Zillow Group Inc

NASDAQ:ZG

Earnings Call Analysis

Zillow Achieves Strong Q2 Performance with Diverse Revenue Growth

In Q2 2024, Zillow reported revenue of $572 million, a 13% year-over-year increase, surpassing expectations by $39 million. The company achieved double-digit revenue growth across residential (8%), rentals (29%), and mortgages (42%), with multifamily revenue rising by 44%. EBITDA grew to $134 million with a 23% margin, thanks to effective cost management. Zillow's transformation into a 'Housing Super App' led to enhanced market performance and increased customer engagement. The company remains on track for double-digit revenue growth and modest EBITDA margin expansion in 2024, forecasting Q3 revenue between $545 million and $560 million.

Introduction of the New CEO

The second quarter of 2024 marked a significant leadership change at Zillow, with the promotion of Jeremy Wacksman to Chief Executive Officer. Rich Barton, the co-founder and now co-executive Chairman, shifted from daily operational leadership to an advisory role. This change comes at a time when Zillow is in a strong financial and strategic position.

Robust Financial Performance Despite Challenges

Zillow delivered a strong performance in Q2 2024, with revenue increasing by 13% year-over-year to $572 million, surpassing their outlook range by $39 million. They reported an improved EBITDA margin of 23%, up by more than 100 basis points. This success was achieved despite the challenging real estate market, characterized by high mortgage rates and a decline in total purchase loan volume.

Growth Across Key Revenue Segments

In Q2 2024, Zillow saw robust growth across its major revenue segments. Residential revenue grew by 8% year-over-year to $409 million, driven by improvements in connection and conversion rates within their Premier Agent program. Rentals revenue surged by 29% year-over-year to $117 million, with multifamily properties revenue increasing by 44%. Multifamily properties listed on Zillow surged 38% year-over-year to 44,000, reaching an all-time high.

Transformative Mortgage Revenue Growth

Zillow's mortgage revenue witnessed a significant increase of 42% year-over-year to $34 million. The Zillow Home Loans (ZHL) segment saw a 125% rise in purchase loan origination volume, reaching $756 million. This growth highlights Zillow's strategy to provide a seamless financing option as part of their broader digital home transaction offering.

Cost Management and Financial Position

Zillow's EBITDA expenses for Q2 totaled $438 million, aligning with their cost management goals. The company ended the quarter with $2.6 billion in cash and investments, down from $2.9 billion in Q1. This decrease was primarily due to the repurchase of convertible senior notes and shares. Notably, Zillow plans to settle $1.5 billion of outstanding convertible debt in cash and shares.

Optimistic Outlook for the Future

Looking ahead to Q3, Zillow anticipates residential revenue between $375 million and $385 million, reflecting normal seasonal changes and continued contributions from their various product offerings. Rental revenue is expected to grow in the mid-20% range year-over-year, with multifamily revenue outpacing overall rental revenue growth. For mortgages, Zillow forecasts similar year-over-year revenue growth as seen in Q2, with total Q3 revenue projected between $545 million and $560 million.

Strategic Priorities and Market Expansion

Jeremy Wacksman highlighted Zillow's strategic focus on expanding its enhanced market strategy and leveraging its strong brand to capture a larger share of the real estate market. Zillow aims to increase its customer transaction share to 6% by 2025, driven by their integrated offering through the 'Housing Super App,' which connects touring, financing, and partner networks seamlessly.

Earnings Call Transcript 2024-Q2

[Operator]

Hello and welcome to Zillow's Second Quarter 2024 Earnings Call. [Operator Instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Brad, you may begin.

[Bradley Berning, executive]

Thank you. Good afternoon, and welcome to Zillow Group's Second Quarter 2024 Call. Joining me today to discuss our results are Zillow Group's Co-Founder and Co-Executive Chairman, Rich Barton; newly appointed CEO, Jeremy Wacksman; and CFO, Jerry Hofmann.

During today's call, we will make forward-looking statements about our future performance and operating plans based on our 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 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 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. We will now open the call with the remarks followed by live Q&A.

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

[Richard Barton, executive]

Thanks, Brad. Good afternoon and good evening to everyone dialing in to hear our second quarter 2024 results. We delivered another strong quarter in an ongoing challenging real estate macro environment, exceeding our outlook for revenue and EBITDA as we continue to successfully execute on our growth strategy.

Today, we also announced Jeremy Wacksman has been promoted to Chief Executive Officer of Zillow Group, and I will serve as co-exec chair of the Board of Directors, alongside my co-Founder, Lloyd Frink. I have been CEO and/or Chairman since the day Lloyd and I seed funded the company in 2004 and will remain engaged. My role, however, will shift to supporting and counseling Jeremy Wacksman and the leadership team rather than daily operational leadership.

Before talking about Jeremy and the team, let me talk about the state of the company. The short version is that Zillow business is in great shape financially, strategically, operationally and organizationally. We are executing well and are consistently outperforming the broader residential real estate industry as we methodically ship great software and services to digitize and integrate home buying, selling, financing, and renting, empowering consumers and partners alike.

We have done this inside the Zillow branded Housing Super App, the integrated consumer and partner experience, we are rolling out in markets across the country. And we continue to increase the breadth of our market coverage and the depth of transaction penetration within those markets. I am pleased with where we are in this effort and the opportunity we see for many years of growth ahead. We have also increasingly leveraged our brand trust and massive audience to diversify our revenue streams. We've leaned hard into the obvious and adjacent rentals and purchase mortgage opportunities, both of which are now exciting growth businesses for Zillow.

