Zillow Group Inc

NASDAQ:ZG

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon and welcome to the Zillow Group First Quarter 2020 Conference Call. [Operator Instructions] Please note, this event is being recorded. Thank you.

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

[Bradley Berning, executive]

Thank you, Sheryl. Good afternoon and welcome to Zillow Group's First Quarter 2020 Conference Call. Joining me today to discuss our Q1 results are Zillow Group's Co-Founder and CEO, Rich Barton; and CFO, Allen Parker.

During the call, we'll make forward-looking statements about our future performance and operating plans based on current expectations and assumptions. These statements are subject to risks and uncertainties, and we encourage you to consider the risk factors described in our SEC filings for additional information. We undertake no obligation to update these statements as a result of new information or future events, except as required by law.

This call is being broadcast on the Internet and is accessible in our Investor Relations website. A recording of the call will be available later today.

During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to as EBITDA. We encourage you to read our shareholder letter and our earnings release, which can be found on our Investor Relations website as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures.

In addition, please note, we will refer to our Internet, Media & Technology segment as our IMT segment. We will open the call with brief remarks followed by live Q&A.

With that, I will turn the call over to Rich.

[Richard Barton, executive]

Thanks, Brad. Hi, everyone. I wonder if this is starting to feel familiar to you, too. Brad, Allen and I are, once again, broadcasting from our homes where we are based for the foreseeable future along with thousands of Zillow Group employees and continuing work on our mission to give people the power to unlock life's next chapter.

Although what we see physically day-to-day is pretty static and repetitive, we are all navigating a world in flux. According to MIT, about half the U.S. workforce is now working from home. And they're not just working from home. They're teaching their kids, eating each meal, conducting their social lives, all from home. Whether they're dreaming about an extra room for an office, a bigger yard, a less dense neighborhood or, for many of you maybe, a new second home, there's evidence that the experience has uncorked new aspirations and hopes of what home can be and needs to be. With each passing day, it becomes clearer that we are not going back to the way things were. Collectively, we are turning the page.

The past 2 months have been marked by health and economic upheaval across the globe. Amid the jolting stories of lives, jobs and businesses lost, we are grateful to be able to share not just strong Q1 results but evidence of the housing market's resilience and an encouraging readiness, perhaps pent-up restlessness, among people who are shopping on Zillow.

When we talked last on our pop-up call on March 23, we had seen visits to Zillow fall nearly 20% from the prior year. Since then, there's been a full rebound and shopping activity on Zillow Group has returned to double-digit year-over-year growth, along with an upswing in request for our customers to connect with a Zillow partner agent at rates exceeding mid-March levels.

From a balance sheet perspective, the foundation we laid in the last year put us on a really solid ground. Then our swift actions to temporarily pause Zillow Offers home buying and reduce expenses by cutting marketing spend, discretionary spend and pausing most hiring helped us preserve and build cash.

During our last call, we reviewed our mid-quarter balance sheet with you. It has strengthened since that call with $2.6 billion in cash and investments at the end of Q1. January and February were very strong months across all our businesses and were a great counterbalance to the pullback we experienced in March. In all, the first quarter delivered strong results as we met or beat our outlook, delivering record results across many measures, thanks to both strong execution and expense management. Our return to underlying double-digit IMT segment revenue growth and significant EBITDA margin expansion underscores the strength of our core business.

In Premier Agent, we have found meaningful success with our strategy of connecting more and higher-intent customers with our high-performing agents, which was illustrated by record performance in January and February. When our partners were most fearful in March, the #bettertogether discounts -- Better Together is one of our core values, plus the hashtag. These discounts we provided to our Premier Agents helped these small business operators and buoyed retention rates through the most uncertain and volatile period. Without being naive, I'll say that Better Together showed our partners how much they mean to us and that they appreciate it. This will pay dividends.

We continue to sharpen our skills in Zillow Offers, and we demonstrated significant progress this quarter by applying early learnings and getting smarter. Our sales velocity broke records in February and March, even as we adapted operations to comply with social distancing requirements. We did this without sacrificing unit economics as we continue to operate within the guideposts we set.

We deliberately reduced our inventory through continued execution of buyer contracts, ending the first quarter with about 1,800 homes in inventory, a decrease of 1,000 homes from the end of 2019. Our decision in March to pause home acquisition for Zillow Offers was due to concerns about our ability to safely and legally conduct acquisition activities, which Fed concerns of a market hold.

