Good afternoon. My name is Sierra, and I will be your conference operator for today. At this time, I would like to welcome everyone to Zillow Group's Fourth Quarter and Full Year 2023 Conference Call. [Operator Instructions] Please note, this event is being recorded.

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

Thank you. Good afternoon, and welcome to Zillow Group's Fourth Quarter and Full Year 2023 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'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 updated investor presentation, 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. With that, I will turn over the call to Rich..

one, we have the leading audience brand and engagement; two, we have proven technology and product talent that is unrivaled in the real estate industry; three, we have built an extensive, talented and increasingly integrated partner network; and four, we have a strong balance sheet that gives us the flexibility to pursue current and future growth opportunities.

For these reasons, we are uniquely well positioned to transform and replatform the largest industry in the country. We spent the last 2 years building the integrated transaction experience and testing it in enhanced markets.

Now it's time to press down on the accelerator to increase our breadth of coverage across more markets and our depth of penetration in those markets. We made a great deal of progress in 2023. We will make more in 2024. Okay. I've talked about our opportunity and our vision for the future of real estate.

Now I will pass the microphone over to our COO, Jeremy Wacksman, to give you a more detailed progress report and where we are headed..

integrating our services. Doing this requires us to pull together consumer, agent and loan officer technology in one place, Zillow, to create an end-to-end experience that carries the customer through the entire transaction process with more transparency and ease.

It's no small feat, but it's what consumers want, and we're in the best position to deliver it to them. As evidenced by our performance in our earliest 2 enhanced markets, Phoenix and Atlanta, our integrated strategy is working to drive customer transaction share gains.

Since the beginning of 2022, our customer transaction share has grown more than 80%. Additionally, across our entire set of 9 enhanced markets, we are seeing consistent outperformance in connections growth versus the industry. This gives us great confidence to further expand our enhanced market footprint more rapidly in 2024.

As we expand to our projected 40 enhanced markets by the end of 2024, our integration within those markets is going to cover 20% of total Zillow connections by the end of the year. We land in each market with a subset of partner and customer coverage and work to expand our product offerings across the market over time.

We are seeing share gains that will move the needle as we roll out more enhanced markets throughout the year into 2025. I'll wrap up with a progress update on rentals. Rentals is a fast-growing business with a big opportunity in front of it.

Nearly every homebuyer starts out as a renter, and providing our customers with optionality is as important as ever in a challenging housing market. Today, we have the largest audience of renters and the most listings in the market, with limited marketing spend to date.

We're now leveraging our position as traffic leader to grow our multifamily properties, which has accelerated our multifamily revenue growth year-on-year from 14% in Q4 2022 to 52% in Q4 2023.

As we look to serve more of this market and grow revenue, we plan to expand the number of multifamily properties and deliver a superior experience for our rentals partners. Before handing it over to Jeremy Hofmann, I do want to highlight that while we've been building these past few years, we've meaningfully outperformed a challenged housing market.

For full year 2023, Zillow reported over $1.9 billion in revenue, outperforming the real estate industry by 1,600 basis points. I'm grateful to our teams who have been working hard to bring Zillow's housing super app to life over the last 2 years, solving real customer pain points with exceptional tech solutions and partners.

We are looking forward to continued growth in the years ahead. With that, I will now pass the line over to Jeremy..

one, we take on a full quarter of operating costs for Follow Up Boss; two, there is an annual increase in payroll taxes that occurs every Q1; and three, we are staffing up variable headcount for sales given the growth we expect in 2024 from rentals, Listing Showcase and Zillow Home Loans. Moving on to 2024 as a whole.

We want to provide some color for how we expect the year to play out based on the information we have today. First, we are currently assuming that the housing market is relatively flat in aggregate for the year.

With that as a backdrop, we expect to drive double-digit revenue growth for the full year, implying accelerated year-over-year revenue growth throughout the year from the high single digits in Q1 that I've discussed in our outlook.

