Zillow Group, Inc. (NASDAQ:Z) Q3 2019 Results Earnings Conference Call November 7, 2019 5:00 PM ET

Company Participants

Dawn Lyon - Chief Corporate Relations Officer and Acting Head of IR
Rich Barton - Co-Founder and CEO
Allen Parker - CFO

Conference Call Participants

Brad Berning - Craig-Hallum
Ron Josey - JMP Securities
Tom Champion - Cowen
Maria Ripps - Canaccord
Heath Terry - Goldman Sachs
Justin Patterson - Raymond James
Brian Nowak - Morgan Stanley
Brad Erickson - Needham and Company
Andy Hargreaves - KeyBanc
Naved Khan - SunTrust

Operator

Good day, and welcome to the Zillow Group Third Quarter 2019 Earnings Conference Call. Please note this event is being recorded.

I would now like to turn the conference over to Dawn Lyon, Chief Corporate Relations Officer and Acting Head of Investor Relations. Please go ahead.

Dawn Lyon

Thank you, Annie. Good afternoon and welcome to Zillow Group's third quarter 2019 conference call. For those on the call I’ve not yet met, I look forward to doing so soon. Joining me today to discuss our Q3 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 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 you as EBITDA. We encourage you to read our shareholder letter and earnings release, which can be found on our IR site, they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures.

In addition, please note we refer to our internet, media and technology segment as IMT segment. We will open the call with brief remarks followed by live Q&A.

I will now turn the call over to Rich.

Rich Barton

Thanks, Dawn. Hi everyone, thank you for joining us today. Our third quarter results were strong demonstrating Zillow Group’s business model to mechanize real estate transaction is gaining traction as consumer demand reveals people want an easier way to buy, sell, rent and finance homes, what we call Zillow 2.0 our business to create an integrated real estate experience that combines advanced technology with high touch services into a single platform, term your friction and one day make moving between homes as simple as trading in a car.

Today’s on-demand consumers are ready for this new frontier in real estate and they want to work with Zillow, a brand they know and trust and an app they already use and love. We’re in the early stages of re-platforming industry with a $1.8 trillion TAM. We’ve a strong cash position having recently raised $1.2 billion to our convertible debt offering and just two weeks ago we closed on an additional $500 million non-recourse credit facility to support in our Zillow Offers business.

Before I get into this quarter’s highlights I want to pause a moment and rewind. We received feedback that many of you would like more clarity on our Premier Agent business model specifically as it relates to the impacts our Flex test. To clarify the success measures for our Premier Agent business remain the same. Regardless of monetization model, we maximize for customer satisfaction, revenue and profit yield per lead.

To recap, during our Q2 call we announced plans to expand our Flex tests into Phoenix and Atlanta in Q4. These plans affected our 2019 revenue and EBITDA outlook because we expect a portion of our prepaid lead generation revenue to shift to the future periods. In the Flex transaction model, we’re paid a success fee only after an agent closes a deal. Because every real estate transaction is different and timelines can vary significantly from several weeks to several months, we’re being methodical in our testing to better understand the financial implications of this postpaid pricing model.

In total our Flex tests including Phoenix and Atlanta are expected to represent only 5% of Premier Agent MRR as we exit 2019. We fundamentally believe Flex will be a win-win-win that will offer better service for customers, better business for our partners and better profits for Zillow. However, we will not expand Flex beyond the current announced 5% of MRR footprint until we’ve the data to convince us and you that Flex will openly become accretive to our bottom line.

Having just talked about the boundaries of Flex, I’ll zoom up one click and talk about our Premier Agent business, which we accelerated this quarter. Revenue exceeded our outlook coming in at $241 million, an increase of 3% year-over-year. Excluding the impact of the six month it’s where we’re different iterations of Flex, Q3 Premier Agent revenue grew 5%, which you will see reflected in the chart on page 5 of the shareholder letter. This chart provides you with a same-store sales view of our MRR growth rates for market based pricing model, which reveals accelerating growth rates in this core business.

We expect same-store sales growth to continue to accelerate in Q4, which has prompted to raise Q4 and full year revenue outlook for Premier Agent. As a reminder the size and strength of Premier Agent and other marketplaces in our IMT segment that allow us to invest in and expand Zillow Offers and other transaction businesses so quickly. The combination of this highly complementary businesses provide Zillow Group distinct competitive advantages that in other way the success of Premier Agent and IMT is fundamental to the success of Zillow 2.0.

This was reinforced in our Q3 as increased operating leverage and agent retention levels contributed to expanding IMT EBITDA margins that we’re able to reinvest in Zillow 2.0. The future of Premier Agent is dependent on strong and constructive partnerships with the best of the best agents and teams. Last week our team hosted Zillow Unlock, our largest industry conference to-date in which we invited the top premier agents, rental property managers and homebuilders to Los Vegas to share our future vision. This included 1,500 of our top premier agents with whom we discussed the importance of working together as our copilot to help navigate in Zillow 2.0.

We believe strong partnerships with top professionals were supported by modern technology and offer highly personalized services are the key to unlocking the full potential of this evolving category. The positive reception and high engagement from our partners reinforces for me that we’re on to something. It’s not just consumers who are ready for Zillow 2.0, the industry is ready as well.

Turning to homes, the third quarter marks the first time home segment exceeded our IMT revenue coming in at $385 million ahead of our outlook and up from just $11 million in the third quarter of 2018. During the quarter we purchased nearly 2,300 homes and sold more than 1,200 homes. In just 18 months Zillow Offers is live in 21 markets. We launched a record 8 markets in the quarter, one about every two weeks.

