Spencer Rascoff - CEO Kathleen Philips - CFO Raymond Jones - IR

Hayden Blair - Stephens Inc. Michael Graham - Canaccord Genuity Ron Josey - JMP Securities Kerry Rice - Needham & Company Jon Lanterman - Morgan Stanley Mark Mahaney - RBC Capital Markets Jason Helfstein - Oppenheimer Heath Terry - Goldman Sachs Brad Erickson - KeyBanc Capital Markets

Thank you. Good afternoon, and welcome to Zillow Group’s fourth quarter and full year 2017 financial results conference call.

Joining me today to discuss our results are Zillow Group’s Chief Executive Officer, Spencer Rascoff, and Chief Financial Officer, Kathleen Philips. During the call, we will make forward-looking statements regarding future financial performance, operations and events.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee these results. We caution you to consider the risk factors described in our SEC filings, which could cause actual results to differ materially from those in the forward-looking statements made on this call.

The date of this call is February 8, 2018, and forward-looking statements made today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events, except as required by law.

During the call, we will discuss GAAP and non-GAAP measures. We encourage you to read our financial results press release, which can be found on our Investor Relations website, as it contains important information about our GAAP and non-GAAP results, including reconciliation of non-GAAP financial measures.

In our remarks, the non-GAAP financial measure Adjusted EBITDA is referred to as EBITDA, which excludes other income, depreciation and amortization expense, share-based compensation expense, a non-cash impairment charge, acquisition-related costs, interest expense and an income tax benefit. We will open the call with prepared remarks, followed by live Q&A.

In addition to taking questions from those dialed into the call, we will answer questions asked via Slido. We encourage you to visit www.slido.com where you may submit questions by entering the event code #ZEarnings.

You may also vote on which submitted questions you want us to answer. This call is being broadcast on the Internet and is available on the Investor Relations section of Zillow Group’s website.

A copy of management’s prepared remarks has been posted to the Quarterly Results section of our Investor Relations website. A recording of the call will be available later today.

I will now turn the call over to Spencer.

Thanks, RJ, and thanks everyone for joining us. We’re hosting today’s call from our San Francisco office, where almost 500 employees are focused on developing and managing products for our Premier Agent platform, as well as our Trulia, Zillow, HotPads and dotloop brands.

It was a fantastic year for Zillow Group. We achieved a major milestone by exceeding $1 billion in revenue.

Our GAAP net loss for the year was approximately $94 million, including a non-cash impairment charge, which Kathleen will provide more details on in a bit. EBITDA for the year came in at just over $236 million.

At the start of 2017, we expected 23% year-over-year revenue growth and 19% EBITDA margin. By the end of the year, we delivered 27% revenue growth and 22% margin.

Our gains in consumer audience and engagement, drove revenue outperformance, which flowed through to profitability. Our business model is sustainable, flexible, and very profitable on the margin.

Each year on the February earnings call, I lay out for investors, employees and other stakeholders, what our strategic priorities are for the upcoming year. For the past two years, our priorities have been, one, grow our audience size and increase engagement.

Two, continue growing our Premier Agent business. Three, grow our emerging marketplaces, and four, attract and retain the best talent and maintain Zillow Group’s unique company culture focused on innovation.

In 2017, our execution of these strategic priorities was solid. We surpassed 100 million unique users on our Zillow brand every month of the year.

Our Premier Agent, New Construction and Rentals marketplaces performed exceptionally well, and we further built and developed our team of talented employees. It’s been an exciting journey to get to where we are today.

When we first launched Zillow.com in 2006, we brought to consumers a wealth of information about residential real estate that previously wasn’t easy to find. People visited our website out of curiosity to see the Zestimate for their, or maybe their neighbor’s, home.

It was a bit voyeuristic and a lot of fun. Our brands still provide that fun, but over the years, we have evolved to become an essential resource for consumers during the home shopping process.

Nearly four out of five buyers are shopping for their home online. Many of them expect more seamless services down the funnel toward the transaction and naturally, we are at the forefront of this trend.

Looking ahead, as we evolve toward being a deeper funnel real estate industry partner, we are refreshing our strategic priorities for 2018, which now are, one, to grow our audience size and increase engagement across all brands, including launching new brands and into new geographies. Two, create better experiences for consumers and more efficiency for our real estate industry partners.

This happens as we accompany home shoppers further down the funnel and closer to the transaction. Three, evolve our revenue models in each marketplace to better align our results with transactions and our industry partners’ commissions at the bottom of the funnel.

Four, attract and retain the best talent and leverage Zillow Group’s unique company culture focused on innovation as a competitive advantage. To support these priorities in 2018, we will continue to invest in building the largest and most trusted home-related marketplace.

Zillow Group is committed to connecting consumers with real estate professionals and delivering a faster, more efficient home shopping process, while providing those professionals with technology and services to better serve their clients, close more transactions and be more successful. With our new priorities, we are moving into the next phase of our evolution, in which we will take our business beyond lead generation, allowing us to better serve consumers, and cementing our partnerships with real estate professionals.

An immediate example of executing upon our strategic priority to expand our audience was announced today in our New York marketplace. During the fourth quarter of 2017, across all Zillow Group brands, for sale and rental listings in New York City attracted more than 32 million visits.

StreetEasy and Naked Apartments have had incredible success in New York City due to their hyper-local focus and content. Together, they are established as go-to resources for everything real estate related in the city.

