Zillow Group Inc (Z) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Zillow Group First Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. RJ Jones, Vice President of Investor Relations.

Thank you.

Good afternoon, and welcome to Zillow Group's First Quarter 2018 Financial Results Conference Call.

Joining me today to discuss our results are Zillow Group's Chief Executive Officer, Spencer Rascoff; Chief Financial Officer, Kathleen Philips; and Jennifer Rock, Vice President of Financial Reporting, Technical Accounting and FPNA.

During the call, we will make forward-looking statements regarding future financial performance, operations and events.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee these results.

We caution you to consider the risk factors described in our SEC filings, which could cause actual results to differ materially from those in the forward-looking statements made on this call.

The date of this call is May 7, 2018, and forward-looking statements made today are based on assumptions as of this date.

We undertake no obligation to update these statements as a result of new information or future events, except as required by law.

During the call, we will discuss GAAP and non-GAAP measures.

We encourage you to read our financial results press release, which can be found on our Investor Relations website, as it contains important information about our GAAP and non-GAAP results, including reconciliation of non-GAAP financial measures.

In our remarks, the non-GAAP financial measure adjusted EBITDA is referred to as EBITDA, which excludes other income, depreciation and amortization expense, share-based compensation expense, acquisition-related costs, interest expense and income taxes.

We will open up the call with brief remarks followed by live Q&A.

In addition to taking questions from those dialed into the call, we will answer questions asked via Slido.

We encourage you to visit www.slido.com, where you may submit questions by entering the event code #ZEarnings.

On Slido, you may vote on which submitted questions you want us to answer.

This will ensure that we prioritize the questions you consider most important.

You may begin submitting questions and voting now.

This call is being broadcast on the Internet and is available on the Investor Relations section of Zillow Group's website.

A copy of management's prepared remarks, which will not be read during this call, has been posted to the Quarterly Results section of our Investor Relations website.

A recording of the call will be available later today.

I will now turn the call over to Spencer.

Thanks, RJ, and thanks, everyone, for joining us.

By now, we hope you've had a chance to review the press release and the prepared remarks that we posted on the Investor Relations website about an hour ago.

Starting with today's call, we will no longer read the prepared remarks.

Going forward, we'll provide a brief overview of the quarter's highlights and then dedicate the rest of this time to answering your questions.

We hope that you like this change.

We had a great first quarter and are already off to a strong start for the year.

We reported first quarter 2018 revenue of nearly $300 million, which was up 22% year-over-year and driven by growth from our Premier Agent, Rentals and New Construction Marketplaces.

Our Premier Agent revenue and other revenue categories outperformed compared to expectations.

Last month, we announced 2 major initiatives that demonstrate how we are taking our business beyond lead generation, creating better experiences for consumers and further strengthening our partnerships with real estate professionals.

First, we're testing a new lead validation and distribution process to address the significant opportunity in our Premier Agent business.

Second, our participation in the Zillow Instant Offers Marketplace as a buyer and then seller of homes on the open market opens up new and additive business opportunities for Zillow Group.

In 2018, we are taking our biggest swings yet.

We're moving deeper down the funnel to deliver better experiences for consumers and more efficiencies for our industry partners.

We're confident that the changes we're making will drive greater profit and growth for us and our partners.

Our evolution towards strong connections is what consumers, agents, brokers and lenders want and expect.

We are the partner who can help -- best help all parties achieve their home-related goals.

Behind everything we create are our employees doing their best work who, together, form the most innovative, transformative company and welcoming culture.

Our people generate great ideas, take risks and move fast to build the most amazing home shopping experience that consumers will ever find.

Our future is the most exciting that it has ever been.

With that, I'll turn the call over to Kathleen.

Thank you, Spencer.

Before we turn to Q&A, I wanted to call out a few items related to our outlook.

Beginning with our second quarter 2018 earnings announcement, we will report financial results for 2 segments: Internet, Media & Technology, or IMT; and Home.

Today, in addition to presenting our consolidated Zillow Group outlook, we also provided the second quarter and full year outlook for each segment.

We have increased our full year 2018 IMT total revenue outlook since our February 8 earnings report, primarily as a result of an increase in the outlook for our Premier Agent revenue.

In addition, our 2018 IMT outlook for the full year includes an immaterial amount of forecasted incremental revenue associated with our adoption of the new ASC 606 revenue accounting standard.

These increases in our revenue outlook were partially offset by the impact of lowering our mortgage revenue expectations, which also negatively impacted our full year IMT EBITDA outlook.

Further, the immaterial amount of forecasted incremental revenue associated with the new revenue standard does not result in a flow-through to our EBITDA outlook.

If this revenue would have flowed through to EBITDA, we estimate that forecasted EBITDA would have been positively impacted by approximately 20 basis points.

Our IMT segment full year 2018 EBITDA outlook was also negatively impacted by increases in headcount-related expenses, primarily due to larger-than-expected payroll taxes related to employee stock option exercise driven by our increased stock price during the quarter.

In the home segment, we currently forecast holding an estimated 300 to 1,000 homes for resale as of December 31, 2018.

As you can see from our second quarter home segment guidance, we expect to incur expenses related to holding costs, overall corporate expense allocation and other related costs.

