Washington, D.C. 20549
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those risks, uncertainties and assumptions described in Part I, Item 1A (Risk Factors) of this report. report, including, but not limited to:
The information Zillow Group posts through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following Zillow Group’s press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Annual Report on Form10-K or any other document we file with the SEC, and the inclusion of our website addresses and Twitter account are as inactive textual references only.
We continue to evaluate a wide array of potential strategic opportunities, including acquisitions and investments. For example, we acquired
HREO and NewZillow Home
Feed, and purchased an equity interestLoans in
a privately held corporation, in the year ended December 31, 2017.October 2018. Any transactions that we enter into could be material to our financial condition and results of operations. The acquisitions may not result in the intended benefits to our business, and we may not successfully evaluate or utilize the acquired products, technology, or personnel, or accurately forecast the financial impact of an acquisition transaction. The process of integrating an acquired company, business or technology could create unforeseen operating difficulties and expenditures. The areas where we face risks include:
diversion of management time and focus from operating our business to acquisition integration challenges;
consumer customer and industry acceptance of products and services offered by the acquired company;
implementation or remediation of controls, procedures and policies at the acquired company;
coordination of product, engineering and sales and marketing functions;
retention of employees from the acquired company;
liability for activities of the acquired company before the acquisition;
litigation or other claims arising in connection with the acquired company; and
impairment charges associated with goodwill and other acquired intangible assets.
For example, during the year ended December 31,
2018, we recognized a non-cash impairment charge of $10.0 million related to a June 2017
we recordedequity investment and a
non-cash impairment for
$174.0$69.0 million related to the
$351.0 million indefinite-lived
intangible asset that we recorded in connection with our February 2015 acquisition of Trulia
for Trulia’s trade names and
trademarks. For additional information about thenon-cash impairment, see Note 9 to our consolidated financial statements.trademarks intangible asset.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business, results of operations and financial condition.
Our Fraud Detection Processes and Information Security Systems May Not Successfully Detect All Fraudulent Activity by Third Parties Aimed at
Users of Our
Mobile Applications and Websites,Employees or Customers, Which Could Adversely Affect Our Reputation and Business Results.
Third-party actors have attempted in the past, and may attempt in the future, to conduct fraudulent activity by engaging with
users of our
mobile applications and websitescustomers by, for example, posting fake real estate listings on our sites and attempting to solicit personal information or money from
users.customers, and by engaging with our employees by, for example, making fake requests for transfer of funds or sensitive information. We make a large number of wire transfers in connection with loan and real estate closings and process sensitive personal data in connection with these transactions. Though we have sophisticated fraud detection processes and have taken other measures to identify fraudulent activity on our mobile applications,
websites and
websites,internal systems, we may not be able to detect and prevent all such activity.
Similarly, the third parties we use to effectuate these transactions may fail to maintain adequate controls or systems to detect and prevent fraudulent activity. Persistent or pervasive fraudulent activity may cause
userscustomers and
advertisersreal estate partners to lose trust in us and decrease or terminate their usage of our products and services,
or could result in financial loss, thereby harming our business and results of operations.
We Are Subject to
a Number ofMultiple Risks Related to the Credit Card and Debit Card Payments We Accept.
We accept payments through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees may require us to increase the prices we charge and would increase our operating expenses, either of which could harm our business, financial condition and results of operations.
We depend on processing vendors to complete credit and debit card
transactions.transactions, both for payments owed to Zillow Group directly and for payments to other third-parties, such as payments made by renters to landlords in our rental payments product. If we or our processing vendors fail to maintain adequate systems for the authorization and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if these systems fail to work properly and, as a result, we do not charge our customers’ credit cards on a timely basis or at all, our business, revenue, results of operations and financial condition could be harmed.
The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly
more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data are compromised due to a breach of data, we may be liable for significant costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures, and significantly higher credit card-related costs, each of which could harm our business, results of operations and financial condition.
We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it more difficult for us to comply. We are required to comply with payment card industry security standards. Failing to comply with those standards may violate payment card association operating rules, federal and state laws and regulations, and the terms of our contracts with payment processors. Any failure to comply fully also may subject us to fines, penalties, damages and civil liability, and may result in the loss
or impairment of our ability to accept credit and debit card payments. Further, there is no guarantee that such compliance will prevent illegal or improper use of our payment systems or the theft, loss, or misuse of data pertaining to credit and debit cards, card holders and transactions.
If we are unable to maintain our chargeback rate or refund rates at acceptable levels, our processing vendors may increase our transaction fees or terminate their relationships with us. Any increases in our credit and debit card fees could harm our results of operations, particularly if we elect not to raise our rates for our service to offset the increase. The termination of our ability to process payments on any major credit or debit card
wouldcould significantly impair our ability to operate our business.
Risks Related to Our Intellectual Property and Technology
If Our Security Measures or Technology Systems Are Compromised, We May Be Subject to Legal Claims and Suffer Significant Losses, and
ConsumersCustomers May Curtail Use of Our Products and Services and
AdvertisersOur Real Estate Partners May Reduce
or Eliminate Their Advertising on Our Mobile Applications and Websites.
Our products and services involve the transmission, processing, and/or storage of users’ information, some of which may be private or include personally identifiable information such as social security numbers,
financial account information, and credit card information. For example, our dotloop real estate transaction management software stores sensitive personal and financial information,
and our Mortech mortgage product and pricing software for mortgage professionals processes social security
numbers.numbers, our rental applications product allows customers to obtain credit and background checks containing sensitive personal and financial information, and Zillow Home Loans, our mortgage origination business, receives, handles and transmits highly sensitive personal and financial information about its borrowers. Security breaches and administrative or technical failures could expose us to a risk of data loss or exposure, including both
consumercustomer and
customerreal estate partner data as well as intellectual property and other confidential business information, which could result in potential significant liability and litigation. Like all mobile application and website providers, our mobile applications and websites are vulnerable to computer viruses,
break-ins, phishing attacks, or other attacks, any of which could lead to loss of critical data or the
unauthorized disclosure or use of personal or other confidential information. Further, outside parties may attempt to fraudulently induce employees, usersofficers, directors, customers or advertisersreal estate partners to disclose sensitive information in order to gain access to our information or our users’customers’ or advertisers’real estate partners’ information, and our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employeeuser error, malfeasance or other disruptions. If we experience compromises to our security that result in the loss or unauthorized disclosure of confidential information, our userscustomers and advertisersreal estate partners may lose trust in us, userscustomers may decrease the use of our mobile applications or websites or stop using our mobile applications, websites, or websitesservices in their entirety, advertisersreal estate partners may decrease or stop advertising on our mobile applications or websites, and we may be subject to legal claims, government investigation and additional state and federal legal requirements.
We engage a variety of vendors to process and store certain
usercustomer information, some of which may be private or include personally identifiable information. We also depend on vendors to host many of the systems and infrastructure used to provide our products and services. If our data storage vendors fail to maintain adequate information security systems and our systems or our
users’customers’ information is compromised, our business, results of operations and financial condition could be harmed. A security breach at our vendor could be perceived by
consumerscustomers or our
customersreal estate partners as a breach of our systems and could result in damage to our reputation and expose us to other losses.
Further, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until launched against a target, and may originate from less regulated and remote areas around the world, we may be unable to proactively address all these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new
userscustomers and increase engagement by existing
users,customers, cause existing
userscustomers to curtail or stop use of our products or services or close their accounts, cause existing
advertisersreal estate partners to cancel their contracts, cause us to incur significant costs to notify affected individuals and upgrade our technology, or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our business, results of operations and financial condition.
Any Significant Disruption in Service on Our Mobile Applications or Websites or in Our Network Could Damage Our Reputation and Brands, and Result in a Loss of
UsersCustomers of Our Products and Services and of
Advertisers,Our Real Estate Partners, Which Could Harm Our Business, Results of Operations and Financial Condition.
Our brand, reputation and ability to attract userscustomers and advertisersreal estate partners and deliver quality products and services depend on the reliable performance of our network infrastructure and content delivery processes. Our mobile applications and websites are exposed to attempts to overload our servers withdenial-of-service attacks or similar disruptions from unauthorized use of our computer systems. We have experienced minor interruptions in these systems in the past, including server failures that temporarily slowed the performance of our mobile applications and websites, and we may experience interruptions in the future. Interruptions in these systems, whether due to system failures, computer viruses, software errors or physical or electronicbreak-ins, could affect the security or availability of our products and services on our mobile applications and websites and prevent or inhibit the ability of userscustomers to access or effect transactions using our services. Since our userscustomers may rely on our products and services, including our freereal estate transaction services and customer relationship management tools, for important aspects of their personal lives and businesses, problems with the reliability, availability or security of our systems could damage our users’customers’ businesses, harm our reputation, delay or inhibit a customer from completing a real estate transaction, result in a loss of userscustomers of our products and services and of advertisersreal estate partners and result in additional costs, any of which could harm our business, results of operations and financial condition. In October 2016, for example, traffic to our websites zillow.com
To deliver web and
trulia.com was impacted by a distributed denial of service attack against one of our domain name system providers. This incident did not have a material adverse effect on our business,mobile Zillow Group brand content while ensuring scalability and
there is no indication that our internal controls were compromised. Despite the additional network detection tools and other processesredundancy, we
implemented, and our continual work to install new, and upgrade existing, information technology systems and provide employee awareness training around phishing, malware, and other cyber risks, we cannot ensure that we will not experience similar incidents in the future.Our Zillow technical infrastructure, mobile applications and websites are hosted at a third-party facility located in the Seattle area. We manage our Trulia mobile applications and website from a shared data center in Santa Clara, California. Additionally, we utilize both third-party web services for cloud computing and storage to assistand shared data centers in service growthSeattle, Washington and redundancy.
Santa Clara, California.
We do not own or control the operation of certain of these facilities. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical
break-ins, computer viruses, earthquakes and similar events. The occurrence of any of the foregoing events could result in damage to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur.
A failure of our systems at one site could result in reduced functionality for our
users,customers, and a total failure of our systems could cause our mobile applications or websites to be inaccessible. Problems faced by our third-party
web-hosting providers with the telecommunications network providers with which they contract or with the systems by which they allocate capacity among their customers, including us, could adversely affect the experience of our
users.customers. Our third-party
web-hosting providers could decide to close their facilities without adequate notice. Any financial difficulties, such as bankruptcy reorganization, faced by our third-party
web-hosting providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party
web-hosting providers are unable to keep up with our growing needs for capacity, our
customers, real estate partners and business could be harmed. In addition, if distribution channels for our mobile applications experience disruptions, such disruptions could adversely affect the ability of users and potential users to access or update our mobile applications, which could harm our business.
We do not carry business interruption insurance sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, which may result from interruptions in our service as a result of system failures. Any errors, defects, disruptions or other performance problems with our services could harm our reputation, business, results of operations and financial condition.
We Rely Upon
Amazon WebCertain Third-Party Services to Support
Operation of Certain AspectsCritical Functions of Our
ServicesBusiness and Any Disruption of or Interference with our Use of
the Amazon Webthose Third -Party Services
Operation Could Adversely Impact Our Operations and Our
Business.Business.
A limited number of third-party services support essential functions of our business, including Amazon Web Services (“AWS”)
and certain other Software-as-a-Service technologies hosted by third parties (“SaaS Services”). AWS provides
us with a distributed computing infrastructure platform for business operations, which is commonly referred to as a “cloud” computing service. Certain of our computer systems utilize data processing, storage capabilities and other services provided by
AWS. Currently,AWS, and we
currently run the vast majority of computing to power our mobile applications, websites, and other technology products and services on
AWS,AWS. In addition, we use SaaS Services to support important functions of our business, including enterprise resource planning, revenue recognition, real estate transaction services, and
wecustomer relationship management. We store a significant amount of
information about our
users’ informationcustomers, real estate partners, employees, and
business on AWS and in the SaaS Services, and we rely on these third-party service providers to provide services on a timely and effective basis. Their failure to perform as expected or as required by contract could result in significant disruptions and costs to our
confidential business information on AWS.operations. In light of
this,our reliance on AWS and SaaS Services, coupled with the
fact that we cannot easily switch our AWS operations to another cloud provider,complexity of obtaining replacement services, any disruption of or interference with our use of
AWSthese third-party services could adversely impact our operations and
our business.
We May Be Unable to Adequately Protect Our Intellectual Property, Which Could Harm the Value of Our Brands and Our Business.
We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and contracts to protect our proprietary rights. If we are not successful in protecting our intellectual property, the value of our brands and our business, results of operations and financial condition could be harmed.
While we believe that our issued patents and pending patent applications help to protect our business, we cannot ensure that our operations do not, or will not, infringe valid, enforceable patents of third parties or that competitors will not devise new methods of competing with us that are not covered by our patents or patent applications. We cannot ensure that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, that such patents will not be challenged by third parties or found to be invalid or unenforceable, or that our patents will be effective in preventing third parties from utilizing a “copycat” business model to offer the same products or services. Our Zestimate home valuation, for example, which we consider to be a key competitive advantage with respect to
consumercustomer engagement, is currently protected by a patent, the loss of which could benefit comparable services provided by our competitors and result in decreased user traffic and engagement with our mobile applications and websites, thereby harming our results of operations and financial condition.
Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services may be provided. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect intellectual property and our proprietary technology adequately against unauthorized third-party copying or use, which could harm our competitive position. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that might diminish the value of our proprietary rights or harm our reputation, even if we have agreements prohibiting such activity. Though certain of these third parties are obligated to indemnify us for breaches of our intellectual property rights, they may be unable to meet these obligations. In addition, we rely on intellectual property and technology developed or licensed by third parties, and we may not be able to obtain licenses and technologies from these third parties on reasonable terms or at all. Any of these events could harm our business, results of operations or financial condition.
In addition, we may actively pursue entities that infringe our intellectual property, including through legal action. Taking such action may be costly, and we cannot ensure that such actions will be successful. Any increase in the unauthorized use of our intellectual property could make it more expensive for us to do business and harm our results of operations or financial condition.
Intellectual Property Disputes Are Costly to Defend and Could Harm Our Business, Results of Operations, Financial Condition and Reputation.
From time to time, we face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties. We are currently subject to intellectual property infringement claims. These claims allege, among other things, that aspects of our technology infringe upon the plaintiffs’ intellectual property. If we are not successful in defending ourselves against these claims, we may be required to pay damages and may be subject to injunctions, each of which could harm our business, results of operations, financial condition and reputation. As we grow our business and expand our operations, we expect that we will continue to be subject to intellectual property claims and allegations. Patent and other intellectual property disputes or litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain products, services or features, purchase licenses that may be expensive to procure, or modify
our products or services. In addition, patent or other intellectual property disputes or litigation may result in significant settlement costs. Any of these events could harm our business, results of operations, financial condition and reputation.
In addition, we use open source software in our services and will continue to use open source software in the future. From time to time, we may be subject to claims brought against companies that incorporate open source software into their products or services, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, and we may
be required to purchase a costly license or remove open source software, devote additional research and development resources to changing our products or services, make generally available the source code for our proprietary technology, or waive certain of our intellectual property rights, any of which would have a negative effect on our business and results of operations.
Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, the time and resources necessary to resolve them could harm our business, results of operations, financial condition and reputation.
We May Be Unable to Continue to Use the Domain Names That We Use in Our Business, or Prevent Third Parties From Acquiring and Using Domain Names That Infringe on, Are Similar to, or Otherwise Decrease the Value of Our Brand or Our Trademarks or Service Marks.
We have registered domain names for our websites that we use in our business. If we lose the ability to use a domain name, we may incur significant expenses to market our products and services under a new domain name, which could harm our business. In addition, our competitors could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the United States and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names and determining the rights of others may require litigation, which could result in substantial costs and diversion of management’s attention.
Confidentiality Agreements With Employees and Others May Not Adequately Prevent Disclosure of Trade Secrets and Other Proprietary Information.
In order to protect our technologies and strategic business and operations information, we rely in part on confidentiality agreements with our employees, independent contractors, vendors, licensees, and other third parties. These agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. Others may independently discover our trade secrets and proprietary information, and in such cases, we could not assert any trade secret rights against such parties. Further, if our employees, contractors or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting
know-how and inventions. Any changes in, or unfavorable interpretations of, intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our business, results of operations, reputation and competitive position.
We May Not Be Able to Halt the Operations of Websites That Aggregate or Misappropriate Our Data.
From time to time, third parties have misappropriated our data through website scraping, robots or other means, and aggregated this data on their websites with data from other companies. In addition, copycat websites have misappropriated data on our network and attempted to imitate our brand or the functionality of our websites. When we have become aware of such websites, we have employed technological or legal measures in an attempt to halt their operations. We may not be able, however, to detect all such websites in a timely manner and, even if we could, technological and legal measures may be insufficient to halt their operations. In some cases, particularly in the case of websites operating outside of the United States, our available remedies may not be adequate to protect us against the impact of the operation of such websites. In addition, if such activity creates confusion among
consumerscustomers or
advertisers,real estate partners, our brands and business could be harmed. Regardless of whether we can successfully enforce our rights against the operators of these websites, any measures that we may take could require us to expend significant financial or other resources, which could harm our business, results of operations or financial condition.
Risks Related to Regulatory Compliance and Legal Matters
We Are, and May in the Future Become, Subject
Failure to a Variety of International,Comply with Federal, State and Local Laws, ManyRules and Regulations or to Obtain and Maintain Required Licenses, Could Materially and Adversely Affect our Business, Financial Condition and Results of Which Are UnsettledOperations.
We provide products and
Still Developingservices to customers and
Which Could Subject Us to Claims or Otherwise Harm Our Business.With office locations throughoutreal estate partners in heavily regulated industries through a number of different channels across the United States and Vancouver, British Columbia,to some extent, in Canada. As a result, we are currently subject to a variety of, and may in the future become subject to additional, international, federal, state and local laws thatand regulations in various jurisdictions, which are continuously evolving and developing,subject to change at any time, including laws regarding the real estate, rental and mortgage industries, mobile-mobile and internet-basedinternet based businesses and other businesses that rely on advertising, as well as privacy and consumer protection laws, including the Telephone Consumer Protection Act, the Telemarketing Sales Rule, theCAN-SPAM Act, the Fair Credit Reporting Act, the Canadian Anti-Spam Law, the Personal Information Protection and Electronic Documents Act, and employment laws, including those governing wage and hour requirements.laws. These laws are complex and can be costly to comply with, require significant management time and effort, and subject us to claims, government enforcement actions, civil and criminal liability or other remedies, including suspension of business operations. These laws may conflict with each other, and if we comply with the laws of one jurisdiction, we may find that we are violating laws of another jurisdiction.
If
For example, certain of the advertising and transactional services that we provide to customers and real estate professionals in the residential real estate, rental, mortgage and new construction industries, are unablesubject to comply with these laws orand regulations in a cost-effective manner, we may modify impacted productsrelating to the collection, use, and services,disclosure of data collected from our users, including those promulgated and enforced by the U.S. Federal Trade Commission and certain states, such as the Telephone Consumer Protection Act (“TCPA”), the Telemarketing Sales Rule, the CAN-SPAM Act, the Fair Credit Reporting Act, the Canadian Anti-Spam Law, the Personal Information Protection and Electronic Documents Act, and the California Consumer Privacy Act (“CCPA”). The CCPA, which could require a substantial investmenttook effect on January 1, 2020, imposes obligations and lossrestrictions on companies regarding their collection, use, and sharing of revenue, or cease providingpersonal information. Implementing regulations from the impacted product or service altogether. If weCalifornia Attorney General have not been finalized but are foundexpected to have violated laws or regulations, weimpose additional obligations and restrictions, and additional amendments to the CCPA may be subjectintroduced in 2020. Several other states are actively considering privacy laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, allow private class-action litigation and carry significant potential liability for our business.
Additionally, laws, regulations, and standards covering marketing and advertising activities conducted by telephone, email, mobile devices, and the internet, may be applicable to significant fines, penalties,our business, such as the TCPA, the Telemarketing Sales Rule, the CAN-SPAM Act, and other losses.similar state consumer protection laws.
We also assist with the processing of customer credit card transactions and consumer credit report requests, originate mortgage loans, buy and sell homes, and provide other product offerings, which results in us receiving or facilitating transmission of personally identifiable information. This information is increasingly subject to legislation and regulation in the United States. This legislationThese laws and regulation isregulations are generally intended to protect the privacy and security of personal information, including credit card information that is collected, processed and transmitted. We could be adversely affected if government regulations require us to significantly change our business practices with respect to this type of information or if the third-parties that we engage with to provide processing and screening services violate applicable laws and regulations.
In addition, by providing a medium through which users can post content and communicate with one another, we may also be subject to laws governing intellectual property ownership, obscenity, libel, and privacy, among other issues. The real estate agents, mortgage professionals, banks, property managers, rental agents and certain of our other customers and advertisers are subject to various state and federal laws and regulations, including, but not limited to those relating to real estate, rentals and mortgages, which may impact their use of our mobile applications and websites. We cannot ensure that these entities will comply with applicable laws and regulations at all times. We endeavor to ensure that any content created by Zillow Group is consistent with such laws and regulations by obtaining assurances of compliance from our advertisers and consumers for their activities through, and the content they provide on, our mobile applications and websites.
In connection with the real estate transaction products and services that we provide, we maintain real estate brokerage, title and escrow, mortgage broker, and mortgage lender licenses in certain states in which we operate. Certain of our mortgage marketing products are operated by our wholly owned subsidiary, Zillow Group Marketplace, Inc., a licensed mortgage broker, and we originate residential mortgages through Zillow Home Loans, LLC, which we acquired in October 2018. Zillow Group Marketplace, Inc. and Zillow Home Loans, LLC are subject to stringent state and federal laws and regulations and to the scrutiny of state and federal government agencies as a licensed mortgage broker and licensed mortgage lender, respectively. Mortgage products are regulated at the state level by licensing authorities and administrative agencies, with additional oversight from the Consumer Financial Protection Bureau and other federal agencies. These laws generally regulate the manner in which lending and lending-related activities are marketed or made available, including advertising and other consumer disclosures, payments for services and record keeping requirements; these laws include the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act and various state laws. State laws may restrict the amount and nature of interest and fees that may be charged by a lender or mortgage broker, or otherwise regulate the manner in which lenders or mortgage brokers operate or advertise.
As a buyer and seller of residential real estate through our Zillow Offers business, we hold real estate brokerage licenses in multiple states and may apply for additional real estate brokerage licenses as our business grows. To maintain these licenses, we must comply with the requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses in the markets where we operate. We may be subject to additional local, state and federal laws and regulations governing residential real estate transactions, including those administered by the Department of Housing and Urban Development, and the states and municipalities in which we transact. Further, due to the geographic scope of our operations and the nature of the services we provide, certain of our other subsidiaries maintain real estate brokerage and title and escrow licenses in certain states in which we operate, including in connection with Zillow Offers and Zillow Closing Services.
For certain licenses, we are required to designate individual licensed brokers of record, qualified individuals and control persons. We cannot assure you that we, or our licensed personnel, are and will remain at all times, in full compliance with state and federal real estate, title and escrow, and mortgage licensing and consumer protection laws and regulations and we may be subject to fines or penalties in the event of any non-compliance. If we apply for new licenses, we may become subject to additional licensing requirements, which we may not be in compliance with at all times. If in the future a state agency were to determine that we are required to obtain additional licenses in that state in order to operate our business, or if we lose or do not renew an existing license or are otherwise found to be in violation of a law or regulation, we may be subject to fines or legal penalties, lawsuits, enforcement actions, void contracts, or our business operations in that state may be suspended or prohibited. Compliance with these laws and regulations is complicated and costly and may inhibit our ability to innovate or grow.
If we are unable to comply with these laws or regulations in a cost-effective manner, we may modify impacted products and services, which could require a substantial investment and loss of revenue, or cease providing the impacted product or service altogether. If we are found to have violated laws or regulations, we may be subject to significant fines, penalties, and other losses.
We are From Time to Time Involved In, or May In the Future be Subject to, Claims, Suits, Government Investigations, and Other Proceedings That May Result In Adverse Outcomes.
We are from time to time involved in, or may in the future be subject to, claims, suits, government investigations, and proceedings arising from our business, including actions with respect to intellectual property,
claims, privacy, consumer protection, information security,
mortgage lending, real estate, environmental, data protection or law enforcement matters, tax matters, labor and employment,
claims,and commercial claims, as well as actions involving content generated by our
users,customers, shareholder derivative actions, purported class action lawsuits, and other matters, including those matters described in Part
I,II, Item
3.8 in Note 20 under the subsection titled “Legal Proceedings” in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. Such claims, suits, government investigations, and proceedings are inherently uncertain, and their results cannot be predicted with certainty. Regardless of the outcome, any such legal proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in reputational harm, liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, operating results and financial condition.
The Requirements of Being a Public Company May Strain Our Resources
In some instances, third parties may have an obligation to indemnify us for liabilities related to litigation or governmental investigations, and
Distract Our Management, Which Could Make It Difficultthey may be unable to,
Manage Our Business.We are requiredor fail to, comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements canfulfill such obligations. If such third parties failed to indemnify us, we would be time-consuming and results in increased costs to us and could harm our business, results of operations and financial condition.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These requirements could strain our systems and resources. The Exchange Act also requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Exchange Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have committed significant resources, hired additional staff and provided additional management oversight. We have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. For example, new revenue recognition guidance was issued by the Financial Accounting Standards Board (“FASB”), which we adopted on January 1, 2018, requiring additional personnel time and other costs to implement. In addition, we expect to invest additional personnel time and other costs to implement new guidance on leases, which we plan to adopt on January 1, 2019. Sustaining our growth will require us to commit additional management, operational and financial resources to identify new professionals to join us and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns and could make it difficult to manage our business,financially responsible, which could harmadversely affect our business, results of operations, financial condition and cash flows. In addition, ifflow. For example, on October 31, 2018, we identifyacquired MLOA by way of purchase of the then-outstanding equity of MLOA. Prior to the acquisition, on February 2, 2018, a former MLOA employee, Beau Charbonneau, filed a complaint against MLOA in United States District Court for the District of Kansas. The complaint alleges, among other things, that MLOA improperly classified its team leader roles as exempt from the overtime provisions of the Fair Labor Standards Act and that it failed to pay its loan officers for all hours worked in excess of 40 hours in any material weaknesses in our internal controls, we could lose investor confidencework week. The complaint also asserts wage-related claims under the Kansas Wage Payment Act and under Kansas common law. On December 6, 2018, the court issued an order conditionally certifying the case as a collective action under the Fair Labor Standards Act and authorized the plaintiff’s attorneys to send notice of the case to impacted team leaders and loan officers advising them of the case and their opportunity to join as a plaintiff. The court has not made any determinations regarding the merits of the claims asserted in the accuracycomplaint, nor has it found that the matter should be tried as a collective or class action. Zillow Group and completenessits affiliates are indemnified for losses incurred in connection with this matter by certain of the prior stockholders of MLOA. Additionally, in accordance with the equity purchase agreement governing the acquisition of MLOA, any costs incurred related to this matter will be paid directly by those same certain prior stockholders of MLOA. Although we do not believe a loss to Zillow Group is probable, should the sellers of MLOA fail to indemnify us for losses related to this matter, our financial reports, which would cause the market pricecondition may be negatively impacted.
Risks Related to Our Financial Statements
We Incurred Significant Operating Losses in the Past and We May Not Be Able to Generate Sufficient Revenue to Be Profitable Over the Long Term.
We have incurred significant net operating losses in the past and, as of December 31,
2017,2019, we had an accumulated deficit of
$592.2$977.1 million. Although we have experienced significant growth in revenue, our revenue growth rate may decline in the future as the result of a variety of factors, including the maturation of our business. At the same time, we also expect our costs to increase in future periods as we continue to expend substantial financial resources to develop and expand our business, including
on:with respect to:•expansion of Zillow Offers;
•expansion of our mortgage origination business;
•product development;
•sales and marketing;
•technology infrastructure;
•strategic opportunities, including commercial relationships and acquisitions; and
•general and administrative expenses, including legal and accounting expenses related to being a public company.
These investments may not result in increased revenue or growth in our business. If we fail to continue to grow our revenue and overall business and to manage our expenses, we may incur significant losses in the future and not be able to achieve or maintain profitability.
Servicing Our Debt Requires a Significant Amount of Cash, and We May Not Have Sufficient Cash Flow From Our Business to Pay Our Substantial
Debt.Debt, Settle Conversions of Our Senior Convertible Notes, or Repurchase Our Convertible Senior Notes upon a Fundamental Change.
We utilize several forms of debt to provide capital for the continued growth and operation of our business, including several tranches of convertible senior notes, bi-lateral credit facilities for Zillow Offers, and warehouse and repurchase facilities for Zillow Home Loans. Our ability to make
scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the remaining outstanding
$10.1$9.6 million aggregate principal under Trulia’s Convertible Senior Notes due in 2020 (the “2020 Notes”)
and, the $460.0 million aggregate principal under our Convertible Senior Notes due in 2021 (the “2021 Notes”),
the $373.8 million aggregate principal amount under our Convertible Senior Notes due in 2023 (the “2023 Notes”), the $673.0 million aggregate principal amount under our Convertible Senior Notes due in 2024 (the “2024 Notes”), the $500.0 million aggregate principal amount under our Convertible Senior Notes due in 2026 (the “2026 Notes”), and all amounts outstanding under our credit facilities for Zillow Offers (current maximum borrowing capacity of $1.5 billion) and mortgage debt facilities (current maximum borrowing capacity of $125 million) depends on our future performance
and, if applicable, the value of collateral, which is subject to economic, industry, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to
extend or refinance our indebtedness will
depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
obligations, including our convertible senior notes, credit facilities, or otherwise.
Holders of our convertible senior notes have the right to require us to repurchase their notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest. Upon conversion of our convertible senior notes, unless we elect to deliver solely shares of our Class C capital stock (for the 2021 Notes, 2023 Notes, 2024 Notes, and 2026 Notes) or solely shares of our Class A common stock (for the 2020 Notes) to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the notes being converted. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the notes surrendered therefor or at the time the notes are being converted. Our failure to repurchase our convertible senior notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the notes would constitute an event of default. If the repayment of any indebtedness were to be accelerated because of such event of default (whether under the notes or otherwise), we may not have sufficient funds to repay the indebtedness and repurchase the notes or make cash payments upon conversions thereof. An event of default under the indenture may lead to an acceleration of our convertible senior notes. Any such acceleration could result in
our bankruptcy. In a bankruptcy, the holders of our convertible senior notes would have a claim to our assets that is senior to the claims of our equity holders.
In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
•make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;
•limit our flexibility in planning for, or reacting to, changes in our business and our industry;
•place us at a disadvantage compared to our competitors who have less debt; and
•limit our ability to borrow additional amounts for working capital and other general corporate purposes, including to fund possible acquisitions of, or investments in, complementary businesses, products, services and technologies.
Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.
The Credit and Debt Facilities that Provide Capital for Zillow Offers and Zillow Home Loans Include Covenants that May Restrict Our Operating Activities and Expose Us to the Possibility of Foreclosure on Our Ownership Interests.They Also Incorporate Variable Interest Rates that May Subject Us to Interest Rate Risk, Which Could Cause Our Debt Service Obligations to Increase Significantly.
We have entered into debt agreements to provide capital for the growth and operation of our businesses, including bi-lateral credit facilities to support Zillow Offers and warehouse and repurchase facilities to support Zillow Home Loans.The terms of these debt agreements and related financing documents require Zillow Group and certain of its subsidiaries, as applicable, to comply with a number of customary financial and other covenants, such as maintaining certain levels of liquidity, tangible net worth, leverage ratios, adequate insurance coverage and market capitalization. These covenants may limit our operational flexibility and may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our shareholders. Additionally, undrawn amounts are not committed, meaning the applicable lender is not obligated to advance loan funds in excess of outstanding borrowings. Further, borrowing base requirements associated with these debt agreements may prevent us from drawing upon our total maximum capacity under these financing arrangements if sufficient eligible collateral, in accordance with these debt agreements, is not available. Refer to Note 15 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on our Zillow Offers credit facilities and Zillow Home Loans mortgage facilities. Upon the occurrence of any event of default under these debt agreements, the lenders will not be required to lend any additional amounts to us and could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable, even in the absence of a payment default. A default under one of our debt agreements could result in a cross-default under other debt agreements and our lenders could elect to declare outstanding amounts due and payable or terminate their commitments. If we fail to repay the amounts due under our credit facilities, the lenders of such debt may require the posting of additional collateral and/or proceed against the collateral granted to secure the credit facilities. We have pledged the majority of the homes owned by our Zillow Offers business and loans originated by Zillow Home Loans as collateral to secure such indebtedness. As a result, a default under applicable debt covenants could have an adverse effect on our financial condition or results of operations.
At December 31, 2019, $722.0 million of our borrowings under our debt agreements was at variable rates of interest thereby exposing us to interest rate risk. If interest rates continue to increase, our debt service obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net loss would increase. In addition, our variable rate indebtedness may use LIBOR as a benchmark for establishing the rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness.
We May Need to Raise Additional Capital to Grow Our Business and We May Not Be Able to Raise Additional Capital on Terms Acceptable to Us, or At All.
Growing and operating our business, including through the development of new and enhanced products and services, may require significant cash outlays, liquidity reserves and capital expenditures. If cash on hand, cash generated from operations and cash equivalents and investment balances are not sufficient to meet our cash and liquidity needs, we may need to seek additional capital and we may not be able to raise the necessary cash on terms acceptable to us, or at all. For example, Zillow Offers requires significant cash to acquire, update and sell homes. We currently utilize three credit facilities we entered into in
July 2018, January 2019, and October 2019 to provide capital for Zillow Offers, and may seek to enter into similar credit facilities in the future. In addition, to provide capital for mortgage home loan originations for Zillow Home Loans, we utilize warehouse and repurchase facilities. Refer to Note 15 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on our revolving credit facilities and mortgage facilities. Financing arrangements we pursue or assume may require us to grant certain rights, take certain actions, or agree to certain restrictions, that could negatively impact our business. If additional capital is not available to us on terms acceptable to us or at all, we may need to modify our business plans, which would harm our ability to grow our operations.
We Rely on Assumptions, Estimates, and Business Data to Calculate our Key Performance Indicators and Other Business Metrics, and Real or Perceived Inaccuracies in These Metrics May Harm our Reputation and Negatively Affect our Business.
Certain of our performance metrics are calculated using third party applications or internal company data that have not been independently verified. While these numbers are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring such information. For example, our measurement of
visits and unique users
and visits may be affected by applications that automatically contact our servers to access our mobile applications and websites with no user action involved, and this activity can cause our system to count the user associated with such a device as a unique user or as a visit on the day such contact occurs.
We regularly review and may adjust our processes for calculating our performance metrics to improve accuracy. Our measure of certain metrics may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology. If real estate professionals,
advertisersour real estate partners or investors do not perceive our
visits or unique users
or visits to be an accurate representation of our user engagement, or if we discover material inaccuracies in our
visits or unique users,
or visits, our reputation may be harmed, and real estate professionals and advertisers may be less willing to allocate their resources to our products and services, which could negatively affect our business and operating results.
