Zillow Group, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Trulia’s results are included only from its February 17, 2015 acquisition date, so full-year comparisons are not like-for-like.
Business context
Zillow Group operates online and mobile real estate and home-related marketplaces, including Zillow, Trulia, StreetEasy and HotPads. It primarily earns revenue from advertising and professional tools. Marketplace revenue includes real estate, mortgage and, for part of 2015, Market Leader offerings; display revenue comes from web and mobile advertising.
Financial performance
| Metric | FY 2015 | FY 2014 | Change or context |
|---|---|---|---|
| Revenue | $644.7 million | $325.9 million | Up 98%; Trulia acquisition materially contributed |
| Marketplace revenue | $555.9 million | $267.2 million | Up 108%; 86% of revenue, versus 82% |
| Display revenue | $88.8 million | $58.7 million | Up 51%; 14% of revenue, versus 18% |
| Operating loss | $149.5 million | $44.7 million | Operating margin approximately -23%, versus -14% |
| Net loss | $148.9 million | $43.6 million | Net loss per share was $0.88, versus $0.36 |
| Adjusted EBITDA | $87.6 million | $49.8 million | Non-GAAP; approximately 13.6% of revenue, versus 15.3% |
| Cash from operations | $22.7 million | $45.5 million | Lower despite higher revenue |
| Cash, cash equivalents and investments | $520.3 million | $455.9 million | At December 31; excludes restricted cash |
| Long-term debt | $230.0 million | None reported | 2.75% convertible notes due December 2020 |
For Q4 2015, revenue was $169.4 million, compared with $92.3 million in Q4 2014. The company reported an operating loss of $26.3 million and a net loss of $25.7 million, versus respective losses of $11.2 million and $10.9 million a year earlier. Q4 Adjusted EBITDA was $20.4 million.
At year-end, working capital was $493.7 million, based on current assets of $574.1 million and current liabilities of $80.4 million. Management said cash, cash equivalents and investments would fund operating activities, working capital, capital expenditures and other requirements for at least the next 12 months.
Material changes and unusual items
- Zillow acquired Trulia for approximately $2.0 billion, primarily in stock, and included Trulia’s results from February 17. Goodwill and intangible assets rose substantially; year-end goodwill was $1.91 billion and intangible assets were $554.8 million.
- The company acquired DotLoop for approximately $105.5 million, primarily paid in cash. It sold Market Leader for approximately $22.6 million and recorded a $4.4 million loss on the divestiture.
- Trulia integration included a workforce reduction of nearly 350 employees and $35.6 million in restructuring costs, including noncash stock-vesting acceleration. Integration of the Zillow and Trulia Premier Agent products was completed in November.
- Share-based compensation was $120.1 million for the year. The filing identifies substantial acquisition-related amortization and legal spending as additional pressures on reported results.
- Marketplace revenue grew faster than display revenue. Real estate revenue reached $482.1 million, mortgages revenue $44.3 million, and Market Leader revenue $29.5 million for the period it was owned.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management expects cost of revenue, sales and marketing, technology and development, and general and administrative expenses to increase in absolute dollars as the business grows; acquisition-related costs were expected to decrease as integration progressed.
- Management reported 123.7 million average monthly unique users in Q4, up 61% year over year, and 92,366 Agent Advertisers at year-end, up 48%. Average monthly revenue per advertiser for FY 2015 was $482, up 43%; the company said it was prioritizing high-producing advertisers and expected advertiser count to decrease.
- The Move, Inc. trade-secrets litigation was a significant contingency. Plaintiffs sought damages that the company acknowledged could materially adversely affect the business if awarded. Zillow denied wrongdoing, intended to defend the claims, and said the possible loss range was not estimable. The company incurred $27.1 million in related legal costs in 2015.
- A Department of Labor review was examining possible overtime underpayment to inside sales consultants. No determination or damages assessment had been made; the company recorded an immaterial accrual and said any additional loss was not reasonably estimable.
- Other key risks include the integration and expected benefits of acquisitions, advertiser retention and return on investment, competition, real estate market conditions, listing and data-provider relationships, privacy and cybersecurity, and evolving regulation. A major listing aggregator’s agreements expired in April 2015; nearly 400 MLSs had signed direct-listing agreements, but full replacement was not assured.
- The notes are convertible into Class A shares and may dilute shareholders. The filing also describes concentrated voting control held by founders through high-vote Class B shares and the non-voting Class C structure.
Important facts for investors to verify
- How much revenue and user growth came from Trulia versus organic growth, given its partial-year inclusion and the resulting comparison limitations.
- Whether acquisition synergies and operating efficiencies offset integration costs, restructuring, elevated stock compensation and acquired-intangible amortization.
- The status and potential financial exposure of the Move litigation and the Department of Labor review, including any developments after the filing.
- Whether operating cash generation improves and how the $230 million convertible notes, $99.7 million of content purchase commitments and $188.1 million of operating lease obligations affect future liquidity.
- Whether direct MLS relationships maintain listing breadth and quality following the expired aggregator agreements, and whether advertiser growth and spending remain durable.