We do not anticipate reporting any meaningful home segment revenue during the second quarter since we do not expect to begin selling homes until the third quarter.

We continue to expect our investments in technology and development and advertising to cause quarterly consolidated EBITDA to fluctuate throughout the year.

Consistent with what we told you last quarter, our first, second, third and fourth quarter consolidated EBITDA are expected to represent approximately 15%, 20%, 30% and 35% of the full year total, respectively.

With that, I will turn the call back to Spencer.

Thank you.

Before we jump into Q&A, though, I'd like to just say a few words.

As you likely saw in today's press release, Kathleen is stepping down from her role as CFO and transitioning towards retirement.

I started working with Kathleen when I was 23 years old and then just started my first company, Hotwire.

She was our outside counsel, and she quickly knocked our socks off.

We knew that we had to have her join our team.

We were fortunate to have her as our General Counsel at Hotwire, and a few years later, when she was negotiating the sale of Hotwire to Expedia, she got to know many of the people who would go on to found Zillow.

At the time, Expedia was run by Erik Blachford and Lloyd Frink, and on its board was its founder Rich Barton and its founding Chairman, Greg Maffei.

A few years later, in 2006, these 4 people were on the founding board of Zillow and eyed Kathleen as someone we'd want to help start our next company.

It wasn't until 2010 that I was able to pry Kathleen away from Silicon Valley and get her to join ahead of our IPO.

We needed a whip-smart, level-headed and experienced general counsel to see us through our company's first huge milestone, and she played a pivotal role in our going public.

Kathleen went on to run many parts of the company, including the legal department, the HR department, facilities, customer care, corporate development and more, moving from General Counsel to Chief Operating Officer, and then into the CFO role.

I've worked with Kathleen for most of my professional life, and I'll very much miss her advice and friendship.

I know I speak for the entire company when I say a heartfelt thank you, Kathleen.

You will be missed.

We will open the search for a new CFO.

Jennifer Rock, VP of Financial Reporting, Technical Accounting and FPNA, has agreed to be our Interim CFO and is on the call with us today.

Jen has been with Zillow Group for 7 years and has played a leadership role through the company's IPO, all of our acquisitions and all financial reporting matters.

We're fortunate to have Jen take on this interim role.

Kathleen will continue to act as an adviser to Jen and the financial team and to our legal and corporate development teams for the next 2 years to ensure a smooth transition.

Now Kathleen, Jen and I will open the call up to questions.

(Operator Instructions) Our first question comes from Michael Graham with Canaccord.

Kathleen, congrats on your retirement.

Just 2 quick ones, Spencer.

Can you comment on any particular qualities you might be looking for in the new CFO?

Any particular industry or experience considerations?

And then just on the Homes business, you had a hypothetical metric in the prepared remarks that implies about a 1.5% gross margin there, and I just wondered if you could kind of expand on that.

And within that, just wonder if you could comment on the level of agent commissions you're paying for this product?

Are they sort of on par with industry standards?

Or do you expect to pay something a little lower?

Just any color you can provide on that.

Sure.

So Kathleen leaves very big shoes to fill.

In terms of things that we'll be looking for, for a CFO, somebody that's comfortable in a high-growth environment, somebody that is ideally a sitting CFO of a public company or a division of a much larger public company.

Somebody that has scaled the business and perhaps somebody with transactional experience and capital markets experience given our new business in Homes.

So those are just some of the requirements.

And of course, just a business partner to me and to the rest of the management team, which Kathleen has been for so long.

In terms of the gross margin, yes, I mean, we put in the prepared remarks this illustrative example.

We have kind of 1% to 2% net profit.

I think we put $3,500 as the transactional net profit out of a $250,000 home purchase.

The commissions that we'll be paying are pretty standard for what other investor buyers would pay, those that are at scale in a given city.

Remember, there are different pieces of commission.

There's the commission that we pay when a listing agent brings us a home that we buy, there's the commission that we pay to a Premier Agent when we buy a home, and then there's the commission that we pay to a Premier Agent when we sell the home.

So all those commissions are different.

But we'll be paying commissions that are locally consistent with what other investor buyers pay at scale.

Much more important to the unit economics than the commission is, of course, the other components of the transaction.

So what we pay for the home, what the light remodel is, and what we sell the home for and how long we hold it for, what the debt used in the transaction are.

Those things are actually even bigger determinants of the unit profitability and return on equity than even the commission.

And as I put in the prepared remarks, we think that there's an opportunity for significant return on equity from the homes business, given that we'll be putting 20% to 30% cash down and turning the capital at least 4 times a year.

So that's the math that we walked you through in the prepared remarks.

Our next question comes from Mark Mahaney with RBC Capital Markets.

Two questions.

One, when you think about the direct participation in the Instant Offers Marketplace, how do you think about -- Spencer, how do you think about balancing direct versus indirect?

Like is there an ideal mix between, I guess, 1P and 3P participation in the Instant Offers Marketplace in the future?

And then secondly, when you talk about these 2 newer initiatives on the Premier Agent side, and one is kind of better qualifying leads and then there's -- I guess, My Agent is kind of the new feature.

Is there any evidence so far as to what impact those are having on the Premier Agent business?

Or is it too early to tell?

The strategic focus is clearly on first party, not third party, your 1P/3P reference.

