Zillow released its latest earnings results on Monday, and the results were mixed with no surprises despite the company’s beats on some key metrics. The real estate website saw its losses rise year over year due to higher expenses, although mobile trends were positive.
Shares of Zillow slumped this morning after initially rising following last night’s earnings report. Today shares fell as much as 3.49% to $94.56 per share during regular trading hours today. Analysts at Canaccord Genuity warn that consensus estimates for 2016 may be too high, setting Zillow up to disappoint Wall Street next year.
Overall, analysts are calling Zillow’s first quarter results “mixed,” with Deutsche Bank using the term as well as Canaccord Genuity, which may be why shares are declining today.
Zillow in the process of integrating Trulia
Zillow posted revenue of $162.5 million for the first quarter, which was beat the consensus estimate of $155.8 million by 4.3%. Adjusted EBITDA was $24.5 million, which came out 230.8% higher than the consensus estimate of $7.4 million. Pro forma earnings were 6 cents per share, compared to the consensus estimate of losses of 12 cents per share.
In their report dated May 13, analysts Michael Graham and Austin Moldow also warned investors that Zillow could face “integration hiccups and low profitability” over the next couple of quarters as it integrates Trulia. They say Trulia’s agent base may “continue to be choppy” as it merges with Zillow and reduces its sales force.
Further, they add that the transition to pricing based on numbers of impressions may cause bumps in the road. The analysts said again that agent growth could be soft over the next two quarters or so due to the ongoing changes.
Looking further out for Zillow
Moving beyond the next two quarters, the Canaccord Genuity team said there should be a “steep ramp” in the combined company’s margins in the fourth quarter. Moving into 2016, they expect there to be increasing pricing power. They remain confident that Zillow will gradually be able to pull more and more value from the real estate market.
They remain Buy-rated on Zillow with a $115 per share price target on the stock because they believe supply and demand will remain favorable.
The good in Zillow’s earnings report
The analysts pointed out a number of positives and negatives in Zillow’s first quarter earnings report. For one thing, they note that 63% of the company’s new ad bookings were from current premier agent advertisers. Also they note that since January, there have been 235 new Multiple Listing Services (MLS) listings added to the real estate website.
Further, they point out that management continues to be confident that once the Zillow – Trulia merger is complete, the combined company will bring synergies of $100 million next year. Management also reaffirmed guidance for next year. In April, Zillow shares were hammered following the company’s weak guidance.
The bad in Zillow’s earnings report
On the negative side, the Canaccord Genuity team said Zillow’s guidance for second quarter EBITDA missed their estimate due to the company spending more than expected on advertising and technology. Also it’s expected that growth in Display ad revenue will soften in the second quarter.
Also on the topic of EBITDA, the analysts say thy think the consensus estimate for next year is just too high. The consensus estimate implies an EBITDA margin expansion of about 1,000 basis points next year. They think the reason it is so high is because Zillow management reaffirmed their expectation of there being $100 million in synergies from the merger with Trulia.
However, they don’t think Zillow is going to slow down on its investments into advertising, technology, data and new marketplaces, which would mean that spending on these areas will likely remain higher than expected. Nonetheless, they do expect about 3,000 basis points of EBITDA margin expansion over the next “several” years, which of course is a good thing.
Zillow remains healthy
Overall, the Canaccord Genuity team said Zillow’s underlying numbers look to be healthy, as 60% of spending by agents on the platform is from existing subscribers. Also average revenue per agent is still growing, and they estimate that the return on investment for agents that use the platform is in the six to eight times range.
Zillow has also mostly solved the problems with listing and data and is now seeing more opportunities in the rental market.
