Zillow Group, Inc. (NASDAQ:Z) Q1 2021 Earnings Conference Call May 4, 2021 5:00 PM ET

Corporate Participants

Brad Berning - Vice President, Investor Relations
Rich Barton - Co-Founder and Chief Executive Officer
Allen Parker - Chief Financial Officer

Conference Call Participants

Ron Josey - JMP Securities
Naved Khan - Truist Securities
Lloyd Walmsley - Deutsche Bank
Ryan McKeveny - Zelman & Associates
Ygal Arounian - Wedbush Securities
John Campbell - Stephens Inc.
Mark Mahaney - Evercore ISI
Maria Ripps - Canaccord
Tom White - D.A. Davidson

Operator

Good afternoon. My name is Riley and I will be your conference operator today. At this time, I would like to welcome everyone to the Zillow Group First Quarter 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [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.

Brad Berning

Thank you, Riley. Good afternoon, and welcome to Zillow Group's first quarter 2021 conference call. Joining me today to discuss our Q1 results are Zillow Group's Co-Founder and CEO, Rich Barton; and CFO, Allen Parker.

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

During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, which we refer to as EBITDA. We encourage you to read our shareholder letter and our earnings release, which can be found on our Investor Relations website, as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures. In addition, please note, we will refer to our Internet, Media & Technology segment as our IMT segment. We will now open the call with brief remarks followed by live Q&A.

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

Rich Barton

Thank you, Brad. Good afternoon, everyone. And thank you for joining our first quarter 2021 earnings call. We are in a much better place compared to one long year ago. And I'm so grateful and impressed these miraculous COVID vaccines are now widely available across the country. I hope that you and yours are beginning to find some normalcy after such a trying year.

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

Our research team recently published a survey based mover report, which we have hyperlink to from the shareholder letter. It's a great read when you have the time. The report indicates that the pandemic has indeed caused people to rethink where they live, and concludes that approximately 8 million existing homeowner households that have been on the sidelines may enter a real estate market already be set by unrelenting demand. Additionally, 8.9% of consumers plan to purchase a home in the next six months near a 20 year high per the conference board's April consumer confidence survey.

The reaction we got from our own employee base when we told them last March that we intended to have a more flexible workplace policy for the long-term is an interesting case study in how remote work catalyzes the great reshuffling.

We found 30% more employees moved in the year following our announcement compared to the previous pre-pandemic year. This time last year, we had employees in 25 states. Now they are in all 50. This is obviously a small sample, but it shows how the great reshuffling might play out as people get certainty about their companies post COVID workplace plans.

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

Beyond the continued reassessment of where we all are had denied the housing market is underpinned by demographic and economic tailwind that will persist for the foreseeable future. Millennials are moving up. Baby Boomers are downsizing and in between people of all generations are rethinking their lives. Despite recent shocks, mortgage rates are expected to be quite constructive for the foreseeable future and are near all time lows versus historical levels.

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

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

Moving on now, to some business results from another strong quarter here at Zillow cloud HQ. First and foremost, all of this energy around moving has created a Zillow wave of sorts. And our customers are surfing it every day. Just last week, Time named Zillow, one of the 100 most influential companies for in their words, “Making an extraordinary impact on the world.”

A little grand perhaps, but definitely a nod to the vast reserve of brand goodness that we have been building up over 15 years. An up tick in pop culture recognition this past year has helped to accelerate our traffic. In Q1, 221 million average monthly unique visitors -- users visited our sites and apps, which represents an increase of nearly 30 million average monthly unique users versus this time last year. This is a level that we previously would not have thought possible and should provide the fuel for years of customer growth into the future.

Our top of funnel engagement with our customers translated into excellent results across Zillow's suite of products and services. Our flagship buy-side business, Zillow Premier Agent once again generated the strongest results we've ever seen reporting 38% revenue growth year-over-year in Q1.

Our nascent sell-side business Zillow Offers continued to accelerate out of the pause we instituted in the pandemic generating over 700 million in revenue and surpassing our internal expectations on revenue, EBITDA and unit level economics.

The success from our buy-side and sell-side offerings when combined with solid execution from our adjacent services and sporting businesses, translated into total revenue growth of 54% sequentially and total company EBITDA of $181 million for the quarter. With that number in context of Zillow's history, it represents 90% of our full year 2018 EBITDA, which was just prior to the commencement of our heavy investment in our Zillow 2.0 vision.

