Zillow Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise. Zillow Group operates online and mobile real estate and home-related marketplaces and professional tools. Its brands include Zillow, Trulia, StreetEasy, HotPads and, following its February 2016 acquisition, Naked Apartments.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $186.0 | $127.3 |
| Operating loss | $(48.1) | $(57.9) |
| Net loss | $(47.6) | $(58.4) |
| Net loss per share, basic and diluted | $(0.27) | $(0.40) |
| Adjusted EBITDA (non-GAAP) | $1.9 | $16.7 |
| Cash from operating activities | $18.9 | $1.5 |
- Revenue rose 46%. Marketplace revenue increased 55% to $169.0 million; display revenue fell 7% to $17.0 million. Real estate revenue was $152.5 million (+63%) and mortgage revenue $16.5 million (+72%).
- Operating loss narrowed, but operating expenses increased to $234.1 million from $185.2 million. Sales and marketing rose 67% and technology and development rose 73%. General and administrative expense included $15.7 million of legal costs related to the Move litigation.
- Operating margin was approximately negative 25.8%, compared with negative 45.5% in Q1 2015. Net margin was approximately negative 25.6%, compared with negative 45.9%.
- Adjusted EBITDA declined despite the smaller GAAP net loss; it excludes, among other items, share-based compensation, depreciation and amortization, acquisition and restructuring costs, interest and taxes.
- Cash and cash equivalents were $232.4 million, short-term investments $281.2 million, and restricted cash $1.1 million at quarter-end. Total liabilities were $473.8 million; shareholders’ equity was $2,661.5 million.
- Long-term debt was $230.0 million: convertible notes due December 2020 bearing 2.75% interest. Cash, cash equivalents, restricted cash and investments totaled $514.7 million. Management said available cash and investments and operating cash flows should fund operations and other needs for at least 12 months.
- Investing activities used $17.2 million, including $12.4 million paid for Naked Apartments and $16.9 million for property, equipment and intangible assets. A simple operating-cash-flow less property/equipment and intangible-asset purchases measure was about $2.0 million, before acquisitions and investment transactions.
Material changes and business drivers
- Average monthly unique users increased 42% to 156.2 million, largely reflecting a full quarter of Trulia in 2016 versus only the post-acquisition portion of Q1 2015. The prior-year comparison also includes Market Leader revenue, which was divested in September 2015.
- Real estate revenue benefited from increased traffic and a sales focus on higher-performing Agent Advertisers. Average monthly revenue per advertiser rose 38% to $487, while Agent Advertisers declined to 91,878 from 103,415.
- Mortgage revenue increased as revenue per loan information request rose 113%, despite requests declining 19% to 10.5 million. Management attributed the request decline to a product change intended to improve lead quality and value.
- Management said display revenue decreased as the company deemphasized display advertising in favor of marketplace growth. Marketing and advertising expense rose with spending to acquire users; technology costs rose with headcount, content and amortization.
- Naked Apartments was acquired for approximately $13.2 million in cash. Its results were not significant in the quarter; the preliminary allocation included $10.6 million of goodwill and $3.7 million of identifiable intangible assets.
Outlook, risks and contingencies
- No quantified revenue, earnings or other formal financial guidance is provided in this filing. Management expected cost of revenue, sales and marketing, technology and development, and general and administrative expenses to increase in absolute dollars as the business grows and invests.
- Management identified acquisition integration and realization of benefits, revenue growth, user engagement, technology scaling, competition, talent, privacy and security, regulation, and intellectual property matters among significant risks.
- The company reported $183.6 million of future minimum operating lease payments and $86.8 million of non-cancelable content purchase commitments. Total contractual obligations, including debt principal and interest, were $532.0 million. Outstanding letters of credit were approximately $9.2 million; surety bonds were approximately $3.6 million.
- Move, Inc. and related plaintiffs’ trade-secret litigation was scheduled for trial in June 2016. Plaintiffs indicated they sought damages that could be materially adverse; the company had not accrued a loss and said any possible loss range was not estimable. The company incurred $15.7 million in related legal costs in Q1.
- A wage-and-hour class action had been certified, and a Department of Labor review remained ongoing. The company recorded immaterial accruals for these matters but said additional possible losses were not estimable. The Trulia stockholder litigation was dismissed with prejudice on April 6, 2016, after quarter-end.
- Management reported effective disclosure controls as of March 31, 2016 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported revenue growth and user growth is organic, given the Trulia comparison and Market Leader divestiture?
- Whether marketplace monetization and higher revenue per advertiser can continue while advertiser counts and mortgage inquiry volumes decline.
- Why adjusted EBITDA fell to $1.9 million even as revenue grew and the reported net loss narrowed; assess share-based compensation and other excluded costs.
- Developments and potential exposure in the Move litigation, the wage-and-hour class action and the Department of Labor review, including updates to accruals and legal expense.
- Integration progress and returns from Naked Apartments, along with the company’s capacity to meet lease, content-purchase and debt commitments while funding growth.