Analysts for this real estate marketing firm are increasing their earnings forecasts: 10 have raised estimates for next quarter; 5 for this year; and 12 for 2017.
Zillow Group, Inc. (ZG)
From Canaccord Genuity Research
Q1 was a strong quarter for Zillow Group, Inc. (ZG). Its core Premier Agent business performed well, exceeding expectations with re-accelerating revenue growth. In addition, agent losses were less than our forecast (600 vs. 2k) while average revenue per agent (ARPA) grew more than anticipated. The real drivers for this segment were the impressive traffic metrics (up 42% y/y) and the improving funnel dynamics (with leads growing 60%).
Home shoppers are seemingly finding the experience much better and agents are benefiting from improved tools for buying ads (self-serve shopping cart), managing leads (team management suite), closing sales (Dotloop), and more.
With top-line outperformance, management raised FY revenue guidance 2.5% (or $20M). However, EBITDA guidance was left unchanged as News Corp. related litigation costs were raised by ~$17M. We continue to see a long runway for growth, although we acknowledge the valuation is heading back up to levels where significant estimate revisions may be needed for further stock price appreciation.
Premier Agent (PA), mortgage, and total revenue growth re-accelerated, also beating consensus; agent count declined by less than expected; FY revenue guidance was raised 2.5%. Q1 litigation expense was $4M higher than expected. FY EBITDA guidance was unchanged despite higher revenue guidance due to 50% higher litigation costs. Revenue exceeded expectations on every line, with the biggest absolute dollar beat on Premier Agent revenue, which grew 26% y/y from 22% in Q4.
The strength was driven by the highest performing agents buying more impressions, which itself was a result of benefits from a combined ZG/Trulia (TRLA) ad platform and several new products. Impression growth was backed by strong traffic growth, up 42% y/y despite a tough comp (from including TRLA). Funnel metrics are getting better as leads to agents are up an even better 60%. Besides the impressive PA revenue growth, ancillary businesses are also contributing to acceleration. Non-PA Real Estate revenue nearly tripled this quarter from a year ago. Based on guidance, this pace is expected to continue, after growing ~60% in 2015. Within that, rental revenue grew over 100% y/y as the segment achieved all-time highs in usage, contacts, and paying relationships.
ZG spent ~$4Mmore than anticipated in Q1 on expenses associated with the News Corp. litigation. The projected full year cost was raised ~50% (from $36M to $50-55M). The ~$17Min incremental legal costs almost entirely consumes the $20M of FY16 revenue guidance upside. Management feels confident in its positioning and believes the suit is “baseless.” The court is considering summary judgement for a dismissal of claims.
We are raising revenue estimates. We raise our price target to $34 (from $26), based on40x (down from 45x) our 2020 EPS estimate of $1.41, discounted to present at 12%.
Michael Graham, Austin Moldow, Vinod Srinivasaraghavan, Canaccord Genuity Research, www.canaccordgenuity.com, 617-371- 3711, May 3, 2016