That's where we think we can really create a differentiated offering for a seller and a differentiated offering for a buyer when they're buying a Zillow-owned home.

So that's the focus and that's, of course, the business that we're standing up in a couple of these cities right now, first in Phoenix and then elsewhere.

The -- on the Premier Agent side, the -- there are really 2 things that we've just launched a week or 2 ago.

One is this lead validation effort, where we're following up with a lead on behalf of the agent and confirming when the home shopper is available and interested in talking with an agent.

And then we're calling agents serially so as to ensure that we get a Premier Agent on the phone.

The early data from those 2 initiatives is very good in terms of improving connections off a consumer inquiry.

It's too early to share any of that data, but we like what we see so far.

We'll be rolling it out certainly by the end of the year, but we're going to roll it out as quickly as it makes sense.

So far, we're happy.

Our next question comes from Tom White with D.A. Davidson.

Just another question on the gross profit and gross margin Instant Offers.

Can you talk just a little bit about -- of those things that you enumerated, kind of where do you expect this -- I guess, what's the lowest-hanging fruit, if you will, in terms of where you can drive efficiencies and improve that gross margin over time?

And then you talked about advertiser account growth in the prepared remarks.

Just curious if you plan to invest more in salespeople against adding more small midsized agents or agent teams, just the outlook there.

Sure.

So the -- one of the biggest areas of low-hanging fruit is on the turn time, and let me just try to use an example so you can get a sense of what I mean by this.

I mean, we've talked very hypothetically about how we believe we're advantaged in this space because we have access to home sellers to generate seller demand, and we have access to homebuyers to generate the buyer demand of homes that we own.

But for example, on the first home that we'll be buying, the first home that we signed a purchase sale agreement on last week, there are about 100,000 home shoppers on Zillow and Trulia every day looking at homes in that ZIP Code and the surrounding ZIP Codes.

So 100,000 home shoppers that might be interested in this home that we're going to own in short order.

There are about 5,000 people that have specifically asked us to notify them when homes that match this type of criteria: bed/bath, square footage, ZIP Code, et cetera.

Those 5,000 people are waiting for an e-mail or a push notification that a home like this has come on the market.

And there are about 18 homes that are currently on the market that look like this home that we'll be buying.

So if you're one of those 5,000 home shoppers who has already looked at those 18 homes that are already in the market or you're one of those 100,000 home shoppers that are looking to have -- aren't receiving notifications from us just yet, you are very interested in this home that Zillow is going to own and bring back on the market just a couple weeks later.

So I think the lowest-hanging fruit is to try to bring down that days on market by marketing and pre-marketing homes that we own and will own and also using that demand signal to make us a much smarter bidder on the front end because we know what homes are likely to sell because we know what buyer demand looks like because we operate the largest marketplaces on the buy side.

So that demand signal is very important, a very important input to us on the bidding side.

The other pieces that go into the return metrics are, of course, around the actual renovation and remodel, what we pay, what selling fees are, et cetera.

Those are all clearly important in the model, but certainly, utilizing our unique advantage of seller demand and buyer demand, that's where I'm particularly excited about.

On the Premier Agent side, the question about salespeople.

Yes, we had a fantastic start to the year.

Some of the numbers that are in the prepared remarks speak to this.

I think we talked about the first 4 months being record bookings, advertiser retention rate being at an all-time high and the number of new advertisers coming on in the first 4 months being the highest that we've seen in years.

That was not by accident.

That was through a lot of hard work.

That was by growing the size of the sales team in Q4 and Q1 and by focusing our efforts and also partnering with important brokerages like Realogy and Berkshire Hathaway Home Services with whom we have great partnerships and relationships among many others.

Where we go from here for Premier Agent, obviously, I'm excited about the changes that we've already talked about on lead validation and lead connections.

We think those have huge potential.

And already, 2018 is off to a great start for Premier Agent without the impact of the new Premier Agent changes, which just started a week ago in just one city.

And now we go ahead and roll that out more broadly.

So Premier Agent is looking really strong, and I'm excited for 2018.

Next question please?

Oh, I'm sorry.

Go ahead if you had a follow-up.

I was going to say congrats to Kathleen on the transition to retirement, and thanks a lot.

Thank you very much.

I appreciate it.

Our next question comes from Ron Josey with JMP Securities.

Kathleen, once again, congrats.

Spencer, I had 2 questions around Homes that maybe you can help us better understand maybe just the size here.

And you talked in the letter to that 5 -- what 5% of sales in the market in the U.S. would look like.

But to get there, you clearly need to be in those markets and roll out and obviously get the scale.

So I'm hoping you can help us understand perhaps what types of homes you might be looking for, single-family versus condos, versus townhomes.

Is there a limit or a maximum price you might be willing to bid on?

And then also, in the letter, you talked about, I believe, the equity would decrease over time to 20% to 30% of the home value.

I guess, I would have thought that might be lower as time moves on.

And so can you just give us some insight as to why that's the right amount going forward?

And maybe how you might quarantine that on the balance sheet.

Sure.

Thanks, Ron.

So the typical home that we're bidding on is kind of right down the middle of the strike zone.

So this is something that's the median home value, plus or minus 30% in any city.

We've thrown out the number of $250,000 as pretty much the sweet spot.

Single-family, detached, it's not super luxury, kind of a pretty standard home in the given city that we're in.