We Expect Our Results of Operations to Fluctuate on a Quarterly and Annual Basis.
Our revenue and results of operations could vary significantly from period to period and may fail to match expectations as a result of a variety of factors, some of which are outside our control. The other risk factors discussed in this “Risk Factors” section may contribute to the variability of our quarterly and annual results. In addition, our results may fluctuate as a result of
seasonal variances of home sales, which historically peak in the spring and summer seasons, fluctuations in the quantity of, and the price at which we are able to sell, our remnant advertising,
seasonal variances of home sales, which historically peak in the spring and summer seasons, and the size and seasonal variability of our
advertisers’real estate partners’ marketing budgets.
The seasonal variance and cyclical nature of home sales may contribute to the variability of our revenue and results of operations for our Homes and Mortgages segments, in particular, which seasonality may be masked as those segments are growing. As a result of the potential variations in our revenue and results of operations,
period-to-period comparisons may not be meaningful and the results of any one period should not be relied on as an indication of future performance. In addition, our results of operations may not meet the expectations of investors or public market analysts who follow us, which may adversely affect our stock price.
We Could Be Subject to Additional Income Tax Liabilities and Our Ability to Use Our Net Operating Loss Carryforwards and Certain Other Tax Attributes May Be Limited.
We are subject to federal and state income taxes in the United States and in Canada. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating these taxes. Our effective tax rates could be affected by numerous factors, such as entry into new businesses and geographies, changes to our existing business and operations, acquisitions and investments and how they are financed, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations. For example, On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a
one-time transition tax on certain untaxed earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign
subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and how AMT credits are utilized; and (5) the additional limitations on deducting executive compensation under IRC section 162(m); and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The Tax Act significantly changes how the U.S. taxes corporations. The Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant
or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies have not implemented all relevant regulations or issued substantive guidance
to-date and could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from our current interpretation.
As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.As of December 31,
2017,2019, we had federal net operating loss carryforwards of approximately
$1,014.0$1,137.6 million, state net operating loss carryforwards of approximately
$21.4$34.3 million (tax effected), and net tax credit carryforwards of approximately
$35.8$71.0 million. Under Sections 382 and 383 of the Internal Revenue Code,
of 1986, as amended, if a corporation undergoes an
“ownershipownership change,
” the corporation’s ability to use its
pre-change net operating loss carryforwards and other
pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. In
general, an “ownership change” will occur if there is a cumulative change in our ownership by certain“5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. In connection with
Zillow’sour August 2013 public offering of
Zillowour Class A Common stock,
Zillowwe experienced an ownership change that triggered
SectionSections 382 and 383, which may limit our ability to utilize net operating loss and tax credit carryforwards. In connection with
Zillow Group’sour February 2015 acquisition of Trulia,
Inc., Trulia,
Inc. experienced an ownership change that triggered Section 382 and 383, which may limit Zillow Group’s ability to utilize
Trulia’sTrulia, Inc.’s net operating loss and tax credit carryforwards.
If we experience one or more ownership changes in the future as a result of future transactions in our stock, our ability to utilize net operating loss carryforwards could be limited. Furthermore, our ability to utilize net operating loss carryforwards of any companies that we have acquired or may acquire in the future may be limited. As a result, if we earn net taxable income, our ability to use ourpre-change net operating loss carryforwards, otherpre-change tax attributes, or net operating loss carryforwards of any acquired companies to offset our federal taxable income or reduce our federal income tax liability may be subject to limitation.Risks Related to Ownership of Our Common and Capital Stock and Debt Instruments
Our Class A Common Stock and Class C Capital Stock Prices May Be Volatile, and the Value of an Investment in Our Class A Common Stock and Class C Capital Stock May Decline.
An active, liquid and orderly market for our Class A common stock and Class C capital stock may not be sustained, which could depress the trading price of our Class A common stock and Class C capital stock. The trading price of our Class A common stock and Class C capital stock has at times experienced price volatility and may continue to be volatile. For example, since shares of our Class A common stock began trading in February 2015, the closing price of our Class A common stock has ranged from $17.06 per share to
$50.69$65.21 per share (adjusted for the August 2015 stock split effected in the form of a dividend) through December 31,
2017.2019. Since shares of our Class C capital stock began trading in August 2015, the closing price of our Class C capital stock has ranged from $16.01 per share to
$51.04$65.57 per share through December 31,
2017.2019. The market price of our Class A common stock and Class C capital stock could be subject to wide fluctuations in response to many of the risk factors discussed in this Annual Report on Form
10-K and others beyond our control, including:
•actual or anticipated fluctuations in our financial condition and results of operations;
•changes in projected operational and financial results;
•addition or loss of significant customers;
•actual or anticipated changes in our growth rate relative to that of our competitors;
•announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;
•announcements of technological innovations or new offerings by us or our competitors;
•additions or departures of key personnel;
•changes in laws or regulations applicable to our services;
•fluctuations in the valuation of companies perceived by investors to be comparable to us;
•the inclusion, exclusion, or deletion of our Class A common stock and Class C capital stock from any trading indices, such as the S&P 500 Index;
•issuance of new or updated research or reports by securities analysts;
•sales of our Class A common stock and Class C capital stock by us or our shareholders;
•issuances of our Class A common stock upon conversion of the 2020 Notes and issuances of our Class C capital stock upon conversion of our 2021 Notes, 2023 Notes, 2024 Notes or 2026 Notes;
•stock price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and
•general economic and market conditions.
Furthermore, the stock markets in recent years have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of the equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A common stock and Class C capital stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have in the past been and are currently the target of this type of litigation, and we may continue to be the target of this type of litigation in the future. Past, current, and future securities litigation against us could result in substantial costs and
divert management’s attention from other business concerns, which could harm our business, results of operations or financial condition.
The Structure of Our Capital Stock as Contained in Our Charter Documents Has the Effect of Concentrating Voting Control With Our Founders, and Limits Your Ability to Influence Corporate Matters.
Since Zillow Group’s inception, our capital structure has included authorized Class A common stock and authorized Class B common stock. Our Class A common stock entitles its holder to one vote per share, and our Class B common stock entitles its holder to 10 votes per share. All shares of Class B common stock have been and are held or controlled by our founders, Richard Barton and Lloyd Frink. As of December 31,
2017,2019, Mr. Barton’s holdings and Mr. Frink’s holdings represented approximately
31.8%31.3% and
20.7%20.4%, respectively, of the voting power of our outstanding capital stock.
For the foreseeable future, Mr. Barton and Mr. Frink will therefore have significant control over our management and affairs and will be able to control most matters requiring shareholder approval, including the election or removal (with or without cause) of directors and the approval of any significant corporate transaction, such as a merger or other sale of us or our assets. In addition, because our Class C capital stock carries no voting rights (except as required by applicable law or as expressly provided in our amended and restated articles of incorporation), the issuance of Class C capital stock (instead of Class A common stock) could prolong the duration of Mr. Barton’s and Mr. Frink’s relative ownership of our voting power. This concentrated control could delay, defer or prevent a change of control, merger, consolidation, takeover, or other business combination involving us that you, as a shareholder, may otherwise support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock or Class C capital stock due to the limited voting power of such stock relative to the Class B common stock and might harm the market price of our Class A common stock and Class C capital stock.
Future Sales of Our Stock in the Public Market Could Cause Our Stock Price to Decline.
Our Class A common stock began trading on The Nasdaq Global Select Market on February 18, 2015, and our Class C capital stock began trading on The Nasdaq Global Select Market on August 17, 2015. We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the prevailing trading price of our Class A common stock and Class C capital stock from time to time. There is currently no contractual restriction on our ability to issue additional shares, and all of our outstanding shares are generally freely tradable, except for shares held by our “affiliates” as defined in Rule 144 under the Securities Act, which may be sold in compliance with the volume restrictions of Rule 144. Sales of a substantial number of shares of our Class A common stock and Class C capital stock could cause our stock price to decline. In addition, we may in the future issue shares of Class C capital stock for financings, acquisitions or equity incentives. If we issue shares of Class C capital stock in the future, such issuances would have a dilutive effect on the economic interest of our Class A common stock.
If Securities or Industry Analysts Do Not Publish Research or Publish Inaccurate or Unfavorable Research About Our Business, Our Class A Common Stock and Class C Capital Stock Price and Trading Volume Could Decline.
The trading market for our Class A common stock and Class C capital stock depends in part on the research and reports that securities or industry analysts publish about our company. If few or no securities or industry analysts cover our company, the market price of our publicly-traded stock could be negatively impacted. If securities or industry analysts cover us and if one or more of such analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts covering us fail to publish reports on us regularly, demand for our stock could decline, which could cause our stock price and trading volume to decline.
If We Issue Additional Equity Securities or Issue Additional Convertible Debt to Raise Capital, It May Have a Dilutive Effect on Shareholders’ Investment.
If we raise additional capital through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution in their percentage ownership of us. Moreover, any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.
The Capped Call Transactions May Affect the Value of Our 2021 Notes,
2023 Notes, 2024 Notes, 2026 Notes and Our Class C Capital Stock.
In connection with the pricing of
each of the 2021
Notes, 2023 Notes, 2024 Notes and 2026 Notes, we entered into capped call transactions with
Citigroup Global Markets Inc. and certain
other financial institutions (the “option counterparties”). The capped call transactions are expected generally to reduce the potential dilution upon conversion of the 2021
Notes, 2023 Notes, 2024 Notes, or 2026 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be.
In addition, the capped call transactions provide for us to elect, subject to certain conditions, for the capped call transactions to remain outstanding (with certain modifications) following our election to redeem the 2021 Notes, notwithstanding any conversions of notes in connection with such redemption.In addition, the
The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our Class C capital stock and/or purchasing or selling our Class C capital stock or other securities of ours in secondary market transactions prior to the maturity of
each of the 2021
Notes, 2023 Notes, 2024 Note, and 2026 Notes (and are likely to do so during any observation period related to a conversion of 2021 Notes,
2023 Notes, 2024 Notes, or 2026 Notes or in connection with any repurchase of 2021
Notes, 2023 Notes, 2024 Notes or 2026 Notes by us). This activity could cause or avoid an increase or a decrease in the market price of our Class C capital stock,
the 2021 Notes, the 2023 Notes, the 2024 Notes, or the
20212026 Notes.
Anti-Takeover Provisions in Our Charter Documents and Under Washington Law Could Make an Acquisition of Us More Difficult, Limit Attempts by Shareholders to Replace or Remove Our Management and Affect the Market Price of Our Stock.
Provisions in our articles of incorporation and bylaws, as amended and restated, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated articles of incorporation or amended and restated bylaws include provisions, some of which will become effective only after the date, which we refer to as the threshold date, on which the Class B common stock controlled by our founders represents less than 7% of the aggregate number of shares of our outstanding Class A common stock and Class B common stock, that:
•set forth the structure of our capital stock, which concentrates voting control of matters submitted to a vote of our shareholders with the holders of our Class B common stock, which is held or controlled by our founders;
•authorize our board of directors to issue, without further action by our shareholders, up to 30,000,000 shares of undesignated preferred stock, subject, prior to the threshold date, to the approval rights of the holders of our Class B common stock;
•establish that our board of directors will be divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;
•prohibit cumulative voting in the election of directors;
•provide that, after the threshold date, our directors may be removed only for cause;
•provide that, after the threshold date, vacancies on our board of directors may be filled only by the affirmative vote of a majority of directors then in office or by the sole remaining director;
•provide that only our board of directors may change the board’s size;
•specify that special meetings of our shareholders can be called only by the chair of our board of directors, our board of directors, our chief executive officer, our president or, prior to the threshold date, holders of at least 25% of all the votes entitled to be cast on any issue proposed to be considered at any such special meeting;
•establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders, including proposed nominations of persons for election to our board of directors;
•require the approval of our board of directors or the holders of at leasttwo-thirds of all the votes entitled to be cast by shareholders generally in the election of directors, voting together as a single group, to amend or repeal our bylaws; and
•require the approval of not less thantwo-thirds of all the votes entitled to be cast on a proposed amendment, voting together as a single group, to amend certain provisions of our articles of incorporation.
Prior to the threshold date, our directors can be removed with or without cause by holders of our Class A common stock and Class B common stock, voting together as a single group, and vacancies on the board of directors may be filled by such shareholders, voting together as a single group. Given the structure of our capital stock, our founders, Richard Barton and Lloyd Frink, who hold or control our Class B common stock, will have the ability for the foreseeable future to control these shareholder actions. See the risk factor above titled “The Structure of Our Capital Stock as Contained in Our Charter Documents Has the Effect of Concentrating Voting Control With our Founders, and Limits Your Ability to Influence Corporate Matters.”
The provisions described above, after the threshold date, may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, which board is responsible for appointing our management. In
addition, because we are incorporated in the State of Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which prohibits certain business combinations between us and certain significant shareholders unless specified conditions are met. These provisions may also have the effect of delaying or preventing a change of control of our company, even if this change of control would benefit our shareholders.
Item 1B. Unresolved Staff Comments.
Not applicable.
We have various operating leases for office space, which are summarized as of December 31,
20172019 in the table
below.below, by reportable segment. Beginning January 1, 2019, Zillow Group has three segments: Homes, Internet, Media & Technology (“IMT”) and Mortgages. We believe that our facilities are adequate for our current needs.
| | | | | | | | | | |
Location | | Purpose | | Approximate Square
Feet | | | Principal Lease
Expiration Dates | |
Seattle, Washington | | Corporate headquarters for Zillow Group | | | 307,237 | | | | 2024 | |
San Francisco, California | | General office space | | | 105,897 | | | | 2023 | |
Denver, Colorado | | General office space | | | 64,908 | | | | 2021 | |
Irvine, California | | General office space | | | 60,074 | | | | 2022 | |
New York, New York | | General office space | | | 53,200 | | | | 2024 | |
San Francisco, California | | Subleased office space | | | 26,664 | | | | 2018 | |
We
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location | | Purpose | | Primary Reportable Segment(s) | | Approximate
Square Feet | | Principal Lease Expiration Dates |
| Seattle, Washington | | Corporate headquarters for Zillow Group | | All segments | | 386,275 | | | 2024 |
| New York, New York | | General office space | | IMT | | 201,562 | | | 2030 |
| Atlanta, Georgia | | General office space | | All segments | | | 108,213 | | | 2025 |
| San Francisco, California | | General office space | | All segments | | 105,897 | | | 2023 |
| Irvine, California | | General office space | | All segments | | 80,312 | | | 2027 |
| Denver, Colorado | | General office space | | All segments | | 73,781 | | | 2021 |
| Overland Park, Kansas | | General office space | | Mortgages | | 70,373 | | | 2024 |
In addition, we lease additional office space in Chicago, Illinois, Cincinnati, Ohio, Lincoln, Nebraska, Atlanta, Georgiaseveral other U.S. locations and in Vancouver, British Columbia. See Note 1614 and Note 20 of Part II, Item 8 of this Annual Report on Form10-K for more information about our lease commitments.
Item 3. Legal Proceedings.
For information regarding legal proceedings in which we are involved, see Note 1620 under the subsection titled “Legal Proceedings” in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report onForm 10-K.
Item 4. Mine Safety Disclosures.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders
Our Class A common stock has traded on The Nasdaq Global Select Market under the symbol “ZG” since August 17, 2015 and under the symbol “Z” from July 20, 2011 through August 14, 2015.
The following table sets forth, for each quarterly period indicated, the high and low sales prices per share for our Class A common stock as quoted on The Nasdaq Global Select Market: | | | | | | | | |
| | | High | | | Low | |
Year Ended December 31, 2017: | | | | | | | | |
First Quarter | | $ | 38.25 | | | $ | 32.63 | |
Second Quarter | | | 50.91 | | | | 33.37 | |
Third Quarter | | | 49.03 | | | | 37.96 | |
Fourth Quarter | | | 43.16 | | | | 38.76 | |
| | | | | | | | |
| | | High | | | Low | |
Year Ended December 31, 2016: | | | | | | | | |
First Quarter | | $ | 25.96 | | | $ | 16.45 | |
Second Quarter | | | 36.65 | | | | 20.87 | |
Third Quarter | | | 39.99 | | | | 32.55 | |
Fourth Quarter | | | 39.19 | | | | 31.17 | |
Our Class B common stock is not listed and there is no established public trading market.
Our Class C capital stock has traded on The Nasdaq Global Select Market under the symbol “Z” since August 17, 2015. Prior to that time, there was no public market for our Class C capital stock.
The following table sets forth, for each quarterly period indicated, the high and low sales prices per share for our Class C capital stock as quoted on The Nasdaq Global Select Market: | | | | | | | | |
| | | High | | | Low | |
Year Ended December 31, 2017: | | | | | | | | |
First Quarter | | $ | 38.05 | | | $ | 32.56 | |
Second Quarter | | | 51.23 | | | | 33.30 | |
Third Quarter | | | 49.36 | | | | 37.68 | |
Fourth Quarter | | | 43.43 | | | | 38.63 | |
| | | | | | | | |
| | | High | | | Low | |
Year Ended December 31, 2016: | | | | | | | | |
First Quarter | | $ | 24.64 | | | $ | 15.36 | |
Second Quarter | | | 36.28 | | | | 19.63 | |
Third Quarter | | | 39.88 | | | | 32.65 | |
Fourth Quarter | | | 39.05 | | | | 31.22 | |
As of February
8, 2018,12, 2020, there were
102,81, three, and
145132 holders of record of our Class A common stock, our Class B common stock, and our Class C capital stock, respectively.
We have never declared or paid a cash dividend on our common or capital stock and we intend to retain all available funds and any future earnings to fund the development and growth of our business. We therefore do not anticipate paying any cash dividends on our common or capital stock in the foreseeable future. Any future
determinations to pay dividends on our common or capital stock would depend on our results of operations, our financial condition and liquidity requirements, restrictions that may be imposed by applicable law or our contracts and any other factors that our board of directors may consider relevant.
Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
Recent Sales of Unregistered Securities
There were
Except as previously reported on a current report on Form 8-K, we had no
unregistered sales of
unregisteredequity securities during the year ended December 31,
2017.2019.
Purchases of Equity Securities by the Issuer
The following graph compares our cumulative total shareholder return on Zillow Group’s common and capital stock with the Nasdaq Composite Index and the RDG Internet Composite Index.
For our Class A common stock, this graph covers the period from December 31,
20122014 through December 31,
2017.2019. This graph assumes that the value of the investment in Zillow Group’s Class A common stock and each index (including reinvestment of dividends) was $100 on December 31,
2012.2014.
For our Class C capital stock, this graph covers the period from August 3, 2015, using the closing price for the first day of trading during the when-issued trading period prior to the August 2015 stock split effected in the form of a dividend through December 31,
2017.2019. This graph assumes that the value of the investment in Zillow Group’s Class C capital stock (including reinvestment of dividends) was $100 on August 3, 2015.
The information contained in the graph is based on historical data and is not intended to forecast possible future performance.
PART II
Item 6. Selected Financial Data.
The selected financial data set forth below should be read in conjunction with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form
10-K and our previously audited financial statements that are not included herein. We have included Trulia, Inc. in Zillow Group’s results of operations prospectively after February 17, 2015, the date of acquisition. We have given retroactive effect to prior period share and per share amounts in our consolidated statements of operations for the August 2015 stock split effected in the form of a dividend so that prior periods are comparable to current period presentation.
Our historical results arePrior periods have been recast to align with Zillow Group’s segment change effective January 1, 2019. In 2018, our business model evolved significantly with the launch of Zillow Offers in April and the acquisition of Zillow Home Loans in October. Zillow Offers, for example, is a cash- and inventory-intensive business with a high cost of revenue as compared with other parts of our operations; the cost of revenue includes the amount we pay to purchase homes and costs incurred to renovate the homes prior to sale. Revenue for the Homes segment includes the sale prices of homes less resale concessions and credits to the buyer, and does not
necessarilyreflect real estate agent commissions, closing or other associated costs. As a result of this evolution of our business model, financial performance for prior year periods may not be indicative of
our results to be expectedfuture performance. Amounts are in
any future period. | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 1,076,794 | | | $ | 846,589 | | | $ | 644,677 | | | $ | 325,893 | | | $ | 197,545 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of revenue (exclusive of amortization) (1)(2) | | | 85,203 | | | | 69,262 | | | | 60,127 | | | | 29,461 | | | | 18,810 | |
Sales and marketing (1) | | | 448,201 | | | | 382,419 | | | | 308,125 | | | | 169,462 | | | | 108,891 | |
Technology and development (1) | | | 319,985 | | | | 255,583 | | | | 184,477 | | | | 84,669 | | | | 48,498 | |
General and administrative (1) | | | 210,816 | | | | 332,007 | | | | 184,984 | | | | 65,503 | | | | 37,919 | |
Impairment and restructuring costs (1) | | | 174,000 | | | | — | | | | 35,551 | | | | — | | | | — | |
Acquisition-related costs | | | 463 | | | | 1,423 | | | | 16,576 | | | | 21,493 | | | | 376 | |
Loss (gain) on divestiture of businesses | | | — | | | | (1,251 | ) | | | 4,368 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total costs and expenses | | | 1,238,668 | | | | 1,039,443 | | | | 794,208 | | | | 370,588 | | | | 214,494 | |
| | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (161,874 | ) | | | (192,854 | ) | | | (149,531 | ) | | | (44,695 | ) | | | (16,949 | ) |
Loss on debt extinguishment | | | — | | | | (22,757 | ) | | | — | | | | — | | | | — | |
Other income | | | 5,385 | | | | 2,711 | | | | 1,501 | | | | 1,085 | | | | 385 | |
Interest expense | | | (27,517 | ) | | | (7,408 | ) | | | (5,489 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Loss before income taxes | | | (184,006 | ) | | | (220,308 | ) | | | (153,519 | ) | | | (43,610 | ) | | | (16,564 | ) |
Income tax benefit (expense) | | | 89,586 | | | | (130 | ) | | | 4,645 | | | | — | | | | 4,111 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (94,420 | ) | | $ | (220,438 | ) | | $ | (148,874 | ) | | $ | (43,610 | ) | | $ | (12,453 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss per share—basic and diluted | | $ | (0.51 | ) | | $ | (1.22 | ) | | $ | (0.88 | ) | | $ | (0.36 | ) | | $ | (0.12 | ) |
Weighted average shares outstanding—basic and diluted | | | 186,453 | | | | 180,149 | | | | 169,767 | | | | 120,027 | | | | 108,087 | |
(1) Includes share-based compensation as follows: | | | | | | | | | | | | | | | | | | | | |
Cost of revenue | | $ | 3,884 | | | $ | 3,550 | | | $ | 2,384 | | | $ | 1,844 | | | $ | 737 | |
Sales and marketing | | | 22,735 | | | | 23,320 | | | | 25,391 | | | | 7,320 | | | | 10,969 | |
Technology and development | | | 39,938 | | | | 31,466 | | | | 26,849 | | | | 11,681 | | | | 4,660 | |
General and administrative | | | 47,014 | | | | 48,582 | | | | 50,590 | | | | 13,240 | | | | 7,070 | |
Impairment and restructuring costs | | | — | | | | — | | | | 14,859 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 113,571 | | | $ | 106,918 | | | $ | 120,073 | | | $ | 34,085 | | | $ | 23,436 | |
| | | | | | | | | | | | | | | | | | | | |
(2) Amortization of website development costs and intangible assets included in technology and development | | $ | 94,349 | | | $ | 87,060 | | | $ | 63,189 | | | $ | 29,487 | | | $ | 19,791 | |
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands) | |
Balance Sheet Data: | | | | | | | | | | | | | |
Cash, cash equivalents and investments | | $ | 762,539 | | | $ | 507,515 | | | $ | 520,289 | | | $ | 455,920 | | | $ | 437,726 | |
Working capital | | | 723,138 | | | | 485,617 | | | | 493,672 | | | | 352,141 | | | | 282,903 | |
Property and equipment, net | | | 112,271 | | | | 98,288 | | | | 85,523 | | | | 41,600 | | | | 27,408 | |
Total assets | | | 3,230,517 | | | | 3,149,677 | | | | 3,135,700 | | | | 649,730 | | | | 608,063 | |
Long-term debt | | | 385,416 | | | | 367,404 | | | | 230,000 | | | | — | | | | — | |
Deferred tax liabilities and other long-term liabilities | | | 44,561 | | | | 136,146 | | | | 132,482 | | | | — | | | | — | |
Total shareholders’ equity | | | 2,660,823 | | | | 2,533,587 | | | | 2,679,053 | | | | 588,779 | | | | 567,796 | |
thousands, except per share data.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | |
| Statement of Operations Data: | | | | | | | | | |
| Revenue: | | | | | | | | | |
| Homes | $ | 1,365,250 | | | $ | 52,365 | | | $ | — | | | $ | — | | | $ | — | |
| IMT | 1,276,896 | | | 1,201,143 | | | 996,203 | | | 775,456 | | | 600,414 | |
| Mortgages | 100,691 | | | 80,046 | | | 80,591 | | | 71,133 | | | 44,263 | |
| Total revenue | 2,742,837 | | | 1,333,554 | | | 1,076,794 | | | 846,589 | | | 644,677 | |
| Cost of revenue (exclusive of amortization) (1)(2): | | | | | | | | | |
| Homes | 1,315,345 | | | 49,392 | | | — | | | — | | | — | |
| IMT | 98,522 | | | 96,693 | | | 80,310 | | | 64,446 | | | 55,946 | |
| Mortgages | 18,154 | | | 7,505 | | | 4,893 | | | 4,816 | | | 4,181 | |
| Total cost of revenue | 1,432,021 | | | 153,590 | | | 85,203 | | | 69,262 | | | 60,127 | |
| Sales and marketing (1) | 714,128 | | | 552,621 | | | 448,201 | | | 382,419 | | | 308,125 | |
| Technology and development (1) | 477,347 | | | 410,818 | | | 319,985 | | | 255,583 | | | 184,477 | |
| General and administrative (1) | 366,176 | | | 262,153 | | | 210,816 | | | 332,007 | | | 184,984 | |
| Impairment and restructuring costs (1) | — | | | 79,000 | | | 174,000 | | | — | | | 35,551 | |
| Acquisition-related costs | — | | | 2,332 | | | 463 | | | 1,423 | | | 16,576 | |
| Integration costs | 650 | | | 2,015 | | | — | | | — | | | — | |
| Loss (gain) on divestiture of businesses | — | | | — | | | — | | | (1,251) | | | 4,368 | |
| Total costs and expenses | 2,990,322 | | | 1,462,529 | | | 1,238,668 | | | 1,039,443 | | | 794,208 | |
| Loss from operations | (247,485) | | | (128,975) | | | (161,874) | | | (192,854) | | | (149,531) | |
| Loss on debt extinguishment | — | | | — | | | — | | | (22,757) | | | — | |
| Other income | 39,658 | | | 19,270 | | | 5,385 | | | 2,711 | | | 1,501 | |
| Interest expense | (101,792) | | | (41,255) | | | (27,517) | | | (7,408) | | | (5,489) | |
| Loss before income taxes | (309,619) | | | (150,960) | | | (184,006) | | | (220,308) | | | (153,519) | |
| Income tax benefit (expense) | 4,258 | | | 31,102 | | | 89,586 | | | (130) | | | 4,645 | |
| Net loss | $ | (305,361) | | | $ | (119,858) | | | $ | (94,420) | | | $ | (220,438) | | | $ | (148,874) | |
| Net loss per share—basic and diluted | $ | (1.48) | | | $ | (0.61) | | | $ | (0.51) | | | $ | (1.22) | | | $ | (0.88) | |
| Weighted average shares outstanding—basic and diluted | 206,380 | | | 197,944 | | | 186,453 | | | 180,149 | | | 169,767 | |
| (1) Includes share-based compensation as follows: | | | | | | | | | |
| Cost of revenue | $ | 3,978 | | | $ | 4,127 | | | $ | 3,884 | | | $ | 3,550 | | | $ | 2,384 | |
| Sales and marketing | 25,126 | | | 22,942 | | | 22,735 | | | 23,320 | | | 25,391 | |
| Technology and development | 69,921 | | | 56,673 | | | 39,938 | | | 31,466 | | | 26,849 | |
| General and administrative | 99,877 | | | 65,342 | | | 47,014 | | | 48,582 | | | 50,590 | |
| Impairment and restructuring costs | — | | | — | | | — | | | — | | | 14,859 | |
| Total | $ | 198,902 | | | $ | 149,084 | | | $ | 113,571 | | | $ | 106,918 | | | $ | 120,073 | |
| (2) Amortization of website development costs and intangible assets included in technology and development | $ | 61,937 | | | $ | 79,309 | | | $ | 94,349 | | | $ | 87,060 | | | $ | 63,189 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | |
| Balance Sheet Data: | | | | | | | | | |
| Cash, cash equivalents and investments | $ | 2,422,252 | | | $ | 1,554,925 | | | $ | 762,539 | | | $ | 507,515 | | | $ | 520,289 | |
| Working capital | 2,589,637 | | | 1,605,200 | | | 723,138 | | | 485,617 | | | 493,672 | |
| Property and equipment, net | 170,489 | | | 135,172 | | | 112,271 | | | 98,288 | | | 85,523 | |
| Total assets | 6,131,973 | | | 4,291,116 | | | 3,230,517 | | | 3,149,677 | | | 3,135,700 | |
| Long-term debt | 1,543,402 | | | 699,020 | | | 385,416 | | | 367,404 | | | 230,000 | |
| Other long-term liabilities | 232,633 | | | 37,419 | | | 65,890 | | | 151,444 | | | 146,225 | |
| Total shareholders’ equity | 3,435,421 | | | 3,267,179 | | | 2,660,823 | | | 2,533,587 | | | 2,679,053 | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form10-K. The following discussion focuses on 2019 and 2018 financial condition and results of operations and year-to-year comparisons between 2019 and 2018. Similar discussion of our 2017 financial condition and results and year-to-year comparisons between 2018 and 2017 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those
containeddescribed in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form
10-K, particularly in
the section titled “Risk Factors”.
Zillow Group, Inc.
operateshouses one of the
leadinglargest portfolios of real estate
and home-related information marketplacesbrands on mobile and the
web, with a complementary portfolio of brandsweb. Zillow Group is committed to leveraging its proprietary data, technology and
productsinnovations to
help consumers find vital information about homes and connect with local professionals. Zillow Group’s brands focus on all stages of themake home
lifecycle: renting, buying, selling,
financing and renting a seamless, on-demand experience for customers. As its flagship brand, Zillow now offers a fully integrated home shopping experience that includes access to for sale and rental listings, Zillow Offers, which provides a hassle-free way to buy and sell eligible homes directly through Zillow, and Zillow Home Loans, Zillow’s affiliated lender that provides an easy way to receive mortgage pre-approvals and financing.
The Zillow Group portfolio ofOther consumer brands
includes real estate and rental marketplaces Zillow,include Trulia, StreetEasy, HotPads, Naked Apartments
RealEstate.com and
OutEast.com.Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions to help real estate
rental and mortgage professionalspartners maximize business opportunities and connect with millions of
consumers. We also own and operate a number ofcustomers. Zillow Group business brands for real estate, rental and mortgage professionals,
includinginclude Mortech, dotloop, Bridge Interactive and New Home Feed.
Our living database
Reportable Segments and Revenue Overview
As of more than 110 million U.S. homes—including homes for sale, homes for rentJanuary 1, 2019, Zillow Group has three reportable segments: the Homes segment, the Internet, Media & Technology (“IMT”) segment and homes not currently on the market—attracts an active and vibrant community of users. Individuals and businesses that use Zillow’s mobile applications and websites have updated information on more than 75 millionhomes, creating exclusive home profiles not available anywhere else. These profiles include detailed information about homes, including property facts, listing information andMortgages segment. The Homes segment includes the financial results from Zillow Group’s purchase and sale data. We provide this informationof homes directly through the Zillow Offers service. The IMT segment includes the financial results for the Premier Agent, Rentals and new construction marketplaces, as well as dotloop, display and other advertising and business software solutions. The Mortgages segment includes the financial results for advertising sold to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and our users where, when and how they want it, throughMortech mortgage software solutions.
In our
industry-leading mobile applications and websites. Using complex, proprietary automated valuation models,Homes segment, we
provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on approximately 100 millionU.S. homes.We generate revenue from the saleresale of advertising serviceshomes on the open market through our Zillow Offers service. We began buying homes through the Zillow Offers service in April 2018, and our suite of marketing software and technology solutions to businesses and professionals primarily associated with the residential real estate, rental and mortgage industries. These professionals include real estate, rental and mortgage professionals and brand advertisers. Our two primary revenue categories are marketplace revenue and display revenue.
Marketplace revenue consists primarily of Premier Agent revenue, other real estate revenue and mortgages revenue. we began selling homes in July 2018.
Premier Agent revenue is generated by the sale of advertising under our Premier Agent and Premier Broker programs, which offer a suite ofservices, as well as marketing and business technology products and services, to help real estate agents and brokers grow and manage their businesses and brands.businesses. We offer these products and services through our flagship Premier Agent advertising product and ourPremier Broker programs. Premier Agent and Premier Broker advertising productproducts, which include the delivery of impressions and validated consumer connections, or leads, are primarily sold on a cost per impressionshare of voice basis. Impressions and leads are distributed to Premier Agents and Premier Brokers in proportion to their share of voice, or an agent advertiser’s share of total advertising purchased in a particular zip code. Impressions are delivered when an advertisement of a sold advertisementPremier Agent or Premier Broker appears on pages viewed by users of our mobile applications and websites. Otherwebsites and connections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. Connections and impressions are each provided as part of our advertising services for Premier Agent and Premier Brokers; we do not charge a separate fee for these consumer leads.
In October 2018, we began testing a new Flex pricing model for Premier Agent and Premier Broker advertising services in limited markets. We may continue to extend the testing of this pricing model to additional regions in the future. With the Flex model, Premier Agents and Premier Brokers are provided with impressions and connections at no upfront cost, and they pay a performance advertising fee only when a real estate transaction is closed with one of those leads.
Rentals revenue primarily includes advertising sold to property managers, landlords and other rental professionals on a cost per lead, cost per click, cost per lease or cost per listing basis. Rentals revenue also includes revenue generated through our rental applications product, whereby potential renters can submit applications to multiple properties for a flat service fee.
Other revenue primarily includes revenue generated by Zillow Group Rentals, through which we offernew construction and display advertising, products in our rentals marketplace and a suite of tools for rental professionals, New Construction, which includes advertising services for home builders, as well as revenue from the sale of various other advertising and business software solutions and services and technology solutions for real estate professionals. Mortgagesprofessionals, including dotloop. New construction revenue primarily includes advertising services sold to home builders on a cost per residential community or cost per impression basis. Display revenue primarily consists of graphical mobile and web advertising sold to advertisers promoting their brands on our mobile applications and websites.