Early last year, we expanded our presence in this region with the acquisition of Hamptons Real Estate Online, or HREO.com, a Hamptons-focused real estate portal that nicely complements our StreetEasy and Naked Apartments brands. Today, we retired the HREO brand and launched a new Hamptons brand using HREO’s data infrastructure, Out East.

With Out East, our seventh consumer brand, we are bringing that local focus and expertise to one of the most popular second home and vacation rental destinations for New Yorkers. The new mobile-friendly site provides buyers and renters with town guides, expansive for sale, for rent and land listings, and a customized shopping experience to help them discover their dream home in the Hamptons.

We are excited for more shoppers and renters to discover the market-specific features and filters that are only available at OutEast.com. Our second and third strategic priorities, creating better experiences for consumers and evolving our revenue models to align with industry success, hinge on our ability to enable more transactions for consumers and our advertisers.

Let me now connect the dots across a few important initiatives, starting with our Premier Agent business, which taken as a whole, demonstrate how we are moving further down funnel and, ultimately, helping our advertisers improve their conversion. The Premier Agent app helps connect home shoppers from our mobile apps and websites with great real estate agents, and helps agents improve their conversion and profitability.

Dotloop provides real estate professionals with software to complete paperless transactions, spend less time on administrative tasks and more time with clients. Our Premier Agent Concierge service helps busy real estate professionals manage high lead volume while maximizing their return on investment.

Zillow Group’s in-house Concierge team helps Premier Agents more efficiently connect with consumers, seven days a week. Our new My Agent feature helps to cement the relationship between agent and client, while improving conversion.

After being connected through Concierge, we are now enabling agents to have an exclusive relationship with consumers on Zillow or Trulia. Once My Agent is activated, when the buyer returns to Zillow or Trulia, the consumer sees only their agent.

The typical buyer comes back to our apps or websites almost 30 times over the course of the month following that initial contact. The exclusivity of the My Agent connection ensures that the consumer communicates only with their agent every time they come back, significantly strengthening that relationship.

Enhancements to Premier Agent allow us to experiment with our contact module. We want to create a frictionless experience for consumers.

To do that successfully, we have to work with the most consumer-centric agents. We are now gathering consumer satisfaction data on Premier Agents and Brokers, which will help us match consumers with the best agents.

Another new product that helps us get deeper down the funnel with home sellers and agents is Instant Offers. Currently testing in two markets, with more to come in 2018, Instant Offers has the potential to be an attractive listings acquisition opportunity for our advertisers.

The early adoption of this product identified a subset of motivated sellers who value speed and certainty of a sale over price, and also connected agents with many consumers who were testing the waters, but want to sell their home in a traditional way. I’ve just listed a few of the ways that we are moving down funnel and closer to the transaction, for the mutual benefit of our advertisers and consumers.

Now, turning to how we’re aligning our revenue model with our partners’ growth. Last year, we changed our Premier Agent advertising model to an auction-based pricing system.

And for the full year, Premier Agent revenue grew more than $157 million from 2016 to 2017, or 26% year-over-year. The new pricing model had the desired effect of increasing the revenue-per-visit in our largest markets.

In those markets, revenue-per-visit rose 10% year-over-year. We continue to anticipate that revenue will increase system-wide this year, consistent with the experience in our test markets, as healthy auction marketplace dynamics gain traction.

Now, we are shifting our focus toward helping advertisers execute more transactions, since improvements in conversion result in better monetization. A key part of this monetization effort is our Premier Broker advertising program.

Premier Broker is becoming widely adopted by some of the country’s largest local brokerages. The product allows brokerages to earn revenue by advertising on our brands and share commissions with their agents.

The brokerage industry is becoming increasingly competitive, with new entrants that rely on technology, new commission-sharing models, and consumer discounts. The Premier Broker program enables brokerages of all types to compete more effectively with one another.

This advertising product scales our platform beautifully, and gets more agents using our technology to prospect for and service their clients, as well as complete more real estate transactions. We are applying the same strategic priorities in moving down funnel and evolving our revenue models to grow our emerging marketplaces as well.

Most notably, we are expanding elements of our Concierge service to our Rentals, Mortgage and New Construction marketplaces. Through successful implementation of Concierge for Premier Agent, we know that the faster consumers are connected with a real estate professional, the more likely they are to make contact and deliver a more transaction-ready consumer to our advertisers.

In Rentals, we continue to innovate on our product offerings to enhance the experience for both renters and property managers. We expect to launch products that make the rental process more seamless for both sides over the next few months.

Across our marketplaces, we are in growth mode. We are very focused on creating a better home shopping experience for consumers, while providing our partners with the technology to do so.

We wouldn’t be able to take these big swings if we didn’t have the best and brightest talent working for us. It continues to be a priority to attract and retain that talent and leverage Zillow Group’s unique company culture focused on innovation as a competitive advantage.

In just the past few months, we received accolades for our workplace culture from Fortune, Glassdoor, Forbes and JUST Capital. Bloomberg also selected us for its inaugural Gender-Equality Index.

These honors show that Zillow Group is a great place to work. We continue to improve on that every day, with programs like The Home Project, Zillow Group’s social impact program that addresses homelessness and housing insecurity, and our ongoing focus on reflecting the principles of equity and belonging in our workplace.

The market opportunity in front of us remains massive, especially as we evolve from simple lead generation to an end-to-end solution for consumers, with a revenue model that aligns our success with the success of our partners. In 2017, we estimate that there’s approximately $1.8 trillion in total US transaction value for homes, up 7% over 2016.

