Zillow Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial statements are unaudited. Unless stated otherwise, amounts below are U.S. dollars in millions. Comparisons with 2014 are affected by Trulia being included only from February 17, 2015.
Business context
Zillow Group operates real estate and home-related marketplaces and professional tools across brands including Zillow, Trulia, StreetEasy, HotPads and DotLoop. Revenue comes primarily from marketplace services for real estate, mortgage and rental professionals, and from display advertising. The company completed the Trulia acquisition in February 2015, acquired DotLoop in August, and sold Market Leader on September 30, 2015.
Financial and operating metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $176.8 | $88.6 | $475.3 | $233.6 |
| Operating loss | $(27.7) | $(16.2) | $(123.2) | $(33.5) |
| Net loss | $(26.0) | $(16.0) | $(123.2) | $(32.7) |
| Net loss per share, basic and diluted | $(0.15) | $(0.13) | $(0.74) | $(0.27) |
| Adjusted EBITDA, non-GAAP | $29.5 | $14.6 | $67.2 | $29.8 |
- Q3 revenue was up 99% year over year; nine-month revenue was up 104%. Q3 marketplace revenue was $153.2 million and display revenue was $23.5 million. Real estate revenue was $129.7 million; mortgage revenue was $12.6 million.
- Management attributed growth mainly to Trulia’s inclusion, more users and advertisers, increased revenue per advertiser, and higher mortgage loan requests. Average monthly unique users reached 142.1 million, up 65%; Agent Advertisers totaled 96,965, up 59%.
- Q3 net loss margin was approximately 14.7%, versus 18.0% in Q3 2014. Adjusted EBITDA margin was approximately 16.7%, versus 16.5%; this non-GAAP measure excludes, among other items, share-based compensation, acquisition and restructuring costs, and divestiture losses.
- Operating cash flow for the first nine months was $38.6 million, versus $33.4 million in 2014. Investing cash flow was $58.6 million provided, largely reflecting Trulia cash acquired, and financing cash flow was $10.6 million provided. Cash and cash equivalents were $233.5 million at quarter-end.
- At September 30, cash, cash equivalents, restricted cash and investments totaled $543.5 million; current assets were $595.5 million and current liabilities $107.0 million. Long-term debt was $230.0 million, consisting of Trulia’s 2.75% convertible notes due December 2020.
- Total assets were $3.16 billion, including $1.91 billion of goodwill and $563.5 million of intangible assets. Share-based compensation was $29.1 million in Q3 and $96.0 million for the first nine months.
Material changes and unusual items
- Trulia’s approximately $2.0 billion acquisition substantially expanded the company, but makes year-over-year growth comparisons non-comparable. The preliminary purchase accounting included $1.74 billion of goodwill and $549 million of identifiable intangible assets.
- DotLoop was acquired for approximately $105.5 million. Market Leader was sold for approximately $22.7 million, including $17.0 million received at closing and an estimated $5.7 million holdback. The sale produced a $4.1 million loss; Market Leader remained in reported results through the sale date.
- The Trulia integration restructuring reduced the workforce by nearly 350 employees and generated $35.1 million of charges year to date. The plan was substantially complete at September 30.
- On August 14, the company distributed two non-voting Class C shares for each Class A or Class B share, effecting a 3-for-1 stock split. Per-share and share data were retroactively adjusted.
Outlook, risks and contingencies
- Management said cash and investments should fund operations, working capital and capital needs for at least the next 12 months. It expected cost of revenue, sales and marketing, technology and development, and general and administrative expenses to rise in absolute dollars as the business grows. No specific revenue or earnings guidance was provided.
- Key risks include successful integration and realization of acquisition benefits, competition, sustaining revenue and user growth, technology and infrastructure needs, privacy and security, and retaining qualified personnel. Management cautioned that forward-looking statements are subject to risks and actual results may differ materially.
- Contractual obligations totaled $564.5 million, including $230.0 million of note principal due after five years, $192.4 million of operating leases and $107.3 million of content purchase commitments. Surety bonds were approximately $2.0 million.
- Legal matters include a trade-secrets lawsuit brought by Move, Inc. and others, pending litigation over the Trulia acquisition and Class C stock dividend, a LendingTree patent appeal, and a Department of Labor review of possible overtime issues involving inside sales consultants. The company recorded immaterial accruals for certain matters; possible additional losses were not estimable. The DOL had not made a violation or damages determination.
- The company reported effective disclosure controls as of September 30, 2015. It identified no material change in internal control other than integration of Trulia into its controls framework.
Important facts for investors to verify
- How much reported growth reflects Trulia’s added revenue versus organic performance, and whether user growth and higher revenue per advertiser persist after integration.
- Whether operating losses narrow as integration and restructuring costs subside, considering rising operating expenses and substantial share-based compensation.
- The final Trulia and DotLoop purchase-price allocations, goodwill and intangible valuations, and the pace and effect of future amortization.
- The terms, conversion dilution potential and refinancing or repayment implications of the $230 million 2020 notes.
- Outcomes of the DOL review and significant litigation, plus the timing and collectability of Market Leader’s $5.7 million holdback.