Rentals now account for 1/5 of total company revenue and Zillow Home Loans purchase mortgage origination volume grew more than 100% year-over-year again this quarter. Rentals has plenty of room to run, and the mortgages opportunity for us is wide open and large. Additionally, we have built and acquired and integrated a quietly exciting set of products and services that we offer to the broader industry, brokers [indiscernible] and the whole of the professional agent community. We are investing in broad industry-wide adoption of our suite of increasingly integrated digital content and workflow tools. including incredible products like our showing time home touring solution, Follow Up Boss agent CRM, dotloop forms and document management and showcase 3D interactive listings. Our conviction is that a rising digital tide lifts all boats, a more digital industry using our software is better for consumers, better for our partners and ultimately better for Zillow Group. We have unique ambition here and unique talent and resources to conjure into reality. And through all of this innovation and expansion, the leadership team has maintained real cost discipline that is delivering improvements in EBITDA margins. Executing well against big, complex interconnected opportunities requires amazing talent who have a clear strategy, high accountability and high trust in one another, which leads me to Jeremy Wacksman, our new CEO and the person we organized most of the company around 3 years ago when we promoted him to COO. He has been supported by an exceptional team and has successfully positioned the company to go after these multiple large opportunities as I have laid out. Jeremy is a familiar voice to you all on this call, but allow me to share some of his history. He has an engineering degree, which is not required here at Zillow, but it's nice. He also got his MBA many years ago, which the engineers don't hold against him. We found Jeremy at Microsoft in 2009 when Zillow was very small and recruited him into a product and marketing role. Throughout his time at Zillow, Jeremy has worn many hats. His responsibilities have steadily gained scope spanning product, marketing and operations. He has been a key strategic partner throughout his tenure, advising Lloyd and me on major strategy and product decisions. Early on, he helped pioneer mobile real estate shopping with the launch of the Zillow app. Later as CMO, he was critical to leading Zillow's consumer marketing strategy, establishing a high bar and a branding framework for what has become a rare loved and trusted household brand. His tenure as COO of the past 3 years with all product engineering, design, marketing sales, IT and go-to-market business operations reporting to him, has been a time of particularly impressive innovation in Brazil, which has put the company back on an accelerating growth path following pandemic dislocation from which the industry has yet to recover. Jeremy operationalized Zillow's Housing Super App strategy while maintaining strong cost discipline, diversifying our revenue base and growing the rentals and mortgages businesses. He successfully championed the Follow Up Boss and showing time acquisitions, helping us deliver on our goal to provide agent partners in the broader industry with the best software solutions to power their businesses. He also organized, elevated and recruited talent that makes up Zillow's world-class R&D organizations and increasingly critical sales and marketing operations. Jeremy's product forward consumer-first leadership, operational experience and technology orientation make him right and ready to be CEO of Zillow Now. I am confident in his judgment and his leadership and I am excited to support him as he leads Zillow's next chapter.

And with that, I'll now hand the mic over to Zillow Group's new Chief Executive Officer, Jeremy Wacksman.

[Jeremy Wacksman, executive]

Thanks, Rich. Having spent the past 15 years at Zillow, I can honestly say taking on this role is the honor of my career. I love this company and I love this team. and I believe deeply in the digital future of real estate we're building for the benefit of buyers, sellers, renters, agents, the broader industry and our shareholders.

Zillow has a huge audience. a partner network comprising some of the best agent teams in the business and tech and product prowess that is unmatched in residential real estate. With an increasingly diversified and growing business, we are primed to capitalize on the strength of the Zillow brand and capture a meaningful slice of the $30 billion accessible TAM in real estate, a slice that more closely reflects our reach in the category. And our results show we're making great headway. I'm excited to share that Zillow had another strong quarter, reporting better-than-expected revenue growth across the business.

Q2 revenue was $572 million, up 13% year-over-year. which marks the eighth consecutive quarter our total revenue results have outperformed the residential real estate industry. We delivered double-digit year-over-year revenue growth and demonstrated cost discipline while continuing to invest to deliver solid EBITDA margin expansion year-over-year. Q2 residential revenue grew 8% year-over-year to $409 million. Rentals continued its strong growth with $117 million revenue in Q2, up 29% year-over-year. Multifamily revenue was up 44% year-over-year, driven by strong growth in our multifamily property count with 44,000 properties at the end of Q2, up from 40,000 at the end of Q1.

We also continue to make strong progress in mortgages with Q2 revenue of $34 million, up 42% year-over-year and purchase mortgage origination volume growing 125% year-over-year. These successes come despite a persistently challenging mortgage rate environment as evidenced by our estimate of total industry purchase loan origination volume being down mid-single digits year-over-year in Q2. We continue to believe our most important investments are in tech innovations that improve the customer experience, which has helped us earn and maintain our strong brand position and massive engaged audience of movers.

In Q2, we reported 231 million average monthly unique users across the Zillow ecosystem of apps and sites. As you'll remember from previous calls and our February investor presentation, about 80% of our users come to us organically, and they're using our app 3x more than anyone else in the category. Another way to measure traffic and brand strength is through comScore, which is widely viewed among Internet brands as a reliable, transparent third-party source because it aims to capture the number of unique visitors while deduping cookies. According to comScore, Zillow Group's apps and sites had 116 million average monthly unique visitors in Q2. We're pleased with the progress we're making to transform and digitize the movie experience on behalf of buyers, sellers, renters, agents and the broader industry. Since 2022, we've been building the digitally integrated transaction experience and testing it in our enhanced markets across the country. Through this year, we've been increasing our breadth of coverage across more markets and our depth of penetration in those markets as we drive towards sustainable profitable growth. As of the end of Q2, we're in 19 enhanced markets, expanding to 36 by the end of August, well on our way to achieving our goal of 40 by the end of 2024. As we've said, Zillow is the Housing Super App, and we are continually adding updates and improvements to it guided by our 5 for-sale growth pillars: touring, financing, seller solutions, enhancing our partner network and integrating our services.

