Zillow Group's (ZG) CEO Spencer Rascoff on Q2 2017 Results
Zillow Group, Inc. (ZG)
Q2 2017 Earnings Conference Call
August 08, 2017 17:00 P.M. ET
Executives
RJ Jones – VP, Investor Relations
Spencer Rascoff – CEO
Kathleen Philips – CFO
Analysts
Ronald Josey - JMP Securities
Mark Mahaney - RBC Capital Markets
Unidentified Analyst - Sli.do
© Provided by Seeking Alpha
Earnings Call Transcripts
Michael Graham - Canaccord Genuity
Christian Rice - Needham & Company
Hayden Blair - Stephens Inc.
Brian Nowak - Morgan Stanley
Mark May - Citigroup
Lloyd Walmsley - Deutsche Bank
Bradley Erickson - KeyBanc Capital Markets
Shyam Patil - Susquehanna Financial Group
Heath Terry - Goldman Sachs
Presentation
Operator
Good day, ladies and gentlemen, and welcome to the Zillow Group's Second Quarter 2017 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. RJ Jones, Vice President of Investor Relations. Sir, you may begin.
RJ Jones
Thank you. Good afternoon and welcome to Zillow Group's second quarter 2017 financial results conference call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer and Kathleen Philips, Chief Financial Officer.
During the call, we will make forward-looking statements regarding future financial performance and events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee these results. We caution you to consider the risk factors described in our SEC filings, which could cause actual results to differ materially from those in the forward-looking statements made on this call. The day of this call is August 8, 2017 and forward-looking statements made today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events, except as required by law.
During the call, we will discuss GAAP and non-GAAP measures. We encourage you to read our financial results press release, which can be found on our Investor Relations website, as it contains important information about our reported and non-GAAP results, including reconciliation of non-GAAP financial measures.
In our remarks, the non-GAAP financial measure adjusted EBITDA is referred to as EBITDA, which excludes other income, depreciation and amortization expense, share-based compensation expense, acquisition-related costs, interest expense, and income tax benefit. This call is being broadcast on the Internet and is available on the Investor Relations section of Zillow Group's website. A copy of management's prepared remarks has been posted to the quarterly results section of our Investor Relations website. A recording of the call will be available later today.
We will open the call with prepared remarks, followed by live Q&A. In addition to taking questions from those dialed into the call, we will answer questions asked via Sli.do. We encourage you to visit www.slido.com where you may submit questions by entering the event code #ZEarnings. You may also vote on which submitted questions you want us to answer. I will now turn the call over to Spencer.
Thank you for joining the call today. With another quarter of record results, total revenue for the second quarter of 2017 grew 28% year-over-year to $267 million, which exceeded the high end of our guidance range by approximately $5 million. Q2 GAAP net loss was approximately $22 million. EBITDA for the quarter was nearly $40 million or 15% of revenue, well ahead of expectations. We're very happy with the first half of the year.
Six months into 2017, the new auction-based pricing model in our Premier Agent business is gaining traction with the most productive agent advertisers. All of our emerging marketplaces are performing at or above our expectations. Our pace of product innovation has quickened to the fastest release cadence that our team has ever achieved. As we entered the back half of the year, we're continuing to build upon our foundation for growth and steadily expanding our margin over time.
We continue to excel across all four of our strategic priorities. Our audience is growing in size and engagement; traffic to Zillow Group brands mobile apps and websites reached more than 178 million average monthly unique users in the second quarter of 2017, an increase of 6% year-over-year. In May, we reached an all-time record of more than 182 million unique users, which was up by more than 10 million unique users from the same period last year. Further down the funnel, visits reached nearly 1.7 billion during the second quarter, up 17% year-over-year. As a reminder, the visits metric helps us evaluate progress towards our goal of increasing engagement with our audience. Users who visit frequently have a greater intent to buy, sell or rent a home, which ultimately means more high-quality leads for our agent advertisers.
Our next priority is to grow our Premier Agent business. In the second quarter of 2017, revenue per Premier Agent exceeded expectations and grew 29% year-over-year. This revenue growth was supported by traffic increases combined with demand from agent advertisers, which lifted market pricing in our most important markets. We're in the early stages of healthy market-based dynamics taking hold as a result of the rollout of our auction-based pricing model. Pricing overall is trending as planned, in line with our experiences from the markets that were in our 2016 pilot.