As we increase the breadth and depth of our products and services throughout the year, we expect our growth pillars will drive the vast majority of the revenue growth across our business in 2024.

More specifically, in our residential revenue category, we expect continued market outperformance as we expand touring, make top-of-funnel improvements, integrate Follow Up Boss into our sales motions and expand the rollout of Listing Showcase.

I will note that we expect the revenue contribution from Follow Up Boss to be a low single-digit percentage of our total company revenue in 2024. In rentals, we expect continued strong growth as we increase our multifamily properties and total listings.

In mortgages, we expect Zillow Home Loans' integration with Premier Agents and our enhanced market expansion to drive meaningful growth.

On the cost side, we 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 with or slightly ahead of revenue initially as we ramp up new hires to be fully productive.

When combining our expected revenue growth and cost discipline, we expect modest EBITDA margin expansion for the full year. Beyond our revenue and EBITDA expenses, share-based compensation expense is an area of focus for us.

We expect the absolute dollars of 2024 share-based compensation expense to be lower than 2023, and we expect to leverage SBC as a percentage of revenue from the combination of lower absolute dollars in SBC expense and projected revenue growth.

Stepping back from our Q4 results, Q1 outlook and 2024 early thoughts, I want to discuss the financial philosophy we have as a company as we execute on our go-forward strategy. As you heard from both Rich and Jeremy, Zillow today is a much different business from what it was several years ago.

Our revenue base has diversified to the point where a majority of our revenue is now derived from sources other than buy side fees. We have growth pillars we are executing against and are excited about, with a $30 billion for sale revenue opportunity accessible in our funnel today.

As we continue to execute on our growth pillars, while controlling fixed costs and gaining leverage on share-based compensation expense, we expect to deliver operating leverage resulting in strong GAAP profitability over time. Beyond our organic investments, we have made several acquisitions to accelerate our growth pillars.

For example, we acquired ShowingTime in 2021, which accelerated our launch of real-time touring. Since then, we acquired 2 real estate media businesses, VRX and Aryeo, to scale ShowingTime+'s Listing Showcase product with both first-party and third-party photographers.

We also acquired Spruce, a tech-enabled title and closing business to add to our housing super app experience over time. And most recently, we acquired Follow Up Boss to create a best-in-class CRM for our Premier Agents and the industry. M&A is not our core strategy.

However, we will continue to pursue selective opportunities when we find ways to accelerate our growth pillars. Beyond our day-to-day operating philosophy, we have been active in deploying capital over the past several years, returning $1.7 billion to shareholders since the beginning of our stock repurchase program in Q4 2021.

And we plan to continue to be opportunistic with the program going forward. Last, we remain focused on retiring our outstanding convertible debt. In 2023, we repurchased a total of $58 million in principal of our 2025 notes. We now have $1.6 billion of convertible senior notes, which we may opportunistically redeem if they become callable.

To close, I'll reiterate what you have heard from us before. 2022 was a year where we restrategized and reorganized around our housing super app vision. 2023 was a year for us to release new products and tests in various markets, setting us up for more depth and more breadth in 2024 and 2025.

We are clearly executing on our strategy and look forward to sharing more updates throughout 2024. And with that, operator, we'll open the line for questions..

[Operator Instructions] Our first question today comes from John Campbell with Stephens..

For the gains, I just wanted to start -- maybe if we could start on the share gains. You guys are obviously using total real estate revenue, I guess, as a basis of comparison versus the industry. I know you guys aren't directly reporting on Premier Agent, but if we can maybe below the surface just isolate that for now.

But my question is, what's the growth initiatives you have in place? And then obviously, the flex pricing changes, would you expect to see a similar rate or maybe even greater degree of outperformance versus the national market just over the balance of the year and maybe even in the next?.

John, this is Jerry Wacksman.

I think the way we think about it is the share gains that we gave out this quarter the 2 most mature markets over that 2-year period helped show the path or what you should expect to see as we roll out more enhanced markets, right? As a reminder, those were the ones where we had great year-over-year data and enough time for the cohort to mature.

