Zillow Group Inc

NASDAQ:ZG

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon. And welcome to the Zillow Group Fourth Quarter 2019 Earnings 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, Sarah. Good afternoon, and welcome to Zillow Group's Fourth Quarter and Full Year 2019 Conference Call. For those on the call that I haven't met yet, I'd like to look forward to doing so soon. Joining me today to discuss our Q4 and full year results are Zillow Group's Co-Founder and CEO, Rich Barton; and CFO, Allen Parker.

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

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

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

[Richard Barton, executive]

Thank you, Brad. I'd like to start by officially welcoming you to our team. Many of you know Brad from his work on the other side of this phone, most recently as a sell-side analyst covering Zillow and other companies. He has decades of experience with deep expertise in housing and financial services. We are delighted to have him on our team, and we expect the call to take half as long now that he's not asking his usual multipart questions. Wink, wink. Seriously, Brad's already making a significant contribution, and we look forward to introducing him on the road in the weeks and months ahead.

Okay. It's been exactly 363 days since Allen and I joined you for our first quarterly conference call. As we sit here a year later, our 2019 results clearly demonstrate we're making progress against our plan to replatform real estate and move down funnel to deliver our customers a seamless and integrated transaction experience. I'm pleased with our team's strong execution, which delivered Q4 and full year results that beat our outlook. This multiyear expedition has us on course to not only streamline the moving experience but also to dramatically expand our market opportunity and profit potential.

I'd like to start by calling out just a few of our 2019 accomplishments. First, we stabilized, then reaccelerated growth in our core Premier Agent business, growth that we expect to carry on in 2020. We continue to be methodical, innovating and optimizing monetization of our lead flow and are optimistic about the future of Premier Agent.

Second, we grew our new Zillow Offers business in the Homes segment to $1.4 billion in revenue in 2019, up from a mere $52 million the year before and ending the year on a $2.4 billion annual revenue run rate. We did this while opening 17 new markets and executing within the unit profit guardrails we laid out for our launch phase. This was extraordinary execution against a rich vein of consumer demand for a novel consumer service.

Third, the addition of transaction-oriented businesses has necessitated a leveling up in how we operate, infusing cost discipline and operational rigor into every business and corporate function. Internally, we call this getting fit with a sharp focus on scaling efficiently. Much more disciplined and accountable planning and review processes have been critical here. Fitness is essential for the expedition. It's foundational for profit leverage and demanding a perpetual focus and improvement.

Next, we strengthened our balance sheet and then ended 2019 with $2.4 billion in cash and investments. Our strong balance sheet with increasingly diversified funding sources provides us with the flexibility to pursue our growth opportunities in a disciplined way.

Next, we filled out our management bench with seasoned operators in mortgage, title and escrow, corporate relations, marketing, finance, operations and more. All the while, we continue to attract outstanding tech industry talent and are consistently recognized as a great place to work and build a career. Our team is strong, and we continue to add and up-level key positions as we grow.

And finally, we are in the process of galvanizing our employees around a new mission statement that animates our transition to Zillow 2.0. At Zillow, our mission is to give the people the power to unlock life's next chapter. I got to do it again. At Zillow, our mission is to give people the power to unlock life's next chapter. It was meant to be more dramatic.

Our homes represent distinct chapters of our lives, and we are building our technology, services and operations to make it easier to, as Bob Seger says, turn the page. In our quarterly shareholder letter, you will find a link to a short video you might enjoy watching about our new mission. It never fails to bring a tear to my eye.

Okay. To wrap my brief year-end review introduction, I'll reiterate that I'm extremely proud of what our team has accomplished over the past year, especially in light of how much business and cultural change I have asked for.

Allen will take you through the Q4 and full year results and 2020 outlook. But first, I want to spend a couple of minutes on our Premier Agent and Homes businesses and share our areas of focus for 2020.

Starting with Premier Agent. While we entered 2019 with significantly heightened partner churn versus the prior year, we have started 2020 with some of the best retention rates we've seen in recent history. Our connection rates are on the rise. And through our work to partner with the best agents, we saw customer satisfaction continue to increase during the quarter. This has been driven primarily by solid execution as our team has heightened its focus on making connections between our customers and our best partners, which contributed to strong Premier Agent revenue growth. I want to commend Susan Daimler, who leads our Premier Agent business, and her entire extended team for, first, stabilizing this core business and then leading a reacceleration of it.

As you can see in the Premier Agent same-store sales chart in our shareholder letter, when we back out the impact of our 2019 Flex tests, we ended December with 12% year-over-year same-store sales growth in monthly recurring revenue, up from 5% at the end of September.

Looking down on our Premier Agent business from 50,000 feet, our goal is to, a, increase our big C conversion rate from visitor to transactor; and b, increase our revenue and profit yield per lead. We believe there's room for growth in both of these metrics. Our whole history with Premier Agent has been about continual business model innovation and testing in service of long-term growth maximization and customer satisfaction. Since introducing the Best of Zillow program and focusing Premier Agent on connection rates, service quality and most importantly transaction conversion, we've seen significant improvements in our business fundamentals.

