Zillow Group (ZG) Tops Q3 Earnings Estimates, Lowers '18 View

Shares of Zillow Group ZG went down around 25%, after the company reported mixed third-quarter 2018 results. Further, the company lowered fiscal 2018 revenue guidance, impacting its share price movement.

The company delivered non-GAAP earnings of 18 cents per share, which came ahead of the Zacks Consensus Estimate by a penny. However, the figure decreased 5.3% from the year-ago figure of 19 cents per share.

Total revenues increased 22% year over year to $343.1 million, but marginally lagged the Zacks Consensus Estimate of $344 million. The figure came within management’s guided range of $337-$347 million.

Strong improvement of the company’s Premier Agent Business primarily drove year-over-year revenue growth. New construction marketplaces and Rentals also aided growth. Zillow is striving to increase audience size and improving consumer engagement via advertising and other related marketing initiatives.

In second-quarter 2018, the company started reporting results in two segments; namely Internet, Media & Technology ("IMT") and Homes.

The IMT segment will comprise the Premier Agent, Mortgages, Rentals, dotloop and display revenues. Revenues from new construction marketplaces, marketing, and business products and services catering to real estate professionals will also be reported under IMT.

The Homes segment will comprise the company's buying and selling of homes directly, announced in April, this year.

Zillow Group, Inc. Revenue (TTM)

Zillow Group, Inc. Revenue (TTM) | Zillow Group, Inc. Quote

Revenue Details

Zillow reported Premier Agent revenues of $232.7 million (67.8% of total revenues), increasing approximately 18% year over year.

In the third quarter, Rentals revenues surged 31% on a year-over-year basis of $37.3 million. The year-over-year increase was primarily due to robust growth in number of average monthly monetized, more rental listings on mobile apps and websites Moreover, higher adoption of technology stack for property managers, landlords and renters positively impacted the segment.

However, Mortgages revenues declined 12% year over year to reach $18.4 million. Notably, average revenue per loan information request declined 22% year over year, primarily due to ongoing transition to Connect subscription-based platform.

Other revenues came in at $43.6 million, up 23% year over year, mainly due to 54% year-over-year increase in revenues from New Construction marketplace and dotloop.

During the reported quarter, traffic increased about 7% to more than 186 million average monthly, unique users. During the quarter, visits improved 13% year over year to 1.9 billion. Management noted that the high visitor rate was driven by improvement in product lines, which increased its app downloads. The increase in visitors is a positive as it enhances the probability of generating leads for agent advertisers.

Premier Agent Direct program enables agents to advertise on Zillow, Trulia, and Facebook.  Newly added feature to the program, that enables a marketing link to be established with customers, is enhancing user-experience as it automatically generates printed postcards and mails to customers.

The company regularly adds new features to bolster experience for property managers and consumers. Rental Inforum is aimed at making property managers better understand the preferences of consumers. “My Agent” can detect when a premier agent is actively engaged in discussions with a consumer and replaces the agent list with a contact box featuring only the chosen agent.

Coming to Homes segment, revenue came in at $11 million, more than management guided range of $2-$7 million. During the quarter under review, Zillow bought 168 homes and sold 36 homes.

Margins and Balance Sheet

Adjusted EBITDA as a percentage of revenues came in at 19% as compared with 25% reported in the year-ago quarter, primarily due higher expenses along with effect of compensation increase from the highly competitive market.

As of Sep 30, 2018, cash & cash equivalents and short-term investments were $1.64 billion, up from $899.6 million reported in the previous quarter. Long-term debt came in at $6.9 billion as compared with $3.94 billion in the previous quarter.

Cash flow from operating activities was $1.02 billion for the nine months ended Sep 30, 2018.

Guidance

Management expects fourth-quarter 2018 revenues to remain in the range of $340-$357 million. The Zacks Consensus Estimate is currently pegged at $348.2 million.

The company expects Premier Agent revenues in the range of $221-$225 million, rental revenues of $35-$36 million, and mortgage revenues of $21-$22 million. Homes segment revenues are expected to be in the range of $20-$30 million.

Adjusted EBITDA is anticipated to remain in the range of $26-$38 million.

Management lowered guidance for 2018. Revenues are now projected in the range of $1.307-$1.324 compared with the earlier range of $1.320-$1.350. The Zacks Consensus Estimate is pegged at $1.32 billion.

The EBITDA outlook now ranges between $195 million and $207 million, down from the previously projected range of $237 million and $253 million due to an anticipated decrease in Mortgage revenues and increase in headcount expenses.

Considering the Homes segment, Zillow is maintaining Dec 31, 2018 guidance. The company continues to intend to hold 300 to 550 homes.

Conclusion

A new lead distribution and validation process is currently under testing aimed at improvising the company’s Premier Agent business. Additionally, participating in the Zillow Instant Offers marketplace is aimed at capitalizing the business opportunities in the Home segment.

The company’s application that allows agents to create 3-D home tours, aiding buyers narrow down their searches before a personal visit, is another positive.

Zillow is working toward growth of emerging marketplaces. With the combination of machine learning and personalization, the company anticipates to align consumer interest with the listed properties. Expanding footprint in new cities and cities where the company has a significant market presence, including the likes of Phoenix, Denver, Irvine, Cincinnati, Lincoln Nebraska, will positively impact the top line, going forward.

Nevertheless, stiff competition, increasing mortgage interest rates and higher advertising spend are major headwinds. Moreover, spending in product enhancements is likely to limit margin growth at least in the near term.

Zacks Rank and Stocks to Consider

Zillow flaunts a Zacks Rank #3 (Hold).

Some better-ranked stocks worth considering in the broader technology industry are Castlight Health, Inc. CSLT, CACI International, Inc. CACI and Stratasys, Ltd. SSYS, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Castlight, CACI and Stratasys are pegged at 22.5%, 10% and 15.75%, respectively.

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