Our Zillow Offers team has delivered ahead of schedule on a remarkable growth pace and we’re now getting close to a national footprint, which has been an early goal for us in order to drive national marketing efficiency. Our unit economics for Q3 came in within our targeted range, which as we previously discussed is plus or minus 200 basis points out of return for home before interest expense.

At scale we’re targeting 400 basis points to 500 basis points and we also see profit opportunity from adding adjacent services to the transaction. And speaking of adjacent services Zillow’s new home ground closing service is also now live in a handful of markets. These are very early days and small numbers, but we’re encouraged by the early consumer signals we’re receiving that reinforce the value of bundling multiple services around each real estate transaction.

To wrap on our home segment and Zillow Offers, I’d like to highlight that this kind of growth from a standing start may not be unique, but it is certainly rare and it was our hope to not just get on the field in this big exciting consumer category, but to become the theme to beat. In doing so within our profit rails is even more impressive, few teams can pull up that kind of new business entry so quickly and it took the whole of the Zillow Group team to make this happen and I want to thank and applaud them. The company is now in a much more secure strategic position for the long-term and has a much larger market opportunity as a result.

Another essential piece of the integrated transaction is mortgages, which delivered as expected in Q3. In the third quarter we welcomed seasoned executives with deep experience, building scaling and running consumer direct lending businesses. Rian Furey joined as President of Zillow Home Loans and Libby Cooper joined as VP of Operations. Combined, these two have more than 40 years of experience. We’re thrilled to have them on board to build out our home financing platform.

Recent positive feedback from our customers demonstrates the substantial value that Zillow 2.0 provides when we begin to offer and streamline all aspects of the transaction. [Tick Kim], a retired U.S. Marine, who lived in Riverside, California and got a job offer in Phoenix, as you check in his estimate on Zillow this summer in anticipation he might sell, we saw a button on his home details page that embedded him to request an offer from Zillow Offers to purchase his home. He clicked and in 48 hours he received an offer that he believed was fair from a Brandy Trust. He went through the process and after six days accepted the offer and went on to start the process of finding a new home in Phoenix.

He was referred to a Zillow Premier Agent, who helped him find his new home at the same time he was preapproved for a loan through Zillow Home Loans. You will find a link to his video interview on page 7 in our letter. Stories Kim’s are our inspiration and give us the opportunity to see the real potential of the business we’re building, which gratifying watch our plan to help people unlock life’s next chapter to come together.

We have a long way to go to fully realize our vision, but the possibility of bundled real estate transaction experience, they’re one shop, Zillow platform and helps people save time, money and hassle are clear. Real estate broadly defined is a huge industry that has been impressively resistant to technological advance. The internet connected to a PC at first and now billions of smart devices has given power to the people and transformed industry after industry many of which I’ve been lucky enough to have had a part in.

Consumer expectation for speed, convenience and price is at a historical high and is accelerating at what seems a time of nauseating pace. Modernizing and re-platforming this massive industry will take time and investment, but it is inevitable. And we’ve the brand, traffic, skills and the capital to lead this pace shift. This is why the Zillow team and I are here and so fired up.

We balance our excitement with long multi-company demonstrated experience building profitable businesses. The most obvious example being our IMT businesses right here inside of Zillow Group where we’re showing profits and demonstrating leverage. Allen, the rest of the team and I treat the investment you have made in us with respect and care. We are meaningful shareholders as well.

Thank you for your partnership. I’ll now turn the call over to Allen to walk us through the results in greater detail.

Allen Parker

Thank you, Rich. I’m going to quickly summarize a few key financial results. Overall, we exceeded our revenue and EBITDA expectations for all segments. In Q3, we reported revenue of $745 million, that's up 117% year-over-year, and exceeded the high-end of our outlook. Much of this growth in revenue was driven by our home segment, which generated revenue of nearly $385 million, growing 55% sequentially. And as Rich noted, is continuing to outperform expectations.

IMT segment revenue grew 7% year-over-year to $335 million and exceeded our outlook. Premier Agent revenue exceeded our expectations at $241 million, up 3% year-over-year. As Rich noted, we’re pleased with the stabilization and recovery in the Premier Agent business. As we highlighted in our shareholder letter, growth in our core Premier Agent market based pricing business on a same-store sales basis was up 5% in Q3. And we expect this year-over-year growth to accelerate in Q4.

As we stabilize Premier Agent retention, we’ve been focused on managing costs and driving increased profitability primarily in our IMT segment. To that end I’m pleased to report that for the nine months ending September 30, we expanded IMT EBITDA margin by 240 basis points and grew IMT EBITDA by 19% year-over-year. As I’ve stated in previous earnings calls, during this time of transformation of Zillow Group, my priorities as CFO are focused on establishing processes and mechanisms in support of the following; 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.

I’m pleased with how we’ve executed on those three priorities through the first three quarters in 2019 and I’ll continue to be laser focused on them as they continue our business transformation. We ended the quarter with $2.3 billion of cash in short term investments on our balance sheet, included the proceeds we raised in our recent $1.2 billion convertible debt offers.

In addition to the cash and investments on the balance sheet, we’re pleased to announce that in October we completed our third non-recourse asset back credit facility for our Zillow Offers business. This new facility has a maximum borrowing capacity of $500 million which combined with our two other Zillow Offers facilities brings our total non-recourse asset back facility maximum borrowing capacity to $1.5 billion. As a reminder these facilities provide us the ability to finance up to 85% of the home value using each home as collateral.

We believe the amount of cash and investments on our balance sheet combined with our asset back credit facilities provides us significant flexibility to take advantage of market opportunities while prudently managing expenses, gaining operating leverage and being mindful of our weighted average cost to capital.