We estimate that Premier Agents and Brokers earned roughly $6.5 billion in commissions from the contacts that were originated on Zillow Group. We estimate this represents about 7.5% of the $87 billion of total real estate agent commissions paid in the US last year.

We reported nearly $762 million in Premier Agent revenue in 2017. So that’s still a small amount relative to total commissions, but an increase from 2016, when contacts from Zillow Group drove an estimated $4.4 billion, or about 5% of all commissions.

We see significant opportunity to expand our addressable market over the long term. As we dive deeper in the funnel, we see more opportunity to increase the number of transactions and commissions to our partners.

With that, I will turn it over to Kathleen for a financial review and to discuss our outlook for 2018.

Thank you, Spencer, and hello to everyone joining us on today’s call. I’ll start with a review of our traffic metrics.

In line with our priority of growing our audience size, traffic to Zillow Group’s mobile apps and websites reached approximately 152 million average monthly unique users in the fourth quarter of 2017, an increase of 8% year-over-year. Our peak traffic month in 2017 was July, when more than 187 million unique users visited Zillow Group’s mobile apps and websites.

With such a large audience scale, we continue our intense focus on how to better engage with our audience. We know that consumers who visit frequently are more likely to be ready to buy, sell or rent a home.

We have many marketing initiatives in place to drive more visits, including mobile and email alerts that bring consumers back regularly. As a result, in the fourth quarter of 2017, visits reached more than 1.4 billion, up 21% year-over-year.

For the full year 2017, we achieved a 19% year-over-year increase to 6.3 billion visits. Our goal is to help visiting consumers connect with a real estate professional, which ultimately means increasing transactions and commissions for our advertisers.

In 2018, we will be investing heavily in areas to increase conversion. Now turning to our financial results for the quarter.

Total revenue for the fourth quarter grew 24% year-over-year to more than $282.3 million. Premier Agent revenue for the fourth quarter grew 21% year-over-year to $199.5 million.

Premier Agent revenue per visit was consistent with the same period last year. As we discussed on our last call, our fourth-quarter Premier Agent revenue guidance included our best in estimate of the impact of seasonality.

Since our results were in line with our outlook, we do not believe there was an unexpected impact from seasonality due to our new auction-based pricing model. Revenue from Premier Agent advertisers who have been on our platform for more than one year, grew by 41% compared to the prior year.

New sales to existing advertisers, or those that were paying advertisers at the start of the quarter, made up 63% of total bookings in the fourth quarter. The number of advertisers spending more than $5,000 per month grew by 70% year-over-year and increased 64% on a total dollar basis during the quarter.

Fourth quarter Other Real Estate revenue grew 60% year-over-year to $47.6 million. Other Real Estate revenue primarily includes Zillow Group Rentals, New Construction, dotloop, as well as revenue from the sale of various other advertising and business software and services for real estate professionals.

Fourth quarter Zillow Group Rentals revenue grew 51% year-over-year, and average monthly rental unique users increased 18% year-over-year to 29 million. More property managers are realizing the benefits of advertising on Zillow Group’s network of rental mobile apps and websites.

We ended the year with more than 21,000 properties advertising their unit availability with us. Starting with the first quarter of 2018, we will begin reporting Rentals revenue as a separate category.

This category will include rental advertising revenue from Zillow, Trulia, HotPads, StreetEasy and Naked Apartments. Please note that we included first quarter and full year 2018 Rentals revenue guidance in our news release issued this afternoon.

Mortgages revenue was $18.5 million in the fourth quarter, which represents a 12% increase year-over-year. Average revenue per loan information request increased 26% year-over-year.

Display revenue for the fourth quarter was $16.7 million, a decrease of approximately 1% over the same period last year. As a reminder, we began our intentional shift from traditional display advertising revenue about three years ago to focus on providing consumers with more personalized experiences that lead to valuable connections for our marketplace advertisers.

Beginning next quarter, Display revenue will be included in our Other Revenue category and not reported separately. Going forward, Other Real Estate Revenue will be renamed as Other Revenue and will include revenue from New Construction, dotloop, Display, as well as from the sale of various other advertising and business software solutions.

Shifting now from revenue to our expenses for the fourth quarter. Total operating expenses were $443.6 million.

During the fourth quarter of 2017, we recognized a non-cash impairment charge of $174 million related to our Trulia trade names intangible asset. Further details on this non-cash impairment charge are included in the 8-K we filed with the SEC this afternoon, which can be found on our investor relations website.

The combination of Zillow and Trulia was the most strategic and transformative business move we have ever made. Trulia has brought, and will continue to bring, significant value to Zillow Group.

Through the merger of Trulia and Zillow, and the development of the other consumer brands in our portfolio, we have been able to combine our ad products, grow revenue rapidly, improve listings quality, develop new business models, gain widespread adoption of our software suite, including dotloop and the PA app, and begin experimenting with Instant Offers. We look forward to continuing to grow the Trulia brand as a key part of our portfolio and overall future success.

Our cost of revenue was $22.6 million, or 8% of revenue. Sales and marketing expense was $103.9 million, or 37% of revenue.

Technology and development costs were $85.2 million, or 30% of revenue. General and administrative costs were $57.8 million, or 20% of revenue.