In our Mortgages segment, we generate revenue from advertising sold to mortgage lenders and other mortgage professionals
as well as revenue generated byon a cost per lead or subscription basis, including our Connect and Custom Quote services, and from Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.
Display We also generate revenue primarily consiststhrough mortgage originations and the related sale of graphical mobile and web advertising soldmortgages on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites and our partner websites. Impressions are delivered when a sold advertisement appears on pages viewed by users of our mobile applications and websites.
Effective February 17, 2015,the secondary market through Zillow Group acquired Trulia, Inc. (“Trulia”), and each of Zillow and Trulia became wholly owned subsidiaries of Zillow Group. The total purchase price of Trulia was approximately $2.0 billion. We have included Trulia in Zillow Group’s results of operations prospectively after February 17, 2015, the date of acquisition. Because the Trulia acquisition occurred during the year ended December 31, 2015, the information presented in this report with respect to the year ended December 31, 2015 relates to Zillow on a standalone basis prior to February 17, 2015 and to Zillow Group after February 17, 2015, whereas the information presented in this section with respect toHome Loans.
Financial Highlights
For the years ended December 31, 20172019 and 2016 relates2018, we generated revenue of $2,742.8 million and $1,333.6 million, respectively, representing year-over-year growth of 106%. The increase in total revenue was primarily attributable to the following:
•Our Zillow Group. ResultsOffers business began selling homes in July of operations, including marketplace2018. Homes revenue grew to $1,365.3 million for the year ended December 31, 2015 include Market Leader revenue from February 17, 2015 through September 30, 2015, the date we divested the Market Leader business, whereas the information presented in this report with respect2019 due to the years sale of 4,313 homes at an average selling price of $316.5 thousand per home. For the year ended December 31, 2017 and 2016 does not include Market Leader revenue. For additional information regarding2018, Homes revenue was $52.4 million due to the transaction with Trulia, see Note 7sale of 177 homes at an average selling price of $295.8 thousand per home. As of December 31, 2019, Zillow Offers was operating in 22 metropolitan areas.
•Premier Agent revenue increased by $25.5 million to our consolidated financial statements.Overview of Significant Milestones and Results
The following is a summary of certain of our significant milestones$923.9 million for the year ended December 31, 2017:
In January, we completed2019 compared to $898.3 million for the acquisition of Hamptons Real Estate Online (“HREO”), a Hamptons-focused real estate portal that provides buyers and renters with a specialized search experience and access to the area’s most comprehensivefor-sale,for-rent and vacant land listings. For additional information about the acquisition of HREO, see Note 7 to our consolidated financial statements.
In March, we launched Premier Agent on StreetEasy, New York City’s leading real estate marketplace. By integrating StreetEasy with Zillow and Trulia, real estate professionals can now reach the largest audience of New York City home shoppers through one platform. In June, we implemented paid inclusion advertising for rental listings featured on StreetEasy, which significantly improved the quality of rental listings.
In March, we launched a new Dotloop application program interface platform for developers. The update makes it easier for developers to more seamlessly create new integrations for external real estate technology and transaction services with Dotloop’s platform.
In April, we launched a new national advertising campaign, “Finding Home”, with several national TV spots featuring different stories that illustrate the diversity of home buyers today and their unique and varied challenges.
In May, we launched RealEstate.com, a new consumer real estate brand tailored to first-time home buyers. On RealEstate.com, buyers can search for homes in a completely new way—by the monthly payment and down payment they can afford.
In May, we announced our testing of the Zillow Instant Offers marketplace, a way for homeowners to sell their homes quickly by providing them with offers from investors and a comparative market analysis from a local real estate agent, as an estimate for what the home might fetch on the open market. In addition to investors being required to use an agent, should a homeowner select an investor’s offer, Zillow will also offer to connect them with a local agent to represent them throughout the transaction.
In May, we launched Zillow Prize, a machine learning competition to improve Zestimate accuracy, with a grand prize of up to $1 million to the person or team who submits the most improved Zestimate algorithm model.
In June, we launched Builder Inform, a cloud-based data dashboard that provides robust anonymized consumer insight data from Zillow Group to residential builders to help them make decisions about future projects. Builder Inform allows builders to view and compare currently listed homes by type and location to help them understand what they should build based on consumer demand in a given zip code.
In June, we purchased an equity interest in a privately held corporation for approximately $10.0 million. For additional information regarding the equity interest, see Note 7 to our consolidated financial statements.
In September, we completed the acquisition of New Home Feed, a streamlined listing management technology that allows builders to input, manage and syndicate their listings across the web. For additional information about the acquisition of New Home Feed, see Note 7 to our consolidated financial statements.
In October, we announced new products to help Premier Agents deepen their connections with clients and build their own personal brands through new technologies in the Premier Agent App, including My Agent. Zillow Group’s evolving tech features will streamline agent-client communication and allow agents to appear as a client’s only buyer’s agent for listings they view on Zillow or Trulia.
In October, we announced the beta launch of Rental Inform, a cloud-based data dashboard of Zillow Group’s exclusive real-time, robust rental market and aggregated, anonymized consumer insight data, which helps property management companies make more informed decisions about operations, marketing and investments.
| • | | In October, we announced plans to bring 3D Homes imaging technology tofor-sale andfor-rent listings. With the launch of the Zillow Group Home Capture App, homeowners and real estate professionals can capture 3D tours of their homes from their iPhones® and post to listings on Zillow and Trulia at no cost, providing home searchers with a new and more immersive way to envision themselves in a home. We plan to roll the feature out nationwide in the latter half of 2018. |
The year ended December 31, 2017 represents2018.
•Rentals revenue increased by $29.6 million to $164.2 million for the first full year inended December 31, 2019 compared to $134.6 million for the year ended December 31, 2018.
•Mortgages revenue increased by $20.6 million to $100.7 million for the year ended December 31, 2019 compared to $80.0 million for the year ended December 31, 2018, driven by our mortgage originations business, which we implemented our new auction-based pricing method for our Premier Agent product by which we determine the cost per impression delivered in each zip code based upon the total amount spent by Premier Agents to purchase impressionsacquired in the zip code during the month.
We have experienced significant revenue growth over the past three years. In 2015, 2016 and 2017, we focused on growing our marketplace revenue, which accounted for the majorityfourth quarter of our revenue growth over that period. The increase in marketplace revenue resulted primarily from growth in our Premier Agent program. Our Premier Agent program represents the primary source of our revenue, and we believe it is more predictable than our other revenue sources.
For2018.
•Visits for the years ended December 31, 2017, 2016,2019 and 2015, we generated revenue of $1,076.8 million, $846.62018 were 8,065.5 million and $644.77,182.1 million, respectively, representing year-over-year growth of 27%, 31% and 98%, respectively. We believe achieving these levels12%. The increase in visits increased the number of events we monetized across our revenue growth was primarily the result of significant growth in traffic to our owned and operated mobile applications and websites—indicated by thecategories.
•The average number of monthly unique users for the three months ended December 31, 2017, 20162019 and 2015 of 151.6 million, 140.12018 were 172.6 million and 123.7157.2 million, respectively, representing year-over-year growth of 8%, 13% and 61%, respectively. This increase in unique users increases the number of impressions and clicks we can monetize in our marketplace and display revenue categories. In addition, we experienced a significant increase in our marketplace revenue, due primarily to growth in our Premier Agent program, which was positively impacted by an increase in visits. Visits for the years ended December 31, 2017, 2016 and 2015 were 6,314.4 million, 5,323.2 million and 3,991.5 million, respectively, representing year-over-year growth of 19%, 33% and 61%, respectively. This increase in visits increased the number of impressions we could monetize in our Premier Agent marketplace. Premier Agent revenue per visit for the years ended December 31, 2017, 2016 and 2015 was $0.121, $0.114 and $0.112, respectively, representing year-over-year growth of 6%, 1% and 24%, respectively. We believe Premier Agent revenue was also positively impacted by the full implementation of the new pricing method for our Premier Agent product, which we believe increased the demand for our advertising platform from both existing and new advertisers. During the year ended December 31, 2016, we began meaningful testing and implementation of a new auction-based pricing method for our Premier Agent product, our flagship advertisingproduct, by which we determine the cost per impression delivered in each zip code in a dynamic way based on demand for impressions in that zip code. In the fourth quarter of 2016, we implemented this method broadly for all existing and new agent advertisers, including brokerages and other teams. We believe the increase in Premier Agent revenue was also due in part to increased advertising sales to current Premier Agents, including brokerages and other teams.
As of December 31, 2017, we had 3,181 full-time employees compared to 2,776 full-time employees as of December 31, 2016.
10%.
Management has identified
visits and unique users
and visits as relevant to investors’ and others’ assessment of our financial condition and results of operations.
Visits
The number of visits is an important metric because it is an indicator of consumers’ level of engagement with our mobile applications, websites and other services. We believe highly engaged consumers are more likely to participate in our Zillow Offers program or use Zillow Homes Loans or more likely to be transaction-ready real estate market participants and therefore more sought-after by our real estate partners.
We define a visit as a group of interactions by users with the Zillow, Trulia and StreetEasy mobile applications and websites, as we monetize our Premier Agent and Premier Broker products on these mobile applications and websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. Visits can occur on the same day, or over several days, weeks or months.
Zillow and StreetEasy measure visits with Google Analytics, and Trulia measures visits with Adobe Analytics. Visits to Trulia end after thirty minutes of user inactivity. Visits to Zillow and StreetEasy end either: (i) after thirty minutes of user inactivity or at midnight; or (ii) through a campaign change. A visit ends through a campaign change if a visitor arrives via one campaign or source (for example, via a search engine or referring link on a third-party website), leaves the mobile application or website, and then returns via another campaign or source.
The following table presents the number of visits to our mobile applications and websites for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | 2018 to 2019
% Change | | 2017 to 2018 % Change |
| 2019 | | 2018 | | 2017 | | | | |
| | | | | | | | | |
| Visits | 8,065.5 | | | 7,182.1 | | | 6,314.4 | | | 12 | % | | 14 | % |
Measuring unique users is important to us because
much of our
marketplace revenue depends in part on our ability to enable real estate, rental and mortgage professionals to connect with our
users,customers - home buyers and
our display revenue depends in part on the number of impressions delivered to our users.sellers, renters and individuals with or looking for a mortgage. Growth in consumer traffic to our mobile applications and websites increases the number of impressions,
clicks, connections, leads and
clicksother events we can monetize
to generate revenue. For example, our Homes segment revenue depends in
part on users accessing our
marketplacemobile applications and websites to engage in the sale and purchase of homes with Zillow Group, and Premier Agent revenue and display revenue
categories. In addition, our community ofdepend on advertisements being served to users
improves the quality of our
living database of homes with their contributions, which in turn attracts more users.mobile applications and websites.
We count a unique user the first time an individual accesses one of our mobile applications using a mobile device during a calendar month and the first time an individual accesses one of our websites using a web browser during a calendar month. If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. If an individual accesses more than one of our mobile applications within a given month, the first access to each mobile application is counted as a separate unique user. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain. Zillow, StreetEasy, HotPads
and Naked Apartments
(as of March 2016) and RealEstate.com (as of June 2017) measure unique users with Google Analytics, and Trulia measures unique users with Adobe
Analytics (formerly called Omniture analytical tools). | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
December 31, | | | 2016 to 2017
% Change | | | 2015 to 2016
% Change | |
| | | 2017 | | | 2016 | �� | | 2015 | | | |
| | | (in millions) | | | | | | | |
Average Monthly Unique Users | | | 151.6 | | | | 140.1 | | | | 123.7 | | | | 8 | % | | | 13 | % |
Visits
Analytics.
The numberfollowing table presents our average monthly unique users for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | 2018 to 2019
% Change | | 2017 to 2018 % Change |
| 2019 | | 2018 | | 2017 | | | | |
| | | | | | | | | |
| Average Monthly Unique Users | 172.6 | | | 157.2 | | | 151.6 | | | 10 | % | | 4 | % |
Basis of visits isPresentation
Revenue
We recognize revenue when or as we satisfy our performance obligations by transferring control of promised products or services to our customers in an important metric because it is an indicator of consumers’ level of engagement with our mobile applications and websites. We believe highly engaged consumers are more likelyamount that reflects the consideration to which we expect to be transaction-ready real estate market participants and therefore more sought-after byentitled in exchange for those products or services.
In our
agent and other real estate professional advertisers.We define a visit as a groupHomes segment, we generate revenue from the resale of interactions by users with the Zillow, Trulia (as of February 17, 2015), StreetEasy (as of March 2017) and RealEstate.com (as of June 2017) mobile applications and websites, as we monetize our Premier Agent and Premier Broker products on these mobile applications and websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. Visits can occurhomes on the same day, or over several days, weeks or months.
open market through our Zillow StreetEasy and RealEstate.com measure visits with Google Analytics, and Trulia measures visits with Adobe Analytics. Visits to Trulia end after thirty minutes of user inactivity. Visits to Zillow, StreetEasy and RealEstate.com end either: (i) after thirty minutes of user inactivity or at midnight; or (ii) through a campaign change. A visit ends through a campaign change if a visitor arrives via one campaign or source (for example, via a search engine or referring link on a third-party website), leaves the mobile application or website, and then returns via another campaign or source.
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | 2016 to 2017
% Change | | | 2015 to 2016
% Change | |
| | | 2017 | | | 2016 | | | 2015 | | | |
| | | (in millions) | | | | | | | |
Visits | | | 6,314.4 | | | | 5,323.2 | | | | 3,991.5 | | | | 19 | % | | | 33 | % |
Basis of Presentation
Revenue
WeOffers program.
In our IMT segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to
businesses and professionals primarily associated with the residential real estate
mortgagebusinesses, professionals and
rental industries.consumers. These professionals include real estate,
mortgagerental and
rentalnew construction brand advertisers, professionals and
brand advertisers.consumers. Our
twothree primary revenue categories
within our IMT segment are
marketplace revenue and display revenue.Marketplace Revenue.Marketplace revenue consists primarily of Premier Agent, Rentals and Other.
In our Mortgages segment, we generate revenue from the sale of advertising services to mortgage lenders and other mortgage professionals, mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans, as well as Mortech mortgage software solutions.
Homes Revenue. Homes revenue is derived from the resale of homes on the open market through our Zillow Offers program. Homes revenue is recognized at the time of the closing of the home sale when title to and possession of the property are transferred to the buyer. The amount of revenue recognized for each home sale is equal to the sale price of the home net of resale concessions and credits to the buyer and does not reflect real estate revenue and mortgages revenue. Marketplace revenue foragent commissions, closing or other costs associated with the year ended December 31, 2015 also includes Market Leader revenue from February 17, 2015 through the date of divestiture of September 30, 2015.transaction.
Premier Agent Revenue.Premier Agent revenue is derived from our Premier Agent and Premier Broker programs. Our Premier Agent and Premier Broker programs offer a suite of marketing and business technology products and services to help real estate agents and brokers achieve their advertising needs,goals, while growing and managing their businesses and brands. All Premier Agents and Premier Brokers receive access to a dashboard portal on our mobile application orand website that provides individualized program performance analytics, self-service ad buying tools and our free customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent or Premier Broker through our mobile and web platforms.We offerplatforms, and our flagship account management tools. The marketing and business technology products and services promised to Premier Agents and Premier Brokers are delivered over time, as the customer simultaneously receives and consumes the benefit of the performance obligations.
Premier Agent advertising product and our Premier Broker advertising productproducts, which include the delivery of impressions and validated consumer connections, or leads, are primarily offered on a cost per impressionshare of voice basis. Payment is received prior to the delivery of impressions and connections. Impressions are delivered when a soldan advertisement appears on pages viewed by users of our mobile applications and websites. In 2016, we began testingwebsites and implementationconnections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. We do not promise any minimum or maximum number of impressions or connections to customers, but instead control when and how many impressions and connections to deliver based on a new auction-based pricing method for our Premier Agent product by which wecustomer’s share of voice. We determine the cost per impression deliverednumber of impressions and connections to deliver to Premier Agents and Premier Brokers in each zip code based uponusing a market-based pricing method in consideration of the total amount spent by Premier Agents and Premier Brokers to purchase impressions and connections in the zip code during the month. This results in the delivery of impressions and connections over time in proportion to each Premier Agent’s and Premier Broker’s share of voice. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly prepaid spend in that zip code as a percentage of the total monthly prepaid spend of all Premier Agents and Premier Brokers in that zip code, and includes both the share of impressions delivered as advertisements appearing on pages viewed by users of our mobile applications and websites as well as the proportion of consumer connections a Premier Agent or Premier Broker receives. The cost per impression that we chargenumber of impressions and connections delivered for a given spend level is dynamic –- as demand for impressionsadvertising in a zip code increases or decreases, the cost per impressionnumber of impressions and connections delivered to a Premier Agent or Premier Broker in that zip code may be increaseddecreases or decreased. This new auction-based pricing method complements our self-serve account interface, which we introduced to Premier Agents over the course of 2016. The interface includes account management tools that allow agent advertisers to independently control their budgets, impression buys, and the duration of their advertising commitment. increases accordingly.
We began testing this auction-based pricing method for our Premier Agent product to better align our revenue opportunities with increasing traffic levels to our mobile and web platforms and leveraging increasing demand by real estate agents for access to home shoppers who use our mobile applications and websites. In the fourth quarter of 2016, we implemented this method broadly for all existing and new agent advertisers, including brokerages and other teams. With this auction-based pricing method, weprimarily recognize revenue related to our dynamic impression-basedthe Premier Agent and Premier Broker products and services based on the contractual maximummonthly prepaid spend recognized on a straight-line basis during the monthly billing period over which the products and services are provided. This methodology best depicts how we satisfy our performance obligations to customers, as we continuously transfer control of the performance obligations to the customer over time. Given a Premier Agent or Premier Broker typically prepays their monthly spend and the monthly spend is refunded on a pro-rata basis upon cancellation of the contract by a customer at any point in time, we have determined that Premier Agent and Premier Broker contracts are effectively daily contracts, and each performance obligation is satisfied over time as each day lapses. We have not allocated the transaction price to each performance obligation within our Premier Agent and Premier Broker arrangements, as the amounts recognized would be the same irrespective of any allocation.
In October 2018, we began testing a new pricing model, Flex, for Premier Agent and Premier Broker advertising services in limited markets. With the Flex model, Premier Agents and Premier Brokers are provided with validated leads at no upfront cost and pay a performance advertising fee only when a real estate transaction is closed with one of the leads. With this pricing model, the transaction price represents variable consideration, as the amount to which we expect to be entitled varies based on the number of validated leads that convert into real estate transactions and the value of those transactions. During this testing phase, we recognize revenue when we receive payment for a real estate transaction closed with a Flex lead. We will continuously reevaluate this determination and the point at which we may begin to estimate variable consideration and record revenue as performance obligations are transferred.
Rentals Revenue. Rentals revenue includes the sale of advertising and a suite of tools to rental professionals, landlords and other market participants. Rentals revenue primarily includes revenue generated by advertising sold to property managers,
landlords and other rental professionals on a cost per lead, cost per click, cost per lease, cost per listing or cost per impression basis. We recognize revenue as leads, clicks and impressions are provided to rental professionals, or as rental listings are published on our mobile applications and websites, which is the amount for which we have the right to invoice. The number of leases generated through our rentals pay per lease product during the period is accounted for as variable consideration, and we estimate the amount of variable consideration based on the expected number of qualified leases secured during the period. We do not believe that a significant reversal in the amount of cumulative revenue recognized will occur once the uncertainty related to the number of leases secured is subsequently resolved.
Rentals revenue also includes revenue generated from our rental applications product through which potential renters can submit applications to multiple rental properties over a 30-day period for a flat service fee. We recognize revenue for the rental applications product on a straight-line basis during the contractual period over which the
services are delivered. Our Premier Agentcustomer has the right to access and
Premier Broker products include multiple deliverables which are accounted for as a single unit of accounting, assubmit the
delivery or performance of the undelivered elements is based on traffic to our mobile applications and websites. In our history of building our real estate and other information marketplaces and product offerings, we have continually evaluated and utilized various pricing and value delivery strategies in order to better align our revenue opportunities with the growth in usage of our mobile and web platforms.From 2012 through the end of the third quarter of 2016, we had primarily charged customers for our Premier Agent product based on the number of impressions delivered on our buyer’s agent list in zip codes purchased and a contracted maximum cost per impression. With this pricing method, we recognized revenue related to our impression-based Premier Agent product based on the lesser of (i) the actual number of impressions delivered on our buyer’s agent list during the period multiplied by the contracted maximum cost per impression, or (ii) the contractual maximum spend on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months or twelve months and thenmonth-to-month thereafter.
We continue to support some legacy Trulia Premier Agent products, which are primarily sold on a fixed fee subscription basis for periods that generally range from six months to 12 months. Subscription advertising revenue for Trulia’s products included in Premier Agent revenue is recognized on a straight-line basis during the contractual period over which the services are delivered.
rental application.
Other real estateRevenue. Other revenue primarily includes revenue generated by Zillow Group Rentals,new construction and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals, including our new construction marketing solutions. Zillow Group Rentals includes our rentals marketplace and suite of tools for rental professionals. Rentals revenue primarily includes revenue generated by advertising sold to property managers and other rental professionals on a cost per lead, cost per lease and cost per click generated basis whereby we recognize revenue as leads are delivered to rental professionals or as qualified leases are confirmed. Our new construction marketing solutions allow home builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis, wherebyand revenue is recognized on a straight-line basis during the contractual period over which the communities are advertised on our mobile applications and websites. New construction revenue also includes revenue generated on a cost per impression basis whereby we recognize revenue as impressions are delivered to users interacting with our mobile applications and websites, which is the amount for which we have the right to invoice. Consideration for new construction products is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.
Mortgages Revenue. Mortgages revenue includes marketing products sold to mortgage professionals on a cost per lead basis, including our Custom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service. Zillow Group operates Custom Quote and Connect through its wholly owned subsidiary, Zillow Group Marketplace, Inc., a licensed mortgage broker. For our Connect and Custom Quote cost per lead marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through our mortgages platform, which is the amount for which we have the right to invoice. For our subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, we contact a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend on a straight-line basis during the contractual period over which the servicesservice is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.
Beginning in the fourth quarter of 2018, mortgages revenue also includes revenue generated by Zillow Home Loans, Zillow’s affiliated mortgage lender. Mortgage origination revenue recorded within our Mortgages segment reflects both origination fees and the corresponding sale, or expected future sale, of a loan. When an interest rate lock commitment is made to a customer, we record the expected gain on sale of the mortgage, plus the estimated earnings from the expected sale of the associated servicing rights, adjusted for a pull-through percentage (which is defined as the likelihood that an interest rate lock commitment will be originated), as revenue. Revenue from loan origination fees is recognized at the time the related real estate transactions are
delivered. Mortgages revenue primarily includes marketing products soldcompleted, usually upon the close of escrow and when we fund mortgage loans. Once funded, mortgage loans held for sale are recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loan is sold. Net origination costs associated with mortgage loans are recognized as incurred. We sell substantially all of the mortgages we originate and the related servicing rights to mortgage professionals on a cost per lead basis, including our Long Form and Custom Quote services. third-party purchasers.
Mortgages revenue also includes revenue generated by Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform, for which we recognize revenue on a straight-line basis during the contractual period over which the services are
delivered. For our Long Form and Custom Quote cost per lead mortgage marketing products, generally, participating qualified mortgage professionals make a prepayment to gain access to consumers interested in connecting with mortgage professionals. In Zillow Group’s Long Form platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals. We only charge mortgage professionals a fee when users contact mortgage professionals through Long Form or Custom Quotes. Mortgage professionals who exhaust their initial prepayment can then prepay additional funds to continue to participate in the marketplace. We recognize revenue when a user contacts a mortgage professional through Zillow Group’s mortgages platform.Market Leader revenue primarily includes revenue from the sale of a comprehensive premiumsoftware-as-a-service based marketing product typically sold to real estate professionals as a bundle of products under a fixed fee subscription. Market Leader became part of Zillow Group through Zillow Group’s February 2015 acquisition of Trulia and was divested as of September 30, 2015.
Display Revenue. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites and our partner websites and mobile applications, primarily in the real estate industry, including real estate brokerages, multi-family rental professionals, mortgage professionals and home services providers. Our advertising customers also include telecommunications, automotive, insurance and consumer products companies. Impressions are the number of times an advertisement is loaded on a web page and clicks are the number of times users click on an advertisement. Pricing is primarily based on advertisement size and position on our mobile applications and websites or on our partner websites and mobile applications, and fees are generally billed monthly. We recognize display revenue as clicks occur or as impressions are delivered to users interacting
with our mobile applications or websites. Growth in display revenue depends on continuing growth in traffic to our mobile applications and websites, continuing growth in traffic to our partner websites and mobile applications, migration of advertising spend online from traditional broadcast and print media, and effectiveness of display advertising versus other methods of online advertising.
We will begin reporting rentals revenue as a separate revenue category beginning with quarterly reporting for the three months ending March 31, 2018. In addition, display revenue will be included in our other revenue category and not reported separately. Going forward, other real estate revenue will be redefined as other revenue and will include revenue from new construction, dotloop, display, as well as from the sale of various other advertising and business software solutions.
provided.
Cost of Revenue. Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries, benefits, bonuses and share-based compensation expense, and bonuses, as well as credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships, depreciation expense and costs associated with the operation ofhosting our data center and mobile applications and websites. For our Homes segment, our cost of revenue also consists of the consideration paid to acquire and make certain repairs and updates to each home, including associated overhead costs, as well as inventory valuation adjustments. For our IMT and Mortgages segments, cost of revenue also includes credit card fees and ad serving costs paid to third parties. For our Mortgages segment, our cost of revenue also consists of direct costs to originate loans, including underwriting and processing costs.
Sales and Marketing.Sales and marketing expenses consist of advertising costs and other sales expenses related to promotional and marketing activities, as well as headcount expenses, including salaries, commissions, benefits, bonuses and share-based compensation expense and bonuses for sales, sales support, customer support, marketing and public relations employees and depreciation expense. For our Homes segment, sales and marketing expenses also consist of selling costs, such as real estate agent commissions, escrow and title fees, and staging costs, as well as holding costs incurred during the period that homes are listed for sale, including utilities, taxes and maintenance. For our Mortgages segment, sales and marketing expenses include headcount expenses for loan officers and specialists supporting Zillow Home Loans.
Technology and Development.Technology and development expenses consist of headcount expenses, including salaries, benefits, bonuses and share-based compensation expense and bonuses for salaried employees and contractorsindividuals engaged in the design, development and testing of our products, mobile applications and websites and equipmentthe tools and maintenance costs.applications that support our products. Technology and development expenses also include amortization costs related to capitalized website and development activities, amortization of software, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our mobile applications and websites, and amortization of intangible assets recorded in connection with acquisitions, including developed technology and customer relationships, amongst others. Technologyothers, equipment and development expenses also includemaintenance costs and depreciation expense.
General and Administrative.General and administrative expenses consist of headcount expenses, including salaries, benefits, bonuses and share-based compensation expense and bonuses for executive, finance, accounting, legal, human resources, recruiting, corporate information technology costs and other administrative support. General and administrative expenses also include legal settlement costs and estimated legal liabilities, legal, accounting and other third-party professional service fees, rent expense, depreciation expense and bad debt expense.
Impairment and Restructuring Costs.There were no impairment costs for the year ended December 31, 2019. Impairment costs for the year ended December 31, 2018 consist of a $10.0 million non-cash impairment related to our June 2017 consists of the $174.0equity investment and a $69.0 millionnon-cash impairment related to the $351.0 million indefinite-lived intangible asset that we recorded in connection with our February 2015 acquisition of Trulia for Trulia’s trade names and trademarks.trademarks intangible asset. For additional information about the impairment,impairments, see Note 9 to our consolidated financial statements. Restructuring costs for the year ended December 31, 2015 consist of workforce reduction expenses in connection with a restructuring plan and related contract termination costs related to operating leases as a resultNote 11 of our February 2015 acquisitionNotes to Consolidated Financial Statements in Part II, Item 8 of Trulia.this Annual Report on Form 10-K.
Acquisition-related Costs.Acquisition-related costs consist of investment banking, legal, accounting, tax and regulatory filing fees associated with effecting acquisitions.Loss (Gain) on Divestiture
Integration Costs. Integration costs consist of Businesses. The gain on divestitureexpenses incurred to incorporate operations, systems, technology and rights and responsibilities of business recorded foracquired companies, during both pre-closing and post-closing periods, into Zillow Group’s business. For the yearyears ended December 31, 2016 consists of the gain recognized2019 and 2018, integration costs primarily include consulting-related expenses incurred in connection with our August 2016 salethe integration of our DiverseSolutions business. The loss on divestiture of business recorded for the year ended December 31, 2015 consists of the loss recognized in connection with our September 2015 sale of the Market Leader business.
Loss on Debt Extinguishment
The loss on debt extinguishment recorded for the year ended December 31, 2016 relates to the partial repurchase of Trulia’s Convertible Senior Notes due in 2020 (the “2020 Notes”) in December 2016.
Zillow Home Loans.
Other income consists primarily of interest income earned on our cash, cash equivalents and short-term investments.
For our Mortgages segment, Other income includes interest income earned on mortgage loans held for sale.
Our corporate interest expense consists of interest on theTrulia’s Convertible Senior Notes due in 2020 Notes(the “2020 Notes”) we guaranteed in connection with our February 2015 acquisition of Trulia, and interest on the Convertible Senior Notes due in 2021 (the “2021 Notes”) we issued in December 2016. Interest is payable2016, interest on the 2020Convertible Senior Notes atdue in 2023 (the “2023 Notes”) we issued in July 2018, interest on the rateConvertible Senior Notes due in 2024 and in 2026 (the “Initial 2024 Notes” and the “2026 Notes”, respectively) we issued in September 2019, and interest on the additional Convertible Senior Notes due in 2024 (together with the Initial 2024 Notes, the “2024 Notes”) we issued in October 2019. Our corporate interest expense also includes the amortization of 2.75%semi-annually on June 15the debt discount and December 15 of each year. Interest is payable ondeferred issuance costs for the 2021 Notes, 2023 Notes, 2024 Notes and 2026 Notes over the term of the notes. Refer to Note 15 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for stated interest rates and interest payment dates for each of our convertible senior notes.
For our Homes segment, interest expense includes interest on borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our revolving credit facilities related to our Zillow Offers business. Borrowings on our revolving credit facilities bear interest at the rateone-month LIBOR plus an applicable margin, as defined in the credit agreements.
For our Mortgages segment, interest expense includes interest on the warehouse lines of
2.00% semi-annuallycredit and beginning in the fourth quarter of 2019, interest on
June 1the master repurchase agreement, related to our Zillow Home Loans business. Borrowings on the warehouse lines of credit and
December 1 of each year.master repurchase agreement bear interest at the one-month LIBOR plus an applicable margin, as defined in the agreements.
We are subject to federal and state income taxes in the United States and
federal and provincial income taxes in Canada.
During the years endedAs of December 31,
2017, 20162019 and
2015,December 31, 2018, we
did not have
recorded a
material amount of current taxable income. We have provided a full valuation allowance against our
net deferred tax assets
as of December 31, 2017 and 2016 because,which we believe, based on the weight of available evidence,
it isare not more likely than not
(a likelihood of more than 50%) that someto be realized. Therefore, no material current tax liability or
all ofexpense has been recorded in the
deferred tax assets will not be realized.consolidated financial statements. We have accumulated federal tax losses of approximately
$1,014.0$1,137.6 million as of December 31,
2017,2019, which are available to reduce future taxable income. We have accumulated state tax losses of approximately
$21.4$34.3 million (tax effected) as of December 31,
2017.On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay aone-time transition tax on certain untaxed earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and how AMT credits are utilized; and (5) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Shortly after enactment, implementation guidance was released by the Securities and Exchange Commission that requires a company to reflect the income tax effects of those aspects of the Tax Act for which the accounting under the accounting rules is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, it should record a provisional estimate in the financial statements. Further, the implementation guidance also provides for a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting pursuant to the accounting rules.
2019.
We recorded an income tax benefit of $89.6$4.3 million for the year ended December 31, 2017.2019. The majority of the income tax benefit is a result of federal and state interest expense limitation carryforwards that are indefinite-lived deferred tax assets that can offset our indefinite-lived deferred tax liabilities. Net operating losses generated after December 31, 2017 can also be offset against the indefinite-lived deferred tax liabilities. Both of these items contributed to a release of the valuation allowance and the recognition of an income tax benefit.
We recorded an income tax benefit of $31.1 million for the year ended December 31, 2018. Approximately
$66.0$15.4 million of the income tax benefit relates to a
$174.0$69.0 million
non-cash impairment we recorded during the year ended December 31,
20172018 related to the
$351.0 million indefinite-lived
intangible asset that we recorded in connection with our February 2015 acquisition of Trulia
for Trulia’s trade names and
trademarks. For additional information about thenon-cash impairment, see Note 9 to our consolidated financial statements.trademarks intangible asset. The remaining
$23.6 millionportion of
theour income tax benefit
is primarily
relates to our initial analysisthe result of
the impact of the rate decreaseincluded in the Tax Act for the impact of the reduction in our net deferred tax liability related to our indefinite-lived intangible asset. As ofoperating losses generated after December 31, 2017 with an indefinite carryforward period due to the Tax Cuts and Jobs Act of 2017 (“the Tax Act”). Current year net operating losses can now be offset against the indefinite-lived deferred tax liabilities which resulted in a release of the valuation allowance and the recognition of an income tax benefit.
During the year ended December 31, 2018, we
have not completed our accounting for the income tax effects
of certain elements of the Tax Act and we have recorded provisional adjustments where we were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete, including as related to the deduction limitations on
compensation.Incompensation under the absence ofTax Act. The Internal Revenue Service provided further guidance in applying the changes inwritten binding contracts requirement under the Tax Act, and we believe certain of our executive compensation previously eligible to be deducted for tax purposes under Section 162(m) of the Internal Revenue Code will be considered grandfathered and, therefore, will continue to be deductible. Based on the clarification of these rules, the accounting related to the Section 162(m) limitation of the Internal Revenue Code is considered complete and as a result, we recorded a $5.9 million tax benefit for the year ended December 31, 2017 would have been approximately $66.0 million. For2018.
Results of Operations
In 2018, our business model evolved significantly with the
year ending December 31, 2018,launch of Zillow Offers in April and the acquisition of Zillow Home Loans in October. Zillow Offers, for example, is a cash- and inventory-intensive business with a high cost of revenue as compared with other parts of our operations; the cost of revenue includes the amount we
expect an overall statutory tax rate (including federal, state and foreign taxes) of approximately 24%, but in the absence of the Tax Act we would have expected an overall tax rate of approximately 38%.Income tax expense was not materialpay to purchase homes. Revenue for the Homes segment includes the sale prices of homes less resale concessions and credits to the buyer, and does not reflect real estate agent commissions, closing or other associated costs. As a result of this evolution of our business model, financial performance for prior year ended December 31, 2016. We recorded an income tax benefitperiods may not be indicative of $4.6 million for the year ended December 31, 2015 due to a deferred tax liability generated in connection with Zillow’s August 20, 2015 acquisition of DotLoop, Inc. that can be used to realize certain deferred tax assets for which we had previously provided a full allowance.