Specifically, we've had to dig in on the capabilities and the productivity of our Premier Agent partners who are best at converting leads into transactions. And this is why we are expanding our Flex tests with high-performing partners in select markets. We're learning that conversion is a key driver of performance, regardless of whether the monetization model is Flex or our larger market-based pricing model. So as we continue to test and grow Premier Agent, I ultimately think of Premier Agent business models we will deploy as an optimization problem and opportunity. We continue to be methodical in our tests, and we are making progress.

The improving performance of Premier Agent has provided a strong foundation of cash flows for the rapid expansion and growth we've seen in our Homes segment. We delivered more than $603 million in revenue in Q4 from Zillow Offers, up from just $41 million in Q4 of 2018. Our outperformance in Homes was driven by strong consumer demand as well as applying learnings to inform our resale strategies. We also experienced less impact from seasonality than we anticipated.

In Q4, we sold over 1,900 homes and purchased nearly 1,790 homes. And we ended the quarter with 2,707 Homes in inventory. Since the inception of Zillow Offers, we purchased approximately 7,200 homes and sold 4,500 homes. It's still early days, but we are learning as we grow, and consumer signals are strong.

In all, we launched a remarkable 17 new markets in 2019, most of which came online in the back half of the year and all on or ahead of schedule, bringing total ZO markets at the end of January to 23. Additionally, we remain on track to be in at least 26 markets by midyear, approximating a national footprint. For 2020, we expect continued strong growth in the ZO business will be driven primarily by servicing high demand in young existing markets and less so on opening new markets.

Zillow Offers is the first time we've owned the transaction, which we know is a hub from which multiple other adjacent transaction services hinge. And we're gaining traction in building out those adjacent services as well. We are progressing with Zillow Home Loans and have confidence that our new mortgages management along with 2019 and 2020 investments will set the stage for future growth acceleration.

And as another important adjacency, in 2019, we stood up a new title and escrow business, Zillow Closing Services, to further support Zillow Offers expansion and deliver an integrated transaction experience for our customers.

A recent Zillow Offers success story is Cathy and Robert Bowen of Atlanta, who wanted a larger home that could accommodate their growing family of 7 and someday their parents as they age. A Premier Agent helped them find a big yellow house with hardwood floors that they love, but it was at the top of their budget range. They couldn't make the down payment without selling their current home, and a traditional sale wasn't feasible with 2 full time jobs, 5 kids and a dog. They turned to Zillow Offers and were able to time the 2 transactions on the same day, allowing them to move with confidence and convenience. It fit together just like a jigsaw puzzle Cathy said.

Their successful trade in is a story that's now playing out for thousands of families around the country. This is fundamentally why we are here, and these success stories prove to me and our team that people are ready for a better way. I don't say this here but -- it doesn't say it on here, but there's a link from the shareholder letter to that video as well. And if you're only going to watch one video, watch this one. It's a great story.

Okay. For 2020, we expect to continue to grow and gain leverage on our core IMT segment operations and use those EBITDA profits to fund our promising high-growth transaction-oriented businesses of Zillow Offers, Zillow Home Loans and Zillow Closing Services. Our team is focused on 4 key growth strategies: one, grow Premier Agent while maximizing revenue and profit yield per lead; two, scale Zillow Offers and increase transactions while gaining operating leverage; three, increase company-wide operational efficiency and improve profitability; and four, continue to invest in adjacent services to deliver a seamless integrated customer experience and expand our total addressable market.

In all, I'd characterize 2019 as tumultuously remarkable. Personally, it was one of the most challenging years of my career. And we've been working to -- as we've been working to simultaneously evolve the hearts and minds of our employees, our industry partners and our investor base while reinvigorating our core businesses and dramatically expanding new ones.

While we have miles to go before we sleep and the way will surely be lumpy, the great progress we've made in a short period of time gives me confidence that Zillow Group is in the pull position in the race to replatform the largest industry. Our talented team here is making it happen. But I also want to thank you, our investors, who have given me and the team the space and support to turn the page and to move to the next exciting chapter in the story of Zillow.

Before I turn the call over to Allen to take you through our numbers and outlook, I want to acknowledge his leadership and impact on defining the more rigorous, planful and accountable operating culture of Zillow 2.0. It's great to be sitting next to you, Allen.

[Allen Parker, executive]

Thank you, Rich. It's great to be here. I'm going to quickly summarize a few key financial results, starting with the fourth quarter and then moving to our full year results.

Overall, we're pleased with our Q4 and full year 2019 results as we exceeded the high end of our expectations for our revenue and EBITDA outlook on both the consolidated basis and across all of our segments. We reported Q4 consolidated revenue of $944 million, up $579 million or 158% year-over-year. The outperformance in revenue was due primarily to strong demand in our Homes segment as we applied learnings to inform our retail strategies and as we saw less seasonal impact than expected on home sales. Consolidated Q4 EBITDA outperformed our expectations at a loss of $3.2 million and was driven by not only the health of our IMT business but also the operational rigor across the organization as all 3 of our segments delivered better-than-expected EBITDA.

