Zillow Group (ZG) is trading sharply higher today after reporting Q1 results last night. The company did report a non-GAAP loss for the quarter of $(0.02) per share, but that was a much narrower loss than had been expected. Revenue rose 51.4% yr/yr to $454.1 mln, which was much better than prior guidance for a revenue range of $417-443 mln.
As we mentioned in our preview, a lot of changes have been going on at Zillow. The big thing is that the company keeps working its way further downstream in the real estate transaction process. ZG started as a source of advertising and lead generations for realtors, but it has been getting closer and closer to the actual home sale.
It bought a mortgage lender (Mortgage Lenders of America) and, even more noteworthy, launched its Homes segment (Zillow Offers) in April 2018. Zillow began buying houses directly from homeowners. The idea is to buy a home on the cheap, renovate it, and put it back on the market and make a profit on the balance. ZG says it's giving "today's ‘uberized,' on-demand consumers a full spectrum of options to buy, sell, borrow and rent on their terms."
Investors were none too pleased when Zillow decided to get into the home flipping business. People thought it was a step too far from its core competency of real estate advertising/lead generation. The stock sold off on the news and has pretty much stayed in the penalty box since then.
With that as context, you now understand that the Homes segment's performance is being very closely watched by investors. And that was probably the best part of this Q1 report. Home segment revenue came in at $128.5 mln, which was well above prior guidance of $100-115 mln. Q2 Homes segment guidance ($230-245 mln) computes to an 80% sequential bump.
ZG also announced that it is accelerating its Zillow Offers market expansion with six new planned markets (Austin, Los Angeles, Sacramento, San Antonio, San Diego, and Tampa), bringing the program's total planned markets to 20 by the end of 1Q20. ZG is also stepping up its home buying operations as it purchased 898 homes in Q1, up 80% sequentially. It also sold 414 homes in Q1, an increase of nearly 200% over Q4.
Zillow also has an IMT segment (Internet, Media & Technology), which consists of its Premier Agent (ads for realtors and brokers), Rentals (largest online rental network, includes listings on Zillow, Trulia, and HotPads), and Mortgages businesses. IMT revenue rose 6% yr/yr to $298.3 mln, in-line with prior guidance of $293-301 mln. Its Premier Agent segment has been struggling since mid-2018, but ZG says that the business is now stabilizing and that churn is returning to historical levels.
In sum, the highlight of the quarter was the good results form the Homes segment. Our sense is that the Q1 report is encouraging to investors, perhaps making them think that ZG's deep dive into home purchases may turn out better than was initially feared. It will take a few more quarters for investors to get a good sense of the long-term viability of this segment, but the Q1 results were a positive step.