Spencer Rascoff speaks at the 2016 Zillow Premier Agent Forum (Photo by GeekWire/Kevin Lisota)

Zillow Group expects to reach a new milestone in 2017: the $1 billion revenue mark.

The Seattle-based online real estate giant today posted its fourth quarter earnings report. Zillow Group beat estimates with $227.6 million in revenue for the quarter, up 34 percent year-over-year, and non-GAAP earnings per share of $0.14; analysts estimated EPS of $0.11 on revenue of $223 million for the quarter.

Even though the company beat expectations, shares were down 5 percent in after-hours trading; the stock is up nearly 120 percent in the past year.

Zillow Group

In a prepared statement, Zillow Group CEO Spencer Rascoff said that he expects the company to pass the $1 billion annual revenue mark for the first time in 2017.

“Zillow Group had a fantastic year in 2016,” Zillow Group CEO Spencer Rascoff said in a statement. “We set records for annual revenue and site traffic, and ended on a strong note with solid fourth quarter results that were ahead of expectations.”

In an interview with GeekWire, Zillow Group CFO Kathleen Philips said that the after-hours market response could be caused by “some short-term investors looking for additional margin expansion in 2017.”

“Our view is that having a forecast for 2017 for $1 billion in revenue is pretty exciting for us,” she said. “We view it as another year of investment so that we can deliver long-term shareholder value.”

Kathleen Phillips.

During the fourth quarter, Zillow Group attracted more than 140 million average monthly unique visitors, a 13 percent increase year-over-year, but down from 164 million in the previous quarter.

Zillow Group is deemphasizing display revenue, which was down 20 percent during Q4, to “improve the user experience,” it noted in today’s report. “Other real estate revenue,” which includes Zillow’s “offering to endemic advertisers that are not traditional display advertising,” was up 145 percent to nearly $30 million for the quarter.

In his prepared statement for the earnings call with analysts, Rascoff noted that Zillow Group mitigated potential risks with its new Premier Agent pricing model and said “the transition has gone well.”

Zillow Group acquired its longtime rival Trulia in February 2015 for $2.5 billion. In January, Zillow acquired its 13th company when it swooped up Hamptons Real Estate Online, a portal for buyers and renters in the popular vacation spot on Long Island.

Philips said the company will continue to evaluate potential acquisitions in 2017. She also noted that Zillow Group does not anticipate international expansion because “our opportunity here is so enormous that we try to focus all of our efforts domestically.”

Asked about any effects on the housing market caused by the country’s new president, Philips said that Zillow is thinking about that but can’t predict any potential impact.

“Zillow Group’s economic expectation for 2017 is for a continued strong housing market, softened a little bit from last year, but still at a 3.5 percent increase in price,” she added. “We think it will continue to be strong.”

During Q4, Zillow Group leased two more floors at its Seattle HQ. It occupies more than a third of the 886,000-square-foot tower at 1301 Second Ave.

Speaking of its hometown, Zillow last month donated $5 million toward a second building for the University of Washington’s Computer Science & Engineering program, joining fellow Seattle-area tech companies Microsoft and Amazon as big donors on the project.

Here are Rascoff’s prepared remarks from today’s post-earnings call with analysts:

Spencer Rascoff, CEO

Thank you for joining the call today.

2016 was an outstanding year of record revenue and accelerated innovation for Zillow Group. We ended the year strong, with a stellar fourth quarter. Revenue for the quarter came in at $228 million, up 34 percent year-over-year and nearly $7 million above the midpoint of the guidance range. Fourth quarter GAAP net loss was approximately $23 million, or 10 percent of Revenue. EBITDA was $55 million, or 24 percent of Revenue, up 168 percent year-over-year and $6 million ahead of the midpoint of guidance. On our last call, we indicated that there was risk to our fourth quarter results associated with the transition to our new Premier Agent pricing model, but we successfully mitigated those risks and the transition has gone well.

For the full year 2016, Revenue was a record $847 million, up 31 percent year-over-year. Our GAAP net loss was approximately $220 million in 2016, or 26 percent of revenue, which included the impact of a one-time $130 million litigation settlement. EBITDA was nearly $15 million in 2016, or 2 percent of revenue, which also includes the one-time litigation settlement. EBITDA in 2016 would have been approximately $145 million, or 17 percent of revenue, an increase of 65 percent year-over-year, excluding the one-time litigation settlement.

