Zillow Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited. The November 2 decision to wind down Zillow Offers occurred after quarter-end and is discussed as a subsequent event; Zillow planned to present it as a discontinued operation once disposition is complete.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.737 billion | $656.7 million | $4.265 billion | $2.551 billion |
| Gross profit (margin) | $240.6 million (14%) | $412.9 million (63%) | $1.286 billion (30%) | $1.027 billion (40%) |
| Operating income (loss) | $(281.6) million | $76.4 million | $(132.3) million | $(130.7) million |
| Net income (loss) | $(328.2) million | $39.6 million | $(266.6) million | $(208.2) million |
| Operating cash flow | Not presented by quarter | $(2.961) billion | $750.2 million |
- Revenue mix and changes: Q3 Homes revenue was $1.186 billion, up 534%, primarily from Zillow Offers selling 3,032 homes versus 583 a year earlier. IMT revenue grew 16% to $480.2 million; Mortgages revenue grew 30% to $70.3 million. Overall Q3 revenue rose 164%, but the mix was heavily weighted to home resale.
- Profitability and unusual charge: Zillow recorded a $304.4 million inventory write-down after homes were purchased at prices above estimated future selling prices, net of selling costs. Q3 Homes gross loss was $236.7 million; IMT gross profit was $428.8 million. Q3 loss also included a $14.8 million debt-extinguishment loss.
- Nine-month trends: Revenue increased 67%. IMT pretax income rose to $407.3 million from $117.6 million, while Homes reported a $539.4 million pretax loss. Nine-month Adjusted EBITDA, a non-GAAP measure, was $195.0 million versus $173.1 million; Q3 Adjusted EBITDA was a loss of $168.7 million versus income of $152.2 million.
- Cash flow: Nine-month operating cash use was driven principally by a $3.6 billion increase in inventory as home purchases exceeded sales. Investing cash flow was positive $620.6 million, including investment maturities and the ShowingTime acquisition; financing cash flow was positive $3.088 billion, including increased home-related borrowings and equity proceeds.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $2.195 billion, short-term investments $1.020 billion, and restricted cash $331.0 million. The company reported $3.6 billion in cash, investments and restricted cash combined.
- Inventory was $3.758 billion, up from $491.3 million at December 31, 2020. Total assets were $10.838 billion; total liabilities were $5.067 billion.
- Total debt carrying value was $4.441 billion, including $2.674 billion in current borrowings under credit facilities and $1.766 billion in long-term debt. Homes credit facilities and the 2021-1 securitization had $2.9 billion outstanding; mortgage warehouse and repurchase borrowings were $208.3 million. The company said it was in compliance with debt covenants at quarter-end.
- Management believed cash, cash equivalents and investments, together with operating cash flows, would be sufficient for at least 12 months. However, Zillow Offers financing relied in part on uncommitted facilities, and the filing cautioned that unavailable financing could require use of cash to fund contracted home purchases.
Outlook, risks and contingencies
- On October 18, Zillow Offers paused signing new home-purchase contracts through year-end; on November 2, the board decided to wind down the business. The wind-down was expected to take several quarters and reduce the workforce by approximately 25%. Zillow expected to complete purchases already under contract and renovate and sell homes in inventory.
- Management expected Zillow Offers inventory growth to lift revenue in the December 2021 and March 2022 quarters, but anticipated revenue to decline beginning in the June 2022 quarter. It also expected further near-term Homes cost of revenue, including potential losses on homes under contract. No formal consolidated earnings or revenue guidance is provided in the filing.
- Homes under contract but not yet purchased totaled $3.3 billion at September 30; Zillow said these contracts could be canceled without significant penalty. Non-refundable escrow on those contracts was $7.7 million.
- Risks include home-price volatility, inventory valuation and resale outcomes, renovation and operational capacity, labor and supply-chain constraints, lender availability and wind-down execution. COVID-19 and housing-market conditions add uncertainty. A 1 percentage-point rise in LIBOR was estimated to increase annual interest expense by approximately $24.7 million on Zillow Offers-related floating-rate facilities and $2.1 million on mortgage facilities, assuming balances were unchanged.
- The $511.7 million ShowingTime acquisition closed September 30. The FTC said its investigation continued and reserved the right to take further action; purchase accounting was preliminary.
- IBM patent litigation presented a reasonable possibility of loss, but the possible loss or range was not estimable. The company reported no material accruals for the discussed legal matters; it did not believe the securities and derivative suits were reasonably likely to result in material loss.
Important facts for investors to verify
- How the Zillow Offers wind-down affects inventory carrying values, sale proceeds, contracted purchases, cash needs and any additional charges.
- Whether uncommitted credit capacity remains available on acceptable terms, and the effect of financing covenants, collateral eligibility and interest rates.
- Actual timing, costs and workforce impacts of the wind-down, including whether Zillow can retain staff and partners needed to sell homes and operate other businesses.
- Underlying performance of IMT and Mortgages apart from the Homes business, including Premier Agent monetization and mortgage gain-on-sale margin trends.
- Final ShowingTime purchase-price allocation and any developments in the FTC review or IBM litigation.