Zillow Group, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; Q4 metrics are identified where disclosed. Amounts are in U.S. dollars.
Business context and reporting period
Zillow Group operates online real estate, rental and mortgage marketplaces, advertising and software businesses, and—beginning in 2018—Zillow Offers, which buys, updates and resells homes. The company reported Internet, Media & Technology (IMT) and Homes segments in 2018. It acquired mortgage lender Mortgage Lenders of America (MLOA) on October 31, 2018.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1,333.6 million | $1,076.8 million |
| Operating loss | $129.0 million | $161.9 million |
| Net loss | $119.9 million | $94.4 million |
| Net loss per share, diluted | $0.61 | $0.51 |
| Adjusted EBITDA (non-GAAP) | $200.8 million | $236.3 million |
| Cash from operations | $3.9 million | $258.2 million |
- Revenue grew 24%. Operating margin was approximately -9.7% (operating loss divided by revenue); net margin was approximately -9.0%.
- Revenue by category: Premier Agent $898.3 million (+18%); Rentals $134.6 million (+31%); Mortgages $80.0 million (-1%); Other $168.2 million (+27%); Homes $52.4 million, newly reported.
- Premier Agent contributed 67% of total revenue, down from 71%. It remains a significant source of revenue concentration.
- Homes revenue came from 177 home resales at an average selling price of $295,800. At year-end, inventory was 509 homes valued at $162.8 million; the filing reports no inventory write-downs in 2018.
- Q4 2018 revenue was $365.3 million, including $41.3 million from Homes. Q4 net loss was $97.7 million and adjusted EBITDA was $32.4 million. The quarter included $69.0 million of Trulia brand impairment.
- Operating cash flow fell sharply, primarily reflecting working-capital uses, including a $162.8 million inventory increase and $41.5 million increase in contract-cost assets. Investing cash flow was -$622.6 million; financing cash flow was +$930.1 million.
- Year-end cash, cash equivalents and short-term investments totaled $1.555 billion; restricted cash brought the total including restricted cash to $1.567 billion. Working capital was $1.605 billion.
- Long-term debt carrying value was $699.0 million. In addition, current borrowings included $116.7 million on the Zillow Offers revolving facility and $33.0 million on MLOA warehouse lines. Notes had aggregate principal of about $843.4 million; the filing also lists these credit-facility borrowings separately.
- Shareholders’ equity was $3.267 billion; accumulated deficit was $671.8 million.
Material changes versus prior period
- Revenue growth slowed to 24% from 27% in 2017. Average monthly unique users in Q4 increased 4% year over year to 157.2 million; annual visits increased 14% to 7.182 billion.
- Net loss widened year over year despite a smaller operating loss. Adjusted EBITDA declined about 15%, while operating cash generation dropped from $258.2 million to $3.9 million.
- Premier Agent revenue grew, but implementation of lead validation and distribution changes contributed to fewer leads for some advertisers and higher-than-expected churn, particularly in the second half. Premier Agent revenue declined sequentially in Q4.
- Rentals growth reflected more listings, including StreetEasy monetization, and the launch of rental applications. Mortgages revenue was slightly lower amid changes to lead distribution and lower refinance monetization as interest rates rose.
- The new Homes business drove $52.4 million of revenue and substantial inventory and operating costs. The company raised capital through a $360.3 million net Class C stock offering and $364.0 million net proceeds from 2023 convertible notes.
- Non-cash impairment charges totaled $79.0 million in 2018: $69.0 million for Trulia trade names and trademarks and $10.0 million for an equity investment. The Trulia impairment followed revenue projections below prior expectations.
Outlook, commentary, risks and unusual items
- No specific consolidated revenue or earnings guidance is provided. Management expects to continue investing in Zillow Offers, mortgage originations, product development, marketing and technology, and expects related costs to increase.
- The company expected to expand Premier Agent Flex Pricing in 2019. It cautioned that advertiser responses to pricing and lead-distribution changes could adversely affect Premier Agent revenue; the impact was not predictable.
- Beginning in 2019, Zillow expected to report Mortgages as a separate segment and said MLOA could materially affect consolidated balance sheets, statements of operations and cash flows.
- Homes expansion creates exposure to home-price movements, inventory valuation, renovation and resale costs, holding periods, vendor availability and liquidity needs. Management noted the business was relatively new and its results difficult to forecast.
- Other key risks include reliance on advertising (especially Premier Agent), real estate market and interest-rate conditions, competition, data accuracy and third-party listing access, privacy and cybersecurity, and extensive real estate and mortgage regulation.
- Legal matters include a copyright case with an approximately $4.1 million recorded liability and securities and derivative lawsuits for which the company recorded no accrual, stating that loss was not probable. A wage-and-hour matter involving MLOA was conditionally certified as a collective action; the company stated that former owners were responsible for specified indemnification and costs.
- Subsequent events: a new Zillow Offers credit agreement entered in January 2019 provided up to $500 million of capacity, initially $50 million. In February 2019, Richard Barton became CEO, succeeding Spencer Rascoff; the company expected a material Q1 2019 share-based compensation expense from Rascoff’s vesting modification.
- The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting. Adoption of the new revenue standard increased 2018 net income by $4.6 million versus prior guidance; adoption of the new lease standard was expected to add about $90 million of right-of-use assets and $115 million of lease liabilities.
Most important facts for investors to verify
- Whether lead-model and pricing changes stabilize advertiser retention and Premier Agent revenue.
- Homes segment unit economics: purchase and renovation costs, resale prices, inventory turnover, valuation write-downs and required financing.
- Cash conversion and working-capital needs as Zillow Offers and mortgage originations expand.
- Debt and facility availability, including covenants, maturities, floating-rate exposure and potential dilution from convertible notes.
- Mortgage origination performance, loan-sale and repurchase exposure, regulatory compliance and the effect of changing interest rates.
- Trulia brand performance and any further impairment, as well as progress in resolving disclosed legal matters.