While in crisis mode, we were very focused on inventory reduction to reduce enterprise risk. Inventory reduction is no longer our goal. We are actively planning to unfreeze Zillow Offers home buying. Internally, we call this Project Han Solo, although our time frozen in the carbonite will be shorter than Han Solo's was. We expect to begin home buying within the next few weeks. There are a number of factors we are considering that will influence the timing of the unpause, including: one, the health and safety of our employees, customers and partners; two, local orders and public health concerns; three, local housing market factors; and four, confidence in our ability to price and transact. Stay tuned.

During our last update, I walked through a severe stress test scenario for our business that demonstrated our ability to make it through a sustained market freeze. The lens we were peering through was foggy at the time, but the fog has cleared to a large extent. We still don't have perfect visibility, but the inputs are improving. The real estate market is predominantly open, and it's clear that we have passed peak fear.

In our Q4 report in February, we talked about key priorities for the year that focused on executing growth and scaling our business. While we plan to return to these, we have adjusted our priorities for the age of COVID. These are: one, protect the enterprise, including protecting the health and safety of our people, customers and partners; two, reduce costs; three, accelerate technology to deliver seamless and now more virtual real estate shopping and transaction experiences, faster to the future as our team likes to say; four, enhance our relative competitive position to lead the industry to real estate 2.0. Overall, I'd say we feel very good about where we are and the key advantages that give us the flexibility and solid footing to be both bold and nimble.

One piece of evidence of Zillow Group's agility is the adaptability with which our team responded to working from home starting March 10. We recently announced most employees will have the option to continue working remotely through at least the end of the year. We did this in order to give our employees the visibility and flexibility to make important life decisions, like did I renew my lease in the city or move closer to my family, without fear of losing their jobs. That, and we've been impressed by how productive people have been given the circumstances. Our valuable people have been truly appreciative of this flexibility, and this policy sets us up well to potentially take advantage of a whole new way to work post-COVID.

Turning to the future, we feel pretty darn good. We have seen all our metrics bounce off the bottom. Some metrics at the top of the funnel, like visits, have more fully recovered and are up -- more than fully recovered and are up double-digit percentages year-over-year, indicating to us even higher demand to move or at least fantasize about moving than before. The bottom of the funnel metrics took a bigger hit, but we are pleased to have largely maintained our Premier Agent monthly recurring revenue base.

We are lucky that it's possible to shop for homes and close transactions without much human contact. That said, we are still watching antiquated processes. Like in-person appraisals, filings and closings cause unnecessary friction in real estate during this crucial time. If interested, check out my tweet from this morning, showing Dawn Lyon, our Corporate Relations Chief, signing her refi paperwork this past weekend with a ballpoint pen and ink-stamping thumbprints. Why? Time for a change.

Our proprietary 3D tours and floor plans, appointment-based virtual tours, physical self-tours, e-signings and remote closings are providing necessary solutions for social distancing today. Adoption is accelerating. Agents used Zillow's proprietary tech to create 525% more 3D home tours in April than in February. As customers embrace this new normal for virtual shopping and selling, we can allow agents to focus their manual high-touch services on high-intent qualified buyers who have already looked around, narrowed the field and are ready to make an offer.

I just heard a great story of this coming to life from our Premier Agent, Chris Speicher, a member of our Agent Advisory Board, who said his team recently helped a Washington, D.C. area buyer who is facing the end of release but works night at the ICU at Walter Reed Medical Center. It is an extremely heart-wrenching, busy and dangerous time for this buyer to be at work, but our partner agent was able to use virtual tours and showings to help her narrow her choices on her schedule. She went under contract last weekend on a new home near the hospital, with a backyard fire pit that will give her a place to wind down after her shift.

Another great example of how this is unfolding before our eyes is our recent Zillow Offers customers, Esteban and Stacy Garza, who shopped for 2 years before they found their dream home, a Zillow Offers owned home outside of Phoenix last month. The timing intersected with stay-at-home orders and social distancing requirements, and the Garzas said the sale would not have happened without the flexibility and peace of mind that came with buying a nonowner-occupied home from Zillow, which allowed the inspector and appraiser to easily do their jobs. Now Esteban said they can take a deep breath and enjoy their beautiful new home.

The virtual tools home shoppers need for safety today will become their expectations for convenience tomorrow. Our focus now is not just on managing our way through this crisis. We're also moving faster to the future. Our vision of Zillow 2.0 is becoming a reality even sooner than we had planned. Like we discussed with you during our pop-up call, successfully navigating storms requires the ability to know when to pull back and tap the brakes and when to hit the accelerator. We are beginning to see our passing lane.

Make no mistake, we are clear-eyed about the public health and economic crisis on the ground and are doing what's right to actively support our employees, partners and communities. And we are mindful of how important it is for the company to have extra buffer for the uncertain future. But we are also not blind to the opportunities being unlocked to accelerate a new era for real estate.