The way the housing stocks falls, there are a lot more than 5% of homes that match that criteria.

Obviously, it's the median, so most homes match that criteria.

In terms of the amount of equity, we'll see.

We are currently negotiating with several banks around the debt piece.

The lenders have been extremely interested in this type of product, to say the least.

We haven't -- I don't have anything to announce right now.

Once that gets signed, we'll announce those terms, of course.

As I described the vision of reducing days on market by taking advantage of our buyer demand, you can start to get a sense for how the -- how big the opportunity can get if the days on market comes down because we're essentially pre-marketing a home before we've even bought it perhaps.

And obviously, that speaks directly to the return on equity as well.

So we'll see what the steady-state cash/debt ratio is, but for now, we're kind of modeling 20% to 30%.

And then in terms of how to quarantine on the balance sheet, that debt will be nonrecourse.

So it'll be secured by the homes not by the company.

And obviously, the size of this opportunity is massive and far exceeds our current capital.

And so in order to achieve the types of numbers and potential that we're talking about, we'll have to raise other financing, but that comes much later.

Jen or Kathleen?

No, that was great.

The next question comes from Jason Helfstein with Oppenheimer.

Two questions.

So the first, why did you decide to go into Instant Offers alone versus with a partner?

You had been working with a partner, so whatever you want to comment on that.

And then the second, I mean, the narrative out there is that younger buyers would basically rather rent new than buy old, which fits into the strategy.

Just talk about, if that's the case, how much modernization goes into these houses?

Do you need to have a kind of a full contractor staff in the market you're in?

Just help us understand a little bit more about the magnitude of the local investment.

Sure.

Thanks, Jason.

So I mean, the reason that we're doing this as a first-party buyer is because we think the size of the prize is so significant that we don't want to share it.

We think that -- I mean, the numbers that I laid out of $1 billion profit opportunity on 5% market share we think justifies the investment that we're making.

I do -- I'm sure somebody will ask it, so we'll come back in a bit to how this also bolsters our Premier Agent business, which is not -- an important point not to be missed.

In terms of the renovations, I think -- I want to be clear about this because I think maybe this is a little bit misunderstood.

These are not remodels, the way -- we're not flipping.

This is not a $40,000, $60,000 add a second-story, redo the kitchen.

That's not what this is.

The way to think about this is really a service to the seller.

And I described it in the prepared remarks that way, and that's really how we're thinking about it.

We're basically doing the type of touchups that a seller would otherwise have to do on their own while readying their home for sale.

So this is cleaning carpets, coat of paint, a couple of thousand dollars touchups of the home.

And we can do that more cheaply, of course, than the usual home homeowner because we'll be doing it at scale, but basically, we're just doing the work that was going to be done already.

And we're essentially charging a fee for that work, and that fee is the net profit that we're making on the buying and the selling of the home.

So don't think of it like a full remodel.

Think of it more as touchup.

In terms of demographic demand, we think this product is going to be really attractive to homebuyers.

We already -- we know it will be, and especially in inventory-constrained markets.

One of the other interesting and exciting things about this is that by injecting liquidity into the real estate marketplace, we think we actually can create new transactions and kind of unstick people from their homes.

One of the reasons people don't sell is because they're afraid that there's nothing to buy.

And if we come in and create more liquidity in the marketplace, we think we can help unstick people from their homes.

Our next question comes from Brent Thill with Jefferies.

This is Alex on for Brent.

Just first on the full year guidance for 2018 in the Homes segment.

Can you just discuss the market expansion plans that are baked into that number?

Any color on how many markets you'll be in by year-end?

And then just quickly on the rental side, just anything you could discuss on the recent success you've had adding buildings to that space?

And any color on how big this business can ultimately become 2, 3 years down the road?

Sure.

So on Instant Offers, the 300 to 1,000 homes that we've talked about is -- we can do that in any number of total cities.

We haven't really decided yet exactly how many cities that will be.

You could see us buying more homes in fewer cities or fewer homes in more cities.

I think a decent kind of framework will be 2 to 4 markets by the end of the year, but we'll have to see, of course.

In terms of rentals, we're off to a really good start to the year.

35% revenue growth in Q1.

The new product launches take us deeper down funnel, so moving into applications and payments and moving much closer to this press a button on your smartphone and have magic happen.

That's where -- that's strategically the direction that we've moved with the single-family rentals as well as multifamily.

In terms of how big the rentals industry could be, certainly, we are, in our view, very under-monetized relative to the size of our rental traffic.

Our rental audience, tens of millions of UUs -- I think it's 30-something million -- 35 million rental UUs at $145 million of revenue is very under-monetized relative to other companies with similar amount of renter traffic.

So I'm not going to put a number out there for how big I think rentals could be other than to say a lot bigger than $144 million to $146 million, which is our guidance for the year.

So look for that number to grow in the future.

I'll take a couple of questions from Slido now.

There was one question.

What specifically about the mortgage experience for consumers needed to be changed and what is that new experience being put in place?

Yes.

So let's talk about Mortgages.

Mortgages had a weak quarter, and we guided down in Mortgages for the year.

There are a couple of the reasons for that, a couple reasons in our control, a couple not in our control.

The first that was in our control was essentially we reduced -- think of it as the ad load for a mortgage promotion.

