In an earnings report today, Zillow Group, the operator of listing portals Zillow, Trulia and RealEstate.com, posted a record profit of $9.2 million in third-quarter 2017 and increased its revenue by 25 percent year over year to a record $281.8 million.

In an earnings report today, Seattle-based Zillow Group, the operator of listing portals Zillow, Trulia, StreetEasy and RealEstate.com, posted a record profit of $9.2 million in third-quarter 2017 and increased its revenue by 25 percent year over year to a record $281.8 million.

The company’s record profit follows a net loss of $21.8 million in second-quarter 2017, but rose from $6.8 million in profit in third-quarter 2016.

Zillow Group’s revenue again beat its own forecast and surpassed its previous record in the second quarter when revenue stood at $266.9 million. As a result, the company once again upped its revenue expectations a bit for all of 2017, to between $1.068 and $1.073 billion.

As usual, most of the company’s third quarter revenue came from Premier Agent advertisers. That program pulled in a record $197.1 million in Q3, up from $158.3 million in the third quarter of 2016 — a 24 percent jump.

Zillow Group also reported that traffic to its mobile apps and websites reached a new all-time high of more than 187 million unique users in July.

“Zillow Group delivered record revenue and profitability for the third quarter of 2017, driven by strong contributions from all of our marketplaces,” said Zillow Group CEO Spencer Rascoff in a statement.

“Consumers are demanding more than ever from their real estate experiences,” he added, citing the company’s recent announcement of its 3-D tour capture app for iPhone and Zillow Instant Offers pilot program that helps homeowners to sell directly to investors.

He noted that the company would continue to innovate in 2018 with new products.

Expenses and revenue

Zillow Group’s Q3 expenses clocked in at $267.1 million, up from $216.8 million a year earlier. Sales and marketing expenses accounted for 38 percent of revenue at $107 million. Technology and development costs were 30 percent of revenue at $83.4 million. General and administrative costs were 19 percent of revenue at $54.2 million.

In an earnings call today, Rascoff noted that while Zillow Group has decreased its sales and marketing expenses to focus on “cost control,” the company intends to grow the size of its sales team in the fourth quarter and into 2018. The company had found that adding $10 to $20 million in sales headcount lead to $200-plus million in incremental revenue, he said.

Spencer Rascoff

“Adding more sales people is highly accretive and we intend to do so,” he said.

The company anticipates revenue of between $274 million and $279 million in the fourth quarter, of which between $199 million and $201 million will be Premier Agent revenue. The company forecasts between $761 million and $763 million in such revenue for all of 2017.

Zillow Group expects to post a profit of between $6.5 million and $11.5 million in fourth-quarter 2017. The company nonetheless anticipates a net loss of between $5 million and $10 million for all of 2017, though this is a smaller net loss than anticipated in the second quarter.

Besides Premier Agent, other sources of Zillow Group’s “marketplace revenue,” which totaled $262.7 million in Q3 (up 27 percent from $206.9 million in Q3 2016) include:

  • Other real estate revenue — $44.8 million in Q3, up 55 percent year over year (this includes “Zillow Group Rentals, new construction, as well as revenue from the sale of various other advertising and business software solutions and services for real estate professionals”).
  • Mortgages revenue — $20.9 million, up 6 percent year-over-year.
  • Display revenue —$19.1 million, up 8 percent year-over-year.

The company ended the quarter with 3,060 employees and $682 million in cash and investments, up from about $600 million in the second quarter.

Traffic

Rascoff noted that traffic to Zillow Group’s mobile apps and websites had risen 6 percent year over year in Q3, to more than 175 million average monthly unique users.

The company told investors last year that it would no longer report agent advertiser count in 2017 because it considered the metric misleading given that many of its “Premier Agents” are likely agent teams.

So, instead, the company now reports quarterly visits as a key metric. The company counted 1.68 billion visits to its apps and websites in the third quarter, up 19 percent year over year.

“Visits growth was driven by a variety of product improvements that increase consumers’ propensity to return to our mobile apps and websites, including initiatives to encourage mobile web visitors from search engines to download our apps,” Rascoff said.

“As a reminder, the visits metric helps us evaluate progress toward our goal of increasing audience engagement. 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.”

Rascoff acknowledged that the company still gets many questions about how many agents are using the Premier Agent program.

“So I want to clarify that, today, more individual real estate agents receive leads from Zillow Group than ever before, thanks to the growth of Premier Broker and team accounts,” he said. Zillow Group launched Premier Broker, a lead acquisition and conversion platform for brokers, in October 2016.

“Since the third quarter of 2016, the number of Premier Broker accounts has grown by 260 percent and the number of team accounts has grown by 87 percent. Premier Broker and teams range from 2 to more than 130 agents under one account,” Rascoff said.

Premier Agent growth

Premier Agent revenue made up 70 percent of Zillow Group’s overall revenue in Q3. Premier Agent revenue grew 24 percent year over year last quarter, due to increased consumer traffic and engagement, according to Zillow Group CFO Kathleen Philips. Premier Agent revenue per visit rose 5 percent on an annual basis, down from 10 percent year-over-year per visit growth in the second quarter.

Kathleen Philips

“We continue to see top-performing agents increasing their spend with us to maintain their competitive advantage in their markets, while other growth-oriented agents are expanding their reach and brand by spreading their ad spend to neighboring ZIP codes where their potential ROI may be higher,” Philips said.

“In both cases, we have more agents increasing their advertising spend with us over time.”

Of total Premier Agent bookings for the third quarter, 52 percent were sales to existing Premier Agents, same as in the second quarter. Total sales to Premier Agents who have been customers for more than one year rose 45 percent year over year in Q3.