Results of Operations
future performance.
The following tables present our results of operations for the periods indicated and as a percentage of total
revenue: | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands, except per share data) | |
Statements of Operations Data: | | | | | | | | | | | | |
Revenue | | $ | 1,076,794 | | | $ | 846,589 | | | $ | 644,677 | |
Costs and expenses: | | | | | | | | | | | | |
Cost of revenue (exclusive of amortization) (1)(2) | | | 85,203 | | | | 69,262 | | | | 60,127 | |
Sales and marketing (1) | | | 448,201 | | | | 382,419 | | | | 308,125 | |
Technology and development (1) | | | 319,985 | | | | 255,583 | | | | 184,477 | |
General and administrative (1) | | | 210,816 | | | | 332,007 | | | | 184,984 | |
Impairment and restructuring costs (1) | | | 174,000 | | | | — | | | | 35,551 | |
Acquisition-related costs | | | 463 | | | | 1,423 | | | | 16,576 | |
Loss (gain) on divestiture of businesses | | | — | | | | (1,251 | ) | | | 4,368 | |
| | | | | | | | | | | | |
Total costs and expenses | | | 1,238,668 | | | | 1,039,443 | | | | 794,208 | |
| | | | | | | | | | | | |
Loss from operations | | | (161,874 | ) | | | (192,854 | ) | | | (149,531 | ) |
Loss on debt extinguishment | | | — | | | | (22,757 | ) | | | — | |
Other income | | | 5,385 | | | | 2,711 | | | | 1,501 | |
Interest expense | | | (27,517 | ) | | | (7,408 | ) | | | (5,489 | ) |
| | | | | | | | | | | | |
Loss before income taxes | | | (184,006 | ) | | | (220,308 | ) | | | (153,519 | ) |
Income tax benefit (expense) | | | 89,586 | | | | (130 | ) | | | 4,645 | |
| | | | | | | | | | | | |
Net loss | | $ | (94,420 | ) | | $ | (220,438 | ) | | $ | (148,874 | ) |
| | | | | | | | | | | | |
Net loss per share—basic and diluted | | $ | (0.51 | ) | | $ | (1.22 | ) | | $ | (0.88 | ) |
Weighted-average shares outstanding—basic and diluted | | | 186,453 | | | | 180,149 | | | | 169,767 | |
Other Financial Data: | | | | | | | | | | | | |
Adjusted EBITDA (unaudited) (3) | | $ | 236,315 | | | $ | 14,826 | | | $ | 87,564 | |
| | | | | | | | | | | | |
(1) Includes share-based compensation as follows: | | | | | | | | | | | | |
Cost of revenue | | $ | 3,884 | | | $ | 3,550 | | | $ | 2,384 | |
Sales and marketing | | | 22,735 | | | | 23,320 | | | | 25,391 | |
Technology and development | | | 39,938 | | | | 31,466 | | | | 26,849 | |
General and administrative | | | 47,014 | | | | 48,582 | | | | 50,590 | |
Impairment and restructuring costs | | | — | | | | — | | | | 14,859 | |
| | | | | | | | | | | | |
Total | | $ | 113,571 | | | $ | 106,918 | | | $ | 120,073 | |
| | | | | | | | | | | | |
(2) Amortization of website development costs and intangible assets included in technology and development | | $ | 94,349 | | | $ | 87,060 | | | $ | 63,189 | |
(3) | See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP. Adjusted EBITDA for the year ended December 31, 2016 includes the impact of the settlement of a lawsuit in June 2016 whereby the Company paid $130.0 million in connection with a release of all claims. |
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Percentage of Revenue: | | | | | | | | | | | | |
Revenue | | | 100 | % | | | 100 | % | | | 100 | % |
Costs and expenses: | | | | | | | | | | | | |
Cost of revenue (exclusive of amortization) | | | 8 | | | | 8 | | | | 9 | |
Sales and marketing | | | 42 | | | | 45 | | | | 48 | |
Technology and development | | | 30 | | | | 30 | | | | 29 | |
General and administrative | | | 20 | | | | 39 | | | | 29 | |
Impairment and restructuring costs | | | 16 | | | | 0 | | | | 6 | |
Acquisition-related costs | | | — | | | | — | | | | 3 | |
Loss (gain) on divestiture of businesses | | | 0 | | | | — | | | | 1 | |
| | | | | | | | | | | | |
Total costs and expenses | | | 115 | | | | 123 | | | | 123 | |
Loss from operations | | | (15 | ) | | | (23 | ) | | | (23 | ) |
Loss on debt extinguishment | | | 0 | | | | (3 | ) | | | 0 | |
Other income | | | 1 | | | | — | | | | — | |
Interest expense | | | (3 | ) | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | |
Loss before income taxes | | | (17 | ) | | | (26 | ) | | | (24 | ) |
Income tax benefit (expense) | | | 8 | | | | — | | | | 1 | |
| | | | | | | | | | | | |
Net loss | | | (9 | )% | | | (26 | )% | | | (23 | )% |
| | | | | | | | | | | | |
revenue (in thousands, except per share and percentage data):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Statements of Operations Data: | | | | | |
| Revenue: | | | | | |
| Homes | $ | 1,365,250 | | | $ | 52,365 | | | $ | — | |
| IMT | 1,276,896 | | | 1,201,143 | | | 996,203 | |
| Mortgages | 100,691 | | | 80,046 | | | 80,591 | |
| Total revenue | 2,742,837 | | | 1,333,554 | | | 1,076,794 | |
| Cost of revenue (exclusive of amortization) (1)(2): | | | | | |
| Homes | 1,315,345 | | | 49,392 | | | — | |
| IMT | 98,522 | | | 96,693 | | | 80,310 | |
| Mortgages | 18,154 | | | 7,505 | | | 4,893 | |
| Total cost of revenue | 1,432,021 | | | 153,590 | | | 85,203 | |
| Sales and marketing (1) | 714,128 | | | 552,621 | | | 448,201 | |
| Technology and development (1) | 477,347 | | | 410,818 | | | 319,985 | |
| General and administrative (1) | 366,176 | | | 262,153 | | | 210,816 | |
| Impairment costs | — | | | 79,000 | | | 174,000 | |
| Acquisition-related costs | — | | | 2,332 | | | 463 | |
| Integration costs | 650 | | | 2,015 | | | — | |
| Total costs and expenses | 2,990,322 | | | 1,462,529 | | | 1,238,668 | |
| Loss from operations | (247,485) | | | (128,975) | | | (161,874) | |
| Other income | 39,658 | | | 19,270 | | | 5,385 | |
| Interest expense | (101,792) | | | (41,255) | | | (27,517) | |
| Loss before income taxes | (309,619) | | | (150,960) | | | (184,006) | |
| Income tax benefit | 4,258 | | | 31,102 | | | 89,586 | |
| Net loss | $ | (305,361) | | | $ | (119,858) | | | $ | (94,420) | |
| Net loss per share — basic and diluted | $ | (1.48) | | | $ | (0.61) | | | $ | (0.51) | |
| Weighted-average shares outstanding — basic and diluted | 206,380 | | | 197,944 | | | 186,453 | |
| Other Financial Data: | | | | | |
| Segment income (loss) before income taxes: | | | | | |
| Homes segment | $ | (312,120) | | | $ | (59,691) | | | $ | — | |
| IMT segment | $ | 80,060 | | | $ | (57,638) | | | $ | (151,747) | |
| Mortgages segment | $ | (44,962) | | | $ | (13,711) | | | $ | (10,127) | |
| Adjusted EBITDA (3): | | | | | |
| Homes segment | $ | (241,326) | | | $ | (48,460) | | | $ | — | |
| IMT segment | 303,863 | | | 240,025 | | | 219,648 | |
| Mortgages segment | (23,653) | | | 9,267 | | | 16,667 | |
| Total Adjusted EBITDA | $ | 38,884 | | | $ | 200,832 | | | $ | 236,315 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| (1) Includes share-based compensation as follows: | | | | | |
| Cost of revenue | $ | 3,978 | | | | $ | 4,127 | | | $ | 3,884 | |
| Sales and marketing | 25,126 | | | | 22,942 | | | 22,735 | |
| Technology and development | 69,921 | | | | 56,673 | | | 39,938 | |
| General and administrative | 99,877 | | | | 65,342 | | | 47,014 | |
| Total | $ | 198,902 | | | $ | 149,084 | | | $ | 113,571 | |
| (2) Amortization of website development costs and intangible assets included in technology and development | $ | 61,937 | | | $ | 79,309 | | | $ | 94,349 | |
| (3) See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP, which is net loss on a consolidated basis and income (loss) before income taxes for each segment. | | | | | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Percentage of Revenue: | | | | | |
| Revenue: | | | | | |
| Homes | 50 | % | | 4 | % | | 0 | % |
| IMT | 47 | | | 90 | | | 93 | |
| Mortgages | 4 | | | 6 | | | 7 | |
| Total revenue | 100 | | | 100 | | | 100 | |
| Cost of revenue (exclusive of amortization): | | | | | |
| Homes | 48 | | | 4 | | | 0 | |
| IMT | 4 | | | 7 | | | 7 | |
| Mortgages | 1 | | | 1 | | | — | |
| Total cost of revenue | 52 | | | 12 | | | 8 | |
| Sales and marketing | 26 | | | 41 | | | | 42 | |
| Technology and development | 17 | | | 31 | | | | 30 | |
| General and administrative | 13 | | | 20 | | | | 20 | |
| Impairment costs | 0 | | | 6 | | | | 16 | |
| Acquisition-related costs | 0 | | | — | | | | — | |
| Integration costs | — | | | — | | | | 0 | |
| Total costs and expenses | 109 | | | 110 | | | | 115 | |
| Loss from operations | (9) | | | (10) | | | | (15) | |
| Other income | 1 | | | 1 | | | | 1 | |
| Interest expense | (4) | | | (3) | | | | (3) | |
| Loss before income taxes | (11) | | | (11) | | | | (17) | |
| Income tax benefit | — | | | 2 | | | | 8 | |
| Net loss | (11) | % | | (9) | % | | | (9) | % |
To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA
in total and for each segment, each a non-GAAP financial measure, within this Annual Report on Form
10-K, anon-GAAP financial measure. 10-K. We have provided a reconciliation below of Adjusted EBITDA
in total to net loss
and Adjusted EBITDA by segment to income (loss) before income taxes for each segment, the most directly comparable GAAP financial
measure.measures.
We have included Adjusted EBITDA in
total and for each segment in this Annual Report on Form
10-K as
it is athey are key
metricmetrics used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a
period-to-period basis.
Our use of Adjusted EBITDA
in total and for each segment has limitations as an analytical tool, and you should not consider
itthese measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;
•Although depreciation and amortization arenon-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not reflect impairment and restructuring costs;
•Adjusted EBITDA does not reflect acquisition-related costs;
Adjusted EBITDA does not reflect the loss (gain) on divestiture of businesses;
•Adjusted EBITDA does not reflect interest expense or other income;
Adjusted EBITDA does not reflect the loss on debt extinguishment;
•Adjusted EBITDA does not reflect income tax benefit (expense);taxes; and
•Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA
in total and for each segment alongside other financial performance measures, including various cash flow metrics, net loss,
income (loss) before income taxes for each segment and our other GAAP results.
The following
table presentstables present a reconciliation of Adjusted EBITDA to
the most directly comparable GAAP financial measure, which is net loss
on a consolidated basis and income (loss) before income taxes for each segment, for each of the periods
presented: | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands, unaudited) | |
Reconciliation of Adjusted EBITDA to Net Loss: | | | | | | | | | | | | |
Net loss | | $ | (94,420 | ) | | $ | (220,438 | ) | | $ | (148,874 | ) |
Other income | | | (5,385 | ) | | | (2,711 | ) | | | (1,501 | ) |
Depreciation and amortization expense | | | 110,155 | | | | 100,590 | | | | 75,386 | |
Share-based compensation expense | | | 113,571 | | | | 106,918 | | | | 105,214 | |
Impairment and restructuring costs | | | 174,000 | | | | — | | | | 35,551 | |
Acquisition-related costs | | | 463 | | | | 1,423 | | | | 16,576 | |
Loss (gain) on divestiture of businesses | | | — | | | | (1,251 | ) | | | 4,368 | |
Interest expense | | | 27,517 | | | | 7,408 | | | | 5,489 | |
Loss on debt extinguishment | | | — | | | | 22,757 | | | | — | |
Income tax (benefit) expense | | | (89,586 | ) | | | 130 | | | | (4,645 | ) |
| | | | | | | | | | | | |
Adjusted EBITDA (1) | | $ | 236,315 | | | $ | 14,826 | | | $ | 87,564 | |
| | | | | | | | | | | | |
(1) | Adjusted EBITDA for the year ended December 31, 2016 includes the impact of the settlement of a lawsuit in June 2016 whereby the Company paid $130.0 million in connection with a release of all claims. |
presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | | | | | | | |
| Homes | | IMT | | Mortgages | | Corporate Items (2) | | Consolidated |
| Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) Before Income Taxes: | | | | | | | | | |
| Net loss (1) | N/A | | | N/A | | | N/A | | | N/A | | | $ | (305,361) | |
| Income tax benefit | N/A | | | N/A | | | N/A | | | N/A | | | (4,258) | |
| Income (loss) before income taxes | $ | (312,120) | | | | $ | 80,060 | | | | $ | (44,962) | | | | $ | (32,597) | | | $ | (309,619) | |
| Other income | — | | | | — | | | | (1,409) | | | | (38,249) | | | (39,658) | |
| Depreciation and amortization expense | 8,414 | | | | 73,369 | | | | 5,684 | | | | — | | | 87,467 | |
| Share-based compensation expense | 32,390 | | | | 150,434 | | | | 16,078 | | | | — | | | 198,902 | |
| Interest expense | 29,990 | | | | — | | | | 956 | | | | 70,846 | | | 101,792 | |
| Adjusted EBITDA | $ | (241,326) | | | $ | 303,863 | | | $ | (23,653) | | | $ | — | | | $ | 38,884 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 | | | | | | | | |
| Homes | | IMT | | Mortgages | | Corporate Items (2) | | Consolidated |
| Reconciliation of Adjusted EBITDA to Net Loss and Loss Before Income Taxes: | | | | | | | | | |
| Net loss (1) | N/A | | | N/A | | | N/A | | | N/A | | | $ | (119,858) | |
| Income tax benefit | N/A | | | N/A | | | N/A | | | N/A | | | (31,102) | |
| Loss before income taxes | $ | (59,691) | | | $ | (57,638) | | | $ | (13,711) | | | $ | (19,920) | | | $ | (150,960) | |
| Other income | — | | | — | | | (244) | | | (19,026) | | | (19,270) | |
| Depreciation and amortization expense | 1,323 | | | 91,232 | | | 6,836 | | | — | | | 99,391 | |
| Share-based compensation expense | 7,731 | | | 131,404 | | | 9,949 | | | — | | | 149,084 | |
| Impairment costs | — | | | 75,000 | | | 4,000 | | | — | | | 79,000 | |
| Acquisition-related costs | — | | | 27 | | | 2,305 | | | — | | | 2,332 | |
| Interest expense | 2,177 | | | — | | | 132 | | | 38,946 | | | 41,255 | |
| Adjusted EBITDA | $ | (48,460) | | | $ | 240,025 | | | $ | 9,267 | | | $ | — | | | $ | 200,832 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | | | | | | | |
| Homes | | IMT | | Mortgages | | Corporate Items (2) | | Consolidated |
| Reconciliation of Adjusted EBITDA to Net Loss and Loss Before Income Taxes: | | | | | | | | | |
| Net loss (1) | N/A | | | N/A | | | N/A | | | N/A | | | $ | (94,420) | |
| Income tax benefit | N/A | | | N/A | | | N/A | | | N/A | | | (89,586) | |
| Loss before income taxes | $ | — | | | $ | (151,747) | | | $ | (10,127) | | | $ | (22,132) | | | $ | (184,006) | |
| Other income | — | | | — | | | — | | | (5,385) | | | (5,385) | |
| Depreciation and amortization expense | — | | | 103,648 | | | 6,507 | | | — | | | 110,155 | |
| Share-based compensation expense | — | | | 105,434 | | | 8,137 | | | — | | | 113,571 | |
| Impairment costs | — | | | 161,850 | | | 12,150 | | | — | | | 174,000 | |
| Acquisition-related costs | — | | | 463 | | | — | | | — | | | 463 | |
| Interest expense | — | | | — | | | — | | | 27,517 | | | 27,517 | |
| Adjusted EBITDA | $ | — | | | $ | 219,648 | | | $ | 16,667 | | | $ | — | | | $ | 236,315 | |
(1) We use income (loss) before income taxes as our profitability measure in making operating decisions and assessing the performance of our segments, therefore, net loss and income tax benefit are calculated and presented only on a consolidated basis within our financial statements.
(2) Certain corporate items are not directly attributable to any of our segments, including interest income earned on our short-term investments included in Other income and interest costs on our convertible senior notes included in Interest expense.
Year Ended December 31,
20172019 Compared to Year Ended December 31,
20162018
Revenue
| | | | | | | | | | | | |
| | | Year Ended December 31, | | | 2016 to 2017
% Change | |
| | | 2017 | | | 2016 | | |
| | | (in thousands) | | | | |
Revenue: | | | | | | | | | | | | |
Marketplace revenue: | | | | | | | | | | | | |
Premier Agent | | $ | 761,594 | | | $ | 604,292 | | | | 26 | % |
Other real estate | | | 164,991 | | | | 102,635 | | | | 61 | % |
Mortgages | | | 80,591 | | | | 71,133 | | | | 13 | % |
| | | | | | | | | | | | |
Total Marketplace revenue | | | 1,007,176 | | | | 778,060 | | | | 29 | % |
Display revenue | | | 69,618 | | | | 68,529 | | | | 2 | % |
| | | | | | | | | | | | |
Total revenue | | $ | 1,076,794 | | | $ | 846,589 | | | | 27 | % |
| | | | | | | | | | | | |
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
Percentage of Total Revenue: | | | | | | | | |
Marketplace revenue: | | | | | | | | |
Premier Agent | | | 71 | % | | | 71 | % |
Other real estate | | | 15 | | | | 12 | |
Mortgages | | | 7 | | | | 8 | |
| | | | | | | | |
Total Marketplace revenue | | | 94 | | | | 92 | |
Display revenue | | | 6 | | | | 8 | |
| | | | | | | | |
Total revenue | | | 100 | % | | | 100 | % |
| | | | | | | | |
Overall
The following table presents Zillow Group’s revenue by category and by segment for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | 2018 to 2019
% Change |
| 2019 | | 2018 | | |
| Homes | $ | 1,365,250 | | | $ | 52,365 | | | 2,507 | % |
| IMT Revenue: | | | | | |
| Premier Agent | 923,876 | | | 898,332 | | | 3 | % |
| Rentals | 164,173 | | | 134,587 | | | 22 | % |
| Other | 188,847 | | | 168,224 | | | 12 | % |
| Total IMT revenue | 1,276,896 | | | 1,201,143 | | | 6 | % |
| Mortgages | 100,691 | | | 80,046 | | | 26 | % |
| Total revenue | $ | 2,742,837 | | | $ | 1,333,554 | | | 106 | % |
The following table presents Zillow Group’s revenue by category and by segment as percentages of total revenue for the periods presented:
| | | | | | | | | | | |
| Year Ended December 31, | | |
| 2019 | | 2018 |
| Percentage of Total Revenue: | | | |
| Homes | 50 | % | | 4 | % |
| IMT Revenue: | | | |
| Premier Agent | 34 | | | 67 | |
| Rentals | 6 | | | 10 | |
| Other | 7 | | | 13 | |
| Total IMT revenue | 47 | | | 90 | |
| Mortgages | 4 | | | 6 | |
| Total revenue | 100 | % | | 100 | % |
Total revenue increased by $230.2$1,409.3 million, or 27%106%, for the year ended December 31, 20172019 compared to the year ended December 31, 2016. Marketplace2018. The increase in total revenue was primarily attributable to our Zillow Offers business, which began selling homes in July of 2018. Homes revenue grew to $1,365.3 million for the year ended December 31, 2019 from $52.4 million for the year ended December 31, 2018, an increase of $1,312.9 million. Visits increased by 29%, and display revenue increased by 2%.12% to 8,065.5 million for the year ended December 31, 2019 from 7,182.1 million for the year ended December 31, 2018. There were approximately 151.6172.6 million average monthly unique users of our mobile applications and websites for the three months ended December 31, 20172019 compared to 140.1157.2 million average monthly unique users for the three months ended December 31, 2016,2018, representing year-over-year growth of 8%10%. This increaseThe increases in visits and unique users increased the number of impressions, leads, clicks and clicksother events we monetized inacross our marketplace and display revenue categories. In connection with the hurricanes that occurred during the summer of 2017, we worked closely with our Premier Agents and other advertisers in affected areas to help manage their advertising budgets. We estimate that relief initiatives, which included billing credits and other forms of advertiser assistance, as well as lost sales, impacted Premier Agent
Homes Segment
Homes revenue by approximately $2.0was $1,365.3 million for the year ended December 31, 2017. We also experienced2019 due to the sale of 4,313 homes at an average selling price of $316.5 thousand per home. For the year ended December 31, 2018, Homes revenue was $52.4 million as a temporary declineresult of the sale of 177 homes at an average selling price of $295.8 thousand per home. The increase in trafficHomes revenue was due to our mobile applications and websites from consumersan increase in impacted areas, which may have impacted the number of unique usershomes sold in the period as customer adoption of Zillow Offers increases in geographic areas in which it is currently operating and visits for the year endedas Zillow Offers expands into new geographic markets. As of December 31, 2017.Marketplace2019, Zillow Offers was operating in 22 metropolitan areas.
IMT Segment
Premier Agent Revenue. Premier Agent revenue grew to $1,007.2$923.9 million for the year ended December 31, 20172019 from $778.1 millionfor the year ended December 31, 2016, an increase of $229.1 million. Marketplace revenue represented 94% of total revenue$898.3 million for the year ended December 31, 2017 compared to 92%2018, an increase of total revenue for the year ended December 31, 2016. The increase in marketplace revenue was primarily attributable to the $157.3$25.5 million, or 26%, increase in Premier Agent revenue.3%. Premier Agent revenue was positively impacted by an increase in visits. VisitsAs discussed above, visits increased 19%12% to 6,314.48,065.5 million for the year ended December 31, 20172019 from 5,323.27,182.1 million for the year ended December 31, 2016. This2018. The increase in visits increased the number of impressions and leads we could monetize in our Premier Agent marketplace. Advertiser churn, or exit from our advertising platform, normalized throughout 2019, which contributed to the increase in Premier Agent revenue during the year ended December 31, 2019.
Premier Agent revenue per visit increaseddecreased by 6%8% to $0.121$0.115 for the year ended December 31, 20172019 from $0.114$0.125 for the year ended December 31, 2016.2018. We calculate Premier Agent revenue per visit by dividing the revenue generated by our Premier Agent and Premier Broker programs in the period by the number of visits in the period. We believe the decrease in Premier Agent revenue per visit was also positively impacted by the full implementationprimarily a result of the new pricing method forchanges we made to our Premier Agent product, which may have increased the demand for our advertising platform. As discussed above, during the year ended December 31, 2016,and Premier Broker programs in 2018. For example, in April 2018, we began meaningful testing and implementation of a new auction-based pricing method forof consumer lead validation and distribution to our Premier Agent product,and Premier Broker advertisers. A validated consumer connection is made when a consumer who is interested in connecting with a real estate professional does not select a specific Premier Agent or Premier Broker with whom they want to connect through one of our flagshipmobile applications or websites; applying the new model, these validated consumer leads are distributed to Premier Agents and Premier Brokers in proportion to their share of voice, or an agent advertiser’s share of total advertising product,purchased in a particular zip code. This transition to the new lead validation and distribution process resulted in a decrease in the total number of leads received by whichsome advertisers and increased advertiser churn in the third and fourth quarters of 2018 as current and prospective Premier Agents and Premier Brokers evaluated the value of these higher-quality leads and market-based pricing continued to take effect. We believe we determinemade appropriate adjustments to the Premier Agent and Premier Broker programs to help address this advertiser churn, by, for example, decreasing the number of screening questions posed to consumers during the consumer lead validation process, in an effort to return to prior lead volumes, and setting price caps on the cost per impression deliveredand cost per lead paid by Premier Agents and Premier Brokers to help stabilize auction-based pricing dynamics in each zip code in a dynamic way based on demand for impressions in that zip code. We continue to evaluate this pricing method, and in the fourth quarter of 2016, we implemented this method broadly for all existing and new agent advertisers, including brokerages and other teams. We believe the increase in certain markets, as advertiser churn normalized throughout 2019.
Premier Agent revenue
was also due in part to increased advertising sales to current Premier Agents, including brokerages and other teams.The increase in marketplace revenue was also attributable to growth in other real estate revenue, which increased by $62.4 million, or 61%, for the year ended December 31, 2017 compared2019 also included an insignificant amount of revenue generated from our initial testing of a new pricing model for Premier Agent and Premier Broker advertisers, Flex, in limited markets. With the Flex model, Premier Agents and Premiers Brokers are provided with validated leads at no upfront cost, and they pay a performance advertising fee only when a real estate transaction is closed with one of the leads. We may continue to extend the testing of this pricing model to additional regions in the future.
Rentals Revenue. Rentals revenue was $164.2 million for the year ended December 31, 2016.2019 compared to $134.6 million for the year ended December 31, 2018, an increase of $29.6 million, or 22%. The increase in other real estateRentals revenue was positively impacted by an increase in quarterly revenue per average monthly rental listing, which increased 18% to approximately $1,021 for the year ended December 31, 2019 from approximately $867 for the year ended December 31, 2018. We calculate quarterly revenue per average monthly rental listing by dividing total Rentals revenue for the period by the average monthly monetized deduplicated rental listings for the period and then dividing by the number of quarters in the period. The increase in quarterly revenue per average monthly rental listing was primarily driven by an increase in revenue from our Rentals application product and revenue from our Rentals cost per impression product. The increase in Rentals revenue was also attributable to an increase in the number of average monthly rental listings on our mobile applications and websites, which increased to 40,211 average monthly rental listings for the year ended December 31, 2019 from 38,816 average monthly rental listings for the year ended December 31, 2018, an increase of 4%. Average monthly rental listings include the average monthly monetized deduplicated rental listings for the period, which are displayed across all of our mobile applications and websites. An increase in rental listings on our mobile applications and websites increases the likelihood that a consumer will contact a rental professional, which in turn increases the likelihood of a lead, click, impression, lease or listing that we monetize. Finally, the increase in Rentals revenue was also driven in part by the 12% increase in visits to 8,065.5 million for the year ended December 31, 2019, which increases the likelihood a consumer will contact a rental professional and, in turn, increases the likelihood of a lead, click, impression, lease or listing that we monetize.
Other Revenue. Other revenue was $188.8 million for the year ended December 31, 2019 compared to $168.2 million for the year ended December 31, 2018, an increase of $20.6 million, or 12%. The increase in Other revenue was primarily athe result of a 66%23% increase in revenue generated by Zillow Group Rentals.our new construction marketing solutions. Growth in Zillow Group Rentalsnew construction revenue was primarily attributable to increases in consumer adoption of our rentals information marketplaces, which in turn increased the likelihood of a lead, lease, or click that we monetize, and advertiser adoption ofhigher spend for our cost per lead, cost per leaseimpression product, driven by a greater volume of impressions that we monetized, and cost perclick advertising products, as well as enhancements to our marketing products that improve the waysincreases in which consumersadoption by and advertisers connect through the Zillow Group Rentals marketplace. Other real estate revenue was also positively impacted by increased advertising sales to new home builders through our New Constructionnew construction platform.
The increase in marketplace
Mortgages Segment
Mortgages revenue was also attributable to growth in mortgages revenue, which increased by $9.5$100.7 million or 13%, for the year ended December 31, 20172019 compared to $80.0 million for the year ended December 31, 2016.2018, an increase of $20.6 million, or 26%. The increase in mortgages revenue was primarily a result of a 54% increasethe addition of revenue generated by Zillow Home Loans, Zillow’s affiliated mortgage lender, which we acquired in our average revenue per loan information requestthe fourth quarter of 2018.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Segment Results of Operations
The following table presents Zillow Group’s segment results for the year ended December 31, 2017 comparedperiods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | | | | | Year Ended December 31, 2018 | | | | |
| Homes | | IMT | | Mortgages | | Homes | | IMT | | Mortgages |
| Revenue | $ | 1,365,250 | | | $ | 1,276,896 | | | $ | 100,691 | | | $ | 52,365 | | | $ | 1,201,143 | | | $ | 80,046 | |
| Costs and expenses: | | | | | | | | | | | |
| Cost of revenue | 1,315,345 | | | 98,522 | | | 18,154 | | | 49,392 | | | 96,693 | | | 7,505 | |
| Sales and marketing | 171,634 | | | 488,909 | | | 53,585 | | | 17,134 | | | 502,785 | | | 32,702 | |
| Technology and development | 78,994 | | | 365,769 | | | 32,584 | | | 21,351 | | | 363,712 | | | 25,755 | |
| General and administrative | 81,407 | | | 243,636 | | | 41,133 | | | 22,002 | | | 220,564 | | | 19,587 | |
| Impairment costs | — | | | — | | | — | | | — | | | 75,000 | | | 4,000 | |
| Acquisition-related costs | — | | | — | | | — | | | — | | | 27 | | | 2,305 | |
| Integration costs | — | | | — | | | 650 | | | — | | | — | | | 2,015 | |
| Total costs and expenses | 1,647,380 | | | 1,196,836 | | | 146,106 | | | 109,879 | | | 1,258,781 | | | 93,869 | |
| Income (loss) from operations | (282,130) | | | 80,060 | | | (45,415) | | | (57,514) | | | (57,638) | | | (13,823) | |
| Other income | — | | | — | | | 1,409 | | | — | | | — | | | 244 | |
| Interest expense | (29,990) | | | — | | | (956) | | | (2,177) | | | — | | | (132) | |
| Income (loss) before income taxes (1) | $ | (312,120) | | | $ | 80,060 | | | $ | (44,962) | | | $ | (59,691) | | | $ | (57,638) | | | $ | (13,711) | |
(1) The following table presents the reconciliation of total segment loss before income taxes to the year ended December 31, 2016. The increase in average revenue per loan information request was primarily a result of our flagship mortgage advertising platform, Long Form, which yields higher revenue than our other mortgage advertising products, and increased consumer adoption of Long Form, which was driven by product enhancements that allow us to monetize our mortgages products more efficiently. There were approximately 22.7 million mortgage loan information requests submitted on Zillow Group platforms by consumersconsolidated loss before income taxes for the year ended December 31, 2017 compared to 30.8 million mortgage loan information requests submitted on Zillow Group platforms by consumers for the year ended December 31, 2016, a decreaseperiods presented (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, | | |
| 2019 | | 2018 | |
| Total segment loss before income taxes | $ | (277,022) | | | | $ | (131,040) | |
| Corporate interest expense | (70,846) | | | | (38,946) | |
| Corporate other income | 38,249 | | | | 19,026 | |
| Consolidated loss before income taxes | $ | (309,619) | | | $ | (150,960) | |
Homes Segment
Cost of 26%. We believe the decrease in the numberRevenue. Cost of loan information requests submitted by consumers is due to our strategic decision to improve loan information request quality by requiring consumers to provide more information before a loan information request is submitted. We believe our mortgage product feature change creates a better experience for consumers and more valuable loan information requests for our lender advertisers.Display revenue was $69.6$1,315.3 million for the year ended December 31, 20172019 compared to $68.5$49.4 million for the year ended December 31, 2016,2018, an increase of $1.1$1,266.0 million. Display revenue represented 6% of total revenue for the year ended December 31, 2017 compared to 8% of total revenue for the year ended December 31, 2016. The increase in display revenue was primarily a result of the increase in unique users, which resulted in a greater number of impressions and clicks we monetized. We continue to deemphasize display advertising in the user experience and instead focus on growth in marketplace revenue.
We will begin reporting rentals revenue as a separate revenue category beginning with quarterly reporting for the three months ending March 31, 2018. In addition, display revenue will be included in our other revenue category and not reported separately. Going forward, other real estate revenue will be redefined as other revenue and will include revenue from new construction, dotloop, display, as well as from the sale of various other advertising and business software solutions.
Cost of Revenue
Cost of revenue was $85.2 millionfor the year ended December 31, 2017 compared to $69.3 million for the year ended December 31, 2016, an increase of $15.9 million, or 23%. The increase in cost of revenue was primarily attributable to a $7.9 millionincrease in revenue sharehome acquisition and renovation costs a $4.8 millionincrease in data center and connectivity costs, a $1.0 million increase in headcount- related expenses, including share-based compensation expense, a $0.8 millionincrease in credit card and ad serving fees and a $1.4 millionincrease in various miscellaneous expenses.to the 4,313 homes that we sold during the period compared to the sale of 177 homes during the year ended December 31, 2018. We expect our cost of revenue to increase in absolute dollars in future years as we continue to incur more expenses that are associated with growth in revenue.
revenue and expansion of Zillow Offers into new markets.
Sales and MarketingMarketing.
Sales and marketing expenses were $448.2 millionfor$171.6 million for the year ended December 31, 20172019 compared to $382.4 millionfor$17.1 million for the year ended December 31, 2016,2018, an increase of $65.8 million, or 17%.$154.5 million. The increase in sales and marketing expenses was primarily attributable to increaseda $56.9 million increase in selling expenses directly attributable to the resale of homes, a $44.2 million increase in headcount-related expenses, including share-based compensation expense, a $20.7 million increase in holding costs, a $20.0 million increase in marketing and advertising expenses, of $34.2a $3.3 million primarily related to advertising spend to attract consumers across online and offline channels, which supports our growth initiatives.In addition to the increases in marketing and advertising, headcount-related expenses increased $20.5 million, including share-based compensation expense, due primarily to significant growth in the size of our sales team. The increase in salestravel expenses, a $3.1 million increase in professional services fees, a $2.2 million increase in depreciation and amortization expense and a $4.1 million increase in miscellaneous expenses.
Sales and marketing expenses was also attributable to a $6.0 millionincreaseinclude $22.6 million in tradeshowsholding costs for the year ended December 31, 2019 and conferences expense and related travel$1.9 million in holding costs a $2.5 millionincrease in consulting costs to support our advertising initiatives, a $1.1 millionincrease in software, hardware and connectivity costs, and a $1.5 millionincrease in various miscellaneous expenses. for the year ended December 31, 2018.
We expect our sales and marketing expenses to increase in absolute dollars in future
yearsperiods as we continue to expand
our sales team and invest more resources in extending our audience through marketing and advertising initiatives.the Homes segment.