Moving on to our bottom line, GAAP net loss for the quarter was $77.2 million, or 27% of revenue, and includes the impact of the non-cash impairment charge, which was partially offset by an $89.6 million tax benefit we recorded in the quarter. Approximately $66.0 million of this tax benefit was a result of the non-cash impairment.

The remaining $23.6 million of this tax benefit was primarily a result of the recent reduction in the federal tax rate. This decrease in rate was applied to our net deferred tax liability related to our Trulia trade name intangible asset.

Our EBITDA for the fourth quarter was $70.9 million, or 25% of revenue. Our fourth quarter EBITDA was impacted by an opportunistic increase in advertising spend in the quarter, as well as by commissions paid due to higher-than-expected sales bookings that will be recorded as revenue in future quarters.

We ended the quarter with nearly 3,200 employees across all of our offices. Now turning to our outlook for 2018.

For detailed first quarter and full year 2018 guidance, I encourage you to review our press release that was issued this afternoon and is available on our investor relations website. We expect full-year Revenue to be within a range of $1.302 billion to $1.317 billion, which represents approximately 22% year-over-year growth at the midpoint of the range.

We also are introducing our full-year EBITDA outlook, which we expect to be in the range of $300 million to $315 million, or 23% margin at the midpoint. For the full year 2018, we expect operating expenses to be within the range of $1.24 billion to $1.255 billion.

We also are providing some additional details on expenses and EBITDA to support your modeling. First, we expect that our sales and marketing expenses will be greatest during the first half of the year.

Included within our sales and marketing expenses are our advertising costs. In 2017, we increased our advertising expense across all of our brands and marketplaces to $156.5 million, compared with $120.2 million in 2016.

Total advertising expense, which we report on an annual basis, came in a little higher than planned, partially due to the opportunistic increase in advertising expense during the fourth quarter that I noted earlier. In 2018, we plan to increase our advertising spend again with a target growth rate that is in line with our forecasted annual revenue growth.

Next, our technology and development expenses are expected to grow in 2018 as we increase investments in our long-term growth initiatives, much as we did in 2017. Consistent with our philosophy throughout the life of our company, we continue to believe that it is important to invest in new products and technology today to stay ahead of changing consumer expectations that are disrupting the real estate category.

We expect to invest approximately $50 million more than we did in 2017 in innovations like Instant Offers, Concierge, 3D Homes, Rental products, PA app enhancements, technology infrastructure and data, along with other initiatives that we believe will further position Zillow Group as both the consumer destination for home shopping and the preferred long-term technology partner to the real estate industry. Accordingly, we expect our investments to cause quarterly EBITDA to fluctuate throughout the year.

Based on our current estimates, first, second, third and fourth quarter EBITDA are expected to represent approximately 15, 20, 30, and 35% of the full year total EBITDA, respectively. We’ve previously shared that we were engaged in discussions with the Consumer Financial Protection Bureau, or CFPB, but had not yet come to a resolution.

We still hope to put this matter behind us as soon as possible, and continue to firmly believe that our co-marketing program allows agents and lenders to comply with their legal obligations. To conclude, 2017 was a milestone year for Zillow Group.

In our 6 years as a public company, we went from $66 million in annual revenue to over $1 billion. This past year, we successfully transitioned the pricing model of our Premier Agent business; launched a new consumer brand with RealEstate.com; continued to grow our emerging marketplaces, including two strategic acquisitions; and introduced several innovative new products that both consumers and our real estate industry partners are excited about.

In 2018, we are choosing to invest in supporting the evolution of our business and specifically, the strategic priorities that Spencer outlined. We’re off to a strong start and we look forward to keeping you updated on our progress throughout the year.

With that, we will now open up the call for questions.

Hey guys. This is Hayden Blair on for John.

Just wondering, obviously you'll be attempting to grow Premier Agent revenues from here, but I'm just wondering if there's any dynamics seasonally that you can help better explain for any reason that the Premier Agent revenue per visit in the fourth quarter would be basically flat, a little bit of growth there. And I'm wondering, are there dynamics that are going to continue that might make that kind of flattish revenue per visit metric kind of a placeholder for our models for the next few years?

So we're - you have to understand that the biggest impact on revenue per visit was seasonality as declining quarter over quarter traffic typically into the fourth quarter as we move out of peak summer home shopping season in Q2 and Q3 and to kind of the post Thanksgiving lull when there's generally much less home shopping traffic. So with market based pricing, agents can choose to ramp down their spend into that period, but spend is stickier than you might expect, even as traffic declines into Q4.

So I guess we've only had now one real Q4 fully rolled out market based pricing and that’s the Q4 we just came off of. So we're - we showed - I guess the visits in Q4 were up 21% year over year and visits in Q3 were up 19% year over year.

So it was a pretty strong year over year in Q4 traffic I guess the short answer is, we're still learning how seasonality in a post market based pricing world impacts revenue per visit, only having had one quarter fully rolled out.

Got you. And then real quickly for a follow up.

On your first strategic priority, you've obviously had a lot of success with your hyper-local focus URLs in New York City, but clearly the Hamptons was a little bit more difficult, but still you're kind of choosing to double down on it. So I’m curious, how many geographies across the US pose the similar hyper-local focus opportunity?

And maybe ultimately, what portion of the $87 billion or so in commissions is that hyper-local focused segment going to represent?

Yes. I mean the Hamptons are definitely a unique opportunity.

The market size there is huge. The team in New York is well positioned to address it.

