Zillow Group Inc

NASDAQ:ZG

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon and welcome to the Zillow Group First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to RJ Jones, Vice President, Investor Relations. Please go ahead.

[Raymond Jones, executive]

Thank you. Good afternoon and welcome to Zillow Group's First Quarter 2019 Financial Results Conference Call. Joining me today to discuss our results are Zillow Group's Co-Founder and CEO, Rich Barton; CFO, Allen Parker; Zillow Brand President and Co-Head of Zillow Offers, Jeremy Wacksman; and President of Media and Marketplaces, Greg Schwartz.

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 9, 2019, 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. This call is being broadcast on the Internet and is accessible through the Investor Relations section of Zillow Group's website. A recording of the call will be available later today.

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 historical 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 have posted our quarterly shareholder letter and financial tables on our Investor Relations website. We will open the call with brief remarks, followed by live Q&A.

I will now turn the call over to Rich.

[Richard Barton, executive]

Thanks, RJ, and thanks to everyone for joining today. Before we open for questions, I wanted to share a few thoughts.

As I reflect on the quarter, I'm reminded of a fantastically cheesy and popular TV show from the '80s called The A-Team about a former special forces unit that became mercenaries for good and would take on daring rescue missions and despite long odds would somehow pull it off. Each episode, just as the tide was turning, cigar in mouth, Colonel Hannibal Smith played by George Peppard would turn to the camera and say, "I love it when a plan comes together." Well, our daring plan to transform the real estate transaction for the super-empowered, smartphone-wielding, uberized consumer is, in fact, coming together or at least is beginning to come together. It's still early days, but Zillow Offers is working.

You'll see in this quarter's results that our Homes segment, where Zillow Offers resides, meaningfully outperformed the high end of our guidance with revenue of $128.5 million. And we are publishing Homes segment guidance range for next quarter of $230 million to $245 million, up from 0 a year ago.

We are leaning in to early success and are accelerating our investment in Zillow Offers. Today, we are announcing plans to enter another 6 markets by the end of Q1 2020, bringing our total announced markets to 20. In Q1, we received more than 35,000 seller requests, and that demand is rapidly accelerating. We now receive 1 request every 2 minutes, which is nearly $200 million in potential transaction value per day.

During the quarter, Zillow sold 414 homes and purchased 898 homes, up dramatically from our Q4 transaction volume. To support Zillow Offers' rapid growth and expansion, we're investing to scale this business as we build a world-class operating platform. We are currently pricing homes to breakeven at the unit level and expect profitability and unit economics will improve over time as we gain efficiencies with scale.

Longer term, we are also expecting to benefit from other adjacent businesses such as title and escrow, insurance, moving and other services we might explore. In fact, in the second quarter, we are planting seeds for title and escrow services tied to Zillow Offers, which is another fundamental yet fragmented piece of the transaction we intend to streamline.

We've also been making solid progress in our Mortgage business. Last month, we rebranded the recently acquired Mortgage Lenders of America as Zillow Home Loans. We've been focused on integrating this loan origination business into our operations while building out a digital mortgage technology platform. In the future, we will more tightly integrate Zillow Home Loans with our Zillow Offers consumer experience. This will take some time, but I'm encouraged by progress to date.

It's incredibly pleasing to see how well the whole of the Zillow Group team is performing to enable such rapid growth on our new bets. Zillow Offers is growing so quickly because it is standing on the shoulders of a huge real estate shopping audience anchored by the Zestimate that has been built up over 14 years. And it is supported by profits from the Premier Agent marketplace that have made us look more courageous than we really are as we invent the future.

Our Premier Agent marketplace performance is improving as planned. Consumer data that we monitor indicates that transactions and conversion are increasing, and agent feedback about the recent changes has been positive. We are also continuing to test new models that are tied to transactions versus leads.