Technology and DevelopmentDevelopment.
Technology and development expenses, which include research and development costs, were $320.0 millionfor$79.0 million for the year ended December 31, 20172019 compared to $255.6 millionfor$21.4 million for the year ended December 31, 2016,2018, an increase of $64.4$57.6 million. The increase in technology and development expenses was primarily due to a $45.2 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment, a $4.6 million increase in data acquisition costs, a $3.8 million increase in depreciation and amortization expense, a $2.0 million increase in professional services fees and a $2.0 million increase in miscellaneous expenses. We expect our technology and development expenses to increase in absolute dollars in future periods as we continue to build new website functionality and other technologies that will facilitate the purchasing and sales processes related to our Homes segment. General and Administrative. General and administrative expenses were $81.4 million for the year ended December 31, 2019 compared to $22.0 million for the year ended December 31, 2018, an increase of $59.4 million. The increase in general and administrative expenses was primarily due to a $36.5 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment. In addition, there was an $8.3 million increase in building lease-related expenses including rent, utilities and insurance, a $4.2 million increase in professional services fees, a $3.5 million increase in software and hardware costs, a $2.1 million increase in travel expense and a $4.8 million increase in miscellaneous expenses. We expect general and administrative expenses to increase in absolute dollars in future periods as we continue to expand our Homes segment.
Interest Expense. Interest expense was $30.0 million for the year ended December 31, 2019 compared to $2.2 million for the year ended December 31, 2018, an increase of $27.8 million. The increase in interest expense was attributable to borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our credit facilities supporting Zillow Offers. We expect interest expense to increase in absolute dollars in future periods as we continue to expand our Homes segment.
IMT Segment
Cost of Revenue. Cost of revenue was $98.5 million for the year ended December 31, 2019 compared to $96.7 million for the year ended December 31, 2018, an increase of $1.8 million, or 25%2%. The increase in cost of revenue was primarily attributable to a $4.9 million increase in data center and connectivity costs and a $3.5 million increase in other direct product costs, partially offset by a $3.4 million decrease in headcount-related expenses, including share-based compensation expense, a $1.4 million decrease in software and hardware costs, a $1.2 million decrease in revenue share costs and a $0.6 million decrease in miscellaneous expenses.
Sales and Marketing. Sales and marketing expenses were $488.9 million for the year ended December 31, 2019 compared to $502.8 million for the year ended December 31, 2018, a decrease of $13.9 million, or 3%. The decrease in sales and marketing expenses was primarily attributable to a $29.1 million decrease in marketing and advertising expenses, a $1.5 million decrease in travel expenses and a $1.3 million decrease in miscellaneous expenses, partially offset by a $12.2 million increase in professional services fees and a $5.8 million increase in headcount-related expenses, including share-based compensation expense.
Technology and Development. Technology and development expenses, which include research and development costs, were $365.8 million for the year ended December 31, 2019 compared to $363.7 million for the year ended December 31, 2018, an increase of $2.1 million, or 1%. Approximately $44.3 millionof$10.3 millionof the increase related to growth in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering teams to support current and future product initiatives. In addition, there was a $10.0 millionincrease in othernon-capitalizable data content expense, a $5.4 millionincrease in the amortization of purchased data content intangible assets, a $1.3 millionincrease in amortization of acquired intangible assets, a $1.1 millionincrease$4.4 million increase in software and hardware costs, a $3.5 millionincrease in other non-capitalizable data content expenses and a $2.3 millionincrease$1.7 million increase in various miscellaneous expenses.Amortization These increases were partially offset by a $17.2 million decrease in depreciation and amortization expense includedand a $0.6 million decrease in technologyprofessional services fees.
General and development for capitalized website development costsAdministrative. General and software was $44.4 millionand $43.8administrative expenses were $243.6 million respectively, for the year ended December 31, 2017 and 2016. Amortization expense included in technology and development related2019 compared to intangible assets recorded in connection with acquisitions was $40.0 millionand $38.7$220.6 million respectively, for the year ended December 31, 20172018, an increase of $23.1 million, or 10%. The increase in general and 2016. Other data contentadministrative expenses was primarily due to a $17.4 million increase in headcount-related expenses driven by the recognition of a total of $23.3 million of share-based compensation expense in the IMT segment during the year ended December 31, 2019 in connection with the modification of certain outstanding equity awards related to the departure of Spencer Rascoff, who served as Zillow Group’s Chief Executive Officer beginning in 2010 and who remains a member of Zillow Group’s board of directors. For additional information regarding the equity modification, see Note 18 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. In addition, there was $35.4an $8.3 million increase in building lease-related expenses including rent, utilities and $25.5insurance, partially offset by a $1.9 million respectively,decrease in professional services fees.
Impairment Costs. There were no impairment costs for the year ended December 31, 2017 and 2016. Amortization expense included in technology and development for purchased data content intangible assets was $10.0 millionand $4.6 million, respectively,2019. Impairment costs recorded to the IMT segment for the year ended December 31, 2018 consist of a $10.0 million non-cash impairment related to our June 2017 equity investment and 2016.$65.0 million of the total $69.0 million impairment related to the indefinite-lived Trulia trade names and trademarks intangible asset. For additional information about these impairments, see Note 9 and Note 11 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Mortgages Segment
Cost of Revenue. Cost of revenue was $18.2 million for the year ended December 31, 2019 compared to $7.5 million for the year ended December 31, 2018, an increase of $10.6 million. The increase in cost of revenue was primarily attributable to our October 2018 acquisition of Zillow Home Loans, and includes a $7.2 million increase in headcount-related expenses, including share-based compensation expense, a $1.7 million increase in mortgage loan processing costs and a $1.7 million increase in miscellaneous expenses. We expect cost of revenue to increase in absolute dollars in future years as we continue to incur expenses associated with growth in revenue and expansion of Zillow Home Loans.
Sales and Marketing. Sales and marketing expenses were $53.6 million for the year ended December 31, 2019 compared to $32.7 million for the year ended December 31, 2018, an increase of $20.9 million, or 64%. The increase in sales and marketing expenses was primarily attributable to a $16.4 million increase in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans, a $1.9 million increase in marketing and advertising expenses and a $2.6 million increase in miscellaneous expenses. We expect our sales and marketing expenses to increase in absolute dollars in future periods as we continue to expand the Mortgages segment.
Technology and Development. Technology and development expenses, which include research and development costs, were $32.6 million for the year ended December 31, 2019 compared to $25.8 million for the year ended December 31, 2018, an increase of $6.8 million, or 27%. The increase in technology and development expenses was primarily a result of a $6.6 millionincrease in headcount-related expenses, including share-based compensation expense, related to our October 2018 acquisition of Zillow Home Loans. We expect our technology and development expenses to increase in absolute dollars over timein future periods as we continue to build new mobilewebsite functionality and website functionality.other technologies that will facilitate the origination of mortgages in Zillow Home Loans.
General and AdministrativeAdministrative.
General and administrative expenses were $210.8 millionfor$41.1 million for the year ended December 31, 20172019 compared to $332.0 millionfor$19.6 million for the year ended December 31, 2016, a decrease2018, an increase of $121.2 million, or 37%.$21.5 million. The decreaseincrease in general and administrative expenses was primarily due to a result of the settlement of a lawsuit with Move, Inc. and certain related entities (collectively, “Move”) in June 2016 whereby the Company paid $130.0 millionin connection with a release of all claims. In addition, there was a $31.1 milliondecrease in professional services fees, primarily as a result of our settlement of litigation with Move, as we incurred $28.8 millionin legal costs related to our litigation with Move for the year ended December 31, 2016. These decreases were partially offset by a $10.9 millionincrease$15.6 million increase in headcount-related expenses, including share-based compensation expense, driven primarily by growth in headcount in shared corporate servicesrelated to support our engineering and other teams,October 2018 acquisition of Zillow Home Loans. In addition, there was a $7.5 millionincrease$2.2 million increase in building lease-related expenses including rent, utilities and insurance, a $6.0 millionincrease in estimated legal liabilities, a $4.7 millionincrease in bad debt expense, a $3.7$1.3 million increase in city and state taxes,professional services fees, a $2.9 millionincrease$1.1 million increase in software and hardware costs and a $2.0 millionincrease in the loss on disposal of assets, a $1.0$1.3 million increase in travel expenses, and a $1.2 millionincrease in miscellaneous general and administrative expenses. We expect general and administrative expenses to increase over time in absolute dollars as we continue to expand our mortgage business.Impairment Costs
Impairment
Acquisition-Related Costs. There were no acquisition-related costs for the year ended December 31, 2017 consist of2019. Acquisition-related costs were $2.3 million for the $174.0 millionnon-cash impairmentyear ended December 31, 2018 and related to the $351.0 million indefinite-lived intangible asset that we recorded in connection with our February2015 acquisition of Trulia for Trulia’s trade names and trademarks. For additional information about the impairment, see Note 9 to our consolidated financial statements. Zillow Home Loans.
Impairment Costs. There were no impairment costs for the year ended December 31, 2016.Acquisition-Related Costs
Acquisition-related2019. Impairment costs were $0.5 millionforfor the year ended December 31, 2017, primarily as a result of our January 2017 acquisition of HREO and our September 2017 acquisition of New Home Feed, including legal and accounting fees. Acquisition-related costs were $1.4 millionfor the year ended December 31, 2016 as a result of our February 2016 acquisition of Naked Apartments and our August 2016 acquisition of Bridge Interactive, including legal, accounting and tax fees.
Loss (Gain) on Divestiture of Businesses
There was no loss (gain) on divestiture of businessMortgages Segment for the year ended December 31, 2017. The gain2018 consist of $4.0 million of the total $69.0 million impairment related to the indefinite-lived Trulia trade names and trademarks intangible asset. For additional information about the impairment, see Note 11 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on divestitureForm 10-K.
Corporate Items
Certain corporate items are not directly attributable to any of business of $1.3our segments, including interest income earned on our short-term investments included in Other income and interest costs on our convertible senior notes included in Interest expense.
Interest Expense. Interest expense was $70.8 million for the year ended December 31, 2016 related2019 compared to the August 2016 sale of our Diverse Solutions business.Loss on Debt Extinguishment
There was no loss on debt extinguishment for the year ended December 31, 2017. The loss on debt extinguishment was $22.8$38.9 million for the year ended December 31, 2016 and related2018, an increase of $31.9 million, or 82%. This increase was primarily due to the partial repurchaseJuly 2018 issuance of the 20202023 Notes, in December 2016.
Interest Expense
Interest expense was $27.5 millionfor the year ended December 31, 2017, compared to $7.4 millionforSeptember 2019 issuance of the year ended December 31, 2016. For2026 Notes and the year ended December 31, 2017, interest expense primarily related toSeptember 2019 and October 2019 issuances of the 2021 Notes that were issued on December 12, 2016. For the year ended December 31, 2016, interest expense primarily related to the 2020 Notes that we guaranteed in connection with the February 2015 acquisition of Trulia.2024 Notes. For additional information regarding the 2020 Notes and the 2021 Notes,convertible senior notes, see Note 1115 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Other Income. Other income not directly attributable to any of our consolidated financial statements.Income Tax Benefit (Expense)
We recorded an income tax benefit of $89.6segments was $38.2 million for the year ended December 31, 2017. Approximately $66.0 million of the income tax benefit relates to a $174.0 millionnon-cash impairment we recorded during the year ended December 31, 2017 related to the $351.0 million indefinite-lived intangible asset that we recorded in connection with our February 2015 acquisition of Trulia for Trulia’s trade names and trademarks. For additional information about thenon-cash impairment, see Note 9 to our consolidated financial statements. The remaining $23.6 million of the income tax benefit primarily relates to our initial analysis of the impact of the rate decrease included in the Tax Act for the impact of the reduction in our net deferred tax liability related to our indefinite-lived intangible asset. Income tax expense was not material for the year ended December 31, 2016.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue
| | | | | | | | | | | | |
| | | Year Ended December 31, | | | 2015 to 2016
% Change | |
| | | 2016 | | | 2015 | | |
| | | (in thousands) | | | | |
Revenue: | | | | | | | | | | | | |
Marketplace revenue: | | | | | | | | | | | | |
Premier Agent | | $ | 604,292 | | | $ | 446,921 | | | | 35 | % |
Other real estate | | | 102,635 | | | | 35,171 | | | | 192 | % |
Mortgages | | | 71,133 | | | | 44,263 | | | | 61 | % |
Market Leader | | | — | | | | 29,549 | | | | N/A | |
| | | | | | | | | | | | |
Total Marketplace revenue | | | 778,060 | | | | 555,904 | | | | 40 | % |
Display revenue | | | 68,529 | | | | 88,773 | | | | (23 | %) |
| | | | | | | | | | | | |
Total revenue | | $ | 846,589 | | | $ | 644,677 | | | | 31 | % |
| | | | | | | | | | | | |
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | |
Percentage of Total Revenue: | | | | | | | | |
Marketplace revenue: | | | | | | | | |
Premier Agent | | | 71 | % | | | 69 | % |
Other real estate | | | 12 | | | | 5 | |
Mortgages | | | 8 | | | | 7 | |
Market Leader | | | 0 | | | | 5 | |
| | | | | | | | |
Total Marketplace revenue | | | 92 | | | | 86 | |
Display revenue | | | 8 | | | | 14 | |
| | | | | | | | |
Total revenue | | | 100 | % | | | 100 | % |
| | | | | | | | |
Overall revenue increased by $201.9 million, or 31%, for the year ended December 31, 20162019 compared to the year ended December 31, 2015. Marketplace revenue increased by 40%, and display revenue decreased by 23%. There were approximately 140.1 million average monthly unique users of our mobile applications and websites for the three months ended December 31, 2016 compared to 123.7 million average monthly unique users for the three months ended December 31, 2015, representing year-over-year growth of 13%. This increase in unique users increased the number of impressions and clicks we monetized in our marketplace and display revenue categories.
Marketplace revenue grew to $778.1 millionfor the year ended December 31, 2016 from $555.9 millionfor the year ended December 31, 2015, an increase of $222.2 million. Marketplace revenue represented 92%of total revenue for the year ended December 31, 2016 compared to 86%of total revenue for the year ended December 31, 2015. The increase in marketplace revenue was primarily attributable to the $157.4 million, or 35%, increase in Premier Agent revenue. Premier Agent revenue was positively impacted by an increase in visits. Visits increased 33%to 5,323.2$19.0 million for the year ended December 31, 2016 from 3,991.5 millionfor the year ended December 31, 2015. This increase in visits increased the number of impressions we could monetize in our Premier Agent marketplace. Premier Agent revenue per visit increased by 1%to $0.114for the year ended December 31, 2016 from $0.112for the year ended December 31, 2015. Beginning on February 17, 2015, the reported visits reflect the effect of Zillow Group’s February 17, 2015 acquisition of Trulia.
The increase in marketplace revenue was also attributable to growth in other real estate revenue, which increased by $67.5 million, or 192%, for the year ended December 31, 2016 compared to the year ended
December 31, 2015. The increase in other real estate revenue was primarily a result of a 124% increase in revenue generated by Zillow Group Rentals. Growth in Zillow Group Rentals revenue was primarily attributable to increases in consumer adoption of our rentals information marketplaces, which in turn increased the likelihood of a lead or lease that we monetize, and advertiser adoption of our cost per lead and cost per lease advertising products, as well as enhancements to our marketing products that improve the ways in which consumers and advertisers connect through the Zillow Group Rentals marketplace.
The increase in marketplace revenue was also attributable to growth in mortgages revenue, which increased by $26.9 million, or 61%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in mortgages revenue was primarily a result of a 153%increase in our average revenue per loan information request for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in average revenue per loan information request was primarily a result of our flagship mortgage advertising platform, Long Form, which yields higher revenue than our other mortgage advertising products, and increased consumer adoption of Long Form, which was driven by product enhancements that allow us to monetize our mortgages products more efficiently. There were approximately 30.8 million mortgage loan information requests submitted on Zillow Group platforms by consumers for the year ended December 31, 2016 compared to 46.8 millionmortgage loan information requests submitted on Zillow Group platforms by consumers for the year ended December 31, 2015, a decrease of approximately 34%. We believe the decrease in the number of loan information requests submitted by consumers is due to our strategic decision to improve loan information request quality by requiring consumers to provide more information before a loan information request is submitted. We believe our mortgage product feature change creates a better experience for consumers and more valuable loan information requests for our lender advertisers. During the first half of 2015 we changed the pricing model for our mortgage advertising products from cost per click to cost per lead, which also may have contributed to growth in mortgages revenue.
Display revenue was $68.5 million for the year ended December 31, 2016 compared to $88.8 million for the year ended December 31, 2015, a decrease of $20.2 million. Display revenue represented 8% of total revenue for the year ended December 31, 2016 compared to 14% of total revenue for the year ended December 31, 2015. The decrease in display revenue is primarily a result of our strategy to deemphasize display advertising in the user experience and instead focus on growth in marketplace revenue.
Cost of Revenue
Cost of revenue was $69.3 million for the year ended December 31, 2016 compared to $60.1 million for the year ended December 31, 2015,2018, an increase of $9.1 million, or 15%. The$19.2 million. This increase in cost of revenue wasis primarily attributable to a $6.5 million increase in data center and connectivity costs, increased headcount-related expenses of $3.8 million, including share-based compensation expense, driven by growth in headcount, and a $3.6 million increase in credit card and ad serving fees, which were partially offset by a $4.2 milliondecrease in printing costs and costs to generate leads for customers related to the Market Leader business that we divested on September 30, 2015 and a $0.7 million decrease in multiple listing services fees.
Sales and Marketing
Sales and marketing expenses were $382.4 million for the year ended December 31, 2016 compared to $308.1 million for the year ended December 31, 2015, an increase of $74.3 million, or 24%. The increase in sales and marketing expenses was primarily attributable to increased headcount-related expenses of $45.9 million, including share-based compensation expense, due primarily to significant growth in the size of our sales team. In addition to the increase in headcount-related expenses, marketing and advertising expenses increased by $30.1 million, primarily related to advertising spend to acquire shoppers across online and offline channels, which supports our growth initiatives. These costs were partially offset by a $1.7 million decrease in various miscellaneous expenses.
Technology and Development
Technology and development expenses, which include research and development costs, were $255.6 millionfor the year ended December 31, 2016 compared to $184.5 millionfor the year ended December 31, 2015, an increase of $71.1 million, or 39%. Approximately $36.9 millionof the increase related to growth in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering headcount to support current and future product initiatives. Approximately $19.9 millionof the increase related to an increase in amortizationthe balance of website development costs and software. Theour short-term investment portfolio generating an increase in technology and development expenses was also attributable to a $9.4 millionincrease in othernon-capitalizable data content expense, a $5.3 millionincrease in amortization of acquired intangible assets, and a $2.5 million increase in loss on disposal of property and equipment, which were partially offset by a $1.3 milliondecrease in amortization of purchased content and a $1.6 million decrease in various miscellaneous expenses.
Amortization expense included in technology and development for capitalized website development costs and software was $43.8 millionand $23.9 million, respectively, the year ended December 31, 2016 and 2015. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $38.7 millionand $33.4 million, respectively, for the year ended December 31, 2016 and 2015. Other data content expense was $25.5 million and $16.2 million, respectively, for the year ended December 31, 2016 and 2015. Amortization expense included in technology and development for purchased data content intangible assets was $4.6 million and $5.9 million, respectively, for the year ended December 31, 2016 and 2015.
General and Administrative
General and administrative expenses were $332.0 million for the year ended December 31, 2016 compared to $185.0 million for the year ended December 31, 2015, an increase of $147.0 million, or 79%. The increase in general and administrative expenses was primarily a result of the settlement of a lawsuit with Move, Inc. and certain other parties in June 2016 whereby the Company paid $130.0 million in connection with a release of all claims.
The increase in general and administrative expenses was also a result of a $11.6 million increase in headcount-related expenses, including share-based compensation expense, including the impact of growth in headcount as a result of our February 2015 acquisition of Trulia, a $4.3 million increase in building lease-related expenses including rent, utilities and insurance, and a $1.1 millionincrease in various miscellaneous expenses.
Acquisition-Related Costs
Acquisition-related costs were $1.4 million for the year ended December 31, 2016 as a result of our February 2016 acquisition of Naked Apartments and our August 2016 acquisition of Bridge Interactive, including legal, accounting and tax fees. Acquisition-related costs were $16.6 million for the year ended December 31, 2015, primarily as a result of our February 2015 acquisition of Trulia, including investment banking, legal, accounting, tax, and regulatory filing fees.
Restructuring Costs
There were no restructuring costs for the year ended December 31, 2016. Restructuring costs for the year ended December 31, 2015 were $35.6 million. On February 17, 2015, in connection with the February 2015 acquisition of Trulia, Zillow Group undertook a restructuring plan that resulted in a total workforce reduction of nearly 350 employees, primarily to eliminate overlapping positions in the sales and marketing functions related to Trulia’s workforce at its Bellevue, Denver, New York and San Francisco locations. The restructuring plan was a result of the integration of Trulia’s business and operations with and into Zillow Group’s business. Employees directly affected by the restructuring plan were provided with severance payments, stock vesting acceleration and outplacement assistance. As of December 31, 2015, the restructuring plan was complete.
Loss (Gain) on Divestiture of Businesses
The gain on divestiture of business was $1.3 million for the year ended December 31, 2016 and relates to the August 2016 sale of our Diverse Solutions business. The loss on divestiture of business was $4.4 million for the year ended December 31, 2015 and relates to the September 2015 sale of our Market Leader business.
Loss on Debt Extinguishment
The loss on debt extinguishment was $22.8 million for the year ended December 31, 2016 and relates to the partial repurchase of the 2020 Notes in December 2016.
Interest Expense
Interest expense was $7.4 million for the year ended December 31, 2016, compared to $5.5 million for the year ended December 31, 2015. The interest expense for each year primarily relates to the 2020 Notes that we guaranteed in connection with the February 2015 acquisition of Trulia, which accrue interest at 2.75% annually.
On December 12, 2016, Zillow Group issued the 2021 Notes. The 2021 Notes bear interest at a fixed rate of 2.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2017. As a result of the issuance of the 2021 Notes, our interest expense increased in future periods related to the contractual coupon interest and amortization of debt discount and debt issuance costs that will be recognized in interest expense.
For additional information regarding the 2020 Notes and the 2021 Notes, see Note 11 to our consolidated financial statements.
Income Taxes
During the years ended December 31, 2016 and 2015, we did not have a material amount of current taxable income. Therefore, no material tax liability or expense has been recorded in the consolidated financial statements for the years ended December 31, 2016 and 2015.
We recorded an income tax benefit of $4.6 million for the year ended December 31, 2015 due to a deferred tax liability generated in connection with Zillow’s August 20, 2015 acquisition of DotLoop, Inc. that can be used to realize certain deferred tax assets for which we had previously provided a full allowance.
Quarterly Results of Operations
The following tables set forth our unaudited quarterly statements of operations data for each of the periods presented below. In the opinion of management, the data has been prepared on the same basis as the audited consolidated financial statements included in this Annual Report on Form
10-K, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the data. The results of historical periods are not necessarily indicative of the results of operations of any future period. You should read the data together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form
10-K. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31,
2017 | | | September 30,
2017 | | | June 30,
2017 | | | March 31,
2017 | | | December 31,
2016 | | | September 30,
2016 | | | June 30,
2016 | | | March 31,
2016 | |
| | | (in thousands, except per share data, unaudited) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 282,330 | | | $ | 281,839 | | | $ | 266,850 | | | $ | 245,775 | | | $ | 227,612 | | | $ | 224,592 | | | $ | 208,403 | | | $ | 185,982 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenue (exclusive of
amortization) (1)(2) | | | 22,559 | | | | 22,152 | | | | 20,260 | | | | 20,232 | | | | 18,706 | | | | 17,608 | | | | 16,745 | | | | 16,203 | |
Sales and marketing (1) | | | 103,935 | | | | 107,108 | | | | 131,218 | | | | 105,940 | | | | 90,509 | | | | 93,180 | | | | 99,629 | | | | 99,101 | |
Technology and
development (1) | | | 85,187 | | | | 83,389 | | | | 78,541 | | | | 72,868 | | | | 67,320 | | | | 64,496 | | | | 63,396 | | | | 60,371 | |
General and administrative
(1) | | | 57,778 | | | | 54,226 | | | | 53,346 | | | | 45,466 | | | | 47,832 | | | | 42,625 | | | | 183,759 | | | | 57,791 | |
Impairment costs | | | 174,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Acquisition-related costs | | | 97 | | | | 218 | | | | 43 | | | | 105 | | | | 533 | | | | 93 | | | | 204 | | | | 593 | |
Gain on divestiture of business | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,251 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses | | | 443,556 | | | | 267,093 | | | | 283,408 | | | | 244,611 | | | | 224,900 | | | | 216,751 | | | | 363,733 | | | | 234,059 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (161,226 | ) | | | 14,746 | | | | (16,558 | ) | | | 1,164 | | | | 2,712 | | | | 7,841 | | | | (155,330 | ) | | | (48,077 | ) |
Loss on debt extinguishment | | | — | | | | — | | | | — | | | | — | | | | (22,757 | ) | | | — | | | | — | | | | — | |
Other income | | | 1,415 | | | | 1,407 | | | | 1,610 | | | | 953 | | | | 716 | | | | 561 | | | | 753 | | | | 681 | |
Interest expense | | | (6,991 | ) | | | (6,906 | ) | | | (6,897 | ) | | | (6,723 | ) | | | (2,668 | ) | | | (1,595 | ) | | | (1,572 | ) | | | (1,573 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (166,802 | ) | | | 9,247 | | | | (21,845 | ) | | | (4,606 | ) | | | (21,997 | ) | | | 6,807 | | | | (156,149 | ) | | | (48,969 | ) |
Income tax benefit (expense) | | | 89,627 | | | | (41 | ) | | | — | | | | — | | | | (1,494 | ) | | | — | | | | — | | | | 1,364 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (77,175 | ) | | $ | 9,206 | | | $ | (21,845 | ) | | $ | (4,606 | ) | | $ | (23,491 | ) | | $ | 6,807 | | | $ | (156,149 | ) | | $ | (47,605 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) per share—basic and diluted | | $ | (0.41 | ) | | $ | 0.05 | | | $ | (0.12 | ) | | $ | (0.03 | ) | | $ | (0.13 | ) | | $ | 0.04 | | | $ | (0.87 | ) | | $ | (0.27 | ) |
Weighted-average shares outstanding—basic | | | 189,439 | | | | 187,692 | | | | 185,439 | | | | 183,158 | | | | 181,852 | | | | 180,583 | | | | 179,451 | | | | 178,686 | |
Weighted-average shares outstanding—diluted | | | 189,439 | | | | 196,425 | | | | 185,439 | | | | 183,158 | | | | 181,852 | | | | 189,661 | | | | 179,451 | | | | 178,686 | |
Other Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA (3) | | $ | 70,859 | | | $ | 70,957 | | | $ | 39,700 | | | $ | 54,799 | | | $ | 54,749 | | | $ | 59,463 | | | $ | (101,260 | ) | | $ | 1,874 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31,
2017 | | | September 30,
2017 | | | June 30,
2017 | | | March 31,
2017 | | | December 31,
2016 | | | September 30,
2016 | | | June 30,
2016 | | | March 31,
2016 | |
| | | (in thousands) | |
(1) Includes share-based compensation as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenue | | $ | 942 | | | $ | 1,014 | | | $ | 1,025 | | | $ | 903 | | | $ | 888 | | | $ | 894 | | | $ | 982 | | | $ | 786 | |
Sales and marketing | | | 5,041 | | | | 5,914 | | | | 6,250 | | | | 5,530 | | | | 5,754 | | | | 5,968 | | | | 6,395 | | | | 5,203 | |
Technology and development | | | 10,609 | | | | 10,438 | | | | 10,400 | | | | 8,491 | | | | 8,306 | | | | 8,035 | | | | 8,366 | | | | 6,759 | |
General and administrative | | | 12,817 | | | | 11,208 | | | | 11,518 | | | | 11,471 | | | | 10,818 | | | | 12,388 | | | | 12,573 | | | | 12,803 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 29,409 | | | $ | 28,574 | | | $ | 29,193 | | | $ | 26,395 | | | $ | 25,766 | | | $ | 27,285 | | | $ | 28,316 | | | $ | 25,551 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(2) Amortization of website development costs and intangible assets included in technology and development | | $ | 24,392 | | | $ | 23,537 | | | $ | 23,159 | | | $ | 23,261 | | | $ | 22,130 | | | $ | 22,006 | | | $ | 22,252 | | | $ | 20,672 | |
(3) | See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA for the three months ended June 30, 2016 includes the impact of the settlement of a lawsuit in June 2016 whereby the Company paid $130.0 million in connection with a release of all claims. |
Amounts are in thousands, except per share data, unaudited.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| | | | | | | | | | | | | | | | |
| Statement of Operations Data: | | | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | |
| Homes | $ | 603,228 | | | $ | 384,626 | | | $ | 248,924 | | | $ | 128,472 | | | $ | 41,347 | | | $ | 11,018 | | | $ | — | | | $ | — | |
| IMT | 319,665 | | | 335,290 | | | 323,669 | | | 298,272 | | | 300,708 | | | 313,638 | | | 305,941 | | | 280,856 | |
| Mortgages | 21,054 | | | 25,292 | | | 26,985 | | | 27,360 | | | 23,280 | | | 18,438 | | | 19,305 | | | 19,023 | |
| Total revenue | 943,947 | | | 745,208 | | | 599,578 | | | 454,104 | | | 365,335 | | | 343,094 | | | 325,246 | | | 299,879 | |
| Cost of revenue (exclusive of amortization) (1)(2): | | | | | | | | | | | | | | | | | |
| Homes | 581,398 | | | 370,796 | | | 240,732 | | | 122,419 | | | 39,080 | | | 10,226 | | | — | | | 86 | |
| IMT | 23,894 | | | 24,318 | | | 26,059 | | | 24,251 | | | 24,623 | | | 25,186 | | | 24,290 | | | 22,594 | |
| Mortgages | 4,325 | | | 4,721 | | | 4,430 | | | 4,678 | | | 3,769 | | | 1,260 | | | 1,237 | | | 1,239 | |
| Total cost of revenue | 609,617 | | | 399,835 | | | 271,221 | | | 151,348 | | | 67,472 | | | 36,672 | | | 25,527 | | | 23,919 | |
| Sales and marketing (1) | 183,761 | | | 181,347 | | | 187,433 | | | 161,587 | | | 138,869 | | | 128,734 | | | 147,727 | | | 137,291 | |
| Technology and development (1) | 125,273 | | | 123,974 | | | 120,330 | | | 107,770 | | | 111,195 | | | 105,314 | | | 100,376 | | | 93,933 | |
| General and administrative (1) | 99,070 | | | 88,493 | | | 82,839 | | | 95,774 | | | 74,758 | | | 70,743 | | | 60,579 | | | 56,073 | |
| Impairment costs | — | | | — | | | — | | | — | | | 69,000 | | | 10,000 | | | — | | | — | |
| Acquisition-related costs | — | | | — | | | — | | | — | | | 268 | | | 1,405 | | | 632 | | | 27 | |
| Integration costs | — | | | 5 | | | 293 | | | 352 | | | 1,492 | | | 523 | | | — | | | — | |
| Total costs and expenses | 1,017,721 | | | 793,654 | | | 662,116 | | | 516,831 | | | 463,054 | | | 353,391 | | | 334,841 | | | 311,243 | |
| Loss from operations | (73,774) | | | (48,446) | | | (62,538) | | | (62,727) | | | (97,719) | | | (10,297) | | | (9,595) | | | (11,364) | |
| Other income | 12,033 | | | 8,999 | | | 9,458 | | | 9,168 | | | 5,962 | | | 7,773 | | | 3,089 | | | 2,446 | |
| Interest expense | (39,927) | | | (26,502) | | | (18,897) | | | (16,466) | | | (14,327) | | | (12,668) | | | (7,187) | | | (7,073) | |
| Loss before income taxes | (101,668) | | | (65,949) | | | (71,977) | | | (70,025) | | | (106,084) | | | (15,192) | | | (13,693) | | | (15,991) | |
| Income tax benefit (expense) | 458 | | | 1,300 | | | — | | | 2,500 | | | 8,402 | | | 14,700 | | | 10,600 | | | (2,600) | |
| Net loss | $ | (101,210) | | | $ | (64,649) | | | $ | (71,977) | | | $ | (67,525) | | | $ | (97,682) | | | $ | (492) | | | $ | (3,093) | | | $ | (18,591) | |
| Net loss per share—basic and diluted | $ | (0.49) | | | $ | (0.31) | | | $ | (0.35) | | | $ | (0.33) | | | $ | (0.48) | | | $ | — | | | $ | (0.02) | | | $ | (0.10) | |
| Weighted-average shares outstanding—basic and diluted | 208,204 | | | 207,002 | | | 205,754 | | | 204,514 | | | 203,561 | | | 202,416 | | | 194,155 | | | 191,464 | |
| Other Financial Data: | | | | | | | | | | | | | | | |
| Segment income (loss) before income taxes: | | | | | | | | | | | | | | | |
| Homes segment | $ | (107,923) | | | $ | (87,870) | | | $ | (71,122) | | | | $ | (45,205) | | | $ | (28,812) | | | | $ | (16,428) | | | | $ | (10,061) | | | | $ | (4,390) | |
| IMT segment | $ | 36,221 | | | $ | 42,053 | | | $ | 13,238 | | | | $ | (11,452) | | | $ | (57,454) | | | | $ | 6,322 | | | | $ | 110 | | | | $ | (6,616) | |
| Mortgages segment | $ | (12,654) | | | $ | (12,254) | | | $ | (10,438) | | | | $ | (9,616) | | | $ | (13,086) | | | | $ | (623) | | | | $ | 356 | | | | $ | (358) | |
| Adjusted EBITDA (3): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Homes segment | $ | (82,525) | | | $ | (67,825) | | | $ | (56,452) | | | | $ | (34,524) | | | $ | (23,186) | | | | $ | (13,409) | | | | $ | (8,352) | | | | $ | (3,513) | |
| IMT segment | 87,659 | | | 91,102 | | | 64,055 | | | | 61,047 | | | 58,261 | | | | 75,363 | | | | 59,718 | | | | 46,683 | |
| Mortgages segment | (8,311) | | | (7,435) | | | (5,306) | | | | (2,601) | | | (2,718) | | | | 4,211 | | | | 4,634 | | | | 3,140 | |
| Total Adjusted EBITDA | $ | (3,177) | | | $ | 15,842 | | | $ | 2,297 | | | $ | 23,922 | | | $ | 32,357 | | | $ | 66,165 | | | $ | 56,000 | | | $ | 46,310 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| | | | | | | | | | | | | | | | |
| (1) Includes share-based compensation as follows: | | | | | | | | | | | | | | | |
| Cost of revenue | $ | 1,099 | | | $ | 1,062 | | | $ | 936 | | | $ | 881 | | | $ | 947 | | | $ | 969 | | | $ | 1,256 | | | $ | 955 | |
| Sales and marketing | 6,087 | | | 6,588 | | | 6,801 | | | 5,650 | | | 5,529 | | | 5,911 | | | 6,340 | | | 5,162 | |
| Technology and development | 17,980 | | | 18,034 | | | 18,399 | | | 15,508 | | | 15,753 | | | 15,031 | | | 14,347 | | | 11,542 | |
| General and administrative | 21,852 | | | 16,444 | | | 17,496 | | | 44,085 | | | 15,489 | | | 19,771 | | | 17,000 | | | 13,082 | |
| Total | $ | 47,018 | | | $ | 42,128 | | | $ | 43,632 | | | $ | 66,124 | | | $ | 37,718 | | | $ | 41,682 | | | $ | 38,943 | | | $ | 30,741 | |
| (2) Amortization of website development costs and intangible assets included in technology and development | $ | 17,046 | | | $ | 15,835 | | | $ | 14,656 | | | $ | 14,400 | | | $ | 17,575 | | | $ | 18,165 | | | $ | 21,020 | | | $ | 22,549 | |
| (3) See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP, which is net loss on a consolidated basis and income (loss) before income taxes for each segment. | | | | | | | | | | | | | | | |
The following tables present our revenue by type and as a percentage of total revenue for the periods
presented: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31,
2017 | | | September 30,
2017 | | | June 30,
2017 | | | March 31,
2017 | | | December 31,
2016 | | | September 30,
2016 | | | June 30,
2016 | | | March 31,
2016 | |
| | | (in thousands) | |
Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Marketplace revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premier Agent | | $ | 199,514 | | | $ | 197,054 | | | $ | 189,725 | | | $ | 175,301 | | | $ | 164,335 | | | $ | 158,322 | | | $ | 147,106 | | | $ | 134,529 | |
Other real estate | | | 47,564 | | | | 44,778 | | | | 37,894 | | | | 34,755 | | | | 29,788 | | | | 28,799 | | | | 26,070 | | | | 17,978 | |
Mortgages | | | 18,516 | | | | 20,869 | | | | 20,936 | | | | 20,270 | | | | 16,512 | | | | 19,775 | | | | 18,392 | | | | 16,454 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Marketplace revenue | | | 265,594 | | | | 262,701 | | | | 248,555 | | | | 230,326 | | | | 210,635 | | | | 206,896 | | | | 191,568 | | | | 168,961 | |
Display revenue | | | 16,736 | | | | 19,138 | | | | 18,295 | | | | 15,449 | | | | 16,977 | | | | 17,696 | | | | 16,835 | | | | 17,021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | $ | 282,330 | | | $ | 281,839 | | | $ | 266,850 | | | $ | 245,775 | | | $ | 227,612 | | | $ | 224,592 | | | $ | 208,403 | | | $ | 185,982 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31,
2017 | | | September 30,
2017 | | | June 30,
2017 | | | March 31,
2017 | | | December 31,
2016 | | | September 30,
2016 | | | June 30,
2016 | | | March 31,
2016 | |
Percentage of Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Marketplace revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premier Agent | | | 71 | % | | | 70 | % | | | 71 | % | | | 71 | % | | | 72 | % | | | 70 | % | | | 71 | % | | | 72 | % |
Other real estate | | | 17 | | | | 16 | | | | 14 | | | | 14 | | | | 13 | | | | 13 | | | | 13 | | | | 10 | |
Mortgages | | | 7 | | | | 7 | | | | 8 | | | | 8 | | | | 7 | | | | 9 | | | | 9 | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Marketplace revenue | | | 94 | | | | 93 | | | | 93 | | | | 94 | | | | 93 | | | | 92 | | | | 92 | | | | 91 | |
Display revenue | | | 6 | | | | 7 | | | | 7 | | | | 6 | | | | 7 | | | | 8 | | | | 8 | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
presented (in thousands, unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| | | | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | |
| Homes | $ | 603,228 | | | $ | 384,626 | | | $ | 248,924 | | | $ | 128,472 | | | $ | 41,347 | | | $ | 11,018 | | | $ | — | | | $ | — | |
| IMT Revenue: | | | | | | | | | | | | | | | |
| Premier Agent | 233,482 | | | 240,698 | | | 231,961 | | | 217,735 | | | 221,012 | | | 232,703 | | | 230,885 | | | 213,732 | |
| Rentals | 39,235 | | | 44,430 | | | 42,670 | | | 37,838 | | | 34,917 | | | 37,319 | | | 33,288 | | | 29,063 | |
| Other | 46,948 | | | 50,162 | | | 49,038 | | | 42,699 | | | 44,779 | | | 43,616 | | | 41,768 | | | 38,061 | |
| Total IMT Revenue | 319,665 | | | 335,290 | | | 323,669 | | | 298,272 | | | 300,708 | | | 313,638 | | | 305,941 | | | 280,856 | |
| Mortgages | 21,054 | | | 25,292 | | | 26,985 | | | 27,360 | | | 23,280 | | | 18,438 | | | 19,305 | | | 19,023 | |
| Total Revenue | $ | 943,947 | | | $ | 745,208 | | | $ | 599,578 | | | $ | 454,104 | | | $ | 365,335 | | | $ | 343,094 | | | $ | 325,246 | | | $ | 299,879 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| Percentage of Revenue: | | | | | | | | | | | | | | | |
| Homes | 64 | % | | 52 | % | | | 42 | % | | | 28 | % | | | 11 | % | | | 3 | % | | | 0 | % | | | 0 | % |
| IMT Revenue: | | | | | | | | | | | | | | | |
| Premier Agent | 25 | | | 32 | | | | 39 | | | | 48 | | | | 60 | | | | 68 | | | | 71 | | | | 71 | |
| Rentals | 4 | | | 6 | | | | 7 | | | | 8 | | | | 10 | | | | 11 | | | | 10 | | | | 10 | |
| Other | 5 | | | 7 | | | | 8 | | | | 9 | | | | 12 | | | | 13 | | | | 13 | | | | 13 | |
| Total IMT Revenue | 34 | | | 45 | | | | 54 | | | | 66 | | | | 82 | | | | 91 | | | | 94 | | | | 94 | |
| Mortgages | 2 | | | 3 | | | | 5 | | | | 6 | | | | 6 | | | | 5 | | | | 6 | | | | 6 | |
| Total Revenue | 100 | % | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Total revenue increased sequentially in all quarters
presented. In general,presented, primarily due to our Homes business that launched in April 2018. Additionally, the
strong increase in
consumercustomer adoption of our mobile applications and websites in the years ended December 31,
20172019 and December 31,
20162018 was reflected in the significant growth in visits and unique users, which resulted in increasedincrease the likelihood of a lead, click, impression, inventory, leads, and graphical display impressionsconnection or other event that we could monetize throughacross our advertising products.
