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Move/News Corp legal battle drags down Zillow Group earnings in 2015

Posts net loss of $91.1 million; sees traffic decline in 4th quarter

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The Zillow Group family of websites, which includes consumer brands Zillow, Trulia, StreetEasyHotPads and now Naked Apartments as well, announced its 2015 financial results on Thursday, with the company reporting a pro forma net loss of $91.1 million in 2015.

Zillow Group presents its earnings on a pro forma basis, allowing a look at the company’s business assuming the acquisition of Trulia happened in 2014, instead of earlier in 2015. This allows an apples-to-apples comparison of the company’s business in 2015 when compared to 2014.

The net loss of $91.1 million in 2015 was a larger net loss than Zillow Group saw on a pro forma basis in 2014, when Zillow saw a pro forma net loss of $83.3 million.

According to Zillow, a large portion of 2015’s net loss was driven by the legal expenses associated with Zillow’s battle with Move, which is now owned by News Corp, over claims of allegations of trade secret theft involving Errol Samuelson, who was once Move's chief strategy officer. And Zillow said those costs may rise in 2016.

Samuelson resigned from Move on March 5, 2014, and joined Zillow as the company's second-highest paid executive on the same day.

Move, which operates Realtor.com for the National Association of Realtorsfiled suit against Zillow after Samuelson left, alleging that Samuelson and Zillow stole trade secrets and proprietary information, and that they have made efforts since to cover that up. Move further alleged that Zillow was hiding or deleting evidence.

The legal battle is still ongoing, with Zillow stating that it spent $8.1 million in legal fees related to the Move/News Corp lawsuit in the fourth quarter, and $27.1 million for all of 2015, with those fees dragging down Zillow’s total financial results.

But Zillow’s not of the legal woods yet.

During a call with investors, Zillow’s chief financial officer, Kathleen Phillips, said that the costs related to Zillow’s “necessary defense” against Move’s claims are projected to rise from $27.1 million in 2015 to $36 million in 2016.

Overall, Zillow reported that its 2015 revenue was $644.7 million on an as-reported basis, and $679.9 million on a pro forma basis, which is up 18% from 2014’s pro forma revenue of $577.8 million.

Zillow said that its pro forma Marketplace revenue increased 26% to $583.9 million from pro forma revenue of $464.5 million in 2014.

Zillow’s Marketplace includes revenue from real estate, mortgages, and Market Leader, which Zillow sold in September 2015.

According to Zillow, its pro forma real estate revenue grew 35% to $502.2 million from pro forma revenue of $372.6 million in 2014.

Zillow also reported that its mortgage revenue grew 47% on a pro forma basis in 2015, from $30.5 million in 2014 to $44.7 million in 2015.

While Zillow’s revenue also rose in the fourth quarter (from pro forma revenue of $158.5 million in the fourth quarter of 2014 to $169.4 million in the fourth quarter of 2015), Zillow’s users dropped from the third quarter.

According to Zillow, its websites had nearly 124 million average monthly unique users in the fourth quarter, which was up 61% year-over-year, but down from the third quarter, when Zillow Group said that its websites saw more than 142 million average monthly unique users.

While Zillow’s traffic may have fallen in the fourth quarter, Zillow Group CEO Spencer Rascoff said during the investor call that the Zillow Group websites saw approximately 150 million users in July 2015, when real estate searches typically peak due to the seasonality of the market.

Zillow also said that its brands now represent approximately 70% market share of all mobile exclusive visitors to the category, based on figures from comScore, an independent source of web traffic data.

Rascoff also said that in December Trulia.com jumped Realtor.com to return to second in total website views for all real estate websites behind Zillow.com.

Rascoff said he feels much better about Trulia’s traffic than he did when the acquisition was finalized, and Rascoff said that the company is looking forward to what 2016 can be for Zillow.

"Last year was a strategically exciting one for Zillow Group," Rascoff said.

"Through our acquisition of Trulia, we formed the largest real estate media company in the world and have now established the foundation for our long-term growth and category leadership,” Rascoff said.

“This year we'll be focused on the strategic priorities of growing our audience, growing our agent advertiser business, growing our emerging marketplaces and continuing to maintain our extraordinary company culture which attracts, retains and motivates extraordinary people to do their best work,” Rascoff continued.

“I couldn't be more excited about what we plan to accomplish in 2016,” Rascoff said. “Last year we were integrating. This year we are innovating.”

(Correction: This article has been updated to clarify that Zillow Group's traffic peaked at 150 million users in July 2015, not January 2016.

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