Before we take your questions, I want to take a moment to provide some comments on our outlook. Due to the underlying strength of Premier Agent, we’re updating our IMT and Premier Agent full year revenue guidance ranges. For IMT we expect revenue growth of 6% a midpoint and we’re bringing up Premier Agent full year outlook to between 915 million and 919 million which represents 2% year-over-year at the midpoint. For Q4, we expect IMT revenue of 4% and Premier Agent revenue growth at 3% at the midpoint. We’re also bringing up the full year outlook of IMT segment EBITDA to between 284 million and 289 million.

The consumer demand for Zillow Offers Service continue to be strong. We’re anticipating Q4 home segment revenue to grow to 465 million to 490 million or 24% sequentially at the midpoint of the range, which reflects the sequential uplift from new market openings partially offset by seasonal slowing in our home acquisition rate consistent with seasonal market trends. This brings our full year revenue estimate for homes to 1.23 billion to 1.25 billion. We’re also tightening the range of full year mortgages revenue to between 97 million and a 100 million.

On a consolidated basis, we expect full year revenue to be in the range of 2.59 billion to 2.62 billion and we expect full year consolidated EBITDA to come in between loss of 1 million to income of 17 million. In all, we’re pleased with our Q3 performance and continued execution to streamline real estate transactions to better help our customers move easily.

With that Operator, we will open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Brad Berning of Craig-Hallum.

Brad Berning

Good afternoon guys, Rich and Allen. Congrats on the inflexion point and the Premier Agent revenues and the margins and thank you for the same-store sales disclosures of Flex, but wanted to follow up a little bit deeper on your commentary here. Can you talk a little bit more about what you’re seeing as the drivers behind the improved activity and what trends you expect in the same-store sales basis that’s included in the 4Q guidance and how are you thinking about early reads and how that’s going to develop as we go into 2020?

Rich Barton

Thanks Brad. I’m looking at my watch right now and realizing we read too fast on. We’re in for a lot of questions so it will take deep breath. Yes, I mean, the Premier business is really healthy as you noted, it’s looking good. It’s kind of reacceleration of revenue, when we look at the same-store sales number that we’re sharing right now is really comforting. Not to mention kind of EBITDA, the business leverage we’re seeing in the IMT segment overall, which happens to coincide with about the time Allen has been here as the company.

But we’re not only seeing revenue growth, we’re seeing leverage on the cost items too. So that’s all good. I think the trends, the inputs or what we try to focus on the most Brad, and these inputs are looking good, customer satisfaction is up, connection rate is up, retention rate for PA customers is up. So the MBP, market based pricing model for PA is working really nicely. As we look forward into Q4, we expect continued improvement in these inputs and so that’s kind of is what’s driving the key for guide. We’re expecting to see more of that goodness.

Relative to next year, what we look forward to give in 2020 guidance next quarter, we’re not ready to talk about it yet, but we look forward to chatting with you by that time. Allen if you have anything to add on?

Allen Parker

No, I think that’s fair.

Rich Barton

Thanks Brad.

Operator

Your next question is from Ron Josey of JMP Securities.

Ron Josey

Great, thanks for taking the question. Maybe just a quick follow up on that Rich. Good to hear retention rates up, marketplace pricing model is up. So, I’m curious when we did take down guidance in 2Q and now we’re coming back to potentially where we were. Was this all a surprise or just plans along the way? I guess just the first question, maybe sort of answered that with Brad, but wanted to clarify.

And then, just on Flex really quickly. Appreciate the color and transparency in understanding no guidance in the 2020, but when you’re thinking about how long it takes to prove out these test markets and understood the 5% or what have you. So just can you us a little more insight on terms of like what you’ve learned thus far so that at least we can think about the opportunity as we move to potentially this type of this model going forward. Thank you.

Rich Barton

Okay, hey Ron, thanks. Maybe I think Allen take the first part and maybe take it, first one.

Allen Parker

Yes. I'll take it. So, the guidance we provided in our Q2 call reflected the impact of us making the decision to expand Flex testing to Phoenix and Atlanta. When we look at Q3 performance and the guidance we provide in this call, that changing guidance reflects improved Q3 performance that we saw in the business.

Rich touched on the input, we also saw improvement in our sales productivity. We touched on age of retention better than expected. So, we say several of inputs trend better than expected. And so, our current Q4 and full-year outlook for PA reflects the continuation of those trends.

And again, I'd like to reiterate Rich touched on as well. What we're really excited about is well the input trends are working well. In our recurrent revenue business when we come off of that recurrent revenue balance, we have to build it back up before we can start to see growth again.

As we did that this year, we were also able to focus on cost discipline, productivity, and thought for resource prioritization, all of which are areas that I've discussed our priority of mine and by building that muscle we've been able to expand margins which will allow even with a 6% IMT growth rate in the first nine months, we see 19% growth in EBITDA.

Rich Barton

Great. And as to you Flex questions, I guess the headline is we are optimistic, we continue to be optimistic that this can be a win/win that it really feels good from a customer satisfaction perspective to last out compensation to the completion of what the customer is trying to get done, that is close the transaction and that is clearly playing out.

It also is a much more attractive model for a certain kind of partner and we're getting a lot of positive feedback from the subset of our partners that are using Flex rate now and other partners who are anxious to do that. And then, we continue to be optimistic that we can derive more revenue and more profit from the same lead flow through this model.

This is all being tested however. The time horizon for figuring out exactly how this is going to play out is a little bit is painfully long. I understand it will take some time. For instance, we have announced six markets that we're testing Flex in and again those six markets represents only 5% of our MRR.

One of those market's in Atlanta, we haven’t even launched yet. We launch in next month, next week.

Allen Parker

Next week.

