Zillow Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and reporting period
Zillow Group operates online and mobile real estate and home-related marketplaces, including Zillow, Trulia, StreetEasy and HotPads, and provides advertising and software tools to real estate, rental and mortgage professionals. Zillow Group acquired Trulia on February 17, 2015, in an approximately $2.0 billion stock-for-stock transaction. Trulia’s results are included only from the acquisition date, so reported year-over-year comparisons are not like-for-like; management cautions that they may not indicate future growth rates.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $127.3 | $66.2 |
| Operating loss | $(57.9) | $(6.5) |
| Net loss | $(58.4) | $(6.3) |
| Net loss per share, basic and diluted | $(1.19) | $(0.16) |
| Operating cash flow | $1.5 | $14.2 |
| Adjusted EBITDA, non-GAAP | $16.7 | $8.7 |
- Revenue increased 92%. Marketplace revenue rose 103% to $108.9 million; display revenue rose 47% to $18.3 million. Real estate revenue was $93.3 million, mortgages $9.6 million and Market Leader $6.1 million.
- Net loss was 46% of revenue versus 9% in the prior-year quarter. The filing reports substantial acquisition, restructuring, share-based compensation and amortization expenses.
- At March 31, cash and cash equivalents were $307.9 million and short-term investments were $320.6 million; restricted cash was $6.8 million. The company reported $635.2 million of cash, cash equivalents, restricted cash and investments combined.
- Long-term debt was $230.0 million, consisting of Trulia’s 2.75% convertible senior notes due December 2020. The notes are convertible into Zillow Group Class A shares; the filing reports an initial conversion price of approximately $80.93 per share.
- Total assets were $3.17 billion, including $1.83 billion of goodwill and $569.1 million of net intangible assets. Shareholders’ equity was $2.67 billion; accumulated deficit was $186.1 million.
- Current assets were $684.7 million and current liabilities $115.0 million. Management stated cash, investments and operating cash flows should be sufficient for operating, working-capital and capital needs for at least 12 months.
Material changes versus the prior comparable period
- Growth was substantially affected by adding Trulia: average monthly unique users increased 56% to 109.9 million, and Agent Advertisers increased 95% to 103,415. Management also reported average monthly revenue per advertiser of $354, up 24%.
- Mortgage loan requests rose 122% to approximately 13.0 million; management noted requests do not directly translate into recognized revenue.
- Operating expenses increased to $185.2 million from $72.7 million. Q1 2015 included $12.5 million of acquisition-related costs and $25.1 million of restructuring costs, neither present in Q1 2014.
- Operating cash flow declined to $1.5 million from $14.2 million despite higher revenue. Investing cash flow was $171.8 million provided, principally reflecting $173.4 million of net cash acquired with Trulia; financing cash flow was $8.8 million provided.
- Share-based compensation expense was $33.4 million, including $10.4 million recorded within restructuring costs. Cash-flow reconciliation separately adds back $23.0 million of share-based compensation.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects operating costs to rise in absolute dollars with growth, including sales and marketing, technology and development, and general and administrative costs. It expects acquisition costs to decrease as integration proceeds.
- The Trulia integration plan includes reducing the workforce by nearly 350 employees, primarily in overlapping sales and marketing roles. The company expects to complete the restructuring by year-end 2015, has recorded $25.1 million of charges, and expects another $5.0–$6.5 million of restructuring costs.
- Integration execution, employee retention, realization of expected synergies, and final purchase-price accounting remain important uncertainties. Trulia acquisition accounting was preliminary and could be adjusted during the one-year measurement period.
- Contractual obligations totaled $596.9 million, including $211.5 million of operating lease payments, $117.5 million of content purchase commitments, $230.0 million of note principal and $38.0 million of stated interest.
- A major listing aggregator’s platform-services agreements expired April 7, 2015. Zillow said it had made progress replacing the listings but might not fully replace them promptly or on favorable terms.
- In the Move/NAR trade-secrets litigation, Zillow denied wrongdoing and intends to defend the claims. The filing says a loss was reasonably possible but the amount or range was not estimable. The Trulia stockholder litigation was subject to an agreement-in-principle to settle, with settlement documentation still being negotiated. Other patent matters include the stayed Smarter Agent case; the LendingTree jury verdict in Zillow’s favor was on appeal.
- The filing identifies risks from competition, dependence on real estate advertising and third-party listing and data sources, privacy and cybersecurity, regulation, and the possibility of failing to realize acquisition benefits. It disclosed a May 2015 distributed denial-of-service attack after quarter-end, stating it had no material adverse effect and there was no indication internal controls were compromised.
Important facts for investors to verify
- How much of reported growth reflects Trulia versus organic growth, using subsequent full-period and pro forma results.
- Whether integration and the planned workforce reductions deliver expected efficiencies without impairing advertiser, employee or user retention.
- Progress replacing listings following the April 7, 2015 aggregator agreement expiry, and any effect on audience, product quality or revenue.
- Actual restructuring costs versus the remaining $5.0–$6.5 million estimate, and final Trulia purchase-price allocation, including goodwill and intangible valuations.
- Cash generation after acquisition-related effects, ongoing content and lease commitments, and the potential dilution or repayment implications of the 2020 convertible notes.
- Developments in the Move/NAR and Trulia stockholder litigation, and any material subsequent cybersecurity or control developments.