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Despite “record” second quarter, Zillow posts $10.48 million loss

Site sets new traffic record in July

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Zillow (Z) posted a net loss of $10.48 million in the second quarter of 2014, driven primarily by sales and marketing expenses that topped $48 million in the quarter.

The company posted record quarterly revenue in the second quarter, reporting revenue of $78.7 million, which is up 68% over the same time period last year.

The company also received record quarterly and all-time traffic, with a new monthly record in July 2014 of nearly 89 million unique users on mobile and web.

Taking into account the increasing traffic and revenue figures, Zillow raised its outlook for revenue to a range of $321 million to $323 million, up from a range of $304 million to $308 million, which represents a year-over-year increase of $124.5 million, or 63%, at the midpoint of the range.

"We had our strongest quarter yet with record consumer traffic and record revenue and bookings by Premier Agent advertisers," said Spencer Rascoff, Zillow CEO. "Our deliberate focus on high-performing agents and their teams drove the significant increase in orders, and has prompted us to increase our full-year outlook. Advertisers are clearly following audience, and we're continuing to reinvest in the business to get the flywheel to spin even faster.

"Additionally, last week we announced our entry into an agreement to acquire Trulia, a move that we believe will allow us to combine our resources and achieve even more impressive innovation for consumers and advertisers."

As Rascoff said, Zillow is currently in the process of acquiring its nearest competitor, Trulia (TRLA) for $3.5 billion in a stock-for-stock transaction.

See HousingWire’s ongoing coverage of the deal hereherehere, and here.

Together, Trulia and Zillow’s 84.6 million unique visitors in May 2014 account for twice the number of unique visitors for the next three real estate websites put together, according to the Beyond Syndication 2014 report from Clareity Consulting.

The Zillow/Trulia deal has brought questions from various Wall Street observers, analysts and prognosticators. Mainstream analysts have been mostly positive on the deal.  

Chris Merwin, an analyst at Barclays Capital who tracks Zillow, wrote in the days before the formal deal announcement his assessment of the deal, and didn’t mention any concerns.

“We believe a potential merger between the two companies could not only generate substantial cost synergies but also dramatically increase the combined entity’s pricing power with real estate agents,” Merwin wrote.

“Trulia and Zillow are currently ramping up their marketing spend, with Zillow planning to spend $65M this year, and Trulia planning to spend about $45M," he said. "As a consolidated entity, we believe Z/TRLA could dramatically scale back that marketing spend and drive substantial margin expansion.”

Merwin did say that the acquisition would increase the pricing power of the newly minted powerhouse, but not inappropriately.

On the other hand, some those outside the Wall Street bubble have questioned the operational and valuation elements of the two companies.

Last week, Housingwire reported on the firebomb critique leveled at the deal by Andrew Left, the contrarian analyst who runs the Citron Report. His critics frequently attack his motivations.

Citron, which is run by a short-seller, has been a longtime critic of Zillow, as noted in other business trade media. This stands to reason as Zillow is one of the most shorted stocks out there, the article in Business Insider claims.

In a report just last month, Citron pointed out that between January 1, 2013, and June 2014, Zillow was up 400%, while at the same time analysts' earnings expectations for 2014 dropped 70%.

When Rascoff was questioned on CNBC about those analysts who have raised questions about the firm's high multiple and opaque metrics, Rascoff answered, “Haters gonna hate.”

In the second quarter, Zillow said that its marketplace revenue increased 72% to a record $62.6 million from $36.5 million in the second quarter of 2013.

The company’s real estate revenue grew 83% to a record $56.1 million from $30.6 million in the second quarter of 2013. “Premier Agent” advertisers spent 82% more in the quarter compared to one year ago, and 21% more compared to the first quarter of 2014.

Additionally, mortgages revenue grew 13% to $6.6 million from $5.8 million in the second quarter of 2013. Display revenue increased 53% to a record $16.1 million from $10.5 million in the second quarter of 2013.

The company also reported additional financial statistics:

Basic and diluted GAAP net loss per share was $0.26 in the second quarter of 2014 compared to basic and diluted GAAP net loss per share of $0.30 in the same period last year. As a result of the record-high Premier Agent bookings during the quarter, which were driven by an increase in impressions available to sell, sales commissions were $0.9 million higher than projected. The higher-than-expected sales commissions increased basic and diluted GAAP net loss per share in the second quarter by $0.02; however, the related revenue will be recognized primarily in future periods.

Basic and diluted non-GAAP net loss per share was $0.05 in the second quarter of 2014 compared to basic and diluted non-GAAP net income per share of $0.01 in the same period last year, which excludes share-based compensation expense. The $0.9 million higher-than-expected sales commissions increased basic and diluted non-GAAP net loss per share in the second quarter by $0.02.

Adjusted EBITDA was $6.2 million in the second quarter of 2014, or 8% of revenue, which was an increase from $5.3 million in the second quarter of 2013, or 11% of revenue. The higher-than-expected sales commissions decreased Adjusted EBITDA in the second quarter by $0.9 million. The year-over-year decrease in Adjusted EBITDA as a percentage of revenue was driven by previously announced plans to invest heavily in advertising to grow brand awareness.

During the second quarter of 2014, visits to Zillow via a mobile device nearly doubled year-over-year, and in July 2014, more than 568 million homes were viewed on Zillow via a mobile device, which equates to 212 homes per second.

Premier agent advertisers spent a record amount with Zillow in the second quarter of 2014. Zillow added 3,850 Premier Agent advertisers in the second quarter for a total of 56,818, with average revenue per agent reaching a record $320, up from $266 in the same period last year. Premier Agent advertisers who have been on the platform more than 12 months spent 62% more in the second quarter this year than they did a year ago.

For FY2013, Zillow had explosive revenue results, increasing 69% to a record $197.5 million. But the company posted an annual net loss of $12.5 million, mainly due to the cost of the advertising blitz the company put on. In FY2012, the company had a profit of $5.9 million.

Zillow has also run afoul of Move (MOVE) and the National Association of Realtors over the hiring of Errol Samuelson. Samuelson resigned March 5 as Move’s chief strategy officer and that same day joined competitor Zillow as the company's second-highest paid executive. 

NAR and Move filed a lawsuit against Zillow after Samuelson joined Zillow, claiming that Samuelson misappropriated trade secret information by acquiring it using improper means, and by copying it without authorization.

Move won a preliminary injunction against Zillow in July, when Washington State Superior Court Judge Barbara Linde enjoined Samuelson from using and sharing any trade secrets and confidential information gained while employed at Move, and from specific activities key to his new position at Zillow.

Earlier in July, the company announced the acquisition of Retsly, a Canada-based real estate software startup that was founded in 2013. According to the company, its goal is to “normalize real estate data from multiple listing services so developers can build data-driven products for the real estate industry.”

Retsly is located in Vancouver, British Columbia but its product is focused on the U.S. real estate market.

“Retsly’s platform will spur tremendous innovation in the real estate space, enabling developers to build software that works across MLS boundaries and without the overhead of dealing with local data formats,” Rascoff said at the time.

“Retsly’s team and cutting-edge technology is a great fit with Zillow and aligns with our goal to offer great value and services to our industry partners. We’re thrilled to welcome Retsly to Zillow.”

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