And then as I said earlier, the 9 markets that we're in now, we're seeing connections growth that out -- that grows faster than the industry, which is a great leading indicator for share gains. So that's why we're so confident in getting from 9 to what will be 40 by the end of 2024.

And as we build the depth with more partners to offer the services to more customers in those markets, you should expect to see similar share gains from the set of customers and partners that we're working with in those markets..

Okay. That's helpful. And then one quick follow-up. I'm sure you guys are bracing for this question.

But on the CoStar media blitz, if you will, obviously, spending, I guess, we'll find out soon how much this year, but it seems like a lot I think the burning question with a lot of investors is, will you guys respond? Will this be something that requires you guys to maybe up your brand investment spend? Maybe if you could talk to that.

I know you guys have called out the 80% organic traffic, which is a pretty important number, but maybe if you could just shed some light on that?.

Okay, John. Yes, this is Rich. So I guess I'd start off by saying we're not currently seeing any impact from this spend nor the buildup to the spend. As really Jeremy Hofmann discussed, our numbers are great.

Our progress versus our growth pillars is great, and we really like our go-forward growth plan to expand our super app to more markets, as Jeremy Wacksman was just talking about, and all this culminated. Jeremy Hofmann gave his 2024 soft guidance on revenue growth to double digits with this -- with the competitive context in mind.

And so that's how we feel things are going to develop. To your specific question -- or do you think we'll need to change anything? We are a company that believe as we think about our marketing mix, we think about it very broadly. We are technologists in our DNA. We are product builders, the customers our North Star.

We have always believed that the most important part of the marketing mix is the product itself. This has served us really well historically. It is what has put us in the position we are in today of being the traffic leader, the brand leader, the engagement leader.

And it's put us in a strategic position that is highly differentiated from anybody else in the industry. We are really trying to digitize the whole of the transaction. We're trying to replatform this whole industry. We're trying to integrate it all into the same Zillow housing super app. This is difficult stuff.

It is highly differentiated, and we believe this is what ensures that we win long term..

Our next question comes from Brad Erickson with RBC..

I guess just first on real-time touring in the markets where you've had some time to see how it plays and appreciate those charts in the presentation.

What would you say are kind of like the main friction points and then time frame that lie kind of between an agent getting -- starting to get those new higher quality leads and then choosing to lean in with their spend? And then I have a follow-up..

Yes, Brad, on real-time touring, it is a mix of eligibility with both the consumer and the agent and the listing, right? It's like all 3 things. And so we're really pleased with how real-time touring has gone.

And I think you heard earlier, we talked about getting from 10% of connections currently to 20% by the end of 2024, and that's through a mix of going broader into more markets, but also going deeper in those markets with both customers and agents.

And then on your specific question on the sort of agent partnering with the buyer, what we tend to find as we talk about this enhanced market strategy is when we start to work with these enhanced partners on the whole basket of services, real-time touring, Zillow Home Loans, seller services, increasingly Follow Up Boss.

This becomes a much broader conversation around how to help them grow and operate their business better in service of our customers. And so it is one part of the overall playbook we work with. Of course, it's a really important one because these are incredibly high-value, high-intent customers who want to go see a house right now.

And so the feedback on the reception continues to be really positive when they get a chance to work with those buyers. But if you remember, we've talked a lot about how this is a new workflow for those agents as well.

And many times, they have to build new muscle with their teams, with their team leads, with their individual agents to help service those customers to really provide that delightful experience that we're creating for the customers.

So when it works, it's really magical because the consumer gets what they want different from anything else in the industry. But to your point, it really is a new training mechanism, which is why we've been so methodical in testing and iterating on it in the markets we've been in..

Got it. And then maybe just a quick follow-up on Follow Up Boss. Can you just give a little more detail there, just kind of on the unlock of the synergies you guys are going after within the PA business? And then just any integration costs for investment embedded there? Any color on that would be great..