Rich Barton

Next week, okay. So, we'll launch Atlanta next week. And then Atlanta we won't have it's not like we'll have all the data. Even the front end, even kind of the starting gun of the transaction, it will not all happen at once. So, they play out over time and it takes transactions from several weeks and at the very short end to several months at the long end.

And we need enough, we need to collect enough data to kind of prove out our theories. I do as I said on the call, this is we continually innovate on business model in premier agent and this is a really interesting innovation that we are testing.

and finally I guess I say while we are doing this, while we are innovating in these Flex test markets, our core business, the core MVP business is sound and reaccelerating and growing and so that's pretty excellent here.

Operator

Next question is from Mark Mahaney, RBC Capital Markets.

Unidentified Analyst

Great, thanks. This is Mike Chen on for Mark. Just on Zillow offers, you've been into a new market this quarter. I think that's the most you've ever done. I was wondering if you could talk a little bit about the pace of your market expansion going into and throughout 2020.

And then, you also saw a nicely improved home EBITDA margin year-over-year and sequentially but how should we think about the past profitability and for losses to improve and in absolute basis for that business segment.

Rich Barton

Okay Mike, I will take the crack and Allen pile on again in the second half if you want. I said it in my scripted part but it's pretty remarkable how quickly this business this Zillow offers business has grown. Of course it is being driven by a really strong consumer signal with frustrated homeowners who want to move saying they want a better way.

Okay, but the growing from the 11 million in revenue in this line item last year to 385 million, this quarter is pretty fantastic. Turning to national footprint what is one of our early goals. Getting to an effectively national footprint and we're pretty close.

I think we're at, I think I said we're a 21 markets right now, we're about to launch the greater Los Angeles area next month, will be 22. I think historically we've said and we reinforce that mid next by mid next year will be in 26 markets.

But kind of phase 1 or rapid scaling as Zillow offer has been about planting flags in many markets and going broad, getting the word out, getting data for the machine learning machine in inputs so that we can better and better offers.

Phase 1 has been about going broad and we're moving into a phase 2 which is getting some depths in these markets. And they're giving out how to roll out software and systems and processes such that we can gain leverage on the cost, on the unit economic cost line items.

And because to go over a long-term in this business is not to lose money and to Zillow offers and just make money on all the adjacent products. We are aiming to have the cores of our offers business make money in and of itself and make and do very well and then also give us all kinds of fantastic optionality on these myriad of verticals that surround the house transaction.

I don’t know if I covered the whole question, homes EBITDA and then I kind of some of it.

Allen Parker

Yes. And I would just add to Rich's point. It is pretty incredible on the performance and gotten that the pace of scale. We continue to execute within our target ranges on profitability per home which we share.

Rich Barton

Which is kind of a surprise, honestly.

Allen Parker

Yes. and so, and we think to the future, I still come back to the customer signal that we're getting is extremely strong which gives us a lot of excitement but we also plan to be prudent and make sure we understand where there is opportunities to make it less one and where we need to test a little more before we go big.

And so, I think we're in a really good place, I think we're positioned to win. I've been really excited and this last it's sort of been nine months almost a year I guess watching this team go after this. And I think we're in a good place going forward.

Operator

The next question is from Tom Champion at Cowen.

Tom Champion

Hi, good afternoon. Allen, you’ve talked about Zillow's progress in building skills around cost control and it was a very encouraging result in EBITDA and I'm keen. I'm just curious if you could talk through that if there's any cost items that help the result anything one time in nature.

And then, maybe a question for Rich. I'm just curious if you could qualitatively describe what you're seeing in the older offers market. And in particular, curious to feedbacks you're getting agents passed with introducing a Zillow offer to customers.

But maybe those customers ultimately choose a standard market transaction. Just any thoughts on that would be really helpful, thank you guys.

Allen Parker

Yes, so. Tom, always face it with the savings or the productivity and margin expansion that we're seeing to come in from a wide range of places with respect to IMT, what I'd say is we’re establishing just a little more rigor around how we measure, how we think about incremental investments.

How we me measure productivity and how we ensure we're kind of maximizing every dollars fits to get the maximize return and that is paying some yields. The specific areas of leverage that you see year-over-year and at nine months are around better leverage on some of our sales and marketing dollars. We've seen better leverage on some of our headcount and that headcount includes people cost that includes a lot of discretionary spend that we are constantly looking at T&E and other spend that we're looking at and finding real savings year-over-year through the three key levers, we're either negotiating more aggressively with vendors, we are clarifying and basically holding to compliance against our policies and we're looking at demand management. It's those three simple levers a lot across a variety of spend categories that we put in place and we have discussions about that are starting to yield some improvements. We expect that to continue and that can either fund investments or can drop to the bottom line, but we're excited about the progress.

Allen Parker

Tom, as to your second part of your question there aren't any older Zillow Offers markets. Really our oldest markets are, I don't know 50 months old. So they are quite, they're still quite young and trying to draw any kind of maturity conclusions from them it's just premature. I'm very happy with the way we're executing in these markets within the guardrails we've laid out and the amount of data coming in from these markets and the amount of learning that's happening is really, it's impressive and rapid.

As to taking advantage of the adjacent lead opportunities and adjacent vertical market opportunities as a result of being able to present all these offers to people and then actually having these listings, the currency of the realm in the real estate industry is listing. And we have all these listings now, we have how many homes so we have listings right now over -- we have 2,800 homes in inventory right now. 2,000 and 2,200 homes in inventory now not all of those are on the market yet, but a good chunk of them are. And the commission lead opportunities the kind of, all the lead opportunities that come from having these golden listings is also pretty impressive. I would say, it's very early days with us monetizing all of that.

