Zillow Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; dollars below are in millions except per-share data. Zillow Group operates Homes (Zillow Offers and closing services), Internet, Media & Technology (IMT), and Mortgages businesses.
Key financial results
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Revenue | $656.7 | $745.2 | $2,550.9 | $1,798.9 |
| Operating income (loss) | $76.4 | $(48.4) | $(130.7) | $(173.7) |
| Net income (loss) | $39.6 | $(64.6) | $(208.2) | $(204.2) |
| Diluted EPS | $0.16 | $(0.31) | $(0.95) | $(0.99) |
| Adjusted EBITDA (non-GAAP) | $152.2 | $15.8 | $173.1 | $42.1 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $750.2 | $(670.3) |
Q3 operating margin was approximately 11.6%, versus approximately negative 6.5% a year earlier. Q3 Adjusted EBITDA margin was 23%, versus 2%. These margins are calculated from reported figures; Adjusted EBITDA is a non-GAAP measure and excludes, among other items, interest, taxes, depreciation and amortization, and share-based compensation.
Segment performance and period-over-period changes
- Q3 revenue fell 12% year over year. Homes revenue decreased 51% to $187.1 million, principally because Zillow Offers sold 583 homes versus 1,211 a year earlier. IMT revenue rose 24% to $415.4 million, including Premier Agent growth of 24%; Mortgages revenue rose 114% to $54.2 million.
- Visits increased 32% to 2,786.2 million and average monthly unique users increased 21% to 236.2 million. Premier Agent revenue per visit declined 6% to $0.107.
- For the first nine months, revenue rose 42%. Homes revenue increased 85% to $1,411.2 million, with 4,414 homes sold versus 2,411. IMT revenue grew 7% to $1,026.4 million and Mortgages revenue grew 42% to $113.2 million. The period still ended with a $208.2 million net loss.
- Q3 total costs and expenses declined 27% to $580.2 million, primarily reflecting lower home-sale costs and reduced marketing spending. Nine-month expenses increased 36% to $2,681.6 million, including $76.8 million of impairment charges and higher Homes costs as home sales expanded.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $1,904.8 million, short-term investments $1,885.4 million, and restricted cash $44.1 million; combined, these totaled $3,834.3 million. All available-for-sale investments had maturities of one year or less.
- Nine-month operating cash flow was $750.2 million, versus cash used of $670.3 million in 2019. The 2020 inflow included a $643.3 million inventory reduction, reflecting home sales and fewer purchases during the Offers pause; mortgage loans held for sale increased and used $88.8 million of cash.
- Total debt carrying value was $2,078.0 million, including $1,845.6 million of convertible notes and $232.4 million of Homes and Mortgages borrowings. Convertible notes had $2,384.7 million aggregate principal outstanding. Credit-facility capacity was $1.5 billion for Zillow Offers and $150 million for Zillow Home Loans; draws were $114.3 million and $118.1 million, respectively.
- Management said available cash, investments, and operating cash flows should fund operating, working-capital, capital-expenditure, and other needs for at least 12 months. The company reported compliance with debt covenants.
Outlook, risks, and unusual items
- Zillow Offers paused home buying in March in response to COVID-19 and resumed buying in all paused markets by early August; the service was available in 25 markets at quarter-end. Management expected home buying, home selling, hiring, and marketing activity to increase, but gave no numerical guidance and said the pandemic’s effects remained uncertain.
- Q3 Homes revenue remained constrained by lower inventory following the pause. Management cautioned that renewed pandemic disruption, housing-market weakness, and financing availability could affect operations, demand, resale values, liquidity, and access to capital.
- Nine-month results included $71.5 million of non-cash impairment of the Trulia trade name and $5.3 million of non-cash impairment of an equity investment. The investment was later sold for $10.0 million, producing a $5.3 million gain.
- In May, Zillow issued $565.0 million principal of 2025 convertible notes and received $553.3 million net proceeds, partly used to repurchase $194.7 million principal of 2021 notes. It also raised $411.5 million net from a Class C share offering. Interest expense rose 49% in Q3 and 85% for the nine-month period, mainly due to convertible-note issuance.
- After quarter-end, Zillow announced it would redeem the remaining $265.3 million principal of 2021 notes on December 18, 2020. Holders could instead convert; full conversion would result in approximately 5.1 million Class C shares. Zillow also extended and increased the capacity of its Citibank mortgage repurchase agreement.
- Contingencies include an IBM patent action for which management said a possible loss was reasonably possible but not estimable, and a securities class action that received class certification on October 28, 2020. The company reported no material accruals for the disclosed proceedings.
Important facts for investors to verify
- Whether Zillow Offers can rebuild inventory and sustain home-sale volume and unit economics after restarting purchases.
- How much of the strong nine-month operating cash flow reflects temporary inventory liquidation rather than recurring cash generation.
- The cash-versus-share settlement outcome and dilution or cash requirements associated with the 2021 note redemption, alongside other convertible-note maturities.
- Whether IMT and Mortgages growth and profitability persist as marketing spending rises and market conditions change.
- Future COVID-19 effects, debt-facility availability and covenants, and developments in the IBM and securities litigation.