We are not alone in this endeavor. We are leaning in to lead, working closely with our partners and industry leaders to move the entire category forward and ensure that no matter what happens in our world, we can assure our customers that real estate is always on to help them move safely into life's next chapter. We are ready. Our customers are ready. Time is now.

Thank you for your partnership and support of us in these unique times. I'll now turn over the call to Allen to walk you through Q1 results and Q2 outlook, and then we'll take your questions.

[Allen Parker, executive]

Thank you, Rich. I'm going to summarize a few key financial results from the first quarter before discussing our outlook for Q2. Overall, we are pleased with our Q1 results as we met or exceeded our revenue and EBITDA outlook both in total and for each of our segments despite headwinds in March because of the coronavirus pandemic.

We reported Q1 consolidated revenue of $1.1 billion, up 148% year-over-year. The outperformance in revenue was due primarily to strong sales execution in our Homes segment. Our enhanced resell strategies accelerated home sales to the highest velocity realized in our Zillow Offers business since inception and did so without sacrificing unit economics. Our consolidated EBITDA outperformance was driven by stronger-than-expected leverage from operational rigor in all 3 of our segments.

It was great to see IMT segment revenue, including our Premier Agent revenue, return to double-digit year-over-year growth in Q1 while substantially expanding IMT segment EBITDA margin. We accelerated revenue growth for the IMT segment and for Premier Agent revenue from 6% year-over-year growth in Q4 to 11% year-over-year growth in Q1. IMT segment revenue was $331 million in the first quarter, at the high end of our outlook, even with the impact from discounts provided to our partners. We estimate that the delayed revenue headwind from the previously announced Flex testing reduced our Premier Agent Q1 year-over-year revenue growth rate by approximately 460 basis points.

IMT EBITDA margin expanded more than expected, improving by 540 basis points year-over-year, which includes approximately 160 basis points of net benefit from unplanned cost and revenue actions in response to coronavirus outbreak. It's also important to note that this quarter faced a 290 basis point headwind from favorable onetime benefits in Q1 2019 EBITDA margin. The underlying inputs that we see in our IMT businesses give us confidence that when we exit this current period of economic uncertainty, we are well positioned to come out competitively stronger.

Homes segment revenue increased $641 million year-over-year to $770 million, exceeding our outlook. Average return on homes sold before interest expense was a profit of $140 per home or 4 basis points as a percentage of revenue. This is up from a loss of 48 basis points in Q4 2019 and within our expected range of plus or minus 200 basis point guardrails we have provided. As we've said in the past, we expect unit economics to fluctuate within this target range, and we are pleased with our Q1 results, especially in light of the circumstances. Homes segment EBITDA loss of $75 million was also better than our outlook as both gross profit and operating costs were better than expected.

We continue to make progress on building out our Mortgages segment. Despite unprecedented volatility in interest rates that pressured our margins on the resale of mortgage loans, our experienced Mortgages team delivered better-than-expected EBITDA due to nimble product and operational focus.

As we've stated on previous earnings calls, my focus as CFO continues to be establishing processes and mechanisms in support of 3 key priorities. Those priorities are: scaling our new businesses, executing within our IMT segment in order to fund investments in new segments along with additional growth opportunities and implementing focused cost discipline and operational rigor across the company as we scale. During this uncertain time, the team and I have also focused on liquidity preservation to protect the enterprise and ensure we are well positioned to execute on opportunities to lead the industry to real estate 2.0.

We ended the quarter with $2.6 billion in cash and investments, the highest balances in our history, up from $2.4 billion at the end of December. I am pleased with how we've executed on these priorities in Q1. While we did not plan for a global pandemic, our strategic position, operational rigor during 2019 and strong balance sheet put us in a solid position to successfully and flexibly navigate the current period of economic uncertainty.

Before moving to Q2 outlook, I would like to update you on the severe stress test that we discussed on our March 23 pop-up investor call. We have updated our severe test modeling using the same framework, which is assuming 75% reduction in pre-coronavirus revenue levels for IMT and Mortgages segments and having to repurchase most of the homes inventory with cash from our balance sheet. Under this scenario, we expect that we would end the year with $1.7 billion in cash and investments, up from the $1.35 billion previously discussed on our March 23 call, due primarily to continued strong results since the start of Q2 and continued selling of inventory since our March 23 call. That said, such a severe scenario seems increasingly unlikely given the favorable demand indicators we've seen over just the past 5 weeks.

