A month has gone by since the last earnings report for Zillow Group (ZG - Free Report) . Shares have lost about 4.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Zillow due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Zillow Group 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.
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.
Management expects third-quarter 2018 revenues to remain in the range of $337-$347 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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -117.14% due to these changes.
Currently, Zillow has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Zillow has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.