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Zillow Group (ZG) Beats on Q2 Earnings Estimates, View Tepid

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Zillow Group (ZG - Free Report) delivered non-GAAP earnings of 13 cents per share in the second quarter of 2018, which came ahead of the Zacks Consensus Estimate of 9 cents per share. Further, the figure increased 225% from the year-ago figure of 4 cents per share.

Total revenues increased 21.9% year over year to $325.2 million, which almost matched the Zacks Consensus Estimate of $325 million. The figure came within management’s guided range of $322-$327 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 its 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.

Shares have returned 23.6% year over year, significantly outperforming industry’s rally of 2.4%.

Revenue Details

Zillow reported Premier Agent revenues of $230.9 million (70.9% of total revenues), increasing approximately 22% year over year.

In the second quarter, Rentals revenues surged 40.4% on a year-over-year basis of $33.3 million. However, Mortgages revenues declined 7.9% year over year to reach $19.3 million.

Other revenues came in at $41.8 million, up 28.6% year over year.

During the second quarter, traffic increased about 7.4% to 188 million average monthly, unique users. During the quarter, visits surged 14% 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.

Furthermore, Zillow also announced that it has entered into a definitive agreement to acquire Mortgage Lenders of America, L.L.C.

During the second quarter of 2018, the company bought 19 homes.

Margins and Balance Sheet

As a percentage of revenues, reported sales and marketing expenses were 45% while technology and development costs were 31%. General and administrative expenses were 19% of total revenues.

Adjusted EBITDA as a percentage of revenues came in at 17% as compared with 15% reported in the year-ago quarter.

In July, the company had raised approximately $750 million through the pricing of convertible senior notes and Class C capital stock. Post the offering, the company now has over $1.5 billion of cash and investments, up from $822.9 million reported in the previous quarter.

Guidance

Management expects third-quarter 2018 revenues to remain in the range of $337-$347 million. The Zacks Consensus Estimate is currently pegged at $411.4 million.

The company expects Premier Agent revenues in the range of $237-$239 million, rental revenues of $37-$38 million, and mortgage revenues of $18-$19 million. Homes segment revenues are expected to be in the range of $2-$7 million.

Adjusted EBITDA is anticipated to remain in the range of $65-$73 million.

Management updated its guidance for 2018. Revenues are now projected in the range of $1.320-$1.350 billion compared with the earlier range of $1.433-$1.578 billion. The Zacks Consensus Estimate is pegged at $1.5 billion.

Considering the Homes segment, Zillow is lowering its Dec 31, 2018 guidance citing time delays. The company now intends to hold 300 to 550 homes, down from 300 to 1,000 homes guided previously.

The EBITDA outlook now ranges between $237 million and $253 million, down from the previously projected range of $260 million and $285 million due to an anticipated decrease in Mortgage revenues and increase in headcount expenses.

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 Other Stocks to Consider

Zillow flaunts a Zacks Rank #1 (Strong Buy).

Some other top-ranked stocks worth considering in the broader technology industry are Amazon.com, Inc. (AMZN - Free Report) , Fortinet, Inc. (FTNT - Free Report) and Paycom Software, Inc. (PAYC - Free Report) , each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Amazon, Fortinet and Paycom Software are pegged at 26.5%, 16.75% and 24.78%, respectively.

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