Zillow Group, Inc. — 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016. Zillow Group operates online and mobile real estate, rental and mortgage marketplaces, monetized primarily through advertising and professional software and services. Its brands include Zillow, Trulia, StreetEasy, HotPads and others.
Comparisons with 2015 are not fully like-for-like: Trulia was included only from February 17, 2015, and 2015 results included Market Leader through its September 2015 divestiture. Zillow acquired Naked Apartments and Bridge Interactive in 2016 and sold Diverse Solutions.
Financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $846.6 million | $644.7 million |
| Operating loss | $192.9 million | $149.5 million |
| Net loss | $220.4 million; $1.22 per share | $148.9 million; $0.88 per share |
| Adjusted EBITDA (non-GAAP) | $14.8 million | $87.6 million |
| Cash from operating activities | $8.6 million | $22.7 million |
| Cash, cash equivalents and investments | $506.5 million | $520.3 million |
| Working capital | $484.6 million | $493.7 million |
| Long-term debt, balance-sheet carrying value | $367.4 million | $230.0 million |
Revenue grew 31%. Marketplace revenue increased 40% to $778.1 million and made up 92% of revenue; display revenue fell 23% to $68.5 million. Premier Agent revenue rose 35% to $604.3 million, other real estate revenue rose 192% to $102.6 million, and mortgage revenue rose 61% to $71.1 million. Marketplace growth more than offset weaker display revenue.
Operating and net margins were approximately negative 22.8% and negative 26.0%, respectively. Costs and expenses totaled $1.04 billion, or approximately 123% of revenue. General and administrative expense rose 84% to $313.7 million, principally reflecting the $130 million Move litigation settlement. Sales and marketing rose 24% and technology and development rose 38%.
Average monthly unique users in the fourth quarter were 140.1 million, up 13% year over year. Average monthly Premier Agent revenue per advertiser increased 18% for the year to $571, while advertisers declined to 84,151 from 92,366. Mortgage loan information requests fell 36% to 29.9 million; management attributed this to tighter requirements intended to improve lead quality, while revenue per request increased.
Material changes versus the prior comparable period
- Net loss widened by $71.6 million, while Adjusted EBITDA declined by $72.7 million.
- Operating cash flow fell by $14.0 million. The 2016 net loss included the paid $130 million Move settlement; share-based compensation and depreciation and amortization were significant non-cash expenses.
- In December, the company issued $460 million of 2.00% convertible notes due 2021. It used about $370.2 million of proceeds to repurchase $219.9 million principal of Trulia’s 2020 notes and about $36.6 million for capped calls. The repurchase generated a $22.8 million debt-extinguishment loss. Remaining 2020 notes had $10.1 million carrying value at year-end.
- Premier Agent moved broadly to auction-based pricing in the fourth quarter, alongside a self-service interface. Management said the financial effect was not yet predictable.
Outlook, risks, contingencies and unusual items
- Management said it expected revenue growth and continued investment in products, technology, sales and marketing; it also expected these operating expenses to rise in absolute dollars. It expected general and administrative expense to decrease near term versus 2016, primarily because 2016 included the $130 million settlement. The filing provides no quantified revenue or earnings guidance.
- Liquidity: management believed cash, cash equivalents and investments plus operating cash flows would fund operations, working capital and capital needs for at least 12 months. Operating cash generation was modest relative to the net loss and investment spending.
- Contractual obligations totaled $911.0 million, including $460 million principal on the 2021 notes, $10.1 million on the 2020 notes, $171.5 million of operating leases and $120.3 million of content purchase commitments. These are scheduled over multiple years, not all immediately payable.
- Legal: the Move matter was settled and paid for $130 million with no admission of liability. The wage-and-hour class settlement is up to $6 million, accrued at year-end, with payments expected in 2017. In the VHT image copyright case, a possible loss was disclosed but the amount or range could not be estimated; no accrual was recorded because management did not consider a loss probable.
- Key business risks include dependence on advertising, competition for users and advertisers, reliance on third-party listing and property data, real estate market and seasonality exposure, privacy and cybersecurity, evolving regulation and licensing, and uncertain returns from acquisitions. The filing also notes risks around the accuracy of Zestimates and the new Premier Agent pricing model.
- The company had $893.3 million of federal net operating loss carryforwards, but a full valuation allowance against deferred tax assets; use of tax attributes may be limited by ownership-change rules. The 2019 lease-accounting standard was expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether auction-based Premier Agent pricing sustains revenue per advertiser and advertiser retention, especially as advertiser counts decline.
- Whether marketplace growth—particularly rentals—can offset declining display revenue and lower mortgage request volumes.
- Whether cash flow improves after the settlement year and how planned investment and capital spending affect liquidity.
- The economic and potential dilution implications of the $460 million 2021 convertible notes, the capped calls, and the remaining 2020 notes.
- Updates on the VHT case, wage-and-hour settlement payments, and any other legal or regulatory contingencies.
- The comparability of reported growth given the Trulia acquisition and Market Leader divestiture, and the limitations of management’s unique-user and Adjusted EBITDA measures.
The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting as of December 31, 2016.