In June, we will expand our Flex pilot and convert multiple ZIP Codes in Colorado and Connecticut to 100% Flex. As a reminder, in Flex, agents do not pay us upfront for advertising exposure. Instead, they pay Zillow a success fee only when they close a deal with a Zillow consumer. This is an important test as it aligns incentives and rewards with our agent partners to deliver superior service and close more transactions. While our initial Flex tests have been positive, we are being methodical in our approach.

I came back as CEO mid-quarter, and this was the first full quarter for our CFO, Allen Parker. While there has been a lot of change at Zillow Group of late, we're settling into a new rhythm as our leadership changes and market expansion are generating a level of excitement and energy that comes from being a start-up again, but a start-up with 14 years of experience and the size and scale to confidently embark on this new mission to transform the transaction. I'm really proud of the way the team is executing.

Despite the bears pawing at the empty garbage cans in our backyard, one must only look in the front yard to see something astounding happening. I know we still have much to prove to you before the fog is fully clear on Zillow Offers. We must show you that we are not just buying dollars for $0.95. The unit economics of Zillow Offers are justifiably under the microscope. But even at small start-up scale, the economics show promise. Of course, we will gain efficiencies from here as we gain depth and density in markets. This will be done while we simultaneously and rapidly roll out new markets, so we will try to be as transparent as possible to get your questions answered. And remember, investments in our Homes segment are funded through our profitable core operations as well as revolving credit facilities that are backed by the home assets themselves and are nonrecourse to the company.

We also must you that we can profit from the multiple adjacent businesses that surround the real estate transaction. It's early, but I have high expectations here. Further, I believe that the really big win comes from integrating these disparate costly and complicated components into one integrated transaction experience. We are rapidly reorienting Zillow Group's talented team to make this dream a reality. We have miles to go before we sleep, but the journey has begun, and results so far are encouraging.

RJ said this at the top, but in addition to Allen, our CFO, recently from Amazon, back in the conference call room by popular demand are Jeremy and Greg, 2 of the folks who actually lead the Homes and IMT businesses, here to answer your questions.

Questions? RJ? Gary? Sorry.

[Operator]

[Operator Instructions] Our first question comes from Tom Champion with Cowen.

[Thomas Champion, analyst]

Congrats on the nice results. My questions are on the Homes segment. So maybe that's for Jeremy. So 1Q transactions and revenues beat our expectations and came in above the high end of the range. I'm hoping you could maybe unpack that outperformance and what were maybe the 1 or 2 or 3 key drivers. And then 2Q guide implies another very healthy step-up. Any context here on how to think about what is driving that growth and maybe how to think about the balance of the year for modeling purposes? Any comments on that would be really helpful.

[Jeremy Wacksman, executive]

Tom, this is Jeremy. On the guide, I mean, it's still so early. We're going a quarter at a time here, and so we'll try and give you visibility as we go. You can kind of look at our market entry pace that we've hit now and draw some lines from that as we try and continue to open markets there.

In terms of what's driving the beat, it's really consumer demand, both on the acquisition side in terms of people wanting the service and then us just finding our footing on the market and bringing those homes back to our large audience on Zillow. We continue to just see very strong consumer demand. I think we crossed 100,000 requests since we've launched now. We're seeing 1 in every 2 minutes. And that's just in the 9 markets that we're in to date.

[Operator]

The next question comes from Justin Patterson with Raymond James.

[Justin Patterson, analyst]

And Rich, thanks for leading off with an A-Team quote. I think we all needed that this afternoon, this spring season. This one is for Allen. Just really wanted to talk about the difference on EBITDA this quarter versus your guidance. And then it looks like you updated the full year outlook. Would love to understand what's better driving those changes around EBITDA.

[Allen Parker, executive]

Yes. Thanks, Justin. This is Allen. Why don't I start with Q1. So we did perform better by about $25 million versus the high end of our outlook on EBITDA, and I describe it in 3 categories. About 50% of the beat came from what I'll call nonrecurring. There was a legal settlement that they were ruling related to pending legal settlement that allows us to adjust our accrual. We had an accrual for this matter of about $4.1 million at 12/31. And based on the latest status of the ruling, we were able to take that accrual down to an immaterial amount.

