Zillow Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative period is Q1 2023. Zillow operates digital real estate marketplaces and related services, including residential, rentals, mortgage, and real estate software offerings.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $529 million | $469 million | +13% |
| Gross profit | $406 million | $377 million | +8% |
| Gross margin | 77% | 80% | Down 3 percentage points |
| Operating loss | $45 million | $45 million | No change |
| Net loss | $23 million | $22 million | Loss increased $1 million |
| Adjusted EBITDA | $125 million | $104 million | +20%; 24% and 22% of revenue, respectively |
| Operating cash flow | $80 million | $93 million | Down $13 million |
| Investing cash flow | $(204) million | $(97) million | Greater investment outflow |
| Financing cash flow | $71 million | $(68) million | Improved, largely due to option exercises and borrowing |
Revenue by category: Residential $393 million (+9%); Rentals $97 million (+31%); Mortgages $31 million (+19%); Other $8 million (flat). Residential growth reflected higher revenue per visit and visits, including Follow Up Boss. Rentals growth was attributed largely to higher monetization and multifamily listings. Mortgage revenue benefited from increased originations.
Visits were 2.316 billion (+3%); average monthly unique users were 217 million (flat). Zillow Home Loans originations rose 131% to $605 million, primarily from purchase loans. The company changed measurement methods for Zillow visits and unique users and recast prior-period metrics; reported Q1 2023 visits were reduced approximately 10% by the visit methodology change.
Balance sheet, debt, and liquidity
At March 31, 2024, Zillow reported $1.439 billion cash and cash equivalents, $1.478 billion short-term investments, and $3 million restricted cash. Total assets were $6.823 billion; total liabilities were $2.158 billion; shareholders’ equity was $4.665 billion.
Total debt was $1.732 billion: $1.609 billion carrying value of convertible notes and $123 million under mortgage repurchase facilities. The $608 million 0.75% notes mature September 1, 2024 and are classified as current. The company reported $77 million of unused borrowing capacity on its two remaining repurchase facilities, with weighted-average rates of approximately 7.0%. A third facility expired in March and was not renewed.
Management said cash from operations and cash and investment balances should meet operating and other expected requirements for at least the next 12 months. Cash, cash equivalents, and restricted cash declined $53 million during the quarter to $1.442 billion. Net purchases of investments were $158 million, and property/equipment and intangible asset purchases totaled $46 million.
Material changes and management commentary
- Cost of revenue increased 34% to $123 million, notably from higher website depreciation and amortization, mortgage processing, and ad-serving costs. Gross margin consequently declined.
- Sales and marketing, technology and development, and general and administrative expenses rose 6%, 7%, and 7%, respectively. Management cited investment in headcount and business growth, partly offset by cost management.
- Share-based compensation was $108 million, compared with $103 million a year earlier. Adjusted EBITDA is a non-GAAP measure; the company cautions it excludes items including share-based compensation, capital needs, interest, taxes, and working capital changes.
- Management cited low housing inventory, fewer new listings, elevated and volatile mortgage rates, home-price fluctuations, and inflation as factors affecting transactions and advertising demand. It said Q1 revenue growth exceeded industry performance, while future effects of market conditions remain uncertain.
- The company expects Rentals revenue and sales and marketing expenses to increase in absolute dollars in Q2 2024. No specific full-year financial guidance is provided in the filing.
Risks, contingencies, and unusual items
- About $1.6 billion of federal tax losses were available at year-end 2023, and a valuation allowance remained against deferred tax assets. Management said a significant portion of the allowance could potentially be released in coming years if sufficient positive evidence emerges.
- Follow Up Boss acquisition consideration included up to $100 million of contingent cash payments over three years; the preliminary purchase-price allocation remained subject to adjustment.
- Legal matters include IBM patent litigation, with most claims dismissed or voluntarily dismissed, but one claim remained tied to a pending appeal. Zillow said possible loss for that matter was not estimable. The company reported no material accruals for the described matters and did not consider losses probable in the securities and derivative shareholder cases.
- Repurchase authorization availability was $761 million at March 31; after April repurchases, $670 million remained at May 1. The filing reports $91 million of April share repurchases.
- Interest rates, housing affordability and supply, industry rules and litigation, mortgage funding and resale, cybersecurity, and competition are among the stated risks. Management reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- How the September 2024 maturity of $608 million of notes will be funded, settled, refinanced, or otherwise addressed.
- Whether revenue growth and mortgage originations can continue amid housing-market constraints and elevated rates, and whether Rentals growth is sustainable.
- Whether higher website amortization and other operating costs continue to pressure gross margin and cash generation.
- The cash-flow effect of mortgage loan growth, share repurchases, capital investment, and any Follow Up Boss contingent consideration.
- Progress and potential exposure in the remaining IBM claim and securities-related litigation; loss amounts are not clearly quantifiable in the filing.
- Comparability of traffic metrics following the change in measurement methodology, and the limits of Adjusted EBITDA as a substitute for GAAP results or cash flow.