We've had more success with -- early success with some things and others. We talked a little bit about Zillow closing services, which includes title that we are just beginning to test with that's small. We're also testing with Zillow Home Loans has just begun to be actually be able to be integrated in certain test markets, so that we can see what the test rates are. We're also playing around with seller and buyer leads that can result from these offer presentations and that's we're figuring that out. We remain long-term very confident and optimistic that there is a ton of opportunity in these adjacencies.

Operator

The next question is from Lloyd Walmsley of Deutsche Bank.

Unidentified Analyst

This is Greg on for Lloyd. One on the Premier Agent business, so you talked about retention improving, but can you may be shed some light on the demographic agent who isn't necessarily coming back. So maybe the spend type or geographically? And then two on homes, with the recent developments in the private funding market have you seen the competitive environment change at all such that the I buyer path to profitability may be better than you initially thought? Thanks.

Rich Barton

Yes, Greg. So I guess, I would say with kind of broad strokes, we have all kinds of Premiere Agents there seeing success with our model and depending on the size of the city and the kind of city and the kinds of homes in the city, these can -- it can differ. But if I were to use a paint a broad brush and listen characteristics of agents where it's particularly well suited. I guess, I would say that agent teams that are focused on more mass-market mechanized personal transaction with a team full of people that may have some specialists, so they can handle the kind of mechanization it takes to analyze a business with a bunch of incoming leads and then either monetizing that via the MBP model or in the 586 Flex markets figuring out how to nurture that lead all the way to the transaction using their tools and increasingly our tools to nurture that lead along the way.

These more mechanized businesslike teams are the ones that we think are at least demonstrating best fitness for what's coming, what we think is coming in the future. I guess that's what I'd say generally. I forget the homes question.

Unidentified Analyst

Are you funding market? Have you seen in the competitive landscape kind of developing differently?

Rich Barton

Feels different, feels a little different. I don't want to get too overly optimistic too early. It has been a burr under my saddle. The easy money, easy late stage money because you got to play the game that's on the field. The game on the field feels like it's changing a bit and the easy money might not be so easy, it may be a bit more demanding. I'm really glad that we have this incredibly healthy core business in our IMT businesses that is growing nicely, gaining leverage, generating all this EBITDA for us to use, to invest in kind of the next generation of growth and TAM.

I'm also really happy that we decided to put a billion dollars or so on the balance sheet this past quarter in the convertible offering that we did, while we could that we feel like we're in a really strong balance sheet position to fund our growth plan which is, it's a real and exciting growth plan, but it's one that we are approaching with Allen by my side put it that way, not just not just me, but Allen is here.

And so, I would say overall I read the news and I'm listening to stuff that's coming out of Martha's mouth that is press conference yesterday and we're listening to things. I'm getting happier about the competitive environment, but I think it's too early to say we're in a normal funding environment.

Operator

The next question is from Maria Ripps of Canaccord.

Maria Ripps

Thanks for taking my questions. Maybe just to follow up on the profitability question, so without providing any specific guidance can you maybe share with us your thinking around improving profitability versus investing for growth next year and what are key investment priorities for you in 2020 outside of the home segment?

Rich Barton

If I can punch that piece, the first part to you we're not giving guidance.

Allen Parker

Yes, I would say that in terms of what do we think our investment priority or how we will invest next year, I think that we continue to expect to scale homes and as we talked about we're going to test our Flex business model while continuing to focus on our agents and customers using the MBP model. And we will continue to put the tech and the stack in place with our executives on the mortgages to grow that business.

So, I mean that I look to our long-term targets to provide you the best guidance on kind of how we'll be thinking about our investment cycle over the next few years. I look forward to sharing more detailed 2020 guidance next year. But as I mentioned on my focus, I will continue to focus on areas where we see the ability to improve productivity, do better resource allocation or build that muscle around disciplined spending that just allows us the flexibility to invest in Zillow 2.0 or to let that go down as margin expansion. But we're not providing any guidance past the guidance we provided today of 2019.

Operator

The next question is, are you ready for the next question?

Rich Barton

Yes, please Amy.

Operator

We have Heath Terry of Goldman Sachs.

Heath Terry

Great, thanks. Rich, just curious, obviously realize that everything about homes and offers is still really early, but if you could kind of mark-to-market for us some of the early assumption that you and the team obviously going back to Spencer talked about in terms of what was underlying some of the economics that the Zillow was thinking about when it entered the business the 90-day turns on home sales, the cost of carrying, the cost of financing sort of how have those assumptions evolved in the 15 months that you've sort of been in the business? Where do those numbers sort of sit in your model now that you've had a little bit more real-world experience in the business?

Rich Barton

I mean Dawn is sitting next to me and she hates it when I say I am surprised that we're operating within the rails we laid out even 15 months ago. But we are and I credit Eric and Jeremy and the Zillow Offers team. We have Eric Power in particular and his really talented team Ericsson Phoenix, they came from one of the precursor company’s invitation homes and they had built up, I guess invitation homes you guys would probably know better probably as 85,000 - 90,000 homes that they own. Now that's a different business but these folks had built up that business and really understood the line item, many of the line items of economics that constitute this Zillow Offers business and it's played out within our expectations, which I'm really pleased about and done so while it's grown a kind of non-measurable percentage year-over-year.

It's growing really fast and gotten really big. I wish we had more evidence to point to you of line-item leverage right now. We will in the future, but as I said, I think on a previous question or maybe in the script, step one was go broad, step two is good deep and get leverage. I guess we can point to one point of leverage on the financing side, of course financing is a very important cost component in this business and I'm also really pleased with the way we have Eric Power and his team and in conjunction with Allen have put together this layer of bilaterals, this kind of stack of bilaterals we've got in place, each one getting better. And one of the things that can come out of the financers from today, I think has to do with our loan-to-value ratio.

