Barton Not Worried By Lawsuits As Zillow Outperforms Depressed Market in Q3 and Makes $400 Million CRM Acquisition

The U.S. real estate portal giant Zillow has announced its earnings for Q3 of the 2023 financial year. Highlights from the Seattle-based company's report for the period include:

• Revenue of $496 million, up 3% year-on-year.
• Adjusted EBITDA of $107 million, down 18% year-on-year.
• Net loss stood at $28 million for the quarter.
• Visits and Unique Monthly Users were both down 5% year-on-year.

Residential revenue decreased 3% year-on-year but, according to a shareholder letter, outperformed the broader transaction market by 1100 basis points. Recent Zillow shareholder letters have been keen to point out that the portal sees 80% of its traffic come directly and has a very defensible position regardless of market fluctuations.

There were sunnier figures for Zillow's rentals segment which saw revenue of $99 million for the quarter representing a 34% year-on-year increase. Zillow's rival CoStar, which is much stronger in the 'multifamily' build-to-rent sector, also saw significant growth in its rentals business for the quarter.

Zillow's mortgage business saw an 8% drop in revenues for Q3 as high interest rates continue to hamper the industry. However, it did see a 35% increase in total loan origination volume compared to Q2 and the company is anecdotally reporting more success in integrating its mortgage offering into its Premier Agent network and increasing customer engagement.

Despite outperforming the residential market, Zillow's net loss for the quarter was $28 million which, although an improvement on Q3 of 2022 ($53 million), was a worse return than the previous quarter ($22 million).

Barton says Zillow "is well-positioned to thrive" despite suits

A pair of ongoing industry lawsuits have the potential to change buyer agent fees and fundamentally alter the landscape of the whole industry and in his comments to shareholders, Zillow's CEO Rich Barton addressed the sword of Damocles hanging over the company.

Zillow's primary business model monetises buyers agents and there has been speculation, including from rival portal operator CoStar, that the lawsuits could mean that Zillow loses a big part of its revenue as a result of legislative shakeups in the wake of the two suits.

Barton said that Zillow expects the Sitzer/Burnet lawsuit to be tied up in court for years and that complete disruption of buyer's agents is improbable.

"We expect industry changes resulting from this lawsuit, or ones like it, will involve commission transparency and negotiability provisions similar to those seen in several of the settlements plaintiffs entered into with other real estate franchisors in advance of the Sitzer/Burnett trial. In forward-leaning markets that have been exploring changes resulting in increased transparency and negotiability, we believe our business thrives."

Barton continued: "However, indulging for a moment a future scenario where buyer’s agency goes away, we have high confidence that Zillow will remain in a strong position, and potentially even stronger. In this scenario, the U.S. market would likely transition to what we observe in several international geographies, where a few large portals offer a “pay to play” digital listings marketplace. In this scenario, we believe Zillow would be an odds-on favorite to become the leading digital listings marketplace, given our brand, traffic, engagement, and unique focus on solving movers’ real pain points with our software-anchored housing super app vision. If international classifieds markets are any guide, it is possible this leads to a larger and more profitable business model for Zillow."

It seems that the market may not agree with Barton's rosy appraisal of the situation as Zillow's share price dropped 7% on Tuesday following the verdict in the Sitzer/Burnett suit.

$400 million CRM acquisition to fuel growth and diversify business

In an announcement before the release of its Q3 results, Zillow revealed that it had agreed on a deal to acquire the CRM software provider Follow Up Boss.

The purchase is a considerable one with Zillow revealing that it agreed to pay an initial cash consideration of $400 million plus up to $100 million in cash earnouts. Follow Up Boss has approximately 100 full-time employees including co-founders Dan Corkill and Tom Markov who will join Zillow Group once the deal goes through.

The company said that Follow Up Boss would continue to operate under its own brand and that Zillow would continue to allow its Premier Agents to work with other third-party CRM providers.

"Follow Up Boss is beloved by agents across the industry, including many Zillow Premier Agent partners and ShowingTime+ clients. Zillow Group continues to invest in tech solutions to help agents deliver an increasingly seamless experience for our shared customers," said Zillow president Susan Daimler. "Follow Up Boss has built the best CRM for agents and teams in the industry, and we look forward to supporting its continued success so agents can exceed the needs of today's buyers and sellers."

The acquisition may be seen as a defensive play designed to diversify Zillow's business against the threat of a potential buyer-side commissions shake-up. It may also be interpreted by agents as a further step down what some see as Zillow's path towards becoming a 'de facto brokerage'.