Our for-sale growth pillars marked the pathway to meeting our goals to increase customer transaction share to 6% by the end of 2025. We are also focused on building up rentals, which currently represents 20% of our revenue and is growing rapidly. First up is touring. Integrating our touring solutions into our buyer flow is meaningfully improving our ability to identify high-intent customers and connect them with our Premier Agent partners. We've seen that those touring connections convert at 3x the rate of other actions on Zillow. Last month, we nearly doubled the number of markets with real-time touring and we're seeing positive early results from being better able to connect higher-intent customers with our Premier Agent partners. In fact, we have already achieved our end-of-year target of approximately 20% of our connections coming from real-time touring as well as improved transaction conversion. As one of the many improvements we're making to this part of the customer journey as a leader in touring software, last quarter, we introduced a touring agreement that instills more transparency into the process. The early indicators of success we saw in our pilot gave us the confidence to integrate it into Zillow's touring experience. And just last week, the agreement became part of the Request a tour flow on Zillow for nearly 80% of our tour connections. We plan to roll it out to remaining tour connections in the coming months. facilitating consumer-friendly agreements earlier in the funnel is not only an opportunity for us to help educate consumers and aid to navigate the industry rule changes, but it also helps us identify higher-intent customers, send more qualified connections to our Premier Agent partners and drive conversion rates.

I'll now move on to financing. We have been working to integrate Zillow Home Loans more seamlessly with our Premier Agent partner network and throughout the customer journey. Overall customer adoption rates in our 9 most mature enhanced markets have reached the mid-teens, and nearly 60% of our Zillow Home loan originations are represented by a Premier Agent partner.

To further capture buyers' attention, we've also launched innovative tools through Zillow Home Loans to help them more accurately understand what they can afford. In Q2, we introduced a feature called buy ability which gives buyers a personalized, real-time estimate of the home price and monthly payment that fit within their budget, powered by mortgage rates through Zillow Home Loans and available to check regularly in the Zillow app. Our efforts have accelerated purchase mortgage growth with $756 million in purchased loan origination volume in Q2, a 125% year-over-year increase. We expect continued purchase mortgage growth for Zillow Home Loans as we launch more enhanced markets and continue to improve our go-to-market integration with our Premier Agent partners.

For our seller solutions update, I'll focus on Zillow Showcase, a unique offering unlike anything else available today that not only make selling a home easier, but also creates real value for sellers and their agents. Zillow Showcase elevates agents brand presence on Zillow and provides an enhanced shopping experience through our AI-powered homegrown rich media and floor plan technology. Showcase listings drive higher engagement compared to similar non showcase listings on Zillow, more views, more saves and more shares. But even more importantly, homes that list with showcase are selling faster and for more money. Showcase listings typically sell for 2% more than similar non showcase listings on Zillow, a bonus of more than $9,000 on a home sold at the average home sale price. Homes listed with Showcase are also more likely to secure an accepted offer within 14 days. And what's more, we've observed that agents who use Zillow Showcase are winning 20% more listings than similar agents on Zillow. These results have made it an attractive offering for real estate professionals. Zillow showcase is available to agents in every market after launching nationwide earlier this year. Even though it's early days, we're pleased to share that more than 1% of all new listings nationwide are now using Showcase. We are on our way to our goal of 5% to 10% listing coverage which represents a $150 million to $300 million annual revenue opportunity, and we believe there is potential for future growth beyond that.

This takes me to our next update, enhancing our partner network. Our Premier Agent partners represent some of the best, most professional agents in real estate, who we believe are poised to take share in the evolution the industry is experiencing. Recall that not every real estate agent is a Zillow Premier Agent partner. In fact, since 2015, we've shrunk our active partner base by roughly 60%, while our Premier Agent revenue has grown by more than 2.5x over the same time frame. We've oriented Premier Agent around some of the best agent teams, those that we believe provide superior customer service, understand the industry and their local market, have a proven ability to scale and make the most money to invest alongside us. The top 20% of agent teams handle 80% of transactions and nearly 4 and 5 Zillow Premier Agent partners are in that top tier. We are supporting our partners by providing them with some of the best digital tools and solutions. For example, we're really pleased with the early results 8 months after our acquisition of Follow Up Boss, one of real estate's leading customer relationship management systems. More than 70% of our connections in enhanced markets are being managed through Follow Up Boss, and those substantial adoption rates set the stage for us to build and improve features and services that help those partners gain share.

And finally, integrating our services. where the for sale growth pillars come together in the Zillow housing super app experience, providing high-intent customers with valuable solutions working with some of the best agents and providing those agents with some of the best tools has paid off for us. In our first 4 enhanced markets, we've seen revenue growth per total transaction value increased by more than 80% since the beginning of 2023, compared with the more than 50% growth we reported back on the February call. And as we expand, we are consistently seeing signs of repeatable success. In the 13 enhanced markets we were in at the end of Q1, we are seeing gains in revenue per total transaction value. We see an opportunity to increase conversion and revenue per total transaction value even more from here as we launch the remaining enhanced markets this year. Now turning our focus to rentals. Last quarter, we released an investor presentation talk through the massive opportunity in front of us.

Today, there is no nationwide marketplace containing all rental listings, resulting in a fragmented experience for renters. We are building a 2-sided marketplace with a comprehensive suite of listings, both multifamily and long tail that enables renters to more easily shop, tour, apply, sign a lease and pay rent securely, all on one convenient platform, Zillow. Having more rental listings in multifamily properties and ramping up our marketing have both helped drive customer awareness of rentals on Zillow. In June, our total rental unique visitors were up more than 20% year-over-year according to comScore, widening our margin as a leading online rentals brand with the largest audience and #1 preference among renters. We expect multifamily to be the primary driver of our rentals revenue growth, and we made great progress in Q2. Zillow now has 44,000 multifamily properties, 38% more than a year ago. And our exclusive partnership with realtor.com is further boosting exposure for our multifamily listings, helping our partners reach even more renters. We have a lot of work ahead, but with multifamily revenue up 44% year-over-year, we are on our way with a $1 billion-plus revenue opportunity in front of us.

