Zillow Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results. Zillow operates Homes (including Zillow Offers), Internet, Media & Technology (IMT), and Mortgages businesses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $768.4 million | $599.6 million | $1,894.2 million | $1,053.7 million |
| Operating loss | $62.7 million | $62.5 million | $207.2 million | $125.3 million |
| Net loss | $84.4 million | $72.0 million | $247.7 million | $139.5 million |
| Adjusted EBITDA | $15.8 million | $2.3 million | $21.0 million | $26.2 million |
| Operating cash flow | Not separately presented for the quarter | $692.6 million | $(373.8) million |
Amounts in U.S. dollars. The filing reports Q2 diluted net loss per share of $0.38, versus $0.35 a year earlier; six-month diluted net loss per share was $1.15 versus $0.68.
- Revenue mix, Q2: Homes revenue rose 82% to $454.3 million; IMT fell 13% to $280.3 million; Mortgages rose 25% to $33.8 million. Homes represented 59% of revenue, compared with 42% a year earlier.
- Homes economics: Zillow Offers sold 1,437 homes, up 83%, at an average selling price of $315,800. Homes cost of revenue was $431.8 million against $454.3 million in Homes revenue, a narrow gross spread before selling and other expenses.
- IMT and mortgage trends: Premier Agent revenue declined 17% to $192.0 million, largely due to pandemic-related discounts; revenue per visit fell 28%. Mortgages revenue growth reflected increased Zillow Home Loans volume and low interest rates.
- Cash and liquidity: At June 30, cash and cash equivalents were $2.045 billion, short-term investments $1.491 billion, and restricted cash $33.6 million. Combined cash, investments, and restricted cash totaled $3.570 billion, versus $2.512 billion at year-end 2019.
- Debt: Balance-sheet debt carrying value was $2.007 billion, including $1.820 billion of convertible notes and $187.0 million of borrowings for Homes and Mortgages. Convertible-note principal totaled $2.387 billion. Zillow stated it complied with debt covenants and expected available cash, investments, and operating cash flows to fund needs for at least 12 months.
- Cash flow qualification: First-half operating cash flow included a $701.1 million cash benefit from lower inventory, as home sales and the pause in purchases reduced inventory. It should not be read as a recurring operating cash-flow run rate.
Material changes versus prior comparable periods
- Q2 revenue increased 28%, mainly because Zillow Offers sold more homes; the six-month increase was 80%. Homes grew to a substantially larger share of total revenue.
- Q2 net loss widened to $84.4 million from $72.0 million, while six-month net loss widened to $247.7 million from $139.5 million. First-half 2020 included $76.8 million of non-cash impairment charges: $71.5 million for the Trulia trade names and $5.3 million for an equity investment.
- Q2 operating loss was broadly flat year over year despite revenue growth. First-half interest expense rose to $75.2 million from $35.4 million, mainly reflecting convertible notes issued in 2019 and 2020.
- In May, Zillow issued $565 million principal of 2025 convertible notes, receiving $553.3 million net, and issued 8.8 million Class C shares for $411.5 million net. It used $194.7 million of note proceeds to repurchase part of its 2021 notes. These financings strengthened liquidity but increased debt and share count.
Outlook, risks, contingencies, and unusual items
- COVID-19: Zillow paused Zillow Offers purchases in all markets on March 23, 2020 and resumed in selected markets from May 18. It was active in 15 of 24 markets at June 30 and reported activity in all 24 beginning in August. Management expected the gradual restart to significantly reduce near-term Zillow Offers revenue until acquisition and resale volumes recover. The pandemic’s duration and financial impact remained uncertain.
- Management actions and expectations: The company offered discounts to Premier Agent and other customers, paused most advertising and noncritical hiring, and reduced discretionary spending. Management expected to increase hiring and marketing during the rest of 2020. It anticipated future increases in Premier Agent revenue as discounts ended and in mortgage revenue from volume and low rates, but gave no quantified company-wide guidance.
- Other unusual items: The quarter included a $6.4 million gain on partial extinguishment of 2021 notes. The first-half impairment charges were non-cash; the Trulia asset was thereafter amortized over an estimated 10-year useful life.
- Contingencies: Zillow disclosed ongoing copyright, securities, derivative, and patent litigation. It said a possible loss in IBM’s first patent action could not be estimated; it did not believe losses in several other matters were probable. No material legal accruals were recorded at June 30.
- Other risks: Zillow Offers is inventory- and capital-intensive and relies on credit facilities; home values, resale timing, borrowing availability, and housing-market conditions could affect results. Variable-rate facilities create interest-rate exposure. The filing also identifies operational, competitive, regulatory, privacy, and data-provider risks.
Investor verification points
- Track Zillow Offers purchase resumption, inventory, homes sold, resale margins, and use and availability of its credit facilities.
- Assess whether IMT revenue and monetization recover as temporary discounts and reduced advertising activity change.
- Reconcile operating cash flow to inventory movements and other working-capital changes rather than treating the first-half cash inflow as recurring.
- Review total debt obligations, convertible-note terms and potential dilution, and the effect of higher interest expense.
- Monitor COVID-19 effects and updates to the IBM and other disclosed litigation, including any change in estimated exposure.