Steady on the gas: Strong progress in building the 'housing super app'

Today, Zillow reported financial results that exceeded our guidance ranges for total revenue and consolidated Adjusted EBITDA(1) in the third quarter through better-than-expected revenue growth coupled with active cost management.???

Alongside those solid results, this past quarter has been an important one for our product roadmap on our journey to our mid-term targets that we shared with you nine months ago.? As a reminder, we introduced a goal to grow our share of customer transactions from 3% to 6% by the end of 2025(2), oriented around increasing engagement, increasing transactions, and increasing revenue per transaction.

Roadmap to 2025 Customer Transaction Share Target(3)

The path to achieving those targets involves product initiatives within five growth pillars: touring, financing, seller solutions, enhancing our partner network, and integrating our services.? As you’ve heard us talk about, Zillow’s vision of a “housing super app” is to create a single digital experience to help customers across all their real estate needs, including buying, selling, financing and renting — serving as one ecosystem of connected solutions for all the tasks and services related to moving.? Through our many years helping people dream and shop on our apps and sites, we feel confident this experience — one that offers choice, ease and convenience — is what customers want, and we are in a strong position to deliver it to them.?

We’ve heard loud and clear from shareholders that it is critical to understand what metrics and milestones we are most focused on internally, in order to evaluate the company amid a housing market that is as choppy as it has been in decades.?

I’ll spend some time going through what we are seeing in our early data, what I am expecting our team to deliver through the rest of this year and into next year, and why I am confident that our strategy is the right one to grow share as we keep a careful eye on the housing macro.

First on our product roadmap is touring.? Touring is important because we, along with our customers and Premier Agent partners, know the tour is the “point of sale” moment for a customer in the buying journey.

We acquired ShowingTime, the leader in centralized software- and phone-based real estate tour reservation services, just over a year ago to make the touring process more seamless compared to what it is today.? As many agents will tell you, arranging tours can devolve into a painful game of phone tag, coordinating multiple different schedules — juggling availability for the seller, the listing agent, the buyer, and the buyer’s agent — just to step foot in the house.? Our integration roadmap started with going out to all ShowingTime users across agents, brokerages, and multiple listing services, and enabling them to enter availability into ShowingTime so we have real-time availability of sellers and/or listing agents running through our software.? Our bet was that this was a no-brainer feature that would reduce a good chunk of administrative scheduling churn , and, so far, we’ve been correct with this applicability of software.? Already, across more than 300 markets, nearly 90% of ShowingTime industry users have enabled this feature for themselves and their sellers. From there, our next step was to expose this availability on Zillow to reduce the friction that currently exists for our mover-customers in touring homes through Zillow, so that booking a home tour for a home shopper is as seamless as booking a restaurant reservation online.?

I am pleased to announce that, in September, we launched what we’ll call real-time touring capability in Atlanta.? It is early days, but the feedback from customers and Premier Agent partners alike is nearly universally positive, with early data showing increased intent to transact and increased conversion rates.? We feel confident enough in the results we are seeing in Atlanta that we are planning to expand to additional markets throughout 2023.? You can hear the excitement from the Premier Agent partners who are working with customers in this program.? Ross Hester and Barbara Meek of the Hester Group in Atlanta said, “This was the most seamless pilot Zillow has launched, from a tech/user interface perspective, that we have ever been involved with, and we have been waiting a long time for leads of this quality to come in.”?

Rollout of real-time touring will be a market-by-market operation.? Educating our partners on using the system and ensuring that our shared mover-customers have a great experience is important.? So, it will take some time, but given the signal we have seen out of Atlanta, we will press forward with intensity.? Adoption of this product enables a better experience, which we believe will drive more transactions.? Given the size of our brand, audience and engagement throughout the industry, we are well-positioned to deliver this feature at scale, in a way that will benefit the entire industry — because, ultimately, helping the industry be more efficient and removing friction for agents and customers is a win for all.?