Before handing it over to Jeremy Hofmann, I want to congratulate the exceptional Zillow team on our eighth consecutive quarter of total revenue outperformance. It's their dedication and expertise that continue to drive our business forward. as we work to deliver exceptional products and services for consumers, agents and the broader industry. Our successes to date give me a great deal of confidence in our future. We're on track to meet our expectations for 2024 to deliver double-digit revenue growth and modestly expand our EBITDA margins. And we believe we are on our way to strong GAAP profitability over time that benefits all of us as shareholders. Thank you for being on this journey with us.

I will now pass the line over to Jeremy Hofmann.

[Jeremy Hofmann, executive]

Thanks, Jeremy, and congratulations. I'm really excited for you and for us as you lead us through the next chapter for the company. .

I will start with our Q2 2024 results, which exceeded expectations for revenue and EBITDA. Revenue in Q2 was up 13% year-over-year to $572 million, which was $39 million above the midpoint of our outlook range. Our strategy is working, and we are seeing our investments drive outperformance across each of our revenue categories, including residential, rentals and mortgages. For the quarter, we outperformed the broader residential real estate industry growth of 3% according to data from the NAR. Additionally, we estimate that the total purchase loan volume for mortgage buyers, which is more aligned with our customer base for Premier Agent was down mid-single digits year-over-year in Q2 and underperformed the overall market.

On a GAAP basis, Q2 net loss was $17 million, representing 3% of our revenue. EBITDA was $134 million for the quarter, resulting in a 23% EBITDA margin, a year-over-year margin expansion of more than 100 basis points. The combination of our revenue outperformance and effective cost management delivered the improved year-over-year EBITDA results. Q2 residential revenue grew 8% year-over-year to $409 million, outperforming our outlook range. Our Premier Agent revenue benefited from the ongoing investments in our top and mid-funnel experiences that drove improvements in our overall connection rates, and we also saw better-than-expected conversion rates.

Looking at our relative performance, the investments we have made since the beginning of 2022 throughout our funnel have paid off. Over the last 2 years, we have increased our ability to connect customers with partner agents by over 2,000 basis points. This has led to residential revenue in Q2, growing 4% when compared to the same period in 2022 or more than 2,000 basis points better than the industry, which is down approximately 20% over the same time period. Rentals revenue grew 29% year-over-year in Q2 to $117 million, primarily driven by our multifamily revenue, which grew 44% year-over-year. We are executing well on our rental strategy to develop a 2-sided marketplace with the most comprehensive set of rentals listings. We saw the number of multifamily properties on our apps and sites grew 38% year-over-year reaching an all-time high of 44,000 multifamily properties as of the end of Q2.

Total active listings across our entire rentals marketplace were up more than 16% year-over-year to an industry-leading 1.9 million listings in June. Mortgages revenue growth accelerated in Q2, up 42% year-over-year to $34 million as revenue growth begins to more closely align with Zillow Home Loans growth. ZHL purchased loan origination volume grew 125% year-over-year to $756 million in Q2. Our mortgage strategy to provide consumers greater financing choice with greater ease from a brand made trust is leading to more customers choosing financing through Zillow Home Loans.

EBITDA expenses in Q2 totaled $438 million, in line with our outlook as a result of our ongoing focus on cost management. We ended Q2 with $2.6 billion of cash and investments, down from $2.9 billion at the end of Q1. Positive net operating cash flow was more than offset by $88 million of repurchases of convertible senior notes due in 2025, and the repurchase of $292 million of our shares at a weighted average price of roughly $42. As of the end of Q2, we had $1.5 billion of outstanding convertible debt, which includes $608 million that is due in September of this year and $419 million that is due in May of 2025. We expect to settle the principal balances in cash and any conversion premiums in shares of Class C capital stock. After backing out our convertible debt, we had a net cash and investments balance of $1.1 billion at the end of the quarter, which gives us continued financial flexibility going forward.

Turning to our outlook for Q3. We expect residential revenue to be between $375 million and $385 million. Our residential revenue outlook for Q3 is driven by the normal seasonality of Premier Agent as well as continued strong contributions from our Showing Time+, New Construction and Follow Up Boss product offerings. We expect rentals revenue to grow in the mid-20% range year-over-year in Q3. We expect multifamily revenue to grow faster than rentals revenue overall as we benefit from our sales execution our national brand awareness campaign and our partnership with realtor.com.

For mortgages, we expect a similar year-over-year revenue growth rate to what we reported in Q2 2024. We remain on track to further integrate Premier Agent and Zillow Home Loans with our planned enhanced market expansion in Q3. We expect total revenue to be between $545 million and $560 million in Q3, implying a year-over-year increase of 11% at the midpoint of our outlook range. This compares to our estimates for the residential real estate industry total transaction value to be in the mid-single-digit year-over-year growth range for Q3.

We expect EBITDA to be between $95 million and $110 million in Q3, equating to a 19% margin at the midpoint of our outlook range. This implies EBITDA expenses will increase from $438 million in Q2 to an estimated $450 million in Q3. The sequential increase in EBITDA expenses is driven by an uptick in our brand marketing spend related to our Rentals brand campaign. We expect EBITDA costs to decline sequentially from Q3 to Q4 as marketing spend decreases in line with typical seasonal media spend.

