When Zillow Group Inc (NASDAQ:ZG) announced yesterday after the market close that it would hold a conference call this morning to discuss its pro forma 2015 outlook, I'm sure mine weren't the only eyebrows raised.
Of course, Zillow's press release also noted it would discuss updates to its integration of Trulia Inc (UNKNOWN:TRLA.DL), the acquisition of which officially closed in mid-February. But generally when a company schedules an unexpected discussion of its full-year outlook, it means investors will be in for either a pleasant surprise or a big disappointment.
About that "transition year"
Unfortunately, Zillow CEO Spencer Rascoff offered the latter during this morning's call, telling investors "2015 is a transition year and we're trending a couple quarters behind where we'd like to be, due to the protracted FTC approval process, which only ended two months ago."
To be sure, late last year, the FTC approval process was a point of contention for Zillow bulls and bears. On one hand, when the FTC issued its second request for information to Zillow in September, bulls took solace in knowing the company insisted it was "a standard part of the full regulatory process." But bearish investors, on the other hand, worried the longer-than-expected wait for approval meant the acquisition might fall through.
In any case, it seems ironic we've found ourselves somewhere in the middle: The acquisition went through without much trouble, but the FTC's relative sluggishness means Zillow isn't as far along as it would like to be. And judging by Zillow stock's 6% drop in Tuesday's early trading, it's no mystery the market hates being told to hurry up and wait.
By the numbers
According to Rascoff, Zillow expects pro forma revenue -- which assumes the acquisition would have closed at the beginning of the year -- of $690 million for the full year 2015. Analysts, on average, were modeling significantly higher 2015 revenue of $753 million.
In addition, Zillow expects earnings before interest, taxes, depreciation, and amortization of $80 million to $85 million. Zillow should exit the year with an EBITDA margin over 20%, putting it well on its way to achieving its long-term target for an EBITDA margin at 40%.
Rascoff also noted around $40 million of this year's revenue will come from Market Leader, a back-end lead management software company Zillow inherited in its acquisition of Trulia. Trulia, for its part, acquired Market Leader for $355 million two years ago. This detail might seem curious to mention, but Rascoff elaborated:
While we are supporting the Market Leader products for existing customers, we are no longer actively selling Market Leader's advertising or CRM products to new clients, and we are evaluating how Market Leader fits into Zillow Group. We are investigating a variety of possible scenariors and don't have any specific plans to discuss right now.
Whatever Zillow decides to do with Market Leader -- whether it's selling the business or integrating its products into existing Zillow offerings -- Rascoff promised it would happen by the end of 2015.
On a more encouraging note, Zillow Group now powers rental listings on Trulia's desktop, mobile app, and mobile web platforms. And Zillow is selling combined advertising packages for both brands to apartment buildings.
"By replacing the partner that used to power Trulia rentals," Rascoff pointed out, "we forego some short-term revenue by creating a significantly better consumer experience on Trulia."
What's more, echoing statements he made during February's conference call, Rascoff says the massive scale of Trulia's rental lead volume is helping Zillow Group more effectively capitalize on the "huge" total addressable market for rental advertising.
Similarly, Zillow has already integrated its mortgages platform to power Trulia's desktop mortgage rate tables, as well as purchase and refinance products. The mobile end of the mortgages integration should be complete by the end of this week, and Zillow Group is already selling mortgage advertising on a combined basis across both Trulia and Zillow. Zillow has also integrated the sales teams for its display media segment, and is selling displays ads for both brands under the newly combined team.
Rascoff's greatest fear
And all of this has been accomplished so far with little disruption to the existing businesses. In fact, Rascoff expressed relief that his "greatest fear going into this acquisition -- that organizational thrash would set us back -- has just not happened."
That said, while Zillow has successfully combined its agent ad sales teams from Seattle, Irvine, and Denver into one group organizationally, Zillow's engineering teams are still working on the complicated task of integrating the agent ad products into one cohesive platform. As a result, Rascoff says, "Denver is still just selling Trulia, and Irvine and Seattle are still just selling Zillow." This integration is Zillow's "number one priority," and should be complete by the end of the year.
Finally, keeping in mind Zillow officially ended its relationship to receive some MLS listings from News Corp-owned ListHub last week, Rascoff reminded investors of Zillow's previous announcements that it has established direct feed relationships with hundreds of new MLSs since January. As it stands, nearly every major MLS in the country is sending listings directly to Zillow Group now, and Zillow officially has more active listings than it would have had if its agreement with News Corp hadn't ended.
All things considered, it seems the only real trouble investors should have with Zillow is the fact that it's behind schedule with the integration of Trulia. But even then, that's not ZIllow's fault; rather, it's due to the extended FTC approval process of the acquisition. For long-term shareholders, it shouldn't be a big deal to wait a few extra months for the bigger, better Zillow Group to achieve its goals. In the end, that's why I continue to believe now is the perfect time for patient investors to open or add to a position in Zillow.