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Zillow edges toward profitability in 2017’s first quarter

Reposted with permission from Mike DelPrete. 

What’s interesting in the Zillow Group results for Q1? Here are highlights, with charts and commentary. In a nutshell:

First: The profitability chestnut. Cutting out all the noise for a moment (including stock-based compensation), let’s focus simply on revenue and expenses.

One of the biggest questions for Zillow is: Can it turn a profit?

Zillow has lost millions of dollars during the past few years and has yet to turn a profit, even though it’s on track to generate more than $1 billion U.S. in revenue this year.

So, any signs that give clues to whether Zillow can and will become profitable are quite relevant.

Zillow has done a good job over the past three quarters; expenses are finally matching revenue. Quarterly revenue growth has picked up steam as well, up from a relatively slow Q4. In Q1, revenue was up 8 percent from Q4, and 32 percent from Q1 in FY2016.

In particular, the sales and marketing expense is quite illuminating. While Q1 revenue was up 8 percent from the previous quarter, expenses were up 9 percent overall and the sales and marketing expense was up 18 percent.

In absolute terms, revenue was up $18 million U.S., expenses were up $19.7 million, and sales and marketing $15.8 million.

But, looked at over the past year, the story changes. Compared to the same quarter last year, revenue is up 32 percent, expenses up 10 percent and sales and marketing 7 percent.

Again, looking at year-over-year growth in absolute terms, revenue was up $60 million, expenses $22.6 million and sales and marketing up $6.8 million.

Looking further, we can see a rough proxy of how effective sales and marketing spend is in driving revenue. For the past several quarters, each dollar spent on sales and marketing generates from $2 to $2.50 in revenue. And it’s slowly trending upwards.

There was a big increase in sales and marketing spend in Q1 of FY2017, so relative effectiveness has dropped slightly. But, overall it’s a good direction to be heading in — upward, that is. Another interesting metric is technology and development spend. It’s finally leveling off. In fact, it’s flat when compared to the previous quarter.

Technology is surely a critical component of Zillow’s consumer and customer proposition, so tech spend will always remain high.

But, if you’re anxious for Zillow to turn a profit, the relatively flat growth is an important factor and a good signal.

Overall, it was a good quarter for Zillow. Not simply for the headline revenue growth, but for the drivers behind it, that signal a meaningful turn for the company towards sustained profitability.

Mike DelPrete is an adviser and consultant who lives in Bolton Landing and works in New York, L.A., San Francisco, London and Amsterdam. Connect with him on LinkedIn.

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