IMT segment revenue grew 6% year-over-year in Q4 to $320 million, exceeding our outlook. Premier Agent revenue accelerated more than we expected in the quarter to $234 million, up 6% year-over-year from 3% growth year-over-year in Q3 and what was essentially flat growth in Q2. Our decision to partner more closely with the best agent partners is not surprisingly yielding strong results with connections, customer satisfaction and agent retention all on a clear upward trajectory. These inputs are key drivers on why MBP same-store sales, monthly recurring revenue growth accelerated at the end of December to 12%. As we did last quarter, we provided same-store sales for monthly recurring revenue for our non-Flex markets, which we estimate represented approximately 95% of our Premier Agent monthly recurring revenue at the end of 2019.

IMT segment EBITDA margins expanded over 800 basis points in Q4 year-over-year to 27.4% and exceeded the high end of our expectations. Our focus on cost discipline and operational rigor across the company is yielding tangible results. Total IMT segment operating expenses declined nearly $10 million year-over-year in Q4, excluding the impact of certain onetime items we recorded in Q4 2018 as we continue to focus on delivering operating leverage.

Moving to full year 2019. In the full year 2019, consolidated revenue grew to $2.7 billion, which more than doubled from $1.3 billion in 2018, primarily as a result of the rapid expansion of our Homes segment. Consolidated EBITDA for the year was $39 million as we invested our IMT segment profits into our Homes and Mortgages business.

2019 IMT segment revenue was $1.3 billion, and IMT segment EBITDA was $304 million. Put that in context, we grew revenue by 6% year-over-year while growing EBITDA 27%, expanding margins by 381 basis points. Premier Agent revenue grew 3% during 2019 to $924 million. We were pleased with the progress to stabilize the Premier Agent business in the first half of the year and the reacceleration in the second half of the year. Homes segment revenue was $1.4 billion for full year 2019, up from just $52 million a year ago.

As I've stated on previous earnings calls, during this transformational time at Zillow Group, my focus as CFO continues to be on establishing processes and mechanisms in support of 3 key priorities, scaling our new businesses, executing within our IMT segment in order to fund investments into the new segments along with additional growth opportunities and implementing focused cost discipline and operational rigor across the company as we scale. I am pleased with how we executed on these priorities in 2019 and believe these efforts have positioned us for even stronger IMT segment EBITDA performance in 2020 to fund our investments in new businesses.

Before moving to your questions, I'd like to provide some select thoughts around our Q1 and full year 2020 outlook in comparison to 2019. Due to the recovery and strong trends we are seeing in our Premier Agent business, we expect Premier Agent revenue growth to accelerate further in Q1. We expect Q1 Premier Agent revenue to be between $238 million to $243 million, an increase of 10% year-over-year at the midpoint of the outlook range compared to 6% growth in Q4 and 2% growth in Q1 2019. This accelerating revenue growth is our first quarter outlook -- in our first quarter outlook includes the net impact of delayed revenue from Flex tests. Without the impact of Flex tests, we estimate Q1 year-over-year Premier Agent revenue growth would be approximately 14% at the midpoint of our outlook range.

Turning to IMT margins. In Q1, we are forecasting IMT EBITDA margins to expand 90 to 120 basis points to between 21.6% to 22.7% despite a couple of onetime items that benefit -- benefited Q1 prior year margins by 290 basis points.

In the Homes segment, we expect another year of strong growth in 2020 as we apply learnings, grow into the 23 markets we've opened in the last 20 months and launch a handful of additional markets. Given how new this business is and our continuous testing and learning, we will continue to provide a quarterly outlook for Homes segment in 2020. In Q1, we expect Homes segment revenue to be between $675 million and $700 million. Homes segment EBITDA in Q1 is expected to be between a loss of $95 million to a loss of $85 million. We expect to maintain the current unit economic guardrails of plus or minus 200 basis points on average return on homes sold before interest expense as we continue to test and innovate.

With regard to our Mortgages segment, the new management team is in place and is making progress to develop our technology platform and expand operations of -- expand the operations of Zillow Home Loans. As we work through this transition, we are moving the Mortgages segment to quarterly guidance, consistent with our approach to the Homes segment.

As Rich mentioned, in our Flex markets, we are seeing positive signals that our most productive agents convert transactions better than the average. Because of this, we will begin to expand our Flex test methodically with high-performing partners in select markets in the second quarter of 2020. Our full year outlook includes the potential for additional testing in the second half of the year if we decide to expand Flex further.

For full year 2020, we expect Premier Agent revenue to be between $980 million to $1.005 billion, up 7% over 2019 at the midpoint of our outlook range. This outlook range includes the net impact of delayed revenue from the Flex test I just discussed. Without this impact, we estimate the 2020 year-over-year Premier Agent revenue growth would be approximately 10% at the midpoint of our guidance range. We expect IMT segment EBITDA margins to expand an additional 300 to 400 basis points in 2020 to between 26.7% to 27.9% for the full year and IMT EBITDA to grow 24% for the full year at the midpoint of our outlook range.

