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Zillow reports record traffic, but bottom line dented by Move/News Corp legal battle

Legal costs drag down Zillow earnings again

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Things have never been better for the Zillow Group websites, which includes consumer brands Zillow, Trulia, StreetEasyHotPads and Naked Apartments, in terms of website traffic, but the company’s bottom line was again negatively affected by Zillow’s legal battle against Move, Realtor.com, the National Association of Realtors and News Corp.

Zillow Group reported its first quarter financials after the market closed on Tuesday, and reported that its websites set an all-time high with more than 166 million unique users in March to Zillow Group sites, an increase of 22% year-over-year. Zillow said that its average monthly unique users during the first quarter reached more than 156 million.

Zillow also laid claim to being the clear leader in the online real estate traffic battle of Realtor.com and all others.

Zillow Group said that achieved its highest market share, capturing 63% of the mobile and Web real estate audience. And on mobile-only, Zillow Group's market share is even larger, capturing 72% of the category, the company said.

The company’s revenue is up too, reaching $186 million in the first quarter, up 25% year-over-year on a pro forma basis.

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 in 2015, which allows an apples-to-apples comparison of the company’s business from year to year.

Zillow also reported that its marketplace revenue increased 23% to $169 million from pro forma revenue of $136.9 million in the first quarter of 2015, its real estate revenue increased 34% to $152.5 million from pro forma revenue of $113.4 million in the first quarter of 2015, and its mortgages revenue increased 65% to $16.5 million from pro forma revenue of $10 million in the first quarter of 2015.

Despite the record website traffic and those positive financials, Zillow still posted a GAAP net loss in the first quarter, with a significant portion of the loss driven by the legal expenses relating to the allegations of trade secret theft involving Errol Samuelson, who was once Move's chief strategy officer, and later joined Zillow.

Zillow reported that its GAAP net loss was $47.6 million in the first quarter of 2016, $15.7 million of which stems from legal costs related to the litigation with Move, which represents nearly a third of Zillow's net loss.

Move, which is now owned by News Corp and 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 unfolding, and in February, Zillow said that it spent $27.1 million in legal fees relating to the lawsuit.

At the time, 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.

But now, Zillow is estimating the legal expenses from the Move lawsuit are going to rise this year, to an estimated range of between $50 million and $55 million.

Zillow also said that it expects its second quarter earnings to be affected by the Move battle, with an estimated $18 million to $20 million expected to be spent this quarter.

Zillow also adjusted its yearly revenue outlook from a range of $805 million to $815 million to a range of $825 million to $835 million.

"We are off to an incredible start in 2016," Zillow Group CEO Spencer Rascoff said.

"We expected to accelerate revenue growth during the year, and we are already seeing this with only one quarter on the books. Growth across our brands continues to be strong, with Zillow Group as a whole seeing a record number of unique users in March,” Rascoff added. “This will be an exciting year for Zillow Group."  

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