Zillow Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Amounts are in millions of dollars unless stated otherwise. Zillow operates Homes, Internet, Media & Technology (IMT), and Mortgages segments. Results were heavily affected by the wind-down of Zillow Offers, its home-buying business.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $4,257 | $1,218 | Up 250%; Homes sales drove the increase |
| Gross profit / margin | $635 / 15% | $507 / 42% | Profit rose 25%, but margin fell as low-margin home resale made up more of revenue |
| Operating income | $57 | $88 | Lower despite higher gross profit, partly due to increased operating expenses and restructuring costs |
| Net income | $16 | $52 | Diluted EPS was $0.06 versus $0.20 |
| Adjusted EBITDA (non-GAAP) | $220 | $182 | Up 21%; management cautions it excludes items including restructuring, interest, taxes, and share-based compensation |
| Cash from operating activities | $3,392 | $241 | Primarily reflected a $3,414 reduction in inventory as homes were sold during the wind-down |
| Cash from investing activities | $(563) | $904 | Q1 2022 included $525 of investment purchases |
| Cash from financing activities | $(2,981) | $598 | Included debt repayments and $348 of share repurchases |
Revenue by segment: Homes revenue was $3,721, including $3,718 from Zillow Offers, versus $704 in Q1 2021. IMT revenue rose 10% to $490, including Premier Agent revenue of $363 (up 9%) and other IMT revenue of $66, partly reflecting ShowingTime. Mortgages revenue declined 32% to $46.
Balance sheet, debt, and liquidity
- At March 31, 2022, cash and cash equivalents were $2,594 and short-term investments were $1,032. Including restricted cash, the company reported $3.8 billion of cash, investments, and restricted cash, compared with $3.4 billion at December 31, 2021.
- Total assets were $7,820, down from $10,695 at year-end; inventory fell to $494 from $3,913 as Zillow Offers homes were sold.
- Total debt carrying value was $2,534, versus $4,840 at year-end. This included $1,656 of convertible senior notes and $878 of mortgage-segment and Homes-segment borrowings. Homes securitization term loans had $793 of principal outstanding at quarter-end; the company reported repaying the remaining $320 and $473 principal balances in April 2022.
- Management said available cash and investments, together with operating cash flows, should be sufficient for operating, working-capital, capital-expenditure, and other requirements for at least the next 12 months. The company reported compliance with debt covenants at March 31.
Material changes and management outlook
- Zillow stopped acquiring homes on January 31, 2022 and is winding down Zillow Offers, with completion expected in the second half of 2022. As of early May, it said all but approximately 100 homes had been sold, were under contract, or had agreed disposition terms; remaining inventory was expected to be substantially sold in Q2, with limited activity potentially extending into Q3.
- Management expects Zillow Offers revenue and related Homes costs to decline as the wind-down proceeds. It cautioned that current and prior-period results may not indicate future performance.
- Q1 included $38 of reported restructuring costs, a $14 loss on extinguishment of debt, $5 of inventory write-downs, and $6 of accelerated depreciation and amortization. The filing estimates total wind-down charges of $170–$185, excluding inventory write-downs; it also expects $50–$62 of additional cash payments for restructuring, excluding financing prepayment penalties.
- The wind-down is expected to reduce the workforce by approximately 25%; about 21% had been completed by the filing’s reporting date. Headcount was 6,549 at March 31, versus 8,005 at December 31.
- IMT revenue increased, with Premier Agent revenue per visit up 4%. Average monthly unique users declined 5% to 211 million, while visits increased 5% to 2.627 billion. Mortgage loan origination volume fell 40% to $701, mainly due to lower refinance demand amid higher interest rates.
- On May 4, 2022, the board authorized an additional $1 billion share-repurchase program, on top of the existing authorization. At March 31, $100 remained available under the earlier $750 authorization.
Risks, contingencies, and unusual items
- Management cited uncertainty in housing conditions, including low inventory, higher mortgage rates, inflation, and changing transaction demand, as well as risks from competition, technology investment, COVID-19, and the Zillow Offers wind-down.
- IBM patent litigation presents a possible loss, but the company said the amount or range of loss was not estimable. The company reported no material accruals for the described legal matters; it said losses were not probable for the newer securities class actions and derivative case related to Zillow Offers.
- The company adopted new convertible-instrument accounting guidance on January 1, 2022. The modified-retrospective adoption reduced additional paid-in capital by $492, increased long-term debt by $336, and reduced accumulated deficit by $156.
- Q1 operating cash flow was unusually high because of inventory liquidation and should not be viewed as ordinary recurring cash generation.
Investor verification priorities
- Track the pace, final costs, and cash requirements of the Zillow Offers wind-down, including disposition of the remaining homes and repayment-related charges.
- Separate recurring IMT performance and margins from Homes revenue generated by the one-time liquidation of the Zillow Offers inventory.
- Assess the sustainability of operating cash flow after the inventory release and the company’s liquidity after April debt repayments, share repurchases, and remaining obligations.
- Monitor mortgage origination trends, Premier Agent monetization, audience engagement, and the effect of higher interest rates on demand.
- Review developments in IBM litigation and other legal proceedings, and confirm subsequent-period repurchase activity and the impact of the additional authorization.