ZILLOW GROUP, INC. annual report, FY2020

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Zillow Group, Inc. — 2020 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. Zillow Group operates Homes (Zillow Offers and title/escrow), Internet, Media & Technology (IMT, including Premier Agent, rentals and advertising), and Mortgages (Zillow Home Loans and related services). The business is expanding from real-estate marketplaces and advertising into home transactions and adjacent services.

Financial performance and liquidity

  • Revenue: $3.340 billion, up 22% from $2.743 billion in 2019. Homes revenue was $1.715 billion (+26%); IMT $1.450 billion (+14%); Mortgages $174.2 million (+73%). Zillow Offers generated $1.711 billion, about 51% of total revenue; Premier Agent generated $1.047 billion, about 31%.
  • Profit/loss: Net loss was $162.1 million, improved from $305.4 million in 2019. Operating loss was $41.4 million versus $247.5 million. Loss before tax was $169.6 million. Fourth-quarter revenue was $789.0 million and net income was $46.0 million.
  • Margins: Consolidated cost of revenue was $1.756 billion, implying gross profit of approximately $1.583 billion and a 47% gross margin. Segment economics varied substantially: Homes had $94.3 million of revenue less cost of revenue (about 5%); IMT about 93%; Mortgages about 82%. These calculations exclude other operating expenses.
  • Adjusted EBITDA: $343.0 million, versus $38.9 million in 2019. This is a non-GAAP measure and should be assessed alongside GAAP results and cash flow.
  • Cash flow: Operating cash flow was $424.2 million, versus cash used of $612.2 million in 2019. The year-over-year swing was substantially influenced by a $345.3 million inventory decrease in 2020, compared with a $673.8 million inventory increase in 2019. Investing cash outflow was $1.038 billion; financing cash inflow was $1.162 billion.
  • Liquidity: Cash, cash equivalents and short-term investments totaled approximately $3.921 billion at year-end; including restricted cash, the total was approximately $3.997 billion. Management said available cash and operating cash flow should cover needs for at least 12 months.
  • Debt: Total debt carrying value was $2.284 billion, comprising $1.614 billion carrying value of convertible notes and $670.2 million drawn on Homes and Mortgages facilities. Convertible-note principal was $2.112 billion. The Homes facilities had $1.5 billion maximum capacity, with $361.2 million drawn; mortgage facilities had $375 million capacity, with $309.0 million drawn. Certain undrawn facility amounts are uncommitted and borrowing is subject to collateral and covenants.
  • Balance sheet: Total assets were $7.487 billion, total liabilities $2.745 billion, and shareholders’ equity $4.742 billion. Home inventory was $491.3 million, down from $836.6 million; mortgage loans held for sale rose to $330.8 million from $36.5 million.

Material changes versus 2019

  • Visits increased 19% to 9.627 billion; average monthly unique users in the fourth quarter rose 16% to 200.7 million. Homes sold through Zillow Offers increased 24% to 5,337, while 4,162 homes were purchased during 2020.
  • IMT income before tax rose to $263.0 million from $80.1 million, aided by revenue growth and lower marketing expense. Mortgages moved to $4.5 million income before tax from a $45.0 million loss. Homes’ loss before tax widened slightly to $320.3 million from $312.1 million.
  • Advertising and marketing cuts, partner discounts, and the temporary pause in Zillow Offers purchases during the first half of 2020 affected results. Purchases resumed in all markets by early August; Zillow Offers operated in 25 markets at year-end.
  • Interest expense increased 52% to $155.2 million, primarily reflecting additional convertible-note issuances. Zillow issued $565 million principal of 2025 convertible notes and raised $411.5 million net from a Class C share offering. Most remaining 2021 notes converted into about 5.1 million Class C shares before the year-end redemption.

Outlook, risks and unusual items

  • Management expected Homes revenue and costs to rise as Zillow Offers buying and selling reaccelerated; it also expected higher investment in marketing, hiring, technology, and mortgage operations in 2021. No specific consolidated revenue or earnings guidance was provided.
  • Management said COVID-19’s continuing effect on demand, operations, financing and housing markets remained uncertain and expected the pandemic to continue affecting 2021 results. Low mortgage rates supported refinancing and mortgage revenue, but future rates and housing-market conditions are uncertain.
  • Zillow Offers carries home-valuation, inventory, resale, renovation, financing and property-price risks. Premier Agent dependence is material: it represented 31% of revenue, and most partner relationships lack long-term commitments. Mortgage operations also depend on warehouse financing, loan sales, and government-sponsored entities.
  • Unusual items included a $76.8 million impairment charge: $71.5 million for Trulia trade names and trademarks and $5.3 million for an equity investment. The Trulia charge was non-cash and followed reduced projected revenue and marketing investment. A $1.4 million gain on extinguishment of 2021 notes was also recorded.
  • After year-end, Zillow agreed to acquire ShowingTime.com for $500 million in cash, subject to closing conditions, including regulatory waiting-period expiration or termination. It also amended certain credit facilities.
  • Legal matters include IBM patent litigation for which a possible loss was disclosed but could not be estimated. The company reported no material accruals for the cited proceedings. A former Mortgage Lenders of America employee collective-action wage case remained pending; the company said it did not believe a loss was probable and cited seller indemnification.
  • The auditor gave an unqualified opinion on the financial statements and internal controls. The filing identifies Trulia’s intangible-asset impairment and highly automated IMT revenue systems as critical audit matters.

Important facts for investors to verify

  • Whether Zillow Offers can produce attractive per-home economics as purchasing volumes and inventory expand; compare homes bought and sold, inventory aging, resale prices, write-downs and segment losses.
  • How sustainable IMT growth and margins are, including Premier Agent revenue concentration, partner retention, discounts and the Flex model’s estimated conversion revenue.
  • Whether operating cash generation remains positive after inventory purchases resume; review working-capital movements, restricted cash and facility borrowing-base/covenant terms.
  • Convertible-note dilution and cash obligations, facility refinancing and uncommitted lender capacity, and the funding and closing conditions for the $500 million ShowingTime acquisition.
  • Potential exposure from IBM and other litigation, mortgage regulation and loan-sale representations, and the effects of COVID-19 and interest-rate changes.
  • Class B shares carry ten votes per share while Class C is generally non-voting; founders held substantial voting control. Zillow had never paid a cash dividend and did not expect to do so in the foreseeable future.