Zillow Group from CanaccordLowering Target Price Q2: Premier Agent business is solid amidst setback in new Homes division; maintain BUY, lower PT to $62 from $65 Zillow reported Q2 results that revealed several moving parts. The fledgling Homes division is evolving more slowly than expected and is also requiring increased investment in headcount. In addition, Zillow is hiring more aggressively to support both the core business and the planned acquisition of Mortgage Lenders of America, which is also linked back to the overall large investment in Homes. Further, there is softness around the edges in Mortgages and Rentals. Despite this, Premier Agent revenue (70% of revenue) continues to perform in line with our estimates, despite Zillow being only 25% complete with the transitioning toward a model of higher-quality agent/consumer interactions, which may temporarily disrupt agents' perception of ROI. Overall, there are enough dislocations in the quarter to create a period of negative sentiment in the near term. However, we look to several potential positives on the horizon, including a new CFO, and the possibility that Homes pressure is simply a shift out into 2019. Key points Core business continues to perform: Zillow's Premier Agent business was slightly ahead of our estimates and guidance, with total visits up 14% y/y and revenue per visit growth reaccelerating to +6.4% (vs. 5.9% last quarter). Unique users in 2Q were up 4.5% y/y, marking the slowest rate of expansion to date, but visits grew 14% due to ongoing engagement funnel improvements. Management slightly raised full-year Premier Agent revenue guidance by ~$2M (0.2%) at the midpoint. The homes segment is off to a slower start: The Instant Offers home buying service launched in two additional cities (Atlanta and Denver) in 2Q and is now available in four markets (including Phoenix and Las Vegas). Zillow acquired 19 homes during the quarter and has since sold nine, several of which had not yet been renovated highlighting the quick turnarounds from purchase to sale that management hopes to make typical of the program going forward. That said, some headwinds have arisen in the form of transaction delays, and management brought down full-year Homes revenue guidance by ~$160M to $30M, citing longer-than-expected times between offer acceptance and closing. The lowered revenue outlook contributed to a $6M decline in segment EBITDA guidance. Softness in non-core adjacent businesses: Mortgage segment revenue was down 8% y/y but came in 5% ahead of our estimates on strong growth in loan requests, and Rental was up 40% but missed guidance and estimates slightly due to weakness in multifamily and softer traffic trends. Management also announced a significant vertical expansion with the acquisition of Mortgage Lenders of America, which will give Zillow the ability to match home buyers with credit for sales arranged on the platform. Estimate changes & valuation We are making several changes to our model, including lowering the outlook for Homes and trimming core EBITDA estimates. We lower our price target to $62 (from $65), based on ~35x (no change) 2019 EV/EBITDA.