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

Speaking of our people, Fortune named Zillow, one of its 100 Best Companies to Work for based on our own employees’ feedback about working at Zillow in 2020, including how trustworthy caring and fair they felt Zillow has been during the pandemic, which forced most into Zoom line. As we reimagined the future of our workplace, we are grateful for our flexible and talented workforce.

While our employees are doing well and our quarterly results are strong, we are oriented to the multi-decade journey in front of us, the journey to digitize and simplifies a huge industry, delivering more and more movers gracefully to their next homes.

Pursuit of these growth opportunities deserves continued appropriate reinvestment of profits. As part of that journey, we recently launched a new advertising campaign with the tagline to “Move is to grow.” We think it wonderfully captures the essence of why moving is both exciting and daunting and how we at Zillow are increasingly able to help our customers navigate this crossing.

The campaign supports the expedition we are on as a company as well. Just as we've been reorienting our employees and mission around transactions, we have the exciting task of re educating our customers on who the new Zillow is and what we can do for them. Every signal we see based on data and customer feedback is that customers expect and demand a more seamless experience. This is Zillow 2.0.

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

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

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

Each customer who uses Zillow to move has a story. One we're sharing today is about first time home sellers Jessica LaRue-Briscoe and her husband Sean. They turned to Zillow when they were anxious about a move from Colorado to Texas, where they wanted their two-year-old son to grow up near their families. Zillow connected Jessica to an agent partner Adam Unger and he walked her through the selling process. It was all new to her and she was scared and dubious. I'm going to take a gamble on you she told him. Adam's experience and professionalism kept their worries at bay and Jessica and Sean felt informed and prepared throughout their move.

I really feel like we were able to be connected with the best real estate agent for us because we went through Zillow, Jessica said. Their happy ending to their stories that their son is now spending time in Texas with Jessica's grandparents who are in their 90s.

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

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

Allen Parker

Thank you, Rich.

As Rich discussed Zillow Group delivered another strong quarter reporting Q1 consolidated revenue of 1.2 billion in EBITDA of 181 million, both exceeding the high end of our outlook range. Q1 IMT segment revenue of 446 million grew 35% year-over-year, as we continue to see accelerated growth in Premiere Agent and strong growth in rentals. IMT segment EBITDA was 209 million in Q1 or 47% of IMT segment revenue. Accelerating revenue growth, combined with year-over-year declines in operating costs, translated into 143% year-over-year EBITDA growth in Q1.

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

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

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

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

Beginning this quarter and going forward, we will disclose our mortgage loan origination purchase and refinance volume. In Q1 refinance loan origination volume comprised 90% of total origination volume. We continued to invest in our mortgage platform to provide a compelling experience for our purchase customers, as well as integrating across our business.

Turning to our outlook for the second quarter. At a consolidated level, we expect revenue to be 1.26 billion up 64% year-over-year at the midpoint of our outlook. And EBITDA to be between 116 million and 140 million. In our IMT segment, we are forecasting 66% year-over-year revenue growth in Q2 and 44% revenue growth over Q2 2019 at the midpoint of our outlook range.

Within the IMT segment, we expect from Premier Agent revenue to be between 342 million to 350 million up 80% year-over-year and up 49% over Q2 2019 at the midpoint of our outlook. This is being driven by strong top of funnel traffic and connections as we enter Q2. It is important to know that during Q2 last year, we provided Better Together billing relief to our Premiere Agent and other marketplace partners. Excluding the impact of this billing relief, we expect Q2 year-over-year Premier Agent revenue growth to be 38% and IMT segment revenue growth to be 35% at the midpoint of the respective outlook ranges.

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

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

We expect mortgage segment revenue to be between 57 million to 62 million in Q2, which is down from Q1. Our Q2 guide reflects slower industry refinance activity and narrow gain on sale spreads. As we have discussed for the past couple of quarters, we do not expect the [indiscernible] high gain on sale margins from originations to be sustainable. We plan to continue to capture solid refinance demand and invest in building the factory to scale our operations, as the purchase business is built over time.

As a result, we expect mortgages segment EBITDA to be between a loss of 9 million and a loss of 5 million. We further strengthened our balance sheet during the quarter by initiating and at the market offering or ATM, selling 551 million of capital stock. We have been and will continue to be opportunistic and prudent in any potential future share sales and have approximately 450 million remaining on the authorization. We ended the quarter with 4.7 billion in cash and investments, which puts us in a strong position to fund our vision for Zillow and make strategic long-term investments both organically and inorganically.