Moving to the full year. I want to reiterate that we expect to drive double-digit revenue growth for 2024 with modest EBITDA margin expansion primarily driven by our growth pillars. Our annual fixed cost run rate is approximately $1 billion, consistent with where we stood at the end of 2023. We continue to believe our fixed investments are at the right level, which should result in our fixed costs growing modestly with inflation. Consistent with previous quarters, our various variable costs are expected to grow ahead of revenue initially as we ramp new hires to be fully productive. Advertising spend is a lever we view as separate and distinct from the rest of the cost base and one we will pull depending on the growth opportunities we see in front of us. We are demonstrating the benefit of pulling this advertising lever in our rentals marketplace given the growth we are seeing in traffic and revenue, and we are pleased with the early results.

To close, it is clear we are executing on our strategy. We are growing across every part of our business. We are seeing great results from our growth pillars in our enhanced markets that will continue to roll out this year, and we are on track to grow revenue by double digits and expand margins in 2024.

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

[Operator]

[Operator Instructions] Our first question comes from Ronald Josey from Citi.

[Ronald Josey, analyst]

Making sure you can hear me okay. Can you hear me?

[Richard Barton, executive]

We got you.

[Ronald Josey, analyst]

So congrats on the new roles, Jeremy specifically and Rich back to Chairman. You mentioned in your conversation upfront just how Zillow is in great shape financial strategically, operationally, organizationally and why now is the right time. At the same time, the industry is going through a change. So just a little more insights on why now would be helpful. And then more importantly, I guess, when we have enhanced markets now in 36 markets by the end of August, 40 by the end of the year, I think accounting for around call it, 40% of total connections. We get a lot of questions around the benefits of enhanced markets. So can you take a step back and just remind us on the benefits of enhanced markets as we get to that, call it, 6% of transactions. I'd love to hear more about what you're seeing in some of the markets. And then given the structural change in the industry, how does enhanced market sort of impact that or benefit from it? .

[Richard Barton, executive]

Thanks, Ron. So maybe I'll take the first bit. Jeremy Wacksman, and you can come in on the second.

[Jeremy Wacksman, executive]

Yes.

[Richard Barton, executive]

Sounds good. Yes. Okay. Yes. I mean it's incredibly impressive to me, Ron, how well we are executing as a company despite all of the kind of stormy weather that is -- that constitutes the real estate macro. I mean, we're just posting terrific numbers. We have for 3 years now, since Jeremy Wacksman was promoted to COO running most of the company in all the lines of business, we have talked about our housing super app strategy and our rental strategy and our mortgage strategy and I would say you all as investors have been like, okay, show me that, that is actually going to work as a way to digitize and integrate this transaction and create a really big long-term growth opportunity. And I would say now that strategically, we have kind of derisked the concept of what we're building here. We have a long way to go to execute and fulfill what I see as our ultimate right of market share and claiming that and growth. But strategically, we are in really good shape. And that is in no small part due to Jeremy Wacksman's leadership over the last few years getting this all together. And so -- that is why the time is right. Jeremy is ready. The company is ready and run. Personally, I am ready as well. I'm not going anywhere. I'm not doing anything else, but I'm really excited to be moving to a role of coach and adviser rather than the daily field general. Thank you. But maybe I'll have our new Chief Executive Officer, Jeremy Wacksman, answer the second part of your question.

[Jeremy Wacksman, executive]

Absolutely. Thanks, Ron. On enhanced markets, just a reminder since you asked the metrics there, it's market share, and we measure that in terms of revenue per total transaction value and then it's also revenue per transaction, right? So numb transactions and revenue per transaction gets you to that. And 17 -- 36 markets by the end of August on our way to 40 by the end of the year that in each of those markets, we're not serving 100% of customers. So I think we gave a stat earlier this year that's going to be about 20% of all customers will get that experience. And that experience allows them to get real-time touring and a touring experience, Zillow Home Loans as a financing option if they choose it. And then most importantly, the enhanced partner network, the handpick set of partners that Jeremy Hofmann talked about in his prepared remarks that really deliver a great job, provide great customer service, raw and professionalized businesses for the modern Internet consumer. So that's what the enhanced market experience is. As we bring that to more and more customers, we are seeing in the markets we're in revenue per total transaction value gains, and we expect those gains to contribute to more of our residential and total company revenue as we get to that 20% of customers and then into next year, more of those customers. So the land and expand strategy is working well. We're really excited to accelerate 236 markets by the end of August and be at 40 markets by the end of the year.

[Operator]

Our next question comes from Brad Erickson from RBC. We'll come back. So we'll go to Nick Jones from Citizens JMP.

[Nicholas Jones, analyst]

Great. Congratulations, Jeremy. I have 2 questions. First, can you maybe double-click on the Rentals business, 44% growth in multifamily is impressive. Can you maybe speak to the key drivers behind the success? How are the conversations evolving with the multifamily operators giving you the confidence to kind of spend after that $1 billion revenue opportunity hang out? And then the second question may be on traffic volumes. You called out 3x more app users. I think as the competitive environment heats up on residential. Folks are increasingly focused on some of these engagement metrics. Can you maybe speak to the -- or remind us of the benefits of the app as opposed to web traffic or mobile web?