So if you use Zillow or Trulia, you'll see a lot of upsells to go down the mortgage path.

And in order to clean up the user experience and make it a little bit more focused home shopping experience, which, of course, helps the Premier Agent business when we generate more Premier Agent leads and home-buying activity, we reduced the mortgage cross-sell on a number of our brands in a number of places.

And so that had the effect of reducing mortgage traffic, mortgage leads and mortgage revenue.

So that's of our own making.

The other initiative in Mortgages is that we continue to change the business or change the ad product to be more deep funnel, high-quality, lower quantity leads.

And so this product of Connect is the successor to the Custom Quotes product.

Custom Quotes basically lets somebody shop for a mortgage and then click off and sort of wish them well on that handoff to a lender.

And Connect is much more deep funnel, where there's more borrower qualification through software and through manpower, and then handing off that much more validated higher-quality lead to a lender.

As we've rolled out that product in 2018, we have promotional pricing to get it off the ground, which is another way of saying we have effectively a low cost per lead, lower than it should have.

And over time, you'll see that cost per lead go up because the leads are higher quality than the old less-validated ad products, but for now, it's under-monetized as we roll out Connect.

And then number three, out of our control is mortgage rates continue to go up.

And of course, that hurts our refi business, which is a relatively small part of the total business but we shouldn't -- mortgage rates clearly have at least some impact on our mortgage business.

So those are some changes to Mortgages.

Next question from Slido, I will give to Kathleen or Jen, which is, Kathleen, why is the full year IMT EBITDA margin guidance changed?

Great.

So thank you, Spencer.

So a number of things impacted the full year guidance.

We had some unanticipated pressure on EBITDA in Q1 for a couple of reasons.

First, the impact of the miss on the Mortgages outlook unfortunately impacted EBITDA.

Second, unexpectedly high payroll tax expense and other related headcount expenses, but primarily payroll tax because we had unanticipated levels of stock option exercises in Q1 by employees due to the strong stock price.

I'd like to put that in context a little bit because, as a reminder, we talked about this periodically, the bulk of the way we compensate our employees is -- are through vesting stock options and RSUs.

We think this is the right thing to do for the company and for our shareholders because it aligns employee incentives with our shareholders.

With the strong stock price, we're seeing employees finally benefit from the tremendous work they've been doing over the vesting period and beyond for their options, so we saw an unexpectedly high level of exercises there.

Another impact, as we noted in the prepared remarks, was the impact of ASC 606 on EBITDA that reduced EBITDA by about 20 basis points due to the new approach with the accounting for commissions.

Next question from Slido is about the Premier Agent experience in New York, including on StreetEasy.

So I think -- I'm not sure 100% I understand the question -- what the questioner was getting at.

I think it's regarding kind of how the Premier Agent process is performing in New York.

So everything that we've been talking about with Premier Agent is consistent with how we're approaching New York.

It's -- just with the addition that Premier Agent in New York is StreetEasy, Trulia, Zillow and RealEstate.com rather than just those other 3 brands outside of New York.

So the Premier Agent business in New York is doing great.

The features like My Agent and the changes to the Premier Agent lead distribution model that I've just talked about will be coming to New York just like they're coming to every city in the country.

Of course, we're only up in a couple of cities right now.

Is that the nature of the New York question, or is it...

It's what it sounded like.

Okay.

Whoever asked that New York question, if there's another follow-up, please feel free to post again on Slido or just ask a question on the call.

Okay.

There's another question through Slido, and I think maybe on social media also about the head tax in Seattle.

So for those not totally familiar with this, there's a proposal at the Seattle City Council to -- for companies with more than, I think, it's $20 million of revenue to have a $500 per employee head tax, which would then phase into a payroll tax in a couple of years.

And this new tax would be to address homelessness and housing affordability.

This is a tricky one for us, obviously.

Homelessness and housing affordability is something that we understand deeply at this company and care deeply about.

In fact, it's been the focus of our philanthropic efforts.

Something called the Home Project is our philanthropic initiative to address homelessness and housing insecurity.

That having been said, the proposed Seattle head tax, we think, is misguided and too blunt an instrument.

The impact on us, as currently proposed, would be somewhere between $1 million and maybe up to $4 million a year a couple years from now.

And we are actively trying to decide where to put the next couple hundred heads.

And this is the type of thing that causes us to consider looking at putting that expansion in other cities where we have large presences, cities like Phoenix; Denver; Irvine; Cincinnati; Lincoln, Nebraska and others.

So we'll see.

Hopefully, the city council or the mayor's office and the Seattle business community can work together to find other solutions to address housing affordability and homelessness, which are real issues, obviously, in Seattle and in most major cities.

Okay.

Next question.

I think we'll go back to the call.

Are there questions on the call, RJ?

Yes.

Okay.

Operator, next question please?

Our next question comes from Mark May with Citi.

Two questions, please.

One on Homes.

As you laid out in the shareholder letter, the opportunity here is potentially quite sizable.

But if I understand it correctly, it could be even more so if you're able to capture some or all of the selling -- seller commission.

And like you mentioned, you guys know where a lot of the potential buyers are.

So I guess, the question is do you think that Zillow has an opportunity down the road to capture some or all of that part of the equation as well?

