Earlier this month, Zillow reported third-quarter results. Zillow reported non-GAAP earnings of 17 cents per share, 4 cents better than the consensus estimate. Revenues rose 27% to $224.6 million. Adjusted earnings before interest, taxes, depreciation and amortization were $59.5 million, about $6 million better than expected. EBITDA margins were 26%, ahead of the 23% guidance and the 14% at the end of the second quarter.
Average monthly users rose 16% to 165 million. Average revenue per user rose 10% vs. 2% in the first half of the year.
It's pretty evident that Zillow has become the dominant online platform to advertise a home for sale. Average revenue per agent grew 200 basis points. The company delivered 4.6 million leads, up 40% to those paying real estate agents advertisers.
The biggest disappointment in the quarter was the continuing decline in average unique users. In the second quarter, the average number of users grew by 20%, but only increased 16% in the third quarter. Management believes the company is seeing more seasonality as it becomes larger.
In terms of revenue, premier agent ad revenue was $158 million. The company had about 90,000 premier agent subscribers. The average revenue per agent was $583. Consumer loan requests were 6.2 million and the average revenue per loan request was $3.36.
Just three years ago, Zillow had just $197 million in revenue. After a series of acquisitions, the company has consolidated the online real estate ad market and has become a must for real estate agents to advertise their listings.
Revenue is projected to exceed $1 billion at the end of next year and as much as $1.3 billion by 2018. The company is expected to end 2016 with gross margins of 92%. Because of heavy spending to develop the platform, operating margins are expected to be a negative 24%. As the company finishes its investment program, operating margins are estimated to end 2017 at 3% and rise thereafter.
Zillow has an incredible opportunity for operating leverage. If the company can lower its spending, with double-digit (20% to 23%) revenue growth and 92% gross margins, earnings will take off. Earnings could go from a loss of $1.04 per share in fiscal 2016 to a gain of 59 cents in 2018 and possibly higher.
In my opinion, with a dominant share of the real estate ad market, gross margins over 90% and the potential for strong operating leverage, Zillow shares are going much higher over the next two years.