Zillow Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Results are unaudited.
Business context
Zillow operates Homes, Internet, Media & Technology (IMT), and Mortgages segments. Its November 2021 decision to wind down Zillow Offers, its home-buying business, materially shaped the period. The company expected the wind-down to be substantially complete in Q3 2022 and planned to classify the business as discontinued operations once disposition was complete.
Financial results and liquidity
- Q2 revenue: $1.009 billion, down 23% year over year. Homes revenue was $505 million, IMT $475 million, and Mortgages $29 million.
- Q2 profitability: Gross profit was $443 million, down 18%; gross margin improved to 44% from 41%. Operating income was $18 million, versus $62 million. Net income was $8 million, or $0.03 per diluted share, versus $10 million, or $0.04.
- Q2 Adjusted EBITDA: $164 million, down 10% year over year; 16% of revenue versus 14%. This is a non-GAAP measure and excludes, among other items, share-based compensation, restructuring, interest and taxes.
- First-half results: Revenue was $5.266 billion versus $2.528 billion, largely reflecting higher Zillow Offers resale volume during the wind-down. Net income was $24 million versus $62 million; Adjusted EBITDA was $384 million versus $365 million. First-half gross margin fell to 20% from 41%, reflecting the revenue mix and low Homes segment margin.
- Cash flow: First-half operating cash flow was $4.255 billion, compared with cash use of $158 million in 2021. The principal driver was a $3.881 billion inventory reduction as homes were sold. Investing used $934 million and financing used $3.976 billion, including debt repayments and $597 million of share repurchases.
- Liquidity: Cash and cash equivalents were $2.181 billion and short-term investments $1.362 billion at June 30; restricted cash was $2 million. Management said available cash, investments and operating cash flow should meet requirements for at least 12 months.
- Debt: Total debt was $1.712 billion, including $1.657 billion of convertible notes and $55 million of mortgage-related borrowings. Zillow Offers credit facilities and securitization term loans had been repaid by June 30. Convertible notes had $1.672 billion aggregate principal, with none due within 12 months.
- Capital returns: The company repurchased $597 million of Class A and Class C shares in the first half; $850 million remained authorized for future repurchases at June 30.
Material changes versus the prior-year period
- Q2 Zillow Offers revenue decreased 35% to $504 million as home sales fell to 1,211 from 2,086. The Homes segment recorded a 5% gross margin, down from 9%.
- IMT Q2 revenue was nearly flat at $475 million. Premier Agent revenue declined 5% to $333 million, while Other IMT revenue rose 31%, primarily following the addition of ShowingTime.
- Mortgages revenue declined 49% to $29 million. Loan origination volume fell 63% to $330 million, mainly due to higher interest rates and lower refinancing demand; gain-on-sale margins also compressed.
- Visits increased 5% to 2.897 billion and average monthly unique users rose 2% to 234 million. Premier Agent revenue per visit declined 9% to $0.115.
- Headcount declined to 5,791 at June 30 from 8,005 at year-end 2021, primarily due to the Zillow Offers wind-down.
Outlook, risks and unusual items
- Management expected Zillow Offers revenue and Homes costs to decline in Q3 as the wind-down progressed; as of early August, the company had sold, contracted to sell, or agreed disposition terms for all but about 25 homes. It expected $10–$12 million of additional wind-down cash payments during 2022.
- Management expected pressure on IMT demand from housing affordability, higher home prices and interest rates, while also anticipating increased IMT technology, headcount, and seasonal marketing spend. No specific consolidated revenue or earnings guidance was provided in the filing.
- Housing-market uncertainty, interest rates, inflation, housing inventory, competition, data access, privacy and legal or regulatory matters are among the disclosed risks. Management stated that market conditions and the wind-down increase uncertainty in estimates.
- Wind-down charges recognized in the first half totaled $99 million, including $39 million of restructuring costs, $37 million of financing-related charges, $14 million of accelerated depreciation and amortization, and $9 million of inventory write-downs. The estimated total for specified other wind-down charges was $174–$176 million, excluding inventory write-downs.
- Subsequent event: the board approved employee option repricing and supplemental RSUs, with estimated incremental share-based compensation expense of $180–$190 million, including approximately $45–$50 million in Q3 2022. The company also entered a warrant agreement with Opendoor, potentially allowing it to acquire up to six million Opendoor shares; financial impact was still under evaluation.
- Legal matters include IBM patent litigation, for which a possible loss was considered reasonably possible but not estimable. The company reported no material accruals for the described cases; it did not believe loss was probable in the disclosed shareholder class and derivative actions.
Important facts for investors to verify
- Completion of Zillow Offers’ wind-down, final home sales and any additional inventory valuation or restructuring charges.
- Underlying operating cash generation after the large, temporary cash release from inventory liquidation.
- IMT revenue and margin trends, including Premier Agent monetization and the contribution and costs of ShowingTime.
- Mortgage origination volume and margins as rates and housing demand change.
- Convertible-note terms, share repurchase pace, and the actual expense and dilution effects of the employee equity actions.
- Developments in IBM litigation and other legal matters, and any eventual impact of the Opendoor warrant agreement.