Zillow Group Inc

NASDAQ:ZG

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon. My name is Eiley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group First Quarter 2021 Conference Call. [Operator Instructions] Please note, this event is being recorded.

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

[Bradley Berning, executive]

Thank you, Eiley. Good afternoon, and welcome to Zillow Group's First Quarter 2021 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 recorded on the Internet and is accessible on 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 and Technology segment as our IMT segment. We will now open the call with brief remarks, followed by live Q&A.

And with that, I will turn over the call to Rich.

[Richard Barton, executive]

Thank you, Brad. Good afternoon, everyone, and thank you for joining our first quarter 2021 earnings call.

We are in a much better place compared to one long year ago, and I am so grateful and impressed that these miraculous COVID vaccines are now widely available across the country. I hope that you and yours are beginning to find some normalcy after such a trying year.

In a typical year, spring begins the traditional home buying season, but we know that this past year was anything but typical. Home buying never really slowed down. The Great Reshuffling, driven by changes in what we want and need out of our homes, has fueled continued interest in moving. And we expect this moving demand to continue as we all adjust to a safer world ahead.

Our research team recently published a survey-based Mover Report, which we have hyperlinked to from the shareholder letter. It's a great read when you have the time. The report indicates that the pandemic has indeed caused people to rethink where they live and concludes that approximately 8 million existing homeowner households that have been on the sidelines may enter a real estate market already beset by unrelenting demand. Additionally, 8.9% of consumers plan to purchase a home in the next 6 months, near a 20-year high for The Conference Board's April Consumer Confidence survey.

The reaction we got from our own employee base when we told them last March that we intended to have a more flexible workplace policy for the long term is an interesting case study in how remote work catalyzes the Great Reshuffling. We found that 30% more employees moved in the year following our announcement compared to the previous pre-pandemic year. This time last year, we had employees in 25 states. Now they are in all 50. This is obviously a small sample, but it shows how the Great Reshuffling might play out as people get certainty about their company's post-COVID workplace plans.

Zillow is an early embracer of a more flexible long-term workplace model, so we are a few steps ahead in firming up our plans. But we expect that other companies will adopt more physical location flexibility to varying degrees, simply because it's hard to take back something that employees have been given and value. That cultural shift will free up more restless households to list and move, and Zillow will be here to serve as their trusted partner and resource.

Beyond the continued reassessment of where we all lay our heads at night, the housing market is underpinned by demographic and economic tailwinds that will persist for the foreseeable future. Millennials are moving up, baby boomers are downsizing and in between, people of all generations are rethinking their lives. Despite recent shocks, mortgage rates are expected to be quite constructive for the foreseeable future and are near all-time lows versus historical levels.

It appears that housing turnover should accelerate from the historically low rates of the past several years. Along with an easier digital transaction, all of these trends point to more liquidity and household formation long term, which creates a healthy backdrop for the housing market and the business in which we operate.

Of course, the most powerful and important shift driving our business is the title shift moving consumers' real estate dreaming, searching and transacting from off-line to online. Just as they have in many other parts of their lives, consumers have experienced the greater convenience of a digital technology-enabled home search and some, the magic of a digital transaction. They will only expect further advancements in the future.

Moving on now to some business results from another strong quarter here at Zillow cloudHQ. First and foremost, all of this energy around moving has created a Zillow wave of sorts, and our customers are surfing it every day.

Just last week, Time named Zillow one of the 100 most influential companies for, in their words, "making an extraordinary impact on the world." A little grand perhaps, but definitely a nod to the vast reserve of brand goodness that we have been building up over 15 years.

An uptick in pop culture recognition this past year has helped accelerate our traffic. In Q1, 221 million average monthly unique visitors -- users visited our sites and apps, which represents an increase of nearly 30 million average monthly unique users versus this time last year. This is a level that we previously would not have thought possible and should provide the fuel for years of customer growth into the future.

Our top-of-funnel engagement with our customers translated into excellent results across Zillow suite of products and services. Our flagship buy side business, Zillow Premier Agent, once again generated the strongest results we've ever seen, reporting 38% revenue growth year-over-year in Q1. Our nascent sell-side business, Zillow Offers, continued to accelerate out of the pause we instituted in the pandemic, generating over $700 million in revenue and surpassing our internal expectations on revenue, EBITDA and unit level economics. The success from our buy side and sell side offerings, when combined with solid execution from our adjacent services and supporting businesses, translated into total revenue growth of 54% sequentially and total company EBITDA of $181 million for the quarter. To put that number in context of Zillow's history, it represents 90% of our full year 2018 EBITDA, which was just prior to the commencement of our heavy investment in our Zillow 2.0 vision.

We are now beginning to register the benefits of the investments we have made across our product innovations for buyers and renters as well as our major ventures into Zillow Offers, Zillow Home Loans and Zillow ClosingServices. This increased profit generation after such a meaningful investment period gives us confidence that the bets we are making across the business are accretive, and we are allocating our time, our people and our capital appropriately for the long term.

