Zillow Group will create a new financial reporting segment to reflect its new business of buying and selling homes.
The Seattle real estate giant today reported its first quarter earnings, meeting analyst expectations with $299 million in revenue, up 22 percent year-over-year, and non-GAAP earnings per share of $0.07.
Zillow reported 175 million average monthly unique visitors to its various websites and apps during the first quarter, up 5 percent.
“Zillow Group had a great start to 2018 and we are already executing well on our strategic priorities for the year,” Zillow Group CEO Spencer Rascoff said in a statement. “First quarter 2018 revenue growth was driven by strength in the Premier Agent, Rentals and New Construction marketplaces. This year, we are taking our business beyond lead generation by creating better experiences for consumers and further strengthening our partnerships with real estate professionals.”
Shares were down more than 9 percent in after-hours trading. The stock was up more than 15 percent in the past month.
The company also announced today that CFO Kathleen Philips, who joined Zillow in 2010 as general counsel, will step down on May 31. She’ll continue to serve as chief legal officer through the end of 2018 and plans to retire in 2020. Jennifer Rock, Zillow’s vice president of financial reporting, technical accounting, and FPA, will serve as interim CFO.
“I’ve worked with Kathleen for most of my career, and she has been a trusted advisor and friend,” Rascoff said in a statement. “Kathleen has helped lead Zillow Group through our most transformative milestones, from our IPO to the acquisition of Trulia.”
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Rascoff on Monday also provided more details about Zillow’s new line of business: buying and selling homes directly, which it announced last month.
Starting with the Phoenix market last month, Zillow is partnering with local brokerages and agents to buy and sell homes. Homeowners will be able receive an offer directly from Zillow, which will get the home ready to list on the open market and sell it with a local brokerage. The homes will be listed in the local MLS and on Zillow.
This is an expansion of Zillow’s Instant Offers program, which launched last year and connects homeowners to offers from investors, as well as a comparative market analysis from a local real estate agent. Instant Offers launched this past May in Las Vegas and Orlando, Fla., and expanded to Phoenix last month.
Starting with the second quarter, Zillow will report financial results in two segments: “Internet, Media Technology,” which includes revenue from its various existing businesses like Premier Agent, Rentals, and Mortgages, and “Homes,” or revenue from the home-buying and selling business.
For 2018, Zillow expects to hold 300 to 1,000 homes in inventory related to the Homes segment, from which it expects $125 to $255 million in new revenue.
In his prepared remarks, Rascoff said the new service “can be significant at scale,” and is one that represents a complementary market opportunity to its Premier Agent business.
“Zillow Group has structural advantages that position us to succeed with this service, including our audience size, brand recognition, agent and broker partnerships, adjacent home services, and deep data expertise,” he said.
Here’s more from what Rascoff had to say about the new Homes business in his prepared remarks:
“We turned on direct participation in Instant Offers in Phoenix, our first market, just a few weeks ago, and seller demand has far exceeded our expectations. Last week, we signed our first few purchase agreements. Instant Offers is a complementary market opportunity to our Premier Agent business and can be significant at scale. Zillow Group has structural advantages that position us to succeed with this service, including our audience size, brand recognition, agent and broker partnerships, adjacent home services, and deep data expertise.
This new service has been welcomed by the real estate industry. Zillow Group’s partners realize that this will bring them new revenue opportunities, as there are multiple ways for agents and brokers to participate in Instant Offers. We have a waitlist of nearly 1,600 agents and many brokerages anxious to participate in Instant Offers once we launch in their cities.
Some home sellers want to avoid the hassle, time commitment and uncertainty of the home-sale process. They are willing to pay for the convenience of avoiding that hassle, and that value is essentially the profit we make on the home’s transaction. Specifically, our net profit is the difference between what we pay to buy the house, including transaction costs, and what we sell the house for, less our update costs, agent commissions and other selling costs, and other overhead expenses. We aim for that delta to be positive even while we are subscale, and we expect the delta will rise to larger levels as we grow. In addition, there are ancillary revenue opportunities in our New Construction and Mortgages marketplaces as we grow larger. We anticipate that, over time, our equity commitment for a home purchase will decrease to 20 to 30 percent of the home value, meaning that our return on equity will be improved relative to today as we apply that incremental equity to additional transactions. Finally, with an expected 90 days or fewer turn-time on our equity, our overall profitability is further improved as we quickly put our money back to work.
Given the enormity of the U.S. residential real estate market, the potential total addressable market for providing homesellers with a service such as this is significant. There are 5.5 million annual home sales at $1.8 trillion in annual sale volume. Providing an Instant Offers service grows the overall transactional volume by creating one new transaction for every one sale. For example, when Zillow buys and sells, it creates two transactions, but in a traditional sale there is only one transaction. In addition, as Zillow injects liquidity into the housing market, it will become easier for homeowners to make the decision to sell their home, potentially helping to alleviate the severe inventory shortage that afflicts many housing markets. This is good for sellers, buyers, and agents.
It’s too early to estimate how many sellers might choose to sell in this way or what our typical net profit per transaction might be, but as an example, if 5 percent of sellers select this method, that is 275,000 transactions. For illustrative purposes at scale, using $250,000 as the typical home value, a $3,500 net profit per transaction would result in a nearly $1 billion profit opportunity annually.”