Yes. Maybe I'll start on the strategy, and Jeremy, you can hit costs. The strategy for Follow Up Boss, as Jeremy Hofmann said, is really twofold, right? One, it's help make what is already one of the best CRMs in the industry even better, right, give them oxygen and the ability to accelerate the road map of features and services that they have.

And then secondly, it's to help introduce Follow Up Boss to more customers. So it's already the most popular CRM with our Premier Agents, but many of our Premier Agents don't yet use it. And obviously, many agents industry-wide don't yet use it, so helping them grow and attract more agent customers is the second part.

When we do both those things, that rising tide is going to lift all boats, it's going to lift the Zillow transaction boat, right? And our agents working with the Zillow customers are going to be able to perform better, be more responsive satisfy the customer better and convert more, and you'll see that in conversion increases.

So that's really the strategy. Maybe I'll turn it over to you for cost. The only thing I'll add on cost is we're really excited to help them accelerate their road map. They had great plans in place already and the acquisition just closed in December. So we're still early in our planning..

Yes. It's Jeremy Hofmann. I'll reiterate what Jeremy Wacksman just said. It is early, right? So I highlighted in our prepared remarks, we're having -- we're seeing the first quarter of full cost to Follow Up Boss early in integration.

I wouldn't say that there's outsized investment at this moment, but definitely really pleased with the product road map they have and the opportunity we have to really help them accelerate from here as we integrate them into our sales motions..

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

Okay. Two questions, please. This sort of outperformance, I think you said it was about 700 bps of outperformance versus the residential market. I think you had first guided the 400 bps. So just explain why you think you've been able to outperform.

I know you've been doing it for a while, but maybe you outperformed a little bit more than you had expected in the quarter. And just how should we think about or how do you think about how your level of outperformance versus the market goes into this next year, into '24? And then I want to switch and ask you about costs.

And get back to this question of if you're going to keep fixed costs fixed to this $1.1 billion and variable costs get leverage against it at that $400 million level and how long do you think you can sustain that for. You've been talking about it for a couple of quarters.

It sounds like you're giving in a little bit on the variable cost, showing a little bit of deleverage first before leverage.

But just, is that framework still going to hold for you that you can keep that fixed cost at $1.1 billion and variable at $400 million and getting leverage against that over time?.

Yes. So it's Jeremy Hofmann, Mark. I'll take the second one first. On the cost structure, we feel -- continue to feel really good. So the fixed cost base, we expect to get leverage on over time. We feel like we're at the right levels right now.

It will grow with inflation a bit, but generally at the right levels, and that's really with an eye towards our year-end 2025 targets on customer share gains. And we feel like we're well invested on the fixed side. And then on the variable side, you're right, over time, we will get leverage, of course.

And Listing Showcase, and rentals, and ZHL, we see really exciting growth opportunities, and we're staffing up sales ahead of that. That will take a little bit of time to ramp to get people fully productive, but over time, of course, get leverage there, and we're looking for efficiencies across the entire cost base always. So feel really good there.

And then on the outperformance side, I'd say Q4 was about as expected, and we're really pleased with the outperformance across all of 2023. We don't overfocus on quarter-to-quarter fluctuations, just given how fluid macro has been and will continue to be. But I think 2023 was a great year for us. We accelerated revenue from Q1 to Q4.

Total company revenue outperformed housing by 1,600 basis points. And then we've had 6 straight quarters of outperformance in residential as well. And we expect more of the same in 2024. I alluded to it in my prepared remarks, but we expect to grow double digits in 2024 against the flattish housing market.

And then to double-click further into that, we expect acceleration throughout 2024 with a lot of that acceleration coming from our growth pillars as we get into more markets and go deeper into existing markets. And when I look across our enhanced markets are going to go from 9 to 40, covering 20% of all connections.