Speaking of our people, Fortune named Zillow one of its 100 Best Companies to Work For based on our own employees' feedback about working at Zillow in 2020, including how trustworthy, caring and fair they felt Zillow has been during the pandemic, which forced most into Zoomland.

As we reimagine the future of our workplace, we are grateful for our flexible and talented workforce. While our employees are doing well and our quarterly results are strong, we are oriented to the multidecade journey in front of us, the journey to digitize and simplifies a huge industry, delivering more and more movers gracefully to their next homes.

Pursuit of these growth opportunities deserves continued appropriate reinvestment of profits. As part of that journey, we recently launched a new advertising campaign with the tagline To Move is to Grow. We think it wonderfully captures the essence of why moving is both exciting and daunting, and how we at Zillow are increasingly able to help our customers navigate this crossing. The campaign supports the expedition we are on as a company as well. Just as we've been reorienting our employees and mission around transactions, we have the exciting task of reeducating our customers on who the new Zillow is and what we can do for them. Every signal we see based on data and customer feedback is that customers expect and demand a more seamless experience. This is Zillow 2.0.

A great example of our customers' enthusiasm for ease is the reaction to our recent announcement that many homeowners in Zillow Offers markets now can see that their Zestimate is a live initial offer from Zillow. The announcement press alone drove record-breaking interest in the service with requests coming in at levels we've never seen before.

We believe we are on to something with this Zestimate offer. The continuing challenge and opportunity going forward will be to translate customer interest into transactions. Now that we have many of the ingredients for our end-to-end home transaction through Zillow services and products, we are upgrading our giant repeat customer funnel and converting more browsers into customers. We are motivated every day to ensure we deliver our customers' excellent integrated experiences on par with simpler, smaller e-commerce transactions in other parts of their lives.

To reiterate, it is still early days in these efforts, and there is so much work to be done as we begin to scale. Across Zillow, we estimate that our 2020 gross profit was larger than any other player in the residential real estate technology category. But our buy side Premier Agent business and sell side Zillow Offers businesses still represent less than 2% of the total annual residential real estate industry service fees. We are proud of our business, but we have an ocean of opportunity in front of us.

Each customer who uses Zillow to move has a story. One we're sharing today is about first-time home sellers, Jessica LaRue-Briscoe and her husband, Shawn. They turned to Zillow when they were anxious about a move from Colorado to Texas, where they wanted their 2-year-old son to grow up near their families. Zillow connected Jessica to an agent partner, Adam Unger, and he walked her through the selling process. It was all new to her, and she was scared and dubious. "I'm going to take a gamble on you," she told him. Adam's experience and professionalism kept their worries at bay, and Jessica and Shawn felt informed and prepared throughout their move. "I really feel like we were able to be connected with the best real estate agent for us because we went through Zillow," Jessica said. The happy ending to the story is their son is now spending time in Texas with Jessica's grandparents who are in their 90s.

We are motivated every day by customer and partner success stories like Jessica, Shawn and Adam's. Like our ad campaign says, to move is to grow, and we're seeing that here at Zillow with our employees, our customers and with our industry partners. As for our investor partners, we appreciate the support as we go on this journey with you.

With that, I'll turn it over to Allen.

[Allen Parker, executive]

Thank you, Rich. As Rich discussed, Zillow Group delivered another strong quarter, reporting Q1 consolidated revenue of $1.2 billion and EBITDA of $181 million, both exceeding the high end of our outlook range.

Q1 IMT segment revenue of $446 million grew 35% year-over-year as we continue to see accelerated growth in Premier Agent and strong growth in rentals. IMT segment EBITDA was $209 million in Q1 or 47% of IMT segment revenue. Accelerating revenue growth, combined with year-over-year declines in operating costs, translated into 143% year-over-year EBITDA growth in Q1.

Premier Agent revenue grew 38% year-over-year in Q1. The accelerated growth was primarily driven from connections growing faster than traffic as well as our focus on providing outstanding service and optimizing to connect high-intent customers with high-performing partner agents.

Growth in Zillow Offers continue to reaccelerate in Q1. We reported Homes segment revenue of $704 million, which exceeded the high end of our outlook with 1,965 home sales. Resale velocity was above our expectations. In Q1, we sold 128% of the beginning inventory of 1,531 homes, which contributed to inventory declining at the end of Q1 to 1,422 homes. Purchases increased to 1,856 homes in the quarter from 1,789 homes purchased in Q4, but not quite at the pace we planned as we continue to work on refining our models to catch up with the rapid acceleration in home price appreciation.

During Q1, we continued to focus on unit costs, automation, adding capacity and sharpening pricing models to improve offer strength as we continue to scale. Our Q1 Zillow Offers unit economics of 549 basis points return before interest expense was above the plus or minus 200 basis point guardrails we've set for ourselves while working to scale the business. The outsized unit economic results were impacted by the ongoing strong housing market, which is temporal in nature. We made progress during the quarter on improving offer strength and sharpened pricing that tightened our unit economics by approximately 120 basis points from that of Q4. The durable operational improvements in overall cost per home contributed 280 basis points improvement from Q1 2020.