And the second piece of those nonrecurring was related to as we reviewed our processes around the new hire process, we made it explicit that some certain payments that are made early are actually earned over a period of time of initial employment. And based on that change, we're able to recognize that cost over that initial period of employment versus recognizing it right away. And so that's kind of a timing thing but did provide a benefit in the quarter and for the year. And that is part of the outlook. It's included in the outlook that we have.

And then the other 50%, just really quickly to touch on it, about 25% in Q1, the $25 million beat was just some ad spending rolling from Q1 to Q2. So that's really just timing. And the remaining 25%, it's just us gaining traction on some of our discretionary spend and improvements, including integration costs, as we look at the integration of MLOA. And again, that's also now reflected in the outlook for the full year.

[Operator]

The next question is from John Campbell with Stephens Inc.

[John Campbell, analyst]

Congrats on the solid quarter. Just one quick question for me on the Flex program. Could you guys provide a little more color on how that testing had gone thus far? And maybe if you could shed a little light on what your plans are maybe over the longer term.

[Greg Schwartz, executive]

Yes. I'll take that one. It's Greg. And thanks for the question. Yes. So now the Premier Agent business has stabilized nicely, we're focused on expansion in Flex. We're hitting the second round of testing, which we just announced this week, which we'll launch in June. It's in Colorado and Connecticut. And the big change there is focused on our most established, highest-performing Premier Agent teams, brokers and agents. The prior round of testing was testing the pipes in the software with newer customers. So we're looking for very strong performance in this next round of Flex testing. And the big gain is it starts to allow us to look at the pipeline, the performance of leads and then direct that volume to the highest-performing folks. So we should see a nice transaction benefit that, with the post-pay approach, allows us to reclaim incremental profits seamlessly. So that's the story there.

[Operator]

The next question comes from Brad Berning with Craig-Hallum.

[Bradley Berning, analyst]

One follow-up on the Zillow Homes segment. When you guys are talking about 100,000 type quotes, maybe you can talk about what portion of some of these initial markets that you're seeing of used home sales are calling to get a quote from you, what portion of those you're buying. And have you made any progress on the seller lead generation side of the equation yet?

[Jeremy Wacksman, executive]

This is Jeremy. On the sort of market buy box, we're pretty broadly penetrated in the markets we're in. We walk into each market, and we rapidly expand as we got the operations online, and the opportunity for Zillow Offers is pretty broad. If you think about the number of homes we would touch if we're in every market, it's around half the country that's in our buy box. So we're talking to most homeowners in the markets we're in that are in that medium price range in and around.

And on seller listings, it's still early. We're focused very much on trying to figure how to have the right conversation with the customer, whether they sell to us or less traditionally with one of our great Premier Agents. But we're focused on ideating on the right product there with our agent partners in our Zillow Offers markets. And that's just a handful for now.

[Richard Barton, executive]

Jeremy, it sounds like Brad was asking about the funnel conversion metrics, too.

[Jeremy Wacksman, executive]

Oh, sure. On the request that we see, I think we talked about it last quarter. We're still only buying 3% to 4% of the homes we see, and that's mostly our choice. We're mostly looking for the right type of home and where we can make the strongest offer. And we'll grow that and we'll grow that conversion as we grow Zillow Offers.

[Operator]

The next question is from Maria Ripps with Canaccord.

[Maria Ripps, analyst]

Rich, can you provide any more depth around the Premier Agent marketplace stabilization? And what are some key metrics you're looking at besides agent churn?

[Richard Barton, executive]

Maria, thanks. Why don't I take that to Greg to answer.

[Greg Schwartz, executive]

Yes. So after the Premier Agent has been launched, Premier Agent 4, we repositioned it as Premier Agent 4, made a bunch of the changes in giving more of those nurtured leads. So we increased the volume of leads to our customers. And then we focused on improving the quality of those connections, those live connections by phone. And the customer feedback on connections had been what we hoped for now that we've had a little incubation time in those connections, which is, gosh, they're starting to convert really nicely. So that's one piece. The quality of the connections and how to achieve what we'd hoped for and the feedback is quite strong from investors and Premier Agents. Just one piece.

