Zillow Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial amounts below are in millions unless otherwise stated. Zillow Offers’ results are reported as discontinued operations; its wind-down was complete by September 30, 2022.
Business context and financial results
Zillow operates its Internet, Media & Technology (IMT), Mortgages and Homes (title and escrow) segments. The filing attributes weaker results principally to higher and volatile mortgage rates, housing affordability and inventory conditions. Zillow reported 5,830 employees at September 30, down from 8,005 at year-end 2021, primarily reflecting the Zillow Offers wind-down.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $483 | $550 | $1,523 | $1,597 |
| Gross profit / margin | $394 / 82% | $468 / 85% | $1,245 / 82% | $1,369 / 86% |
| Operating expenses | $445 | $413 | $1,255 | $1,162 |
| Continuing-operations loss | $(51) | Income $18 | $(16) | Income $96 |
| Net loss, including discontinued operations | $(53) | $(329) | $(29) | $(267) |
| Adjusted EBITDA, non-GAAP | $130 | $156 | $441 | $500 |
Revenue trends and material changes
- Q3 revenue declined 12%. IMT revenue was $457, down 5%; Mortgages revenue was $26, down 63%. Homes segment revenue was not material.
- Premier Agent revenue fell 13% to $312; revenue per visit fell 16% to $0.113. Rentals revenue rose 10% to $74, while other IMT revenue rose 31% to $71, primarily reflecting ShowingTime.
- Mortgage originations revenue weakened amid a 76% decline in loan volume to $271 million, including a 96% fall in refinance volume. The company also cited lower gain-on-sale margins and reduced mortgage advertising demand.
- Operating expenses rose 8% in Q3 despite lower sales and marketing spending, as technology and development and general and administrative costs increased. Share-based compensation was $148 in Q3 versus $79 a year earlier.
- Net loss improved year over year largely because Q3 2021 included a $347 after-tax discontinued-operations loss. Continuing operations nevertheless moved from income to loss.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $4,420, compared with $(2,962) in 2021. The 2022 inflow was primarily driven by a $3,904 inventory reduction as Zillow Offers wound down; it should not be read as a comparable indication of recurring operating cash generation.
- Nine-month investing cash flow was $(1,123), including $1,019 of net investment purchases and $87 of property-and-equipment purchases. Financing cash flow was $(4,160), including $2,205 of credit-facility repayments, $1,158 of long-term debt settlement and $773 of share repurchases.
- Cash, cash equivalents, investments and restricted cash totaled approximately $3.5 billion at quarter-end, versus $2.8 billion at December 31, 2021. Cash and cash equivalents were $1,973 and short-term investments were $1,516. Management said available resources and operating cash flows should cover needs for at least 12 months.
- Debt included $1,672 of convertible-note principal (carrying value $1,659) and $45 borrowed under mortgage facilities. The notes mature in 2024, 2025 and 2026; none was due within 12 months. The mortgage facilities had total capacity of $250 and maturities in 2023.
Outlook, unusual items and risks
- Management expected IMT revenue to decline in absolute dollars in Q4 2022, primarily due to housing affordability pressures, and Mortgages revenue to decline because of adverse housing-market factors. It also expected Q4 restructuring costs to rise as it streamlined operations and prioritized investments. The filing provides no specific revenue or earnings guidance amounts.
- August equity award actions—including option repricing and supplemental restricted stock units—were expected to generate approximately $189 of incremental share-based compensation expense; $56 was recognized in Q3, with most remaining expense expected over roughly two years. The option repricing affected 7 million options and 3,348 employees.
- On November 1, 2022, after quarter-end, the board expanded repurchase authorization to permit purchases of some outstanding convertible notes. At September 30, $674 remained available under the share repurchase authorizations. Nine-month share repurchases totaled $773.
- Housing-market weakness, interest rates, inflation, mortgage funding and secondary-market sales, competition, privacy and data access, regulation, and litigation are cited risks. A 2017 securities class action had reached an agreement in principle, subject to final documentation and court approval; insurance was expected to cover the full settlement payment. IBM patent matters remained, with possible loss not estimable. The company recorded no material accruals for the described legal matters.
- The filing says disclosure controls were effective at September 30 and reports no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Q4 housing and mortgage conditions further reduce Premier Agent monetization, loan volume and IMT or Mortgages revenue.
- How much of reported operating cash flow reflects the nonrecurring Zillow Offers inventory liquidation, and the ongoing cash-generation profile after the wind-down.
- The timing and effect of the remaining equity-award compensation expense, restructuring actions and related workforce costs.
- Liquidity and capital-allocation plans, including convertible-note maturities, repurchases and mortgage-facility funding needs.
- Final settlement terms and court approval for the securities class action, and developments in IBM and other litigation.