Our Mortgages segment revenue increased 169% year-over-year in Q1 to $68 million, and Mortgages segment EBITDA was $6 million compared to the midpoint of our outlook range for a loss of $1 million. The revenue and EBITDA outperformance was primarily driven by mortgage loan origination volume, which was up more than 8x year-over-year, as well as our mortgage marketplace, both as a result of strong refinance activity. Beginning this quarter and going forward, we will disclose our mortgage loan origination, purchase and refinance volume.

In Q1, refinanced loan origination volume comprised 90% of total origination volume. We continue to invest in our mortgage platform to provide a compelling experience for our purchase customers as well as to integrate it across our business.

Turning to our outlook for the second quarter. At a consolidated level, we expect revenue to be $1.26 billion, up 64% year-over-year, at the midpoint of our outlook, and EBITDA to be between $116 million and $140 million. Our IMT segment -- in our IMT segment, we are forecasting 66% year-over-year revenue growth in Q2 and 44% revenue growth over Q2 2019, at the midpoint of our outlook range. Within the IMT segment, we expect Premier Agent revenue to be between $342 million to $350 million, up 80% year-over-year and up 49% over Q2 2019, at the midpoint of our outlook. This is being driven by strong top-of-funnel traffic and connections as we enter Q2.

It is important to note that during Q2 last year, we provided Better Together billing relief to our Premier Agent and other marketplace partners. Excluding the impact of this billing relief, we expect Q2 year-over-year Premier Agent revenue growth to be 38% and IMT segment revenue growth to be 35%, at the midpoint of the respective outlook ranges.

We expect Q2 IMT EBITDA margin to be 41% at the midpoint of our outlook, down sequentially from 47% in Q1. As we position ourselves to drive sustainable, profitable long-term growth, we expect Q2 IMT EBITDA margin to reflect accelerated investments in marketing, staffing and technology, up from Q1 levels, and we expect to further accelerate investments into Q3. For full year 2021, we expect EBITDA dollar growth more in line with revenue growth rates rather than expansion from the 38% EBITDA margin we reported in 2020.

In Q2, we expect our Homes segment revenue to increase sequentially to $735 million at the midpoint of our outlook. The higher-than-expected Q1 resale velocity I mentioned previously pulled forward a portion of expected Q2 home sales. Customer interest in selling their homes to Zillow and the operational improvements we have continued to make have shown strong improvement in top of funnel as we enter Q2, which gives us confidence in our ability to continue to scale the business in the periods ahead.

We expect Mortgage segment revenue to be between $57 million to $62 million in Q2, which is down from Q1. Our Q2 guide reflects slower industry refinance activity and narrower gain on sales spreads. As we have discussed for the past couple of quarters, we do not expect the cyclically high gain on sale margins from originations to be sustainable. We plan to continue to capture solid refinance demand and invest in building the factory to scale our operations as the purchase business is built over time. As a result, we expect Mortgages segment EBITDA to be between a loss of $9 million and a loss of $5 million.

We further strengthened our balance sheet during the quarter by initiating an at-the-market offering, or ATM, selling $551 million of capital stock. We have been, and will continue to be, opportunistic and prudent on any potential future share sales and approximately -- have approximately $450 million remaining on the authorization. We ended the quarter with $4.7 billion in cash and investments, which puts us in a strong position to fund our vision for Zillow and make strategic long-term investments, both organically and inorganically.

As a reminder, we do have a $500 million commitment to acquire ShowingTime as we cooperate with federal regulators to work diligently toward closing the acquisition.

As we look forward to the balance of the year, our priorities remain focused on innovating and executing on behalf of our customers and partners. We look to: grow our customer base and engagement through a compelling dream and shop experience; invest in sustainable top line growth opportunities across the company; reduce cost structure and improve productivity in transaction services; drive profit growth through operational discipline.

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

[Operator]

[Operator Instructions] Our first question today will come from Ron Josey with JMP Securities.

[Ronald Josey, analyst]

Appreciate it. I wanted to ask -- clearly, so much going on. I wanted to maybe zero in on Zillow Offers here first. I mean significant demand in the quarter. Sales pulled forward, Allen, you talked about that. Zestimate driving even more demand. Maybe with supply seems being a little bit harder here and you're sharpening pricing to offset that, Rich, can you just talk about the broader market for Offers in a stronger real estate market? Just how do you acquire the inventory relative to demand? How do you balance those 2 things together?

[Richard Barton, executive]

Yes, Ron. Thanks. I mean we are rapidly learning how ZO lives in this -- really this unprecedented home price appreciation environment. The appreciation in the last 6 months is the largest move up or down that we observed in the data set over the last 35 years, right? So it's a very fluid market.