Please note that the pace of investment is in our control to execute our key growth strategies as Rich discussed previously. While we are not providing outlook on consolidated 2020 revenue or EBITDA, philosophically, we are managing towards a breakeven range as we use the contributions from our IMT segment to help fund the expansion and growth of our Homes and segment -- Homes and Mortgages segments. Furthermore, our balance sheet remains strong and provides a significant flexibility to take advantage of market opportunities to gain scale and operating leverage in our new businesses.

We ended the year with $2.4 billion in cash and investments along with $900 million in undrawn credit facilities and lines of credit to further support the growth of Zillow Offers and Zillow Home Loans. We remain mindful of our cost of capital, and we invest in these -- as we invest in these opportunities and will continue to prudently manage expenses.

In all, we are very pleased with our Q4 and full year 2019 performance, the momentum we're carrying into 2020 and the progress we're making towards streamlining real estate transactions to better help our customers unlock the next chapter of their lives.

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

[Operator]

[Operator Instructions] Our first question comes from Ron Josey with JMP Securities.

[Ronald Josey, analyst]

Lots to talk about here for sure. But maybe, Rich and Allen, I wanted to focus a little bit on the just Premier Agent business at first with guidance calling for revenue growth accelerating -- the acceleration to continue and I think 7.5% growth at the midpoint. I hear you on agent retention rates and improving CSAT scores. But with the unknowns around Flex and just rolling out to new markets in 2Q and maybe even more markets in the back half of the year, just -- can you just talk a little bit more about the confidence in that accelerating growth in Premier Agents, which clearly is the bread and butter at least, what underlines the investments going forward.

And if I could sneak just a follow-up on Flex. Rich, you mentioned in the letter high-performing agents are just converting leads at a higher rate. Just any additional insights there would be helpful.

[Richard Barton, executive]

Okay. Ron, this is Rich. Let me let Allen start out on that one, and then I'll jump in.

[Allen Parker, executive]

Yes. Thanks for the question. So yes, I'll reiterate. I know you mentioned it, but our confidence really does come from the improvements we've seen in some of the underlying inputs over the past 6 months. Both connections and CSAT metrics are up substantially, and our retention has been trending near the highest levels ever.

So while -- what I would say is as we look to and what's incorporated in the guidance, it's still early on Flex. We thought it was appropriate to include some flexibility to increase our testing in Flex. We control the Flex testing. And some of the early signs are leading us to feel confident that our higher-performing partners can provide returns and be accretive earlier than a full market flip.

But again, given just the basic inputs of our core business, which is still the majority of the revenue that we report from PA, these trends along with continuing product innovations, investments we're making in connections and operational improvements are driving strong forward indicators. So we feel very comfortable. The guidance range we provided gives us the ability to continue to test a variety of monetization models, including Flex, while still supporting this core MBP business.

[Richard Barton, executive]

And yes, I mean, the inputs are -- all the inputs are improving. On the high-performing partners question and providing more clarity, it's really what it is. It's unsurprisingly when we find partners who use our software, understand our system, we explain our system well, and they -- and give good customer service and convert those customers into buyers, transactors of homes, those are the partners we're looking for. And we are testing and learning different things in different markets. It's too early to make any broad generalizations to characterize what those partners look like, but we're finding them. We're finding enough of them. We're seeing enough good results to continue to methodically expand our Flex tests.

I would say we're looking for high-performance partners across the universe of PA, too. Flex is a very small part of the overall Premier Agent business. And the whole -- the company's new focus on the transaction itself and what it takes to get a customer into a new home has actually brought goodness to the whole of the Premier Agent business as well and taught us how to focus on what customers really want. So...

[Operator]

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

[Mark Mahaney, analyst]

I had 2 questions on the Homes business. But Rich, thanks for quoting Bob Seger. On the Homes business, the one thing that looks a lot is that there was a sequential decline in homes inventory. So could you not find enough homes that you wanted to purchase? Is it harder for you? Is there some reason? Is that a more competitive market? Just explain why this is the first time in which you -- that kind of that -- those 2 numbers have flipped, homes sold and homes purchased.

And then secondly, in the homes, thanks for the business economics, that kind of drill down is really valuable. And I know it's a small part of the cost equation here. You've got this nice leverage in home acquisition cost, but you've got this deleverage and renovation costs. And I don't know why that would be, but that's kind of offsetting everything and kind of driving you. I know it's within your guardrails, but it did turn your return on homes sold negative before interest expense. Just explain what's happening with the renovation costs.

[Richard Barton, executive]

Yes. Okay. Okay. Great. Maybe I'll turn the second one, Mark, over to Allen on that. But on the first part of your question, I guess I'd deflect first and say we had remarkable growth in selling our Zillow-owned homes, right? It's $603 million in revenue. That was up, I don't know, almost 15x from the year before. So it's turned into a really big number, and that's pretty remarkable.

On the purchase deceleration or decline that you asked about, we actually planned for purchases to be down sequentially going into Q4 due to seasonality. Q4 is a slow -- historically a slow selling season. And so we were appropriately cautious heading into the quarter, and we fulfilled against our plan to do that. So that was not a surprise.