The second is not all stuff that we break out, but gross sales volume is something we, of course, follow and then net retention. That stuff is all hitting the forecast we provided you for 2019. No changes to the forecast. But the stabilization we're hoping for has arrived. And as you know, this is a SaaS business. So you dig a little hole and you have to fill it in until you grow. So the same growth forecast in the third and fourth quarter that we led you to is what we're sticking with.

[Operator]

The next question is from Ron Josey with JMP Securities.

[Ronald Josey, analyst]

Maybe just a follow-up on Flex. And Rich, a bigger question for you, I guess. Just on Flex, I think, Greg, you talked about you're expanding to Colorado and Connecticut. In the letter, you talked about some impacts to revenue in 2Q in '19 from deferred. Can you just talk about how you -- how we should think about or how you think about what the impact is? Because I think the full year, Premier Agent revenue was still sort of -- still pretty good, in fact, unchanged maybe at the high end, increase at the low end. And then, Rich, you talked about on Homes like efficiencies from here as you get from depth and density. Can you just talk about where you see those efficiencies? We look at, I guess, your first figure around home acquisition costs, renovation costs, holding costs. Any insights there will be helpful.

[Allen Parker, executive]

This is Allen Parker. I'll take the first part of your question with respect to the impact of these Flex tests on our PA revenue. So with respect to the 2 markets that we're going to go into, our current guidance -- and you're right, we left the top the same and we actually took the bottom up a little bit on revenue. It's included in that number, and it's not significant for the size of these 2.

[Jeremy Wacksman, executive]

Yes. And then I'll take at the second piece on Homes unit economics.

[Richard Barton, executive]

I didn't have to ask for that. Thank you, Jeremy.

[Jeremy Wacksman, executive]

Scale efficiencies come across all those items in the cost line. So it's going to come across buying and selling costs as well. It's going to come across renovation efficiencies and rehab return. It's going to come across closing and faster holding. So pretty much all the lines, when you get to scale on density, you'll see us improve leverage there.

[Operator]

The next question is from Nat Schindler with Bank of America Merrill Lynch.

[Nat Schindler, analyst]

Just looking at the charts on Page 5 and 6 on the home unit economics, I see on Chart 5, you're really pointing out interest expense being a little bit more than 1% on a per home basis. Would you consider that to be a good placeholder that it will likely stay somewhere around that number long term? And is that inclusive of -- is that only inclusive of the homes that are actually sold in the quarter on a per home basis? Or is that divided by the homes sold if it's -- there are some homes sitting on the market for longer? And then I have a follow-up based on Chart 6, on the chart -- on the next chart.

[Allen Parker, executive]

Okay. This is Allen Parker. Maybe I'll take the first part of that. Yes. So on a per home basis, it's coming at about 129 basis points of revenue for the home value. And when you think about the current facilities we have, we have 2 and we discussed them in the Q, they're about 6% interest. And our leverage right now, effective leverage is about 76% of the home value.

And so based on our turns, this is probably something we'd expect, but there's going to be a lot of decisions to make as we think about ways that we're going to get capital or finance the assets over time and what we can do to reduce hold period. So there's quite a few variables there, but we think this is reasonable based on what we would have expected at this stage, and then we'll continue to track it. And I did want to just call out that yes, in this calculation, this is the interest related to the homes actually sold.

[Nat Schindler, analyst]

Okay. And then just going further down on the next chart when you do the at scale kind of calculation, you're using EBITDA. And since you're always going to be leveraging these homes and as you get above, that really should take out the interest rate. So you take out the 130 bps basically and you're really looking at -- should we really think of this business as kind of a 70 bps to kind of a little less than 2% business at scale?

[Allen Parker, executive]

Yes. I think what we did say before is we're sitting for 100 and 200 basis points of EBITDA less interest at scale. So that would imply that at the low end, the 2, we have to have better turns, and so our interest rates will be slightly lower. So if you take the 200 to 300 before interest, or at EBITDA, prior to adjacencies and think about around 100 basis points of interest at scale, that's what we think is the long-term model.