But as you noted in your question, our -- and Allen talked about in his script, our top-of-funnel indicators are good, like it turns out that speed, certainty and convenience are attractive to sellers no matter what kind of market they are in. So we are seeing record levels of folks raising their hand to get a Zillow Offer. I think part of that is driven by this really nifty feature we launched last quarter that we internally call Zestimate Offers, which is this live initial -- having the Zestimate be a live initial offer for lots of the homes inside of the buy box in Zillow Offers markets.

So anyway, we're also really happy with this kind of glow that we're seeing across the business from this positive reinforcement we have from having all of these linked businesses and having this very large single funnel of customer demand coming in. And the IMT and adjacent business numbers are really, really commendable. But on ZO, in particular, Ron, we're leaning in, like -- we're leaning in. We're expanding in the 25 markets. We're heavily staffing, as I think we made an announcement, maybe Allen just talked about it, too. We are planning as a company. I'm hiring a net 2,000 people in 2021, and a lot of that will be for Zillow Offers. And we're making other investments in ZO as well.

So we are comfortable with that increased investment because of what we're seeing top of funnel because what we know about the consumer value proposition. And also, we're leaning in because most consumers don't even know what Zillow Offers is yet. They don't even know -- we've got to take Zillow 2.0 out of the kind of quarterly conference call realm and into the consumer awareness realm. And so we've got a lot of work to do there, and we're basis points penetrated in the business overall. So long answer, but we're feeling -- we're leaning in and feeling good.

[Allen Parker, executive]

Ron, and Rich, I'll just add, just to give a little color to the guidance for Q2 with respect to Homes segment revenue. We called out the resell velocity pulling some sales into Q1. And I just want to call out, even with strong top-of-funnel activity, there is a lag as we go through between offer, purchase and an eventual sale, and when we see the revenue. And so a lot of this top-of-funnel activity will start to show up more in Q3, and that's part of the reason for the Q2 guide. That's reflected -- that lag is reflected in the Q2 guide.

[Operator]

Our next question comes from Naved Khan with Truist Securities.

[Naved Khan, analyst]

Just a couple of questions. So maybe just on Zillow 2.0, how do you measure the progress that you're making on the initiative? And how do you think about the long-term profitability potential in the 2.0? And then just maybe on hiring, what are the areas that we're seeing the biggest increase in headcount?

[Richard Barton, executive]

Okay. Naved, so the 2.0 bet is all about the fact that we believe customers want speed, simplicity, integration, value. Like these are not risky bets to make on consumer behavior, okay? They're kind of timeless features of what customers demand. And we also believe that our brand and our traffic give us a competitive advantage relative to kind of point solution competitors. Because we have a large audience, we can spread any customer acquisition costs we may have for those customers over a much larger revenue profit and transaction base. So that's kind of the business school answer to why we like the competitive advantages.

So that's why we've made the bet. So we've made these big bets over the last 2.5 years when we really leaned into 2.0 and building out all of the 2.0 components like Zillow Offers, Mortgages, Zillow ClosingServices, even Rentals.

Anyway, the short answer to your question is it's working. All the children appear to be above average. I don't know if we're getting any chuckles out there to the Garrison Keillor reference, but all the businesses are performing really well beyond our expectations. So that's a terrific proof point that the integrated strategy and the transaction strategy is working.

Our revenue and profit on a per user basis is steadily rising, which is really nice to see, and it's still quite low, so we have a ways to go. I said in my script, we kind of introduced some new kind of TAM and penetration concept, this 2 -- less than 2% gross profit penetration into the total addressable market of service fees in the industry. We keep struggling for ways to talk about the full opportunity in quarters past. We've talked about trying to estimate transaction share and what share of transactions we touched. That is fraught because we don't exactly know how many transactions we touch. So we're -- I've challenged the team to try to figure out if there's maybe a gross profit penetration metric we can come out to communicate the opportunity for ourselves and for you all. So that could be interesting.

Anyway, there's still a ton of work to do on 2.0. Not the least of which, as I said before, is awareness of 2.0. That's where you're seeing marketing investment -- increased marketing investment from us. Anyway, stay tuned. We're on the path. We like the path. Things look clear, and lots of green lights out the front windshield.

[Naved Khan, analyst]

And maybe on the headcount, can you give us some more clarity on the areas where these are [ predictable ].

[Richard Barton, executive]

Maybe Allen, if you want to answer that.

[Allen Parker, executive]

Yes. I mean I guess what I would just say is I would classify -- we're continuing to make investments across a variety of our businesses where we feel like there's a lot of opportunity to accelerate, innovation for our customer, shop and dream, buy with, sell with. And so there's quite a bit of tech and dev, but there's also transactional type resources that are necessary as we scale the business. And so I think you're seeing kind of a mix of those. There are some additional innovative ideas around 3D tours and other things. So most of the initiatives we talk about, we are looking at where we need to resource and to accelerate our investment. But it's spread across the company. And I'll just take this moment to say we continue to prioritize our existing resources as well to make sure we're making bets on the right big bets. But we like the results we're seeing. We like the inputs that we're tracking and look forward to execution.

