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Earnings Results: Zillow lost more than $230 million in its iBuying fire sale, but the stock is still surging

Three months after a home-flipping initiative imploded in an embarrassing public display, Zillow Group Inc. reported record revenue from selling the underwater homes Thursday, sending shares surging.

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shares rose between 15% and 20% in after-hours trading Thursday, when executives revealed fiscal fourth-quarter revenue approaching $4 billion, more than the company recorded in any full year before 2021. Even with the gains, Zillow shares would still be well short of the prices commanded three months ago, when executives admitted that a business created to flip homes had purchased far too many houses at too-expensive prices.

Zillow shares have plunged 24% in the three months since Zillow executives said they expected to lose more than half a billion dollars and lay off about a quarter of staff as a result of the massive miscalculation. Chief Executive Rich Barton and Chief Financial Officer Allen Parker said those estimates were coming down as houses came off the ledger — expectations were for a fourth-quarter write-down of roughly $250 million, but it actually came in at $93 million — and that they now expected the dissolution of the iBuying business would be cash-flow positive.

“We’ve made significant progress in our efforts to wind down our iBuying
business — selling homes faster than we anticipated at better unit economics
than we projected,” they wrote in a letter to investors. “The wind-down process is running smoothly and efficiently, and we expect it to generate positive cash flow.”

Those “unit economics” were still not great for Zillow, however. The company managed to sell 8,353 homes in the final three months of the year, but took an average loss of $27,609 on those sales for a total loss of more than $230 million. After disclosing in December that they had already found buyers for more than half the homes they still owned, and expected to use millions recouped from the sales to repurchase stock, executives said Thursday they have now reached agreements to sell 85% of the homes.

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Parker added in a conference call that Zillow wrapped up its final purchase in January and expects to sell all but a few of the houses by the end of the second quarter this year, and went into more detail about the cash flow.

“We expect the approximately $800 million of cash equity that was in the inventory at the end of Q3 will more than cover the realized losses on inventory operating costs and the cash portion of restructuring costs of the winddown,” Parker said. “As a result, we now expect the net effect of the wind-down of iBuying operations to be cash-flow positive in aggregate slightly better than our prior outlook of at least cash-flow neutral at the end of Q3.”

Barton and Parker bet on iBuying as a key part of what they called “Zillow 2.0,” but said in Thursday’s letter and call that the dissolution of that business had not changed their strategy.

“Our mission has been steady, and our vision for Zillow 2.0 remains unchanged,” they wrote in the letter.

Zillow’s iBuying business had helped boost revenue — in 2021, Zillow recorded revenue of more than $8 billion. But executives said Thursday their long-term goal is to hit $5 billion in revenue in 2025 after dumping the home-flipping business. Instead of being such an integral part of the home-purchasing process as iBuyers, Zillow executives now want to build a mobile app that can help buyers and sellers navigate the entire home-buying and -selling process.

“To execute on this strategy, we are focused on building the ‘housing super app’ — an integrated digital experience in which Zillow connects all the fragmented pieces of the moving process and brings them together on one transaction platform,” they wrote. “We are well-positioned to execute here, given our position in the hearts and minds of consumers today, with more than 3x the number of daily active app users than our closest competitor.”

“We see expanded seller service within closing services as key to the integration we expect to provide and are hard at work cooking up what’s next based on our learnings from having now bought and sold 1000s of homes of homes,” Barton said in the conference call. “When we put all of these ingredients into the pot, we see an opportunity to meaningfully increase the number of customers who raised their hands to work with us and the number of customers who ultimately transact with us.”

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Overall, Zillow reported a quarterly loss of $261.2 million, or $1.03 a share, on revenue of $3.88 billion, up from $789 million a year ago. After adjusting for stock compensation and more than $70 million in impairment and restructuring costs, Zillow reported a loss of 42 cents a share, after posting adjusted earnings of 41 cents a share a year ago. Analysts on average expected an adjusted loss of 90 cents a share on sales of $3.01 billion, according to FactSet.

For the first quarter of 2022, Zillow executives guided for total revenue of $3.12 billion to $3.44 billion, with a midpoint of $3.3 billion, while analysts on average were expecting revenue of $3.26 billion. They predicted adjusted Ebitda of $124 million to $174 million, while analysts were predicting a loss by that standard of $13 million, according to FactSet.

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