[Operator]

The next question is from Jason Helfstein with Oppenheimer.

[Jason Helfstein, analyst]

As we're trying to think about the fixed cost as you scale it out, is it fair to think about it on a per market basis? So as you add each market, there's a certain amount of fixed cost for Homes and Mortgages? So any kind of color where you can help us think about that. And then the investment cost for title and escrow, where will they show up in the model?

[Jeremy Wacksman, executive]

Yes. This is Jeremy. I'll take the first part of that. You can think about each -- as we get to scale on the platform, each market will have a relatively modest fixed cost to open. I think we've talked about a couple dozen folks in each market with a lot of assumptions being centralized on the platform. Obviously, we're early days from that now, but that's what this will look like at scale.

[Greg Schwartz, executive]

And then on the Mortgage business, our model is a consumer direct model with our -- overwhelming majority of our staff in a call center or in a few call centers. So there won't be much of a footprint or cost specific to markets.

[Allen Parker, executive]

Title and escrow, we're just kicking off. It will be reported in the Homes segment, but it's so early, and the fact that we are just giving guidance one quarter out, there's really not much of significance included in that 2Q guidance.

[Operator]

The next question comes from Ryan McKeveny with Zelman & Associates.

[Ryan McKeveny, analyst]

So my question also relates to the scale margin opportunity in Homes, so that 2% to 3% EBITDA margin. So obviously recognizing a lot is going to change and there's certainly a lot of opportunity to leverage fixed costs. But I wanted to focus on the selling costs and the leverage there that you mentioned. So I'm just curious, do you expect things to look meaningfully different in the future in terms of how those kind of third-party agents are involved in the transactions? And I guess the question to be blunt is over time, does this look more like a brokerage-type structure where maybe you actually employ agents, ship some of those variable commission costs to kind of a fixed point of leverage? Or is that kind of too extreme with maintaining things on the IMT side? Any thoughts there would be great.

[Jeremy Wacksman, executive]

This is Jeremy. I'll take that one. So when you think about the cost leverage, it's very important to think about across all those. So buying and selling is one. But closing and transaction costs, and that's why we talked about title and escrow a bit here, and then holding costs and turns, those all add up to the leverage we see at scale. As it relates to selling specifically, we absolutely expect to see better leverage there on the work that we ask, whether it's employees or partners, to do as we scale. We currently are using our great agent partners in every one of our transactions, and we plan to continue to do that. As you can imagine, as we're scaling to hundreds of listings in each market, the work we're asking them to do, you can scale that work across many more listings, and we can drive efficiencies in the work we're paying for.

[Operator]

The next question is from Lloyd Walmsley with Deutsche Bank.

[Gregory-T. Vlahakis, analyst]

This is Greg on for Lloyd. One, within the channel, we've been hearing that a couple of agent teams are starting to dismantle just because of a lack of volume advantage. So I guess are you guys seeing something similar? And if so, how is that affecting the Premier Agent business? And second, I noticed that there's a redesign to the mobile app and the desktops. And also, you guys included a couple of new features to help agents with the lead flow. So I guess can you talk about the redesign and some of the new features and how that's impacting the business?

[Greg Schwartz, executive]

Yes. It's Greg. Happy to grab it. So agent teams are going strong. We're actually seeing the opposite movement from what perhaps you observed in the channel, which is we're seeing the differentiation standardization. The service commitment that teams bring is increasingly important, especially as our volume concentrates for Zillow Offers and into our Flex test. So we think teams are a growth strategy for us, and it's certainly what we're seeing.

Redesign, yes. We've redesigned recently both the mobile app and desktop experiences with a beautiful photo-driven and video-enabled experience. It's been well received by consumers and very carefully tested. As it pertains to new features in our CRM or Premier Agent app, the Premier Agent app has been a quiet and very significant success for us. The vast majority of the leads we generate are actually touched in the app. It's probably one of the most used -- impossible to compare it but probably the most used CRM in the industry. And it's become really critical to our agents' success in converting, and we will continue to invest in it because we think we can help them drive real efficiencies in their activities and power them with differentiated data.