The key to having real time touring drive share of customer transaction gains here will be facilitating more successful tours.? Our current successful tour rate on Zillow is roughly 30%.? This means 30% of buyers on Zillow get to see the home they want to tour at the time they requested and 70% do not.? If we are able to increase that successful tour rate, which we think is achievable given this new program, we will see share of customer transaction gains emerge, because our data indicates that successful tours convert to transactions at approximately three times other actions on Zillow today.

The next growth pillar update for this quarter is on enhancing our partner network.? Those of you who have followed us for a long time know we have consistently innovated on our partner network and pricing models to create the best experience for our customers, for our Premier Agent partners, and for Zillow.?

The most recent evolution of our partner network is in flight in one of our key test markets in Raleigh, North Carolina.? We did a few things here earlier this year:? First, we significantly consolidated the number of partners we worked with to enable scalable testing, send more customers to our top-performing partners, and offer our shared customers an improved mortgage product experience.? Second, we have a partner that has created a team solely built to serve Zillow customers in order to provide a much more integrated customer experience.? Now, with a roughly 15% customer adoption rate of Zillow Home Loans in Raleigh, our new approaches to serving Zillow customers in this market give us confidence in our strategy of integrating our mortgage product experience.?

That 15% ZHL adoption rate metric in Raleigh leads us? to our third update on the growth pillar product roadmap, which is financing.? We’ve said it many times before, but it’s worth reiterating that we believe financing is core to a buyer’s experience – all the way from first dreaming about a home, and what one can afford, through to the close of the contract. We see integrating financing as critical to the end-to-end customer experience we envision.? Our previous swings at creating a mortgage business focused on providing financing for our iBuying customers and using Zillow Home Loans for refinancing transactions — neither of which turned out to be durable sources of loan volume — this year we’ve turned our focus toward building the foundation for a substantial direct-to-consumer purchase mortgage operation.??

In addition to improvement of the customer experience when a mortgage is seamlessly integrated, we see a real business opportunity in a large and fragmented market where we are well-positioned to take share over time.? We know that 87% of homebuyers get a purchase mortgage(4), that the top 25 lenders in the country have only about one-third market share of purchase originations combined(5), that industry customer acquisition costs are on average 25% of origination revenue, and the total addressable market for purchase mortgages is more than $50 billion in origination revenue.?

We believe the fragmentation in the space exists for a few reasons:? First, because of the highly regulated nature of the product, manufacturing a loan is a commodity. Additionally there are very few nationally recognized brands, making customer acquisition expensive for most. And finally, distribution requires both meaningful brand power and a network of real estate agents in local communities throughout the country.

Against that backdrop, we see a significant opportunity for Zillow.? We know that roughly 67% of actual homebuyers use Zillow today.? We also know that roughly 40% of all homebuyers begin their journey with financing(6).? Despite fairly limited investment on our apps and sites and in our marketing efforts, millions of prospective Zillow Home Loans customers raised their hands for financing help and were sent to third-party lenders for lead generation in the past 12 months, which provides us ample customer acquisition on small-dollar investments.? And, we have found that roughly 80% of those prospective mortgage customers do not have a real estate agent when they look to us for financing advice(7).? Beyond the built-in brand and distribution we have from being Zillow, we also have a fantastic national network of Premier Agent partners that provides us with a potential distribution channel for Zillow Home Loans as we deliver on behalf of our shared customers.

Of course, we know this big opportunity is merely theoretical without solid execution.? For us to capture share in this market, we are embarking on a few critical workstreams.? First, we need to overhaul and transition our current mortgage funnels away from third-party lead generation, toward being powered by Zillow Home Loans.? Today, we have multiple entry points for customers who need financing on our apps and sites, and those customers are then sent to a wide variety of lenders in our mortgage marketplace.? Those lenders then work with their real estate agent relationships to serve our customers.? Our product roadmap starts with simplifying the entry points in our funnel and being much more explicit that Zillow provides financing through Zillow Home Loans.?

From there, we have four key areas that we have to execute on from now through 2023 to start to capture share.? First, we have to make sure more of our customers are aware we offer financing through Zillow Home Loans.? The term ‘‘Zillow’’ is more often Googled than the term ‘‘real estate,’’ so our overall brand awareness is quite high, but the majority of people on our apps and sites don’t know that they can get a mortgage through Zillow Home Loans.? The combination of the funnel work I outlined before, alongside using our mobile and web platforms to better explain ZHL to customers, should help solve this challenge.?