[Jeremy Wacksman, executive]

Yes. Thanks, Nick. Thanks for the questions. On rentals, yes, as I said a little bit in my prepared remarks and we shared for those that were on in February, a more detailed investor presentation on our rental strategy. We're so excited about our rental strategy because it's really unique, and it really solves the consumer problem, right? What renters want is to find all the inventory. There is no one place fill inventory. There is no MLS for rental. So they end up having to shop everywhere during a really compressed time frame. It's super stressful. And so we set out years ago to try and assemble as much of the inventory as possible, both multifamily, the big buildings we all know and long tail the millions of homes and small unit properties that are out there for rent that turn over in frequently by a long tail of owners, and we've done that. We now have the most listings. We still don't have them all. Every year, we're trying after more, and we're growing our listing count. But we have most -- the most inventory of anyone out there, and that has yielded us the most audience, the biggest audience of renters, right? So Zillow's rental network is the largest audience. It just grew 20% year-over-year this last month, and it continues to grow because renters want that product. And so that 2-sided marketplace now gives way to the monetization growth you're seeing coming from multifamily. And so that's the stats I gave in my prepared remarks, 44,000 buildings on Zillow now up from 40,000 last quarter, that's driving the 29% revenue growth you're seeing, which 44% revenue growth in multifamily, that's coming from that property count and that engagement with the advertisers. So that's what gets us so excited. It's this really great win-win marketplace where the consumer is getting a better and better experience as the supply comes online and that then in turn drives the demand and makes the product better for the renters and vice versa. So that's why you've heard Jeremy Hofmann talk about using advertising as a lever to help stimulate demand to help continue to make that marketplace spin. And that's what gives us the excitement not just in Q2's growth and in the guide for rentals, but in the $1 billion-plus business opportunity we see in front of us.

And then on traffic, yes, I mean, we have talked long about how the most important part of audience is the engagement with that audience. And I talked in my prepared remarks, you can measure cookies and devices in people in many ways, but what matters is do people know who you are? Do they use you to shop, do they find a light in your services? And Zillow has a long believe that the best way to drive audience is great products, great innovative products, amplified by marketing, and you see that in the mix of our traffic, right? 80% of our audience comes to us brand direct. They come to us because they know who we are and they choose to use us and app usage is a good measure of that, right? So that's why I talked about the app being used 3x more than the than the others in the category. It's just a great measure of really healthy deep engagement. If you're buying a home, if you're actually trying to shop, you're going to use an app, and you're going to use a desktop website that ties to that app and you're going to use us as a shopping experience, and you're going to use an agent that you find from us, and that's going to lead you down the funnel to these transactions. So that's why, for us, brand engagement and health of traffic is so important. It is the start of this transaction strategy we're on. And as we talk a lot about, our goal is to take all that great app usage engagement with audience and turn that into more transactions, right? Our goal of 6% transaction share comes from taking this 60%, 70% audience share we have and getting more of them to use us and use our housing super app to actually buy, rent, finance or sell their home.

[Operator]

Our next question, we'll return to Brad Erickson from RBC.

[Bradley Erickson, analyst]

Can you guys hear me?

[Jeremy Wacksman, executive]

Yes, we got you, Brad.

[Bradley Erickson, analyst]

Technology is hard. A couple of questions just on the -- I have to ask the obligatory commission question. Just first, just latest and greatest views on kind of the changes coming and any noticeable observations yet? And kind of what feedback are you getting from your PAs as we head into August 17? And then second, I guess if we assume that any effect of the regulatory changes may vary a lot up and down kind of the spectrum of the market. Talk about how you view Zillow's exposure, particularly to that to the degree that there is any change with commissions.

[Jeremy Hofmann, executive]

Yes, Brad, it's Jeremy Hofmann, and I'll take that one. I think we can't really speak to broad commission trends just because 80% of our Premier Agent base is in that top 20% of all producers. So we're working with the top agents versus a broad swath of professionals. That said, across our business, we've seen commission rates stay in a pretty tight band over the past 3 years. 2024 is down a few basis points versus 2023, but in line with 2022 levels. And I think just stepping back, we've been pretty consistent here for a while. We believe we and our partners are the outsized beneficiaries of these changes coming in the industry. We have the most customers. We work with the best partners. We provide the most technology. And we expect our PAs will deliver and get paid because they provide great service. And today -- and we think will be share takers in any future evolution or dispersion of the industry. So that's how we're seeing it. That's been very consistent for a while now, and nothing has really changed our minds on that based on the latest things that we can see.

[Operator]

Our next question comes from Mark Mahaney from Evercore.

[Mark Stephen Mahaney, analyst]

Two things. One, I just want to wish you, Rich, the best at whatever you're going to do operationally going forward. So just congrats on all the success with the company over the years, and best luck to Jeremy in the new CEO role. I just want to ask one question about the customer transaction share. So I know the goal has long been to get to the 6%. And could you just quantify are there lead markets where you think you're -- are there any lead markets now where you think you're within spitting distance of that of the different enhanced markets that you're in? I know you provided some data around, but I just wanted to focus just on that number. Are there in the other markets where you think you're within 1 point or 1.5 points of that?

[Jeremy Wacksman, executive]

Yes. Thanks, Mark. I'll -- on the market share gains, I think I said in my -- I said in my prepared remarks, the way we're measuring that is revenue per total transaction value growth. And in the first -- in the oldest enhanced markets where we have the most data and we have good year-over-year, which we've given you an update on earlier this year, we said we were up 50% year-over-year. That growth has accelerated to 80% year-over-year in those first 4. And then in the 13 that we've been in since Q1, we don't have year-over-year yet but the early trend line is gains in revenue per total transaction value across those 13. So that curve looks similar to us. As we get into next year, we'll have year-over-year on more markets. So that's what gives us confidence that as we take this recipe this housing super app experience to more partners in each market and to more markets, we'll see that same trend line of share in revenue per total transaction value, grow the way we're seeing it in our 4 original markets.

[Jeremy Hofmann, executive]

And Mark, I'll just pile on a bit. It's Jeremy Hofmann. Jeremy Wacksman said it, we were at 50% in the first 4 markets, we grew revenue in 2023, 50% versus total transaction value, and we're now at 80% through 18 months of that. So you're seeing a consistent steady growth. And then on top of that, we saw really good results in our oldest markets, which we put in the investor deck we did in February, where in Phoenix and Atlanta over, call it, 2-year period, we saw 80% and 90% transaction growth during that period of time, which is effectively -- it's close to double. So those are the types of proof points that make us feel quite good and why you see us accelerating the way that we have going from 19 to 36 pretty quickly is just because we keep seeing really solid results that we think sets us up quite well for continued future growth.