At the same time, the number of Premier Agent accounts spending more than $5,000 per month grew by 98 percent year-over-year and increased 88 percent on a total dollar basis, the company said.

Zillow Group estimated that the hurricanes in the South and the wildfires in Northern California impacted the company’s third-quarter Premier Agent revenue by more than $800,000 and anticipates a nearly $1 million hit in the fourth quarter due to lost sales and relief in the form of billing credits and other assistance.

“We worked closely with our Premier Agents, Premier Brokers, and other advertisers in the affected areas to manage their advertising budgets efficiently during those challenging times,” Philips said.

“We also experienced a temporary decline in traffic to our mobile apps and websites from consumers in affected areas during the month of September,” she added.

New risk

In every quarterly earnings filing, the company posts a statement regarding changes that “could have a significant negative effect on us in terms of our future financial position, results of operations or cash flow.”

For the third quarter, the company listed all of the risks noted in the second quarter, including “outcomes of legal proceedings” and “protection of our brand and intellectual property,” but added one new risk: “our investment of resources to pursue strategies that may not prove effective.”

Asked why this new risk was added, Zillow Group said in an emailed statement: “[W]e routinely review and update our risk factors and don’t have anything specific to share.”

Update on CFPB

In August, Zillow Group disclosed that it was heading into settlement discussions with the Consumer Financial Protection Bureau (CFPB) because the federal agency alleged the company’s agent-lender co-marketing program had violated an anti-kickback provision of the Real Estate Settlement Procedures Act (RESPA) and a part of the Consumer Financial Protection Act that prohibits anyone from helping financial service providers deceive consumers.

Today, Philips told investors that Zillow Group and the CFPB “have not yet come to a mutually agreeable settlement.”

If they don’t reach a settlement, the agency may pursue legal action against the company. “We believe that our practices are lawful and that our co-marketing program allows agents and lenders to comply with their legal obligations. We will continue to engage in discussions with the CFPB and hope to put this matter behind us as soon as possible,” Philips said.

Philips noted that the company still has “robust participation” from lenders in the co-marketing program, which she took as a sign that the lenders believe the program is compliant with regulations. The percentage of agents that have a co-marketing partner also hasn’t changed in the last year or two, including since Zillow Group announced the CFPB investigation, Rascoff said.

Zillow Group continues to say revenue from the co-marketing program is only a small percentage of the company’s overall revenue, but won’t say exactly what that percentage is. “We don’t break it out because we don’t think it’s instructive,” Philips said.

Shareholder lawsuits and VHT

In the third quarter, Zillow Group shareholders filed two lawsuits — one in August and another one in September —  seeking class-action status against the company, Rascoff and Philips, alleging they defrauded investors by misrepresenting the extent to which its co-marketing program complied with RESPA.

“We anticipate that a consolidated amended complaint will be filed in the first quarter of 2018. We intend to deny the allegations of wrongdoing and vigorously defend the claims in these lawsuits,” the company said in a public filing.

“We have not recorded an accrual related to these lawsuits as of September 30, 2017, as we do not believe a loss is probable.”

In the second quarter, Zillow Group recorded an estimated liability of $4.1 million in relation to a listing photo copyright lawsuit brought against the company by real estate photography firm VHT. Both companies filed notices of appeal in that case and on October 26, Zillow Group “filed an appeal with the Ninth Circuit Court of Appeals seeking review of the final judgment and certain prior rulings entered by the district court,” the company said in a public filing.

Products in Q3

The third quarter was a busy one for Zillow Group. Here are some announcements that made headlines:

  • In September, Zillow acquired New Home Feed (formerly known as Graphic Language) “for an immaterial amount.” The platform allows builders to input, manage and syndicate their listings across Zillow Group and partner sites, the company said. “This acquisition makes it easier for our builder partners to send their listings to Zillow Group and ultimately improve the quality and accuracy of our new construction listings across our consumer brands,” Rascoff said.
  • Also in September, real estate giant Realogy extended a multiyear listing feed agreement with Zillow Group, undercutting an NYC industry boycott of StreetEasy by providing a way for The Corcoran Group, Citi Habitats and local Sotheby’s International Realty brokerages — all owned by Realogy — to send for-sale listings and rental listings directly to StreetEasy and Zillow Group’s network of search sites. “Our New York City industry relationships remain strong. This was a big win for consumers and Zillow Group, as these are some of the leading brokers in New York City,” Rascoff said.
  • In October, Zillow Group announced it was testing a 3-D tour capture app. “Stitching together still photos taken from an iPhone to create an immersive 3D panorama tour requires teams intently focused on machine learning and image recognition. We’re currently testing the app in one market, and anticipate its nationwide rollout in 2018,” Rascoff said.
  • In late October, Zillow Group announced several new updates to its Premier Agent app that will become available in 2018, the biggest of which is a feature called My Agent that aims to allow real estate pros to more easily build relationships with buyer leads from Zillow and Trulia. My Agent is part of the company’s focus on improving lead conversion, according to Rascoff.
  • The company did not offer specifics on how its Instant Offers program, launched in May, is going. “It is still early in the experiment, so we are not sharing specific results, but we are seeing a positive response from agents, direct homebuyers and sellers,” Rascoff said.

Editor’s note: This story has been updated with details from Zillow Group’s earnings call with investors and from the company’s quarterly earnings filing with the SEC. This story has also been corrected to note that the company added one new risk factor, not two, to its third-quarter public filing.

Email Andrea V. Brambila.

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