What did surprise us a bit was how good our resale volume was. It was much higher than expected. It made us a bigger net seller than we actually expected. And I would say this is a credit to applying all these learnings we're gaining. The unit numbers in this business are starting to build. They're still small but they're starting to build. And each new unit that we transact, it pumps data and learning into the machine and people. And we're getting better at pricing homes. We're getting better at price drop strategy. We're getting better at all the stuff that is required to price and sell the home. And so we were able to move a lot more homes than we anticipated.

I guess I'd say looking forward, because we still are in the early days, most of our markets are really young, we expect it to be -- it won't be a nice, clean -- it will be a lumpy path. It won't be a nice, clean, linear thing, which is one of the reasons we're only guiding one quarter out.

Now on the renovation deleverage, I'll turn it over to Allen.

[Allen Parker, executive]

Yes. Mark, it's Allen Parker. Yes. So as you called out, renovations as a percentage of average revenue was 4.69% in Q4 versus 4.02%, a negative -- basically an increase of 67 basis points quarter-over-quarter. I'll call out that we believe there's opportunity across all 4 lines. We did get 21 basis points improvement in home acquisition costs.

I wouldn't read too much of anything in the quarter-over-quarter trends right now as we're testing and iterating across all of these markets. What I will say is we have a team that's very focused on what's the right amount to spend on renovation to make the home great for our customer but without overdoing it and spending money on things we don't need to.

So we've got an opportunity. We obviously -- in total, we were 48 basis points negative as a percentage of revenue and well within our, as you mentioned, our plus or minus 200 basis points. I wouldn't read too much into changes, but that's definitely an area we're focused on, in renovation, although we're focused across all 4 expense lines as well.

[Operator]

Next question comes from Justin Patterson with Raymond James.

[Justin Patterson, analyst]

Great. A couple on Flex. Could you talk about your learnings in 2019, the markets you're expanding to in 2020 and on the puts and takes around further expansion?

And then finally, I wanted to go back to Flex partners and extensibility. Is there anything you can do to help nudge that general agent population toward becoming higher performers in Flex? Or do you think it's a little more binary? It simply works for some but not everyone.

[Richard Barton, executive]

Okay. Yes. I mean I think our big learnings for PA overall, but Flex included, for 2019 is how, regardless of business model, we are looking to, like any other funnel transaction business, increase conversion and increase take rate, increase yield, okay? And we have had an intuition that there's upside in those 2 big levers for quite some time, and we're starting to actually -- we're starting to actually see that. And we feel that both have room to grow.

The history of our Premier Agent business is a history of innovating on the business model, trying to drive those 2 levers. And Flex is simply the latest instance of that innovation. Now we had to start talking about it more specifically because of revenue recognition stuff, but it's really just an instance of that business model innovation.

And we're pretty early. The first big Flex markets were really Phoenix and Atlanta, which we launched in Q4. So we're still really in the early learning phases of this. But we've seen interesting stuff on these interesting results with these high-performing -- high-performance partners to give us the confidence to expand the test. So we've seen that data. We're expanding methodically. Allen has taken you through what we think the impact will be going forward in 2020. But we like what we're seeing.

And I guess the customer-oriented person in me also really likes that with Flex, we drive a better conversion percentage, a better conversion rate, and that is the single greatest driver towards customer satisfaction. And so we have happier customers as well. And so all of that is a long-winded way of me kind of saying we kind of look at this as an optimization problem now, and we're continuing to innovate on these models.

[Allen Parker, executive]

Yes. And I'll just add, Rich, that in terms of the launch plan, our market plan, it's still very fluid. As Rich said, it's early. We just felt that including the flexibility to have to expand testing as needed and calling out the impact of that in our 2020 outlook provided you guys with a little bit of stabilization on Flex' impact and gives us some of the flexibility to look at testing. I think initially, it's going to be a very small test that starts in Q2. But if we find that there are some benefits there and that we become accretive sooner, we've given ourselves some flexibility to expand those tests in Q3 and Q4, without having to come back with the guidance change, if that makes sense.

[Richard Barton, executive]

And Justin, I think your last part of the question was about nudge and binary. Is there something we can do to nudge? We think we have a ton of upside in mechanizing and professionalizing and applying software and modern technology to this nurture funnel, to the sales funnel. And there has been a woeful, an embarrassing lack of tech investment in the real estate industry for pretty much its history. And so we're waiting into -- a gnarly problem, yes. But it's a really fertile field. There's a long pent-up desire to kind of mechanize and professionalize through software this industry. So we have a lot -- we see opportunity everywhere we look.

[Allen Parker, executive]

Right. And it's fair to say that, that opportunity can be spread across our MBP business, the learnings.

[Richard Barton, executive]

No question, yes.

[Allen Parker, executive]

Which is a great lever. It's not just in Flex.

[Richard Barton, executive]

Yes. And honestly, like a lot of the learnings we're gaining are coming from our Zillow Offers business as well because we're actually the primary with our Zillow-owned homes and Zillow Offers. And that has a way of focusing the mind and the development docket to when we're actually buying and selling homes, and we need to do it more efficiently, and we want to do it more efficiently. We're actually utilizing some of those processes. We're learning from ZO for our PA business as well.

