Zillow Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports unaudited results for the fourth quarter ended December 31, 2019; it is not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
Zillow operates consumer real estate marketplaces and related advertising, home-buying, and mortgage businesses. Its three reportable segments are Homes (Zillow Offers home purchases and resales), Internet, Media & Technology (IMT, including Premier Agent, Rentals and other marketplaces and services), and Mortgages. The year continued a major shift toward transaction-related services: Zillow Offers scaled rapidly, while IMT remained the principal marketplace and advertising business. Zillow Offers was available in 22 metropolitan areas at year-end.
Financial and operating performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $2.743 billion | $1.334 billion |
| Operating loss | $247.5 million | $129.0 million |
| Net loss | $305.4 million | $119.9 million |
| Net loss per share, diluted | $1.48 | $0.61 |
| Adjusted EBITDA, non-GAAP | $38.9 million | $200.8 million |
| Net cash from (used in) operating activities | $(612.2) million | $3.9 million |
- Revenue grew 106%, primarily because Homes revenue rose to $1.365 billion from $52.4 million as Zillow Offers resales increased to 4,313 homes from 177. Average selling price was $316,500 in 2019 versus $295,800 in 2018.
- IMT revenue increased 6% to $1.277 billion. Premier Agent revenue rose 3% to $923.9 million, Rentals rose 22% to $164.2 million, and Other rose 12% to $188.8 million. Premier Agent generated 34% of total revenue.
- Mortgages revenue increased 26% to $100.7 million, largely reflecting Zillow Home Loans, acquired in October 2018.
- Reported cost of revenue was $1.432 billion, or about 52% of revenue; the resulting gross profit was approximately $1.311 billion. This headline margin is heavily affected by Homes, whose revenue includes home resale prices and whose cost of revenue includes acquisition and renovation costs; selling, closing and holding costs are reported separately.
- Segment results before tax: Homes loss of $312.1 million; IMT income of $80.1 million; Mortgages loss of $45.0 million. Segment Adjusted EBITDA was $(241.3) million, $303.9 million and $(23.7) million, respectively. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, interest, taxes, depreciation and share-based compensation.
- For Q4 2019, revenue was $943.9 million and net loss was $101.2 million, compared with revenue of $365.3 million and net loss of $97.7 million in Q4 2018. Q4 2019 Adjusted EBITDA was $(3.2) million.
- Visits reached 8.1 billion for the year, up 12%; average monthly unique users in Q4 were 172.6 million, up 10% year over year. Premier Agent revenue per visit fell 8% to $0.115.
Liquidity, cash flow and debt
- Cash, cash equivalents and short-term investments totaled $2.422 billion at year-end, versus $1.555 billion a year earlier. Including restricted cash, the total was $2.512 billion. Working capital was $2.590 billion.
- Operating cash use of $612.2 million was driven principally by the $673.8 million increase in home inventory as Zillow Offers expanded. Year-end inventory was $836.6 million, up from $162.8 million.
- Investing activities used $456.1 million; financing activities provided $1.636 billion, including net proceeds from 2024 and 2026 convertible notes and borrowings for Zillow Offers. Management said available cash, investments and operating cash flows should be sufficient for operating and capital needs for at least the next 12 months.
- Total debt carrying value was approximately $2.275 billion, comprising $1.553 billion of convertible notes and $722.0 million of Homes and Mortgages facility borrowings. Convertible-note principal totaled $2.016 billion. Zillow Offers facilities had $691.5 million outstanding against stated capacity of $1.5 billion; mortgage facilities had $30.4 million outstanding.
- Of borrowings under debt agreements, $722.0 million was at variable rates at year-end. The company estimated a one-percentage-point rise in LIBOR would increase annual interest expense on Zillow Offers facilities by about $6.9 million, assuming balances were unchanged. The company reported compliance with debt covenants at year-end.
Material changes, outlook and risks
- The business mix changed sharply: Homes rose to 50% of revenue from 4% in 2018, while IMT declined to 47% from 90%. Homes’ rapid expansion contributed to revenue growth but also substantial cash consumption and segment losses.
- Management expected Homes and Mortgages expenses to rise in absolute dollars as those businesses expanded, and expected to extend Zillow Offers into additional markets in 2020. The filing provides no numerical revenue, earnings or margin guidance.
- Premier Agent advertiser churn, which increased in the second half of 2018 after changes to lead validation and distribution, normalized during 2019 following program adjustments. Flex pricing remained in limited-market testing; under this model, agents pay when a referred transaction closes.
- Management cited exposure to home-price and housing-market changes, inventory valuation and resale execution, financing availability and variable rates, and the ability to scale Zillow Offers profitably. Other key risks include Premier Agent spending concentration and partner churn, competition, listing and data-provider relationships, regulatory and licensing requirements, privacy and cybersecurity, and mortgage loan sale or repurchase obligations.
- IBM patent litigation was disclosed as having a reasonable possibility of loss, but the possible loss or range could not be estimated. The company said it did not believe losses were probable in the disclosed securities class action and other specified cases. The VHT copyright matter remained subject to further proceedings; no material accruals were recorded for the described legal matters.
- Unusual items included $26.4 million of share-based compensation expense associated with the former CEO’s equity-award modification and departure arrangements. No impairment costs were recorded in 2019; 2018 included $79.0 million of impairment charges.
- Richard Barton became CEO in February 2019, succeeding Spencer Rascoff, who remained on the board. The company adopted lease accounting guidance in 2019, recording right-of-use assets and lease liabilities; the adoption did not materially affect operations or cash flows.
Important facts for investors to verify
- Whether Zillow Offers can improve unit economics and generate cash as home purchases, inventory and resale volumes grow; review inventory write-down assumptions and homes under contract.
- Whether IMT growth and Premier Agent monetization can persist, including advertiser retention, revenue per visit and the results of Flex pricing tests.
- Whether operating cash consumption, short-term facility borrowings and convertible-note obligations remain manageable under weaker housing or capital-market conditions; confirm facility availability, collateral terms and covenants.
- Whether Zillow Home Loans can scale while maintaining mortgage funding, secondary-market sales and compliance, and without material loan repurchase losses.
- Developments in IBM and other litigation, regulatory matters and data/privacy risks, including any changes to potential exposure or required reserves.