Zillow Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context and results
Zillow operates Homes (Zillow Offers and closing services), Internet, Media & Technology (IMT, including Premier Agent and rentals), and Mortgages (Zillow Home Loans and mortgage advertising). Q2 revenue rose 70%, with growth across all three segments; Zillow Offers and Premier Agent were the largest contributors.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,310 | $768 | $2,528 | $1,894 |
| Gross profit / margin | $538 / 41% | $281 / 37% | $1,046 / 41% | $614 / 32% |
| Operating income (loss) | $62 | $(63) | $149 | $(207) |
| Net income (loss) | $10 | $(84) | $62 | $(248) |
| Diluted earnings (loss) per share | $0.04 | $(0.38) | $0.24 | $(1.15) |
| Adjusted EBITDA (non-GAAP) | $183 | $16 | $364 | $21 |
- Q2 segment revenue: Homes $777 million (+71%); IMT $476 million (+70%); Mortgages $57 million (+68%). Zillow Offers sold 2,086 homes, up 45%, at an average selling price of $370,100. Premier Agent revenue rose 82% to $349 million.
- Q2 operating costs: Operating expenses were $477 million, up 39%; interest expense was $39 million. Income tax expense was $13 million.
- Cash flow, six months: Operating cash flow was $(158) million, versus $693 million provided in 2020; investing provided $1,295 million and financing provided $938 million. Operating cash use chiefly reflected a $678 million inventory increase as home purchases exceeded sales.
- Liquidity: Cash and cash equivalents were $3,713 million, short-term investments $881 million, and restricted cash $141 million at June 30. Combined, these totaled approximately $4,735 million, compared with $3,997 million at year-end 2020.
- Debt: Total carrying value was $2,594 million, including $824 million of Homes credit-facility borrowings, $163 million of Mortgages borrowings, and $1,607 million of convertible notes. Convertible-note principal was $2,040 million. The 2023 notes were redeemed or converted after quarter-end, as described below.
Material changes versus prior year
- Q2 revenue growth reflected recovery from the 2020 pause in Zillow Offers home buying, higher home resale volume and selling prices, stronger Premier Agent demand, and mortgage origination growth. Visits increased 10% to 2.75 billion; average monthly unique users rose 5% to 228.8 million.
- Gross margin expanded to 41% from 37%. Homes gross margin improved to 9% from 4%, while Mortgages gross margin fell to 64% from 79%, reflecting industry gain-on-sale margin compression and higher origination-related costs.
- Q2 2020 included COVID-related business impacts and discounts, and the first half of 2020 included $77 million of impairment costs. No impairment costs were recorded in the first half of 2021.
- First-half 2021 financing included $545 million net proceeds from Class C stock sales under an equity distribution agreement. Shares outstanding increased; the filing reports 248.9 million combined common and capital shares at June 30.
Outlook, commentary, risks and unusual items
- Management expects Zillow Offers revenue and related Homes costs to rise as home buying and selling expand; it also expects IMT revenue to grow, partly with expansion of the Flex pricing model, and mortgage costs to increase with business growth. These are directional expectations, not quantified company-wide guidance.
- Management stated that cash, cash equivalents and investments, together with operating cash flows, should be sufficient for operating activities and capital requirements for at least the next 12 months. However, Zillow Offers is cash- and inventory-intensive, and first-half operating cash flow was negative.
- The proposed $500 million cash acquisition of ShowingTime remained subject to regulatory review; the FTC had issued a Second Request and the parties had a timing agreement. Acquisition-related costs were $4.5 million for the first half.
- Subsequent events: holders converted $366.4 million of 2023 notes into approximately 4.7 million Class C shares in July; the remaining $1.3 million was redeemed in cash. Zillow also amended a Goldman Sachs facility to increase maximum capacity to $750 million. An approximately $450 million Zillow Offers securitization was priced August 3, with closing expected around August 11; it was not yet closed as of the filing.
- Homes and Mortgages credit facilities bear floating LIBOR-based rates. At June 30, management estimated a one-percentage-point LIBOR increase would raise annual interest expense by approximately $8.2 million for Homes facilities and $1.6 million for Mortgages facilities, assuming balances unchanged.
- Legal matters include securities and derivative actions and two IBM patent cases. No material accrual was recorded for the matters described; the possible loss in the IBM cases was considered reasonably possible but not estimable. COVID-19 effects, housing-market conditions, competition, mortgage margins, acquisition approval, and legal outcomes remain risks.
Important facts for investors to verify
- Whether Zillow Offers can manage inventory, resale margins and cash needs as purchasing volumes expand; inventory was $1,170 million and homes under purchase contract were about $1,153 million at June 30.
- Whether IMT growth and margins persist, and whether mortgage origination growth offsets continued gain-on-sale margin pressure.
- Actual closing terms and financing impact of the ShowingTime acquisition and the post-quarter securitization.
- The final cash, share dilution and debt effects of 2023-note conversions, and future share issuance under the remaining stock-sale authorization.
- Developments in IBM litigation and other proceedings, and effects of floating-rate debt, housing-market changes and COVID-19-related uncertainty.