Zillow Group, Inc.'s Legal Troubles Can't Hold It Back Anymore

By Markets Fool.com

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Zillow Group Inc. just finally resolved its troublesome lawsuit with News Corp.'s Move.com, and investors are rightfully pleased.

To be sure, shares of Zillow Group climbed more than 5% Tuesday after an SEC filing revealed the online real estate specialist has "reached an amicable resolution by way of a settlement and release" with respect to a lawsuit filed in early 2014 by Move.com, the National Association of Realtors, and three other related entities. For perspective, the lawsuit centered around Zillow's hiring of former Move.com executives Errol Samuelson and Curt Beardsley in early 2014, and more specifically whether those executives were privy to sensitive information and misappropriated trade secrets.

According to Zillow, all parties have agreed to dismiss all claims and counterclaims with prejudice, and Zillow Group will pay the plaintiffs $130 million within 14 calendar days in connection with the settlement. Neither side will admit liability, wrongdoing, or responsibility.

Of course, $130 million might seem like a jaw-dropping amount of cash for Zillow to fork over. But some analysts on Wall Street were already predicting that even if Zillow were able to avoid a negative ruling in the case, such a settlement could come with a price tag as high as $500 million.

If that wasn't enough, the settlement looks even more attractive considering Zillow's lofty ongoing costs of defending itself in court. When Zillow Group released fourth-quarter 2015 results this past February, for example, it revealed the company had not only incurred a whopping $27 million in legal costs related to the suit, but also projected litigation costs would rise to $36 million in 2016. At the time -- and keeping in mind Zillow still is purposefully forsaking profitability in favor of taking market share and investing in top-line growth -- Zillow CFO Kathleen Philips lamented, "Absent this lawsuit, these financial resources could otherwise be used to support innovation and growth, or margin expansion."

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Worse yet, even as the company announced a fantastic first-quarter 2016 performance last month, legal fees in Q1 increased to agreater-than-expected $15.7 million, and Zillow revised its estimate for those fees to increase to between $50 million and $55 million this year.

Once the settlement is paid, however, and with the burden of litigation removed, Zillow will be able to hone its focus on executing its business plan -- or as Philips put it, to use future funds to support strategic efforts to drive innovation, growth, or margin expansion.

Make no mistake: That's a great thing considering the already-enviable state of Zillow's business as of its most recent quarterly report. Quarterly revenue rose 25% on a pro forma basis, to $186 million, well above Zillow's guidance for $174 million to $179 million.

Zillow CEO Spencer Rascoff noted the company is already seeing the fruits of its efforts to accelerate revenue growth this year following last year's acquisition of Trulia. The number of unique users across its four consumer-facing brands (Zillow, Trulia, StreetEasy, and HotPads) increased 22% year over year in March, to 166 million. And Zillow's quality-over-quantity approach for its Premier Agent business is paying off; by focusing primarily on the highest-performing agents, Premier Agent revenue climbed 25%, to $134.5 million, helped by a 40% increase in average revenue per advertiser, to $487.

Zillow also increased its full-year revenue outlook, calling for 2016 revenue of $823 million to $835 million (up from $805 million to $815 million previously). At the same time, Zillow reiterated its guidance for full-year adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $115 million to $125 million, all despite the aforementioned increase in expected litigation expenses.

In the end, if Zillow Group can capitalize on its newfound legal freedom to further accelerate this momentum, it could be an unstoppable force as it strives to grab as large a piece as possible of the $12 billion that real estate agents spend advertising their listings each year. And that's not to mention the promise of Zillow's younger burgeoning businesses including mortgages and rentals. All things considered, if it paves the way to future success, this settlement could make a convincing case as the best $130 million Zillow Group has ever spent.

The article Zillow Group, Inc.'s Legal Troubles Can't Hold It Back Anymore originally appeared on Fool.com.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.