Zillow Group 2018 Shareholder Letter

April 11, 2018

Dear Fellow Shareholders,

I’ve looked forward to writing this letter every year since going public in 2011. It gives me the opportunity to review my thoughts on where we are on our journey and share our vision for Zillow Group’s future – one that I’m very excited about.

Like I start every Zillow Group all-employee meeting, I’ll begin here by stating our mission and core values. Rituals like these reinforce the primacy of our mission and our expectation around employee behavior.

Our mission:

Build the largest, most trusted and vibrant home-related marketplace in the world.

Along with being mission-centric, we act according to our six core values:

Own It

Act with Integrity

Move Fast, Think Big

ZG is a Team Sport

Turn on the Lights

Winning is Fun

Our mission and core values provide the framework for our exceptional company culture, which attracts and retains incredible people and motivates them to do their best work to build Zillow Group to its full potential. 

***

First, let’s take a look back:

2017 was a momentous year for Zillow Group. We achieved record mobile and web traffic, we exceeded $1 billion in annual revenue, and we maintained our superior company culture even as we significantly scaled the size of our team to more than 3,000 employees.

To get to this point, we have been executing on four strategic priorities over the past two years:

1.      Grow our audience size and increase engagement.

2.      Grow our Premier Agent business.

3.      Grow our emerging marketplaces.

4.      Attract and retain the best talent and maintain Zillow Group’s unique company culture focused on innovation. 

Our execution for each strategic priority in 2017 was excellent.

First, our average monthly audience across Zillow Group’s mobile apps and websites peaked at over 187 million unique users in July 2017, up from our peak of 171 million in May of last year. Traffic surpassed 100 million unique users on the Zillow brand every month of the year. We also received 6.3 billion visits, up 19 percent from 2016, which, for perspective, is over 200 consumer engagements per second. 

Next, the results in our Premier Agent business this past year were excellent; our annual revenues exceeded $760 million, up from $604 million in 2016. This is especially significant because we completed our first year on the new auction-based pricing system, our latest iteration on our Premier Agent business model. We took a big swing by switching to a pricing method that took us more than seven years to perfect, and it turned out to be a great long-term, strategic decision.     

Supporting the success of the Premier Agent business, our relationships with our industry partners continued to strengthen. At the end of 2017 we were working with almost 700 multiple listing services to help them and their members market their clients’ home-for-sale listings online. With our dotloop paperless transaction technology being rapidly adopted by brokerages and agents across the country, we believe dotloop supported over one-third of the residential real estate transactions in the U.S.   

All of these efforts have produced our intended result: more transactions and commissions for our Premier Agents and Brokers. In 2017, we estimate the transaction value for homes in the U.S. was approximately $1.8 trillion. We estimate Premier Agents and Brokers earned roughly $6.5 billion in commissions[1] from contacts that originated on the Zillow Group platform. We believe this represents about 7.5 percent[2] of the $87 billion total real estate agent commissions paid in the U.S. in 2017[3]. That’s still a small percentage of the total, but nearly a 50 percent increase from 2016, when contacts from Zillow Group drove an estimated $4.4 billion[4], or about 5 percent of all commissions[5].

Outside of real estate agent advertising, our emerging marketplaces also performed well in 2017. Our Rentals marketplace exited the year as our second largest marketplace; our Mortgages marketplace successfully grew despite a rising rate environment; our New Construction marketplace became our fastest growing business. And in New York City, we successfully launched two new monetization initiatives by joining Premier Agent with for-sale listings and implementing rentals listings paid inclusion across our NYC Rentals Network.  

Finally, our culture continues to distinguish itself within the tech and corporate landscape. Zillow Group was named one of Glassdoor’s Best Places to Work in the U.S. for the fifth consecutive year; Fortune ranked Zillow Group #6 on its Best Workplaces in Technology list, and we were named one of America’s Most JUST companies by Forbes and JUST Capital, amongst many other accolades in our local offices. Additionally, we were selected to be a part of the inaugural 2018 Bloomberg Gender-Equality Index and were one of only seven tech companies selected. Zillow Group’s leadership and company culture give us a sustainable advantage. I am proud of our people, our policies and our practices that have helped us create a work environment that encourages equity and belonging, where people feel they can be themselves, contribute their best work, and further our mission.

***

Next, let’s take a look at the present.

We have assembled an extraordinary company at Zillow Group. If we were to break out our 12-year history into versions, it might look something like this:

?      1.0: Turn On The Lights

?     Zillow.com launches minimum viable product to attract audience. The new age of transparency in the industry to benefit consumers begins with the arrival of Zillow and the Zestimate.  

?      2.0: Mo’ mobile

?     Expand audience leadership into the mobile era, with dozens of leading apps on smartphones, tablets, and mobile web.