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

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

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

Question-and-Answer Session

Operator

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

Ron Josey

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

Rich Barton

Hey, Ron, thanks. I mean, we are rapidly learning how ZO lives in this, really this unprecedented home price appreciation environment. The appreciation over the last six months is the largest move up or down that we observe in the data set over the last 35 years, right. So it's a very fluid market. But as you noted in your question and Allen talked about in his script, our top of funnel indicators are good. Like, it turns out, speed, certainty and convenience are attractive to sellers no matter what kind of market they are in. So we are seeing record levels of folks raising their hand to get a Zillow offer. I think part of that is driven by this really nifty feature we launched last quarter that we internally called Zestimate offers which is this, live initial -- having the Zestimate via a live initial offer for lots of the homes inside of the buy box in Zillow Offers markets.

So anyway, we're also really happy with this kind of glow that we're seeing across the business from this positive reinforcement we have from having all of these linked businesses and having this very large, single funnel of customer demand coming in. And the IMT and adjacent business numbers are really, really commendable. But on ZO in particular Ron, we're leaning in like -- we're leaning in, we're expanding in the 25 markets. We're heavily staffing as I think we made an announcement maybe Allen just talked about it too. We are we are planning as a company hiring a net 2000 people in 2021. And a lot of that will be for Zillow Offers and we're making other investments in ZO as well. So we are comfortable with that increased investment because of what we're seeing top of funnel because what we know about the consumer value proposition.

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

Allen Parker

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

Operator

Our next question comes from Naved Khan with Truist Securities.

Naved Khan

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

Rich Barton

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

So we've made these big bets over the last two and a half years when we really leaned into 2.0. And building out all the 2.0 components, like Zillow Offers, mortgages, Zillow closing services, even rentals. Anyway, the short answer to your question is, it's working. All the children appear to be above average. I don't know if we're getting any chuckles out there to the Garrison Keillor reference, but all the businesses are performing really well beyond our expectations. So that's a terrific proof point that the integrated strategy and the transaction strategy is working our revenue and profit on a per user basis and steadily rising, which is really nice to see and it's still quite low. So we have a ways to go.

I said in my script, to kind of introduce a new kind of TAM and penetration concept. This less than 2% gross profit penetration into the total addressable market of services in the industry. We keep struggling for ways to talk about the full opportunity in quarters past we talked about trying to estimate transaction share, and what share of transactions we touched, that is fraught, because we don't exactly know how many transactions we touched, or were, I challenged the team to try to figure out if there's maybe a gross profit penetration metric, we can come out to communicate the opportunity for ourselves and for you all. So that could be interesting. Anyway, there's still a ton of work to do on 2.0 not the least of which as I said before, is awareness of 2.0. That's where you're seeing marketing investment, increased marketing investment from us anyway. Stay tuned, we're on the path, we like the path, things look clear and lots of green lights out the front windshield.

Naved Khan

Thank you, Rich. And maybe on the headcount and give us some more clarity on the areas where these are…

Rich Barton

Maybe Allen, if you want to answer that?

Allen Parker

Yes. I mean, I guess what I would just say is, I would classify, we're continuing to make investments across a variety of our businesses where we feel like there's a lot of opportunity to accelerate innovation for our customer, shop and dream, buy with, sell with. And so there's quite a bit of tech and dev, but there's also transactional type resources that are necessary as we scale the business. And so I think you're seeing kind of a mix of those, there are some additional innovative ideas around 3D tours and other things.

So, most of the initiatives we talk about, we are looking at where we need the resource and to accelerate our investment. But it's spread across the company. And, I'll just take this moment to say we continue to prioritize, our existing resources as well, to make sure we're making bets on the right thing. But we like the results we're seeing, we like the inputs that we're tracking and look forward to execution.

Operator

Our next question comes from Lloyd Walmsley with Deutsche Bank.

Lloyd Walmsley

Thanks. Two questions. First, you're recognizing better growth in the second quarter guide on that kind of normalized basis excluding the better together discounts? Can you just talk about the sustainability of the PA business, particularly into the second half as comms get harder? What are some of the drivers behind the outlook for 2Q and that can help in the second half? And then, secondly, you've put up the 47% segment margin in IMT guidance implies first margins about 44%. So if full year margins are going to be kind of flashed with last year, it implies a big step up in the second half, can you give us a better sense of what you're investing in? How it's going to flow across the segments? And then, what specifically will we be weighing on IMT segment margins in the second half, given disciplined on cost growth there for multiple years now? Thanks for your help there.