Allen Parker

Yes I usually express a simple loan-to-value, I'll call it a leverage ratio which is our homes inventory value on the balance sheet of 9:30 versus the vehicles, the asset backed credit facility utilized and that 79% versus 74% at the end of 6:30, so an improvement of 500 basis points. That is reflective of our continued improvement on trying to ensure as we buy these homes and put them through these facilities that we do it in a very effective and efficient way to ensure where possible we're leveraging these facilities for some of the capital needs we have versus our own capital.

But I will also express that number will likely vary, we're still very early days and that number will likely vary, but with respect to our assets backed borrowing in the homes business, we continue to work. We announced the new facility and continue to work with a lot of different parties who are very receptive and the goal we've expressed is that we want to go deeper cheaper and longer maturity, longer, which provides us more flexibility.

I would say the one, I'll call it mark-to-market as you called it that I think it's important to clarify is the 90-day whole time is one that's just hard because that's an average that really is representative of a lot of different distributions and not really representative of any of them. So when we buy homes depending on price, market and variety of other things, we expect those whole times to vary that is reflective in our fee. I don't want to give the impression in all cases we're looking to reduce the whole times, but that 90-day across an average portfolio is just not the way we manage the business. We manage it across an expectation that we pay for and again we expect overtime to improve that through a variety of ways.

Rich Barton

We get paid for.

Allen Parker

Yes.

Rich Barton

Let me wrap this one Heath, by saying we really do think scale and I think I said this already, but we really do think scale in Zillow matters. We think that we know that sellers are -- this is a pretty price elastic business and that every little bit that we're able to -- every little bit more we're able to offer a homeowner for their house because we're running a more efficient operation, we have cheaper financing expenses. We are able to sell a market these homes cheaper than ones to twos here or small folks, every little bit that we're able to do actually dramatically increases the size of the business that we think we can ultimately run.

So there is a, I guess, I don't know if I call this a network effect that's not really, it's just a scale effect there is a strong scale effect we believe in the Zillow Offers business. So we think this is an important strategic decision to actually have this be big to make it get big.

Operator

The next question is from Brent Thill at Jeffries.

Unidentified Analyst

Thanks for taking the question. This is Alex John on for Brent. Just going back to your comments around the I buying competitive environment, I think we're starting to see some more overlap now between some of the bigger players we heard from Radisson last night that they're ramping at a quicker pace as well. Just curious if that's starting to impact pricing at all and whether it impacts your thoughts around the pace in which you're entering new markets? Thanks.

Rich Barton

They're different, they're different things, they're different competitive dynamics and different kinds of tests and learnings going on in each market right now that we're in and it depends on competition. It depends on a lot of different factors and I guess, I would use that as a way of saying that if you're scraping on the last data and coming to conclusions about what's going on in any individual market, don't over extrapolate too much because it's early days and there are bunches, there are lots of tests going on.

The amount of I buying in totality is tiny. It's really tiny most people don't know about it okay. It's really, really small and so I don't, we have not entered a phase in this I buying thing where the competitive dynamics actually matter all that much. They certainly come into play a bit, but the most important thing is for us to offer a product and a service at a price that is attractive to the old way of doing it and that's what we're focused on right now.

Operator

The next question comes from Justin Patterson at Raymond James.

Justin Patterson

Great, thank you very much. On PA, you talked about customer satisfaction, revenue and profit yield as the central pillars. Focusing on that what are the key things to solve, to bring a product like seller listings to market? And then secondly, a big picture one, Rich you talked a lot about the vision of an integrated product. You've got a ton of areas where you can test and learn from PA, mortgages and homes. Since you've come back to the company, what are the biggest changes you've made to align the teams to execute on those areas without getting too far over their skis? Thanks.

Rich Barton

Good stuff. On the seller listings product and I chatted about it a little bit before, I do think of seller listings as one of many kind of knock on or adjacent opportunities that are out there and I guess, I'd also say that while the revenue numbers are quite large for the homes business, to the end the number of units is still pretty small and so the magnitude is the number of looks we're getting for this kind of opportunity are still really small and tiny compared to the hurricane of leads we get from our traditional business and that two billion visits a month that we get on our absent site. So it's early days there. We are rapidly learning. We're trying a whole bunch of different things, some of you sniffed around in markets and discovered all kinds of tests that we're running and so we're trying things. Some things are showing promise some things are not working.

For the second part of your question, it was integrated product in what we're learning and yes, so bringing on people who know how to run these businesses is job number one. We didn't have people that knew how to build, that knew how to buy this many homes and we recruited an amazing team to do that. We didn't know about title and escrow and we've recruited a fantastic team to do that. We didn't know how to create a mortgage and so we purchased a small company last year and now brought on some really seasoned leadership from direct to consumer lending businesses to run the mortgage business. We're investing in these in a way that I would call aggressive, but prudent without getting out of our skis utilizing EBITDA from the main, from our core advertising businesses. I feel really good that it's in balance and that it's working pretty well.

Operator

The next question is from Brian Nowak at Morgan Stanley.

Brian Nowak

Thanks for taking my questions. Hey guys, so I have two. The first one just on the same-store sale acceleration in Premiere Agent, I was wondering it could you just talk to sort of anything that changed from a consumer behavior perspective that drove this? Are you actually seeing more homes being sold to the platform that's driving more bidding around impressions? What are the other changes made? What sort of drove the acceleration sort of mechanically for us, as we sort of think about further levers to go? And then on Flex maybe walk us through sort of the framework that you guys plan to apply on the market by market basis. It is sort of evaluating which markets may or may not be best served with a Flex offering in them overtime? Thanks.