[Operator]

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

[Thomas White, analyst]

A very nice quarter. A couple on the guidance, if I may. I guess what stood out most to me was the big ramp in implied EBITDA margins for the IMT segment. I think the midpoint was like 27%, and the high end was something like 28%. Can you just talk a bit more about the specific drivers of that leverage?

And then on the PA outlook for 2020, I think it sounds like back to double digits kind of ex Flex. Maybe -- it sounds like you're leaning into these kind of top-performing agents. I'm trying to reconcile that with the comments about retention at peak levels. Just kind of curious about how some of the other not peak performing agents are behaving or reacting to the fact that they're presumably getting fewer leads or fewer connections.

[Richard Barton, executive]

Okay. Maybe, Allen, the first part?

[Allen Parker, executive]

Yes. Yes. Tom, thanks for the question. So before I get to 2020, I'm just going to step back to the performance we saw on margin expansion in 2019. So again, in 2019, we were able to expand IMT margins by 381% -- 381 basis points, sorry, 381 basis points. And that expansion is coming from and kind of reflects the fundamental health of our business. We have improved connections with our customers, which is leading to better retention rates with our agents and has driven accelerating revenues. And at the same time, our cost management is driving operational leverage.

So it's kind of a best of both worlds. Our teams have been focused on prudent resource allocation and cost controls and has led to efficiencies in our operations and overhead. We are investing. We're investing in connections. We're investing in products, but we've been able to fund those investments through prioritization and kind of a lot of discipline around discretionary spending.

So with that 381 basis points of expansion, looking into accelerating growth and our outlook for 2020, we feel like we can continue those trends, continue to invest to grow the business but also yield 300 to 400 basis points of leverage in margin. And you're right, at the midpoint, it's about 350 basis points of margin improvement and about 27.3% margin rate.

So again, we made a lot of traction this year. And as we grow, and we can grow with investments but funding those internally and taking a hard look at discretionary spend, leverage efficiency, we feel really good about our opportunity to grow next year and to grow EBITDA at a rate of 2.5 to 3x our top line.

[Richard Barton, executive]

And that's really one of the big themes of the year, Tom, is this operating leverage mindset and this prioritization mindset and this mindset where teams don't go into budgeting thinking, oh, what is my add to what I already have, how many more heads am I going to add. It's actually having crisp priorities, OKRs against those priorities and having us all together make trade-offs all the way throughout the organization about what the priorities are. It's really bearing fruit. And I sense there's more leverage, but I don't know. I think Allen would agree with that.

Anyway, on your last bit, I mean I think we should probably kind of let -- it was about retention and how agents are feeling about the move to Flex in some markets and ZO move, which is unsettling to a lot of agents and what that's doing to retention. I think the numbers kind of can speak for themselves like -- although I guess we didn't share specifics, but we have said that we're seeing some of the highest retention rates in our MBP PA.

So the core traditional business, the big business that -- the one that you're worried about, we were seeing the highest -- some of the highest retention rates we've ever seen. And so despite the fact that we are doing all of these, making all of these -- some might characterize as aggressive moves but really just innovative moves in the space with Zillow Offers and with Flex, we are doing well with our traditional partners.

They sense real opportunity here. They also know that we get 173 million unique users a month that come to our sites and that our brand, Zillow, the word Zillow is searched more in Google than the term real estate. They know that. And so good news flows from that great relationship we have with all these customers.

[Operator]

Our next question comes from Lloyd Walmsley with Deutsche Bank.

[Lloyd Walmsley, analyst]

I have 2, if I can. First, can you give us any sense for how monetization of Flex looks on a per lead basis versus the kind of traditional Premier Agent business? What are you seeing in terms of the ultimate rev per lead accretion? And what kind of rev rec lag should we be thinking about in terms of timing?

And I guess second one would just be can you walk us through the impact of adding the request a tour, the impact of that on the conversion to leads and kind of the timing of that rollout across the footprint. Anything you can help us with there would be great.

[Richard Barton, executive]

Okay. Allen, maybe you can take the first part, yes.

[Allen Parker, executive]

I'll take the first one. So to answer, it's still really early in our testing as Rich mentioned. We just launched Phoenix and Atlanta in Q4, so we don't have enough data points yet to extrapolate a curve on what we think that multiplier impact will be. But as Rich mentioned, the goal of the program is to improve our revenue per lead. So we needed to be accretive for it to work. We control the testing here.

As we get further along, I think we will be able to have more information, and we'll share that as we feel good about what that extrapolation curve looks like. So what we have done right now is try to give you, like I said, just a guardrail of what we think the impact will be on our top line growth rate for the Flex programs. You can kind of have a with and without as you think about your growth curves. Same thing...

[Richard Barton, executive]

You're talking about the 300 basis points?

[Allen Parker, executive]

300 basis points for the year, 400 basis points for Q1.

And then with respect to the rev recognition, we continue to assess that. We've made a lot of progress in improving and putting the structure in place to ensure that we understand when transactions occur and get paid for that. But the N is still fairly small just given when we started in Q4. So we don't have a good curve for cash, cash collection curve at the full cohort of, say, a month of lead. So we'll keep you posted on that.

On the impact of tours on lead conversion, do you want to get that?