Rich Barton

Thanks Lloyd . That sounds like an Allen question.

Allen Parker

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

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

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

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

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

Lloyd Walmsley

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

Allen Parker

That's on a headline basis. It's the 49%, if you just take Q2 2019 for instance, Q2 2021 midpoint, that's 49% growth. And we think that's a good way to pin your models.

Operator

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

Ryan McKeveny

Thank you. Congrats on the results and great to see the momentum continuing. So the first question, I apologize if I've missed this, but can you share an update on the transition to using in-house agents or employees on the high buyer transactions? Maybe what share transactions in the quarter were working in-house? And how that transition is going versus your expectations? And second question on the mortgage business, so the stat on the 90% share of refi is very interesting thing, it seems to be a bit of a kind of early confirmation signal that the overall Zillow business is moving from something that was once servicing and monetizing buyers, to then sellers and now homeowners that might want to refi. So I guess I'm curious on the mortgage space. Can you talk about the strategy and maybe that interplay between driving the actual attachment on the high buyer purchase product and driving mortgage value more generally because I know, there can, of course, be a lot of differences in just strategy to the approach of kind of purchase versus refi share over time. So hoping you can maybe separate those pieces and talk a bit about strategy. Thanks so much.

Allen Parker

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

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

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

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

Operator

Our next question comes from Ygal Arounian with Wedbush Securities.

Ygal Arounian

So just one question on Zillow Offers and one on Premier Agent. So let's go back to Allen's comment, hope I'm not miss quoting it, highlighted purchases were not at the pace that you were expecting kind of over the course of the quarter and do work to kind of catch up with HPA and really strong environment, can you expand on that and what you're doing to catch up [indiscernible] for that and fix the model or just the model to what we're seeing, especially in light of some data that we've seen from your competitors continuing to accelerate some of their purchases there.

And then, on PA, you highlighted improvements in PA connections and that's what I was hoping, you could talk about that a little bit. And then, listings are still challenged overall. Can you talk about the impact that has the PA business down significantly year-over-year? Does that have a meaningful impact? Thanks.

Rich Barton

You want to start with the ZO stuff, Allen?

Allen Parker

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

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

Rich Barton

Before I -- let me editorialize on that just a little bit that the risk of keeping this issue open. Allen, the unit economics, the margins that we're earning on a unit basis right now are, not what our goal is? I'll just reiterate that. We want this and know this can be a giant business. And it's only going to be a giant business when the pricing is perceived to be fair to consumers. So it's not our goal, to have 549 basis points or whatever it is we just printed on a unit basis. No, it's slightly better than last quarter.

In other words, it's lower. But what we're aiming to do is to provide a fair offer and charge a fair fee to our customers. And thus we believe we maximize the TAM, we maximize the number of transactions we can touch and participate in. And we have the ability to sell a bunch of adjacent services around those transactions. So it's worth pausing there for a sec.

All right. On the listings, question, yes, listings are really, really skinny, inventories really, really low. I think I said this last quarter, it's kind of like the flight attendant on the airplane when she says even though the airbag does not appear to inflate the oxygen will flow. That is what's happening clearly in the market, volumes are up, price appreciation is way up to but homes are just moving really, really fast. And so, we like to see a market where lots of activity is happening. We see offline to online shifts happening. We see demographic shifts happening. We see great reshuffling things happening, all to put wind in the sails of our pa business and our business indeed overall.

Ygal Arounian

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

Rich Barton

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

Operator

Our next question comes from John Campbell with Stephens Inc.

John Campbell

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

Allen Parker

46% year-over-year growth rate is fantastic. We're really pleased with our rentals business. It comes from and it's driven by a lot of the decisions we've made to invest in a fairly good streamline set of product innovations. And I think we're starting to see the benefit of some of those over the last few years that we've made. A lot of those are integrated services like one click applications, payments, listings and these services are all kind of coming together.