Next, I'd like to provide some additional thoughts about our Q2 outlook and what our inputs indicate as our likely trajectory heading into Q3 in the absence of providing full year guidance. As we've indicated during our late March investor call, we will be providing quarterly guidance only for the time being due to the uncertainty of the current operating environment. We expect Premier Agent revenue to decline temporarily in the second quarter to between $165 million to $175 million, primarily due to the discounts we provided to our Premier Agent partners. As Rich mentioned, the strong rebound in site traffic and agent connections we experienced in April and continue to see thus far in May have alleviated much of the pressure on issuing discounts. We have not yet determined what discount, if any, we will provide in late May for the following month, but we have assumed some discount levels in our outlook into June.

We also expect other revenue within our IMT segment to be down sequentially. Despite strong results in our rentals business outside of New York, our StreetEasy brand is experiencing declining revenue due to the shelter-in-place orders. We are also seeing some pressure in some of the shorter-term advertising-related products for display and new construction. We do expect these to recover as health conditions improve and shelter-in-place orders begin to lift. In light of the temporary revenue decline and inclusive of cost actions we've described, we expect IMT segment EBITDA for the second quarter to be in the range of $20 million to $30 million, improving throughout each month during the quarter.

In the Homes segment, we expect total revenue to decline sequentially in light of the lower inventory balance going into the quarter. We expect Homes segment revenue to be between $325 million and $350 million for the quarter. We expect Homes segment EBITDA to be between a loss of $70 million and $80 million. As Rich mentioned, we are actively planning to unpause Zillow Offers home acquisitions. However, we do not expect Q2 results to be materially impacted by this unpausing.

With regard to our Mortgages segment, we expect revenue to be between $17 million and $20 million and EBITDA to be within a loss of $12 million and $9 million. The sequential decline from Q1 reflects current conditions in our marketplace businesses as there is less demand for lower credit score leads due to tightened underwriting in the financial sector.

Overall, Zillow is on strong footing today despite the unexpectedly complex and rapidly changing environment around us. Our balance sheet is strong. Our demand indicators have largely recovered from their recent lows, and our platform and partners are well positioned and ready to help our customers move safely into the next chapter of their lives.

And with that, operator, we'll open the line for questions.

[Operator]

[Operator Instructions] The first question is from Ron Josey of JMP Securities.

[Ronald Josey, analyst]

Glad to hear everyone again and really glad to see the rebound as much as we're seeing, so great to see. And Rich, I wanted to dig in a little bit more on the PA business, and I'm sure we'll get more later in the call around the Homes business. But on PA specifically and the new chart, I think, on Page 11 of the letter, talks -- basically goes through the monthly trends for Zillow Group visits, MRR index and the revenue index. And with traffic rebounding as much as it is here from the lows in March, I just want to understand a little bit more how -- why the revenue index perhaps isn't rising as fast as the traffic? Understood the Better Together discounts has an impact, and there's more targeted discounts potentially coming. But maybe you can help us just understand how you're thinking about the PA business and how it recovers this traffic as that leading indicator.

[Richard Barton, executive]

Thanks, Ron. Thanks for the question. Maybe I'll throw that one over to Allen, I think.

[Allen Parker, executive]

Yes. Thanks for the question, Ron. And Rich, jump in as you need to. So first, Ron, we provided this chart to help -- we thought there was a need to provide a little more clarity as to our input trends that we're seeing through the period and the related impact on some of our business outputs and not just at quarter points but throughout the period. And what this chart kind of -- what it does reflect is a strong start in the Q1 reflecting the momentum we had coming out of Q4 and the continued strength of all of those trends through January and February.

What you can see though is a dislocation of our input metrics in mid-March, and we took a quick action that we discussed in our March 23 call and made a broad 50% Better Together discount to support our partner base, and that allowed us to maintain much of our monthly recurring revenue base, which is what -- the intent was to work with our agents but protect our base. And after the initial round of discounts, and you see that flow through revenue on a lag basis as those discounts work through, in the next period, while we were seeing some input trends improve, we also were seeing, in some areas, still some challenges. So we utilize a much more targeted market-based discount, which resulted in discounts coming in about half of the initial discount level that we made in the first part of the month. And you see those flow through the chart.

As of today, as Rich mentioned, we're seeing a lot of our input levels back to pre-coronavirus levels, and we continue to monitor these at local markets. So while we have not determined yet what, if any, discounts we'll provide for June, our outlook does assume there is some continued level of discounts in the quarter, and that's what reflects the revenue slowly coming back up. We believe, in summary, that this action and leveraging this tool with the discount allowed us to largely retain the majority of our MRR base that we came into the year with. And so we feel like we're really well positioned with our partners coming out of Q2.

[Operator]

Your next question is from John Campbell of Stephens.

[John Campbell, analyst]

If you could just maybe talk a bit...