[Operator]

Our next question comes from Lloyd Walmsley with Deutsche Bank.

[Lloyd Walmsley, analyst]

Two questions. First, recognizing better growth in the second quarter guide on that kind of normalized basis, excluding the better together discounts. Can you just talk about the sustainability of the PA business, particularly into the second half as comps get harder? What are some of the drivers behind the outlook for 2Q and -- that can help in the second half?

And then secondly, you put up the 47% segment margin in IMT, guidance implied first half margins about 44%. So if full year margins are going to be kind of flattish with last year, it implies a big step-up in the second half, can you give us a better sense of what you're investing in, how it's going to flow across the segments? And then what specifically will be weighing on IMT segment margins in the second half given you've been so disciplined on cost growth there for multiple years now?

[Richard Barton, executive]

Thanks, Lloyd. That sounds like an Allen question.

[Allen Parker, executive]

Sure. Thanks, Lloyd. So on growth, yes, in Q1, Premier Agent growth, up 38% year-over-year. If you compare it to the underlying growth rates we've talked about, in Q4, was 27% and -- in Q4 2020 was 27% and in Q3 of 2020 was 20%. So we've seen this accelerating underlying growth trend in Premier Agent.

If you look in our Q2 outlook, the underlying growth rate of 38% at the midpoint after you adjust for the better together discounts is a continuation of the inputs that we're seeing. We have a large audience, strong top of the funnel. And when you combine that with a focus on some of the inputs of customer satisfaction and conversion and revenue per lead, we're just seeing very encouraging trends on the inputs. And I think it's all predicated by this focus on helping the customer get through the transaction.

In terms of the second half, we're not providing guidance, but what I would call out is that the Premier Agent Q2 2-year growth rate of 49% that I call -- we called out in the shareholder letter at the midpoint of our range is probably a good way to think about growth as you look at your models on how to model forward through this weird year that we had in 2020. So hopefully, that helps.

With respect to margin, our Q2 IMT EBITDA margin, we expect to be 41% at the midpoint of our outlook. That is down sequentially from the 47% print in Q1. As we position ourselves to drive sustainable, profitable long-term growth, we do expect this margin rate to reflect accelerated investments in marketing and staffing and technology to provide innovation on behalf of the customer. And so we do expect that to increase from Q1 levels, and we expect further acceleration in Q3.

When I think about full year, given your question, what I'd say is we do expect EBITDA dollar growth, but that growth more in line with revenue growth rates rather than expansion of the 38% margin rate we put it in 2020. So hopefully, that helps.

[Lloyd Walmsley, analyst]

Yes. No, that's great. And just to clarify, when you say kind of the 2-year growth kind of consistent is a good way to think about it, is that excluding the Better Together? Or is that just on a headline basis?

[Allen Parker, executive]

That's on a headline basis.

[Lloyd Walmsley, analyst]

Got it. All right.

[Allen Parker, executive]

It's the 49% -- if you just take Q2 2019 print to Q2 2021 midpoint, that's 49% growth, and we think that's a good way to pin your models.

[Operator]

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

[Ryan McKeveny, analyst]

Congrats on the results and great to see the momentum continuing. So first question, and I apologize if I missed this, but can you share an update on the transition to using in-house agents or employees on the iBuyer transactions? Maybe what share of transactions in the quarter were in-house and how that transition is going versus your expectations?

And second question on the mortgage business. So the stat on the 90% share of refi is very interesting. I think it seems to be a bit of a kind of early confirmation signal that the overall Zillow business is moving from something that was once servicing and monetizing buyers to then sellers and now homeowners that might want to refi. So I guess I'm curious on the mortgage space, can you talk about the strategy and maybe that interplay between driving the actual attachment on the iBuyer purchase product and driving mortgage volume more generally because I know there can, of course, be a lot of differences in just strategy to the approach of kind of purchase versus refi share over time? So hoping you can maybe separate those pieces and talk a bit about the strategy.

[Allen Parker, executive]

All right. I'll start and Rich or Brad, jump in. But on Zillow brokerage services, we're operating in just a few of the 25 markets. So that's still relatively nascent. It's going well. We are excited about initial results, but there's nothing with respect to attach or any kind of data point yet. Over time, we do believe that's a great way to have a better integrated customer experience, but we still work with partners across all our markets, and we're learning the services that we can provide but still relatively new.

And then on mortgage, I guess the way I would describe it, as you think about our mortgage strategy coming together, when we purchased Mortgage Lenders of America way back in 2018, they were really a direct-to-consumer, nonconforming origination shop. Our initial strategy was to move to a broader mix of conforming mortgages while updating and transforming the platform and bringing in new leadership.