Since the Zillow brand launched over a decade ago, we've been a destination for sellers who come to Zillow to look at their homes and their Zestimate. Agents know that, and they've been asking for products that help them connect with those potential sellers. With that in mind, we created Seller Boost last year. This year, we're experimenting with a product called Zillow Instant Offers. The product, which we're testing on a small scale in two markets, allows sellers to receive a comparative market analysis from a Premier Agent, alongside non-binding offers from multiple institutional homebuyers. We've heard from listing agents participating in the test that Instant Offers is a great way for them to get listing leads.
There are several startups and real estate brokerage websites experimenting in this space, but Zillow is the only one that has designed a product to keep the agent involved in every part of the transaction, most notably by giving them the opportunity to secure new listing agreements. Ultimately, Zillow Instant Offers has the potential to deliver the highest intent, highest quality listing leads at scale to our Premier Agents.
Despite the growing consumer demand for faster and easier processes, buying or selling a home will remain an infrequent and high-stakes transaction. An agent's role as trusted adviser is incredibly valuable and permanent. That's why we'll continue to support our industry partners by providing them with the tools they need to deliver an incredible consumer and customer experience for their clients. The best, most productive agents across many brokerages use Zillow Group advertising and services.
We continue to invest in developing innovative technology that helps our Premier Agents improve lead conversion, manage listings, and close deals more efficiently. This year, we'll spend more than $300 million building products that attract consumers to connect with agents and developing marketing software and technology solutions for real estate professionals to maintain our position as the leading technology partner for all agents, brokerages, and MLSs.
Our third strategic priority is to grow our emerging marketplaces of mortgages, rentals, new construction and New York city. Our Mortgages marketplace once again outpaced industry activity in the second quarter, with 14% year-over-year revenue growth. The majority of our mortgage product users continued to be home purchase loan shoppers who are less deterred by fluctuations in interest rates than refinancing shoppers.
Rentals is the fastest growing of our marketplaces. During the second quarter of 2017, rentals revenue grew 64% year-over-year. An average of 34 million monthly unique rental users visited Zillow Group brands mobile apps and websites during the second quarter of 2017. We continue to grow rental traffic by adding innovative features while bringing on more inventory from multifamily apartment buildings. An example of product innovation for our Rentals marketplace is the Renter Profile, which provides landlords and property managers with valuable information to determine if an applicant meets their qualifications. More than 9 million renters have created Renter Profile accounts on Zillow and Renter Profile makes it easier for landlords to connect with qualified tenants. We are rapidly becoming the most valued partner to the rental industry and we're excited about the potential for this marketplace.
In our new construction marketplace, positive momentum is growing as more home builders realize the benefits of advertising with Zillow Group. Last quarter, we launched a new product called Builder Inform, which is available to developers who participate in Zillow Group's exclusive promoted communities advertising product. The Builder Inform dashboard provides our new construction partners with unique data and valuable insights to help them make more informed decisions about where to build, what to build, and how to price new homes. This one-of-a-kind resource is only available from Zillow Group, and the response from homebuilders has been very positive.
In our New York City Marketplace, we recently implemented two changes to our offerings in the country's most valuable housing market that we believe will improve the home shopping and rental experience for both consumers and real estate professionals. On the home buying side, the second quarter was the first full quarter with Premier Agent on StreetEasy. Now, as consumers find properties that they're interested in touring, they can easily contact a local agent to represent them as a buyer.
Before Premier Agent, interested buyers in New York only had the option of contacting the listing agent that represents the seller. The reception of Premier Agent by real estate professionals and brokers seeking to build their businesses with homebuyers has been strong. Monthly recurring Premier Agent revenue in this market in June 2017 was nearly double the size it was when we launched in March 2017. Leading brokerages and agents in New York recognize the benefit of empowering consumers with a choice as well as the opportunity to build the buy side of their business and have committed to partnering with StreetEasy.
On the rental side in New York, we launched another change this month -- last month, when we introduced the New York city rental network, a program that solidifies our commitment to providing consumers with the most accurate and current database of New York rental listings. During the second quarter, the New York city rental network attracted more than 14.7 million rental visits across all Zillow Group brands in the core urban New York area, and delivered 2.1 million leads to rental professionals.
Over the last few years, StreetEasy has invested enormous product marketing and support resources in building a reliable, consumer-friendly platform with valuable data, content and quality listings. In order to continue fueling innovation, technology, and resources to support a robust rental marketplace, we now charge agents a small fee per listing per day to advertise their rental listings in New York across StreetEasy, Zillow, Trulia, and HotPads. This has had the immediate and desired effect of eliminating stale or fraudulent listings, which significantly improves the user experience in a city known for being one of the most challenging markets for renters to find an apartment.
In addition, agents receive all of the leads from their exclusive listings. Since rentals listings in New York are on the market for an average of around 25 days, the cost to advertise on StreetEasy is only a small fraction of the typical commission rental agents earn and the rental shopping experience is improved dramatically for consumers and agents.
