“You only find out who is swimming naked when the tide goes out.”
Warren Buffett uses this phrase in shareholder letters to describe how companies get exposed during less-than-ideal circumstances.
Zillow Group CEO Rich Barton alluded to the wisdom on an investor call this week to explain how the Seattle real estate giant plans to weather the storm amid the COVID-19 crisis.
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“I want to assure you: Zillow Group is not swimming naked,” he said. “We have wetsuits, navigational instruments and safety gear, all supported by a highly experienced crew who will keep us moving forward until calm waters return.”
On the call, Barton revealed that Zillow will slash expenses by 25% this year; freeze hiring across the company; cut nearly all marketing spend; and suspend home-buying through its Zillow Offers business. The moves come in response to social distancing mandates in various locales related to the coronavirus crisis and uncertainty in the U.S. real estate market. Zillow employed 5,249 people as of Dec. 31.
Barton’s message seemed to resonate with some investors as Zillow’s stock was up 18 percent Tuesday after hitting a 4-year low last week.
“We believe Zillow is taking appropriate steps to address what increasingly appears to be an unprecedented shock to its business and to the U.S. economy, including the residential real estate sector,” RBC Capital’s Mark Mahaney said in a research note.
This isn’t the first rodeo for Barton, who co-founded Zillow in 2006 and returned to the CEO seat last year. He and Zillow vice chairman Lloyd Frink were leading Expedia during the 9/11 terrorist attacks, and took Zillow through the financial crisis in 2007-08.
“We successfully navigated these trying periods and emerged from both disruptions stronger than we entered them,” he said Tuesday. “We did this by making informed calls to use the brakes when appropriate, and to use the accelerator when appropriate. In both of these cases, and throughout our career, optionality was created with cash.”
As of Feb. 29, Zillow has $2.5 billion in cash. Barton walked investors through a “stress test scenario” to envision what would happen this year if the COVID-19 outbreak severely impacts the company’s business.
Even if revenue was dramatically impacted from the company’s profit-driving businesses and Zillow struggles to sell homes with Zillow Offers, it would still have $1.35 billion in cash by the end of 2020, based on the hypothetical.
Barton said he spoke recently with his friend and former Zillow board member Bill Gurley. They did a Zoom call and looked at Zillow’s balance sheet together.
“He quizzed me for about 10 minutes on what each line item was,” Barton said. “Interestingly, I found it incredibly comforting for myself to explain the balance sheet.”
Even for small startups, having enough cash is paramount during an economic crisis. Barton recalled the same mantra during his days at Microsoft.
“Lloyd and I were raised at Microsoft in the ’80s and ’90s,” Barton said. “Part of the Microsoft lore is that Bill [Gates’] dad told him he always should have enough money in the bank to be able to run the company for at least one year with zero revenue.
“This is how I’ve managed every company I founded and led,” said Barton, who also co-founded Expedia and Glassdoor, and is a Netflix board member. “This is how I have advised every company I have invested in or sat on the board of.”
Barton said Zillow’s online traffic is down 20 percent year-over-year in recent days. Requests for Zillow Premier Agents have also decreased substantially as open houses are put on hold in various cities due to the stay-at-home orders.
Zillow last week said it would give Premier Agents a 50% discount off their next monthly bill, starting March 23. It estimated a $40 to $50 million impact on revenue as a result of the offer.
As for the home-buying business, Zillow will restore Zillow Offers once health concerns pass. It is suspending plans to open additional Zillow Offers markets; the service is live in 24 regions.
Other real estate rivals including Redfin, Opendoor, and Offerpad also recently paused their home-buying activity.
Zillow Offers, which rolled out a year ago, is the company’s big new bet and allows homeowners to quickly sell their house. It brought in $603.2 million in revenue this past quarter, nearly two-thirds of total company-wide revenue. Zillow sold 1,902 homes and purchased 1,787 homes, ending the quarter with 2,707 homes on its balance sheet. That inventory had been reduced to 1,860 homes as of March 19.
“We can pause this business, keep the apparatus in place, and still run our other business,” Barton said. “There’s no change in how we feel about the Zillow Offers opportunity long-term, and we are really happy that we have this optionality and flexibility.”
Barton added that “this crisis very well could accelerate a technology-driven re-platforming.”
“This current situation has illuminated just how antiquated systems and paper-driven processes weigh down this sector and how technology can ultimately make exchanges with our customers and partners more seamless and the entire market more efficient,” he said.
Zillow is still on pace to meet or beat guidance ranges for its first quarter earnings. But the company suspended its full-year 2020 outlook due to the COVID-19 outbreak.
In response to the crisis, the company is relying on Zillow 3D Home technology to make virtual home tours easier, as well as virtual consultations with Zillow’s local broker and Premier Agent partners. Last week it saw a 191% increase in the creation of 3D Home tours compared to the February average.
Zillow published a research report earlier this month that analyzed past pandemics and their effect on housing. For example, during SARS, Hong Kong home prices did not fall significantly but transaction volumes greatly subdued, which mimics what’s happening in China right now, according to the Zillow study.
“While we cannot predict what is yet to come, we do know from the data our economics have analyzed from prior pandemics and recessions that while transaction volumes slowed during the most severe periods, prices remained relatively stable and activity came back quickly when related health concerns subdued,” Zillow wrote in a letter to shareholders last week.
However, the full impact of COVID-19 on the economy is still unclear.
“There are now two eras in the U.S. housing market and economy at large – pre-coronavirus and post-coronavirus – and what happens next is uncertain at best,” Zillow wrote in its February sales data report. “The months ahead will almost certainly be a difficult stretch for the industry, but the promise of better times to come on the other side may yet be enough to keep things floating.”