Zillow Group, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Amounts are U.S. dollars.
Business context
Zillow Group operates online and mobile real estate, rental, and mortgage marketplaces and sells advertising and software services to related professionals. Its portfolio includes Zillow, Trulia, StreetEasy, HotPads, and other brands. The business is heavily dependent on advertising, particularly its Premier Agent program.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1,076.8 million | $846.6 million |
| Operating loss | $161.9 million | $192.9 million |
| Net loss | $94.4 million | $220.4 million |
| Adjusted EBITDA (non-GAAP) | $236.3 million | $14.8 million |
| Operating cash flow | $258.2 million | $8.6 million |
| Cash, cash equivalents, and investments at year-end | $762.5 million | $507.5 million |
| Working capital at year-end | $723.1 million | $485.6 million |
Revenue grew 27%. Operating margin was approximately negative 15.0% and net margin approximately negative 8.8%. The company’s $236.3 million Adjusted EBITDA is a non-GAAP measure and excludes, among other items, impairment, share-based compensation, interest, and taxes; it should not be treated as cash flow or a substitute for GAAP results.
Marketplace revenue rose 29% to $1,007.2 million, or 94% of total revenue. Premier Agent contributed $761.6 million (71% of revenue), other real estate $165.0 million, mortgages $80.6 million, and display advertising $69.6 million. Purchases of property, equipment, and intangible assets totaled approximately $78.6 million; investing cash outflow was $247.4 million, including net investment purchases.
Year-end debt carrying value was $385.4 million. Principal outstanding was $460.0 million on 2.00% convertible notes due 2021 and $10.1 million on 2.75% notes due 2020. Total contractual obligations were $886.0 million, including debt principal and interest, operating leases, and content purchase commitments.
Material changes versus 2016
- Revenue growth eased to 27% from 31%; visits increased 19% to 6,314.4 million, while average monthly unique users in the fourth quarter increased 8% to 151.6 million.
- Premier Agent revenue increased 26% to $761.6 million, supported by higher traffic, a 6% increase in revenue per visit, and full-year implementation of auction-based pricing.
- Other real estate revenue rose 61% to $165.0 million, primarily reflecting 66% growth in Rentals revenue. Mortgage revenue grew 13% even as mortgage information requests fell 26% to 22.7 million; management attributed the decline to changes intended to improve lead quality and monetization.
- Display revenue increased 2%, but the company continued to de-emphasize display advertising relative to marketplace offerings.
- Net loss narrowed by $126.0 million. General and administrative expense fell 37%, mainly because 2016 included a $130.0 million Move litigation settlement. The 2017 result included a $174.0 million non-cash impairment of Trulia trade names and trademarks.
- Operating cash flow increased substantially, but included significant non-cash adjustments, including impairment, depreciation and amortization, share-based compensation, and deferred taxes.
Outlook, commentary, risks, and unusual items
- Outlook: The filing does not provide a specific revenue or earnings forecast. Management expected sales and marketing, technology and development, and general and administrative costs to increase in absolute dollars as the company invests in growth. It warned that real estate seasonality may become more pronounced as growth slows.
- Tax: The 2017 $89.6 million income tax benefit included approximately $66.0 million related to the Trulia impairment and $23.6 million primarily related to the Tax Cuts and Jobs Act. The company had not completed its accounting for certain tax-law provisions. It expected an overall statutory tax rate of approximately 24% for 2018, versus an estimated 38% without the Act.
- Revenue concentration: Premier Agent generated 71% of revenue. Most advertisers lack long-term contracts and may reduce or end spending with limited notice, making advertiser retention, pricing, and perceived return on investment important risks.
- Impairment: The Trulia brand intangible was written down from $351.0 million to $177.0 million, reflecting projected revenue below the level assumed at acquisition. Further impairment could result if actual or estimated Trulia-brand revenue falls short.
- Legal matters: CFPB settlement discussions concerning the co-marketing program remained unresolved; the company recorded an immaterial accrual and said potential additional loss was not estimable. A VHT copyright judgment was reduced to approximately $4.1 million and was under appeal. Securities class actions and shareholder derivative suits were also pending, with no accrual recorded for those suits.
- Commitments and accounting: Content purchase commitments were $216.8 million and operating lease obligations $162.2 million. The company expected adoption of new revenue guidance in 2018 to result in a $40–$45 million decrease in accumulated deficit, primarily from capitalizing certain sales commissions. New lease accounting was expected to materially increase reported assets and liabilities.
- Other risks: The filing highlights competition, dependence on third-party listing and property data, data accuracy and security, regulatory compliance, seasonality, and reliance on third-party cloud infrastructure. Management reported effective disclosure controls and internal control over financial reporting; the 2017 audit opinion was unqualified.
Most important facts for investors to verify
- Whether Premier Agent advertisers remain engaged and whether auction-based pricing can sustain revenue per visit and growth.
- Whether Rentals and other emerging marketplaces can diversify revenue beyond Premier Agent; track lead volume, monetization, and mortgage request quality.
- How much of operating cash flow reflects recurring cash generation versus non-cash adjustments, and the company’s cash needs against debt, lease, and content commitments.
- Any resolution, accrual changes, or financial impact from the CFPB matter, VHT appeal, and securities and derivative litigation.
- Whether Trulia brand performance supports the remaining $177.0 million intangible value and whether further impairment is warranted.
- The final impact of tax-law accounting and adoption of revenue and lease standards.