And I also had a question on the lead optimization product as well, but as a follow-up.

Sure.

So if -- I mean, I guess, the way that we will benefit from the demand side of the funnel is by selling these homes quickly and at a high price or higher price than if we didn't have access to the demand.

We will also benefit from having the demand side of the marketplace by a being a smarter bidder on the homes that we're buying.

The other piece of this, I would just actually read from the shareholder letter because I think it sort of nails what I'm getting at here.

I wrote, "In addition, Instant Offers strengthens our Premier Agent business by delivering validated seller leads on the homes we don't buy, paying Premier Agent commissions on the homes we do buy, generating potential mortgage revenue on the homes we sell and creating an amazing experience for consumers who sell to us and buy from us." So in a nutshell, that's the -- that's why Homes -- that's why Instant Offers is interesting and exciting.

We think there's a huge opportunity in the Homes business itself, and we think it's incredibly additive to the Premier Agent business and IMT.

Mark, what was the next question on the Premier Agent business?

On lead validation.

I was just trying to understand the mechanics of how you'll look to roll this out.

Like what -- are you going to just -- are all leads, at some point in time in the near future, going to go through this validation process?

If not, how do you select which of the leads are validated?

Just trying to understand the execution or rollout strategy for this.

Sure.

So we started in one city in Montana 2 weeks ago, running leads through this system.

It worked flawlessly.

We then expanded for the rest of Montana, and then we have expanded to a couple of states since then.

And so we'll go state-by-state until by the end of the year, every lead of every Premier Agent and all consumers will go through this lead-validation process and lead distribution process to Premier Agent.

And this is a similar rollout process that we've gone through, the 2x before that we've made big changes like this to the Premier Agent business, the shift to market-based pricing and other big changes that we made to Premier Agent.

This is how we've always rolled them out in the past.

And as you know, from having been around the story for a long time, when things are going well with these types of rollouts, we tend to accelerate it more quickly than our initial conservative guidance.

And for now, it's going well so far, and we're promising to have it done by the end of the year.

The early results look great.

And at a high level, I assume, one of the things that this does is reduce the number of qualified leads that you're handing off but increases the average price you're able to charge.

Can you give us a sense of, like in Montana, what those -- the impacts are?

Like how much has it reduced the volume but increased the price?

So it doesn't necessarily reduce the volume.

Here, let me explain why.

I mean, sometimes it does, and sometimes it doesn't.

In the old world, when a consumer wanted to see a home, they would e-mail a real estate agent, e-mail a Premier Agent, and the e-mail would sit in that agent's inbox.

In the new world, the home shopper e-mails that real estate agent and Zillow Group contacts that consumer and -- by text, e-mail and over the phone.

Now frequently, that consumer is not actually ready to talk an agent.

They just had a question about the home.

They were just kind of up funnel, if you will.

At that -- in the old world, that lead dies on the vine because the agent typically doesn't do anything to incubate that home shopper.

In the new world, we maintain that relationship with that home shopper until she's ready to contact an agent.

So then when the consumer is ready to talk to an agent, whether it's right away or 6 weeks later, then at that point, we call Premier Agent 1, Premier Agent 2, Premier Agent 3. So it is a very significant change to how leads become -- or how consumer inquiries become, at the very bottom of the funnel, commissions.

And so you got to take these 2 pieces together, lead validation piece and then the lead disposition piece.

In terms of the early results, I'll just say it's dramatically improving the live connection rate.

The chances of getting an actual real estate agent on the phone are significantly higher when you call agents in this method.

And on the incubation or validation piece, it's early because some of these (inaudible) 2 weeks, so we don't have good incubation data, but we are optimistic that it will also generate more contacts down funnel when the consumer is ready to actually talk to an agent a couple weeks or months later.

So there is a question from Slido.

I'll take it.

It says, can you give us a sense of how accurate Zillow's valuation estimates need to be in a given market for direct participation to be viable such as a target margin of error?

Can you share any statistics on Zestimates versus observed close prices in Phoenix?

I mean, so I've looked at every offer that we've made so far, and the Zestimates and the offer prices are very close, like -- there's no question that Zestimates are very accurate in this part of the market.

On homes like this, Zestimates are very accurate.

So they're close to each other.

How will you charge for seller leads when a homebuyer declines a Zillow Instant Offer?

Great question.

So today, we're passing these seller leads -- or really, the request for a comparative market analysis to our partners at Realogy and Berkshire Hathaway and their local franchise affiliates and other brokerages that we're working with.

And we're doing that gratis.

We're learning from that.

We're seeing how agents win those listings, we're getting a better understanding of the funnel.

Eventually, this, we believe, will become a large listing lead generation business, which will benefit IMT on the Premier Agent side.

We aren't ready to announce how we'll actually monetize that, whether it will be through the Seller Boost ad products, where we already sell an ad product that generates listing leads on not-for-sale homes, whether it will be a brand-new product, whether it be sold at auction, through the agents, through brokerages, et cetera.

There are a lot of ways that we can monetize this.

But if you just look at the data that we have on our funnel of how much consumer demand there is for Instant Offers, we know that we can build a big business that generates listing lead opportunities for agents and brokers from Instant Offers.

Next question comes from Brad Erickson with KeyBanc Capital Markets.

Just had a couple here.