There was a great acquisition available to us. The size of the real estate market in the Hamptons is around - I think home values in total in the Hamptons are around $200 billion, which is kind of in the ballpark of the value of all homes in Seattle, just to sort of benchmark the two.

Since we're a Seattle headquartered company, it's helpful for me to think about the market size in the Hamptons there relative to Seattle. I don't expect us to be launching other local brands in other cities, if that's the question.

We’ll see, but for now, we've got this seventh consumer brand in the US and we're obviously always thinking about geographic expansion. But will you see another brand in Boston or in Miami any time soon?

Unlikely.

Thank you. A quick one on the first priority too about geography.

When you said other geographies, are you still referring to the US or do you have some international thoughts in mind? And then you mentioned in the guidance that ad spend would go up about the same as revenue in terms of growth this year.

And in the past, you've mentioned that the real governor on sort of ad spend and how much you felt you needed to invest, would be driven by brand recognition and sort of how you felt like the brand was being built over time. And just wondering if you can update us on your current view of where the brand stands.

Do you have like a metric that you're managing to or just any thoughts on where you stand with that?

Sure. On your first question, international expansion is a distinct possibility.

I don’t have anything to announce specifically right now. And on ad spend, Kathleen?

Sure. So you're right.

We have talked in the past about the Zillow brand specifically and brand awareness as one of the benchmarks we look at to measure the effectiveness and on some of the efficiency of our advertising. I can report for the Zillow brand specifically, we're very, very pleased with the increases that we've seen in brand awareness.

We don't share those metrics, but we've been really pleased. That being said, we're in a really different place as a business than we were in when we first started spending on the Zillow brand advertising.

We are now increasingly putting our advertising dollars to work across our entire brand portfolio, which is actually really great news if you think back to four, five years ago when we first started spending significantly on the Zillow brand. The Zillow brand represented our entire market opportunity.

Now we have lots of other opportunities. With each brand, we do take different approaches depending upon the audience for that brand.

As you can imagine, the consumers for HotPads are very different than say the consumers for Trulia overall. The types of executions that we use, whether it be TV for Zillow and Trulia, digital advertising for other brands, taxi top and subways for StreetEasy and the New York brands.

And all of this is designed to support our entire portfolio and to make sure that we're taking advantage of the full opportunity that’s available to us. What we learned in advertising the Zillow brand is that we can deploy our incredibly effective team against brand advertising.

We can very specifically track effectiveness of that advertising, and we can use it to fill our audience growth and engagement.

I’ll just add. Our brand awareness metrics, which we measure very closely, are at all-time highs for all our brands, but in particular for Zillow brand.

Our brand dominance is an all-time high for Zillow brand. And although we don't report it, many investors and others look at Google Trends as a proxy for things like awareness, and it tells a pretty clear story about how the brand Zillow has benefited from our advertising and product development and achieved categorization that way.

Operator, next question please.

Great. Thanks for taking the question.

So Spencer, with the new focus you highlighted, taking the business beyond lead gen I think is what you said and working with shoppers through down the funnel, improving conversion rates with agents, you mentioned a bunch of tools like the Premier Agent app, the Concierge, My Agent dotloop. They’ve all been live for a while.

And so I'm wondering if you can talk about just the plans to bring those all together so that you can move beyond lead gen. is it more investment in concierge to help do that, more agent education?

Or do you see this more as like a multi-year sort of like investment towards that goal of basically delivering leads further down the funnel that can hopefully convert? And then just quickly on geography, I know nothing to report, but any insight on perhaps what might be interesting to you, what metrics or data points might be interesting to expand Zillow?

Thanks.

Yes. So great question, Ron.

The whole focus, the name of the game now in terms of growing Premier Agent revenue in a post market based pricing world, in a post multi brand world where the ad units are integrated across our different brands, the name of the game is lead conversion. And you were right to reiterate some of the initiatives that help with lead conversion include Concierge, My Agent and Premier Broker.

The one that we've talked about probably the least with investors is dotloop and it's the sleeper hit. So dotloop has basically doubled usage and tripled revenue since we acquired it about three years ago.

And today, about 70,000 real estate agents use dotloop every day. Almost 300,000 real estate agents use dotloop every month.

About a third of all real estate transactions are now closed using dotloop software. So the exciting next step for us is integrating dotloop with the Premier Agent app.

Or I should say, integrating - yes, integrating dotloop with the Premier Agent app, which will provide Premier Agents with unprecedented visibility into the efficacy of their Premier Agent advertising spend. It will help improve their lead conversion.

It will give them visibility into what their funnel looks like. And we believe in a market based pricing world, it will increase their spend.

So that is coming in the next couple of months and I'm incredibly excited for it, and I think it's going to help connect a lot of these dots for our advertisers and probably for our investors as well as they start to see how the chess pieces that we've assembled in the B2B software space, start to come together to drive business results. In terms of further expansion, we'll see.

Stay tuned. Clearly we look at things like market size, language, competitive landscape, structure of the real estate industry, and then of course we have a lot of domestic priorities that we're also balancing.

So stay tuned. Operator, next question please.

Thanks a lot. A couple of questions.

Maybe the first one, just to follow up on the previous one going beyond kind of lead gen and your incremental marketing spend as we go into 2018. Are there any changes in how you're marketing, still leveraging TV?

Are you moving more to digital? Any other context and maybe changes around that?

And then the other question I have is on mortgages. If I’ve calculated this right, it looks like you're looking for some pretty strong growth in 2018 in mortgages.