[Richard Barton, executive]

I no longer hear Sheryl.

[John Campbell, analyst]

Rich, you there?

[Richard Barton, executive]

This is Rich.

[John Campbell, analyst]

Rich, are you there?

[Allen Parker, executive]

Rich, we could hear you. I expect you can hear me.

[John Campbell, analyst]

Yes, I can hear you guys. Rich, I'd appreciate if you could maybe just talk to the competitive environment. Obviously, everybody is kind of managing on the fly, things have changed a lot. But how have things shifted in the market over the, call it, the last month or 2?

[Richard Barton, executive]

Yes. I mean it's tough out there, of course. And I guess I'd broadly say -- well, I guess I'd first say that coincident with the arrival of Allen Parker to the company -- I don't know how long ago that was now, Allen, about 18 months? Feels longer than that. We embarked on getting fit. Allen have Project Airstream, and he is teaching the company how to get fit. And so we were well on our way to being very fit coming into this crisis. But from a competitive advantage perspective, I really feel like this situation has enhanced our competitive position. We have the biggest brand and the biggest audience. And in these kinds of times, people tend to fall back on familiar and trusted and big brands. I think you're seeing that across industries right now. We have a really strong balance sheet, the strongest balance sheet in the industry, which is also terrific to have in a situation like now. We have the best partners. We have the best products in tech. We have the best services. All these things make me feel good.

Turning to the partner side, there are probably fewer choices on how to market themselves and how to generate customer demand, how to generate relationships and generate commissions. And so we may be finding that they're focusing their marketing energies on Zillow and Zillow Group's brands. We're also advantaged because we're seeing -- like in so many industries that you guys are looking at, you're seeing -- really, you're seeing years of technology progress get accelerated down into months. And as the leaders -- as the tech leaders in this industry, we are in a position to lead, and we're the beneficiaries of that. As I said in my script, I said something like today's necessity for this kind of distance shopping and buying is tomorrow's expectation because, of course, virtual buying, rich media experiences, 3D floor plans, virtual touring, electronic trafficking of documents and signing of documents, that's all exactly what people -- what people's expectations for a 2020 industry, how it should operate. But today's real estate industry has not been operating that way. It's been operating as if it's been back in the 1960s or '70s.

Anyway, because of all that, we're in a really fantastic position to accelerate out of this period of uncertainty. And as we've said, we're seeing a lot of green signals. Lights that were red only 2 months ago are moving through yellow and beginning to flash green. And so we're not out of the woods yet, but we're moving with a lot more confidence.

[John Campbell, analyst]

That's helpful. And a quick follow-up. And Rich, I agree with you. I think we're going to enter a new normal kind of coming out of this pandemic. On the spike in virtual tours, like, to me, that's not really a flash in the pan. I think that sticks, and it's going to be part of the new kind of process of buying homes. If that's the case, I'm just curious, near term, what you guys are seeing, if that's helping drive connections. To me, it feels like it's helping lead homebuyers to an action or it's bringing them a little further down the funnel and creating a better connection. Are you guys seeing that? And do you expect that to continue, if so?

[Richard Barton, executive]

Yes. We are seeing it. We're seeing a more qualified buyer show up because of it. And we're seeing -- interestingly, I don't know what -- Allen, what was our comment -- what did we release on connections? I mean connections are good, and the buyers are more qualified. And yes, it's just completely obvious that the industry has been really, really resistant to even the most basic media enhancements in the systems that run the business. I mean -- and we've been trying for years to get our partners and owners and sellers to use all of this technology that we've been working on for a long time. But you know what, they don't really need to. They don't really need to. And so adoption was not that fast. Now it's happening really, really quickly. So we're not going back. This is now people's expectation.

[Operator]

Your next question is from Maria Ripps of Canaccord.

[Maria Ripps, analyst]

Hope everyone is doing well. You shared a lot of interesting commentary about the housing market in the shareholder letter. I would love to hear your perspective in a little more detail on what you're seeing in the real estate market, how you're positioned relative to that. And maybe, again, how are you leveraging your tech capabilities to navigate this environment?

[Richard Barton, executive]

Yes. Okay. Maria, this is Rich. So I guess my first comment, and part of the answer, I would say that the real estate market that COVID weighted into in a very uninvited and rude way was a strong one, okay? So we went -- the industry went into this in good shape and strong. Back when we were having peak fear around the end of March -- middle to the end of March, we didn't know if the market would continue to function properly because of safety concerns or legal concerns, and we thought that the market might close, we and everybody else. And it's very clear from the data that we're reporting now and the data you're getting from other sources that the market is open, okay? It's not where it was exactly. Shopping is more than where it was, but transactions are not quite where they were. They're recovering on kind of a checkmark -- in a checkmark pattern, as you can see from that exhibit in the shareholder letter. But the market is open. So top of funnel, rebound. Bottom of funnel, a little bit slower.

