Zillow Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; dollars in millions unless stated otherwise. Zillow reports one operating and reportable segment. Zillow Offers was wound down in 2022 and is presented as discontinued operations in the prior-year income statement.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $496 | $483 | $1,471 | $1,523 |
| Gross profit / margin | $386 / 78% | $394 / 82% | $1,165 / 79% | $1,245 / 82% |
| Operating loss, continuing operations | $(53) | $(51) | $(165) | $(10) |
| Net loss | $(28) | $(53) | $(85) | $(29) |
| Adjusted EBITDA | $107 | $130 | $322 | $441 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $268 | $4,420 |
Q3 net loss per share was $0.12, versus $0.22; nine-month net loss per share was $0.36, versus $0.12. Q3 other income was $34, primarily investment income, compared with $12 a year earlier; nine-month other income was $108 versus $19. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, share-based compensation, depreciation and amortization, interest, taxes, and impairment and acquisition costs.
Revenue mix and operating indicators
| Revenue category | Q3 2023 | Year-over-year change | Nine months 2023 | Year-over-year change |
|---|---|---|---|---|
| Residential | $362 | Down 3% | $1,103 | Down 7% |
| Rentals | $99 | Up 34% | $264 | Up 28% |
| Mortgages | $24 | Down 8% | $74 | Down 27% |
| Other | $11 | Flat | $30 | Down 12% |
Q3 visits declined 5% to 2.626 billion and average monthly unique users fell 5% to 224 million. Zillow Home Loans originations rose 69% to $457 million in Q3, led by purchase loans; nine-month originations fell 19% to $1.059 billion as refinancing dropped sharply.
Financial position, cash flow and debt
- At September 30, cash and cash equivalents were $1.846 billion and short-term investments were $1.421 billion; cash, investments and restricted cash totaled approximately $3.3 billion. Current assets were $3.612 billion and current liabilities $941 million.
- Total debt was $1.755 billion: $1.664 billion carrying value of convertible notes and $91 million of mortgage-related credit-facility borrowings. The notes have $1.672 billion aggregate principal, including $608 million due in September 2024; the 2025 and 2026 notes mature thereafter.
- Nine-month operating cash flow was $268 million, compared with $4.420 billion in 2022. The prior-year amount was heavily affected by a $3.9 billion reduction in Zillow Offers inventory during its wind-down, so the periods are not directly comparable. 2023 investing activities provided $339 million; financing activities used $226 million, including $336 million of share repurchases.
- Share repurchases totaled $336 million in the first nine months. The company increased cumulative repurchase authorization to $2.5 billion; $914 million remained available at quarter-end.
Changes, outlook and material developments
- Q3 revenue increased 3%, as Rentals growth more than offset lower Residential and Mortgage revenue. Nine-month revenue decreased 3%. Q3 gross margin fell four percentage points and Adjusted EBITDA declined 18%; nine-month Adjusted EBITDA declined 27%.
- Management attributed residential pressure to low housing inventory, fewer new listings, elevated and volatile mortgage rates, and home-price fluctuations. Industry residential transaction dollars declined 14% year over year in Q3 and more than 20% for the first nine months, according to the filing’s cited industry data.
- Management expected Residential and Rentals revenue to decrease in absolute dollars in Q4 2023, citing housing-market pressure and seasonality. It also expected Rentals declines from seasonal listing and landlord advertising patterns. No numerical revenue or earnings guidance was provided.
- Q3 cost of revenue rose 24%, partly due to higher website-development amortization. Nine-month technology and development expense rose 14% and general and administrative expense rose 10%, including share-based compensation effects. Nine-month capitalized website-development costs were $144 million.
- Completed acquisitions of Aryeo for approximately $35 million of consideration, including cash and Class C shares, and Spruce for approximately $19 million in cash. After quarter-end, Zillow agreed to acquire Follow Up Boss for $400 million cash at closing plus up to $100 million tied to performance, subject to conditions including regulatory approval.
- Management stated available cash, investments and expected operating cash flows should fund operating and capital needs for at least 12 months. Mortgage warehouse and repurchase facilities had $200 million total capacity and $91 million outstanding; borrowings carried weighted-average rates of approximately 7.0%–7.5%. Zillow Home Loans was compliant with facility covenants.
Risks, contingencies and unusual items
- Housing-market conditions and higher interest rates may constrain transactions, advertising demand, mortgage originations and affordability; persistent inflation may also increase labor, marketing and hosting costs.
- IBM patent litigation remained a contingency: the company disclosed a reasonable possibility of loss but said the possible loss or range was not estimable. In one action, the PTAB ruled in October 2023 that the asserted patent claims were unpatentable. A separate IBM action and other litigation remained pending. The company recorded no material accrual for the described matters.
- The 2024 convertible notes are classified as current liabilities. The filing identifies $608 million of principal and $27 million of coupon interest payable within 12 months as of September 30.
- After quarter-end, Zillow entered a $100 million UBS mortgage repurchase facility and repurchased approximately $28 million principal of 2025 notes. These were not reflected in quarter-end balances.
- Federal and state tax-loss carryforwards and a valuation allowance affect tax accounting; management said a significant portion of the U.S. valuation allowance may no longer be needed if sufficient positive evidence emerges in coming years.
Important facts for investors to verify
- Whether housing inventory, mortgage rates and transaction activity improve or further pressure Residential revenue and traffic.
- Whether Rentals growth is sustainable and how management’s stated Q4 seasonal decline compares with actual results.
- Mortgage origination growth, gain-on-sale margins, funding availability and the cost and renewal terms of warehouse and repurchase facilities.
- Cash generation excluding the prior-year Zillow Offers inventory unwind, and the effect of capitalized website spending and share-based compensation on reported performance.
- Funding and closing conditions for the Follow Up Boss acquisition, and the impact of acquisitions and repurchases on liquidity and capital allocation.
- Developments in IBM and other litigation, and the timing and settlement requirements of the 2024 convertible notes.