Zillow Group, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing is an annual report, not a standalone Q4 filing; it also presents selected unaudited quarterly results. Zillow operates Homes, Internet, Media & Technology (IMT), and Mortgages businesses.
Financial results
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $8.147 billion | $3.340 billion |
| Gross profit / margin | $1.753 billion / 22% | $1.473 billion / 44% |
| Operating loss | $327.7 million | $41.4 million |
| Net loss | $527.8 million | $162.1 million |
| Adjusted EBITDA, non-GAAP | $194.6 million | $343.0 million |
| Operating cash flow | $(3.177) billion | $424.2 million |
Revenue rose 144%, driven mainly by Zillow Offers home resales: Homes revenue was $6.016 billion, including $5.982 billion from Offers, versus $1.715 billion in 2020. IMT revenue increased 30% to $1.886 billion, including Premier Agent revenue of $1.396 billion (+33%). Mortgages revenue increased 41% to $245.8 million. Zillow sold 15,436 Offers homes at an average $387,600 per home, compared with 5,337 at $320,500 in 2020. Visits increased 6% to 10.2 billion; average monthly unique users for Q4 declined 1% year over year to 198 million.
Despite higher gross profit dollars, consolidated gross margin fell to 22% from 44%, reflecting the much larger, lower-margin Homes business and inventory losses. Homes gross margin was negative 2%, versus 5% in 2020; IMT margin was 89%, versus 87%; Mortgages margin was 66%, versus 78%. Q4 2021 revenue was $3.882 billion and net loss was $261.2 million; Q4 included $3.349 billion of Homes revenue.
Operating cash use was driven largely by a $3.827 billion increase in inventory as home purchases exceeded resales. Investing activities provided $1.088 billion, including investment maturities and partly offset by $497.3 million paid for ShowingTime. Financing activities provided $3.148 billion. Cash, short-term investments and restricted cash totaled approximately $3.4 billion at year-end, versus $4.0 billion in 2020.
Total debt carrying value was $4.840 billion, comprising $3.408 billion of Homes credit facilities and securitization debt, $112.0 million of mortgage facilities and $1.319 billion carrying value for convertible notes. Convertible notes had $1.672 billion aggregate principal. Management stated that cash from operations and cash and investment balances should be sufficient for operating and capital needs for at least the next 12 months. The company reported compliance with debt covenants at year-end.
Material changes and unusual items
- On November 2, 2021, Zillow decided to wind down Zillow Offers after pricing unpredictability, operational-capacity constraints, and labor and supply-chain challenges. The wind-down was expected to finish in the second half of 2022; management expected revenue to decline as it proceeded.
- FY 2021 included $407.9 million of total inventory write-downs; $211.0 million related to homes still in inventory at year-end. The year also included $72.2 million of impairment and restructuring costs, $6.2 million of financing-related charges, and $4.9 million of accelerated depreciation and amortization associated with the wind-down.
- At year-end, inventory was $3.913 billion, compared with $491.3 million a year earlier. A 1% decrease in estimated selling prices at year-end would, the company estimated, add $17.8 million to the inventory valuation adjustment.
- The company acquired ShowingTime in September 2021 for approximately $511.8 million in cash, subject to adjustments. The FTC said its investigation remained open and reserved the right to take further action.
- Zillow issued 3.16 million Class C shares for net proceeds of $544.6 million under its equity distribution agreement and repurchased 4.94 million Class C shares for approximately $302.2 million. The board had authorized up to $750 million in repurchases, with $447.8 million remaining at year-end.
Outlook, risks and contingencies
Management expected the Offers wind-down to reduce Homes revenue, expenses and financing needs through 2022. It estimated $175 million–$205 million of total wind-down-related charges other than inventory write-downs, including $81 million–$97 million of future cash payments; anticipated financing-related charges were $40 million–$48 million. These are estimates and may change. By early February 2022, the company reported that more than 85% of homes expected to be resold during the wind-down had been sold, were under contract, or had agreed disposition terms.
Key risks include achieving orderly home sales at expected values and timing; additional inventory write-downs, financing costs or restructuring charges; dependence on housing-market conditions and interest rates; availability of mortgage and home-inventory financing; competition and reliance on listing data and MLS access; cybersecurity, privacy, regulatory and licensing compliance; and litigation. Zillow disclosed IBM patent litigation with a possible loss that was not estimable, and said it did not believe a loss was probable in newer securities class actions concerning Zillow Offers. The filing reported no material accruals for the described proceedings. COVID-19 effects and future results were uncertain. The company reported an accumulated deficit of $1.7 billion and a full valuation allowance against net deferred tax assets.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective. The company has never paid cash dividends and did not anticipate doing so in the foreseeable future.
Investor facts to verify
- Track actual wind-down completion, home-sale proceeds and prices, inventory balances, and any further write-downs against management’s estimates.
- Reconcile ongoing IMT and Mortgages performance with reported revenue, margins and cash generation as Offers revenue runs off; consider the non-GAAP nature and limitations of Adjusted EBITDA.
- Review debt repayments, borrowing availability, covenants, interest-rate exposure and expected prepayment penalties during the wind-down.
- Monitor workforce reductions, remaining restructuring payments and other wind-down charges, and whether liquidity remains adequate.
- Follow the outcomes of IBM litigation, the Offers-related securities cases and the FTC’s ShowingTime inquiry; the filing does not quantify possible losses for certain matters.