So as I said, we are fortunate to be in a business -- I mean we're not like a restaurant or a shopping mall. Shopping and transactions can happen without a lot of human contact in real estate, and people are figuring that out. And even as future -- if and as future waves of COVID hit, we are now putting all of the procedures, the kind of clean, mask, distance, all of the stuff that we need to do to get in place to allow shoppers to shop safely and to transact safely.

Interestingly, mortgage rates are really low right now for those who can qualify, and that's encouraging for the industry. But new listings are down, which means inventory is low for those shopping. So if you pair this kind of low inventory with high demand -- I've heard said internally, there are lots of fish biting but just not a lot of bait in the water. We've got to figure out -- so prices have stayed up. Supply and demand has had prices stay relatively level. And we're -- and our Econ team is not forecasting that prices come down that much. Our challenge now will be to educate the industry and educate sellers on the fact that it is actually a pretty interesting time to throw some bait in the water, if you want. If you want to move, the market is there, demand is there. And so we're working on how to educate people as to that and as well the whole industry is.

Anyway, I hope that helps. We have very talented Econ team that has published a lot of stuff that we refer to in the letter that you can dig through on your own, too. Thanks, Maria.

[Operator]

Your next question is from Lauren Cassel of Morgan Stanley.

[Brian Nowak, analyst]

It's Brian on for Lauren. Just had 2 questions for you, Rich. I guess the first one, maybe sort of talk to us about how post-COVID, post-downturn, how do you think about any real structural changes in the real estate industry that you see developing? And talk about the investments that you need to make at Zillow to really capitalize and drive those. And then secondly, where is sort of your head on the timing to roll out Flex into more markets as the economy kind of starts to light up in the back half?

[Richard Barton, executive]

Brian, yes. Post-COVID, like, yes, I mean we were chatting about that before, this is not going to -- we're not going to bounce back to the way things were done before. We're seeing all kinds of systems, processes, business models, players change right now. And there are going to be a bunch of sad stories there, but there are going to be a bunch of happy progress for consumers and for the industry as a result. A lot of the technology that I've already been talking about, this kind of real estate 2.0, a modern platform for virtual shopping and digital closing, that's all -- it's just -- it's really rapidly progressing right now, and that's not going to go back either.

I think there's an interesting one that is kind of a question right now. I think we all kind of feel all -- a lot of pent-up demand to move. That may be too simple a way to put it. We're all rethinking how we live, where we live, the structure of where we live. I'm right now in my bedroom because I have 3 kids on Zoom school right now at -- all over the house. I don't have an office in my house. My dad had an office when I was growing up. I never saw the need for an office. Well, I see the need now. All of a sudden, I have there a need. There are people certainly who don't want to live in the city anymore. They may want to live somewhere else. I do think we're going to see a lot of companies, including Zillow, get a lot more permissive and accepting and embracing of people who might want to work from anywhere.

And all -- so all of these factors -- plus economic turmoil will dislocate people, too. But all of these factors are leading to what I'm thinking of as this great reshuffling. We're all going to -- a whole bunch of us who are able to, force to or have the means to are going to reshuffle where and the way we live our lives as a result of this. So this is a major thing. Well, at least, we view this as a major thing. And this part of it, at least, is leading me to believe that we're going to see the great unsticking of the housing market. The housing market has been stuck since the global financial crisis in this weird, artificially low volume liquidity state. And it just feels to me like this is going to be the thing that gets it unstuck. On Flex...

[Brian Nowak, analyst]

Got it. Great. And then just -- yes.

[Richard Barton, executive]

It was so long ago that I -- I was talking for so long that I almost successfully dodged the Flex question. We don't have any...

[Brian Nowak, analyst]

Can't shovel away from that.

[Richard Barton, executive]

We're really glad, like, we're so happy we have Flex in our quiver. We're so happy that we have that as a weapon right now and a tool because, as you might imagine, pay later might be pretty attractive in a time when commission income is down for our partners. And so we're really excited we have that in our quiver. We don't have anything new to report. We're methodically testing with a few additional kind of high-performing partners this quarter as we -- just like we previously announced. Regardless of business model, what we're doing -- what we're trying to do is create a better customer satisfaction experience for our customers, more money for our partners, with better partners and higher revenue and profit per lead. And we are looking at this as kind of an optimization problem, if this was a, I don't know, problem -- optimization opportunity at this point and working with different model -- different business models to achieve those goals is what we're focused on.

