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Zillow (ZG) Q3 Earnings Beat on Strong Marketplace Revenues

Zillow Group ZG reported non-GAAP earnings of 19 cents per share in the third-quarter of 2017, which came ahead of the Zacks Consensus Estimate  and the year-ago quarter’s earnings  of 17 cents per share.

Total revenue increased 25% year over year to $281.8 million, beating the Zacks Consensus Estimate of $277 million.

The year-over-year growth was primarily attributed to strong growth of the company’s Marketplace segment. Management is particularly focused on the performance of the Premier Agent Business that comprises around 70% of total revenues. Zillow is working on increasing its audience size and improving consumer engagement via advertising and other related marketing initiatives.

Revenue Details

Zillow has two reportable segments namely, Marketplace (which includes Premier Agent, other real estate and mortgages) and Display.

In the third quarter, Marketplace revenues of $262.7 million increased 27% on a year-over-year basis. Premier Agent increased 24% year over year to $197.1 million. Real Estate revenues surged 55% year over year to $44.8 million. Mortgages reached $20.9 million, reflecting a 6% year-over-year increase.

On the other hand, Display revenues of $19.1 million increased approximately 8% on a year-over-year basis, primarily driven by better sales initiatives, which resulted in higher traffic.

During the third quarter, traffic increased about 6% to 175 million average monthly, unique users. The all-time record traffic of 187 million was witnessed in July. During the quarter, visits surged 19% year over year to 1.7 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.

The company added two new advertising options to its premier agent advertising product line, namely Premier Broker Program and Team Accounts. The new additions are aimed at improving consumer experience related to agent advertising. Both these programs have performed well over the past year, with the number of Premier Broker accounts growing 260% and the number of Team Accounts rising 87%.

Additionally, Premier Agent Direct program that enables agents to advertise on Zillow, Trulia, and Facebook FB was enhanced with an additional feature. A marketing link can be established with customers via this new feature, which automatically generates printed postcards and mails to customers.

Moreover, management is also optimistic about the feature called “My Agent”. It 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. This feature is expected to be beneficial for agents as well as consumers.

The company’s newly announced application allows agents to create 3-D home tours. It will help buyers narrow down their searches before a personal visit and is another positive for the company. This application, which is currently in testing mode in one of the markets, is expected to have a nationwide release in 2018.

Zillow Group is working toward the growth of emerging marketplaces. With the combination of machine learning and personalization, the company expects to align consumer interest with the listed properties.The recently launched product called Rental Inforum is aimed at making property managers better understand the preferences of consumers.

During the third quarter, the company expanded its relationship with some prominent brokers such as Realogy, City Habitats and Sotheby's. These additions are anticipated to boost the company’s top line.

Zillow Group, Inc. Price, Consensus and EPS Surprise

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

Margins and Balance Sheet

As a percentage of revenues, reported sales and marketing expenses were 38% whereas technology and development costs were 30%.

As of the nine months ended Sep 30, 2017, Zillow had cash and cash equivalents of $319.9 million compared with $243.6 million as of Dec 31, 2016.

Guidance

Management expects fourth-quarter 2017 revenues to remain in the range of $274 million to $279 million. The Zacks Consensus Estimate is pegged at $235.9 million.

The company expects Premier Agent revenues in the range of $199 million to $201 million, other real estate revenues of $42 million to $43 million, and mortgage revenues of $18 million to $19 million, which taken together comprise Marketplace revenues.

Display revenues are projected in the range of $15 million to $16 million.

Operating expenses are expected to remain in the range of $261 million to $266 million. Net income is expected in the range of $6.5 million to $11.5 million.

Management raised its guidance for 2017. Revenues are now anticipated to be in the range of $1.068 billion to $1.073 billion. The EBITDA outlook ranges between $233 million and $238 million.

Zacks Rank and Key Picks

Zillow has a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector include Adobe Systems Incorporated ADBE and Fair Isaac Corporation FICO, both 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 Adobe and Fair Isaac is projected to be 17% and 10%, respectively.

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