In fact, as we talked about, Zillow, 2.0, getting closer to the transactions, I believe we're seeing that in the rental space. It's also assisted though by this continued strength in top of funnel and our large audience. And even some of the demographics we talked about on the housing market, the broader, the great reshuffling and these demographic trail wins are also helping our rentals business. So we're excited with the progress. The growth has been strong. And we're excited about the products and services that we're able to deliver both to our customers and to our property managers. I don't know, Rich, if you want to add anything.

Rich Barton

No, that was completely great. Thanks, Allen.

John Campbell

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

Allen Parker

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

Brad Berning

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

Operator

Our next question comes from Mark Mahaney with Evercore ISI.

Mark Mahaney

Two questions. Just talk through the EBITDA margins in the mortgages segment. And I'm sorry, if you touched on this before, seemed like they picked on a little bit, not assuming anything material, but just talk through that. And then, getting back to the unit economics on the homes business, so it sounds like that you want to run this business with those, I forget what you call them, the rail guards, whatever it is, plus 200 minus 200. And the strategy, Rich, I think is you extract economics from this, then to take those economics and bring them down to the guardrail. So that long-term, you can bring down commissions. And so you can expand TAMs and just feed this beast. So that's my understanding of the flywheel.

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

Rich Barton

Hey, Mark, nice to see a brand new analyst from Evercore here on the call with us today. Congrats on the new job. I think Allen maybe start with the ZO margin question and then we can both tackle the –

Allen Parker

Yes. I do mortgage, I'll start ZO and you can jump on. So Mark, thanks for the question. On mortgage, EBITDA margin what we see and what's reflected in the guide is that a significant portion of the revenue downtick in our guide compared to Q1 is related to the gain on sales spreads in our guidance. And so that kind of falls through we still are very excited about the platform we're building and we're continuing to build the factory. And so when you see that downtick, it has an effect, that kind of falls straight through the EBITDA versus Q1 performance. And so that's what's driving the majority of that downtick Q1 to Q2 on the mortgage margin rates.

And on ZO, sorry, I think you hit it right on the head, what I'd say is, we still provided long-term targets, of 400, 500 basis points return before interest, but current period and in near term, our guidance that we provided is no -- this plus or minus 200 basis points because of the size of the opportunity and because it's important to get out there and provide a great experience as we learn. We're willing to invest in as plus or minus 200 as we learn the business.

I'd say we see opportunities across all areas, we have improved 280 basis points, primarily across renovations and selling costs versus last year. You can imagine renovations, as you have more density in the area for your renovations. And as you get better and smarter about what needs to be done and what the customer is willing to pay for. Who is repurchasing the home that you'll see benefits in that area, right now is about 3% costs of revenue. Holding costs are reflected with a lot of things but there are definitely many things we can do to improve that's a relatively small cost. And then selling costs over time as we as we grow Zillow brokerage services. And as we reduce through automation and technology, some of these non-value added costs that currently happen in the world today, we expect that number to come down. And we expect acquisition costs to be to be reflective of a fair offer, as Rich mentioned, but solid cost structure.

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

Rich Barton

At the scale we are right now, thank you for clarifying what I said Allen, I didn't mean to imply we didn't want to make money natively off this business. But we are subscale dramatically subscale right now in our estimation and while we are scaling it, we're targeting this plus or minus 200. So anyway, thanks. Thanks for clarifying. And you have the flywheel right. That's the flywheel that we're making. We also bet in addition to the leverage, we see on the three line items Allen was talking about, we see leverage on customer acquisition costs, because we have a much cheaper customer funnel. The zestimate offer being just like the perfect characterization of that people come look at the zestimates and if more and more customers know that zestimate is alive, initial offer for their home, we are more likely to get first crack at them.

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

Operator

Our next question comes from Maria Ripps with Canaccord.

Maria Ripps

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

Allen Parker

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

And again, if you go to the inputs of improving CSAT, driving more and more of our customers through our connections program and delivering high intent customers to high performing agents, those are all things -- the input dials that we're driving go across both flex and our MVP model and we're seeing results. We are continuing to look at and we expect to increase the flex representation across our pool. There's not any particular market, it requires us understanding and identifying agents that are willing to grow with us. And so, there's not really any particular attribute to call out or metric to give I think our growth rate is reflected last optimizing the process, the monetization models we have available and the inputs that we're driving around the customer and customer experience to help close transactions.

Maria Ripps

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

Rich Barton

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

Operator

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

Tom White

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

Rich Barton

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

Tom White

All right. Thanks guys. Congrats on a nice quarter.

Operator

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

Rich Barton

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

Operator

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