[Operator]

Your next question is from Heath Terry of Goldman Sachs.

[Heath Terry, analyst]

Great. Just to dig a little bit into the Flex side of things further. I guess, one -- and realize that this obviously has disrupted any chance of sort of having understandable metrics or trends or anything in any part of the business. But just any update on sort of what you are, or maybe were, seeing or just sort of how conversion rates or your feeling about the impact that, that business is having on customer satisfaction, agent close rates, agent ROIs would be helpful, understanding that it's all sort of taken within the context that we are in a very different world at the moment and probably will be for a while.

And then I guess to follow up a bit on that question about Flex timing, given this disruption that we're in right now, any reason not to use this disruption to accelerate the timing on rolling out Flex? Is it -- is there an almost "what do you have to lose" kind of component to just going ahead? Since you know that, that seems to be where you want to go, that maybe now it might not be such a bad time to just go ahead and get there given everything else is already as disrupted as it is.

[Richard Barton, executive]

We all -- it's the air cover, you got air cover.

[Heath Terry, analyst]

Right.

[Richard Barton, executive]

Maybe Allen, do you want to take the first?

[Allen Parker, executive]

Do you want me to start on that? And then you could...

[Richard Barton, executive]

Yes, sure. It's okay.

[Allen Parker, executive]

I was just going to try to give some color. We called out the impact on Q1. So I guess what I'd say is that right now, Flex is going about as expected. We had planned -- we called out a 400 basis point impact in Q1 on our call in February. That was actually about a 430 basis points, we round it. The actual number came in a little over 460. So Flex is going about as we expected. What I would say is that we are finding, as we work through this, that it's not just to flip a switch and let it go. It's a process. It's working with our best partners to put mechanisms and operational rigor in place to allow them to scale and grow. So it's not something you can just flip and expect to serve the customer better. And so that is why we're being a little more methodical as we test.

So we are looking at opportunities to work with our best partners. As Rich mentioned, we're continuing to expand the program and expect to continue still in the Q2. But it's just not something we can flip. So I don't know if you want to add any more color. So I think we're finding that it does work, but there are things we're learning that make it work better, and that's why we're continually refining it before just flipping the switch.

[Richard Barton, executive]

Yes. And we -- and Heath, as you might imagine, it's a little harder to measure. We're doing all kinds of testing to figure out how and where it's working, how it's better for us from a revenue and profit per lead perspective and how it's better for our partners and customer satisfaction. And that equation is -- as transactions plummeted during kind of peak fear, it kind of throws a little bit of a monkey wrench in our measurement devices on that. And so what's great is that we are working to focus -- where we're moving more quickly and using this time to move more quickly is focusing our lead flow, our customer flow, those partners that are best able to give good service and convert. And we're taking this time to really build out those predominantly teams of people in various cities to make that happen. And we're really encouraged. I'm really encouraged by what I'm hearing coming out of the PA group. They're super energized right now.

[Operator]

Your next question comes from Naved Khan of SunTrust.

[Naved Khan, analyst]

I just wanted to understand the dynamics between MBP and the fact that you're now doing some discounting in Q2. Just wanted to understand, once you let the MBP decide what the advertising is going to be, where the rates are going to be, maybe in Q3, is it possible for you to have the recurring rates kind of come back to 1 and not dip below the 1 index that you show on the chart?

[Allen Parker, executive]

Yes. So I'll take this. Thanks for the question. So again, we're providing guidance just for the quarter. However, we put that chart in place to kind of show the relationship between the input metrics and this discount. So as we've moved, to be honest, from the first decision point at the end of March when we saw this dislocation to our input starting to come back, this targeted market approach is actually moving our [ FBP ] back more and more to MBP as we go. And so we expect, if these trends were to continue, that we would be closer and closer to where we started the quarter if our inputs reflect that. There is a lot of uncertainty. And again, we saw the -- we think we've hit the floor and we're seeing the positives. But our modeling would suggest that if we continue to see these input trends, our discounting would become less and less and eventually to a very minimal amount. Our outlook, as I mentioned, did provide for some additional discounting in the latter part of the quarter, but less so than even the second round that was more targeted, if that helps.

[Naved Khan, analyst]

Got it. And maybe one follow-up question for Rich. It looks like you were able to use some machine learning techniques for selling the inventory you had on the iBuyer side. Can you just maybe give us some more color on what are these techniques and how much of help they are?