Our accomplishments in 2016 all tie to our long-term strategy. In fact, our strategic position today has been years in the making. Let me take you back for a moment to give you perspective:

– Four years ago, we launched impression-based advertising for Premier Agents and completely changed our business model away from an approach driven by share of voice subscriptions.
– Three years ago, we began investing in advertising for the Zillow brand, which massively accelerated our audience growth.- Two years ago, we accelerated the consolidation of the online real estate media category by acquiring our closest competitor, Trulia, which significantly increased our audience and volume of leads delivered to agents.

– About 18 months ago, we finished the integration of Trulia, unified our agent advertising products, and released the most advanced business management platform in the real estate industry.- At the end of 2016, we completed the rollout of our self-serve auction-based pricing platform for our Premier Agent advertisers, along with unprecedented ad products, including

Premier Agent Direct and Seller Boost, that help agents extend their reach and build a stronger business.

Each one of those accomplishments is a piece of our larger strategy and laid the foundation for the strong position we are in today. We continue to focus on extending our competitive advantages. On every fourth quarter earnings call since we became a public company five years ago, I have explained our strategic priorities for the upcoming year. The priorities we laid out for 2016 were the right ones. They tie to our mission and position Zillow Group to grow into the massive potential ahead. We made enormous progress on them, and for 2017, we are mostly keeping our priorities unchanged. Our 2017 priorities are:

1. Grow our audience size and consumer engagement,
2. Grow our Premier Agent advertising business,
3. Grow our emerging marketplaces, and
4. Maintain our extraordinary company culture, which attracts and retains incredible people, and motivates them to do their best work.

As you have heard me say many times, advertisers follow audience, which is why our first priority remains growing audience size and engagement. Traffic to Zillow Group brands’ mobile apps and websites reached more than 140 million average monthly unique users in the fourth quarter of 2016 and our annual seasonal peak was more than 171 million in May. At the bottom of the funnel, year-over-year growth in leads sent to Premier Agent advertisers continues to outpace unique user growth, and leads to advertisers in our emerging marketplaces is growing even faster.

Our strategy for growing our audience starts with creating mobile and desktop experiences that increase engagement and loyalty with consumers by providing products that span the home life cycle – whether owning, renting, buying, selling, or financing. Higher engagement leads to more of our audience contacting a professional when they are ready to take action. When agents receive more contacts from us, they spend more, which increases our revenue. We utilize free and paid channels to raise awareness and reach more consumers. The foundation of our traffic and growth continues to be from free channels, but the investment in advertising accelerates that growth. As I mentioned earlier, we began advertising the Zillow brand in 2013. Three years later in 2016, we spent more than $100 million advertising our portfolio of consumer brands. This has been a very effective strategy for us, and the strength of our consumer and business brands in our portfolio continues to grow.

Going forward, we will continue to use advertising to drive growth and brand awareness for many of our brands. With that in mind, we plan to increase our advertising expense across our 5 consumer brands, our business brands, and our 4 marketplaces in 2017, but at a rate that is lower than revenue growth, as we did last year. We are choosing to increase advertising investments this year to help us realize advantages of scale over the long term.

Our second priority is to grow our Premier Agent advertising business. In 2016, Premier Agent revenue grew 35 percent year-over-year to a record $604 million and exceeded our outlook.

During the fourth quarter, we delivered nearly 4 million leads to Premier Agent advertisers across our mobile apps and websites. This was up almost 33 percent year-over-year. We expect to be able to continue to grow leads faster than unique users as our product innovations continue to drive increased engagement.

During the fourth quarter of 2016, we completed the roll out of our dynamic self-serve account interface to Premier Agents nationally. The new account management tools enable all our advertisers to independently control their budgets and ad impressions through an auction based system. Premier Agent advertisers can now see how they measure up against all market participants in a given zip code, along with estimated ROIs for advertising in that area. With this new model, each agent pays the same price for an impression based on what all agents are willing to spend in a market. This transparent system benefits the best Premier Agent advertisers and is consistent with our strategy of focusing on elite agents who excel at lead conversion and provide great service to our home shoppers.

We continue to see the nation’s best real estate agents – those who convert leads at high rates – gain transaction share in their respective markets as a result of advertising with Zillow Group. In 2016, around $87 billion in total real estate agent commissions were paid in the U.S., which increased almost 9% over 2015 based on our estimates. We earned $604 million in Premier Agent revenue last year and we delivered nearly 17 million leads to Premier Agents. We estimate that from those leads, agents earned roughly $4.4 billion in commissions. We estimate this represents about 5 percent of all commissions in the U.S.3 That’s still a small percentage of the total, but an increase from the previous year, when approximately 12 million leads from Zillow Group drove about $3.2 billion, or about 3.9 percent of all commissions. The opportunity in front of us remains massive. Our next priority is to grow our emerging marketplaces, which consists of Mortgages, Rentals, New York City, and New Construction. Revenue in each of these marketplaces is growing faster than our Premier Agent revenue.