[Richard Barton, executive]

Yes, sure. Okay. So if you think about the conversion funnel, I'm waving my arms, drawing a picture in the air here. At the very top of the funnel, we have visits. And at the bottom, we have somebody moving into their new home. Lots of steps in that conversion funnel, lots of levers and decision points all along the way to improve conversion.

For example, a visitor turning into a submit, a submit into a meeting, a meeting into a house tour or straight from submit to house tour, from house tour to offer, et cetera, et cetera. Every one of these levers, we have the opportunity to pull, we believe, twist and improve. And we can address a lot of these with better training but also with software, which is great.

The tour lever is just one of them, and it's an interesting one. As you might imagine, a lot of buyers are on Zillow and Trulia and StreetEasy, and what they really want to do is go see the place. And so we have done some great feature work in the last quarter to improve the coverage of Tour It Now for our customers. And that is just one of a patchwork or a collection of features and products that we're working on to improve that conversion.

[Operator]

Our next question comes from Brian Nowak with Morgan Stanley.

[Brian Nowak, analyst]

Bob Seger and Robert Frost, same prepared remarks, tough act to follow, Rich. I have 2. So I know it's early in Flex with only 2 markets with Atlanta and Phoenix, but just maybe could you talk to us a little bit about 1 or 2 of the friction points or areas that you've really improved on in those 2 markets, whether it's measurement, tying things through, getting the right agents? Just talk us through some of the blocking and tackling that's improved that you think will make Flex go smoother going forward.

And then on Homes, maybe talk to us how you're thinking about sort of the profitability of your oldest markets throughout 2020 once you sort of have less upfront costs and start to get more potential leverage, et cetera?

[Richard Barton, executive]

Thanks for recognizing that, Brian. I don't know if I had any other embedded references in there. On the kind of Flex friction points and what's working and what's not, I mean we are really early, but we are discovering, as I said before, kind of a woeful lack of kind of application of software to better nurture the transaction experience in this industry.

Traditional brokerages do not have and have not had big tech and dev budgets. They have really -- they just haven't invested in technology. And that hasn't really necessarily been their primary concern anyway because their business models have been a little different. So we're seeing a tremendous amount of opportunity all along the nurture funnel of a customer.

And as we find things, we're automating it. We're finding the right partners who can -- who are better at converting these things. I mean even basic things like drip marketing and e-mail communication and when is the right time to call and when is the right time to send an e-mail and don't overwhelm consumers and bombard them with e-mails because they'll get turned off and they'll go away, these kinds of -- some basic stuff that we have been in the tech business for a long time kind of take for granted. But we're bringing those fresh skills to this industry, and we see a lot of opportunity.

On the Homes, the second part of Brian's question, Allen, do you want to try to do some Homes -- the Homes question?

[Allen Parker, executive]

Yes. Yes. So I think the question was how are we looking at profits in our oldest home markets in 2020. So again, with respect to Homes in all markets, actually, we're continuing to measure and look at ways to ensure we're improving year-over-year. But at the same time, even in our oldest markets, they're still not that old, and we are testing and iterating on resell and acquisition and a variety of other measures that could impact profitability quarter-over-quarter just given what that test is and what its outcome is.

So right now, what we're looking at Homes on is we expect to improve overall margin percentage on Homes on an annual basis. It may not always be sequentially quarterly. We are holding Homes accountable for improving efficiencies and processes and all of the automation things that are required for us to scale. So we have OKRs, as Rich mentioned, to ensure we're getting more productive and efficient. But at the same time, we are still very much iterating and learning around the sale -- acquire and resell process that could affect profits from time to time.

So I guess what I'd say is that we'll continue to look for that Homes profitability to improve annually as a percentage of revenue, but I don't think there's a bifurcation between what we'll call old home markets and new home markets today.

[Operator]

Our next question comes from Naved Khan with SunTrust.

[Naved Khan, analyst]

Yes. Maybe you can give us some sense around the expansion of Flex traditional markets. Is it going to be ZIP Codes? Or are these going to be entire markets you're thinking about maybe in second quarter or the back half? Can this 5% coverage that you have for Flex, can it go to 10% by year-end?

[Richard Barton, executive]

So we're learning really rapidly on the expansion of Flex. We've tried a bunch of different things in different markets. And hanging our strategy on a particular geography or ZIP Code is kind of not the way we're doing it. We're looking at high-performing partners, getting it working and then landing and expanding from there.

And so that will take a different shape for maybe how we've talked about it in the past. We can see Flex running simultaneously in markets right alongside MBP and us optimizing between the 2 as we grow and learn.

On the 5% question, I think what we're trying to do in our 2020 guidance, maybe I'll let Allen repeat it, we're trying to simply build some room to test Flex and expand Flex methodically right into our guidance.

[Allen Parker, executive]

Yes. And the way I would describe it is that a percentage of MRR can have a varying effect depending on what period of time throughout the year you do it. So we think the most appropriate metric to share with you guys to give you a feel for with and without Flex is what our expected impact of -- net impact of Flex is for the year, which is a 300 basis points of revenue growth that we called out in my prepared statements.

[Richard Barton, executive]

The midpoint of the guide on 2020 is Premier Agent growing...

[Allen Parker, executive]

7%.

[Richard Barton, executive]

7%?

[Allen Parker, executive]

Correct.

[Richard Barton, executive]

And plus 300 basis points to 7.4%.

[Allen Parker, executive]

No, 300 basis points to 10%.

[Richard Barton, executive]

Sorry, 300 basis points to 10%. Got it. Just adding it to the 7.4%.

[Allen Parker, executive]

Exactly.

[Richard Barton, executive]

I just want to be clear.

[Allen Parker, executive]

Yes. And again, it is really fluid. I think the only thing we kind of know we're going to do is start some very small testing with high-performing partners in various markets, but that will be a small test in Q2. And then we'll have better learnings from our tests we launched last year as well as early reads on those to determine whether we do anything in the second half.

We just wanted to give ourselves the flexibility to provide you with those guardrails, so we weren't surprising. But as we learn stuff that -- around a lot of the questions that have been asked today, we'll continue to communicate where appropriate.

[Richard Barton, executive]

Overall, in PA, we really like the growth we're seeing. We're impressed with the growth we're seeing. The growth of EBITDA is -- the growth rate of EBITDA is far exceeding the growth of revenue as well, which is nice. So we're showing leverage. This is a healthy business that we're optimistic about.

[Operator]

Our next question comes from John Campbell with Stephens Inc.

[John Campbell, analyst]

Great job getting Premier Agent back on a firm footing. I'm sure you guys saw this with your Seattle rev in Redfin. They announced the pricing change. We were kind of viewing that as maybe serving as potential to increase the stickiness or drive some desired behavior around the home sellers, also using them on the buy side on the next home. I don't know. That was pretty interesting. But I don't know what you guys can do, but I'm curious, is there something that you can do to drive better adoption across the ancillary businesses or maybe help steer more customers to Flex conversions? I don't know if you can offer up lower closing costs or if there's some type of rebate that you can provide from the commission fees from Flex.

[Richard Barton, executive]

We will test all kinds of things, and in fact, are testing all kinds of things. Some of you actually noticed us testing some things. Don't over extrapolate those things onto the whole business.

I guess what I'd say, at least with respect to Zillow Offers in that is -- and adjacencies is that we're really focused on getting the hub of the wheel of transaction of TAM solid and rolling. We want to get the wheel rolling and getting the Zillow Offers transaction to a place where it's solid, predictable and showing leverage first is our #1 priority. And then we have all these ancillary adjacent transaction that hang off of and are dependent upon or tied to that transaction, including title and escrow and mortgage and others in the future perhaps. We're working on those, and we have planted some good stakes in the ground, and they're showing good promise.

But the overall numbers of Zillow Offers home transactions are actually still pretty small. So we're not going to see a lot of -- we're not going to see a lot of action in that for a little while. We do feel like the whole wheel of transactions though provides us with a large amount of opportunity. And we believe that once they're integrated, we can offer a highly differentiated customer experience because they are all connected.

And so that -- a customer can approach on more one click like transaction. We're not really seeing that yet in real estate, but we're seeing it in car transactions at Tesla. We're seeing it in a lot of other major transactions that people wouldn't necessarily have thought of as e-commerce transactions. And we're going to see that in real estate, too. These transactions are going to get much more streamlined, efficient and integrated.

[Allen Parker, executive]

Right. And I think our partner agents are going to play a role in those innovative transactions as well. And that is what we're testing.

[Richard Barton, executive]

Yes, no question. In fact, the Bowen -- the example I used -- watch the video. I'm serious. It's really good. That -- the Bowen transaction, the Atlanta couple -- the Atlanta family has started with a Premier Agent and it ended up incorporating Zillow Offers into that and enabling not a one click but a one step, like a same-weekend type transaction. And that's cool.

[John Campbell, analyst]

And speaking of not extrapolating, I feel like I have to ask you this. But with the brokerage license you guys recently got in New York, I'm guessing that's because of Flex. But can you talk to why you need that and whether we should expect you to maybe continue picking that up on a state-by-state basis as you expand Flex?

[Richard Barton, executive]

Yes. Look, most people don't know this, but we've been brokers for a long time in most places. We're going around cleaning stuff up and doing that. Now we've done that in an abundance of caution, kind of belt and suspenders stuff because the amount of regulation in these industries we operate is quite high. And so long ago, we got our brokerage licenses. This happens to break into the surface and get into the open air in New York and attract a little attention. But really, there's no new news there.

[Operator]

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

[Richard Barton, executive]

Okay. Thanks for your time today, guys. We are really pleased with our progress to replatform the real estate industry. And we're, as you can tell, excited about what's yet to come. Today's on demand, always on consumers who're eager for a better way to move and we're the best positioned company with our audience size, our technical expertise, our great partners, our platform, our team. We're in the best position to lead this revolution.

Our investments are enabling Zillow to begin to participate directly in market making, dramatically expanding our TAM that we believe will drive top and bottom line results for us and for shareholder return over time. We really appreciate your support, your counsel and your feedback as partners in this journey. Thanks a lot. We'll talk to you soon.

[Operator]

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