business segments.
Homes Segment
The sequential increases in Homes revenue were primarily attributable to an increase in the number of homes sold in each period as customer adoption of Zillow Offers increases in geographic areas in which it is currently operating and as Zillow Offers expands into new geographic markets.
IMT Segment
Premier Agent Revenue.Premier Agent revenue also increased sequentially in all quarters presented. As discussed above, duringpresented with the yearexception of the three months ended December 31, 2016,2018 and 2019 and the three months ended March 31, 2019. We believe the decreases in revenue for these periods were driven by certain changes we began meaningful testing and implementation of a new auction-based pricing method for ourmade to the Premier Agent product, our flagship advertising product, by whichand Premier Broker programs in the second half of 2018 as discussed in the “Results of Operations” section above in this Item 7. Additionally, we determinebelieve seasonality contributed to the cost per impression delivereddecreases in each zip code in a dynamic way based on demand for impressions in that zip code. We believethe three months ended December 31, 2018 and 2019 related to the normal cycles of the residential real estate market. For all other quarters, Premier Agent revenue was also positively impactedincreased, supported by consistent increases in the full implementationnumber of visits and unique users to our mobile applications and websites.
Rentals Revenue. Rentals revenue increased sequentially in all quarters presented with the exception of the new pricing method for our Premier Agent product, which may have increased the demand for our advertising platform. We believe the increase in Premier Agentthree months ended December 31, 2018 and 2019. The quarter over quarter rentals revenue was also due in part to increased advertising sales to current Premier Agents, including brokerages and other teams.The year-over-year quarterly increases in revenue were also attributable to year-over-year growth in other real estate revenue, which was primarily a result increases in revenue generated by Zillow Group Rentals. Growth in Zillow Group Rentals revenue wastrends are primarily attributable to increasesthe corresponding fluctuation in consumer adoption of our rentals information marketplaces,listings, which in turn increasedincrease the likelihood of a lead, lease, click or click thatother event we monetize, and advertiser adoptionmonetize. Additionally, rentals revenue increased quarter over quarter as a result of the launch of our cost per lead, cost per leaserental applications product in 2018 which allows prospective renters to submit rental applications online through Zillow.com for a flat service fee. We believe the sequential quarterly decreases in rentals revenue for the three months ended December 31, 2018 and cost per click advertising products, as well as enhancements2019 were primarily driven by seasonality related to our marketing products that improve the ways in which consumers and advertisers connect through the Zillow Group Rentals marketplace. Otherresidential real estate market.
Other Revenue. Other revenue increased sequentially in all quarters presented with the exception of the three months ended March 31, 2019 and the three months ended December 31, 2019. The decreases in revenue for these periods was also positively impacteddriven by a decrease in display advertising sales and aligns to the seasonality of the residential real estate market. For all other quarters, other revenue increased, supported by increased advertising sales to new home builders through our New Constructionnew construction platform. Mortgages Segment
We reported year-over-year quarterly growth in mortgages revenue in 2019 for all quarters, with the exception of the three months ended December 31, 2019. The
compositionyear-over-year quarterly growth was primarily a result of the addition of revenue
continuesgenerated by Zillow Home Loans, Zillow’s affiliated mortgage lender, which we acquired in the fourth quarter of 2018. We believe the decrease in mortgages revenue for the three months ended December 31, 2019 compared to
shift from display revenue to marketplace revenue, as we continue to dedicate more of our advertising placements on search, map and home detail pagesthe three months ended December 31, 2018 is due to our
information marketplace products, which provide consumers with services that are directly relevantfocus on investing in systems and operations to
home-related searches.seamlessly integrate the Zillow Home Loans platform into our offerings to enhance the customer experience.
Seasonality
Portions of our business may be affected by seasonal fluctuations in the residential real estate market, advertising spending, and other factors. We believeWith respect to our rapidHomes segment, the rate of revenue growth as we expand into new geographic markets may mask seasonality in revenue; we may, for example, be able to more quickly sell homes during the spring and summer high seasons. Similarly, the rate of growth as we expand into new markets for Zillow Home Loans may mask seasonality in revenue within the Mortgages segment, as we may be maskingable to originate more mortgages during the underlying seasonality of our business.spring and summer high seasons. As our revenue growth rate related to our IMT segment slows, we expect seasonal variances may continue to become more pronounced, causing our operating results to fluctuate. For example, in the years ended December 31, 2017we have begun to observe Premier Agent and 2016, costs and expenses peakedRentals revenue peaking in the three months ended June 30th, primarily attributable to increases or September 30th, in salesline with peak residential real estate activity in the spring and marketing expenses which were, in turn, primarily attributable to increased investment in marketing and advertising initiatives to attract consumers across online and offline channels during peak seasons for home sales activity.summer seasons. In addition, the average numbernumbers of visits and unique users and visits have historically peaked during the three months ended June 30th or September 30th, also consistent with peak residential real estate activity in the spring and summer months. Because the number of visits and unique users and visits may impactimpacts impression inventory, leads and connections to real estate professionals, clicks and graphical display inventory whichother events we monetize, we believe this trend in the average number of visits and unique users and visits may resulthas resulted in seasonalityseasonal fluctuations in revenue in corresponding periods.
The following table sets forth a reconciliation of Adjusted EBITDA to net
income (loss)loss for each of the periods presented below. See “Adjusted EBITDA” under “Results of Operations” above in this Item 7 for additional information about why we have included Adjusted EBITDA in this Annual Report on Form
10-K and how
we usemanagement uses Adjusted EBITDA.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31,
2017 | | | September 30,
2017 | | | June 30,
2017 | | | March 31,
2017 | | | December 31,
2016 | | | September 30,
2016 | | | June 30,
2016 | | | March 31,
2016 | |
| | | (in thousands) | |
Reconciliation of Adjusted EBITDA to Net Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (77,175 | ) | | $ | 9,206 | | | $ | (21,845 | ) | | $ | (4,606 | ) | | $ | (23,491 | ) | | $ | 6,807 | | | $ | (156,149 | ) | | $ | (47,605 | ) |
Other income | | | (1,415 | ) | | | (1,407 | ) | | | (1,610 | ) | | | (953 | ) | | | (716 | ) | | | (561 | ) | | | (753 | ) | | | (681 | ) |
Depreciation and amortization expense | | | 28,579 | | | | 27,419 | | | | 27,022 | | | | 27,135 | | | | 25,738 | | | | 25,495 | | | | 25,550 | | | | 23,807 | |
Share-based compensation expense | | | 29,409 | | | | 28,574 | | | | 29,193 | | | | 26,395 | | | | 25,766 | | | | 27,285 | | | | 28,316 | | | | 25,551 | |
Impairment costs | | | 174,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Acquisition-related costs | | | 97 | | | | 218 | | | | 43 | | | | 105 | | | | 533 | | | | 93 | | | | 204 | | | | 593 | |
Gain on divestiture of business | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,251 | ) | | | — | | | | — | |
Interest expense | | | 6,991 | | | | 6,906 | | | | 6,897 | | | | 6,723 | | | | 2,668 | | | | 1,595 | | | | 1,572 | | | | 1,573 | |
Loss on debt extinguishment | | | — | | | | — | | | | — | | | | — | | | | 22,757 | | | | — | | | | — | | | | — | |
Income tax (benefit) expense | | | (89,627 | ) | | | 41 | | | | — | | | | — | | | | 1,494 | | | | — | | | | — | | | | (1,364 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA (1) | | $ | 70,859 | | | $ | 70,957 | | | $ | 39,700 | | | $ | 54,799 | | | $ | 54,749 | | | $ | 59,463 | | | $ | (101,260 | ) | | $ | 1,874 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Adjusted EBITDA for the three months ended June 30, 2016 includes the impact of the settlement of a lawsuit in June 2016 whereby the Company paid $130.0 million in connection with a release of all claims. |
Unique Users
Amounts are in thousands, unaudited.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| | | | | | | | | | | | | | | | |
| Reconciliation of Adjusted EBITDA to Net Loss | | | | | | | | | | | | | | | |
| Net loss | $ | (101,210) | | | $ | (64,649) | | | $ | (71,977) | | | $ | (67,525) | | | $ | (97,682) | | | $ | (492) | | | $ | (3,093) | | | $ | (18,591) | |
| Other income | (12,033) | | | (8,999) | | | (9,458) | | | (9,168) | | | (5,962) | | | (7,773) | | | (3,089) | | | (2,446) | |
| Depreciation and amortization expense | 23,579 | | | 22,160 | | | 21,203 | | | 20,525 | | | 23,090 | | | 23,375 | | | 26,020 | | | 26,906 | |
| Share-based compensation expense | 47,018 | | | 42,128 | | | 43,632 | | | 66,124 | | | 37,718 | | | 41,682 | | | 38,943 | | | 30,741 | |
| Impairment costs | — | | | — | | | — | | | — | | | 69,000 | | | 10,000 | | | — | | | — | |
| Acquisition-related costs | — | | | — | | | — | | | — | | | 268 | | | 1,405 | | | 632 | | | 27 | |
| Interest expense | 39,927 | | | 26,502 | | | 18,897 | | | 16,466 | | | 14,327 | | | 12,668 | | | 7,187 | | | 7,073 | |
| Income tax (benefit) expense | (458) | | | (1,300) | | | — | | | (2,500) | | | (8,402) | | | (14,700) | | | (10,600) | | | 2,600 | |
| Adjusted EBITDA | $ | (3,177) | | | $ | 15,842 | | | $ | 2,297 | | | $ | 23,922 | | | $ | 32,357 | | | $ | 66,165 | | | $ | 56,000 | | | $ | 46,310 | |
Visits
Refer to “Visits” above in this Item 7 for information about how we measure visits. The number of visits has historically peaked during the three months ended June 30 or September 30, consistent with seasonal variances of home sales which generally peak in the spring and summer months. The following tables set forth our unique userstable presents the number of visits for each of the periods presented below. (in millions, unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| | | | | | | | | | | | | | | | |
| Visits | 1,759.5 | | | 2,104.9 | | | 2,181.4 | | | 2,019.8 | | | 1,607.8 | | | 1,888.9 | | | 1,920.6 | | | 1,764.8 | |
Unique Users
Refer to “Unique Users” above in this Item 7 for information about how we measure unique users. The average number of unique users has historically peaked during the three months ended June 30 or September 30, consistent with seasonal variances of home sales which generally peak in the spring and summer months.
Because the number of unique users may impact impression inventory, leads to real estate professionals, and graphical display inventory which we monetize, this trend inThe following table presents the average number of unique users
may result in seasonality of revenue. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average for the Three Months Ended | |
| | | December 31,
2017 | | | September 30,
2017 | | | June 30,
2017 | | | March 31,
2017 | | | December 31,
2016 | | | September 30,
2016 | | | June 30,
2016 | | | March 31,
2016 | |
| | | (in millions) | |
Unique Users | | | 151.6 | | | | 175.2 | | | | 178.1 | | | | 166.6 | | | | 140.1 | | | | 164.5 | | | | 168.7 | | | | 156.2 | |
Visits
The following tables set forth our visits for each of the periods presented below. Refer to “Visits” above in this Item 7 for information about how we measure visits. Consistent with the trend in our unique users discussed
above, the number of visits has historically peaked during the three months ended June 30 or September 30, consistent with seasonal variances of home sales which generally peak in the spring and summer months. Because the number of visits may increase the number of impressions we could monetize in our Premier Agent marketplace, this trend in the number of visits may result in seasonality of revenue.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31,
2017 | | | September 30,
2017 | | | June 30,
2017 | | | March 31,
2017 | | | December 31,
2016 | | | September 30,
2016 | | | June 30,
2016 | | | March 31,
2016 | |
| | | (in millions) | |
Visits | | | 1,435.6 | | | | 1,667.1 | | | | 1,678.7 | | | | 1,533.0 | | | | 1,189.7 | | | | 1,403.8 | | | | 1,431.4 | | | | 1,298.3 | |
(in millions, unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average for the Three Months Ended | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| | | | | | | | | | | | | | | | |
| Unique Users | 172.6 | | | 195.6 | | | 194.3 | | | 181.1 | | | 157.2 | | | 186.6 | | | 186.1 | | | 175.5 | |
Liquidity and Capital Resources
As of December 31, 20172019 and December 31, 2016,2018, we had cash and cash equivalents, investments and investmentsrestricted cash of $762.5$2,511.9 million and $507.5$1,567.3 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions, money market funds, U.S. government agency securities, commercial paper, treasury bills, corporate notes and bonds commercial paper, U.S. government agency securities and certificates of deposit with original maturities of three months or less.deposit. Investments as of December 31, 2017 and December 31, 2016 consist of fixed income securities, which include U.S. government agency securities, corporate notes and bonds, commercial paper, municipal securities, certificates of deposit and foreign government securities.treasury bills. Restricted cash consists of amounts funded to the reserve and collection accounts related to our credit facilities and amounts held in escrow related to funding home purchases in our mortgage origination business. Amounts on deposit with third-party financial institutions exceed the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation
insurance limits, as applicable. As of December 31, 2019, Zillow Group and its subsidiaries were in compliance with all debt covenants specified in the facilities described below.
We continue to invest in the development and expansion of our operations. Ongoing investments include but are not limited to improvements in infrastructure, networking equipment and software, release improvements to our software code as well as investments in sales and marketing. To finance these investments as well as ongoing operations in the event that we require additional funding to support strategic business opportunities, we have issued convertible senior notes. The following table summarizes our convertible senior notes as of the periods presented (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2019 | | | | | December 31, 2018 | | |
| Maturity Date | | Aggregate Principal Amount | | Stated Interest Rate | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| September 1, 2026 | | $ | 500,000 | | | 1.375 | % | | $ | 327,187 | | | $ | 597,380 | | | $ | — | | | $ | — | |
| September 1, 2024 | | 673,000 | | | 0.75 | % | | 490,538 | | | 730,500 | | | — | | | — | |
| July 1, 2023 | | 373,750 | | | 1.50 | % | | 310,175 | | | 356,464 | | | 294,738 | | | 321,855 | |
| December 1, 2021 | | 460,000 | | | 2.00 | % | | 415,502 | | | 514,312 | | | 394,645 | | | 446,200 | |
| December 15, 2020 | | 9,637 | | | 2.75 | % | | 9,637 | | | 16,842 | | | 9,637 | | | 16,744 | |
| Total | | $ | 2,016,387 | | | | | | $ | 1,553,039 | | | $ | 2,215,498 | | | $ | 699,020 | | | $ | 784,799 | |
Refer to Note 15 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on Zillow Group’s convertible senior notes, including conversion rates, conversion and redemption dates and the related capped call transactions.
Homes
The expansion of Zillow Group’s purchase of homes through the Zillow Offers program and sale of homes on the open market continues to have a significant impact on our liquidity and capital resources as a cash and inventory intensive business. We primarily use debt financing through credit facilities to fund a portion of the purchase price of homes and certain related costs. The following table summarizes our credit facilities as of the periods presented (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lender | | Final Maturity Date | | Maximum Borrowing Capacity | | Outstanding Borrowings at
December 31, 2019 | | Outstanding Borrowings at
December 31, 2018 | | Weighted Average Interest Rate |
| Goldman Sachs Bank USA | | April 20, 2022 | | $ | 500,000 | | | $ | 39,244 | | | $ | — | | | 4.41 | % |
| Citibank, N.A. | | January 31, 2022 | | 500,000 | | | 296,369 | | | — | | | 5.54 | % |
| Credit Suisse AG, Cayman Islands | | July 31, 2021 | | 500,000 | | | 355,911 | | | 116,700 | | | 5.63 | % |
| | Total | | $ | 1,500,000 | | | $ | 691,524 | | | $ | — | | | |
Refer to Note 15 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on Zillow Group’s credit facilities.
IMT
Our principal sources of liquidity for the IMT segment are cash flows from operations within the segment.
Mortgages
The October 31, 2018 acquisition of Zillow Home Loans continues to impact our liquidity and capital resources as a cash intensive business that funds mortgage loans originated for resale in the secondary market. We primarily use debt financing to fund the mortgage loan originations. The following table summarizes our warehouse lines of credit and master repurchase agreement as of the periods presented (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lender | | Maturity Date | | Maximum Borrowing Capacity | | Outstanding Borrowings at
December 31, 2019 | | Outstanding Borrowings at
December 31, 2018 | | Weighted Average Interest Rate |
| Citibank, N.A. | | October 27, 2020 | | $ | 75,000 | | | $ | 394 | | | $ | — | | | 3.29 | % |
| Comerica Bank | | June 27, 2020 | | 50,000 | | | 30,033 | | | 18,892 | | | 4.22 | % |
| People’s United Bank, N.A. | | October 15, 2019 | | 50,000 | | | — | | | 14,125 | | | 4.89 | % |
| | | | Total | | $ | 30,427 | | | $ | 33,017 | | | |
Refer to Note 15 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on Zillow Group’s mortgage facilities.
We believe that cash from operations and cash
and cash equivalents and investment balances will be sufficient to meet our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months.
On February 17, 2015, we acquired Trulia in astock-for-stock transaction. The total purchase price of Trulia was approximately $2.0 billion. We have included Trulia’s results of operations prospectively after February 17, 2015, the date of acquisition. Our February 2015 acquisition of Trulia had a significant impact on our liquidity, financial position and results of operations.
Further, as a result of the acquisition, Zillow Group entered into a supplemental indenture in respect of the 2020 Notes in the aggregate principal amount of $230.0 million, which supplemental indenture provides, among other things, that, at the effective time of the Trulia acquisition, (i) each outstanding 2020 Note is no longer convertible into shares of Trulia common stock and is convertible solely into shares of Zillow Group Class A common stock, pursuant to, and in accordance with, the terms of the indenture governing the 2020 Notes, and (ii) Zillow Group guaranteed all of the obligations of Trulia under the 2020 Notes and related indenture. The aggregate principal amount of the 2020 Notes is due on December 15, 2020 if not earlier converted or redeemed. Interest is payable on the 2020 Notes at the rate of 2.75%semi-annually on June 15 and December 15 of each year. In December 2016, the Company used approximately $370.2 million of the net proceeds from the issuance of the 2021 Notes discussed below to repurchase $219.9 million aggregate principal of the 2020 Notes in privately negotiated transactions.
Holders of the 2020 Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding the maturity date. In connection with the supplemental indenture in respect of the 2020 Notes, the conversion ratio immediately prior to the effective time of the Trulia Merger of 27.8303 shares of Trulia common stock per $1,000principal amount of notes was adjusted to 12.3567 shares of our Class A common stock per $1,000 principal amount of notes based on the exchange ratio of 0.444 per the Merger Agreement. This was equivalent to an initial conversion price of approximately $80.93 per share of our Class A common stock. In connection with the August 2015 distribution of shares of our Class C capital stock as a dividend to our Class A and Class B common shareholders, the conversion ratio has been further adjusted to 41.4550 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $24.12 per
share of our Class A common stock. The conversion ratio will be adjusted for certain dilutive events and will be increased in the case of corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the indenture governing the notes). The conversion option of the 2020 Notes has no cash settlement provisions. The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.
The 2020 Notes are redeemable, at our option, in whole or in part on or after December 20, 2018, if the last reported sale price per share of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
For additional information regarding the 2020 Notes, see Note 11 to our consolidated financial statements.
In December 2016, Zillow Group issued $460.0 million aggregate principal amount of 2021 Notes, which amount includes the exercise in full of the $60.0 million over-allotment option, to Citigroup Global Markets Inc. as the initial purchaser of the 2021 Notes in a private offering to the initial purchaser in reliance on the exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) for resale to qualified institutional buyers as defined in, and pursuant to, Rule 144A under the Securities Act. The 2021 Notes bear interest at a fixed rate of 2.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2017. The 2021 Notes are convertible into cash, shares of our Class C capital stock or a combination thereof, at the Company’s election. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased, redeemed, or converted in accordance with their terms. The Company incurred transaction costs of approximately $12.2 millionrelated to the issuance of the 2021 Notes, including approximately $11.5 million in fees to the initial purchaser, which amount was paid out of the gross proceeds from the note offering.
The net proceeds from the issuance of the 2021 Notes were approximately $447.8 million, after deducting fees and expenses. The Company used approximately $370.2 million of the net proceeds from the issuance of the 2021 Notes to repurchase a portion of the outstanding 2020 Notes in privately negotiated transactions. In addition, the Company used approximately $36.6 million of the net proceeds from the issuance of the 2021 Notes to pay the cost of Capped Call Confirmations as discussed in Note 11 to our consolidated financial statements. The Company used the remainder of the net proceeds for general corporate purposes.
Prior to the close of business on the business day immediately preceding September 1, 2021, the 2021 Notes are convertible at the option of the holders of the 2021 Notes only under certain conditions, none of which conditions have been satisfied as of December 31, 2017. On or after September 1, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2021 Notes may convert their 2021 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2021 Notes by paying or delivering, as the case may be, cash, shares of Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The conversion rate will initially be 19.0985 shares of Class C capital stock per $1,000 principal amount of 2021 Notes (equivalent to an initial conversion price of approximately $52.36 per share of Class C capital stock). The conversion rate is subject to customary adjustments upon the occurrence of certain events. The Company may redeem for cash all or part of the 2021 Notes, at its option, on or after December 6, 2019, under certain circumstances at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indenture governing the 2021 Notes).
We may not redeem the 2021 Notes prior to December 6, 2019. We may redeem the 2021 Notes for cash, at our option, in whole or in part on or after December 6, 2019, if the last reported sale price per share of our Class C capital stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
For additional information regarding the 2021 Notes, see Note 11 to our consolidated financial statements.
In January 2017, we acquired HREO for an immaterial amount. A substantial majority of the purchase price for HREO has been allocated to goodwill and intangible assets.
In June 2017, we purchased an equity interest in a privately held corporation for approximately $10.0 million. For additional information regarding the equity interest, see Note 7 to our consolidated financial statements.
In September 2017, we acquired New Home Feed for an immaterial amount. A substantial majority of the purchase price for New Home Feed has been allocated to goodwill and an intangible asset.
The following table presents selected cash flow data for the periods
presented: | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | |
Cash Flow Data: | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 258,191 | | | $ | 8,645 | | | $ | 22,659 | |
Net cash provided by (used in) investing activities | | | (247,394 | ) | | | (65,719 | ) | | | 64,441 | |
Net cash provided by financing activities | | | 97,706 | | | | 71,528 | | | | 16,273 | |
Net presented (in thousands):
| | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2019 | | 2018 |
| Cash Flow Data: | | | |
| Net cash provided by (used in) operating activities | $ | (612,174) | | | $ | 3,850 | |
| Net cash used in investing activities | (456,054) | | | (622,639) | |
| Net cash provided by financing activities | 1,635,694 | | | 930,137 | |
Cash
Flows Provided By
(Used In) Operating Activities
Our operating cash flows result primarily from cash received from real estate professionals,
mortgagerental professionals,
rentalmortgage professionals and brand
advertisers.advertisers, as well as cash received from customers for sales of homes through Zillow Offers and sales of mortgages originated by Zillow Home Loans. Our primary uses of cash from operating activities include payments for
homes purchased through Zillow Offers, marketing and advertising activities,
mortgages funded through Zillow Home Loans and employee
benefitscompensation and
compensation.benefits. Additionally, uses of cash from operating activities include costs associated with operating our mobile applications and websites and other general corporate expenditures.
For the year ended December 31, 2017,2019, net cash provided byused in operating activities was $258.2$612.2 million. This was primarily driven by a net loss of $94.4$305.4 million, adjusted by anon-cash impairment chargeshare-based compensation expense of $174.0$198.9 million, depreciation and amortization expense of $110.2$87.5 million, share-based compensation expense of $113.6 million, an $89.6 millionnon-cash change in our net deferred tax asset and valuation allowance as a result of thenon-cash impairment charge and the rate decrease included in the Tax Cuts and Jobs Act, amortization of the discount and issuance costs on the 2021 Notes, 2023 Notes, 2024 Notes and 2026 Notes of $18.0$52.1 million, an increase in bad debt expenseamortization of $7.3contract cost assets of $35.3 million, a change in deferred rentamortization of $7.1 millionandright of use assets of $23.1 million, a loss on disposal of property and equipment of $5.7 million.$7.2 million, accretion of bond discount of $6.3 million and a $4.3 million change in deferred income taxes. Changes in operating assets and liabilities increased cash provided byused in operating activities by $5.9$703.1 million. The changes in operating assets and liabilities are primarily due to a $21.2 millionincrease $673.8 million increasein accounts receivable driven by aninventory due to the purchase of homes through Zillow Offers, a $34.7 million increase in revenue,contract cost assets due primarily to the capitalization of sales commissions and an $18.9 million decrease in lease liabilities due to scheduled lease payments, partially offset by a $19.0$19.6 million increase in accrued expenses and other current liabilities due to growth in our business, partially offset by a $10.8 million decrease in prepaid expenses and other assets driven primarily by the timing of payments.payments, a $6.4 million increase in accrued compensation and benefits and a $5.7 million increase in deferred revenue driven primarily by a corresponding increase in sales volumes.
For the year ended December 31, 2016,2018, net cash provided by operating activities was $8.6$3.9 million. This was primarily driven by a net loss of $220.4$119.9 million, including the impact of the settlement of a lawsuit for $130.0 million in June 2016, adjusted by share-based compensation expense of $106.9$149.1 million, depreciation and amortization expense of $100.6$99.4 million, non-cash impairment charges totaling $79.0 million, amortization of contract cost assets of $36.0 million, a lossnon-cash change in our deferred income taxes of $31.1 million, amortization of the discount and issuance costs on debt extinguishmentthe 2023 Notes and 2021 Notes of $22.8$26.7 million, accretion of bond discount of $4.3 million, a loss on disposal of property and equipment of $3.7$3.6 million an increaseand a change in bad debt expense of $2.7 million, an increase in the balance of deferred rent of $1.7 million, amortization of bond premium of $1.5 million, a $1.4 million gain on the divestiture of a business, a $1.4 millionnon-cash change in the valuation allowance related to a deferred tax liability generated in connection with our February 2016 acquisition of Naked Apartments, and amortization of the discount and issuance costs on the 2021 Notes of $0.9 million. Changes in operating assets and liabilities decreased cashprovided by operating activities by $8.9 million. The decrease in operating assets and liabilities is primarily due to a $13.3 million decrease in accounts receivable driven by the timing of payments received, a $13.3 million decrease in prepaid expenses and other assets driven by the timing of payments made, and a $12.5 million increase in accrued compensation and benefits due primarily to an increase in sales commissions driven by increased sales as well as the timing of payroll.
For the year ended December 31, 2015, net cash provided by operating activities was $22.7 million. This was driven by a net loss of $148.9 million, adjusted by share-based compensation expense of $105.2 million, depreciation and amortization expense of $75.4 million,non-cash restructuring costs of $19.0 million, a $3.9 millionnon-cash loss on divestiture of businesses, net, bad debt expense of $3.2 million, a $2.9 millionnon-cash change in the valuation allowance related to a deferred tax liability generated in connection with our acquisition of DotLoop, Inc., an increase in the balance of deferred rent of $2.6 million, amortization of bond premium of $2.5 million, and a loss on disposal of property and equipment of $1.4$2.0 million. Changes in operating assets and liabilities decreased cash provided by operating activities by $38.8$233.5 million.
Net The changes in operating assets and liabilities are primarily due to a $162.8 million increase
in inventory due to the purchase of homes through Zillow Offers, a $41.5 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $34.1 million increase in prepaid expenses and other assets driven primarily by the timing of payments, a $12.6 million increase in accounts receivable due primarily to an
increase in revenue and a $11.3 million increase in accrued compensation and benefits driven primarily by the timing of payments.
Cash
Provided By (Used In)Flows Used In Investing Activities
Our primary investing activities include the purchase and sale or maturity of investments, the purchase of property and equipment and intangible assets
the purchase of cost method investments, netand cash paid in connection with
acquisitions and proceeds from divestiture of businesses.acquisitions.
For the year ended December 31,
2017,2019, net cash used in investing activities was
$247.4$456.1 million. This was primarily the result of
$147.8$369.4 million of net purchases of investments
$78.6in connection with investment of a portion of the net proceeds from our issuance of the 2024 Notes and 2026 Notes and $86.6 million of purchases for property and equipment and intangible
assets, $11.5 million paid in connection with acquisitions, and approximately $10.0 million related to the purchase of a cost method investment, partially offset by $0.6 millionin proceeds from our August 2016 sale of our Diverse Solutions business.assets.
