Zillow Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with the three months ended March 31, 2022 unless noted. Zillow Offers was wound down in 2022 and is presented as discontinued operations in the prior-year income statement; prior-year cash flows include its effects.
Business context
Zillow operates digital real estate marketplaces and related services, including Premier Agent, Rentals, Zillow Home Loans, title and escrow, and real estate software. In 2023, management reorganized reporting and operations around the company as a whole, resulting in one operating and reportable segment. Revenue is reported in four categories: Residential, Rentals, Mortgages and Other.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $469 million | $536 million | Down 13% |
| Gross profit / margin | $377 million / 80% | $444 million / 83% | Gross profit down 15% |
| Operating income (loss) | $(45) million | $36 million | Operating expenses rose 3% to $422 million |
| Net income (loss) | $(22) million; $(0.09) per diluted share | $16 million; $0.06 per diluted share | 2022 included a $9 million discontinued-operations loss and $25 million income from continuing operations |
| Adjusted EBITDA | $104 million; 22% of revenue | $166 million; 31% of revenue | Down 37%; non-GAAP measure |
| Operating cash flow | $93 million | $3.392 billion | Prior-year cash flow included a $3.4 billion inventory reduction during the Zillow Offers wind-down |
| Investing / financing cash flow | $(97) million / $(68) million | $(563) million / $(2.981) billion | 2023 investing included net investment purchases and capital spending; financing included share repurchases |
Revenue by category: Residential $361 million, down 14%; Rentals $74 million, up 21%; Mortgages $26 million, down 43%; Other $8 million, down 27%. Residential declines reflected weaker housing activity and a 9% decrease in Residential revenue per visit. Rentals growth was supported by a 16% increase in average monthly rentals unique visitors. Mortgage revenue was pressured by lower advertising and loan activity; total Zillow Home Loans origination volume fell 63% to $262 million, including refinance volume down 99% and purchase volume up 111%.
Costs and margins: Cost of revenue was $92 million, flat year over year. Sales and marketing fell 10% to $156 million, while technology and development rose 27% to $137 million and general and administrative rose 10% to $123 million. Higher technology and administrative costs included increased share-based compensation, partly associated with the August 2022 equity award actions. Other income rose to $32 million from $2 million, primarily due to higher investment returns amid higher interest rates.
Balance sheet, debt and liquidity
- At March 31, 2023, cash and cash equivalents were $1.394 billion, short-term investments $1.975 billion, and restricted cash $2 million; together these totaled approximately $3.371 billion, versus $3.364 billion at December 31, 2022.
- Total assets were $6.614 billion; total liabilities were $2.094 billion; shareholders’ equity was $4.520 billion.
- Total debt carrying value was $1.703 billion: $1.661 billion of convertible senior notes and $42 million under mortgage-related credit facilities. The notes have aggregate principal of $1.672 billion and mature in 2024, 2025 and 2026.
- Management said available cash, investments and 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.
- The company repurchased $86 million of shares in the quarter; $414 million remained under its repurchase authorizations.
Outlook, commentary and risks
- No comprehensive financial guidance was provided. Zillow expected Rentals revenue and sales and marketing expense to increase in absolute dollars in the quarter ending June 30, 2023.
- Management cited low housing inventory, fewer new listings, mortgage-rate increases and volatility, home-price fluctuations, and inflation as factors affecting consumer transactions and advertising demand. It cautioned that results may not indicate future performance.
- Key risks include housing-market and interest-rate conditions; competition and partner relationships; access to listing data and MLS compliance; growth and funding of Zillow Home Loans; cybersecurity and third-party service reliance; litigation; and the ability to meet debt obligations or refinance.
- Several legal matters remain. A proposed settlement of an earlier securities class action had preliminary court approval; its payment was covered by insurance. IBM patent litigation continues, and the company said a possible loss is reasonably possible but not estimable. Management did not believe losses were probable in the securities class action and derivative matters related to Zillow Offers.
- Management reported effective disclosure controls as of March 31, 2023 and no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether housing-market conditions stabilize enough to support Residential revenue and monetization per visit.
- Whether Rentals growth continues and whether management’s stated Q2 revenue expectation is achieved.
- Whether Zillow Home Loans can sustain purchase-volume growth amid weak refinancing demand and elevated funding costs.
- How much of reported operating cash flow reflects recurring operations, given the prior-year comparison’s large Zillow Offers inventory liquidation.
- The trajectory of share-based compensation, operating expenses, and Adjusted EBITDA relative to GAAP losses.
- Debt maturities, mortgage-facility availability and covenants, remaining repurchase capacity, and developments in litigation.