I guess, just following on that last question.

Are you seeing any changes in the Premier Agent business in Phoenix and Vegas that you can call out since you voiced your public intent to go into those markets?

I haven't -- actually, I haven't actually looked at Premier Agent bookings data.

I can tell you that -- and I put it in the shareholder letter -- the agent reaction to the announcement has been extremely enthusiastic.

I think I mentioned we have 1,600 agents and dozens of brokerages that are on waitlist to participate when we take Instant Offers to their cities.

We've done now about 30, I think, in-market meetings in many major cities where we have discussed Instant Offers and the changes to the Premier Agent business in detail with hundreds of local agents.

So we've probably talked in person to, I don't know, thousands, maybe even more than 10,000 agents in the last 3 weeks.

And the overall reaction to Instant Offers has been fantastic.

So it wouldn't surprise me if bookings in Phoenix -- Premier Agent bookings are up, but to be honest, I haven't observed that personally.

Got it.

That's helpful.

And then Kathleen, just on the guidance, seems like the losses related Homes is maybe a little bit lower than when we chatted mid-April.

Does that reflect maybe a few fewer cities going into this year?

Was there are some other change from the last time we chatted?

No.

It's -- they're the same underlying assumptions in terms of the rollout of the product, still focusing on that.

And I realize it's a big range, but the 300 to 1,000 homes held at the end of the year.

One thing that we have refined is allocation of some of our costs into the Homes segment.

And that's going to continue to be a work in progress as we continue to operate this business and see how much employees are spending time on both products such that some of that cost associated with those services would be allocated to the Homes segment versus IMT.

But in terms of rollout, to answer your specific questions, no, the assumptions are the same.

Got it.

So just to clarify that, I think on the last call, you had said 10 to 15 -- correct me if I'm wrong, was $10 million to $15 million of EBITDA investment effectively that was contemplated in the original full year guidance for homes, but obviously, that was prior to announcing it.

Is that right?

I think that the $15 million to $20 million that we signaled was actually the expenses that we expected to allocate into the Homes segment.

It wasn't a reference to the EBITDA.

And we ended up in that range in terms of the allocation, but as I said, it will continue to be a work in progress.

So you'll see some variations in that as we move through the year and through the implementation.

Our next question comes from Heath Terry with Goldman Sachs.

I was a bit surprised to see the guidance for Homes in Q2 just given that you've been testing this for a while.

Is the guidance that you gave sort of absent of that testing?

Or is it really that the testing was so small that it effectively rounds to 0 in the second quarter?

And then Spencer, on the featured listing side of things -- you know, that -- we always talked about this before, always seems like a big opportunity, use the real estate that you have in the sort results for home search.

Any reason that we're not seeing that progress further or limitations that you can talk about there?

Yes, great question.

So firstly, just on the Q2 question.

It's not in the Q2 revenue because we only book revenue when we sell, and we're not forecasting that we'll have sold anything in Q2.

We will have bought homes in Q2, but they won't have come out the other end and already sold in Q2.

So the other question is about merchandising Zillow-owned listings, is sort of a lay-up for me, which is why I'm laughing because it's the other benefit from moving into Instant Offers -- is that we will get really good merchandising particular listings and helping to move that product.

And we expect that we will productize that type of merchandising and it will probably, over time, become a listing promotion product, sort of like our Premier Agent Direct product today but even more effective.

We've seen companies in other countries, of course, get really good at merchandising certain types of paid listings, and we will be following that lead with our own inventory, and then probably over time, productize this and make it available as an ad product for listing agents.

Our next question comes from Jon Lanterman with Morgan Stanley.

Just a question on My Agent.

You rolled it out late last year and had positive things to say last quarter.

Any update here with 3 more months under your belt?

And then on G&A spend, it was down sequentially just a little bit.

Anything that drove kind of savings here?

Jen will take the G&A one.

I'll do My Agent real quick.

So My Agent is doing great.

We have thousands of agents connected.

Actually, maybe it's more than that, maybe it's tens of thousands now, that -- and in those connections, we see higher retention among those advertisers and we see higher connection rates with their home shoppers.

And therefore, we infer higher ROI from that ad spend.

We run tens of thousands of leads through My Agent now, which are tens of thousands of leads that otherwise would have gone to non-connected agents and have been impossible to convert for those agents.

So we're excited about My Agent.

It's part of the whole Premier Agent stack, and it connects beautifully with the way the per agent app works and the new lead distribution method serially to multiple agents in order to ensure connection.

Jen, on G&A in the quarter?

Sure, so comparing to Q1 of last year, we did have an increase in G&A of about $10.6 million.

Comparing to Q4, I would say there's nothing super notable, perhaps just small decreases in legal costs.

With regards to the IMT segment, in particular, you would see G&A come down just a touch because of costs being shifted to the Homes segment.

But I would say there's nothing else notable.

Our next question comes from the line of Lloyd Walmsley with Deutsche Bank.

Two, if I can.

First, just on the Homes space.

There's some pretty well-capitalized private players.

Wondering if you can just comment on kind of how you view competition in the space broadly, and if it might make sense to invest more aggressively to get into more markets and get ahead of the competition.

And then second one, following up on Ron's question from earlier.

