Zillow (Z)'s CEO Spencer Rascoff shared tips with entrepreneurs on how to prepare for an initial public offering such as the one he pulled off in July 2011, the Seattle Times reported in recent weeks. Be profitable, Rascoff advised. He had waited until his online real estate firm was profitable, Rascoff reportedly said.
While Zillow has indeed reported profits in every quarter but two since March 2011, more than a fourth of its assets now consist of estimates that could need revision down the line. The financial data in the company's regulatory filings result in an AGR score of 6, indicating higher accounting and governance risk than 94% of comparable companies.
Rascoff and his team, facing Wall Street analysts who insist on explosive performance, on August 8 promised that their sales would improve by around 60% year over year to between $30 and $31 million in the third quarter. That sounds unambitious compared to the company's nearly 102% year over year sales growth in the first quarter. Meanwhile, rival Trulia is nipping at Zillow's heels and attempting its own public offering.
Under pressure to grow, Rascoff has been aggressively buying up companies. He and his team said this May that they would spend $40 million cash on the rental relationship management software provider RentJuice, which launched in 2009, has 31 employees, and whose revenue is "currently immaterial," according to Rascoff on his August 8 conference call. In spring 2011 the company also acquired the online real estate listing firm Postlets for an undisclosed amount. During the same year for around $7.8 million in cash and stock, Zillow bought Diverse Solutions, which has 18 employees. Rascoff and his team ended up paying around $35.4 million more for these acquisitions than they were worth on the books as of June 30, and this goodwill accounts for more than 26% of Zillow's total assets.
How much money those acquisitions end up making in the long-run remains an open question. Rascoff said August 8 that his team doesn't expect near-term significant monetization from the rentals business associated with RentJuice, but they think the market opportunity is "very significant," given factors such as Zillow's consumer traffic and the billions spent marketing rentals every year. If Rascoff's guess on this one turns out wrong, his team will have to revise their goodwill estimates downward in later years and take a hit to earnings as a result.
So far the recent acquisitions have been weighing on Zillow's efficiency, as the company generated an average of nearly 86 cents of sales per dollar of assets over the past twelve months, down from 93 cents per dollar the previous quarter. Rascoff better keep an eye on that number, if he wants his advice to other entrepreneurs to be taken seriously.
Region: North America
Country: United States
Industry: Real Estate Operations
Market Cap: $ 1,110.3 mm (Mid Cap)
ESG Rating: N/A
AGR Rating: Very Aggressive (6)