Zillow Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited, consolidated GAAP results. Zillow Group operates real estate and home-related marketplaces and services, including Zillow, Trulia, StreetEasy, HotPads, and Naked Apartments.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $208.4 | $171.3 | $394.4 | $298.5 |
| Operating loss | $(155.3) | $(37.6) | $(203.4) | $(95.5) |
| Net loss | $(156.1) | $(38.7) | $(203.8) | $(97.1) |
| Net loss per share | $(0.87) | $(0.22) | $(1.14) | $(0.60) |
| Adjusted EBITDA | $(101.3) | $21.0 | $(99.4) | $37.7 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(60.5) | $16.1 |
Revenue grew 22% in Q2 and 32% for the first half. Marketplace revenue rose 32% in Q2 to $191.6 million; display revenue fell 35% to $16.8 million. Premier Agent revenue was $147.1 million, up 28%, while mortgage revenue was $18.4 million, up 77%. For the first half, marketplace revenue rose 42% to $360.5 million and display revenue declined 23% to $33.9 million.
Average monthly unique users increased 20% year over year to 168.7 million in Q2. Average monthly Premier Agent revenue per advertiser rose 43% to $536, although agent advertisers declined to 91,184 from 101,297. Mortgage loan information requests fell 49% in Q2 to 7.0 million; management attributed this to requiring more consumer information to improve lead quality.
Q2 operating costs and expenses were $363.7 million, or 175% of revenue. General and administrative expense was $179.6 million, including a $130 million legal settlement payment and $12.5 million in Move-related legal costs. The settlement was the principal driver of the larger GAAP loss and negative Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and does not reflect, among other things, capital spending, working-capital needs, or share-based compensation.
Liquidity, cash flow, and debt
At June 30, 2016, cash and cash equivalents were $155.2 million, short-term investments $264.9 million, and restricted cash $1.1 million; together these totaled $421.2 million, down from $523.3 million at December 31, 2015. Current assets were $471.4 million and current liabilities $116.8 million. Management said available cash, cash equivalents, and investments, together with operating cash flows, should be sufficient for operating and capital needs for at least 12 months.
First-half operating cash use was $60.5 million, compared with $16.1 million provided in the prior-year period. Investing cash use was $20.9 million, including $12.4 million paid for Naked Apartments and purchases of property, equipment, and intangible assets; financing provided $7.5 million. Long-term debt was $230 million, consisting of 2.75% convertible senior notes due December 2020. The notes’ estimated fair value was $360.8 million; their conversion terms may create dilution.
Material changes, outlook, and risks
- Marketplace monetization strengthened while display advertising was intentionally deemphasized. Management linked revenue growth to increased traffic, sales focus on higher-performing agent advertisers, and improved mortgage-product monetization.
- Comparisons are affected by the February 2015 Trulia acquisition and the September 2015 Market Leader divestiture; the prior-year first-half results do not represent the same business scope throughout the period.
- Zillow acquired Naked Apartments in February 2016 for approximately $13.2 million in cash. Its results were not significant in the period; purchase-price allocation remained preliminary.
- Management expected cost of revenue, sales and marketing, and technology and development expenses to increase in absolute dollars as the company invested in growth, its sales team, and product development. It expected general and administrative expense to decline in future quarters because the Move settlement had been paid. The filing provides no specific revenue or earnings guidance.
- The $130 million settlement with Move, Inc., the National Association of Realtors, and related entities resolved all claims with prejudice and contained no admission of liability. A Department of Labor wage-and-hour review remained ongoing; settlement of a related class action was contingent on its resolution. Management said it did not expect a material loss beyond amounts accrued.
- The filing reported that a July 2016 appellate ruling found all LendingTree patent claims asserted against Zillow invalid. Other stated risks include acquisition integration, competition, growth execution, privacy and security, intellectual property, and regulatory changes.
Most important facts for investors to verify
- Whether the $130 million settlement is treated as a one-time item in assessing underlying operating performance, and how GAAP losses compare with non-GAAP Adjusted EBITDA.
- Whether marketplace growth can continue as display revenue declines, agent advertisers decrease, and mortgage lead volumes fall.
- Cash burn, investment balances, and management’s 12-month liquidity assessment, particularly given the first-half operating cash outflow.
- The status and potential implications of the Department of Labor review and any remaining legal contingencies.
- Potential dilution and other terms of the $230 million convertible notes due 2020, as well as progress integrating acquired businesses.