The comapny said the “wind down” of Offers will “take several quarters” and will lead to reduction of the company’s workforce by 25%. The announcement, which followed a “pause” in the business announced two weeks prior, sent Zillow shares down 8% in late trading, after the stock had already fallen 11% during the regular session. As CEO Richard Barton explained in prepared remarks, “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility.” The wind-down comes even as Zillow Offers was seeing surging growth. Revenue in the quarter had risen 531%, year over year, to $1.17 billion. Back in 2019, Barton had vowed to prove doubters wrong about the economics of the business. Tonight, it seems, the negative ecomomics have prevailed. The entire Zillow Homes business unit, of which Offers was 99% of the total, had a negative gross profit margin of 36%, and a negative ebitda margin of 32%, meaning that Zillow was losing 36 cents on the dollar, effectively, for every dollar of home sales. (The tiny remaining sliver of Homes is the company’s title and escrow services business.) Zillow’s borrowings to fund buying homes has ballooned. According to a document of supplementary financial figures posted by Zillow on its investor relations site, the company’s borrowings under its credit facilities were $2.67 billion in the quarter. That is up from $987 million in the June quarter. The credit facilities, funded by Goldman Sachs and other banks, are not entirely for home purchases, but in past, the vast majority has been. In the June quarter, $824 million of the $987 million total was for homes purchased. In the company’s letter to shareholders this afternoon, Zillow explained multiple issues had felled the program, sales of which had quintupled in the three months ended in September. One was the global pandemic, which changed housing patterns, it said. The end result was that the company was unable to forecast adequately, it said. Zillow expected to have “guardrails” on home prices so that it could ensure a profit as it bought homes from people and then sold them for a profit. However, forecasting was proving too tough: In addition to the inability to forecast, Zillow said that to make the business scale adequately, it would require much more capital than the company wanted to take on: Because of the inability to forecast, Zillow will take multiple hundred-million-dollar write-offs because of lost value of homes, it said this afternoon: The deep losses on Offers contributed to a rough earnings report this evening for Zillow. For September quarter, Zillow’s total revenue rose 165%, year over year, to $1.74 billion, yielding a net loss of 95 cents a share. Analysts had been modeling $2 billion and a 17-cent profit per share. For the current quarter, the company sees revenue of $2.22 billion to $2.64 billion, above Wall Street’s average estimate for $1.96 billion.