Next, we have to build a better digital mortgage experience on Zillow so we are meeting customers wherever they are in their journey.? As I’ve said before, millions of people per year contact us about financing help.? In a lead-generation model, volume is the name of the game.? But for a transaction model, we have to get far better at filtering those customers so the customers who have the highest intent are speaking with our loan officers, while those who are years away from purchasing a home are offered nurture services so they stay in our ecosystem until they are ready to buy a home.? Alongside better serving our customer base, we have to bolster our loan officer tools and capabilities so our loan officers can handle the volume and do their jobs more efficiently while we manufacture loans more effectively.?

And last but certainly not least, we need our Premier Agent partner base to understand the value Zillow Home Loans can provide their customers.? This is a combination of technology, service model, and proving to our best partners who are most invested in Zillow, that Zillow Home Loans can provide the best financing experience for our mutual customers.? Our future state is one where customers who start with Zillow Home Loans work with a Premier Agent partner we’ve connected them to, and customers who start with a Premier Agent partner through our touring product are also choosing Zillow Home Loans as their mortgage provider.? Ultimately, the metrics we are measuring ourselves against are the number of purchase loans, loans per loan officer, and Zillow Home Loans customer adoption rate.

Of course, beyond all of the product improvements we are making to the buying experience, we are also innovating rapidly on behalf of sellers and listing agents.? We announced our strategic partnership with Opendoor last quarter, and teams at both companies are working hard to launch the product in Q1 of 2023, with expansion plans outlined throughout next year.? While it will take time to scale the partnership, we believe the combination of the customer signal we saw when operating our iBuying business, alongside Opendoor’s nationwide presence, should allow us to serve a significant number of sellers through a suite of seller services that includes the option of a cash offer or a traditional listing, when at scale.

Additionally, we’re investing in solutions that better equip the more than 1 million real estate agents who use ShowingTime today.? We’ve recently reorganized our real estate software offerings under one umbrella brand called ShowingTime+?.? This brand houses ShowingTime; dotloop; Bridge Interactive; and Rich Media Technology, which includes AI-powered interactive floor plans and 3D home tours.? The ShowingTime+ software suite is designed to help agents and brokers operate their businesses more efficiently, win more customers, and elevate the listing experience for themselves and their clients.?

The long-term problem we are looking to solve is to make the listing process simpler for listing agents.? Listing agents have many jobs to do on behalf of their customers.? They need to win new listings, then manage and market those listings, then coordinate showings, and manage offers and transactions, all before selling the home.??

We start this journey with a number of beloved assets in the real estate community with the ShowingTime+ portfolio I mentioned a moment ago.? And in 2023, we plan to launch Listing Media Services and Listing Showcase, two new listing agent marketing tools from ShowingTime+ to help agents win their next listing.? Listing Media Services is a photography service and comprehensive media package that captures all aspects of a home for agents and gives potential buyers an immersive, digital home shopping experience.? Alongside Listing Media Services is Listing Showcase, which is a complete media and placement package that will showcase the seller’s home with the most cutting-edge, interactive, immersive listing presentations on the internet — and, importantly, will put the listing agent’s brand front and center.? The combination of ShowingTime+’s software capabilities and Zillow’s audience reach and proprietary technologies should allow us to access listing agent wallet share through both software and marketing spend, further broadening our reach within the addressable market we are going after.? We will begin launching the products in early 2023, with additional launches throughout the remainder of the year.? Positive feedback from early demos to agents and investors alike has us excited about the opportunity in front of us.

I’ve spent a lot of time going through all the reasons I am excited about what we’re building — the stuff we have control over.? Of course, the elephant in the room is the state of the housing market, and just how significant the gyrations are to those involved in helping customers move.?

