 transactions in 2021 on 1.4 million connections so about a 25% conversion rate.

Can you share any insight on how that conversion rate from connection to consumer or to customer compares to maybe the last 2, 3, 4, 5 years? I'd imagine both the number of connections as well as the conversion rate has improved over time.

But maybe seeing a bit of a trend line there on how things have trended will help us bridge to what to expect in the future..

Allen, do you want to take a stab at that?.

Yes, yes. I guess what I'd say is that when we made a decision in 2018 to go deeper into the transaction, we -- that was the start of us taking a harder look at how can we drive transactions and success for our customers through the transaction. And maybe the proxy I'll use is connections.

But since 2019, we've seen our ability to drive connections and conversion through our partner agent base grow. I don't have the, I guess, the analogue to -- compared to the 1.4 million, 360,000, but we have seen growth as we started to focus on ensuring our customers were connected with an agent were served well.

And I think you heard about us talk about connections, high-intent customers and the things we've done to drive that and close transactions versus the more ad-based or lead-based gen that we had been prior to '19. I don't know, Brad or Rich, would you add anything to that? I just don't have the data..

Well, it's taken a lot. I guess what I'd say, Ryan, its like strategically, you've been hearing us talk about Zillow 2.0 and the move towards the transaction for a few years, right? And we -- it's taken us this long to get to a point where we could even find the transaction to count, given the diversity of our business model.

And so a big reason we don't have a good historical comp for you on that is that we don't have historical comps.

We have worked really hard to come up with this estimate so that we can -- to communicate to you all for sure, but this is how we want to manage our business and our strategy internally, all right? So this is super important for us to get right internally.

But as Allen pointed out, the history of the company is about slowly but surely driving conversion rates from user in the customer. And now we have what we think it should be a pretty good denominator for that..

That makes sense. A quick second question. Rich, a big picture 1 for you. So after the Zillow wind-down, you're left with a significant amount of cash, you can focus on growth, repurchase stock as you have been, investing in R&D. I guess to focus a bit more on the M&A side of things.

I guess I wonder, how do you think about the opportunity or the possibility to be more active with proptech investments, either directly investing in early-stage proptech startups or outright acquiring companies? I'm just -- I'm almost thinking, is there an opportunity to be somewhat of an incubator? I'm sure you see a lot of interesting tech early in the days as things get started and just wonder how you think big picture about that opportunity or just the M&A opportunity to tack some good tech on over time..

Yes. I mean, it's an opportunity. I would call -- looking at Zillow, our history is that a consistent but opportunistic acquirer, okay? When we see opportunities to really accelerate what we're trying to do strategically, we will take advantage of that. And the ShowingTime acquisition last year is a good example of that.

A couple of years ago when we acquired Mortgage Lenders of America, to get a -- not have a cold start on our mortgage operation, that was another one. Jeremy Hoffman, who runs our corp dev group in addition to strategy and IR, is probably the most popular guy in proptech.

So we talk with, we run tests with, partner with all of these companies in the space. We don't have an explicit incubation venture capital -- kind of corporate venture capital endeavour. We do have a lot of opportunity in that regard.

We don't necessarily think we need to invest because when things want to trade, everything kind of lands on our doorstep first anyway. And I don't want to sound too opportunistic that way, we have really good relationships with these companies, and we think there's a lot of cool innovation happening..

I'll now turn the call back to Rich Barton..

All right. Thank you all for showing up. It is -- as I said at the end of my prepared remarks, it's a really, really fun and entertaining, endlessly interesting industry real estate is, maybe not quite as entertaining as Netflix but not too far off. We're really psyched to be on the journey with you and we'll talk to you soon. Thanks..

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