Allen Parker

You want me to take the first.

Rich Barton

Sure.

Allen Parker

So I kind of want to be clear we've been talking about this recurrent revenue MBPs, a recurrent revenue model that we had a really high churn. We dug ourselves in the hole. We've had to build ourselves up so. I do want to be clear that there was not a significant inflection point so much as the inputs have been going really well and we saw what I'll say productivity and agent retention in Q3 come in better than we expected. So the 5% was better than we had expected which is why we showed the results, we did and we expect this in Q4. But a lot of these trends have been going on all year we've had to build kind of dig ourselves out of this hole that we had dug when we had the high churn in the second half of last year, but I think it's just basic blocking and tackling.

PA forward is providing more connections, more warm leads to our agents which is getting customer and agent together. CSAT is improving. We can't track conversion on all submits that we do, but we have indicators that conversion is improving and so it's really just basic blocking and tackling. We've seen the inputs get better overtime and we just kind of had a little bit better productivity and retention that caused us to inflect a little better than our forecast which we reflected obviously in Q3 results as well as our Q4 guidance. So, it's just a lot of, it's a lot of inputs that are slowly getting better and we feel like we've got continued room to improve those.

Rich Barton

I guess essentially the market is the partners and our customers, the end consumers are responding well with this push that we're making to move down funnel in the core PA business as well, meaning we're taking care to make the connection, to make sure the meeting happens, to arrange the tour in a way that the tour actually happens and then to follow that shared consumer on their journey towards the transaction. We are building, we continue to roll out tools that make that happen and that's making the business work better and we expect that to continue.

The second part of your question was about Flex framework for evaluation. We're trying into a diversity of things in these different markets, we hope that these five, six markets represent enough footprint and enough diversity for us to get a good test signal, yes to get a good testing signal. So we're trying a whole bunch of different things. We don't have any patterns to report on yet. In some places and some things are working in other places they're not. And so we are highly motivated because we're so optimistic that this is a potential big win-win-win all the way around as you've heard us say.

And we like it because it's better for customers, it's better for partners and it could be better for us and it fits with this move down the funnel towards the transaction that we think is so key to unlocking all of these knock on adjacent opportunities. Again it will take time.

Allen Parker

I think we said Rich, but we did choose Phoenix and Atlanta because they were Zillow markets that we were.

Rich Barton

The latest two markets that we've announced, I guess we announced that last quarter but we're in Phoenix now we're about to ship Atlanta. There's no surprise that those are two of our older, I just said we don't have any old two of our first Zillow Offers markets and we have terrific Zeo partners in those markets, who we have done some of the most deep systems integrations with in order to follow these customers throughout the whole transaction and we're leveraging a lot of that infrastructure to do these Flex tests as well. And so that's, it's we're optimistic.

Operator

The next question comes from Brad Erickson at Needham and Company.

Eric Erickson

Hi, thanks. First just I guess, last quarter felt like the message with Flex was definitely the future for the PA business. You're obviously talked about the merits of the better model, better monetization, better customer experience all that. So I guess wondering why all the sudden it seems like the message that legacy MRR is a little bit better and it's going to be more wait-and-see on Flex. I guess how should we take that in the context of which business model you're likely to pursue here going forward, and I guess second like is there a chance where if the economics on Flex aren't good for whatever reason would sticking with the MRR model work with the broader down funnel pieces your longer-term? Thanks.

Rich Barton

There hasn't been an underlying change, it's just been a change in the way we've communicated it and in recognition that we left a big open question unanswered last quarter in terms of hey it's just, it is different, it could be different revenue recognition. But it's just a test and we don't know when etcetera. We just left a big question mark which was a mistake. We're trying to solve for that this quarter which is what you're detecting is the changes, as a potential change in the underlying way we're thinking about it or not we're just changing we're saying, look this test we're trying to frame it for you saying it represents 5% of ARR excuse me MRR in the business which seems like a reasonable amount of MRR to test with.

And we're also going further saying, look we need the data case ourselves and we know we need to make the dedicates to you to the extent we move beyond it and while we're doing this we're growing the core MBP business really nicely, getting leverage on that. We like that business but we do think it can be improved but we really like that business partners, like that business and customers like that business too.

Operator

The next question is from Andy Hargreaves at KeyBanc.

Andy Hargreaves

I’m just -- on the Flex team, if that's okay.

Rich Barton

No.

Andy Hargreaves

Thank you I’ve made a change, I can. I'm wondering what you're looking for from a metric standpoint from demand agent demand around Flex and if you guys can share anything around sign ups or feedback so far recognizing that it's still a test?

Rich Barton

Yes. We just did this unlock event in Las Vegas I think we had 2,000 people overall maybe 1,500 of them were Premium Agents. These are the top agents and teams. They paid to come, so it's not a representative sample of the total partner base we have. It's the most productive, the most forward-thinking. I would characterize it as, these people are making their money from the business as it is, as it currently is and any change is a little scary. But I would say a large subset and growing are realizing this is a real potential game changer for the business long-term, for the whole industry long term.

They are understanding that for the middle of the bell curve of real estate transactions these are going to go to high volume teams. It's going to get mechanized just like every other business that technology touches and they are really anxious to be at the front of the queue for testing. A lot of hands are going up saying when you come to expo to my town, I want to be your test partner and so that's it an encouraging signal. There are others as well that we talk to and that you might talk to as well that are, think it's the end of the world is a little too strong but are worried about it. They're making money the way they're making money and they don't want to change. But we want the best partners no matter how we monetize. That's best for all and that's best for customers as well. Thanks.