[Operator]

Our next question comes from Ryan McKeveny from Zelman.

[Ryan McKeveny, analyst]

Congrats Jeremy and Rich. Nice job on the quarter. I wanted to ask from a macro perspective, around first-time buyers. So there's been periods in the past where that was called out as a tailwind. Last quarter, it was mentioned as a headwind within the guidance. And obviously, you strongly outperformed that. So is your sense that this quarter's results came in where they were in spite of a drag that did exist from that first-time buyer dynamic? Or did something maybe change beneath the surface where that just didn't turn out to be the headwinds you might have expected? And kind of part 2 of that is just any views on this dynamic into the third quarter and kind of what's embedded within the guidance there?

[Jeremy Hofmann, executive]

Yes, sure. Ron, I'll take it. It's Jeremy Hofmann. I think the mortgages market was challenged in Q2. We called that out in the May call, and it persisted. So we think that it was down mid-single digits year-over-year versus 3% up for the housing market. So there was a headwind there. We just happened to perform quite well throughout it. And that's a great story for us. It's one that we feel quite good about and that's a function really of us outperforming across the business. I think we've really performed well.

On the residential side, we had a soft pocket in late March and early April when rates spiked but then they normalize. And as a result, our MBP marketplace got healthier throughout the quarter, both on new sales and lower churn. And then additionally, the conversion across Premier Agent, both MBP and Flex was stronger than we anticipated and that flowed through right to revenue. And then on the rest of the residential side, Showcase is growing nicely. The New Construction marketplace is growing nicely and Follow Up Boss is outperforming what we expected in early days of the acquisition. And then you have mortgages and rentals, obviously, Jeremy has talked a bit about that already, but rentals was up 29%, multifamily was up and then CHL grew 125%. So really, when we look across all of the business in Q2, it felt quite good regardless of what's going on in the first-time homebuyer market. And then I'd be suffice to say like on the EBITDA front, we're pretty proud of the consistent ability to accurately forecast and hold ourselves accountable on costs. As we tell the team, when we're in a market like this, revenue is harder to forecast, which makes it even more important to be really good on the cost line. And for Q2, we expected $440 million of costs. We came in at $438 million. So when we outperformed on the revenue front, it all flowed through to the EBITDA line.

[Ryan McKeveny, analyst]

That's very helpful. And also on the mortgage piece, so obviously some momentum under the surface there sequentially and year-over-year, growing nicely. I know there are some moving pieces with the very significant growth in purchase origination volume, but some of the offset on the marketplace side. Can you just remind us where the marketplace stands at this point, both strategically in terms of where that fits in maybe in terms of loan products or differences against CHL. And just kind of how you think of that mix between CHL and Marketplace moving forward?

[Jeremy Hofmann, executive]

Yes. Ryan, I can take it. It's Jeremy Hofmann and then Jeremy Wacksman may pile in as well. But I think that you're right that the bulk of the business going forward is going to be Zillow Home Loans. So you see the mortgage category start to more accurately map to the Zillow Home Loans growth, that's not to say the marketplace isn't important, too. It's just secondary. They're going to be -- inevitably, there are going to be times in which we can't service a customer through Zillow Home Loans, and we like having the marketplace as a way to serve customers regardless, right? We're always about customer choice and making sure that in financing, we're providing customer choice as well. So we feel quite good about both of those businesses, but the vast majority of the focus going forward is going to be in Zillow Home Loans.

[Operator]

Our next question comes from John Campbell from Stephens.

[John Campbell, analyst]

And Rich, congrats on helping position the business for a pretty promising set up here in the years ahead. glad you'll be able to see it through on the board seat. And then, of course, congrats to you, Jeremy, well deserved. But a 2-part question here. First on the toying agreement. You guys called out early indicators of success in your pilot I think you also, for the last couple of years, have said the touring connections have converted at 3x the rate, I've got to believe that touring agreement probably boost that conversion rates. It's obviously signaling even more or greater intent. Maybe if you could talk a little bit deeper into what you're seeing thus far? And then I've got one more quick one on Zillow Home Loans.

[Jeremy Wacksman, executive]

Yes. Thanks, John. Thanks for the congrats. And on touring, you're right. We continue to see touring actions convert higher than any other action on Zillow. And our expectation is the touring agreement will be a net benefit to conversion because it's in the flow post introduction and so it's just education and it's helpful qualification. And the pilot was small. We saw basically no negative to likely positive impact there as we started to engage consumers. And so that's what gave us the confidence to roll it out to take it to now almost 80% of connections and we expect to get to all eventually. So I think you nailed the idea of education to the consumer done in a consumer-friendly way, helps get that consumer more informed before they get to the tour and makes it more likely that they want to work with the agent. As you know, having worked with us and followed us for a long time, the lag on seeing that data and transactions as long, right? So a pilot market, a tour experience measuring transaction rates with those agents is going to be a period of quarters and quarters and quarters, but the early indicator data gave us confidence that this is a good thing. And that's why we proceeded so rapidly to roll it out.

[John Campbell, analyst]

Okay. That's great to hear. And then on the Zillow Home Loans, I mean, obviously, refi was, I think, about half of the origination mix 2 years ago. That dropped to 1% last year. So I think it's probably a good problem you're having as far as like capacity issues. It seems like you got an exorbitant amount of demand on purchase, but I'm just curious about how you're thinking about the staffing, how you're thinking about if there is a degree of a mini refi wave, if you feel like you can participate in that in the year or so ahead.