For the year ended December 31,
2016,2018, net cash used in investing activities was
$65.7$622.6 million. This was primarily the result of
$71.7$489.0 million of
net purchases
for property and equipment and intangible assets, $16.3 million paidof investments in connection with
our February 2016 acquisition of Naked Apartments and our August 2016 acquisition of Bridge Interactive, $10.0 million related to the purchaseinvestment of a
cost method investment, partially offset by $29.1 millionof net maturities and salesportion of
investments and $3.2 million in proceeds from the
divestiture of a business.For the year ended December 31, 2015, net cash provided by investing activities was $64.4 million. This was primarily the result of $173.4 million of net cash acquired in connection with our February 2015 acquisition of Trulia, $36.0 million of net proceeds from maturitiesour July 2018 public offerings of Class C capital stock and sales of investments, and $23.4 million in proceeds from the divestiture of businesses, partially offset by $104.2 million paid in connection with our acquisition of DotLoop, Inc., $68.12023 Notes, $78.5 million of purchases for property and equipment and intangible assets and a $3.9$55.1 million decrease in restricted cash.
The increases in capital expenditures and intangible assets during all three periods reflect our continued investments in support of business growth. We expectnet cash paid for acquisitions, related to continue to make significant investments in our business to provide for the continued innovation in our products and services inOctober 2018 and thereafter.
Net acquisition of Zillow Home Loans.
Cash
Flows Provided By Financing Activities
Net cash provided by financing activities has primarily resulted from the exercise of employee option awards and equity awards withheld for tax liabilities, net proceeds from the issuance of convertible notes, net proceeds from equity offerings, proceeds from borrowings on our credit facilities related to Zillow Offers and proceeds from borrowings on warehouse lines of credit and the master repurchase agreement related to Zillow Home Loans.
For the year ended December 31,
2017, our2019, cash provided by financing activities
was $1,635.7 million, which primarily
resulted from the net proceeds from the issuance of the 2024 Notes and 2026 Notes of $1,157.7 million, partially offset by $159.7 million paid in premiums for the related capped call confirmations. Cash provided by financing activities also included $574.8 million of net proceeds from borrowings on our credit facilities related to
the exerciseZillow Offers and $65.5 million of
employee option awards. The proceeds from the exercise of option awards,
for the year ended December 31, 2017 were $98.1 million.partially offset by $2.6 million of net repayments on our warehouse lines of credit related to Zillow Home Loans.
For the year ended December 31,
2016, the2018, cash flows provided by financing activities includes $364.0 million of net proceeds from the issuance of the
20212023 Notes
net of issuance costs, were $447.8 million. The Company also paid approximately $36.6 million in premiums for certain Capped Call Confirmations in December 2016. The Company used approximately $370.2and $360.3 million of
the net proceeds
from our Class C capital stock public offering, partially offset by $29.4 million of premiums paid for the issuance of the 2021 Notes to repurchase $219.9related capped call confirmations. It also includes $120.1 million aggregate principal of the 2020 Notes in privately negotiated transactions. The proceeds from the exercise of option awards, for the year ended December 31, 2016 were $31.2 million.
For the year ended December 31, 2015, the$116.7 million of proceeds from borrowing on the exercise of option awards were $24.4 million. In addition, for the year ended December 31, 2015, approximately $8.2credit facility related to Zillow Offers and $0.5 million of equity awards were withheld for tax liabilities.
proceeds from borrowing on the warehouse lines of credit associated with our October 2018 acquisition of Zillow Home Loans, partially offset by $2.0 million of contingent consideration related to a prior period acquisition.
Off-Balance Sheet Arrangements
We did not have any
off-balance sheet arrangements other than outstanding surety bonds issued for our benefit of approximately
$3.7$10.2 million and
$3.6$8.9 million, respectively, as of December 31,
20172019 and
2016.2018. We do not believe that the surety bonds will have a material effect on our liquidity, capital resources, market risk support or credit risk support. For additional information regarding the surety bonds, see Note
1620 to our
consolidated financial statementsNotes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K under the subsection titled “Surety Bonds”.
Contractual Obligations and Other Commitments
The following table provides a summary of our contractual obligations as of December 31,
2017: | | | | | | | | | | | | | | | | | | | | |
| | | Payment Due By Period | |
| | | Total | | | Less Than
1 Year | | | 1-3 Years | | | 3-5 Years | | | More Than
5 Years | |
| | | (in thousands, unaudited) | |
2021 Notes (1) | | $ | 460,000 | | | $ | — | | | $ | — | | | $ | 460,000 | | | $ | — | |
Interest on 2021 Notes (2) | | | 36,033 | | | | 9,200 | | | | 18,400 | | | | 8,433 | | | | — | |
2020 Notes (3) | | | 10,137 | | | | — | | | | — | | | | 10,137 | | | | — | |
Interest on 2020 Notes (4) | | | 837 | | | | 279 | | | | 558 | | | | — | | | | — | |
Operating lease obligations (5) | | | 162,171 | | | | 25,510 | | | | 49,585 | | | | 48,354 | | | | 38,722 | |
Purchase obligations (6) | | | 216,822 | | | | 57,822 | | | | 127,000 | | | | 32,000 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 886,000 | | | $ | 92,811 | | | $ | 195,543 | | | $ | 558,924 | | | $ | 38,722 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | The aggregate principal amount of the 2021 Notes is due on December 1, 2021 if not earlier converted or redeemed. |
(2) | The stated interest rate on the 2021 Notes is 2.00%. |
(3) | The aggregate principal amount of the 2020 Notes is due on December 15, 2020 if not earlier converted or redeemed. |
(4) | The stated interest rate on the 2020 Notes is 2.75%. |
(5) | Our operating2019 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payments Due By Period | | | | | | | | | | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | | | | | | | | | | | | | Convertible senior notes (1) | $ | 2,016,387 | | | $ | 9,637 | | | $ | 460,000 | | | $ | 1,046,750 | | | $ | 500,000 | | | Interest on convertible senior notes (2) | 106,909 | | | 26,994 | | | 43,491 | | | 24,966 | | | 11,458 | | | Homes segment credit facilities (3) | 703,991 | | | 703,991 | | | — | | | — | | | — | | | Operating lease obligations (4) | 342,918 | | | 38,914 | | | 83,833 | | | 77,031 | | | 143,140 | | | Homes under contract (5) | 163,405 | | | 163,405 | | | — | | | — | | | — | | | Purchase obligations (6) | 98,896 | | | 65,375 | | | 33,014 | | | 507 | | | — | | | Mortgages segment credit facilities (7) | 30,427 | | | 30,427 | | | — | | | — | | | — | | | Total contractual obligations | $ | 3,462,933 | | | $ | 1,038,743 | | | $ | 620,338 | | | $ | 1,149,254 | | | $ | 654,598 | | ____________________ (1) Includes the aggregate principal amount of the convertible senior notes. Refer to Note 15 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for maturity dates, stated interest rates and additional information on our convertible senior notes. (2) Includes the coupon interest on the convertible senior notes. Refer to Note 15 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for maturity dates, stated interest rates and additional information on our convertible senior notes. (3) Includes principal amounts due for amounts borrowed under the credit facilities used to provide capital for our Zillow Offers business. Amounts include $12.5 million of estimated interest payments. (4) For additional information regarding our operating leases, see Note 14 to our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. (5) We have obligations to purchase homes under contract through our Zillow Offers business. (6) We have noncancellable purchase obligations for content related to our mobile applications and websites and certain cloud computing costs. For additional information regarding our purchase obligations, see Note 20 to our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. (7) Includes principal amounts due for amounts borrowed under the warehouse line of credit and master repurchase agreement to finance mortgages originated through Zillow Home Loans. Amounts exclude an immaterial amount of estimated interest payments. | | | | | | | | | |
As of December 31, 2019 and 2018, we had outstanding letters of credit of approximately $16.9 million which secure our lease obligations consist of various operating leases for office space under noncancelable operating lease agreements. For additional information regarding our operating leases, see Note 16 to our consolidated financial statements. |
(6) | We have noncancelable purchase obligations for content related to our mobile applications and websites. For additional information regarding our purchase obligations, see Note 16 to our consolidated financial statements. |
We have excluded unrecognized tax benefits from the contractual obligations table above because we cannot make a reasonably reliable estimatein connection with certain of the amount and periodoperating leases of payment due primarily to our significant net operating loss carryforwards.
office spaces.
In the course of business, we are required to provide financial commitments in the form of surety bonds to third parties as a guarantee of our performance on and our compliance with certain obligations. If we were to fail to perform or comply with these obligations, any draws upon surety bonds issued on our behalf would then trigger our payment obligation to the surety bond issuer. We have outstanding surety bonds issued for our benefit of approximately
$3.7$10.2 million and
$3.6$8.9 million, respectively, as of December 31,
20172019 and
2016.2018.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition,
the net realizable value of inventory, amortization period and recoverability of contract cost assets, website and software development costs, recoverability of long-lived assets and intangible assets with definite lives, share-based compensation,
income taxes, business combinations, and the recoverability of goodwill and indefinite-lived intangible assets, have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
We recognize revenue when (i) persuasive evidenceor as we satisfy our performance obligations by transferring control of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. We consider a signed agreement, a binding insertion order or other similar documentation reflecting the terms and conditions under whichpromised products or services will be providedto our customers in an amount that reflects the consideration to which we expect to be persuasive evidenceentitled in exchange for those products or services.
As a practical expedient, we do not adjust the promised amount of an arrangement. Collectability is assessed based on a number of factors, including payment history andconsideration for the creditworthinesseffects of a customer. If itsignificant financing component as the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service is determined that collection isone year or less.
We do not reasonably assured,disclose the transaction price related to remaining performance obligations for (i) contracts with an original expected duration of one year or less and (ii) contracts for which we recognize revenue is not recognized until collection becomes reasonably assured,at the amount to which we have the right to invoice for performance completed to date. The remaining duration of our performance obligations is generally upon receiptless than one year.
In our Homes segment, we generate revenue from the resale of
cash.Wehomes on the open market through our Zillow Offers program.
In our IMT segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to businesses and professionals primarily associated with the residential real estate mortgage and rental industries. These professionals include real estate mortgage and rental professionals and brand advertisers. Our twothree primary revenue categories within our IMT segment are marketplacePremier Agent, Rentals and Other.
In our Mortgages segment, we generate revenue from the sale of advertising services to mortgage lenders and display revenue. Incremental direct costs incurredother mortgage professionals, mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans, as well as Mortech mortgage software solutions.
Homes Revenue. Homes revenue is derived from the resale of homes on the open market through our Zillow Offers program. Homes revenue is recognized at the time of the closing of the home sale when title to and possession of the property are transferred to the acquisition or origination of a customer contract in a transaction that results in the deferralbuyer. The amount of revenue are expensed as incurred.Marketplace Revenue. Marketplace revenue consists primarilyrecognized for each home sale is equal to the sale price of the home net of resale concessions and credits to the buyer and does not reflect real estate agent commissions, closing or other costs associated with the transaction.
Premier Agent revenue, other real estate revenue and mortgages revenue. In addition, Market Leader revenue is included in our results of operations in Marketplace revenue from February 17, 2015 through the date of divestiture of September 30, 2015.Revenue.
Premier Agent revenue is derived from our Premier Agent and Premier Broker programs. Our Premier Agent and Premier Broker programs offer a suite of marketing and business technology products and services to help real estate agents and brokers achieve their advertising needs,goals, while growing and managing their businesses and brands. All Premier Agents and Premier Brokers receive access to a dashboard portal on our mobile application orand website that provides individualized program performance analytics, self-service ad buying tools and our free customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent or Premier Broker through our mobile and web platforms.We offerplatforms and our flagship account management tools. The marketing and business technology products and services promised to Premier Agents and Premier Brokers are delivered over time, as the customer simultaneously receives and consumes the benefit of the performance obligations.
Premier Agent
advertising product and
our Premier Broker advertising
productproducts, which include the delivery of impressions and validated consumer connections, or leads, are primarily offered on a
cost per impressionshare of voice basis.
Payment is received prior to the delivery of impressions and connections. Impressions are delivered when
a soldan advertisement appears on pages viewed by users of our mobile applications and
websites. In 2016, we began testingwebsites and
implementationconnections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. We do not promise any minimum or maximum number of
impressions or connections to customers, but instead control when and how many impressions to deliver based on a
new auction-based pricing method for our Premier Agent product by which wecustomer’s share of voice. We determine the
cost per impression deliverednumber of impressions and connections to deliver to Premier Agents and Premier Brokers in each zip code
based uponusing a market-based pricing method in consideration of the total amount spent by Premier Agents
and Premier Brokers to purchase impressions
and connections in the zip code during the month.
This results in the delivery of impressions and connections over time in proportion to each Premier Agent’s and Premier Broker’s share of voice. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly prepaid spend in that zip code as a percentage of the total monthly prepaid spend of all Premier Agents and Premier Brokers in that zip code, and includes both the share of impressions delivered as advertisements appearing on pages viewed by users of our mobile applications and websites, as well as the proportion of consumer connections a Premier Agent or Premier Broker receives. The
cost per impression that we chargenumber of impressions and connections delivered for a given spend level is dynamic
–- as demand for
impressionsadvertising in a zip code increases or decreases, the
cost per impressionnumber of impressions and connections delivered to a Premier Agent or Premier Broker in that zip code
may be increaseddecreases or
decreased. This new auction-based pricing method complements our self-serve account interface, which we introduced to Premier Agents over the course of 2016. The interface includes account management tools that allow agent advertisers to independently controltheir budgets, impression buys, and the duration of their advertising commitment. increases accordingly.
We began testing this auction-based pricing method for our Premier Agent product to better align our revenue opportunities with increasing traffic levels to our mobile and web platforms and leveraging increasing demand by real estate agents for access to home shoppers who use our mobile applications and websites. In the fourth quarter of 2016, we implemented this method broadly for all existing and new agent advertisers, including brokerages and other teams. With this auction-based pricing method, weprimarily recognize revenue related to our dynamic impression-basedthe Premier Agent and Premier Broker products and services based on the contractual maximummonthly prepaid spend recognized on a straight-line basis during the monthly billing period over which the products and services are provided. This methodology best depicts how we satisfy our performance obligations to customers, as we continuously transfer control of the performance obligations to the customer over time. Given a Premier Agent or Premier Broker typically prepays their monthly spend and the monthly spend is refunded on a pro-rata basis upon cancellation of the contract by a customer at any point in time, we have determined that Premier Agent and Premier Broker contracts are effectively daily contracts, and each performance obligation is satisfied over time as each day lapses. We have not allocated the transaction price to each performance obligation within our Premier Agent and Premier Broker arrangements, as the amounts recognized would be the same irrespective of any allocation.
In October 2018, we began testing a new pricing model, Flex, for Premier Broker and Premier Agent advertising services in limited markets. With the Flex model, Premier Brokers and Premier Agents are provided with validated leads at no upfront cost, and they pay a performance advertising fee only when a real estate transaction is closed with one of their leads. With this pricing model, the transaction price represents variable consideration as the amount to which we expect to be entitled varies based on the number of validated leads that convert into real estate transactions and the value of those transactions. During this testing phase, we recognize revenue when we receive payment for a real estate transaction closed with a Flex lead. We will continuously reevaluate this determination and the point at which we may begin to estimate variable consideration and record revenue as performance obligations are transferred. Once we reach the point at which we may begin to estimate variable consideration associated with Flex, we will estimate the transaction price based on the consideration to which we expect to be entitled in exchange for transferring the validated Flex leads. This will include estimates associated with the probability that Flex leads provided will result in closed real estate transactions and the expected value of those transactions.
Rentals Revenue. Rentals revenue includes the sale of advertising and a suite of tools to rental professionals, landlords and other market participants. Rentals revenue primarily includes revenue generated by advertising sold to property managers, landlords and other rental professionals on a cost per lead, cost per click, cost per lease, cost per listing or cost per impression basis. We recognize revenue as leads, clicks and impressions are provided to rental professionals, or as rental listings are published on our mobile applications and websites, which is the amount for which we have the right to invoice. The number of leases generated through our rentals pay per lease product during the period is accounted for as variable consideration, and we estimate the amount of variable consideration based on the expected number of qualified leases secured during the period. We do not believe that a significant reversal in the amount of cumulative revenue recognized will occur once the uncertainty related to the number of leases secured is subsequently resolved.
Rentals revenue also includes revenue generated from our rental applications product through which potential renters can submit applications to multiple rental properties over a 30-day period for a flat service fee. We recognize revenue for the rental applications product on a straight-line basis during the contractual period over which the services are delivered. Our Premier Agentcustomer has the right to access and Premier Broker products include multiple deliverables which are accounted for as a single unitsubmit the rental application.
Other real estateRevenue. Other revenue primarily includes revenue generated by Zillow Group Rentals,new construction and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals, including our new construction marketing solutions. Zillow Group Rentals includes our rentals marketplace and suite of tools for rental professionals. Rentals revenue primarily includes revenue generated by advertising sold to property managers and other rental professionals on a cost per lead, cost per lease and cost per click generated basis whereby we recognize revenue as leads are delivered to rental professionals or as qualified leases are confirmed. Our new construction marketing solutions allow home builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis, wherebyand revenue is recognized based on the contractual spend on a straight-line basis during the contractual period over which the servicescommunities are advertised on our mobile applications and websites. New construction revenue also includes revenue generated on a cost per impression basis whereby revenue is recognized on a straight-line basis during the contractual period over which the advertising impressions are delivered. Consideration for new construction products is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.
Mortgages Revenue.Mortgages revenue primarily includes marketing products sold to mortgage professionals on a cost per lead basis, including our Long FormCustom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service, and beginning in the fourth quarter of 2018, also includes revenue generated by Zillow Home Loans, our affiliated mortgage lender, and revenue generated by Mortech.
For our Connect and Custom Quote services. cost per lead marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through our mortgages platform, which is the amount for which we have the right to invoice. For our subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, we contact a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend recognized on a straight-line basis during the contractual period over which the service is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.
Mortgage origination revenue reflects (1) origination fees and (2) the corresponding sale, or expected future sale, of a loan. When an interest rate lock commitment is made to a customer, we record the expected gain on sale of the mortgage, plus the estimated earnings from the expected sale of the associated servicing rights, adjusted for a pull-through percentage (which is defined as the likelihood that an interest rate lock commitment will be originated), as revenue. Revenue from loan origination fees is recognized at the time the related real estate transactions are completed, usually upon the close of escrow and when we fund mortgage loans. Once funded, mortgage loans held for sale are recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loan is sold. Net origination costs and fees associated with mortgage loans are recognized as incurred. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers.
Mortgage loans are sold with limited recourse provisions, which can result in repurchases of loans previously sold to investors or payments to reimburse investors for loan losses. Based on historical experience, discussions with our mortgage purchasers, analysis of the volume of mortgages we originated and current housing and credit market conditions, we estimate and record a loss reserve for mortgage loans held in our portfolio and mortgage loans held for sale, as well as known and projected mortgage loan repurchase requests. These have historically not been significant to our financial statements, but could vary in future periods.
Mortgages revenue also includes revenue generated by Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform, for which we recognize revenue on a straight-line basis during the contractual period over which the services are delivered. Forprovided.
Inventory
Inventory is comprised of homes acquired through our Long FormZillow Offers program and Custom Quoteis stated at the lower of cost per lead mortgage marketing products, generally, participating qualified mortgage professionals makeor net realizable value. Homes are removed from inventory on a prepaymentspecific identification basis when they are resold. Stated cost includes consideration paid to gain access to consumers interestedacquire and update each home including associated allocated overhead costs. Work-in-progress inventory includes homes undergoing updates and finished goods inventory includes homes ready for resale. Unallocated overhead costs are expensed as incurred and included in connecting with mortgage professionals. In Zillow Group’s Long Form platform, consumers answercost of revenue. Selling costs include real estate commissions, escrow and title fees, and staging costs, as well as holding costs incurred during the period that homes are listed for sale, including utilities, taxes and maintenance.
Each quarter we review the value of homes held in inventory for indicators that net realizable value is lower than cost. The calculation of net realizable value is based on several estimates which may ultimately vary materially from actual results. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of inventory a
seriescritical accounting estimate. When evidence exists that the net realizable value of
questions to findinventory is lower than its cost, the difference is recognized in cost of revenue. We estimate that a
local lender, and mortgage professionals receive consumer contact information. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals. We only charge mortgage professionals a fee when users contact mortgage professionals through Long Form or Custom Quotes. Mortgage professionals who exhaust their initial prepayment can then prepay additional funds to continue to participate1% decrease in the
marketplace. We recognize revenue when a user contacts a mortgage professional through Zillow Group’s mortgages platform.Market Leader revenue primarily includes revenue from the salelower of a comprehensive premiumsoftware-as-a-service based marketing product typically sold to real estate professionals as a bundlecost or net realizable value of products under a fixed fee subscription. Market Leader became part of Zillow Group through Zillow Group’s February 2015 acquisition of Trulia and was divestedour inventory balances as of September 30, 2015.
Display Revenue. Display revenue primarily consistsDecember 31, 2019 and 2018 would increase our inventory valuation adjustment by $8.4 million and $1.6 million, respectively.
Contract Cost Assets
We capitalize certain incremental costs of
graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites and our partner websites and mobile applications, primarily in the real estate industry, including real estate brokerages, multi-family rental professionals, mortgage professionals and home services providers. Our advertising customers also include telecommunications, automotive, insurance and consumer products companies. Impressions are the number of times an advertisement is loaded on a web page and clicks are the number of times users click on an advertisement. Pricing is primarily based on advertisement size and position on our mobile applications and websites or on our partner websites and mobile applications, and fees are generally billed monthly. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites.Upon our January 1, 2018 adoption of the new guidance issued by the FASB on revenue fromobtaining contracts with customers that we expect that the number of estimatesto recover. These costs relate to commissions paid to sales personnel, primarily for our Premier Agent and assumptionsPremier Broker programs. As a practical expedient, we make will increase related to revenue recognition andrecognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. Capitalized commission costs are recorded as contract cost assets in our consolidated balance sheets. Contract cost assets are amortized to expense on a straight-line basis over a period that is consistent with athe transfer to the customer of the products or services to which the asset relates, generally the estimated life of the customer relationship. Amortization expense related to contract cost assets is included in sales and marketing expenses in our consolidated statements of operations. Our determination of the estimated life of the customer relationship involves significant judgment. In determining the estimated life of our customer relationships, we consider quantitative and qualitative data, including, but not limited to, estimateshistorical customer data, recent changes or expected changes in product or service offerings, and assumptions relatedchanges in how we monetize our products and services. The amortization period for our Premier Agent and Premier Broker programs ranges from two to variablethree years.
We monitor our contract cost assets for impairment and recognize an impairment loss in the statement of operations to the extent the carrying amount of the asset recognized exceeds the amount of consideration
practical expedients applied,we expect to receive in the future and
that we have received but have not recognized in revenue less the
period over which commission costs
will be recognized. that relate directly to providing those goods or services that have not yet been recognized as expenses.
Website and Software Development Costs
The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized in property and equipment and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs,
(includingincluding those costs in the post-implementation
stages)stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the
websites (or software)website or software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives.
Amortization expense related to capitalized website and software development costs is included in technology and development expense.
Capitalized development activities placed in service are amortized over the expected useful lives of those releases, currently estimated at one to
twofive years.
EstimatedThe estimated useful lives of website and software development activities are reviewed frequently and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing functionality.
We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our mobile applications and websites, assess the ongoing value of capitalized assets, or determine the estimated useful lives over which the costs are amortized, the amount of website and software development costs we capitalize and amortize could change in future periods.
Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets
We evaluate intangible assets and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. We group assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. If this comparison indicates impairment, the amount of impairment to be recognized is calculated as the difference between the carrying value and the fair value of the asset group.
Unforeseen events, changes in circumstances and market conditions and material differences in estimates of future cash flows could adversely affect the fair value of our assets and could result in an impairment charge. Fair value can be estimated utilizing a number of techniques including quoted market prices, prices for comparable assets, or other valuation processes involving estimates of cash flows, multiples of earnings or revenues, and we may make various assumptions and estimates when performing our impairment assessments, particularly as it relates to cash flow projections. Cash flow estimates are by their nature subjective and include assumptions regarding factors such as recent and forecasted operating performance, revenue trends and operating margins. These estimates could also be adversely impacted by changes in federal, state, or local regulations, economic downturns or developments, or other market conditions affecting our industry.
We measure compensation expense for all share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest. We use the Black-Scholes-Merton option-pricing model to determine the fair value for option awards and recognize compensation expense on a straight-line basis over the option awards’ vesting period. For restricted stock units and restricted units, we use the market value of our Class A common stock and Class C capital stock, as applicable, on the date of grant to determine the fair value of the award, and we recognize compensation expense on a straight-line basis over the awards’ vesting period.
Determining the fair value of option awards at the grant date requires judgment. If any of the assumptions used in the Black-Scholes-Merton model changes significantly, share-based compensation expense for future option awards may differ materially compared with the awards granted previously. In valuing our option awards, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives.
In addition, through December 31, 2016, we made assumptions about estimated forfeiture rates. Beginning on January 1, 2017, we elected to account for forfeitures as they occur.
Risk-free interest rate. Risk-free interest rates are derived from U.S. Treasury securities as of the option award’s grant date.
Expected dividend yields. Expected dividend yields are based on our historical dividend payments, which have been zero to date.
Volatility. The expected volatility for our Class A common stock and Class C capital stock is estimated using our historical volatility.
Expected term. The weighted-average expected life of the option awards is estimated based on our historical exercise data.Forfeiture rate. Prior to January 1, 2017, forfeiture rates were estimated using historical actual forfeiture trends as well as our judgment of future forfeitures. These rates were evaluated at least quarterly and any change in share-based compensation expense was recognized in the period of the change. We considered many factors when estimating expected forfeitures, including employee class and historical experience.
We will continue to use judgment in evaluating the expected volatility and expected terms utilized for our share-based compensation expense calculations on a prospective basis. Actual results, and future changes in estimates, may differ substantially from management’s current estimates. As we continue to accumulate additional data related to our Class A common stock and Class C capital stock, we may have refinements to the estimates of our expected volatility and expected terms, which could materially impact our future share-based compensation expense. In future periods, we expect our share-based compensation expense to increase as a result of our existing, unrecognized share-based compensation that will be recognized as the awards vest, and as we grant additional share-based awards to attract and retain employees.
Income Taxes
We use the asset and liability approach for accounting and reporting income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance against deferred tax assets would be established if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets are not expected to be realized.
Our assumptions, judgments, and estimates relative to the value of our deferred tax assets take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments, and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
Since inception, we have typically incurred annual operating losses, and accordingly, we have generally not recorded a material current provision for income taxes, though we have historically in certain instances recorded income tax benefits in connection with acquisitions. We generally do not expect any significant changes in the amount of our income tax provision until we are not routinely incurring operating losses.
We establish reserves fortax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay aone-time transition tax on certain untaxed earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and how AMT credits are utilized; and (5) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Shortly after enactment, implementation guidance was released by the Securities and Exchange Commission that requires a company to reflect the income tax effects of those aspects of the Tax Act for which the accounting under the accounting rules is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, it should record a provisional estimate in the financial statements. Further, the implementation guidance also provides for a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting pursuant to the accounting rules.
In the absence of the changes in the Tax Act, our tax benefit for the year ended December 31, 2017 would have been approximately $66.0 million. For the year ending December 31, 2018, we expect an overall statutory tax rate (including federal, state and foreign taxes) of approximately 24%, but in the absence of the Tax Act we would have expected an overall tax rate of approximately 38%. In 2018, we expect to record income tax benefits to the extent we generate additional operating loss carryforwards.
Business Combinations
We recognize identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the
acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that we identify adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. We recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition, and is not amortized. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired.
Typically,In our evaluation of goodwill, we
choose to forgo the initialtypically first perform a qualitative assessment
and perform quantitative analysis to
assist in our annual evaluation. If impairment exists,determine whether the carrying value of
each reporting unit is greater than its fair value. If it is more likely than not that the
goodwillcarrying value of a reporting unit is
reduced togreater than its fair value,
throughwe perform a quantitative assessment and an impairment charge
is recorded in our statements of
operations.For our most recent goodwill impairment assessment performed as of October 1, 2017, we chose to forgooperations for the initial qualitative assessment and performed a quantitative analysis whereby we determined that our market capitalization is well in excess of the bookcarrying value of our common stock, and therefore, we concluded that the reporting unit over its fair valuevalue.
Our indefinite-lived intangible asset is not amortized, and we assess the asset for impairment on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that the asset may be impaired. On an interim basis, we consider if there are any events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset, including, but not limited to, costs that could have a negative effect on future expected earnings and cash flows, changes in certain key performance metrics, and changes in management, key personnel, strategy or customers. In our evaluation of our trade names and trademarks indefinite-lived intangible asset, we typically first perform a qualitative assessment to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired. If so, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of the carrying value of the indefinite-lived intangible assets over their fair value.
During the year ended December 31, 2017,2019, we first performed a qualitative assessment to determine whether the carrying value of the indefinite-lived intangible asset was greater than the fair value. In doing so, we determined that it is not more likely than not that the indefinite-lived intangible asset is impaired and therefore did not perform a quantitative assessment. In connection with this impairment analysis, we evaluated our planned future use of the Trulia trade names and trademarks intangible asset and concluded that it remains appropriate to consider this asset to have an indefinite life. While we used our best estimates and assumptions for the analysis, our estimates are inherently uncertain and require judgment. To the extent there is a shortfall in actual revenue attributable to the Trulia brand as compared to our estimates and assumptions additional impairment could be recorded in future periods.
During the year ended December 31, 2018, we recognized a
non-cash impairment charge of
$174.0$69.0 million related to our indefinite-lived Trulia trade names and trademarks intangible asset.
The impairment charge is included in Impairment costs within our IMT and Mortgages segments for $65.0 million and $4.0 million, respectively. In connection with our
qualitative assessment ofannual budgeting process that was substantially completed during the
recoverability of this asset during our annual impairment test as of October 1, 2017,three months ended December 31, 2018, we identified factors that led us to conclude it was more likely than not that the
$351.0$177.0 million carrying value of the asset exceeded its fair value. The most significant of such factors was a shortfall in projected revenue related to the Trulia brand compared to projections at the time the intangible asset was
initially recorded in February 2015.remeasured as of October 1, 2017. Accordingly, with the assistance of a third-party valuation specialist, we performed a quantitative analysis to determine the fair value of the intangible asset and concluded that our best estimate of its fair value was
$177.0$108.0 million. The valuation was prepared using an income approach based on the relief-from-royalty method and relied on inputs with unobservable market prices including the assumed revenue growth rates, royalty rate, discount rate, and estimated tax
rate. In connection with thisrate, and therefore is considered a Level 3 measurement under the fair value hierarchy. Fair value can be estimated utilizing a number of techniques including quoted market prices, prices for comparable assets, or other valuation processes involving estimates of cash flows, multiples of earnings or revenues, and we may make various assumptions and estimates when performing our impairment
analysis, we evaluatedassessments, particularly as it relates to cash flow projections. Cash flow estimates are by their nature subjective and include assumptions regarding factors such as recent and forecasted operating performance, revenue trends and operating margins. These estimates could also be adversely impacted by changes in federal, state or local regulations, economic downturns or developments or other market conditions affecting our
plannedindustry. Changes in these estimates could result in future
use ofmaterial impairment losses related to the Trulia trade names and trademarks intangible
asset and concluded that it remains appropriate to consider this asset to have an indefinite life.To the extent there is a shortfall in actual estimated revenue attributable to the Trulia brand as compared to our estimated projections as of October 1, 2017, the date of our most recent annual impairment test, additional impairment could be recorded in future periods.
asset.
Recently Adopted Accounting Standards and Recently Issued Accounting Standards Not Yet Adopted
For information about our recently adopted accounting standards and recently issued accounting standards not yet adopted, see Note 2 of the accompanying notesNotes to our consolidated financial statements included withinConsolidated Financial Statements in Part II, Item 8 of this annual report.Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.
Under our current investment policy, we invest our excess cash in money market funds, certificates of deposit, U.S. government agency securities,
treasury bills, commercial paper, foreign government securities, municipal securities and corporate notes and bonds. Our current investment policy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting our principal at risk.
Our investments are exposed to market risk due to the fluctuation of prevailing interest rates that may reduce the yield on our investments or their fair value. As our investment portfolio is short-term in nature, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio.
As of December 31, 2017, we have outstanding $460.0 million aggregate principal Convertible Senior Notes due in 2021 (the “2021 Notes”). The 2021 Notes were issued in December 2016 and carry a fixed interest rate of 2.00% per year. As of December 31, 2017, we also have outstanding $10.1 million aggregate principal Convertible Senior Notes due in 2020 (the “2020 Notes”). The 2020 Notes were guaranteed by Zillow Group in connection with our February 2015 acquisition of Trulia, Inc. The 2020 Notes carry a fixed interest rate of 2.75% per year. Since the 2020 Notes and 2021 Notes
Our convertible senior notes bear interest at fixed
rates,rates. Thus, we have no
related direct financial statement risk associated with changes in interest rates. However, the fair values of the
2020 Notes and 2021 Notesconvertible senior notes change primarily when the market price of our stock fluctuates or interest rates change.
For The following table summarizes our outstanding convertible senior notes as of December 31, 2019 (in thousands, except interest rates):
| | | | | | | | | | | | | | |
| Maturity Date | | Aggregate Principal Amount | | Stated Interest Rate |
| September 1, 2026 | | $ | 500,000 | | | 1.375 | % |
| September 1, 2024 | | 673,000 | | | 0.75 | % |
| July 1, 2023 | | 373,750 | | | 1.50 | % |
| December 1, 2021 | | 460,000 | | | 2.00 | % |
| December 15, 2020 | | 9,637 | | | 2.75 | % |
| | $ | 2,016,387 | | | |
We are subject to market risk by way of changes in interest rates on borrowings under our credit facilities that provide capital for Zillow Offers. As of December 31, 2019 and December 31, 2018, we had outstanding $691.5 million and $116.7 million, respectively, of borrowings on these
reasons, we do not expectcredit facilities which bear interest at a floating rate based on the one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin, which increase was primarily driven by the growth of our
resultsZillow Offers business and the addition of
operations or cash flows would be materially affected by a sudden changetwo credit facilities in 2019. Accordingly, fluctuations in market interest
rates.rates may increase or decrease our interest expense. Assuming no change in the outstanding borrowings on our revolving credit facilities, we estimate that a one percentage point increase in LIBOR would increase our annual interest expense by approximately $6.9 million for the year ended December 31, 2019 compared to an increase of $1.2 million for the year ended December 31, 2018.