If you kind of look at the true addressable market, maybe stripping out home values that you're not going to be bidding on or regional areas that don't make sense, any rough sense of what percent of the addressable market you guys really can attack with the new model?

And maybe you could walk us through kind of the funnel as you narrow down the market based on key attributes you're looking for.

Any color there would be helpful.

Sure.

Thanks, Lloyd.

So obviously, we're moving with urgency against this opportunity, not for competitive reasons, but because we think the opportunity is that large and it merits it.

We have a huge advantage because we have consumer audience in every city in the country.

So we're going to move as quickly as we can, but we're also going to move prudently.

And we're off to a good start.

We're now -- we're running at it very, very quickly.

And I think importantly, it strengthens the core business.

So I'm not worried about cannibalization.

In fact, the faster we can roll it out, the more successful we can make the Homes segment, the more it will strengthen and improve the Premier Agent business.

So those are just some thoughts on competition.

In terms of addressable market, again, we really -- we don't know because we're helping to create a new service here.

Now we believe that the service is appealing to a lot of people.

What we learned from a year of testing the marketplace model is that a lot of homeowners are very interested in comparing a hassle-free, highly certain sale process with a traditional longer lead time, uncertain sale process.

And being able to compare those 2 is really eye opening for homeowners.

So we think the addressable market is much larger than the homes out there that are able to be addressed by a traditional home flipper, homes that can be bought in a distressed situation, need a lot of work.

I mean, that's not what this is.

We think this is a service that's appealing to most home sellers.

Really, almost every home seller is faced with this type of effort.

And now we're not going to -- I don't foresee a situation where we're bidding on homes that are more than $1 million or very unusual or very unique.

So it probably can't be 100% of the market that is addressable.

But I do think it's a lot more addressable than a typical flipper might look at it because of the way we're thinking about the service.

Our next question comes from Tom Champion with Cowen.

Thanks for the color on unit economics related to Instant Offers.

I'm just curious if you're monetizing Instant Offers at all today.

Is there an opportunity to earn a fee when you're not the ultimate buyer?

Or does this aspect of Instant Offers go away?

And then Spencer, maybe taking a step back, I'm curious if you could comment on the market which is characterized as supply constrained.

How does this relate to the Premier Agent business, if at all?

Yes.

So today, we're not monetizing homes that we either choose not to buy or homes that we bid on and the home seller chooses to turn down our offer.

In the future, there'll be 3 forms of monetization from Instant Offers, in addition to the Homes segment's monetization of buying and selling homes.

Those are: listing lead generation, which will directly feed into the Premier Agent business; mortgage revenue, which will directly feed into our IMT business.

That's mortgage origination and advertising revenue from homes that we sell; and number three, I -- and this is more speculative, but I suspect that the merchandising that we'll be doing on Zillow-owned homes will become a paid platform, paid ad product for listing agents to promote their own listings as we get better at figuring out how to merchandise a home.

Think back to the beginning of the call when I said on the first home that we're buying, there are 100,000 daily people visiting Zillow and Trulia in -- that are interested in that home, 5,000 of whom get e-mails when new listings match, and there are 18 homes that are on the market that are similar to that listing.

Imagine if you were a listing agent in that market with one of those 18 homes or maybe the 19th home, how much would you pay to get that home in front of the 5,000 home shoppers that get listing alerts for homes like that or to make sure that the 100,000 people on Zillow and Trulia that are looking every day at homes like that to make sure that they see your home?

I think you'd probably pay a lot.

And Zillow-owned homes will, of course, benefit from that, but I think that can become an ad product over time, too.

The second part of your question was about housing inventory.

And housing inventory is very, very constrained.

There are many markets in the country where we're at record-low inventory levels of less than a month.

And as I said, we think Instant Offers has the potential to create new inventory to unstick people from their homes by giving them a certain sale, and that creates new inventory, which we can then bring onto the market.

In terms of how housing inventory -- low housing inventory levels are impacting the Premier Agent business, we haven't seen it impact the Premier Agent business -- I mean, directly.

I know it's in there somewhere in a couple of ways.

So when a Premier Agent gets a buyer lead, it's harder for them to earn a commission check because there are fewer homes for that buyer to buy, and so that agent needs to work harder and longer with that buyer before generating a commission.

On the other hand, when an agent gets a listing lead from us, that listing sells more quickly.

So that's a more quick and certain commission than ever before because of low inventory.

So there's some puts and takes, and it's really hard to know what impact inventory levels has on the Premier Agent business.

I guess, the other benefit would be agents feel flush because agents are doing great.

And when agents feel flush, they tend to buy more advertising.

So there are puts and takes on low inventory levels.

I think, operator, maybe one more call or -- we're done?

Okay.

So thank you.

Kathleen, thank you for your immense contributions to Zillow Group.

You will be missed.

And I know you won't be far, though.

This is an innovative time for us.

There are a lot of exciting changes to the Premier Agent business.

Instant Offers opens up a huge market opportunity for us.

The Premier Agent business, Rentals and New Construction are all killing it and off to a great start for 2018.

Thank you, investors, shareholders, analysts for not asking any boring or boneheaded questions.

I appreciate that, and I look forward to talking to you on the next call.

Thanks a lot.

Thank you, everyone.

This concludes today's call.

Thank you for your participation.

Have a wonderful day.

You may all disconnect.