Zillow Group’s Mortgages marketplace continues to experience significant growth in usage, leads and revenue. Revenue was $71 million and grew 61 percent year-over-year in 2016. We exceeded 300,000 lender reviews by consumers, which makes us the category leader in consumer-generated reviews of lenders. Looking ahead, we are well-positioned to continue to grow Mortgages revenue faster than the industry and competition, even in a rising interest rate environment, as our mortgage shopping usage is predominantly for home purchase loans.

Next, our Rentals marketplace continues to experience rapid growth. Revenue was up 124 percent in 2016. Our advertising products for rental professionals continue to gain popularity in the industry. We now operate the top two rentals brands and attract 30 million average monthly rental shoppers. According to comScore, our audience is nearly twice the size of our nearest rental competitor.6 We remain focused on creating more products and services that enable rental pros – from multi-family managers to single-family property owners – to be more efficient in their workflow and lower the time on market of their rental units.

Our New York City marketplace continues to grow and evolve. Revenue for StreetEasy and Naked Apartments grew 80 percent year-over-year in 2016 – and since our 2013 acquisition of StreetEasy, revenue has quadrupled. We recently added another small but strategic acquisition by acquiring Hamptons Real Estate Online, or HREO.com, a Hamptons-focused real estate portal. HREO’s hyper-local focus complements StreetEasy and Naked Apartment’s strength in the city.

In New York City – the most valuable real estate market in the world – we have assembled a portfolio of brands: StreetEasy, Zillow, Trulia, Naked Apartments, Hotpads, HREO – that puts us in an exciting position in a market with billions in residential commissions and fees. We recently announced our latest emerging marketplace, New Construction. With the launch of several exciting new features, homebuilders can now participate in the Zillow Group Promoted Communities program. Builders can display real-time lot availability on search results and maps, allowing them to easily showcase the breadth of their available inventory to home shoppers. Builders who participate in the program will receive insights on consumer behavior through the new Zillow Group Builder Insights platform, enabling them to assess local market conditions and determine consumer preferences, helping them make decisions regarding their product positioning, land acquisition and marketing. The reception of these programs has been positive and we are excited about the opportunity for this emerging marketplace, which has a $1 billion dollar advertising TAM.

Finally, our fourth strategic priority – which is crucial to the success of everything we do here at Zillow Group – is attracting and retaining the best talent while maintaining our unique company culture focused on innovation. Our people and culture are key competitive advantages. I cannot say it enough: great people build great products, which in turn attract audience. We dedicate substantial energy toward creating an environment at Zillow Group in which our nearly 2,800 employees can excel. I am proud to report Zillow Group was named one of Glassdoor’s 2017 Best Places to Work in the U.S. for the fourth year in a row. Also, Fortune ranked Zillow Group #4 on its Best Workplaces in Technology list and we were included on their list of Best Workplaces for Parents. These accolades result from the high level of engagement and passion of our employees, and reflect their commitment to our core values. Our leadership team here has been incredibly stable and long-tenured, and helps create our culture that has been so important to our success. I would like to extend my sincere thanks to all of Zillow Group’s hard working and enthusiastic employees for our ongoing success. Now, turning to our outlook for the year: We are excited that in 2017 we expect our full-year revenue to exceed $1 billion. When we went public in 2011, and with annual revenue of $66 million that year, few expected us to reach this milestone by 2017. But Zillow Group has grown at a pace that has surprised even our most optimistic leaders, investors and analysts. While that is incredibly exciting, even more exciting is the potential for growth still in front of us.

In 2017, we expect full-year revenue in the range of $1.03 to $1.05 billion and EBITDA of $190 to $210 million. We anticipate EBITDA as a percentage of revenue to be 19 percent at the midpoint of guidance, greater than 17 percent in 2016, and consistent with our strategy for steady margin expansion, on our way to an eventual 40% EBITDA margin at scale. The further we go down this path, it has become clear to us that size of the prize is even bigger than we thought. To fully grow into our opportunity, we are going to invest today to benefit tomorrow. We have learned from our successful investments in the past that marked the path to $1 billion in annual revenue, including our investment in growing our brands and investing in our emerging marketplaces.

I’ll now turn the call over to Kathleen.

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