Zillow Group, Inc. Turns the Key to a Strong Beat and Raise

By Markets Fool.com

IMAGE SOURCE: ZILLOW GROUP INC.

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Zillow Group Inc. (NASDAQ: Z)(NASDAQ: ZG) released better-than-expected third-quarter results Tuesday after the market close, and shares of the online real estate platform company jumped more than 6% Wednesday as a result. Let's look inside to see how Zillow kicked off the second half of the year.

Zillow Group's headline numbers

Excluding sales from Market Leader, which was divested late last year, quarterly revenue grew 35% year over year, to $224.6 million. That's well above Zillow's guidance provided last quarter, whichcalled for revenue of $217 million to $220 million.

Trending toward the bottom line, adjusted earnings before interest, taxes, depreciation, and amortization (EBTIDA) climbed 102% year over year, to $59.5 million. Here again, that's above the high end of Zillow's guidance, which called for adjusted EBITDA of $48 million to $53 million.

Based on generally accepted accounting principles (GAAP), that translated to pro forma net income of $6.8 million, or $0.04 per share, compared with a net loss of $26 million, or $0.15 per share in the same year-ago period. On an adjusted (non-GAAP) basis, which excludes items such as stock-based compensation and acquisition costs, Zillow's net income was $32.9 million, or $0.18 per diluted share.

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Zillow didn't offer guidance for third-quarter net income in its previous report. But for perspective, and keeping in mind we don't typically pay close attention to Wall Street's expectations, analysts' consensus estimates predicted that Zillow would achieve lower adjusted earnings of $0.13 per share.

Digging deeper

Zillow GroupCEOSpencer Rascoff elaborated:

Our third-quarter performance was terrific. We delivered another quarter of record revenue, and adjusted EBITDA exceeded our expectations. Traffic to Zillow Group's mobile apps and websites increased year over year and revenue growth in our Premier Agent marketplace accelerated. With all of our marketplaces performing strongly, we expect to end 2016 in a strong position to continue executing on our strategic priorities.

More specifically, Zillow's Marketplace revenue climbed 45% year over year, to $206.9 million, excluding Market Leader. Driving that total was 33% growth in Premier Agent revenue, to $158.3 million, above guidance for $156 million to $158 million. Meanwhile, "Other" real estate revenue -- including sales from agent services, dotloop, StreetEasy, Naked Apartments, and rentals -- climbed 182% year over year, to $28.8 million. Mortgage revenue rose 57%, to $19.8 million.

Separately, display segment revenue fell 25% year over year, to $17.7 million. But we should note that Zillow's guidance called for lower display revenue in the range of $15 million to $16 million. And even then, display's year-over-year declines arethe result of Zillow's conscious strategy to de-emphasize display advertising in favor of both improving its user experience and fostering the higher-potential marketplaces segment.

Regarding traffic, over 164 million average monthly unique users visited Zillow Group's five consumer-facing brands -- up 16% year over year this quarter -- including Zillow, Trulia, HotPads, Naked Apartments, and StreetEasy. Zillow also revealed that its market share in September was just under two-thirds of the total online real estate category, roughly consistent with last quarter. Its share on mobile devices is even higher, as Zillow's brands captured nearly three-quarters of total visits in the category.

Next, Zillow's advertisers continue to see the benefits of this scale. Leads to Zillow Group premier agent advertisers increased almost 40% year over year, to 4.6 million, and climbed sequentially from just over 4 million last quarter.

And those agents remain loyal. Total sales to premier agent advertisers who have been customers for over a year climbed 59% year over year, while sales to existing premium agent advertisers made up 71% of total bookings. As a reminder, Zillow recently shifted its strategy to focus on quality over quantity, namely by focusing primarily on developing business with the highest-performing agents.

Looking ahead

For the current quarter, Zillow expects revenue of $218 million to $223 million, including premier agent revenue of $161 million to $163 million, and display revenue of $14 million to $15 million. That should translate to fourth-quarter adjusted EBITDA in the range of $46 million to $51 million. Curiously, by comparison, analysts' consensus estimates anticipated fourth-quarter revenue near the high end of that range.

Of course, that doesn't preclude the possibility that Zillow is once again underpromising with the intention of overdelivering. But in the meantime, given its relative outperformance in the third quarter, Zillow increased its full-year guidance to call for 2016 revenue of $837 million to $842 million, up from $830 million to $840 million previously, including premier agent revenue of $601 million to $603 million, up from $597 million to $602 million, and display revenue of $66 million to $67 million, up from $60 million to $62 million before. Zillow also sees 2016 adjusted EBITDA arriving in the range of $136 million to $141 million, another increase from its prior $125 million-to-$135 million range.

In the end, this was another simple beat-and-raise scenario from Zillow that -- with shares still down around 10% over the past three months despite a similarly strong report in early August -- left investors little choice but to love its progress executing against its strategic initiatives and permeating the market for online real estate.

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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.