?      3.0: Zillow Group rises

?     Connect growing, consolidated audience with professionals across home-related marketplaces through innovative advertising products. Launch mortgages, rentals, and new construction marketplaces. Transform the company through multiple acquisitions, including consumer facing brands Trulia, HotPads and StreetEasy.  

?      4.0: Deeper integration into real estate industry

?     Iterate on our business models while building and deploying leading technology at scale for the industry. Launch the Premier Agent App and auction-based pricing, partner with brokerages and MLSs, and grow industry usage of transaction management software, dotloop.  

We combine people, companies, brands, data and technology into one entity to serve a dual-sided marketplace of real estate consumers and professionals. That’s unique, and a few crucial characteristics make it work:

?      Keeping the consumer as our “North Star”– We are truly consumer-obsessed. We constantly ask ourselves how we can make things better for the consumer in the process of buying, selling, renting, financing or owning a home. 

?      A rapid iteration capability at scale – We tear down and rebuild deliberately and strategically. When it comes to features, products, business models and markets, nothing is off limits for change. We are infinite learners with a “growth mindset” who assimilate the value of what we learn from our users into our next products and features.

?      A technology and data enabled platform – We leverage our technology, talent and living database of 110 million homes to build things that were once thought to be impossible – quickly. We ship new features to consumers and professionals across our brands daily. Our tempo is relentless and exciting. 

?      A team-sport core value – We organize ourselves as a horizontal matrix of cross-functional teams to accomplish our mission. Priorities, communication and resources all synchronize in action. We avoid layers, promote transparency and prioritize speed. At Zillow Group, the MVP awards go to the players with the most assists, not the most points.

?      A culture of empowerment – Our people and our culture are exceptional. Our reputation as an employer is one of a welcoming, rewarding, diverse and inclusive environment. Over 95 percent of our employees would recommend that a friend come to work with us and 80 percent plan to work for us for at least the next 2 years – record-setting levels of employee engagement among tech companies. Our core values enable distributed decision-making by our employees throughout the company in pursuit of our mission. Our leadership principles emphasize serving others, removing obstacles and sharing vision and information.    

As a shareholder, you own the most nimble and advanced innovation engine in real estate.

***

Now, let’s look ahead.

2018 is on track to be the most exciting year of our existence. 

We are about to go further with our model than any of us had previously imagined. The next phase of our evolution is moving beyond advertising and lead generation, toward being what we call a “deeper funnel” partner to the real estate industry – one that helps consumers and professionals in the transaction. We have become an essential resource for consumers during the home shopping process: nearly 4 out of 5 buyers are shopping for their home online today. Many of them expect more seamless services down the funnel from us, whether buying, selling, financing or renting a home. Moving from leads into experiences is Zillow Group 5.0, and we’ve recast our 4 strategic priorities for 2018 as we move into this next phase:

1.      Grow our audience size and increase engagement across all brands – including launching new brands and into new geographies.

2.      Create better experiences for consumers and more efficiency for our real estate industry partners, as we accompany home shoppers further down the funnel and closer to the transaction.

3.      Evolve our revenue models in each marketplace to better align our results with transactions and our industry partners’ revenue at the bottom of the funnel.

4.      Attract and retain the best talent and leverage Zillow Group’s unique company culture focused on innovation as a competitive advantage.

The opportunity in front of us is enormous. As we expand beyond merely selling ads, the size of the opportunity ahead becomes ever-larger. U.S. residential real estate generates an estimated $1.8 trillion in home transaction value, $1.7 trillion in residential mortgage originations and nearly $500 billion in annual rent payments each year. These figures are now more relevant as we move toward providing an end-to-end solution for consumers across our home-related marketplace with revenue models that align our success with that of our industry partners. We are sailing on massive oceans of economic opportunity. The more home-related transactions that can flow across our platform, the more valuable we become.  

Thank you for supporting Zillow Group as a shareholder. Every Zillow Group employee is also an equity holder, and we are all aligned in achieving long-term stock price appreciation. You play an integral role in helping us accomplish our mission, in which we are still very early days. We are more excited about our future today than ever before. We appreciate your partnership and will work hard every day to grow the value of Zillow Group over the long term.

Sincerely,

Spencer Rascoff, CEO

Email: [email protected]

[1] Zillow Group internal estimate (2017 total industry commissions, REAL Trends / total leads to Premier Agents)

[2] Zillow Group internal estimate (total transactions attributable to ZG / total industry transactions, National Association of REALTORS? 2017)

[3] Zillow Group internal estimate (total new and existing homes sold, National Association of REALTORS? 2017 x average agent commissions, REAL Trends)

[4] Zillow Group internal estimate (2016 total industry commissions, REAL Trends / total leads to Premier Agents)

[5] Zillow Group internal estimate (total transactions attributable to ZG / total industry transactions, National Association of REALTORS? 2016)