In 2020, we started to share our focus on building the factory to bringing in the loan officers and loan processors and building the systems, and we did that off of the strong refinance demand. And we continue to do that into Q1. I think over time, you'll see that mix normalize more to industry standards. But we want to have a compelling and great customer experience, and we're continuing to work with customers and learn. And I think over time, we expect to provide all mortgage services that a customer may want, whether it be refi -- our customer, both those that are doing other services within Zillow as well as refi customers who come looking for refi.

So we're very excited about what the team has done and where we are. And we think that mortgage is a very important part of the Zillow 2.0, and we're continuing to expand there.

[Operator]

Our next question comes from Ygal Arounian with Wedbush Securities.

[Ygal Arounian, analyst]

So just one question on Zillow Offers and one on Premier Agent. So let's go back to Allen's comments, I hope I'm not misquoting, and you highlighted purchases were not at the pace that you were expecting kind of over the course of the quarter, and you work to kind of catch up with HPI and the really strong environment. Can you expand on that and what you're doing to catch up, as you say, to that and fix the model or adjust model to what we're seeing, especially in light of some data that we've seen from the [ church ] and your competitors continuing to accelerate some of the purchases there?

And then on PA, you highlighted improvements in PA connections and [ that's why ] I was hoping you could talk about that a little bit. And then as listings are so challenged overall, can you talk about the impact that has to the PA business -- if it's down significantly year-over-year? Does that have a meaningful impact?

[Richard Barton, executive]

You want to start with the ZO stuff, Allen, and I...

[Allen Parker, executive]

Sure. Yes. So yes, I mean, I think Rich hit it pretty well. What I'd say is if you look at our unit economics, and as I mentioned, 549 basis points of return on homes sold before interest expense being above our plus or minus 200 basis point guardrails, the driver that's there that has improved from Q4 is home acquisition costs as a percentage of sales. So it's at 87% of home rev -- Homes revenue versus 85.9% in Q4 but still higher than we would expect, and that's reflective of this resell velocity and our selling of homes at rates higher than we would have expected or underwrote to when we acquired them. And so it's this expansion that we're catching up with. There's also a lot of nuance just in the Offers and how we present them that we're also iterating.

So I guess what I would describe is we are continually figuring out how to improve our Offer strength and the way we communicate that to our customers. The top of funnel and the interest is strong. We're seeing early trends in Q2 that give us confidence that this is something that we are going to be able to do. The guide that I provided in Q2 is reflective of the lag as we purchase those homes, renovate them and then resell them as well as the Q1 kind of overperformance. But we're very confident that we have a compelling offer that iBuying is something customers want even in this market, and the early signs give us confidence that we can continue to grow and scale this business. So hopefully, that helps.

[Richard Barton, executive]

On the -- before I -- let me editorialize on that just a little bit at the risk of keeping this issue open, Allen. Yes. The unit economics, the margins that we're earning on a unit basis right now are not what our goal is. I'll just reiterate that. We want this and know this can be a giant business, and it's only going to be a giant business when the pricing is perceived to be fair to consumers. So it's not our goal to have 549 basis points or whatever it is we just printed on a unit basis. Now it's slightly better than last quarter. In other words, it's lower. But we -- what we're aiming to do is to provide a fair offer and charge a fair fee to our customers, and thus, we believe we maximize the TAM, we maximize the number of transactions we can touch and participate in. And we have the ability to sell a bunch of adjacent services around those transactions. So it's just -- it's worth pausing there for a sec.

All right. On the listings question, yes, listings are really, really skinny. Inventory is really, really low. I think I said this last quarter. It's kind of like the flight attendant on the airplane when she says even though the airbag does not appear to inflate, the oxygen will flow. That is what's happening clearly, and the market volumes are up. Home price appreciation is way up, too, but homes are just moving really, really fast. And so we like to see a market where lots of activity is happening.

We see -- we see off-line to online shifts happening. We see demographic shifts happening. We see Great Reshuffling things happening, all to put wind in the sails of our PA business and our business indeed overall, Ygal.

[Ygal Arounian, analyst]

I think just a real quick follow-up on Zillow Offers. Would it be wrong to characterize that maybe you're slowing your purchases or being more cautious on your purchases based on what's going on with HPI?

[Richard Barton, executive]

Risk is always an important component of pricing, of course. And forecast of home price appreciation is a very important part of pricing as well. And needless to say, we're in a really -- just in a really fluid environment on that, and we're learning really quickly. So...

[Operator]

Our next question comes from John Campbell with Stephens Inc.

[John Campbell, analyst]

Congrats on the continued success. You guys have a couple of positive things kind of spinning up across the product set, obviously, but it feels like Rentals just tends to kind of fly under the radar. You guys put up some good growth this quarter, last couple of quarters of good growth. Just curious about the drivers there and how much lift you've seen from kind of the shift in the monetizing of the rentals and then maybe also the broader opportunity ahead for Zillow Rental Manager.