Real-time touring, we think, is going to go from 10% of all connections to 20% of all connections. Showcase is really starting to sell broadly in January, and we expect that revenue to build throughout the course of the year. And then rentals is executing really, really well. We're expecting to see 30%-plus growth again in Q1.

And ZHL will grow alongside market expansion and more consumption of mortgage leads. So just across the business, it feels like we're really well set up for 2024 as well..

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

Congrats on the progress. Curious if you can talk about Listing Showcase.

I guess just reception to date between what are Premier Agents and let's call the non-Premier Agents, and I ask because within the slide deck and kind of the opportunity ahead of getting to 5% to 10% share of listings seems to suggest plenty of opportunity, both for Premier Agents and kind of cross-selling the Listing Showcase product and non-Premier Agents.

So anything you can share with us to date. Obviously, knowing it's small at this point in time, but yes, how that's going so far and how you think about that balance and opportunity between kind of cross-selling in the PA side of things versus new agents that don't currently partner with Zillow..

Yes. Happy to. I mean you're right. It is early, and Listing Showcase having just launched in Q3 and we're just now flipping to national. But in the early signal, there's lots of signal. And as I talked about, the agent response has been really positive.

I think folks are seeing it as a tool to market themselves and win more listings as well as market the listings. And then, of course, that provides us benefit to our buyer experience that results in the higher engagement with page view saves and shares, we shared some of the data on.

We are seeing success with both Premier Agents and non-Premier Agents in the markets we've been in and as we've continued to take it to more markets and we expect that to continue.

And that's what gives us excitement for the intermediate-term target we shared with you all going from what is less than 1% of listings today to 5% to 10% of total active listings at some point here in the future. And we think there's growth and opportunity beyond that. Scale in this business requires solving a bunch of operational complexity.

The team has been hard at work doing, as Jeremy Hofmann talked about, it required a bunch of media investments. It requires a bunch of partner operations that the team has worked hard to get right, and we're now benefiting from the fruits of a lot of that investment as we take this nationwide. So it is still early.

We'll share more as we learn from being in more markets with a larger set of partners, but we're really pleased with the response and the progress and the ability to work with just great agents, whether they are existing Premier Agents or this is their way into working with Zillow for the first time is an exciting opportunity for Listing Showcase.

And it's something we're seeing..

That's helpful. And one on ZHL. So the purchase volume growth kind of speaks for itself. But I think it implies market share-wise in the purchase origination business, close to a doubling in just the last 2 quarters alone. So obviously, good progress there.

I guess I'm curious on the comments you made about going from 23% to 53% of customers that are also working with the PA.

Is that a combination of the 2 kind of connection approaches you've talked about in the past being property first and financing first? Is that kind of a mix of both PA coming back to you and you going to PA? And just any commentary on whether it's one of those approaches meaningfully driving things or if it's a combination of both moving in the right direction..

Yes, it's a good question. The short answer to your last question is it's both.

And I think the reason why it's both, it's important to remember sort of why mortgage for the customer and for Zillow, right? And yes, we all know 80% of homes are financed with a mortgage, but it is more importantly that 40% of homebuyers start their journey shopping for a mortgage.

And so that's why we talk so much about most consumers either want to go see the house and book a tour, ideally with real time touring, or they want to figure out what they can afford, which Zillow Home Loans can help them with. Ultimately, they need to go through both those experiences.

And whichever door they start with, they need to use a great agent and they need to get a mortgage to get the house done. And so it really is a contribution of both those things that's driving that 23% to 53%.

And that's why we're so excited about the opportunity to grow and deliver that integration to more customers in more of these enhanced markets as we scale this recipe.

And that really does speak to the strong customer acquisition cost advantage, we think we have at Zillow, the majority of those customers, as Rich talked about, are already on Zillow, and many of them are already going through one of those doors.

And so helping them understand and get what they need to use more of our services to get the house transaction done, right, that's a great business for us. But ultimately, as Rich said, it's what the consumer wants. It's what they need to be able to buy the house. So that's why we're so excited about mortgage.

