Zillow Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless stated otherwise. Zillow operates Homes, Internet, Media & Technology (IMT), and Mortgages businesses.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $1,125.8 million | $454.1 million; up 148% |
| Homes revenue | $769.9 million | $128.5 million; up 499% |
| IMT revenue | $330.7 million | $298.3 million; up 11% |
| Mortgages revenue | $25.3 million | $27.4 million; down 8% |
| Net loss | $163.3 million | $67.5 million |
| Net loss per share, diluted | $0.78 | $0.33 |
| Adjusted EBITDA, non-GAAP | $5.1 million | $23.9 million |
| Operating cash flow | $302.0 million | $(145.5) million |
| Cash, cash equivalents, investments and restricted cash | $2,617.4 million | $2,511.9 million at Dec. 31, 2019 |
| Total debt carrying value | $2,042.2 million | $2,275.0 million at Dec. 31, 2019 |
Revenue growth was led by Zillow Offers: 2,394 homes sold, versus 414 a year earlier, at an average selling price of $321,300. Visits rose 5% to 2,117.6 million and average monthly unique users rose 6% to 192.5 million. Homes made up 68% of revenue, compared with 28% a year earlier.
Total cost of revenue was $761.7 million, equivalent to a 32.4% gross margin before other operating expenses; the Homes segment’s cost of revenue was $732.2 million against $769.9 million of revenue. Operating loss was $144.5 million, or 12.8% of revenue; net loss was 14.5% of revenue. Segment losses before tax were $98.0 million for Homes, $41.5 million for IMT, and $13.1 million for Mortgages.
Operating cash flow benefited substantially from a $302.6 million inventory reduction as homes were sold and purchases slowed. Investing activities provided $254.3 million, while financing activities used $163.1 million, including net repayments on Zillow Offers credit facilities. Accordingly, the positive quarterly operating cash flow should not be read as evidence of recurring profitability.
Material changes and unusual items
- Homes revenue and related costs rose sharply as Zillow Offers scaled sales. Inventory fell to $534.0 million from $836.6 million at year-end; Homes credit-facility borrowings fell to $431.8 million from $691.5 million.
- Q1 included $76.8 million of non-cash impairment charges: $71.5 million for Trulia trade names and trademarks and $5.3 million for an equity investment. The Trulia asset’s carrying value fell from $108.0 million to $36.5 million and will be amortized over an estimated 10-year useful life.
- Interest expense increased to $37.6 million from $16.5 million, principally due to convertible notes issued in 2019. Total convertible-note principal was $2,016.4 million; notes due in 2020 had $9.6 million outstanding classified as current.
- Q1 2019 general and administrative expense included a $26.4 million share-based compensation charge tied to the former CEO’s equity modifications, affecting the year-over-year expense comparison.
Outlook, risks and contingencies
- COVID-19 had an adverse effect late in Q1; management said the full impact was expected to be significant and could not be reliably forecast. On March 23, Zillow paused home buying through Zillow Offers in all markets, while continuing to update and sell existing inventory where possible.
- Management expected to begin restarting Zillow Offers purchases at a graduated pace within the next few weeks, but could not predict when operations would resume in all markets or how quickly they would reaccelerate. It expected the pause to materially reduce future Homes revenue and related costs.
- Management expected Q2 revenue pressure from discounts: a 50% discount on certain Premier Agent bills, targeted subsequent discounts, and temporary discounts on other IMT and mortgage products. It also paused most advertising spending, limited hiring to critical roles, and reduced discretionary spending.
- The company stated that cash from operations and cash and investment balances were expected to cover operating, working-capital and capital needs for at least 12 months. This outlook was subject to uncertainty around the pandemic, housing activity, cash flows, access to credit and financing availability.
- Homes credit facilities had $431.8 million drawn against $1.5 billion maximum capacity; the filing notes undrawn capacity is not committed. Mortgage warehouse and repurchase facilities had $34.8 million drawn against $125 million capacity. The company reported compliance with debt covenants and no defaults at quarter-end.
- IBM patent litigation presented a reasonable possibility of loss, but the amount or range was not estimable. Management did not consider losses probable in the described VHT, securities class-action, or derivative matters; no material legal accruals were recorded.
- Inventory valuation, intangible-asset valuation, customer demand, and housing-market conditions involved heightened estimation uncertainty. A 1% decline in the estimated lower of cost or net realizable value of Q1 inventory would increase the inventory valuation adjustment by $5.3 million.
Most important facts for investors to verify
- Whether and when Zillow Offers resumed purchases, and the pace of home sales, inventory turnover, and losses or margins after the pause.
- Whether Q2 discounts and lower advertising activity affected Premier Agent, other IMT, and Mortgages revenue as management expected.
- How much of reported operating cash flow reflected inventory liquidation versus sustainable operating cash generation.
- Available committed liquidity, borrowing-base eligibility, covenant headroom, and refinancing or repayment needs for credit facilities and convertible notes.
- Whether COVID-related estimates lead to further inventory or intangible-asset impairments, and developments in the IBM litigation.