Zillow Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results are for continuing operations unless noted. Zillow reported one operating and reportable segment beginning in 2023. Zillow Offers was wound down in 2022; its prior-year results are presented as discontinued operations.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $506 million | $504 million | $975 million | $1,040 million |
| Gross profit / margin | $402 million / 79% | $407 million / 81% | $779 million / 80% | $851 million / 82% |
| Net income (loss) | $(35) million | $8 million | $(57) million | $24 million |
| Adjusted EBITDA (non-GAAP) | $111 million | $145 million | $215 million | $311 million |
| Operating cash flow | Not separately presented | Not separately presented | $193 million | $4.255 billion |
- Q2 revenue was nearly flat year over year. Rentals grew 28% to $91 million, while Residential declined 3% to $380 million and Mortgages declined 17% to $24 million. Other revenue was $11 million.
- First-half revenue fell 6% year over year: Residential declined 9% to $741 million and Mortgages declined 33% to $50 million; Rentals increased 25% to $165 million.
- Operating expenses rose 17% in Q2 to $469 million, including increases in technology and development and general and administrative costs. Share-based compensation was $130 million in Q2 and $233 million in the first half.
- At June 30, cash and cash equivalents were $1.566 billion and short-term investments were $1.745 billion; total cash, investments and restricted cash were approximately $3.3 billion. Total debt was $1.729 billion, including $1.663 billion of convertible notes and $66 million under mortgage-related credit facilities. Shareholders’ equity was $4.486 billion.
- First-half operating cash flow fell sharply from $4.255 billion to $193 million. The 2022 figure was substantially affected by a $3.9 billion reduction in inventory as Zillow Offers was wound down, so the periods are not directly comparable. First-half 2023 investing cash flow was positive $84 million and financing cash flow was negative $177 million.
Business trends, outlook and material items
- Management cited low housing inventory, fewer new listings, mortgage-rate increases and volatility, and home-price fluctuations as pressures on the housing market. Industry residential transaction dollars declined by more than 20% year over year in both the quarter and first half, according to the National Association of REALTORS.
- Visits declined 8% in Q2 and 7% in the first half; average monthly unique users declined 3% and 1%, respectively. Q2 Residential revenue per visit rose 6%, partially offsetting lower visits.
- Q2 Rentals growth reflected 15% growth in average monthly rental unique visitors and higher revenue per visitor. Zillow Home Loans’ Q2 loan originations rose 3% to $340 million, with purchase originations up 73% and refinance originations down 97%.
- Outlook: Zillow expected Residential revenue to decline in absolute dollars in Q3 2023, primarily due to housing-market pressures. Management also expected Q3 general and administrative expense to decrease in absolute dollars, partly because Q2 included costs associated with personnel departures. The filing provides no numerical revenue or earnings guidance.
- On July 31, 2023, the board authorized an additional $750 million of repurchases, bringing total authorization to $2.5 billion and available capacity to $1.0 billion. Zillow repurchased $236 million of stock in the first half. The same day, the company acquired Aryeo for approximately $35 million in cash and Class C stock, subject to adjustments.
- Legal matters include proposed settlements in older securities and derivative actions, with final approval hearings scheduled for August 2023. The company reported that the securities class-action settlement payment was funded by insurers; it expected insurance to cover attorneys’ fees and costs in the derivative settlement. IBM patent litigation remains unresolved; Zillow stated a possible loss could be incurred but could not estimate a range. No material accruals were recorded for the matters described.
- Other risks include housing-market and interest-rate exposure, inflation and costs, mortgage-funding and loan-resale capacity, listing-data and MLS access, competition, cybersecurity, litigation and debt obligations. Management said cash, investments and operating cash flows should cover requirements for at least 12 months.
Key investor verification points
- Track whether housing-market conditions and the Q3 Residential revenue outlook develop as management anticipated.
- Assess the sustainability and quality of Adjusted EBITDA against GAAP losses, rising operating costs and substantial share-based compensation.
- Distinguish recurring operating cash generation from the exceptional 2022 cash flow associated with the Zillow Offers wind-down; monitor mortgage working-capital needs.
- Review liquidity and refinancing or settlement exposure as the $608 million principal amount of 0.75% convertible notes approaches its September 2024 maturity, alongside other notes due in 2025 and 2026.
- Verify final court approval and insurance coverage for proposed settlements, and follow the unresolved IBM litigation and any resulting financial exposure.
- Monitor the impact of the expanded repurchase authorization and Aryeo acquisition on cash, share count and capital allocation.