[Operator]

The next question comes from Brad Erickson with Needham & Company.

[Bradley Erickson, analyst]

A couple of follow-ups, I guess. One, Jeremy, when you call out the 3% to 4% conversion rate on the inbound requests for Offers, and I recognize that can move a lot higher, do you view that as kind of the opportunity set for seller leads ultimately? Or do you expect to be able to refer seller leads to, say, more of a majority of the inbound leads you're receiving ultimately? And then I guess secondarily, given how many you're getting so far, I think you said something like 1 every 2 minutes, it would seem like you have significant demand for PAs to get in front of those opportunities like now today. Why do you think that hasn't happened yet?

[Jeremy Wacksman, executive]

Yes. This is Jeremy. I'll take that, and Greg maybe can chime in. So the conversion opportunity is definitely the whole 100, right, not the 3% to 4%. And there's just different phases based on what their question is for us, whether they're actually getting an offer, whether they're getting to a final offer for us or whether they're not eligible. So yes, we do think that the opportunity for both seller listings and Zillow Offers to grow is the fact that everyone is showing up asking about how to help sell their house and either Offers or a great Premier Agent is the right answer for them. And that is what we're testing today with our agent partners.

[Greg Schwartz, executive]

I would add one more thing. Customers are falling in love with the Zillow Offers experience. So it takes a little bit of invention and magic to take someone who's fallen in love with an Offers experience and get them over to Premier Agents. And Jeremy and my team, both these teams are really working hard to figure out what the compelling offer is to get a consumer to do it. And that's why it's not in this year's financial plans is we have some invention to do because they want an offer and they want to transact with us. So we're channel-changing them, and we'll get there. I'm just not ready to put it in paper yet.

[Operator]

The next question is from Ygal Arounian with Wedbush Securities.

[Ygal Arounian, analyst]

On Zillow Offers, so you guys noted -- you got a lot of questions about getting to scale, but you noted building a world-class operating platform for national scale. Was wondering if you could dig into that a little bit and highlight some of -- what that means, some of the things you're doing to help you get to scale. And then you also noted the 7% average rate on Offers. I was wondering if you could talk about in various markets where there might be more or less competition, how that differs and as you think over time as competition increases, pricing on offers would play an important role or not.

[Jeremy Wacksman, executive]

Yes. This is Jeremy. I'll take both. So on platform, you can think about it as a couple of buckets. One is kind of workforce management and tools to enable all of operations and the operators to scale. So everyone who touches one of the homes in the field and central office, there needs to be scale, tools and technology that allows us to run this operation more efficiently than we are today. And then you can also think of it as kind of pricing and Big Data. So we're collecting every day more data to make our models more efficient and more real time in their feedback to drive not just a more accurate price but a faster customer experience. So that's how you might want to think about the platform.

On the fee and are we seeing sort of variableness by market or from competitors, it's still so early. We're not seeing much in terms of cross-shopping. I mean our biggest competitor here is just the traditional way of listing and whether that's the right path for each customer. Obviously, the fee varies widely because we're solving for what we think it will take to sell your house. And so the 7% was the average but it varies for every house. And so different price bands, different neighborhoods will have different estimates of what it will take to sell, how long and at what price. And that's what spits out the fee.

[Operator]

The next question comes from Brent Thill with Jefferies.

[Brent Thill, analyst]

We saw the illustration in the shareholder letter showing the path to 3% margins at scale within the Homes business. Can you just give us a sense of how long you think it takes to get to scale or how many markets or homes that would entail?