Our fourth priority is attracting and retaining the best talent and maintaining Zillow Group's unique company culture focused on innovation. We've been fortunate and successful as we are attracting top talent to Zillow Group, which gets reflected by the frequent accolades we receive identifying us as a top place to work. We strongly believe that if you treat employees with respect, encourage dissent, value diversity, and care about our people as both contributors and human beings, it will show itself in our results. And those results are further reflected in our innovative product offerings, some of which I mentioned earlier.
One of Zillow Group's goals has always been to establish itself as the industry's trusted technology partner. Home shoppers today want easier, less stressful and more integrated experiences available to them that provide transparency and control. We want to make it possible for agents from all brokerages, brokerages themselves, and our MLS partners to leverage technology to provide those experiences to their clients in a way that ensures their growth and long-term success. With that, I'll turn the call over to Kathleen.
Thank you, Spencer, and hello to everyone joining us on today's call. Let's dive into our financial results. Total revenue for the second quarter increased 28% year-over-year to a record $266.9 million from $208.4 million in the same period last year. Marketplace revenue, which accounts for 93% of total revenue, was $248.6 million for the second quarter, an increase of 30% year-over-year. As a reminder, our Marketplace category includes Premier Agent, Other Real Estate and Mortgages revenue.
Premier Agent revenue increased 29% year-over-year to $189.7 million in the second quarter. Premier Agent revenue was positively impacted by growth in visits, which increased the number of impressions we could monetize. Premier Agent revenue per visit grew 10% year-over-year, which we attribute in part to our new auction-based pricing platform.
Top-performing agents and teams continued to increase their spending with us as they realize the benefits of advertising on our platform. For example, revenue from same agent advertisers, or those who have been on our platform for more than one year, grew by more than 49% compared to the prior year. New sales to existing advertisers made up 52% of total bookings in the second quarter. The number of Premier Agent accounts spending more than $5,000 per month grew by 107% year-over-year and increased 92% on a total dollar basis during that period.
On our last earnings call, we shared that the Consumer Financial Protection Bureau had requested additional information from us as part of its evaluation. That evaluation is now complete. We have been invited to discuss a possible settlement and informed that if those discussions do not result in a settlement, the CFPB intends to pursue further action. We believe that our co-marketing program has and continues to, allow agents and lenders to comply with the law while using our product.
Getting back to our financial results for the quarter. Other Real Estate revenue grew 45% year-over-year to $37.9 million. Other Real Estate revenue primarily includes Zillow Group Rentals, New Construction, dotloop, as well as revenue from the sale of various other advertising and business software solutions and services for real estate professionals.
Mortgages revenue reached $20.9 million in the second quarter, which represents a 14% increase year-over-year. Average revenue per loan information requests increased 56% year-over-year. In our Display category, revenue was $18.3 million, an increase of approximately 9% over the same period last year, driven by stronger-than-expected brand sales initiatives and increased traffic.
Shifting now from revenue to our expenses. Total operating expenses were $283.4 million in the second quarter. Our cost of revenue during the quarter was $20.3 million or 8% of revenue. Sales and marketing expense was $131.2 million or 49% of revenue. As in prior years, our advertising spend is the highest in the second quarter, in line with the seasonality of the real estate industry. Our second quarter advertising expense typically accounts for approximately one third of our annual advertising budget. Advertising expense in the third quarter will look more that like Q1 and the fourth quarter will be the lightest.
Technology and development costs in the second quarter were $78.5 million or 29% of revenue. General and administrative costs in the second quarter were $53.3 million or 20% of revenue. Note that we've recorded an estimated liability of $4.1 million during the second quarter of 2017 in connection with our ongoing litigation matter with VHT, which continues to be the subject of appeals. We ended the quarter with more than 3,000 employees across all of our offices and approximately $600 million in cash and investments.
Now turning to our outlook for the remainder of 2017, we are updating our full year revenue outlook to a new range of $1.055 billion to $1.065 billion, which represents 25% year-over-year growth at the midpoint of the range. We also are updating our full year you EBITDA outlook to a range of $220 million to $230 million or 21% margin at the midpoint of the range. For detailed third quarter and full year 2017 guidance, I encourage you to review our press release that was issued this afternoon and is available on our Investor Relations website.
We delivered strong results for the first half of 2017. As we continue to execute on our long-term strategic priorities, we look forward to our progress toward achieving revenue growth and steady margin expansion over time. With that, we will now open the call for questions.
Click here to read question and answer session
Comments
Post a Comment