Yes, you're right, we're seeing over 100% year-over-year growth in purchase mortgage origination volume, and we expect growth to continue in 2024 as we continue to scale the business..

The next question comes from Tom Champion with Piper Sandler..

Rentals growth is really strong, and it sounds like multifamily is driving a lot of that. The business has been around for a while. I'm just curious kind of the timing and why now that it's become kind of so large and picked up so much momentum.

And just curious if there's any comment on the single-room initiative, I think, that was announced recently?.

Yes, Tom, I'll take both of those. I mean I think the why now is just the rental strategy that we've had in place for a while is working and it's working for both consumers and partners.

We've had -- we have grown and have the largest audience in the category where we have the most renters coming to Zillow Group properties because we have the most listings, we have the most complete set of listings, which is really the #1 problem to solve for renters.

And we're able to leverage that audience growth and engagement to really drive multifamily growth and start to work with more multifamily partners to bring their inventory online on to our properties. And that's why we see a lot of growth potential ahead of us for rentals. That's what's driven the meaningful growth throughout 2023.

And as Jeremy Hofmann said, we expect that to continue into 2024. And then you specifically asked about the room for rent.

Again, so for those who didn't see, we launched this week a new listing type, which is folks can post rooms for rent rather than entire places for rent, which is something that is increasingly common and prevalent across a lot of our rental markets. And we're really pleased with the early results there.

We just turned it on in the last couple of weeks.

But that again speaks to the strategy of try and organize and provide the most services and experiences for the renter and all renter personas and segments and then help them figure out which door they need to get through and which subset of inventory they want and that drives then the benefit for our partners, for the folks who are trying to find the right renter, whether that is a big building or an individual single-family home..

Our last question today comes from Ron Josey with Citigroup..

Great. Just a quick follow-up on the rentals question right there.

Just -- when you think about growth going forward, is that from the multifamily property growth of 37,000 and growing or the mix of single-family, multifamily and sort of offering everything to everyone, which given your audience, I'm assuming that's the case, but any insights on those 2? And then I think, Jeremy, you talked about staffing up in head count for sales, and you mentioned rentals and Listing Showcase and Zillow Home Loans.

Talk to us a little bit more about just the maturity of the current sales force and how you -- where you're investing, I guess, across those newer areas like rentals, Showcase and ZHL?.

Yes. Maybe I'll start, and you can hit the staffing. I mean the short answer is it's going to be a mix of both. You're seeing, I would say, over-indexing growth from a revenue contribution standpoint in multifamily right now, but back to the strategy of the most complete set of listings.

We do have both multifamily growth and longer tail, smaller inventory growth in terms of our rental manager and suite of products and services that are landlords and property managers use on that side. So we're excited about both segments of supply driving not just audience growth and engagement but the business over time.

But obviously, in the near term, you're seeing a faster acceleration in ramp on the multifamily side. In Q4, you saw that overindex, and I think you saw it in Q3 as well. And you should expect to see that early into next year as well. And then maybe on the various staff-ups, I don't know if you want....

Yes, I can hit that. I mean I think it's natural at this point just given the evidence of traction that we have that we should be accelerating growth, and it's across all 3 of those. They all are doing quite well but have a lot of opportunity ahead of them.

And we want to make sure we are well positioned from a sales staffing perspective to capture that growth..

This will conclude our Q&A session. So I would like to pass the conference over to Rich for any further remarks..

Thanks, Sierra, and thanks, everybody, for your questions. You've heard today about our tremendous progress that we've made over the past 2 years on our journey to transform and replatform this largest of industries.

As we look ahead, we are pressing down on the accelerator, increasing the breadth and depth of our products and services across more markets as we tap into this $30 billion TAM that's already accessible, already raising their hands for help, already inside our store.

We'd like to thank you again for being on this journey with us, and we look forward to sharing more progress with you in the months ahead. All right. Have a nice evening..

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines..