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Good afternoon. My name is Abigail, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Zillow Group Second Quarter 2020 Conference Call. [Operator Instructions] Please note, this event is being recorded. Thank you.
I would now like to turn the conference over to Brad Berning, Vice President, Investor Relations. Please go ahead.
Thank you, Abigail. Good afternoon, and welcome to Zillow Group's Second Quarter 2020 Conference Call. Joining me today to discuss our Q2 results are Zillow Group's Co-Founder and CEO, Rich Barton; and CFO, Allen Parker.
During the 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 make -- 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 our earnings release, which can be found on our Investor Relations website, as they contain important information about our GAAP and non-GAAP results, including reconciliations to the historical non-GAAP financial measures. In addition, please note, we will refer to our Internet, Media & Technology segment as our IMT segment.
We will now open the call with brief remarks followed by live Q&A. And with that, I'll turn the call over to Rich.
Thanks, Brad. It's great to be on the line with you all from Zillow Cloud HQ to discuss our results. I hope you're getting some downtime this summer and staying safe. Downtime matters now more than ever, so take care of yourselves and get some.
Okay. The second quarter was one for our history books. We faced down fear and uncertainty and took prudent action to control costs, stopping short of layoffs or furloughs and to extend the lifeline to our valued agent partners. We've refinanced to convert and raised nearly $1 billion of capital for defense and for offense.
Since the curse of COVID commenced for us here in the U.S., you've heard me speak several times on quarterly earnings and pop-up conference calls, striking what was perhaps a more optimistic tone than you thought was warranted. This quarter's numbers are even better than we had hoped and firm up our belief that Zillow's business is experiencing powerful tailwinds in both real estate and technology.
As I said before, I believe we are at the dawn of a great reshuffling. I'm sure I don't need to spell it out for you because we are all living it, spending an average of 9 hours more per day at home. Zoom meetings are changing the way families think about space and privacy. Home offices are in high demand. Backyards are more desirable than parks and gyms. Work-from-home policies are eliminating the commute for many. There's an endless list of considerations. Millions of people are currently considering upsizing, downsizing, getting closer to family, further from the office, et cetera.
At Zillow last week, we announced our intent to be a flexible employer, offering most of our employees the option to work remotely at least part of the time, indefinitely. It's something we never could have anticipated a year ago. New habits and norms are forming rapidly right now. In many cases, as with working from home, we have found better, more efficient and more healthy ways to live and work. We're not going to just go back to the way things were. This is a tectonic shift that we expect to play out for years to come.
Additionally, home turnover has been abnormally low since the global financial crisis, which means we entered the pandemic already carrying pent-up demand. These are the forces driving the real estate tailwind, supported by all signals we see and intuit.
You see this reflected in our outperformance in Q2 on most every measure, which sets us up well going into Q3, for which we have an outlook that now exceeds our pre-COVID estimates on most metrics. The great reshuffling is driving unusually high interest in home shopping. As the category leader, synonymous with real estate, we hit a record 218 million average monthly unique users this quarter. During the month of June, we grew users on Zillow Group sites and apps by more than 32 million year-over-year.
Across every industry we are all studying, we are seeing an acceleration in the preexisting [ O-to-O ] customer migration, navigating from offline to online. In the absence of being able to do much in the physical world, folks have turned to digital delivery systems: Amazon, Netflix, Zoom, et cetera. These are the forces powering tailwind #2, the technology tailwind. We believe we are the outsized beneficiary of this tailwind. No company in our industry is better positioned than Zillow to deliver on seismic shifts in technology adoption. Zillow recreated what it meant to search and find real estate, that we are now investing to recreate and digitize the transaction itself. 3 out of 4 U.S. adults said they want to use video or virtual 3D tour technology to shop for a home right now. Sellers are creating 3x as many Zillow 3D home tours as they were in March.
Okay. These 2 tailwinds, real estate and technology, are rapidly converging with Zillow at the nexus. The [ O-to-O ] shift, as it pertains to Zillow, is in part what we've been talking about as real estate 2.0, and we're seeing years of adoption accelerate in months. Real estate 2.0 will be an integrated transaction with virtual shopping, digital document routing, and one day, a trade-in button for your house. Zillow has the tech and R&D capabilities to enable this shift. And with the leading brand in real estate, we are best positioned to capture more transactions as more people change the places they call home.
These tailwinds pair with excellent execution this past quarter and set us up well for the future. Let me recap a few highlights. In the haze of uncertainty as the crisis began, we budgeted conservatively, but we planned aggressively to be ready to step on the gas when real estate bounced back. We avoided layoffs and other deep permanent cuts to our cost structure, and we've set ourselves up to press advantages, ending Q2 with $3.5 billion in cash. This positions us well now that the real estate market is snapping back more quickly than many expected.
Our Premier Agent business delivered its best sales and retention month on record in June. We expect this momentum to continue and are forecasting 15% year-over-year revenue growth in Q3. Regardless of the monetization model, we believe goodness flows from partnering with high-performing agents and teams to deliver high customer satisfaction and maximization of revenue and profit per customer.
Q2's higher-than-expected revenue in our IMT segment, coupled with COVID-driven expense prudence, drove year-over-year margin expansion of 584 basis points that far exceeded our expectations. We continue to see top line momentum in this segment, which informs a Q3 EBITDA margin outlook of close to 40%. Should we achieve this outlook, it will serve as a preview of profit leverage we can achieve in this business. However, we continue to see attractive growth opportunities in IMT and will invest appropriately.
In Zillow Offers, we used enhanced selling strategies and differentiated data signals to manage our inventory. The fact that we were able to make it gracefully through the uncertainty of the past 5 months, continuing to sell inventory is a testament to the team's agility. Our combination of machines and humans is getting smarter and more experienced.
We have since reopened all 24 markets after our March pause, offering a certain, convenient and safe way to sell. And the digital shopping experience of the future for buyers, this includes Zillow apps 3D home tours from anywhere, virtual home tours with a Zillow Premier Agent by appointment and in-person self-tours where buyers can unlock Zillow-owned homes with their mobile phones. A recent study by researchers at Sanford, Northwestern and Colombia shared how Zillow Offers should increase liquidity and mobility by making it easier for people to move, especially people who are downsizing. Zillow Offers is likely helping grease the skids of the great reshuffling.
Our Zillow Home Loans business is doing well, with June loan volume up 2.6x versus a year ago, our best month ever. Zillow Closing Services is now up and running in all Zillow Offers markets after less than 12 months. It's still early, but these adjacent businesses are gaining some traction, offering our customers value and convenience along the way.
Real estate 2.0 is picking up steam, and we are leading the way. Going forward, we remain focused on driving more transactions across all business segments during this remarkable moment in time that we are all living through. People in all sorts of situations are rethinking their living space, and they're coming to Zillow for help to rent, buy, sell, finance and to close.
We are continuing to invest heavily in technology and services that will allow more people to do more of their transactions with Zillow, whether that's through our Zillow branded transaction services or our best-in-class partners.
The video we included in the shareholder letter of Seattle landlord, Raul Tello, and his new tenants demonstrates the technology tailwind in action. Raul is a local doctor and a Colombian immigrant whose fledgling real estate investment business is a piece of his American dream. When public health orders made it difficult to show his townhouse to potential renters this summer, he turned to Zillow and discovered a suite of virtual tools that made it possible for renters to take a 3D tour online, go on a personalized virtual tour, sign their lease and pay their rent, all without ever meeting Tello in person. He went from nervous to relieved and surprised. He said, "There's no other way I would have been able to do this without the Zillow platform."
Before I pass the mic over to Allen, I want to take a moment to acknowledge that we, at Zillow, recognize the tailwinds we are experiencing are an advantage of being in the shelter business, which is at the base of Maslow's hierarchy of needs, a good and lucky place to be in a pandemic. Our country is grappling with fear, loss, protest and anger through a health crisis and a social reckoning. I'm proud of how our team at Zillow has responded. Our employees helped raise over $1 million for COVID-19 relief efforts in our communities. And additionally, our company has since pledged at least $1 million to support equity and racial justice.
Further, we have made a public comment that we can and will do more, starting at our own company in helping to lead progress in the real estate industry, which has a troubled legacy of discrimination that has impacted generations. Recently deceased U.S. representative, John Lewis, wrote that, "Nothing can stop the power of committed and determined people to make a difference in our society." We at Zillow are committed and determined to help shape a more equitable world.
We appreciate your partnership in this journey.
Okay. Allen?
Thank you, Rich. I'll summarize a few key financial results from Q2, followed by a discussion of our outlook for Q3.
As Rich discussed, Zillow Group delivered a strong second quarter. We reported consolidated revenue of $768 million, up 28% year-over-year. Our revenue outperformance was primarily due to a better-than-expected sales results in our Homes segment, when IMT and Mortgages also both outperforming our outlook.
While our Zillow Offers home buying was paused temporarily at the beginning of Q2, our actions, improved housing market conditions and low mortgage rates helped drive better revenue than expected for all 3 of our segments. Stronger revenue, combined with continued focus on managing costs, delivered consolidated EBITDA of $16 million, significantly outperforming our expectations of a loss of $61 million at the midpoint of our outlook range.
IMT segment revenue of $280 million and the underlying Premier Agent revenue of $192 million was impacted by the Better Together discounts provided to our partners during Q2. These discounts were effective in retaining our partners and put us in a strong position to benefit from the faster-than-expected housing market recovery. While our IMT segment revenue declined 13% year-over-year, the decline was better than the 25% decrease at the midpoint of our Q2 outlook.
As Rich mentioned, in June, we experienced record new Premier Agent monthly recurring revenue, and at the end of June, experienced our highest level of total MRR and retention since the inception of our Premier Agent MBP program. Given where the quarter started, this is a strong testament to our team's ability to manage through market volatility.
IMT segment EBITDA margin was 25.6%, approximately 1,500 basis points above the midpoint of our Q2 outlook. This performance allowed us to grow EBITDA dollars 12% year-over-year even with the declining revenue.
While Homes segment revenue decreased sequentially due to the pause at home buying during the first half of the quarter, we did sell 1,437 homes or 80% of the inventory we had at the beginning of Q2, exceeding our expectations. Housing transactions proved resilient as we, our partners and the broader industry participants found creative solutions to enable real estate transactions and customers to move forward safely. We restarted purchasing homes midway through the second quarter, and we are pleased with the initial inputs. We are seeing solid demand while driving continued operational improvements and safety measures.
Our Q2 Mortgages segment revenue of $34 million increased 25% year-over-year, exceeding the high end of our outlook range. Increased loan officer productivity enabled us to participate in the refinance wave driven by low mortgage rates. The Mortgages segment also delivered EBITDA of $5 million.
As we stated on previous earnings calls, my focus as CFO continues to be establishing processes and mechanisms in support of 3 key priorities. Those priorities are: scaling our new businesses; executing within our IMT segment in order to fund investments in our new segments, along with additional growth opportunities; and implementing focused cost discipline and operational rigor across the company as we scale.
Last quarter, I also discussed that during this uncertain time, the team and I have been focused on liquidity preservation to protect the enterprise and ensure we are well positioned to execute on opportunities to lead the industry to real estate 2.0. We ended the quarter with $3.5 billion in cash and investments, the highest balance in our history. In May, we completed nearly $1 billion in capital raises with a combined convertible debt and equity offering, effectively refinancing a portion of our convertible debt due next year.
Turning to our outlook. We are providing a 1 quarter outlook for all segments. While we are pleased with the execution of our team coming out of Q2 and the strong current input trends have informed our Q3 outlook, we do note that given the pandemic, there remains a more -- there remains more of a macro uncertainty in our current environment than normal.
Let me start with a few Q3 highlights. In Q3, we expect consolidated EBITDA at the midpoint of the guidance range to be $70.5 million, which is well above what we internally expected even pre-COVID. Accelerated revenue growth in our IMT and Mortgages segments are the primary factors driving top line contribution. EBITDA margins are expected to improve meaningfully as we leverage this revenue growth with continued focus on operating expense discipline. We will begin to increase marketing and advertising investments in Q3 as compared to Q2 as we press our leadership position and drive growth. However, we do expect to see continued year-over-year operating leverage in Q3 for marketing and advertising.
We also expect operating leverage in our people costs, technology and development and other operating expenses. People costs are expected to be relatively flat year-over-year as we plan to cautiously manage headcount given the continued uncertain economic environment.
Moving to each of our segments. Within the IMT segment, we expect Premier Agent revenue to be $277 million, up 15% year-over-year at the midpoint of our outlook range. The sequential improvement from Q2 is driven by expected continued strong sales and partner retention in Q3, coupled with discontinuing our Better Together partner discounts. Other IMT segment revenue growth is also expected to improve in Q3, with further acceleration in rentals revenue growth and discontinued Better discount -- Better Together discounts. Partner hit marketplaces like New York City and Display are expected to improve in Q3 from year-over-year declines in Q2 but still remained somewhat down year-over-year in Q3.
In light of these factors, we expect IMT EBITDA margin to take a significant step upwards to 39% in Q3 at the midpoint of our outlook range, up nearly 1,200 basis points year-over-year from 27.2% in Q3 2019.
In Q3, we expect our Homes segment revenue to be between $140 million and $160 million, and an EBITDA loss to be between $80 million to $70 million. Revenue is expected to decline both sequentially and year-over-year due to the pause in purchasing homes that impacted Q2 and the resulting lower inventory balance coming into Q3.
With regard to our Mortgages segment, our management team has successfully operationalized our move to conforming mortgages from FHA and VA loans, improved loan officer efficiency and has successfully navigated the dynamic rate environment. We are continuing to innovate our Mortgages technology platform to provide our customers and partners a more streamlined experience. We expect Q3 Mortgages revenue to be between $34 million and $37 million, and EBITDA to be between a slight loss of $3 million and breakeven based upon capacity, current market conditions and additional investments in operations.
As our results demonstrate, Zillow has a strong foundation despite the ongoing complex and rapidly changing environment around us. Our actions in Q2 to accelerate our virtual tools, provide partner discounts to support and retain partners, and our reduced spending enabled us to extend our leadership position and deliver second quarter results above expectations.
Our balance sheet is strong. Our demand indicators have reached record highs, and our platform and partners are well positioned and ready to help our customers move safely into the next chapter of their lives.
And with that, operator, we'll open the line for questions.
[Operator Instructions] Our first question comes from the line of Jason Kreyer with Craig-Hallum.
Congrats on the execution this quarter. Rich, there's been a lot of moving parts in the real estate industry, and it even sounds like it's been stronger recently. But with a lot of macro uncertainty lingering, just wanted to see if you could give us some perspective on how you're thinking about real estate going forward.
Yes. I mean it's not as hard to forecast as it was 4 months ago, but it's still pretty foggy. There's a ton of uncertainty. But here's what we're seeing, and I'm sure you're seeing it, too. Demand is high. Supply is relatively low, okay? And mortgage rates are low. So all of that is supporting prices and increasing prices should or good prices should lead to increased inventory, but that's been a stubborn one. There are a couple of early leading indicators on inventory that are flashing yellow to green right now, though. So maybe that's changing right now. Rents are stable to up, and shopping is active. So I guess the question is why are we seeing this right now? I mean it really is those 2 big tailwinds I talked about that we are benefiting from here at Zillow. We're lucky to be benefiting from them. The more debatable tailwind is this great reshuffling that you heard me, waving my arms about. But literally, it's almost math that we want -- that a lot of people want a new living space, whether they want to remodel it or move. And that is driving real estate demand for all, everywhere, not just in the suburbs, everywhere.
The tailwind that is more powerful and advantage to Zillow more is this technology-driven [ O-to-O ] tailwind, this retail to digital that's happening in every category, of course. But it's beginning to happen -- it's really happening in real estate now. And we're the digital leader, all the way from the top-of-funnel search and find right through 3D full floor plans, deep down the shopping funnel. So I guess we're benefiting from this title shift up and down the funnel. And we're positioned really well going forward given our roots, really, our roots are as a tech company.
Yesterday, I spoke to 106 Zillow interns in a cloud -- on a Zoom-based cloud meeting. It's pretty phenomenal. The large majority are -- of these interns, are engineering and data science interns. I'd say a few other companies in our industry even have an intern program, much less such a diverse set of young, bright people from top schools, and we're running it all remotely. This is really quite amazing, and it's a great advantage for us. If it weren't for a pandemic and potential economic calamity, we could really get excited.
Anyway, it's sort of exciting nonetheless. I hope that helps clarify things. But signals are looking pretty good.
And our next question comes from the line of Brad Erickson with Needham.
So I guess the IMT and Premier Agent business, in particular, the outlook you gave there for Q3 is I think ahead of what most of us were thinking. You talked about some of the factors that are driving that. Maybe, Rich, just talk about the sustainability of those trends as we look out maybe a bit beyond Q3. How should we think about that?
I mean it feels good, Brad. I mean it feels -- it's up and down the funnel. I mean at the top of the funnel, and it was driven by this [ O-to-O ] shift, I guess, and people wanting to find a new place, but just for instance, I think the stat I cited was that we increased new use in June by 32 million unique users. But the more interesting thing to sustain it -- we can't expect that kind of thing to continue. So we have to move down funnel to find the levers to drive the business in a sustainable way, right? And we have these levers all the way down the funnel, these kind of dials that we have all the way down the funnel that we are not yet maximizing or monetizing. And we've begun to turn them, and we're beginning to see action.
So our focus -- we began a year or a little over a year ago a focus -- this focus on transactions. And that focus on driving transactions is helping us drive more and better connections out of the same traffic flow. We got an increase traffic flow, but it's helping us drive more and better connections out of a similar traffic flow. We're getting them to better partners who are delivering better customer satisfaction and more transactions. So all of that results in more revenues and profit per customer for Zillow. So you're seeing that show up in our Q2 results, which are surprisingly good, and you're seeing that in our Q3 outlook. It's hard to know beyond that, but we sense plenty of road ahead for improvement in these dials and optimization of them given the amounts -- just the sheer amount of blue ocean that's off our [ balance ].
And our next question comes from the line of Ron Josey with JMP Securities.
Rich, I wanted to stick with the Premier Agent business. 2 questions that's in here. You mentioned a comment around regardless of the revenue model, the focus is on revenue maximization. I'm curious if the pandemic accelerated Flex or how you're thinking about that, assuming no change. But interesting comment.
And then maybe, Allen, with EBITDA margins guiding to around 39%, 40% or so in the IMT business, advertising is coming back, which you talked about, despite strong user growth. So that's one thing. But just wondering how sustainable that margin is for the IMT business and what's driving that.
Yes. Do you want me -- Ron, thanks for the questions. Look, I can take the second, and then we can talk about Flex. I think the -- so Ron, on our -- with respect to our Q3 guide on IMT margins, our margin outlook in Q3 is reflective of how our marketplace business models can perform when top line growth is combined with cost discipline. Our focus is providing a great customer experience by improving connections, customer satisfaction and conversion for our customers through technology and partnering with high-performing agent partners. This focus is working, as evidenced by the strong trends we're experiencing exiting Q2, and has informed the accelerating revenue growth incorporated into our Q3 outlook. But we control the cost levers, and we'll continue to focus on cost discipline.
I would call out, though, that we'll also invest strategically and opportunistically to press our leadership position where warranted. So given the uncertainty and lack of clarity, we're not providing any guidance or target updates outside of the Q3 outlook, but we feel really good about where we are and the business models that we're operating with it.
Okay. And to your first one, Ron. I -- thanks for jumping in there, Allen. I started talking, and I was -- I did the classic Zoom mute air. Sorry about that. I was talking at my computer stream to myself. So on the -- yes, on the Flex question, certainly early in the pandemic, you heard us comment that we were certainly happy that we had the Flex arrow in our quiver. We had the Flex entrée on our dinner menu of stuff that we can offer our partners as we move to get these better partners who are better at converting and are focused on customer satisfaction and transactions. And we're willing to delay gratification from revenue in order to do that. So it's been -- it was certainly nice to have, especially at an uncertain time. It's still uncertain, but a decent amount of fog has cleared. And the way we're thinking about this really, Ron, is a kind of this menu that I described. We have these different business models, these different ways we interact with different partners in different geographies, and not just in PA, but also on the businesses that surround Zillow offers. And what we're finding is that having a flexible menu of things that we can figure out how to make them work the best, with different partners, has offered us a really interesting optimization, opportunity. And that's really what's going on now. We continue to test and roll out this and other models, but we think about this just in a much broader context of continuing to get more dollars to drop out the bottom of this customer funnel. And so you're going to probably hear less specific stuff about Flex, I think, going forward. And that's not to say we don't love it. We do. It's just become part of the way we do business. And because of the -- we don't -- I should let Allen speak about it. But the only reason we started talking about it as a separate thing initially was because of this revenue recognition thing. And I think we've kind of -- that's just not as necessary anymore to focus on. I hope that helps, Ron.
Yes. I'd just add, Rich, it flows out that one question that now that we are also offering and monetizing Flex, alongside MBP in the same markets, it just becomes more of an optimization, how do we manage our business versus our Flex versus MBP by market assessment. And so that's why I think we're in an optimization model, looking to maximize revenue per lead, and that's how we'll be looking at the business.
And our next question comes from the line of Naved Khan with SunTrust.
This is Robert Zeller for Naved. So following the pause and subsequent resumption of purchasing homes, how aggressive do you expect to be with Zillow Offers going forward in Q3 and the rest of the year? And just curious how consumers' interest in this offering has evolved throughout the pandemic.
And then separately, in the shareholder letter, I think you said that you have agreed to repurchase homes, but sometimes the closing can take weeks or months to close, which is why some won't be added to inventory until Q3 or later. I'm just wondering -- I just want to clarify whether or not that's -- these homes are reflected in the 86 homes sold in the quarter. And then separately, how long do you expect it to take for these homes to close? And how much volatility do you expect in closing times?
So maybe I'll start, Allen, with the first half of the question, and then you -- if I screw anything up on trying to answer the second part of the question, you can hop in and help out.
So starting with your question, Robert, about how aggressive we want to be with Zillow Offers. Well, we've now, as of today, actually opened up all 24 of the markets that we had open before COVID hit. And we -- so you can tell, by the way, we've opened markets and how aggressively we've reopened markets, you can tell we feel good about it. And the supposition is that this price certainty, this time certainty and convenience and the kind of safety associated with -- if you're a seller, not having to have a bunch of people go through your house, and if you're a buyer, letting yourself into a home with a Zillow app with nobody there, those both feel like good things in the midst of a health crisis, and we're seeing that play out.
So we feel that in a way, the pandemic highlights some of the benefits of working with Zillow Offers. It is -- the reopening is early days. So we're watching. And -- carefully, but we're feeling good about kind of the post-COVID Zillow Offers.
On the repurchase question, I'm not -- maybe you have the letter in front of you. I think what you're asking is -- what maybe a little confusion is just basically us highlighting that, of course, pausing the factory for 8 weeks or so is going to cause an air gap of product coming out of the other side of the factory, and then it just takes the cycle time in the factory of getting a home all the way through the factory out the other side and sold, takes some time. So we're going to see -- what you're basically seeing is in our guidance for Homes next quarter. I'll have -- maybe Allen, you have it in front of you. You're just going to see that air gap in the factory reflected in that outlook.
Yes. I think it's exactly right, Rich. And I'll just try to add a little color to that. So we purchased 86 homes in Q2. We disclosed that in the shareholder letter. And we unpaused -- we started up again -- Zillow Offers up again. We were only in 15 markets coming out of Q2. We're now in all 24. That's exactly what Rich mentioned. Our guide -- our revenue guidance of $140 million to $160 million, down 61% year-over-year and 67% sequentially at the midpoint, is really due to this air pocket. We have not seen any substantial increases in the cycle time from when we agreed to an offer with one of our customers who's selling their home to when we close, but it does take time. And so what we've got here is because of the pause -- and we were actually paused up to 21 weeks before we were open in all 24 markets. It's just going to take a little time as we restart the factory, it's air gap that Rich mentioned, to run that through.
I'll give you a historical reference. We entered this quarter into Q3 with 440 homes. You'd have to go back to when we entered Q1 of 2019, we had a little over 500 homes. So that's the closest reference point. We get about $130 million in revenue in that quarter. We are planning -- and our guidance implies a slight acceleration versus that quarter with our $140 million to $160 million, but that's the reason the revenue is declining sequentially.
I'm sorry, I was distracted by a fluffy kitten that just ran into my room. It's a joys of working from home.
Allen, it's Brad. I'm going to add one thing, just to clarify the question specifically, which is the 86 homes or homes we closed on from a purchase perspective, it does not include commitments that we did to purchase homes. So just to clarify that as well.
And our next question comes from the line of Brian Nowak with Morgan Stanley. Our next question comes from the line of Maria Ripps from Canaccord.
Great. I just wanted to follow up on Homes. So now that you resume your home buying across all of your markets, can you comment on what you are seeing in terms of pricing and homes availability? And are you finding good undervalued homes to buy? And any updated thinking on targets for average return on homes sold now that your data models are getting better and better?
Maybe I'll take the first half, Allen, you take the second?
Yes. Okay.
Great. All right. So just as -- thanks for your question, Maria. So just as a reminder, what we're doing in our Zillow Offers Homes business is not looking for distressed situation, deep discounting, take advantage of a seller situation and make a big profit. We're really going for a high-volume scaled service that offers anybody within our buy box a fair price and the ability for them to choose a convenient date to affect the transaction. So that doesn't mock with their lives. So I'm just saying that because embedded in your question was a little bit that we have a -- it's just a house or a type of business.
But what we are finding, it's early in the reopening, and we're feeling good about the product we're finding. I want to see inventories build. And inventories are beginning to build now, and that's good. When it was scary, and we couldn't see the future, I wanted to see the inventories go down, and they did. And now inventories are rising. And so it's reinforcing that lots of sellers in our 24 markets are seeing the value of the convenience and certainty and safety of the Zillow Offers service. Allen?
Yes. And so the second part of your question on the average return. Again, we're still very early stages in ZO in 24 markets. And so we're not adjusting our guardrails of the plus or minus 200 basis points. We still believe that we've got a lot of testing and iteration to do across a lot of areas. We are very excited as we start up operations again with opportunities to improve our cost structure. But for right now, the plus or minus 200 basis points are still the guardrails we have in place as we test and iterate.
I will call out that given our pause and our restart, we do expect some increased volatility near term in these metrics as we refill our factory across all 24 markets. And this is going to be driven by what would have been a normal operating cycle curve and a normal distribution of aged inventory when we were in normal operations, is going to be skewed a little bit to older inventory as the pause works its way through our factory. And then the newer inventory comes in, and we expect end of 2020 to early 2021 to be back on a normal operating cycle. So there will be a little volatility there, but we're really excited to get going and be buying from our customers again and providing the service.
And our next question comes from the line of Brian Nowak with Morgan Stanley.
Can you guys hear me now?
He was there. It was the mute problem. Yes.
Yes. And I'm bad at technology. So I have 2 questions. The first one on the agent discounts. So I appreciate the color about Better Together. I got to be curious to hear about how to think about the order of magnitude, how big was that in the second quarter? And then as you look into your third quarter guide, what are you assuming for discounting? Are you sort of assuming that those go away given the strength of underlying demand?
Then the second one, curious to hear about just how your discussion with agents has evolved throughout a shelter-in-place and now the reopening. There's a lot of other real estate platforms that are trying to compete for your agents. How has that discussion changed around their asks of you to really provide value for them?
Allen, do you want to take the first bit, at least?
Yes. I'll take the first bit. So Brian, I think that -- yes, we spoke about the Better Together discounts as one of the many action items that we took late in Q1 to manage our business, and we're really excited we did. We think those, along with other actions, help retain our partners and respond. So we were able to respond when the industry came back faster than expected, it was the right thing to do. And we're seeing the benefits in record sales, high retention, higher connections and improved customer satisfaction.
With respect to how I would look at the business, I think the best way for you guys to think about the business is I would guide you towards our Q3 outlook for PA with a guide range on revenue of $272 million to $282 million. That's year-over-year growth of about 15% at the midpoint. That is the best barometer of where we kind of feel the business is going into the quarter. The discounts were very heavily weighted to early in the quarter. And so a number over the quarter doesn't really help you too much. So I'd look to our Q3 guide. There are no discounts implied in that range as kind of where we are trending coming out of Q2 into Q3 and onward.
And I guess, Brian, for the second part, how is the agent discussions changed with shelter-in-place and the reshuffling. I guess I would characterize it that -- well, I guess, number one, we feel like we are the outsized beneficiary of agent retention right now as they hunt for new businesses -- new customers, simply because people have fewer places to go to shop and agents have fewer places to get visibility where customers are. And so we are finding more inbound interest or more general interest.
We've been working our way towards finding better, more productive, more transaction and customer satisfaction-focused agents. And I don't think I'd be going too far to say that we made -- we've accelerated those trends during COVID. As Allen was saying, we bought a lot of goodwill with the Better Together discount. And we are seeing that play out in some numbers but feeling it play out in just general partnership sentiment, which is really good.
And then finally, I'd say we've seen attitudes towards technology adoption amongst the agent community to be quite different during COVID than pre-COVID, put it that way. And that's not really a nasty comment. It's more, when everything is going fine, doing things the old way or -- just don't bother me with the new way stuff. Don't bother me with the 3D tours. Don't bother me with the virtual stuff. But let's just -- we can just do it the old way. And now, of course, they don't -- this is the way to do it, to do it safely. And so we're getting all kinds of adoption and usage of the tools that we've had in place for a while during this period. I hope that gives you some texture.
I'd add one more just for fun. And it's something you all are seeing, too, because most all of you, I'm sure, are mainly working remotely and trying to carry on business or reinvent the way you do business and the way you convene and the way you meet. Of course, communicating with our many thousands of Premier Agent partners is really important for us. And historically, we've been able to physically convene in Las Vegas or wherever to do unlock. And now we've begun to do that virtually and are having really tremendous early, knock on wood, success at using these fantastic new tools to run events, to educate, to fill the questions, to train. It's really -- it feels good to me. And it feels like something that we're not going to go back on. We can serve more partners virtually than we could in Las Vegas. And if we can do it just as well or better, then that's really amazing.
And our next question comes from the line of John Campbell with Stephens Inc.
Phenomenal results and good guidance. Good work. On the closing revenue, you guys kind of tuck that in that kind of new revenue line item under the cover of night last quarter. But just doing the math on the homes that you sold thus far this year, I mean, it's small potatoes. It's $0.30 or so per home sold, but I'm guessing that you guys -- the closing services that you have in there with title and escrow and some of the other settlement services, that could probably get you somewhere up to, I don't know, $5,000, $6,000, maybe $7,000 per transaction, is that the right way to think about it?
Allen, you're on mute, and I'm waiting for you to reply.
Yes. So this is title and escrow. And yes, we reported $436 million in Q2. We had $761 million. It's shown up, just so everyone knows, in other revenue within our Homes segment. And what this really is, is more of a play on integrated transaction. I believe it's about 100 basis points is what we're talking about, and it saves us on cost when we use ZCS services, our own internal services, and a transaction that we're closing with ZO. And then there are other times where we're able to use that for non-ZO transactions, but more like 100 basis points. So you may be a little high on your number for the escrow services that we're providing now, but we believe we can scale that. We're open in all 24 markets. We were not open throughout the entire year in all 24 markets, but we're really excited how quickly this team has kind of built up and is supporting our customers.
But again, what we really like is in partnering with our actual Zillow Offers business, these 2 services can make the transaction painless, fast, and it's actually a cost structure reduction for us when we do it ourselves versus pay a third party. Did that answer your question?
Yes. Yes, that makes sense. And then second question for me. On the reduction in -- and sales and marketing are getting a little bit of leverage in sales and marketing, I'm imagining you guys are probably going to see a little bit of lift there over the next couple of quarters. But how much of that is driven by kind of deemphasizing Trulia? Or is there other pieces there that are helping offset some of that marketing spend?
Yes. So again, we talked about our pause in marketing for Q2. We announced that even prior to our Q2 guidance. So it was incorporated in our Q2 guidance. We are starting to, at least sequentially in Q3, look for opportunities where it makes sense to support our brand and to increase spending. We continue to support both Trulia and Zillow, but our priority is on the Zillow brand. And what I'd say is that we'll continue to look, assess, monitor, measure and adjust the spend as appropriate to support our brand and to continue to support growth. But the guide of Q3 incorporates a sequential increase but still providing year-over-year leverage, and that's coming both on the Trulia brand and the Zillow brand.
And our next question comes from the line of Heath Terry with Goldman Sachs.
Great. Rich, you've mentioned a few times the increased pace of adoption that you're seeing from brokers of new technology. You've never been one to shy away from sort of leaning into the development of that technology. Seeing this, what are you doing or how are you using this opportunity to sort of push Zillow's investment in that technology? How much more do you want to spend, need to spend? And to the -- obviously, I'm sure you don't want to tip your hand to any public or private competitors, but to the extent that there are -- that there is a road map priorities of where the biggest opportunities for you in that technology investment, I would appreciate those sort of insights.
Yes. Heath, I think if I broaden out, if I could at least choose to hear your question in a broad framework, I'd say there's no greater priority. We are -- it's weird, but real estate has been a laggard in adoption of modern technology even before COVID. And for a lot of legacy regulatory complexity, fragmentation, distribution reasons, it has been pretty stubborn in its resistance to technology adoption. So I really -- I believe we are at the beginning of a cycle of complete replatforming and new good of being sorted out and a new foundation for the industry being built.
And so I'm like, this is it. We are really excited about this. And we're excited that we're in a position to be able to just have the talent and hire the talent, that is able to dream up what that looks like, make it all work together, and to do so in a way with the ultimate customer in mind, not necessarily the legacy industry user in mind. But the industry user matters a lot, but it's really the customer experience that we need to fix. It's really quite broken, and we're at the early stages of that.
So broadly speaking, I would say, it's like -- it's the top development platform that we have. Specifically, I think you're asking more about kind of the virtual touring stuff and the stuff that we've been talking about. And yes, we're leaning into that, too. It's pretty clear that people want to shop this way even as they -- as we ask them about shopping post pandemic, would you still want to take virtual tours? Yes. Would you still want to let yourself into a home so that you can tour it yourself? Yes. Would you -- et cetera. And so we do think that these are rapidly becoming industry norms. And so we're leaning into that.
We do have -- there is some competition there, no doubt, that is investing in this, but I think our collective -- our R&D expenditure and capabilities in this area really give us an advantage, Heath.
And our next question comes from the line of Lloyd Walmsley with Deutsche Bank.
Great. Two, if I can. First, just what is the latest update on seller leads and kind of converting sale inquiries from Zillow Offers where you don't make an offer into seller leads from your agents?
And then second, can you talk about whether you're seeing any signs of just increased moving activity in the sense of people looking to move out of cities or tolerating longer commutes? Is there any real signal in search activity that this notion of potentially unlocking like a multiyear trend of elevated moves that could be real? Anything you could share there would be great.
You want to start, Allen, and I'll finish?
Yes. Yes. So on -- we call it partner leads. But on partner leads, what I'd say is that Zillow Offers buying pause was an opportunity for us to look at and refine our partner lead generation channel. We're continuing to enhance our processes to better support our customers. We're providing them with multiple options now early in the pipeline, whether they want to sell to ZO or sell traditionally through with our PA partners. So we're very excited. It's still very early. We're seeing some positive trends, but we're still iterating, and we're excited about the opportunity here.
Lloyd, thanks for your question. Yes, it's a tricky one. It's a really popular story to tell this deurbanization story. Everybody seems to want to tell it. The real story is that shopping is up everywhere, and that's what our data says. And we're speculating beyond what we're seeing as is everybody. We are -- we do have -- COVID has accelerated many preexisting trends, pick your trends, social, political and in business, and COVID has accelerated these trends. And there was a preexisting trend that was kind of an affordability crisis in some coastal urban -- high-density urban areas, and we were already seeing a deceleration of migration. And we actually expect logically to have COVID be an accelerant of that. And the longer we go on with companies -- I think I said this, the longer we go on working -- having many companies, not all, but the lucky companies being able to have people work from home, the more the concrete kind of sets. And the more habits get set, and the less likely companies are to go back the way it was. And so we are pretty confident that this is going to be a lasting, multiyear meaningful trend. We can't call exactly how it's going to play out from the data yet. But from an intuition supported by some bit of data, it seems like something real.
And this completes the allotted time for questions. I will now turn the call back over to Rich Barton for any closing remarks.
Thanks, Abigail. Thanks, everybody. This quarter, it's -- this further evidence that Zillow is in a strong position to lead the industry through the tech transformation ahead that I've been talking about. In the short term and the long term, we're committed to bringing our customers a safe, convenient, seamless way to move forward. And we feel like the wind is at our backs, and we're in a great position. I really appreciate your partnership in this journey. Stay safe, and carry on. And again, make sure you take a break and enjoy the summer. It's more important now than ever. Good talking to you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.