Given the higher interest rate environment, maybe could you give us a little more context on why you think that will grow so strongly? Thank you.

Sure. On advertising, there have been no significant changes in the types of advertising we do.

we've been using TV, radio, digital advertising, both search, social and display, outdoor print sort of a variety of advertising media to support all of our brands. And as Kathleen alluded to, a lot of that is done centrally by a unified team, which gives us benefits of scale and expertise.

And the advertising that’s done in a decentralized manner, still benefits from our scale and expertise a lot of the time as well. Kathleen, mortgages?

Sure. So yes, we are projecting strong growth with mortgages, particularly in light of the industry levels of originations which are negative for the past year, and we don't expect to be much more positive in the coming year.

So a lot of what we're benefiting from with our mortgage projection are some of the initiatives we had last year, moving borrowers down the funnel, just like we're trying to do with our real estate products, and creating a closer engagement between potential borrowers and lenders so that we're providing much more educated and transaction ready borrowers to lenders, makes our consumers very attractive to our mortgage lender partners. For 2018, more of the same.

We’re continuing to work to maximize movement down the funnel with product innovations, and you'll see us releasing some things that really align the top of the funnel and the bottom of the funnel, much in the same way we're moving with PA.

Operator, I'll switch to a couple of questions from Slido now. One question was, how should we think about Zillow’s growth rate relative to rentals?

I'm pleased to be - starting to provide more transparency to investors about our rentals results. The guidance, I guess - I mean we've said 145 odd million of rentals revenue in 2018, grew 66% in 2017.

We see a massive amount of running room ahead in terms of rentals that comes from adding new properties and units. It comes from adding new features and it comes from improving monetization.

It's a huge, huge market. We've got a massive audience of over 30 million monthly users interested in rentals, the largest rental audience, and we think this is going to be just a huge business for us over time.

And already you can see in 2018, it's a pretty big business already.

I would just add to that, Spencer, that when we do release separate category gate for rentals with our next quarterly report, we’ll provide some more detail, both in terms of product and past performance and should give you a better picture of rentals now that we're moving on to reporting that as a separate category.

Operator, I’ll do another question from Slido. It’s, how has lead pricing changed this far into the market based pricing model?

I think we've probably answered some of that already. Just to reiterate, in the top, I think it was 20 cities that we looked at, we saw 10% price lift that we attribute to market based pricing.

We think that will continue in other markets and potentially grow further even in those markets as more auction marketplace dynamics take hold. And as I've already discussed, the key now is of course improving lead conversion and providing more visibility to Premier Agents.

I mean if you ask Premier Agents, what would it take to spend more money with Zillow Group, and ask them this constantly, the most frequent answer is, more visibility into how much more money I would make if I spent another $1,000 a month. I have a pretty good sense that if I spent another $1,000 a month, I would make a bunch more, many multiples of that, but boy, I'd love to know how much that last $1,000 a month got me.

So when we can help answer that question through dotloop data in the Premier Agent app, I think we’ll reap the benefits of market based pricing even more. Operator, we’ll do one more Slido question then go back the call.

With visits growing much faster than unique users, how will this not result in a degradation of lead quality? So I mean there's so many things that we're doing to improve the quality.

Just think for a moment about My Agent for a second. So I said in the script that consumers come back 30 more times.

So imagine in the old world before My Agent, a consumer contacts an agent and then comes back 30 more times. That’s 30 more impressions and 30 more opportunities that they might have to generate a lead to a different real estate agent.

And now, once the agent and that first consumer - once the consumer and that first agent are connected, no other agent will be shown. So that's 30 fewer opportunities to generate kind of a garbage lead that can't be converted by another agent because that consumer is already working with the first agent.

So that dramatically improves lead quality. It also dramatically increases cost per lead because agents are getting fewer leads.

Premier Agent and Concierge obviously impacts lead quality as well. So anyway, there are a lot of moving pieces in the lead quality and cost per lead calculation taken as a whole.

What we're trying to do is generate more transactions, more commission dollars, more transaction dollars out the bottom of the funnel year over year. And we think if we can keep growing that number, then through the market based pricing model, we'll be able to keep growing Premier Agent revenue.

Okay. Operator, we'll go back to the call please for the next question.

Hi guys. Thanks for taking my questions.

I have two questions, one on My Agent. When you guys are talking to agents, what’s the reception been thus far?

Do they care that they’re getting fewer leads? Or are they happy that they’re more high quality leads?

What's kind of been the feedback thus far? And then on rentals, nice to see you guys are breaking this piece of the business out.

When you compare yourself to competitors, looking at traffic, user interface and then supply of listings, how would you kind of grade yourself? And then looking at monetization, can you just remind us how you currently monetize, maybe how that's progressed over time and then maybe additional opportunities down the road?

Thank you.

We announced My Agent at our client event in Las Vegas in December, maybe November. I forget.

In Q4?

October.

In Q4, to I believe it was a standing ovation if I remember correctly, or at least innovation. We just started selling it to the rest of the country a couple of days ago.

We’re requiring a certain price, a certain ARPA, a certain spend level in order to gain the feature, and it's been selling extremely well. Rentals, I would grade - today in 2018, I would grade our traffic as an A, our listing coverage as a B plus, and our monetization as a B.

I don't know if that's probably - I’m a hard grader. So to those on the rentals team who work for us, listen to that call.

Hopefully that’s motivation. But anyway, that's how I would grade us, with massive, massive, massive opportunity ahead obviously.