[Allen Parker, executive]

Right. Will you take this, Rich?

[Richard Barton, executive]

Yes, yes. You start. Yes.

[Allen Parker, executive]

Yes. I mean 46% year-over-year growth rate is fantastic. We're really pleased with our Rentals business. It's -- it comes from and is driven by a lot of the decisions we've made to invest in a fairly good, streamlined set of product innovations. And I think we're starting to see the benefit of some of those over the last few years that we've made. A lot of those are integrated service -- services like one click applications, payments, listings. And these services are all kind of coming together. In fact, as we talk about Zillow 2.0 getting closer to the transactions, I believe we're seeing that in the rental space.

It's also assisted, though, by this continued strength at the top of funnel and our large audience. And even some of the demographics we talked about on the housing market, the broader -- the Great Reshuffling and these demographic tailwinds are also helping our rentals business. So we're excited with the progress. The growth has been strong, and we're excited about the products and services that we're able to deliver both to our customers and to our property managers.

I don't know, Rich, if you want to add anything.

[Richard Barton, executive]

No, that was complete and great. Thanks, Allen.

[John Campbell, analyst]

And then one more follow-up, and appreciate the color there. That's very helpful. On the IDX shift for you guys, I don't know if you ever framed this up, but could you help -- maybe help us understand kind of the offset on operating costs from the shift?

[Allen Parker, executive]

Yes. I guess what I'd say is we're now taking feeds as we're MLS. There's some puts and takes across that. There's -- I would say that we continue to invest to make that a great experience, and there's some costs that come with that, whereas there's also some costs that are reduced from some of the other data acquisition costs that we may have had in the future. But it's not a big enough call out, I think, where we've disclosed one way or the other what the savings are. Well, we really think it's a great customer experience, and it's just really consistent with our ability to have great information on the site and to provide a great experience to our customers. So that's the real win, I think, on the IDX side.

[Bradley Berning, executive]

Allen, I'll just jump in real quick and add. It was really Q3 of last year when we saw the largest debt benefit. There's been other tangible benefits, but there's been a fair cost to invest in the platform since then. So it's been in the expense infrastructure for a couple of quarters already.

[Operator]

Our next question comes from Mark Mahaney with Evercore ISI.

[Mark Stephen Mahaney, analyst]

Let me try 2 questions. Just talk through the EBITDA margins in the Mortgages segment, and I'm sorry if you touched on this before. It seemed like they ticked down a little bit in that business, [ and you may not think ] material, but just talk through that.

And then getting back to the unit economics on the Homes business. So it sounds like you want to run this business with those -- I forget what you call them, the rail guards, or whatever it is, plus 200, minus 200. And the strategy, Rich, is, I think, is as you extract economics from this, then to take those economics and bring them down to the guardrail so that long term, you can bring down commissions and so that you can expand TAMs and just -- and just feed this beast. So that's my understanding of the flywheel.

Now there are scale advantages as you do more and more of this. Where do the scale advantages most show up in terms of bringing those costs down as a percentage of revenue? And so maybe that's really the question I'm asking here is, as you get more and more experience and more and more scale in the Homes business, where do you think the -- where are you seeing and where do you think the most leverage is going to come from in the expense line items that's going to allow you to stick -- pass more of those savings back to the consumer and feed that flywheel?

[Richard Barton, executive]

Yes. Mark, nice to see a brand-new analyst from Evercore here on the call with us today. Welcome and congrats on the new job. I think, Allen, you maybe start with the ZHL margin question, and then we can both tackle the...

[Allen Parker, executive]

Yes. Why don't I do mortgage, I'll start ZO and you can jump on. So Mark, one, thanks for the question. On mortgage EBITDA margin, what we see and what's reflected in the guide is that a significant portion of the revenue downtick in our guide compared to Q1 is related to the gain on sale spreads in our guidance. And so that kind of falls through. We still are very excited about the platform we're building, and we're continuing to build the factory. And so when you see that downtick, it has an effect that kind of falls straight through to EBITDA versus Q1's performance. And so that's what's driving the majority of that downtick Q1 to Q2 on the mortgage margin rates.

And on ZO, I'm sorry, I think you hit it right on my head. What I'd say is we've still provided long-term targets of 400, 500 basis points return before interest. But current period and in the near term, our guidance that we provided is this plus or minus 200 basis points because of the size of the opportunity and because it's important to get out there and provide a great experience. As we learn, we're willing to invest in this plus or minus 200 as we learn the business.

I'd say we see opportunities across all areas. We have improved 280 basis points primarily across renovations and selling costs versus last year. You can imagine renovations as you have more density in the area for your renovations and as you get better and smarter about what needs to be done and what the customer is willing to pay for, who is repurchasing the home that you'll see benefits in that area. Right now it's about 3% of cost -- the cost of revenue.

