Zillow Group (ZG 49.11, -9.89, -16.76%), which operates a portfolio of well known
online/mobile real estate brands, is trading sharply lower today after
announcing it wants to expand its Instant Offers feature. Before getting into
last night's news, a little background would help. Zillow does more than just
It covers all stages of the home lifecycle: renting, buying, selling, and financing. They own several brands besides Zillow, including Trulia, StreetEasy, HotPads, Naked Apartments, and RealEstate.com. In addition, Zillow works with tens of thousands of real estate agents, lenders, and rental professionals to connect to millions of consumers. These brands include Mortech, dotloop, Bridge Interactive, and New Home Feed. In 2015, Zillow acquired its rival Trulia for $2.5 bln in stock. The deal was large and transformative. By far, the largest chunk of revenue comes from Premier Agent revenue, which is generated by the sale of advertising and Zillow offers a suite of marketing tools to help real estate agents and mortgage brokers grow their businesses.
Turning to the Q2 results, non-GAAP EPS more than tripled to $0.13 from $0.04 in the prior year period. Revenue rose 21.9% year/year to $325.25 mln. The EPS was better than expected while revenue was in-line. Revenue growth was driven primarily by its Premier Agent, Rentals and New Construction marketplaces. ZG also issued guidance for Q3, sees Q3 revs of $337-347 mln, which is quite a bit below market expectations. Full year revenue is expected at $1.32-1.35 bln, which also is below market expectations. On the call, Zillow said Q2 marked a major milestone as it launched its Homes business and began buying houses directly from homeowners in two cities through its Zillow Offers program.
Besides earnings, the other big news from Zillow is that it will acquire Mortgage Lenders of America, a national mortgage lender. Terms of the deal were not disclosed, but it should close in Q4. The acquisition will allow Zillow to streamline and shorten the home-buying process for consumers who purchase homes through Zillow Offers. Overall, this deal moves Zillow further down funnel towards the transaction and beyond simple lead generation.
So why the poor guidance? The main reason is that ZG needed to adjust its revenue outlook for the Homes segment. ZG now expects full year Homes segment revenue to be $20-40 mln vs prior guidance of $125-255 mln. Home sellers are maximizing the flexibility that Zillow Offers provide them when selling their homes. The adjusted outlook reflects the impact of the extended period of time between offer acceptance by sellers and closing of the sale to Zillow, which is taking longer than ZG originally anticipated.
Zillow explained more during Q&A on the call: When ZG started this Homes business a couple months ago, it had no data on how long it would take from when a seller says yes to when a seller actually puts the house to Zillow. It's sort of like offering sellers a put option on their home. They put the house to Zillow when they're ready to close. Zillow had forecasted a very brief time period, a matter of a couple days. It's actually turning out to be more than a month and that's delaying revenue because Zillow now gets the keys 4-8 weeks later than expected. As a result, the renovation starts later and then the relisting starts later and then the actual re-sale takes longer. On the positive side, the longer time period does allow Zillow to be better prepared for its renovation team to hit the ground running. That's one of the reasons that Zillow is selling the homes much faster than originally forecast because of that head start.
On the bright side was Premier Agent revenue as ZG raised the low end of its full year guidance range to $921 mln while maintaining the high end of the range at $927 mln. ZG says its Premier Agent business is strong and undergoing exciting changes. Basically, Zillow is moving beyond lead generation and actively evolving toward being a deeper funnel real estate industry partner. Before the end of this year, its new consumer lead validation and distribution process will be rolled out nationwide and ahead of schedule.
For its Rentals segment, ZG lowered its outlook to $136-138 mln from $144-146 mln. To adequately grow this marketplace, ZG says it needs to increase listings as well as the size of its multi-family sales team. ZG has also prioritized its focus to go deeper down funnel in Rentals, including renter applications and rental payment processing.
The EBITDA outlook was also reduced to $237-253 mln from $260-285 mln due to the revenue outlook from above and it reflects increases in head count related expenses, primarily due to higher cost to recruit talent, incremental head count to support the expansion of its Homes business, and initial projections for new hires associated with the integration and ramping up of the proposed acquisition announced today as well as higher ad spending.
In sum, the stock is selling off sharply on the lowered guidance. This whole idea of Zillow getting more deeply involved in sales transactions, including even buying the home itself, is a big change in the business model from simple lead generation. This is still new and nobody really knows how it's going to shake out. Based on the trading action today, it seems investors are nervous about the revenue guidance decline for its Homes and Rentals segments. Also, the MLOA deal may be adding some risk as well. Investors are taking money off the table for now.
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