[Allen Parker, executive]

Yes. This is Allen. I think what I'd say is longer than 3 to 5 years because I think our view is our long-term target of getting to the 5,000 homes purchased a month and getting to a $20 billion rev run rate, the 200 to 300 basis points that we say is at scale likely exceeds that point. But again, we're learning all the time. And the great thing is, as Jeremy just talked about, we're focused on the inputs. We're focused on building the mechanisms to drive great operations, and we've got a customer signal that's really strong. So all of those things have to continue and execution we control, and the customer signal keeps getting stronger as we enter markets. So we're optimistic, but I can't put a time line on it.

[Richard Barton, executive]

And to a certain extent -- this is Rich. To a certain extent, it's a function of growth. To the extent we are continuing to see rapid growth and future growth opportunities, we will continue to make smart investment decisions on a go-forward basis, which might put off achieving the scale model.

[Operator]

The next question is from Deepak Mathivanan with Barclays.

[Deepak Mathivanan, analyst]

Two questions. So first, on the Homes business, last quarter, you ended with about a little over 400 homes -- sorry, 500 homes in your inventory. And in the first quarter of this year, you sold closer to 400. I mean there seems like there's a few ones older than 90 days. Can you talk about the inventory aging trends there? And then on EBITDA loss for Homes business in 2Q, can you parse out between contribution profit and then fixed costs? Just a quick one on the PA business as well. You guys had a sizable advertising spend on the Premier Agent business last year. But clearly now the messaging and the creatives have changed to a more holistic basis. How should we think about the advertising spend allocation between the IMT business and then Homes and Mortgages business this year?

[Jeremy Wacksman, executive]

This is Jeremy. I'll take the first of what I counted as 3 questions. So on inventory aging, you're right. And you'll see our inventory grow as we scale because every month, we're going to buy more than the homes we had bought in prior months to sell. And as we grow and we get to more aged inventory, you'll see us manage that on a cohort basis. So for any given cohort homes we buy, we're pricing that cohort to account for both the head of overperformers that sell faster and that tail you'll start to see as homes that take longer to sell. And so we'll treat each cohort carefully and revenue manage it as a portfolio, but you'll see that total inventory balance grow as we continue to push for scale.

[Allen Parker, executive]

Yes. And this is Allen. Let me just add to that, that in addition, as any company that has inventory and manages inventory, we have processes in place to ensure that we're adjusting -- assessing our inventory values and marking them down to lower cost of market. And to date, we have not had to make an adjustment. However, as Jeremy mentioned, as we grow, it's likely in the ordinary course of business that we will have to make such an adjustment.

And then maybe I can just quickly take your second, Deepak. We don't break out the split, but I think what I would just highlight is in Q1, our EBITDA for Homes segment was negative 27% of revenue. And if you look at our Q2 guidance, it implies a range of negative 20% to negative 23% of revenue. So you can see that as we grow and even as we enter new markets, we're going to continue to get leverage. And then our fixed cost will not grow as fast as our top line.

[Jeremy Wacksman, executive]

And on the marketing question, I mean we don't give out an allocation to the segments. I mean you can -- the vast majority of the spend is driving all segments right now. And if you actually look at our new ad campaign that talks about all segments. In fact, some of our hero spots talk about -- one of our hero spots talk about Offers, Mortgages and PA. But we aren't disclosing the breakdown of sort of media weight or specifics.

[Operator]

The next question is from Shyam Patil with SIG. [Operator Instructions] And the next question is from Mark May with Citi.

[Mark May, analyst]

I have 2, please. Maybe just a follow-up on the last question and your answer. I just want to clarify in terms of thinking about the cohorts head and tail and some of the homes that might work, some of them that may be down to your expectation. Did you say that you haven't yet had to write down the value of any homes? I just wanted to be clear. Maybe if that's not the case, can you give us a sense for what portion of the homes that you've purchased live to date that maybe did not meet your sort of criteria in terms of average markup or resell or holding period and if, in fact, that there haven't been any that you had to sell at a loss? Just was trying to clarify that. And then in terms of the -- we've had the existing home sales kind of soft here for a while. Just curious what impact, if any, you've seen on the Premier Agent side of the business in terms of active accounts on -- active paying accounts on Zillow and/or the average spend per lead per agent as a result of kind of the softer existing home sales market.

