Zillow Group, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Unaudited quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Zillow Group operates real estate and home-related consumer marketplaces and provides advertising, marketing software and technology services. Revenue is reported in one operating segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $266.9M | $208.4M | $512.6M | $394.4M |
| Operating loss | $(16.6)M | $(155.3)M | $(15.4)M | $(203.4)M |
| Net loss | $(21.8)M | $(156.1)M | $(26.5)M | $(203.8)M |
| Net loss per share, diluted | $(0.12) | $(0.87) | $(0.14) | $(1.14) |
| Adjusted EBITDA (non-GAAP) | $39.7M | $(101.3)M | $94.5M | $(99.4)M |
- Q2 revenue grew 28% year over year; marketplace revenue rose 30% to $248.6M, while display revenue rose 9% to $18.3M. Premier Agent revenue was $189.7M (+29%), other real estate $37.9M (+45%), and mortgages $20.9M (+14%).
- For the first half, revenue increased 30%. Marketplace revenue rose 33% to $478.9M; display revenue was $33.7M, roughly flat year over year. Premier Agent revenue was $365.0M (+30%) and other real estate revenue was $72.6M (+65%).
- Q2 operating loss was about 6% of revenue; first-half operating loss was about 3% of revenue. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results.
- Cash and cash equivalents were $276.5M and short-term investments $322.5M at June 30; including restricted cash, these totaled approximately $600.0M. Current assets were $686.6M versus current liabilities of $102.5M.
- First-half operating cash flow was $84.9M, compared with cash used of $60.5M in 2016. Investing cash outflow was $114.0M and financing cash inflow $62.0M; cash increased $32.9M during the period.
- Long-term debt carrying value was $376.3M. The 2021 convertible notes had $460.0M principal outstanding and a 2.00% coupon; the 2020 notes had a reported carrying value of $10.1M and a 2.75% coupon. The 2021 notes are convertible and may be settled in cash, shares or both at the company’s election.
Changes, outlook and notable matters
- The 2016 comparison is materially affected by a $130.0M Move litigation settlement paid in June 2016, plus related legal costs. This drove much of the year-over-year improvement in G&A, operating loss and Adjusted EBITDA; it is not a like-for-like measure of underlying expense trends.
- Management attributed marketplace growth to increased traffic and the broad rollout of auction-based Premier Agent pricing. Q2 visits rose 17% to 1.68 billion; average monthly unique users increased 6% to 178.1 million. Management said the long-term effect of the pricing change remained uncertain.
- Rentals revenue grew 64% in Q2. Mortgage loan-information requests fell 27% in Q2 and 34% for the first half, which management attributed to changes intended to improve request quality and advertiser value; revenue increased as revenue per request rose.
- Management expects cost of revenue, sales and marketing, technology and development, and G&A to rise in absolute dollars as the business expands. It stated that available cash and investments, together with operating cash flows, should be sufficient for operations and capital needs for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- Legal contingencies include a $4.1M accrued VHT copyright judgment, which Zillow appealed in July 2017; a $6.0M accrued employee class-action settlement; and a CFPB matter concerning the co-marketing program. The company reported that the CFPB had concluded its investigation, but settlement discussions or further action remained possible; no loss was accrued and the possible loss was not estimable.
- The company expects the new lease accounting standard to materially increase balance-sheet assets and liabilities, primarily due to office leases. It also anticipated a significant revenue-standard impact related to sales commissions, which would be capitalized and expensed over the expected recovery period; adoption was planned for January 1, 2018.
Most important facts for investors to verify
- Underlying growth and profitability after accounting for the unusually large 2016 Move settlement and related legal expense.
- Sustainability and advertiser response to auction-based Premier Agent pricing, and whether traffic growth continues to translate into revenue.
- Developments and potential financial exposure from the CFPB matter, VHT appeal and other legal proceedings.
- Convertible-note terms, dilution or cash-settlement consequences, and the company’s liquidity and capital-spending needs.
- Implementation effects of new revenue and lease accounting standards, including the treatment of sales commissions and operating leases.