Operator, next question.

Great. Two questions, one on the rental side.

I know you gave the full year rentals guidance. What year over year revenue growth does that imply, that $145 million?

And then secondly, in terms of your EBITDA expansion, just could you remind us what you think the long term EBITDA margins of the business are? And you list out a couple of reasons why the margin - you’ll have margin expansion this year, probably be a little slower than you’ve typically done historically.

But just remind us of what the incremental margins you've seen at times in the past are and any reason to think that there's a need to rethink the long term trajectory of your EBITDA margins. Thanks a lot.

Great. Thanks, Mark.

On rentals, stay tuned. In terms of the year over year growth rate, we're still working on finalizing the historicals there, and when we release first data around the rentals category reporting, we’ll provide you with all that historical data.

On margin, we've always said, even going back to - I think to our IPO roadshow, that we thought when the company was in a more mature state, we would be at 40% plus adjusted EBITDA margins. And nothing about - nothing that's happened over the last seven years has changed my perspective on that, except that I think that “end state” will have - will be able to have a much larger dollar - revenue dollar or adjusted EBITDA dollar value associated with it because we think TAM is much larger than we did when we went public seven years ago.

And more generally, let me just talk for a second kind of philosophically about this revenue growth margin trade off. The investments that we make in future growth initiatives are always on strategy, and we've been very transparent with investors about what our strategy has been.

We’ve always tried to plant seeds in areas that we think are on strategy that pay off typically a couple of years later. I can give you a lot of examples of investments that have paid off that investors do have visibility into now like mortgages and rentals, which for the first couple of years, were big money losers to the tune of tens of millions of dollars.

And frankly, we could have very easily sold off those verticals like most of our competitors had and probably made many more than tens of millions of dollars of near term profit had we done so, but I'm glad we didn't. We invested very heavily in industry plumbing.

This is dotloop, Bridge, Retsly. Again, for a couple of years, it wasn't really clear why we were doing that, clear to investors.

It was clear to us of course. Now I think it's becoming more clear as you can start to see how that industry plumbing ties to lead conversion and how the industry software suite that we put together impacts pricing through the auction model.

New construction is another marketplace that we've spent millions of dollars building out and now is driving significant revenue growth. And then our investments in New York and StreetEasy are another example.

So as we sit here today in 2018, we're investing about $50 million more year every year in these types of initiatives, new initiatives essentially than we did last year. These are things like Instant Offers, geographic expansion, brand expansion, like Out East and RealEstate.com, data acquisition.

We always spend between 2% and 10% of our expenses on these types of projects, and I like our track record of how they’ve paid off. But we do it with rigorous discipline.

We - you should see how long the list of things that we don't pursue is, and how many good ideas are actually on that list. it's quite exciting actually.

So as - these investments that we’re making in 2018 in particular I think are exciting because they expand the TAM. As we go deeper funnel in real estate, we're spending a TAM.

As we go deeper funnel into other marketplaces and new geographies, I think our TAM is getting a lot bigger. So that's why we make these investments, and that's how we think about the margin tradeoff associated with them.

Operator, next question from the call please.

Yes. There was a question on this on slide 02.

So just to sort of combine them, you're right. you'll recall a couple of quarters ago, I said that I felt we needed to hire more new sales people who tend to prospect for brand new clients in order to bring in new advertisers and we did that.

In Q4, we hired a couple dozen new salespeople, which was the first time in at least six, maybe 12 months that we had hired brand new sales classes. We have done some small back fill of salespeople, but we hadn't hired entirely new classes in quite some time for most of 2017.

And in Q4, we did and it's working as we expected. It’s now bringing on new smaller advertisers.

And in that cohort of new smaller advertisers, I'm sure are the next 10, 20, 30,000 dollar a month spenders a year or two from now. Operator, next question please.

Thanks. Just not the hot one right now, but it’s the next interesting opportunity.

Can you talk about how you think about the different opportunities when you have apartments, and obviously we know what you're doing in New York, but you also have single home rentals as well. How do you just think about, when you think about the national opportunity on rentals, how that separates between multifamily and single home and how you approach that?

And then also any update on what you're doing in new construction? Thanks.

Sure. Well, a much larger portion of the rental housing stock is single family than multifamily.

That's the good news from a single family standpoint. The other good news is that our brand and our product is really well positioned, the Zillow brand in particular, well positioned for the single family rental space because a lot of those single landlords, homeowners, are using Zillow of course to figure out what their home is worth and to market it.

The bad news is it’s harder to monetize that long tail of single family rentals. We have built products for both single family and multi-family.

We tend to monetize multifamily. But from a focus standpoint, we're focused pretty equally I guess on both those parts of the market, multifamily and single family from a products standpoint and from a consumer audience standpoint, although the monetization comes from multifamily.

On new construction, new construction is just a little bit behind rentals in terms of kind of being next to up in the - it's in the on deck circle I guess for - getting ready for prime time. It is an awesome business.

The competitive landscape is - works to our advantage because there aren't a lot of great places to go shop for new construction inventory. And so Trulia and Zillow are clearly the best places to look for new homes on the web.

The business model is quite clear. It’s a paid inclusion business model.

Home builders, our professional marketers, they spend hundreds of thousands dollars per home, hundreds of millions of dollars per community sometimes. And they have a line item in their budget called marketing.

