Zillow Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Zillow Group operates online and mobile real estate and home-information marketplaces and related professional tools. Its portfolio includes Zillow, Trulia, StreetEasy and HotPads, among other brands. The February 17, 2015 Trulia acquisition materially changed the scale and composition of the business: Trulia’s results are included only from the acquisition date, while prior-year figures reflect Zillow on a standalone basis. Accordingly, year-over-year comparisons are not like-for-like.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $171.3 | $78.7 | $298.5 | $144.9 |
| Operating loss | $(37.6) | $(10.8) | $(95.5) | $(17.2) |
| Net loss | $(38.7) | $(10.5) | $(97.1) | $(16.7) |
| Adjusted EBITDA (non-GAAP) | $21.0 | $6.4 | $37.7 | $15.2 |
- Q2 revenue rose 118%; marketplace revenue increased 132% to $145.5 million and display revenue rose 61% to $25.8 million. Management attributed much of the increase to Trulia, higher traffic and advertiser growth. Agent Advertisers increased 78% to 101,297, and average monthly unique users increased 74% to 141.0 million.
- Q2 operating margin was approximately negative 22%, compared with negative 14% a year earlier; net margin was approximately negative 23%, versus negative 13%. Higher operating expenses, including acquisition-related amortization, share-based compensation, restructuring, expanded staffing and marketing, contributed to the larger reported loss.
- For the six months, operating cash flow was $16.1 million, down from $28.9 million. Investing cash flow was $146.2 million provided, principally reflecting $173.4 million of cash acquired with Trulia, partly offset by $33.6 million of property/equipment and intangible-asset purchases. Financing cash flow was $14.2 million provided.
- At June 30, cash and cash equivalents were $302.3 million, short-term investments $322.7 million and restricted cash $6.6 million; together these totaled $631.6 million. Total current assets were $682.1 million and current liabilities $112.4 million.
- Long-term debt was $230.0 million: Trulia’s 2.75% convertible notes due December 2020, guaranteed by Zillow Group. The notes’ estimated fair value was $297.0 million. Total liabilities were $499.4 million.
- Goodwill was $1.833 billion and net intangible assets were $565.3 million at June 30, largely reflecting the Trulia acquisition. The purchase-price allocation remained preliminary.
Material changes and unusual items
- Trulia was acquired for a purchase price of approximately $1.966 billion, primarily in Zillow Group stock. The company issued about 17.3 million Class A shares in the transaction.
- The integration restructuring reduced the workforce by nearly 350 employees. Six-month restructuring charges were $31.7 million, including $14.0 million of non-cash share-based compensation; the company expected the plan to be completed by year-end 2015.
- Six-month acquisition-related costs were $14.2 million. Share-based compensation expense was $66.9 million for the six-month period.
- In July, Zillow agreed to acquire DotLoop for approximately $108 million in cash, subject to closing adjustments and customary conditions; closing was expected in Q3 2015. Zillow also determined that Market Leader met held-for-sale criteria and expected a sale by year-end 2015.
- The company announced a planned dividend of two non-voting Class C shares for each Class A or Class B share, with distribution scheduled for August 14, 2015. Two purported lawsuits sought to block the dividend; a preliminary-injunction hearing was scheduled for August 5.
Outlook, commentary and risks
- No quantified revenue, earnings or cash-flow guidance is provided. Management expected cost of revenue, sales and marketing, technology and development, and general and administrative expenses to increase in absolute dollars as the business grows; it also planned continued selective consumer and professional advertising and product investment.
- Management stated that cash, cash equivalents and investments, together with operating cash flows, should be sufficient for operating, working-capital, capital-expenditure and other requirements for at least the next 12 months.
- Key risks include successful integration of Trulia and realization of expected benefits; continued advertiser demand and user growth; competition; access to listing and property data following expiration of a major listing-aggregator agreement in April 2015; retention of key employees; privacy, security and service availability; and real estate-market and regulatory changes.
- The filing describes a May 2015 distributed denial-of-service attack on Zillow’s website; the company said it restored performance and found no material adverse effect or indication that internal controls were compromised.
- Litigation includes a trade-secret dispute with Move and others, patent matters, Trulia acquisition-related shareholder litigation and the post-quarter Class C dividend lawsuits. Management said it could not estimate possible losses for certain matters; an immaterial accrual was recorded for the Trulia shareholder litigation, with possible additional loss not estimable.
- Other commitments include $207.2 million of future operating lease payments and $108.6 million of non-cancelable content purchase commitments. The filing states interest-rate, inflation and foreign-currency exposures were not expected to have a material near-term effect.
Important facts for investors to verify
- How much reported growth reflects Trulia versus organic growth, and whether integration delivers the anticipated revenue opportunities and cost efficiencies.
- Progress on the Trulia integration, the remaining restructuring costs and employee retention, as well as final purchase-price allocation and acquired-intangible amortization.
- Whether operating cash generation improves as integration and growth spending continue; monitor cash and investment balances against capital expenditures, commitments and the 2020 notes.
- Outcome and potential exposure from disclosed litigation, including the Move dispute and Class C dividend lawsuits, and the planned Market Leader disposal and DotLoop acquisition.
- Performance and methodology behind key operating metrics—unique users and Agent Advertisers—which the company says are internally calculated and not independently verified.