Zillow Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are primarily with Q1 2020.
Business context
Zillow operates three reportable segments: Homes, including Zillow Offers home purchases and sales; Internet, Media and Technology (IMT), including Premier Agent, rentals and software; and Mortgages, principally Zillow Home Loans and mortgage advertising. Zillow Offers operated in 25 metropolitan areas at quarter-end.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $1,218.4 million | $1,125.8 million |
| Operating income (loss) | $87.6 million | $(144.5) million |
| Net income (loss) | $52.0 million | $(163.3) million |
| Operating margin | 7.2% | (12.8)% |
| Net margin | 4.3% | (14.5)% |
| Operating cash flow | $241.7 million | $302.0 million |
| Capital expenditures and intangible purchases | $16.0 million | $37.5 million |
- Revenue mix: Homes revenue was $704.2 million, down 9%; IMT was $446.3 million, up 35%; and Mortgages was $68.0 million, up 169%.
- Segment results: IMT income before taxes was $143.6 million, compared with a $41.5 million loss. Homes recorded a $58.5 million pretax loss, improved from $98.0 million; Mortgages recorded a $1.8 million pretax loss, improved from $13.1 million.
- Adjusted EBITDA: $181.0 million, versus $5.1 million. This is a non-GAAP measure and excludes, among other items, interest, taxes, share-based compensation and impairment costs.
- Liquidity: Cash and cash equivalents were $3.402 billion; short-term investments were $1.294 billion; restricted cash was $120.7 million. Combined, these totaled $4.817 billion, compared with $3.997 billion at December 31, 2020.
- Debt: Total debt carrying value was $2.259 billion, including $1.597 billion carrying value of convertible notes and $662.2 million of Homes and Mortgages borrowing facilities. Convertible-note aggregate principal was $2.059 billion. The company reported compliance with debt covenants and said available liquidity should cover requirements for at least 12 months.
- Per share: Basic and diluted earnings per share were $0.21 and $0.20, respectively, versus a loss of $0.78 per share for both measures in Q1 2020.
Material changes versus Q1 2020
- Total revenue rose 8%, driven by Premier Agent growth, higher rentals revenue and mortgage originations. Visits increased 19% to 2.511 billion; average monthly unique users increased 15% to 220.5 million.
- Premier Agent revenue increased 38% to $334.3 million. Premier Agent revenue per visit rose 16% to $0.133.
- Mortgage loan origination volume increased to $1.167 billion from $137.0 million, principally reflecting refinance volume. Zillow Home Loans revenue increased to $68.0 million.
- Zillow Offers sold 1,965 homes, down 18% from 2,394; revenue declined 9% to $701.0 million. Average selling price increased to $356,700 from $321,300.
- Net income improved substantially, but the prior-year quarter included $76.8 million of noncash impairment charges, including a $71.5 million Trulia trademark impairment. No impairment costs were recorded in Q1 2021.
- Operating cash flow declined despite the return to GAAP profitability. Q1 2020 cash flow benefited significantly from a $302.6 million inventory decrease; Q1 2021 inventory-related cash benefit was $18.9 million.
- Financing cash flow included $544.6 million of net proceeds from Class C stock issuance under a $1.0 billion equity distribution agreement, as well as $61.1 million from option exercises. Shares outstanding increased during the quarter.
Outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance was provided. Management expected IMT revenue to grow in absolute dollars, Zillow Offers activity and revenue to increase as home buying and selling expanded, and Mortgages costs to rise with business growth. Management also expected higher Homes costs and interest expense as Zillow Offers inventory and activity increased, and planned to hire more than 2,000 employees in 2021.
- Management cautioned that COVID-19 and its effects on the economy, housing market, customer activity and estimates remained uncertain. Rising interest rates could reduce refinance activity. The business also faces competition, listing-data access and regulatory risks, and execution and financing risks associated with its cash- and inventory-intensive home and mortgage businesses.
- The proposed $500 million cash acquisition of ShowingTime remained subject to regulatory review. The FTC issued a Second Request in April 2021, extending the HSR waiting period pending substantial compliance and subsequent review.
- Q1 included a $1.4 million loss on extinguishment of debt tied to conversions of convertible notes. Note conversions issued approximately 1.2 million Class C shares. The notes were convertible at holders’ option from April 1 through June 30, 2021.
- Legal matters include IBM patent litigation, for which the company said a loss was reasonably possible but the amount or range was not estimable; a VHT copyright case scheduled for a third-quarter 2021 retrial on certain issues; and securities and derivative litigation. The company reported no material accruals for the described proceedings.
- The filing reported no material changes to the risk factors in the 2020 Form 10-K. Management concluded disclosure controls and procedures were effective as of March 31, 2021.
Important facts for investors to verify
- Whether Zillow Offers can expand purchases and sales profitably, and how home resale margins, inventory levels and borrowing needs develop.
- Whether IMT growth, including Premier Agent and rentals, is sustained as marketing spend and staffing increase.
- Whether mortgage revenue remains supported if refinancing declines, and how mortgage funding capacity and margins evolve.
- The effects of stock issuance, employee equity awards and convertible-note conversions on share dilution.
- The eventual FTC outcome and closing terms for ShowingTime, along with developments in IBM, VHT and other litigation.
- Cash generation excluding investment maturities, equity proceeds and working-capital movements, and the implications of variable-rate borrowing and debt maturities.