[Jeremy Wacksman, executive]

Yes. I mean our focus has been on purchase, not just because of where the refi market was, and I think it will remain on purchase. And that's just because of what we've talked about as our opportunity, right? You've heard us talk a lot about -- I mean, everything we've said about the integrated transaction and the benefits for the consumer. It is for the homebuyer. And our ability to go have more and more customers who either start by asking that purchase financing question or ask that go-shop question. end up getting exposure to our great agents and our great financing options. That's demand that we won't tap out of for a long time, and that's what we're methodically scaling, both in our enhanced market strategy as they were all more enhanced markets, but also digitally to our consumers that come to the website and actually want to start with what can I afford this is a tough market question. So we are, I think, in a privileged position to be able to go build durable growth in the mortgage business really focused on purchase, and we're excited about how we did in Q2, and we're excited about our plans for Q3.

[Operator]

Our next question comes from John Colantuoni from Jefferies.

[John Colantuoni, analyst]

Can you hear me?

[Jeremy Wacksman, executive]

Yes. We got you, John.

[John Colantuoni, analyst]

So I wanted to just start with the housing market. I was hoping you could unpack the outlook for mid-single-digit growth in residential housing transactions during the third quarter with pending sales down 8% in June. I'm just curious if your outlook incorporates an assumption that the market bounces back a bit in August and September based on potentially recent pickup in activity. And second, it looks like your outlook for the residential revenue segment implies a bit of underperformance for the Premier Agent business relative to your mid-single-digit housing market outlook. If you exclude the M&A tailwind from Follow Up Boss, can you just talk about the drivers of that underperformance? And maybe if you've embedded some room for upside in that assumption?

[Jeremy Hofmann, executive]

Yes. Thanks, John. It's Jeremy Hofmann, so I'll take it. Similar to what we've said in the past, we don't really overfocus on the quarter-to-quarter fluctuations given how fluid macro has been and will continue to be. We're pleased that we've outperformed the industry by 2,000 basis points in residential over the last 2 years, and that's really a credit to the product experiences that we're driving the conversion gains are driving and the partner experiences that we're driving. At the same time, we are seeing healthy growth versus that mortgage market. So that was called out earlier in the in the call, that's where we tend to index our customer base tends to index, and those folks are struggling comparatively. So they -- the first-time homebuyer, if you measure it by the mortgage market is underperforming 800 to 1,000 basis points per in Q2, and we think those trends probably continue into Q3. So I think we feel all in quite good about where the business is, knowing that that's out there. And I think most important is just the consistent outperformance we've had across both residential and the total company. We expect to continue to do so as we roll out our enhanced markets and see success there, right? Jeremy has talked a lot about that, but that's a really important piece to the future story, and we're just getting started rolling markets out. And I will kind of step back and remind you all Q1, we were up 13% year-over-year. As a company, Q2, we were up 13% year-over-year. Our outlook calls for a revenue range of 10% to 13% for Q3. We're clearly well on our way to double-digit revenue growth in 2024 and margin expansion, and it's been a rough housing market. So we sit there and feel like the business is really well positioned despite all that.

[Operator]

Our next question comes from Tom Champion from Piper Sandler.

[Thomas Champion, analyst]

Hopefully, you can hear me as well. Jeremy, as you take the baton as CEO, what's your top goal for the business over the medium term? What are you looking to achieve? And then maybe for Jeremy Hofmann, can you talk about the margin profile associated with enhanced markets? Does this get you closer to GAAP profitability?

[Jeremy Wacksman, executive]

Yes. I'll start, Tom, and maybe Jeremy, you can hit margin profile. I mean, Tom, it's going to sound a little boring, but my focus and strategy is more of what we've been doing. And I think accelerating and continuing to roll out our enhanced market strategy, continuing to grow our rentals business into the opportunity we've laid out for you all continuing to build mortgage into the big business. We know it can be and then powering all that with the amazing software and technology we are building to help rewire the real estate industry for agents, teams and brokers at large. Like that has been our strategy we've talked to you all about for the last however many calls, you're seeing the early signs and results of that play out in the output numbers. And we're really excited to have more of this come to light. So you see more of it in the output numbers in the years to come. As we grow into the share target we have for you all, and then grow our business beyond that. So oftentimes, when there's a leadership change, there's like what's going to change question. And the answer is not much is going to change. We're going to focus on continuing to execute, deliver, scale and accelerate this into the future.

[Jeremy Hofmann, executive]

Yes. And then I can take the margin question. I think it's less about enhanced markets. In our march to GAAP profitability, it's really around the cost structure we've laid out. So we have roughly $1 billion in fixed costs today. We feel like we're pretty well invested there to at least get to our 2025 share targets. And so we expect that to grow kind of modestly with inflation. Variable is 25% to 30% of revenue. That will scale a little faster than revenue when we ramp up. But ultimately, that's a good profile and then the balance is in marketing and advertising. So we feel good that if we are controlled on the fixed side, we can grow revenue faster than cost on the EBITDA front and you're seeing that in the margin expansion you've seen throughout this year so far. And then going forward on the GAAP side, the next thing that's really important to us is getting stock-based compensation in a good spot. So we've committed to shrinking total dollars year-over-year in '24 versus '23 and then even more so as a percentage of revenue. And it's important to remember that 90% of our -- of our SBC cost sits in that fixed bucket. So as we keep our eyes really, really focused on that, we're going to get more and more leverage on SBC over time, and that puts us on a nice path to get to GAAP profitability.

[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]

Thank you all. As you guys can see, the company is really doing well. The company is on firm footing and -- as you can also see demonstrated in this call and on many calls before, Jeremy Wacksman is ready to lead and the broader leadership team is ready as well. And so I'm super excited. There is a ton clean water in front of the company, lots of opportunity may be the wind will change direction and come behind us one of these days, but we certainly don't need it. But I'm sure it will happen at some point. I want to thank you all for being on the journey with us. We'll talk to you soon.