Zillow Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Zillow Group operates real estate marketplaces and software, buys and resells homes through Zillow Offers, and provides mortgage services. From January 1, 2019, it reported three segments: Internet, Media & Technology (IMT), Homes, and Mortgages.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $454.1 million | $299.9 million; up 51% |
| Operating loss | $62.7 million | $11.4 million loss |
| Net loss | $67.5 million; $0.33 per share | $18.6 million; $0.10 per share |
| Adjusted EBITDA (non-GAAP) | $23.9 million | $46.3 million |
| Cash from operating activities | $(145.5) million | $24.7 million |
| Cash, cash equivalents, short-term investments and restricted cash | $1.545 billion | $1.567 billion at December 31, 2018 |
| Inventory | $325.2 million | $162.8 million at December 31, 2018 |
| Debt and credit borrowings | $246.0 million revolving credit facilities; $28.0 million warehouse lines; $707.9 million carrying value of long-term debt | Revolving facilities: $116.7 million at December 31, 2018 |
Consolidated operating margin was approximately negative 13.8% (operating loss divided by revenue). Homes revenue is reported at home resale prices, with acquisition costs in cost of revenue; therefore, revenue growth is not directly comparable to the asset-light marketplace business. The filing does not present a single consolidated gross-margin measure as a key metric.
- Revenue mix: IMT $298.3 million (+6%); Homes $128.5 million (no comparable Q1 2018 Homes revenue); Mortgages $27.4 million (+44%). Within IMT, Premier Agent revenue was $217.7 million (+2%), Rentals $37.8 million (+30%), and Other $42.7 million (+12%).
- Homes activity: Zillow sold 414 homes at an average selling price of $310,400; it operated in eight metropolitan areas. Homes segment loss before taxes was $45.2 million.
- Other segment results: IMT loss before taxes was $11.5 million; Mortgages loss before taxes was $9.6 million.
- Engagement: Average monthly unique users were 181.1 million (+3%); visits were 2.020 billion (+14%).
- Cash flow: Operating cash use was primarily driven by a $162.3 million inventory increase related to Zillow Offers. Investing activities provided $108.3 million, mainly from net investment maturities; financing activities provided $137.9 million, including $129.3 million of revolving-credit borrowings.
- Borrowings: Convertible senior notes totaled $843.4 million aggregate principal, with maturities in 2020, 2021 and 2023. The $707.9 million balance-sheet long-term debt amount is a carrying value, not the aggregate principal.
Material changes versus comparable period
- Revenue rose 51%, primarily because Zillow Offers had launched after Q1 2018 and contributed $128.5 million in Homes revenue. Management cautioned that the evolved, inventory-intensive business mix makes prior-year performance less indicative of future results.
- Net loss widened to $67.5 million from $18.6 million. Higher expenses included share-based compensation of $66.1 million versus $30.7 million, and interest expense of $16.5 million versus $7.1 million.
- Operating cash flow shifted from $24.7 million provided to $145.5 million used, with home purchases driving the inventory build.
- Premier Agent revenue grew only 2% despite higher traffic. Revenue per visit fell 11%, which management attributed primarily to program and lead-distribution changes and related advertiser churn.
- Cash and investment balances were $22.2 million lower than at year-end, while inventory and revolving-credit borrowings increased.
Outlook, commentary and risks
- Management said existing cash, cash equivalents and investments should fund operating activities, working capital, capital expenditures and other requirements for at least the next 12 months. It also emphasized that Zillow Offers is cash- and inventory-intensive and expected related costs and expenses to rise as the business expands. No numerical earnings or revenue guidance is provided in the filing.
- Management expected ongoing investment to increase absolute costs in several areas, including Homes and Mortgages, technology and development, and sales and marketing. It expected IMT general and administrative expense to decline in later quarters relative to Q1, reflecting a one-time equity-modification charge.
- CEO Richard Barton took office on February 21, 2019, succeeding Spencer Rascoff. The departure-related award modifications generated $26.4 million of share-based compensation expense, including $23.3 million allocated to IMT.
- Homes purchase commitments not yet closed were $140.2 million. Revolving facilities had $246.0 million outstanding against stated maximum capacity of $1.0 billion; actual current capacity under one facility was subject to conditions. Homes and mortgage lending therefore carry funding, inventory, resale and housing-market risks.
- Floating-rate borrowings expose the company to interest-rate changes. Management estimated that a 1 percentage-point LIBOR increase would raise annual interest expense by approximately $2.5 million on revolving facilities and $0.3 million on warehouse lines, assuming balances remained unchanged.
- The Ninth Circuit issued an opinion in the VHT copyright case, affirming some rulings, remanding an issue and vacating the willful-infringement finding; Zillow reported an immaterial estimated liability. A securities class action motion to dismiss was denied on April 19, 2019, after quarter-end; the company denied the allegations, intended to defend the case and had not accrued a loss because it did not consider one probable.
- The company reported compliance with financial covenants and no defaults on its revolving or warehouse credit facilities at March 31, 2019. It reported effective disclosure controls. It stated there had been no material changes to the risk factors in its 2018 Form 10-K.
Key facts for investors to verify
- Whether Zillow Offers can scale home purchases and resales without materially worsening cash use, inventory exposure or segment losses; track homes sold, inventory, purchase commitments and borrowing availability.
- Whether Premier Agent revenue growth and advertiser retention recover, and whether the Flex Pricing tests produce sustainable economics.
- How much of reported revenue growth reflects Homes resale volume versus growth in recurring or marketplace-related revenue; assess Homes costs, selling expenses and segment losses alongside reported sales.
- Whether operating cash burn and debt funding remain manageable, including the terms and conditions of available revolving capacity and the maturities of convertible notes.
- Developments in the securities class action and VHT proceedings, as well as the financial impact of the CEO transition and share-based compensation.