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Zillow (ZG) Q1 Revenues & Earnings Top, Raises '18 Outlook

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Zillow Group (ZG - Free Report) delivered non-GAAP earnings of 7 cents per share in the first-quarter of 2018, which came ahead of the Zacks Consensus Estimate by a penny. However the figure declined 36.4% from the year-ago figure of 11 cents per share.

Total revenues increased 22% year over year to $299.9 million, surpassing the Zacks Consensus Estimate of $298.96 million. The figure came ahead of management’s guided range of $291-$296 million as well.

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

Revenue Details

Zillow reported Premier Agent revenues of $213.7 million (71.3% of total revenues), which increased 22% year over year.

In the first quarter, Rentals revenues surged 35% on a year-over-year basis of $29.1 million. However, Mortgages revenues declined 6% year over year to reach $19.0 million.

During the third quarter, traffic increased about 5% to 175 million average monthly, unique users. During the quarter, visits surged 15% year over year to 1.8 billion.

Management noted that the high visitor rate was backed by improvement in product lines, which increased its app downloads. The increase in visitors is a positive as it increases 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 boost 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.

Furthermore, Zillow’s expanded relationship with some prominent brokers such as Realogy, City Habitats and Sotheby's favored the company’s top-line.

Margins and Balance Sheet

As a percentage of revenues, reported sales and marketing expenses were 45.8% while technology and development costs were 31.3%.

As on Mar 31, 2018, Zillow had cash and cash equivalents of $397.4 million up from $352.1 million as of Dec 31, 2017.

Zillow Group, Inc. Price, Consensus and EPS Surprise

Zillow Group, Inc. Price, Consensus and EPS Surprise | Zillow Group, Inc. Quote

Guidance

Management expects second-quarter 2018 revenues to remain in the range of $322-$327 million. The Zacks Consensus Estimate is currently pegged at $349.9 million.

Going forward, from second-quarter 2018, the company will report 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.

The company expects Premier Agent revenues in the range of $228-$230 million, other real estate revenues of $42-$43 million, and mortgage revenues of $18-$19 million.

Rentals revenues are projected in the range of $34-$35 million.

Adjusted EBITDA is expected to remain in the range of $49-$57 million.

Management raised guidance for 2018 due to an anticipated increase in Premier Agent revenue and additional revenue pertaining to adoption of ASC 606. Revenues are now anticipated to be in the range of $1.433-$1.578 billion compared with the earlier range of $1.302-$1.317 billion.

Considering the Homes segment, Zillow intends holding 300 to 1,000 homes, for resale purpose, as on Dec 31, 2018. The company anticipates incurring expenses rather than reporting significant revenues (forecasted in the range of $125-$255 million) as it does not intend to sell homes until the third quarter.

The EBITDA outlook now ranges between $260 million and $285 million, down from the previously projected range of $300-$315 million due to an anticipated decrease in Mortgage revenues and increase in headcount expenses.

Adjusted EBITDA is expected to fluctuate throughout the year due to investments in development, technology and advertising. The management informed, “First, second, third, and fourth quarter consolidated EBITDA are expected to represent approximately 15%, 20%, 30%, and 35% of the full year total respectively.”

Conclusion

A new lead distribution and validation processis currently under testing aimed at improvising 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 Key Picks

Zillow has a Zacks Rank #4 (Sell).

Better-ranked stocks in the broader technology sector worth considering are Western Digital Corporation (WDC - Free Report) , Mellanox Technologies, Ltd. (MLNX - Free Report) and Micron Technology, Inc. (MU - Free Report) , 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 Western Digital, Mellanox and Micron areprojected at 19%, 15% and 10%, respectively.

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