Operator

The next question is from Jason Helfstein at Oppenheimer.

Unidentified Analyst

Hi this is Jason Hoffman on for Jason Helfstein. We were wondering how many, like what is the percent of home in inventory that is greater than 60 days and just last quarter you mentioned that you were increasing the size of your Flex, but now you are not. How much of that is being pulled forward into your guidance going forward?

Rich Barton

Maybe I will take the second question first just go ahead and get short. I'm not sure I understood we announced, we were expanding our Flex tests at the end of our Q2 call and that because we were going to be flipping those markets from our prepaid model to this Flex testing which is where we get paid upon the close of the house that would have the impact of deferring revenue into future periods and our change in guidance for the second half of the year was lowered to reflect that movement of revenue into future periods.

Nothing has changed with respect to that. We are flipping those markets as expected and so as I mentioned before that impact in Q2 was driven by Flex expanding that market, the adjustment, the performance of Q3 and the adjustment of Q4 outlook is reflective of our core MBP business improving in both sales productivity and retention rate versus our expectations at the time of the Q2 guidance.

With respect to your first question, we don't provide a distribution of our homes and our aging. As I mentioned, we don't believe the actual age days is very reflective externally just given that it varies a lot by market, by price of home and a variety of other factors. All of our underwriting and pricing takes that into account when we provide our offer because homes that we believe will take longer to sell we charge more for relating to the holding costs interest and others.

So I think the best thing to kind of consider is and provide the per unit home metric and then we did, we talked about it last call and we do assess as required to markdown our inventory to the lower of cost or net realizable value and we do that assessment for inventory in the balance sheet on a quarterly basis. That's an accounting adjustment and does require us to mark that inventory that is below cost to a net realizable value. But it doesn't, it's not a mark to market so we don't take the mark on the high end and that mark in Q3 was consistent with Q2 it a little less than 1% of the inventory values. Hopefully that helps.

Operator

The next question is from Naved Khan at SunTrust.

Naved Khan

Yes. Thanks a lot. Just on the inventory valuation, are there things that you -- tweaks to your algorithm so that maybe in terms of just pricing and when you make the offers, you just home the algorithms as pricing is better and you don't, you do less of the adjustments? And then secondarily, on the integrate mortgage in origination offering, I guess on the last call you said, it was delayed any updates on when you can go to market with that?

Rich Barton

Yes. Did you get the first part? Could you just repeat the question on inventory -- you’re saying are there things we could do -- reduce the inventory reserve?

Naved Khan

The question ties to the, I guess, write down on the inventory you carry which happened last quarter and I think you said that it was similar adjustment this time around in terms of percentage -- of the percentage component. Are there things that you can do in terms of how you value the homes when you buy them so that you kind of lower the adjustment if it's upward or downward?

Rich Barton

Yes. I guess what I'd say is in general as we think about this business and we make offers to our customers, who are interested in selling to us. We are attempting to provide them a fair value for their price, adjusted for renovations that we need to make and what we expect the holding cost of that home over the period we expect to sell it, along with a fee for the service we provide. So what I have learned in the homes business is that obviously pricing that home is very important and that is where overtime as we get more data and we have access to a lot of data. We continue to get more. We will get better and better about what types of homes, what attributes to allow us to predict better, what fact performance of that house should be within a range that we expect something to do better and some to do worse.

But the smarter we get and the more we leverage data and machine learning, we will be able to tighten that standard deviation between what the average of that portfolio does. What this lower of cost or net realizable value reserve adjustment does it's an accounting adjustment that requires to take those houses that are on one side and that standard deviation i.e., that we are going to sell them for less than we bought them for including selling costs and make that adjustment in the current period versus when we sell it.

We don't get a full mark where we take the benefit of the houses on the other side of the mean, one standard deviation that we make more money. But again, as we -- what I guess I would say is our expectation obviously these customers business, data has to help us reduce that variance on a portfolio basis from the mean when you think about one standard deviation that tail, and as we do that we would expect to have less as a percentage in here. But it's a normal adjustment and we do expect that there will always be homes on both sides if that helps.

Allen Parker

Unless we want to close on this with the [sparkler], I can get this. You got that?

Rich Barton

Yes.

Allen Parker

This is just to give people scale on kind of the homes economics, this would be basically accumulation of the pretty of the economics that we've provided in the last three quarters and it is lifetime four quarters, lifetime is zero we've sold 814 homes -- we've had 814 million of revenue off of 2,588 homes. Our return on homes sold before interest expense is 2.3 million and that return on home sold after interest expense is a loss of 9 million. So in the scheme of -- when Rich talks about we're really excited about the scale we've had and how we're operating on the limits that's a pretty tight that could have gone a lot of different way.

Rich Barton

It's impressive and relatively small. So it's a good weather. Now your last question was about the integration of mortgage. We're executing on our plan looks. It looks good. We've got some exciting new management in place with Ryan and Libby that I talked about before. We're doing some localized tests of integrated Zillow Home Loans as per that fantastic video that I'm sure you guys a lot of time to click on from the shareholder letter. It's a fun video actually and it's a true story. So it's cool.

So it's beginning to happen this one like many of these adjacencies is going to play out overtime as we learn and build a business though. But we're excited about that. We're very excited about the long term profit potential in these adjacent businesses.

Rich Barton

I think that's it. Thank you guys very much. We're really excited by the progress we're making to mechanize this transaction and it's fun to update you guys on our progress along the way. So thank you for joining us on this. Thank you for your investment dollars. We will we take it as I said before we care, we're shareholders and we will take care of your capital and do our best with it. Thank you for being great partners. Talk to you next quarter.

A - Allen Parker

Thank you.

Operator

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