[Jeremy Wacksman, executive]

Yes. This is Jeremy. I'll take that first and maybe Allen can clarify. I think Allen's talking more about the accounting treatment. No. In any of our cohorts, we're selling homes a little bit above what we enter into in that we're having to drop price and sell them for less on others. So it's not about pricing. We're really, really pleased actually with how tightly we are to our underwriting. The vast majority of our homes are actually performing within bps of what we underwrote to, which is really impressive to see for how early we are in the operations in some of these markets. I think Allen was talking specifically around do we hit a test in accounting in which we have to actually account for inventory markdown, and we haven't hit that yet. And we probably won't for a while because it won't be material to the business. I think that's what Allen was saying there.

[Richard Barton, executive]

We'll have to. We believe it will happen in the future.

[Allen Parker, executive]

In the ordinary course of business, we will likely do some of these markdowns. And Mark, just to be clear, the lower cost to market assessment would come -- for example, at 3/31, we would look at all of the 993 homes in inventory, focusing on all -- focusing likely on the aged ones and determine whether the expected price we expect to sell for is lower, including sales cost, the cost to sell is lower than the carrying value. And if so, we would have to take a markdown. And what I was trying -- what I indicated was we have not yet taken a markdown for that event.

[Greg Schwartz, executive]

Mark, it's Greg. On the Premier Agent business, with relatively low interest rates still hanging around and decent -- growing choices among homes, Premier Agent business is buyer-driven, so buyers are having a suddenly easier experience finding something to move into. So that business hasn't seen macro headwinds in this period. The fourth quarter when it was tough from a macro perspective, things look really solid right now.

[Operator]

The next question is from Heath Terry with Goldman Sachs.

[Heath Terry, analyst]

I just wanted to dig a little bit into the guidance. Bringing the EBITDA guidance up the way that you did. I know you called out some of the nonrecurring items and stock-based comp in the quarter. Anything that we should be thinking about sort of in the forward guidance, whether nonrecurring items or other things sort of underlying the improvement and the profitability outlook? And then on -- with the rebranding of the Mortgage business, any more color on the progress that you're seeing in integrating with home offers and what sort of uptake you're getting in Mortgages along with that part of the business?

[Allen Parker, executive]

Yes. So this is Allen. I'll take the first part of your question. So again, we exceeded Q1 guidance -- our top end of our guidance by about $25 million. And for the year, we've taken up EBITDA about $35 million to $40 million. I walked through the $25 million, and what I'd say is that besides that amount, there's still a little bit more, about another $8 million -- $8 million to $10 million related to this change in our recognition of the employee expenses that go throughout the year. And then the remainder is just based on our latest forecast and looking at some of the traction we're getting on discretionary spend.

[Greg Schwartz, executive]

It's Greg. As it pertains to Mortgage, we're having a blast with that business. We rebranded Zillow Home Loans, rebranded the new brand. And we're a bit ahead of schedule on the software and platform build. You know this is intensive, operationally demanding business. We got to get a digital borrower platform out for borrowers and our loan officers. We've got -- have a very efficient operating model with underwriting and processing. And then we have to make a lot of progress on automation to build a healthy, scalable business. That is 100% our focus. It is not the time -- we're not focused on attach at this point. We are focused on building a scalable model that's technically driven. And we're a little -- we're maybe a quarter ahead of schedule. We already have this digital platform being tested by 2 of our origination teams. But there's many, many, many miles to walk here. And as you know, attach really isn't significantly in the biz model for this year. It's still the tech and the platform that's scalable.

[Operator]

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Rich Barton for any closing remarks.

[Richard Barton, executive]

Thanks for your time today. Look, we are in the midst of a major transformation to revolutionize the real estate transaction. And as I said at the top, the plan is coming together. We know that this will take time, but we are well on our way. As investors, I realize this requires more belief and imagination than required in a typical public company investment. I am convinced Zillow Group is anything but typical. Thank you for your continued constructive support. Smart critical shareholders who are owners just like us make for great partners.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.