And they're professional marketers whose job it is to gain awareness and distribution of their inventory. And so it's a very - it's a great business for us to invest in for all those reasons.

And I'm personally super excited about it. And one of my New Year's resolutions for 2018 for example is to get even more involved in our new construction business and meet with more of our homebuilder partners and as it becomes a bigger part of our business.

And I've been doing just that and I'm getting even more excited about new construction the more time I spend in it. We'll go to Slido now, operator.

Let's see. How efficient is your R&D spend given most new products have come through M&A, Trulia, StreetEasy, dotloop, Out East?

It's a good question. How do I think about that?

I mean, it's true, there's been a lot of M&A that's driven innovation, but almost all the acquisitions that are listed on this question, we have dramatically increased the R&D once we acquired them. So dotloop or - all of these companies.

I mean StreetEasy for example had no mobile, none. No apps, no mobile web at the time that we acquired it.

We completely rewrote StreetEasy. The Zillow Seattle team did build the first version of all the StreetEasy mobile apps.

We dramatically increased R&D in New York and Seattle to support StreetEasy. And now of course the Premier Agent product and listing fees and Premier Agent app is all provided to StreetEasy from outside of New York.

So sure, M&A started it, but a lot of incremental R&D went to it. dotloop, same thing, when we acquired dotloop, it was a startup that Zillow Group provided a lot of enterprise level technology and R&D.

Mortech the same thing. Again, a small startup that we acquired and we dramatically increased R&D post acquisition.

But the biggest dollar value of our R&D is of course just focused on the Trulia brand or the Zillow brand. We’ve got probably four or 500 people in Seattle that just focus on Zillow brand and two or 300 people here in San Francisco focus on Trulia.

And that R&D I think is very efficient, if you think about the traffic growth and contact lines that we've generated from the products that those people have developed. Just to give you a number, for example in 2017, we expensed $44 million from website development costs, non acquisition related.

So from an accounting standpoint, you can think of us as a spending $44 million in internal R&D not related to acquisitions to generate 150 odd million monthly unique users across brand. Pretty efficient.

Operator, is there another question from the call? If not, we'll finish up on Slido.

Great. Thanks.

Spencer, you reference the data that you're starting to get from expanding the technology offering to agent. What are you seeing or what have you learned about the the ROI that agents are giving?

You guys used to quote sort of a 15 to one number a while back. Curious how having access to more data has sort of informed the way that you view the ROI that agents are getting from their spend on the platform.

And then to the extent that you can, the seller leads product, curious sort of what kind of traction you're seeing there and how much of your guidance for ’18 reflects growth in that part of the business?

Sure. So in 2016, the stats that we shared where we were estimating about a 7x ROI.

So agents spent about $600 million and they generated about $4.4 billion of commissions. And in 2017, we estimate that the ROI was also in the seven to eight times range.

They spent about $762 million with us and they generated $6.5 billion of commissions. So we think ROI was basically flat-ish year every year in the seven to 8x range.

The - now, of course once we have data from dotloop and the PA app integrated, agents will be able to see their ROI on an individualized basis. And more importantly, our sales people will be able to see it, and they'll be able to call an agent and say hey, you see that lead that you got from Trulia six weeks ago on 123 Main Street?

It looks like you just got an $8,000 commission check from it. How about we buy another $1,000 of impressions in that zip code?

That's an exciting day when we can make that phone call. Your question, Heath about seller leads.

So the Seller Boost is one of a variety of products that we have that are focused on listing agents. We have sub primaries and direct which helps one generate listings and market an existing listing.

They’ve both been received well. We haven't shared specific details on sales through either of those products.

Of course in the case of Seller Boost, we bundle it with the regular Premier Agent product as well. So it can't be broken out.

And I'll just add to further sort of muddy the waters, Instant Offers also we think has the potential to generate a large number of seller leads, but in the two test markets for Instant Offers, we don't monetize those leads. We simply pass them to Premier Agents for the time being.

And so as we think through our Instant Offers game plan, we're of course thinking through the seller lead side of the equation. I think we're out of time, RJ.

One more question? Okay.

Operator, one more question please and then we’ll end.

Hi. I just had two quick follow ups.

One, when you lay out the $50 million of incremental spend on these various initiatives, can you just frame the - how that size looks comparable to year over year? Is that like multiples of what you spent around some of those last year?

Is it something that's lower than that in terms of growth? And then second, now that you’ve had market based pricing out for more than a year, I just wanted to check in on sort of what you're seeing turn wise in terms of the agents.

And I understand that like in many cases, what used to be a single customer now tends to often be a team approach. But of you had to guess, like is the number of agents that are ultimately leveraging those lead gen capabilities growing or flat or down year over year, if you had to guess?

Thanks.

Yes. So on that one, there's no doubt in my mind that the number of agents that work Zillow Group lead today is at an all-time high.

The number of credit cards to buy those leads, of course we no longer report that number, but I can tell you that having hired new sales classes that are bringing on brand new advertisers, definitely helps increase the number of brand new advertisers. On the incremental spend, just to be clear so everyone is on the same page, we said it's up $50 million year over year.

So last year it was X and this year it's $50 million more than X. And we’ve tried to keep it in the 2% to 10% range of all expenses.

Is that, Kathleen?

Yes. That’s right.

Yes.

Okay. Great.

Okay. Thank you everyone for joining the call today.

We look forward to talking to you again in another quarter. We’ll talk to you in May.

Thank you.

Thanks everyone.

Bye-bye.