Holding costs, I reflect with a lot of things, but there are definitely many things we can do to improve. That's a relatively small cost. And then selling costs over time, as we grow Zillow Brokerage Services and as we reduce through automation and technology, some of these non-value-added costs that currently happen in the world today, we expect that number to come down, and we expect acquisition costs to be to be reflective of a fair offer, as Rich mentioned, but a solid cost structure.

Our decision to be plus or minus 200 basis points is reflective of us reinvesting any improvements we make right now to be at this plus or minus 200 because of the size of the opportunity. And as we've mentioned several times, the fact that we're 549 is just saying that we're still working to catch up here.

[Richard Barton, executive]

At the scale we are right now. Thank you for clarifying what I said, Allen. I didn't mean to imply we didn't want to make money natively off this business. But we are subscale, dramatically subscale right now in our estimation. And while we are scaling it, we're targeting this plus or minus 200. So anyway, thanks for clarifying.

And you have the flywheel right. That's the flywheel bet we're making. We also bet, in addition to the leverage we see on the 3 line items that Allen was talking about, we see leverage on customer acquisition costs because we have a cheaper -- we have a much cheaper customer funnel. The Zestimate offer being just like the perfect characterization of that. People come look at their Zestimate. And if that's -- if more and more customers know that Zestimate is a live initial offer for their home, we are more likely to get first crack at them.

Now the challenge is making sure that people even know Zillow Offers exists and what it is, and is there a trick, and is it too good to be true in education and marketing. So we're in that early phase of doing that right now, Mark.

[Operator]

Our next question comes from Maria Ripps with Canaccord.

[Maria Ripps, analyst]

Great. I just wanted to follow up on the PA revenue growth. It seems like a lot of strength there. Can you maybe comment on how Flex is performing relative to your core PA business in this current strong environment? And are you able to share with us any color on how you're thinking about expanding Flex beyond your current markets? And if so, sort of what determines what markets are suitable for this revenue model? And then I have a quick follow-up.

[Allen Parker, executive]

Yes. Thanks, Maria. This is Allen. What I'd say is our revenue growth in Q1 of 38% as compared to that underlying growth statistics I gave of 27% in Q4 of 2020 and 20% in 3Q, obviously accelerating. There aren't any significant -- there are no changes in revenue accounting or revenue recognition to call out in Q1. So that's -- that is the underlying growth rate. And we've talked about the guide of 38% adjusted in Q2 at the midpoint. That is a combination of both MBP and Flex programs working together as 2 monetization tools that we have, and they're both performing well.

And again, if you go to the inputs of improving CSAT, driving more and more of our customers through our connections program and delivering high-intent customers to high-performing agents, those are all things -- the input dials that we're driving go across both Flex and our MBP model, and we're seeing results. We are continuing to look at, and we expect to increase the Flex representation across our pool. There's not any particular market -- it requires us understanding and identifying agents that are willing to grow with us. And so there's not really any particular attribute to call out or metric to give.

I think our growth rate is reflective of us optimizing across the monetization models we have available and the inputs that we're driving around the customer and customer experience to help close transactions.

[Maria Ripps, analyst]

Got it. That's very helpful. And just a quick follow-up on sort of adjacent services opportunity, especially around home insurance. Can you maybe just talk about how you're thinking about bringing -- potentially bringing this additional service to consumers within your platform? And any thoughts sort of around going after this opportunity on your own versus partnering with someone else in the space?

[Richard Barton, executive]

Maria, this is Rich. We see lots of continued adjacency -- logical adjacency opportunities all around the transaction. We haven't targeted or begun talking about any additional ones other than the businesses we're in right now with mortgage, title, escrow, et cetera. But we do obviously see other large adjacencies. We're just going to knock things off one at a time and evaluate each additional one as the time calls for it. Thank you very much. One more, maybe, Brad.

[Operator]

Our last question today will come from Tom White with D.A. Davidson.

[Thomas White, analyst]

I'll ask just one and maybe a follow-up on your comments about kind of your cost advantages in the Offers business and the multiple opportunities you guys are kind of developing to sort of monetize customers that hopefully stick with you. I'm just curious to hear your thoughts on like your appetite for maybe increasing the prices of the homes that you're going after any time soon as a way to maybe increase your TAM.

[Richard Barton, executive]

Tom, thanks for the question. We are constantly experimenting on a market-by-market basis with the buy box and what works and what doesn't, and we have lots of data streaming in, not as much as I would like. I'd like it to be even bigger. The -- if you step back and look at the overall number of transactions we conducted here, it's still relatively low. So we want to get that up, keep the learning machine going and get the buy box as broad as we possibly can, in as many markets as we possibly can.

[Operator]

This concludes our question-and-answer session. I'd like to turn the call back over to Rich Barton for any closing remarks.

[Richard Barton, executive]

Thank you very much, and thank you all for your time today. We're really grateful to have you along for the journey, and we look forward to speaking with you again next quarter, if not sooner. Talk to you soon.

[Operator]

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