[Richard Barton, executive]

Sorry, I was muted. I mean it's just the machines getting smarter. It -- these businesses feel big and old, but this business is actually small and young for us. And we have just gotten a whole lot better at how to figure out what to buy, where to buy it, how to rehab it, how to appraise it, how to price drop it, and all of this is informed by data. And as you -- as demonstrated by the outputs of our sales velocity on ZO, it's definitely working, working way better, honestly, than we anticipated. At the beginning of the crisis, we were quite worried we would not -- we were just worried. We're wondering whether or not we would be able to move a bunch of that inventory, and I've been really impressed. We were already on that trend. We were already speeding sales faster than we were acquiring inventory. And so that trend has continued. I've been really impressed with that. It's time for us to stop celebrating declining inventory numbers, however. It's time for us to get back to business on the Zillow Offers and get Han Solo out of that carbonite. So we're excited about turning on the acquisition side, too.

[Naved Khan, analyst]

Got it. Would it be fair to say then maybe there was some kind of a step change in this -- the improvements you derived maybe in Q1 that helped you speed up the velocity? Or would that be a stretch?

[Richard Barton, executive]

I think that's a stretch. I mean the improvements of -- with machine learning, maybe in early days, come in big steps and then afterwards, come in, in lots of small increments. And that's what we are seeing right now. And even though the market is a little wonky, we will continue to -- we expect to continue to see that.

[Operator]

Your next question is from Edward Yruma of KeyBanc.

[Edward Yruma, analyst]

The Homes business, I know there's a little bit of tentativeness, but I think you guys said about 3 weeks from now, you'll restart. What will the cash implications of that be as you re-ramp? And kind of give us an idea of what gates you're going to use to evaluate kind of the re-ramp? And then second, you indicated you're going to do some tactical discounts going forward in the PA business. I guess any kind of idea as to how much discounts will be and kind of what criteria you'll use per market to determine what the discount should be.

[Richard Barton, executive]

Can you take that, Allen?

[Allen Parker, executive]

I'll take the first one, and then I want to make sure I understand the second one. But on -- the unpause of ZO, again, I do want to reiterate, we continue to believe in the thesis of Zillow Offers in that business model. And as Rich has discussed today, that thesis may be even stronger, and real estate 2.0 and our customer needs may be a better value proposition, which is obviously a positive. So our penetration may be better. With respect to the capital needs of that business, when we made the pause, we talked about the actions we took. We can start up again without a significant incremental cash or cost increase getting back to the volumes and run rates that we were at. And again, Rich mentioned we're going through the plan on how exactly we'll start that up, and we expect to do that soon.

We'll continue, as we always have, to just assess our ability to fund either with equity for our portion of the houses. We'll continue to leverage the asset-backed warehouse deals that we have for the homes. We're excited about the resell velocity that we have, which allows us to move homes through quicker if those trends continue. So we'll just continue to monitor it on a cost of capital and an ROI basis, looking at a long-term investment in that business. But I don't expect it to significantly change. In fact, it'll likely be less than the capital we had talked about coming into the year just given that we had to pause and we have to ramp up again, if that helps.

And then you had a question. I believe you said how are we thinking about MBP discounts?

[Edward Yruma, analyst]

Yes. And just trying to really understand again the dynamics you're considering. Some of your competitors are kind of continuing to step on the gas from a promotional perspective. So kind of what gives you confidence that a more tactical approach is what's warranted in this environment?

[Allen Parker, executive]

Yes. So I guess what I'd say is I'll just grow the data point up that when -- after our first adjustment or discount, which was -- I call it a sledgehammer, but it was 50% across the board. And again, inputs were dislocating. As trends started to come back up and as we made a more targeted adjustment to our discount process in late April, we are continuing to see very good retention of all of our partners and the partners that we want. So that's a data point that says that we believe this tool is working, that is showing we are in this with our partners for the long term as well as it's working to retain our best partners to ensure our customers are served. So right now, we believe it's a tool that will continue to work. We're well positioned. If you look at our traffic, our brand, our balance sheet, I think we're in a great position to continue to win. We will continue to serve customers with technology, which will drive traffic.

And so I believe that the metrics that we showed and our ability to go back to more of an MBP pricing when we're providing value to our customers is real. And again, there's a lot of uncertainty out there, but we're happy with where we are. We feel like we're in a really good position.

[Operator]

This completes the allotted time for questions. I will now turn the call back over to Rich Barton for any closing remarks.

[Richard Barton, executive]

Okay. So this period has clarified just how essential it is for people to be able to shop for a home and move. Now we more clearly see that people have an innate desire to move and that this period may even be a catalyst for many to change their address for a variety of reasons that we've talked about. Watching this unfold has given new meaning to our mission and the important role that Zillow is privileged to play in the lives of so many.

So as my e-mail auto signature says, keep calm, be safe and carry on. We'll talk to you soon. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.