Twelve months later, we feel we made the right decision to wind down our iBuying operations, particularly given how this year has played out, and I am pleased that as of Sept. 30, we have no more inventory on our balance sheet.? That said, we are not immune to the challenges in the housing market right now.? We’ve seen 30-year mortgage rates spike over the past few months and recently surpass 7%, a level that hasn’t been reached in 20 years.? Big weekly swings in rates continue to occur as well.? What this means is that buyers are recalculating what they can afford on the fly, and are uncertain about their ability to purchase — and afford — a home.? This volatility has impacted our funnel, as our connections suffer while buyers decide whether they want to be on or off the sidelines in this current market.?

When coupled with persistently low inventory and continued lackluster flow of new listings, the setup to begin 2023 in housing looks challenged.? With that in mind, we made the difficult but necessary decision to let go of a set of employees, after having let go of about 25% of the company earlier this year during the wind-down of our iBuying operations.? This decision, and the impact it has on people, is not taken lightly by any of us.? That said, we have to be clear-eyed about the market we find ourselves in, so we’ve taken cost actions to streamline our operations and prioritize investments through a combination of this reduction in force, a decrease in committed marketing dollars, and further tightening of discretionary spend.?

While we are actively managing our cost structure, we are still investing against our product roadmap and growth pillars.? We have decided not to cut into our product and technology investments, and in fact continue to hire in these areas, because of the confidence we have in our go-forward product roadmap.? While the housing market is challenged right now, if long-term average turnover rates persist, we would expect 60 million homes to trade hands over the next 10 years, and that’s the basis of the long-term opportunity in front of us.? Additionally, we expect to continue to be active in our repurchase program, given our go-forward opportunity.? We have the benefit of a well-capitalized business that produces operating cash flow, and we are going to use that to our (and shareholders’) advantage.? Having led Expedia through 9/11, Zillow through the financial crisis in 2008 and early COVID in 2020, we have experience staying relatively steady on the gas when others are slamming the brakes.? We are well aware of dangers on the road, but our vehicle is charged up and handling well, and we see opportunity ahead of us.??

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This LinkedIn article is adapted from my remarks to Zillow shareholders on Nov. 2, 2022. For more, visit Zillow Group Investor Relations.?

For more details regarding Zillow Group’s results for Q3 2022, check out our Shareholder Letter.?

Footnotes:

1.? Adjusted EBITDA and segment-level Adjusted EBITDA are non-GAAP financial measures; they are not calculated or presented in accordance with U.S. generally accepted accounting principles, or GAAP.? Please see the section “Adjusted EBITDA” in our shareholder letter for more information about our presentation of Adjusted EBITDA and segment-level Adjusted EBITDA, including a reconciliation to the most directly comparable GAAP financial measure, which is net loss on a consolidated basis and income (loss) from continuing operations before income taxes for each segment, for the relevant period.? Adjusted EBITDA and segment-level Adjusted EBITDA do not reflect the results of discontinued operations.

2.? Please see the section “Use of Operating Metrics” in our shareholder letter for additional information about our calculations of customer transactions and share of customer transactions.

3. The graphic is provided for illustrative purposes to demonstrate one path toward achieving Zillow Group’s 2025 target for share of customer transactions.?

4.? March 2022 National Association of REALTORS? “2022 Home Buyers and Sellers Generational Trends Report”

5.? Consumer Financial Protection Bureau “Data Point: 2021 Mortgage Market Activity and Trends”

6.? Zillow Group internal data and estimates

7.? Zillow Group internal data and estimates

Forward-Looking Statements:?

This post contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, including, without limitation, statements regarding our 2025 targets, the future performance and operation of our business, the current and future health and stability of the residential housing market and economy, volatility of mortgage interest rates, and our expectations regarding future shifts in behavior by consumers and employees. Differences in Zillow Group’s actual results from those described in these forward-looking statements may result from actions taken by Zillow Group as well as from risks and uncertainties beyond Zillow Group’s control. For more information about potential factors that could affect Zillow Group's business and financial results, please review the "Risk Factors" described in Zillow Group's Annual Report on Form 10-K for the year ended Dec. 31, 2021, filed with the Securities and Exchange Commission, or SEC, and in Zillow Group’s other filings with the SEC.