We are also subject to market risk by way of changes in interest rates on borrowings under our warehouse line of credit and master repurchase agreement that provide capital for Zillow Home Loans. As of December 31, 2019 and December 31, 2018, we had outstanding $30.4 million and $33.0 million, respectively, of borrowings on our warehouse line of credit and master repurchase agreement which bear interest at a floating rate based on LIBOR plus an applicable margin. We manage the interest rate risk associated with our mortgage loan origination services through the use of forward sales of mortgage-backed securities. Assuming no change in the outstanding borrowings on the warehouse line of credit and master repurchase agreement, we estimate that a one percentage point increase in LIBOR would increase our annual interest expense associated with the warehouse line of credit and master repurchase agreement by an insignificant amount for the years ended December 31, 2019 and 2018.
We do not believe that inflation has had a material effect on our business, results of operations or financial condition. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, results of operations and financial condition.
Foreign Currency Exchange Risk
We do not believe that foreign currency exchange risk has had a material effect on our business, results of operations or financial condition. As we do not maintain a significant balance of foreign currency, we do not believe an immediate 10% increase or decrease in foreign currency exchange rates relative to the U.S. dollar would have a material effect on our business, results of operations or financial condition.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly Results of
Operations.”Operations” in this Annual Report on Form 10-K.
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Zillow Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance
sheetsheets of Zillow Group, Inc. (the “Company”) as of December 31,
2017,2019 and
2018, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for
each of the
year thenthree years in the period ended
December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2017,2019 and 2018, and the results of its operations and its cash flows for
each of the
year thenthree years in the period ended
December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31,
2017,2019, based on
the criteria established in Internal
Control—Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February
15, 201819, 2020 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification (ASC) 842, Leases.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
thesethe Company’s financial statements based on our
audit.audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
lawlaws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our
auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our
auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Debt - Convertible Senior Notes — Refer to Note 15 in the Notes to Consolidated Financial Statements
Critical Audit Matter Description
On September 9, 2019, the Company issued $600.0 million aggregate principal amount of Convertible Senior Notes due 2024 (the “Initial 2024 Notes”) and $500.0 million aggregate principal amount of Convertible Senior Notes due 2026 (the “2026 Notes”) in a private offering to qualified institutional buyers. The net proceeds from the issuance of the Initial 2024 Notes and 2026 Notes were approximately $592.2 million and $493.5 million, respectively, in each case after deducting fees and expenses payable by the Company. The Company used approximately $75.2 million and $75.4 million, respectively, of the net proceeds from the issuance of the Initial 2024 Notes and the 2026 Notes to pay the cost of the capped call transactions entered into in connection with the issuances. On October 9, 2019, the Company issued $73.0 million aggregate principal amount of
0.75% Convertible Senior Notes due 2024 (the “Additional Notes” and, together with the Initial 2024 Notes, the “2024 Notes”). The Additional Notes were sold pursuant to the initial purchasers’ partial exercise of their option to purchase such notes, granted in connection with the offering of the Initial 2024 Notes. The Additional Notes have the same terms, and were issued under the same indenture, as the Initial 2024 Notes. The net proceeds from the offering of the Additional Notes were approximately $72.0 million, after deducting fees and expenses payable by the Company. The Company used approximately $9.1 million of the net proceeds from the issuance of the Additional Notes to pay the cost of the capped call transactions entered into in connection with the issuance of the Additional Notes. The 2024 Notes and 2026 Notes are convertible into cash, shares of Class C capital stock or a combination thereof, at the Company’s election. In accounting for the issuance of the 2024 Notes and 2026 Notes, the Company separated proceeds into liability and equity components. The carrying amount of the liability component for each of the 2024 Notes and 2026 Notes was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2024 Notes and 2026 Notes, respectively.
Given the complexity in accounting for convertible debt issuances and the related capped call transactions, the required involvement of professionals with specialized expertise, as well as the degree of judgment required in evaluating the significant assumptions related to volatility, implied yield, and synthetic credit rating in determining the fair value of the liability, we considered the audit of such conclusions to be a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accounting for the 2024 Notes and 2026 Notes and the related capped call transactions, including management’s judgments and calculations related to the determination of the fair value of the liability component of the 2024 Notes and 2026 Notes, involved the following procedures, among others:
•We tested the design and operating effectiveness of the Company’s internal controls over the accounting for the 2024 Notes and 2026 Notes and related capped call transactions, and over the determination of the fair value of the liability component of the 2024 Notes and 2026 Notes, including the significant assumptions related to volatility, implied yield, and synthetic credit rating.
•We evaluated the reasonableness of management’s business and accounting assumptions used in the fair value measurement by:
◦Assessing the reasonableness of the expected dividend yield by evaluating the Company’s history and future plans;
◦Validating the amount of outstanding 2024 Notes and 2026 Notes as of the estimate date;
◦Validating the senior unsecured nature of the 2024 Notes and 2026 Notes; and
◦Considering the impact of events and transactions that have occurred after December 31, 2019 but before the completion of the audit on the conclusions reached.
•With the assistance of our fair value specialists, we audited the valuation methodology and key assumptions used to determine the fair value of the liability component of the 2024 Notes and 2026 Notes by:
◦Evaluating the appropriateness of the valuation model and techniques used in determining the fair value; and
◦Assessing whether valuation assumption inputs, including synthetic credit rating, volatility and implied yield are consistent with those that would be used by market participants through the testing of source information, checking the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing to those selected by management, where applicable.
•We evaluated management’s conclusions regarding the accounting applied to the 2024 Notes and 2026 Notes and the related capped call transactions through consideration of possible alternatives under accounting principles generally accepted in the United States of America.
Revenue – Highly Automated Revenue Systems in the Internet, Media and Technology Segment — Refer to Note 2 and Note 24 in the Notes to Consolidated Financial Statements
Critical Audit Matter Description
The Company’s Internet, Media & Technology (IMT) segment, which includes the Premier Agent, Rentals, and new construction marketplaces, as well as dotloop, display, and revenue from the sale of various other marketing and business products and services to real estate professionals, derives substantially all of its revenue from the sale of advertising services and a suite of marketing software and technology solutions to businesses and professionals primarily associated with the residential real estate, rental and residential construction industries. The total revenue for the IMT segment for the year ended
December 31, 2019 was $1.3 billion. The Company operates multiple mobile applications and websites to deliver each of its products to end users, and the revenue for each product consists of a significant volume of transactions utilizing multiple systems.
The process to calculate, aggregate, and record revenue across the IMT segment product offerings is highly automated, relies on multiple internally developed tools and systems, and involves interfacing significant volumes of data across the systems. Given the complexity of the information technology (IT) environment, the required involvement of professionals with expertise in IT to identify, test, and evaluate the revenue data flows, systems, and automated controls, we considered the audit of the Company’s revenue generating transactions within the IMT segment to be a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s revenue transactions within the IMT segment included the following, among others:
•With the assistance of our IT specialists, we:
◦Identified the relevant systems used to calculate and record revenue transactions;
◦Tested the general IT controls over each of these systems, including testing of user access controls, change management controls, and IT operations controls; and
◦Performed testing of system interface controls and automated controls within the relevant revenue streams.
•We tested business process controls to reconcile the various systems to the Company’s general ledgers.
We performed detail transaction testing by agreeing the amounts recognized to source documents and testing the mathematical accuracy of the recorded revenue.
/s/ DELOITTEDELOITTE & TOUCHETOUCHE LLP February
15, 201819, 2020
We have served as the Company’s auditor since 2016.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe BoardTable of Directors and Shareholders of Zillow Group, Inc.
We have audited the accompanying consolidated balance sheet of Zillow Group, Inc. as of December 31, 2016, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zillow Group, Inc. at December 31, 2016, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Seattle, Washington
February 7, 2017
Contents
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 352,095 | | | $ | 243,592 | |
Short-term investments | | | 410,444 | | | | 263,923 | |
Accounts receivable, net of allowance for doubtful accounts of $5,341 and $1,337 at December 31, 2017 and 2016, respectively | | | 54,396 | | | | 40,527 | |
Prepaid expenses and other current assets | | | 24,590 | | | | 34,817 | |
| | | | | | | | |
Total current assets | | | 841,525 | | | | 582,859 | |
Property and equipment, net | | | 112,271 | | | | 98,288 | |
Goodwill | | | 1,931,076 | | | | 1,923,480 | |
Intangible assets, net | | | 319,711 | | | | 527,464 | |
Other assets | | | 25,934 | | | | 17,586 | |
| | | | | | | | |
Total assets | | $ | 3,230,517 | | | $ | 3,149,677 | |
| | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 3,587 | | | $ | 4,257 | |
Accrued expenses and other current liabilities | | | 61,373 | | | | 38,427 | |
Accrued compensation and benefits | | | 19,109 | | | | 24,057 | |
Deferred revenue | | | 31,918 | | | | 29,154 | |
Deferred rent, current portion | | | 2,400 | | | | 1,347 | |
| | | | | | | | |
Total current liabilities | | | 118,387 | | | | 97,242 | |
Deferred rent, net of current portion | | | 21,330 | | | | 15,298 | |
Long-term debt | | | 385,416 | | | | 367,404 | |
Deferred tax liabilities and other long-term liabilities | | | 44,561 | | | | 136,146 | |
| | | | | | | | |
Total liabilities | | | 569,694 | | | | 616,090 | |
Commitments and contingencies (Note 16) | | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Preferred stock, $0.0001 par value; 30,000,000 shares authorized; no shares issued and outstanding | | | — | | | | — | |
Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized; 56,629,103 and 54,402,809shares issued and outstanding as of December 31, 2017 and 2016, respectively | | | 6 | | | | 5 | |
Class B common stock, $0.0001 par value; 15,000,000 shares authorized; 6,217,447 shares issued and outstanding as of December 31, 2017 and 2016 | | | 1 | | | | 1 | |
Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 127,268,598 and 121,838,462 shares issued and outstanding as of December 31, 2017 and 2016, respectively | | | 13 | | | | 12 | |
Additionalpaid-in capital | | | 3,254,146 | | | | 3,030,854 | |
Accumulated other comprehensive loss | | | (1,100 | ) | | | (242 | ) |
Accumulated deficit | | | (592,243 | ) | | | (497,043 | ) |
| | | | | | | | |
Total shareholders’ equity | | | 2,660,823 | | | | 2,533,587 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 3,230,517 | | | $ | 3,149,677 | |
| | | | | | | | |
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,141,263 | | | $ | 651,058 | |
| Short-term investments | 1,280,989 | | | 903,867 | |
| Accounts receivable, net of allowance for doubtful accounts of $4,522 and $4,838 at December 31, 2019 and 2018, respectively | 67,005 | | | 66,083 | |
| Mortgage loans held for sale | 36,507 | | | 35,409 | |
| Inventory | 836,627 | | | 162,829 | |
| Prepaid expenses and other current assets | 58,117 | | | 61,067 | |
| Restricted cash | 89,646 | | | 12,385 | |
| Total current assets | 3,510,154 | | | 1,892,698 | |
| Contract cost assets | 45,209 | | | 45,819 | |
| Property and equipment, net | 170,489 | | | 135,172 | |
| Right of use assets | 212,153 | | | — | |
| Goodwill | 1,984,907 | | | 1,984,907 | |
| Intangible assets, net | 190,567 | | | 215,904 | |
| Other assets | 18,494 | | | 16,616 | |
| Total assets | $ | 6,131,973 | | | $ | 4,291,116 | |
| Liabilities and shareholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 8,343 | | | $ | 7,471 | |
| Accrued expenses and other current liabilities | 85,442 | | | 63,101 | |
| Accrued compensation and benefits | 37,805 | | | 31,388 | |
| Borrowings under credit facilities | 721,951 | | | 149,718 | |
| Deferred revenue | 39,747 | | | 34,080 | |
| Deferred rent, current portion | — | | | 1,740 | |
| Lease liabilities, current portion | 17,592 | | | — | |
| Convertible senior notes, current portion | 9,637 | | | — | |
| Total current liabilities | 920,517 | | | 287,498 | |
| Deferred rent, net of current portion | — | | | 19,945 | |
| Lease liabilities, net of current portion | 220,445 | | | — | |
| Long-term debt | 1,543,402 | | | 699,020 | |
| Deferred tax liabilities and other long-term liabilities | 12,188 | | | 17,474 | |
| Total liabilities | 2,696,552 | | | 1,023,937 | |
| Commitments and contingencies (Note 20) | | | |
| Shareholders’ equity: | | | |
| Preferred stock, $0.0001 par value; 30,000,000 shares authorized; no shares issued and outstanding | — | | | — | |
| Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized; 58,739,989 and 58,051,448 shares issued and outstanding as of December 31, 2019 and 2018, respectively | 6 | | | 6 | |
| Class B common stock, $0.0001 par value; 15,000,000 shares authorized; 6,217,447 shares issued and outstanding as of December 31, 2019 and 2018 | 1 | | | 1 | |
| Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 144,109,419 and 139,635,370 shares issued and outstanding as of December 31, 2019 and 2018, respectively | 14 | | | 14 | |
| Additional paid-in capital | 4,412,200 | | | 3,939,842 | |
| Accumulated other comprehensive income (loss) | 340 | | | (905) | |
| Accumulated deficit | (977,140) | | | (671,779) | |
| Total shareholders’ equity | 3,435,421 | | | 3,267,179 | |
| Total liabilities and shareholders’ equity | $ | 6,131,973 | | | $ | 4,291,116 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Revenue | | $ | 1,076,794 | | | $ | 846,589 | | | $ | 644,677 | |
Costs and expenses: | | | | | | | | | | | | |
Cost of revenue (exclusive of amortization) (1) | | | 85,203 | | | | 69,262 | | | | 60,127 | |
Sales and marketing | | | 448,201 | | | | 382,419 | | | | 308,125 | |
Technology and development | | | 319,985 | | | | 255,583 | | | | 184,477 | |
General and administrative | | | 210,816 | | | | 332,007 | | | | 184,984 | |
Impairment and restructuring costs | | | 174,000 | | | | — | | | | 35,551 | |
Acquisition-related costs | | | 463 | | | | 1,423 | | | | 16,576 | |
Loss (gain) on divestiture of businesses | | | — | | | | (1,251 | ) | | | 4,368 | |
| | | | | | | | | | | | |
Total costs and expenses | | | 1,238,668 | | | | 1,039,443 | | | | 794,208 | |
| | | | | | | | | | | | |
Loss from operations | | | (161,874 | ) | | | (192,854 | ) | | | (149,531 | ) |
Loss on debt extinguishment | | | — | | | | (22,757 | ) | | | — | |
Other income | | | 5,385 | | | | 2,711 | | | | 1,501 | |
Interest expense | | | (27,517 | ) | | | (7,408 | ) | | | (5,489 | ) |
| | | | | | | | | | | | |
Loss before income taxes | | | (184,006 | ) | | | (220,308 | ) | | | (153,519 | ) |
Income tax benefit (expense) | | | 89,586 | | | | (130 | ) | | | 4,645 | |
| | | | | | | | | | | | |
Net loss | | $ | (94,420 | ) | | $ | (220,438 | ) | | $ | (148,874 | ) |
| | | | | | | | | | | | |
Net loss per share—basic and diluted | | $ | (0.51 | ) | | $ | (1.22 | ) | | $ | (0.88 | ) |
Weighted-average shares outstanding—basic and diluted | | | 186,453 | | | | 180,149 | | | | 169,767 | |
(1) Amortization of website development costs and intangible assets included in technology and development | | $ | 94,349 | | | $ | 87,060 | | | $ | 63,189 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | |
| | | 2019 | | 2018 | | 2017 |
| Revenue: | | | | | | |
| Homes | | $ | 1,365,250 | | | $ | 52,365 | | | $ | — | |
| IMT | | 1,276,896 | | | 1,201,143 | | | 996,203 | |
| Mortgages | | 100,691 | | | 80,046 | | | 80,591 | |
| Total revenue | | 2,742,837 | | | 1,333,554 | | | 1,076,794 | |
| Cost of revenue (exclusive of amortization) (1): | | | | | | |
| Homes | | 1,315,345 | | | 49,392 | | | — | |
| IMT | | 98,522 | | | 96,693 | | | 80,310 | |
| Mortgages | | 18,154 | | | 7,505 | | | 4,893 | |
| Total cost of revenue | | 1,432,021 | | | 153,590 | | | 85,203 | |
| Sales and marketing | | 714,128 | | | 552,621 | | | 448,201 | |
| Technology and development | | 477,347 | | | 410,818 | | | 319,985 | |
| General and administrative | | 366,176 | | | 262,153 | | | 210,816 | |
| Impairment costs | | — | | | 79,000 | | | 174,000 | |
| Acquisition-related costs | | — | | | 2,332 | | | 463 | |
| Integration costs | | 650 | | | 2,015 | | | — | |
| Total costs and expenses | | 2,990,322 | | | 1,462,529 | | | 1,238,668 | |
| Loss from operations | | (247,485) | | | (128,975) | | | (161,874) | |
| Other income | | 39,658 | | | 19,270 | | | 5,385 | |
| Interest expense | | (101,792) | | | (41,255) | | | (27,517) | |
| Loss before income taxes | | (309,619) | | | (150,960) | | | (184,006) | |
| Income tax benefit | | 4,258 | | | 31,102 | | | 89,586 | |
| Net loss | | $ | (305,361) | | | $ | (119,858) | | | $ | (94,420) | |
| Net loss per share — basic and diluted | | $ | (1.48) | | | $ | (0.61) | | | $ | (0.51) | |
| Weighted-average shares outstanding — basic and diluted | | 206,380 | | | 197,944 | | | 186,453 | |
____________________
(1) Amortization of website development costs and intangible assets included in technology and development | | $ | 61,937 | | | $ | 79,309 | | | $ | 94,349 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Net loss | | $ | (94,420 | ) | | $ | (220,438 | ) | | $ | (148,874 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | |
Unrealized gains (losses) on investments | | | (858 | ) | | | 210 | | | | (448 | ) |
Reclassification adjustment for net (gains) losses from investments included in net loss | | | — | | | | 19 | | | | (23 | ) |
| | | | | | | | | | | | |
Net unrealized gains (losses) on investments | | | (858 | ) | | | 229 | | | | (471 | ) |
| | | | | | | | | | | | |
Total other comprehensive income (loss) | | | (858 | ) | | | 229 | | | | (471 | ) |
| | | | | | | | | | | | |
Comprehensive loss | | $ | (95,278 | ) | | $ | (220,209 | ) | | $ | (149,345 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Net loss | $ | (305,361) | | | $ | (119,858) | | | $ | (94,420) | |
| Other comprehensive income (loss): | | | | | |
| Unrealized gains (losses) on investments | 1,377 | | | 144 | | | (858) | |
| Currency translation adjustments | (132) | | | 51 | | | — | |
| Total other comprehensive income (loss) | 1,245 | | | 195 | | | (858) | |
| Comprehensive loss | $ | (304,116) | | | $ | (119,663) | | | $ | (95,278) | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class A Common
Stock, Class B
Common Stock and
Class C Capital Stock | | | Additional
Paid-In
Capital | | | Accumulated
Deficit | | | Accumulated
Other
Comprehensive
Loss | | | Total
Shareholders’
Equity | |
| | | | | |
| | Shares | | | Amount | | | | | |
Balance at December 31, 2014 | | | 122,387,520 | | | $ | 12 | | | $ | 716,498 | | | $ | (127,731 | ) | | $ | — | | | $ | 588,779 | |
Issuance of common and capital stock in connection with an acquisition | | | 51,779,112 | | | | 5 | | | | 1,883,723 | | | | — | | | | — | | | | 1,883,728 | |
Equity award vesting acceleration in connection with restructuring | | | — | | | | — | | | | 14,859 | | | | — | | | | — | | | | 14,859 | |
Fair value of equity awards assumed in connection with acquisitions | | | — | | | | — | | | | 82,840 | | | | — | | | | — | | | | 82,840 | |
Debt premium recorded in additionalpaid-in capital in connection with an acquisition | | | — | | | | — | | | | 126,386 | | | | — | | | | — | | | | 126,386 | |
Issuance of common and capital stock upon exercise of stock options | | | 2,732,767 | | | | 1 | | | | 24,422 | | | | — | | | | — | | | | 24,423 | |
Vesting of restricted stock units | | | 1,899,531 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Shares and value of restricted stock units withheld for tax liability | | | (324,013 | ) | | | — | | | | (8,150 | ) | | | — | | | | — | | | | (8,150 | ) |
Share-based compensation expense | | | — | | | | — | | | | 115,533 | | | | — | | | | — | | | | 115,533 | |
Net loss | | | — | | | | — | | | | — | | | | (148,874 | ) | | | — | | | | (148,874 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (471 | ) | | | (471 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2015 | | | 178,474,917 | | | | 18 | | | | 2,956,111 | | | | (276,605 | ) | | | (471 | ) | | | 2,679,053 | |
Issuance of common and capital stock upon exercise of stock options | | | 2,518,172 | | | | — | | | | 31,211 | | | | — | | | | — | | | | 31,211 | |
Vesting of restricted stock units | | | 1,487,263 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Shares and value of restricted stock units withheld for tax liability | | | (21,634 | ) | | | — | | | | (616 | ) | | | — | | | | — | | | | (616 | ) |
Share-based compensation expense | | | — | | | | — | | | | 116,979 | | | | — | | | | — | | | | 116,979 | |
Portion of repurchase price recorded in additionalpaid-in capital in connection with partial repurchase of 2020 | | | — | | | | — | | | | (127,615 | ) | | | — | | | | — | | | | (127,615 | ) |
Equity component of issuance of 2021 Notes, net of issuance costs of $2,494 | | | — | | | | — | | | | 91,400 | | | | — | | | | — | | | | 91,400 | |
Premiums paid for Capped Call Confirmations | | | — | | | | — | | | | (36,616 | ) | | | — | | | | — | | | | (36,616 | ) |
Net loss | | | — | | | | — | | | | — | | | | (220,438 | ) | | | — | | | | (220,438 | ) |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 229 | | | | 229 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | | | 182,458,718 | | | | 18 | | | | 3,030,854 | | | | (497,043 | ) | | | (242 | ) | | | 2,533,587 | |
Cumulative-effect adjustment from adoption of guidance on accounting for share-based payment transactions | | | — | | | | — | | | | 780 | | | | (780 | ) | | | — | | | | — | |
Issuance of common and capital stock upon exercise of stock options | | | 6,202,421 | | | | 2 | | | | 98,070 | | | | — | | | | — | | | | 98,072 | |
Vesting of restricted stock units | | | 1,463,825 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Shares and value of restricted stock units withheld for tax liability | | | (9,816 | ) | | | — | | | | (365 | ) | | | — | | | | — | | | | (365 | ) |
Share-based compensation expense | | | — | | | | — | | | | 124,807 | | | | — | | | | — | | | | 124,807 | |
Net loss | | | — | | | | — | | | | — | | | | (94,420 | ) | | | — | | | | (94,420 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (858 | ) | | | (858 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | | 190,115,148 | | | $ | 20 | | | $ | 3,254,146 | | | $ | (592,243 | ) | | $ | (1,100 | ) | | $ | 2,660,823 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common
Stock, Class B
Common Stock and
Class C Capital Stock | | | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Shareholders’
Equity |
| | | | | | | | | | | |
| Shares | | Amount | | | | | | | | |
| Balance at December 31, 2016 | 182,458,718 | | | $ | 18 | | | $ | 3,030,854 | | | $ | (497,043) | | | $ | (242) | | | $ | 2,533,587 | |
| Cumulative-effect adjustment from adoption of guidance on accounting for share-based payment transactions | — | | | — | | | 780 | | | (780) | | | — | | | — | |
| Issuance of common and capital stock upon exercise of stock options | 6,202,421 | | | 2 | | | 98,070 | | | — | | | — | | | 98,072 | |
| Vesting of restricted stock units | 1,463,825 | | | — | | | — | | | — | | | — | | | — | |
| Shares and value of restricted stock units withheld for tax liability | (9,816) | | | — | | | (365) | | | — | | | — | | | (365) | |
| Share-based compensation expense | — | | | — | | | 124,807 | | | — | | | — | | | 124,807 | |
| Net loss | — | | | — | | | — | | | (94,420) | | | — | | | (94,420) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (858) | | | (858) | |
| Balance at December 31, 2017 | 190,115,148 | | | 20 | | | 3,254,146 | | | (592,243) | | | (1,100) | | | 2,660,823 | |
| Cumulative-effect adjustment from adoption of guidance on revenue from contracts with customers | — | | | — | | | — | | | 40,322 | | | — | | | 40,322 | |
| Issuance of common and capital stock upon exercise of stock options | 5,472,728 | | | — | | | 120,074 | | | — | | | — | | | 120,074 | |
| Vesting of restricted stock units | 1,740,134 | | | — | | | — | | | — | | | — | | | — | |
| Shares and value of restricted stock units withheld for tax liability | (1,489) | | | — | | | (70) | | | — | | | — | | | (70) | |
| Share-based compensation expense | — | | | — | | | 157,674 | | | — | | | — | | | 157,674 | |
| Portion of conversion recorded in additional paid-in-capital in connection with partial conversion of convertible senior notes maturing in 2020 | 20,727 | | | — | | | 500 | | | — | | | — | | | 500 | |
| Issuance of Class C capital stock in connection with equity offering, net of issuance costs of $13,425 | 6,557,017 | | | 1 | | | 360,345 | | | — | | | — | | | 360,346 | |
| Premiums paid for capped call confirmations | — | | | — | | | (29,414) | | | — | | | — | | | (29,414) | |
| Equity component of issuance of 2023 Notes, net of issuance costs of $2,047 | — | | | — | | | 76,587 | | | — | | | — | | | 76,587 | |
| Net loss | — | | | — | | | — | | | (119,858) | | | — | | | (119,858) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 195 | | | 195 | |
| Balance at December 31, 2018 | 203,904,265 | | | 21 | | | 3,939,842 | | | (671,779) | | | (905) | | | 3,267,179 | |
| Issuance of common and capital stock upon exercise of stock options | 2,918,053 | | | — | | | 65,465 | | | — | | | — | | | 65,465 | |
| Vesting of restricted stock units | 2,244,631 | | | — | | | — | | | — | | | — | | | — | |
| Shares and value of restricted stock units withheld for tax liability | (94) | | | — | | | (3) | | | — | | | — | | | (3) | |
| Share-based compensation expense | — | | | — | | | 210,849 | | | — | | | — | | | 210,849 | |
| Premiums paid for capped call confirmations | — | | | — | | | (159,677) | | | — | | | — | | | (159,677) | |
| Equity component of issuance of 2024 Notes and 2026 Notes, net of issuance costs of $4,725 | — | | | — | | | 355,724 | | | — | | | — | | | 355,724 | |
| Net loss | — | | | — | | | — | | | (305,361) | | | — | | | (305,361) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 1,245 | | | 1,245 | |
| Balance at December 31, 2019 | 209,066,855 | | | $ | 21 | | | $ | 4,412,200 | | | $ | (977,140) | | | $ | 340 | | | $ | 3,435,421 | |
See accompanying notes to the consolidated financial statements.
ZILLOW GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Operating activities | | | | | |
| Net loss | $ | (305,361) | | | $ | (119,858) | | | | $ | (94,420) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | |
| Depreciation and amortization | 87,467 | | | 99,391 | | | | 110,155 | |
| Share-based compensation expense | 198,902 | | | 149,084 | | | | 113,571 | |
| Amortization of right of use assets | 23,142 | | | — | | | — | |
| Amortization of contract cost assets | 35,323 | | | 36,013 | | | | — | |
| Amortization of discount and issuance costs on 2021 Notes, 2023 Notes, 2024 Notes and 2026 Notes | 52,097 | | | 26,672 | | | | 18,012 | |
| Impairment costs | — | | | 79,000 | | | | 174,000 | |
| Deferred income taxes | (4,258) | | | (31,102) | | | | (89,586) | |
| Loss on disposal of property and equipment and other assets | 7,174 | | | 3,617 | | | | 5,678 | |
| Bad debt expense | 2,772 | | | 869 | | | | 7,349 | |
| Deferred rent | — | | | (2,045) | | | | 7,085 | |
| Amortization (accretion) of bond premium (discount) | (6,344) | | | (4,313) | | | | 431 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | (3,694) | | | (12,556) | | | | (21,203) | |
| Mortgage loans held for sale | (1,098) | | | (1,161) | | | | — | |
| Inventory | (673,798) | | | (162,829) | | | | — | |
| Prepaid expenses and other assets | (978) | | | (34,068) | | | | 10,807 | |
| Lease liabilities | (18,940) | | | — | | | — | |
| Contract cost assets | (34,713) | | | (41,510) | | | | — | |
| Accounts payable | (496) | | | 1,311 | | | | (373) | |
| Accrued expenses and other current liabilities | 19,573 | | | 1,920 | | | | 19,000 | |
| Accrued compensation and benefits | 6,417 | | | 11,291 | | | | (4,948) | |
| Deferred revenue | 5,667 | | | 2,162 | | | | 2,633 | |
| Other long-term liabilities | (1,028) | | | 1,962 | | | | — | |
| Net cash provided by (used in) operating activities | (612,174) | | | 3,850 | | | 258,191 | |
| Investing activities | | | | | |
| Proceeds from maturities of investments | 1,126,058 | | | 399,228 | | | 259,227 | |
| Purchases of investments | (1,495,477) | | | (901,761) | | | (407,032) | |
| Proceeds from sales of investments | — | | | 13,567 | | | — | |
| Purchases of property and equipment | (67,044) | | | (66,054) | | | (66,728) | |
| Purchases of intangible assets | (19,591) | | | (12,481) | | | (11,907) | |
| Purchases of equity investments | — | | | — | | | (10,000) | |
| Proceeds from divestiture of business | — | | | — | | | 579 | |
| Cash paid for acquisitions, net | — | | | (55,138) | | | (11,533) | |
| Net cash used in investing activities | (456,054) | | | (622,639) | | | (247,394) | |
| Financing activities | | | | | |
| Proceeds from issuance of convertible notes, net of issuance costs | 1,157,675 | | | 364,020 | | | — | |
| Premiums paid for capped call confirmations | (159,677) | | | (29,414) | | | — | |
| Proceeds from issuance of Class C capital stock, net of issuance costs | — | | | 360,345 | | | — | |
| Proceeds from borrowings on credit facilities | 688,489 | | | 116,700 | | | — | |
| Repayments of borrowings on credit facilities | (113,665) | | | — | | | — | |
| Net borrowings (repayments) on warehouse lines of credit and Repurchase Agreement | (2,590) | | | 482 | | | — | |
| Proceeds from exercise of stock options | 65,465 | | | 120,074 | | | 98,071 | |
| Value of equity awards withheld for tax liability | (3) | | | (70) | | | (365) | |
| Contingent merger consideration | — | | | (2,000) | | | — | |
| Net cash provided by financing activities | 1,635,694 | | | 930,137 | | | 97,706 | |
| Net increase in cash, cash equivalents and restricted cash during period | 567,466 | | | 311,348 | | | | 108,503 | |
| Cash, cash equivalents and restricted cash at beginning of period | 663,443 | | | 352,095 | | | | 243,592 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 1,230,909 | | | $ | 663,443 | | | $ | 352,095 | |
| Supplemental disclosures of cash flow information | | | | | |
| Cash paid for interest | $ | 42,156 | | | $ | 15,473 | | | $ | 9,198 | |
| Noncash transactions: | | | | | |
| Capitalized share-based compensation | $ | 11,947 | | | $ | 8,590 | | | $ | 11,236 | |
| Write-off of fully depreciated property and equipment | $ | 36,159 | | | $ | 22,364 | | | $ | 15,004 | |
| Write-off of fully amortized intangible assets | $ | 9,999 | | | $ | 12,999 | | | $ | 5,473 | |
| Property and equipment purchased on account | $ | 8,775 | | | $ | 3,844 | | | $ | 4,268 | |
See accompanying notes to consolidated financial statements.
ZILLOW GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Operating activities | | | | | | | | | | | | |
Net loss | | $ | (94,420 | ) | | $ | (220,438 | ) | | $ | (148,874 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities, net of amounts assumed in connection with acquisitions: | | | | | | | | | | | | |
Depreciation and amortization | | | 110,155 | | | | 100,590 | | | | 75,386 | |
Share-based compensation expense | | | 113,571 | | | | 106,918 | | | | 105,214 | |
Loss on debt extinguishment | | | — | | | | 22,757 | | | | — | |
Amortization of discount and issuance costs on 2021 Notes | | | 18,012 | | | | 883 | | | | — | |
Impairment costs and restructuring costs | | | 174,000 | | | | — | | | | 19,001 | |
Deferred income taxes | | | (89,586 | ) | | | (1,370 | ) | | | (2,853 | ) |
Loss on disposal of property and equipment | | | 5,678 | | | | 3,689 | | | | 1,384 | |
Loss (gain) on divestiture of businesses, net | | | — | | | | (1,360 | ) | | | 3,899 | |
Bad debt expense | | | 7,349 | | | | 2,681 | | | | 3,235 | |
Deferred rent | | | 7,085 | | | | 1,730 | | | | 2,553 | |
Amortization of bond premium | | | 431 | | | | 1,489 | | | | 2,487 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (21,203 | ) | | | (13,324 | ) | | | (1,051 | ) |
Prepaid expenses and other assets | | | 10,807 | | | | (13,260 | ) | | | (761 | ) |
Accounts payable | | | (373 | ) | | | 856 | | | | (11,158 | ) |
Accrued expenses and other current liabilities | | | 19,000 | | | | (5,065 | ) | | | (18,384 | ) |
Accrued compensation and benefits | | | (4,948 | ) | | | 12,463 | | | | (4,020 | ) |
Deferred revenue | | | 2,633 | | | | 7,794 | | | | (2,434 | ) |
Other long-term liabilities | | | — | | | | 1,612 | | | | (965 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 258,191 | | | | 8,645 | | | | 22,659 | |
| | | |
Investing activities | | | | | | | | | | | | |
Proceeds from maturities of investments | | | 259,227 | | | | 199,369 | | | | 335,443 | |
Purchases of investments | | | (407,032 | ) | | | (175,210 | ) | | | (307,658 | ) |
Proceeds from sales of investments | | | — | | | | 4,963 | | | | 8,260 | |
Decrease in restricted cash, net of amounts assumed in connection with an acquisition | | | — | | | | — | | | | 3,931 | |
Purchases of property and equipment | | | (66,728 | ) | | | (62,060 | ) | | | (52,685 | ) |
Purchases of intangible assets | | | (11,907 | ) | | | (9,662 | ) | | | (15,423 | ) |
Purchases of cost method investments | | | (10,000 | ) | | | (10,000 | ) | | | — | |
Proceeds from divestiture of businesses | | | 579 | | | | 3,200 | | | | 23,359 | |
Cash acquired in acquisition, net | | | — | | | | — | | | | 173,406 | |
Cash paid for acquisitions, net | | | (11,533 | ) | | | (16,319 | ) | | | (104,192 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | (247,394 | ) | | | (65,719 | ) | | | 64,441 | |
| | | |
Financing activities | | | | | | | | | | | | |
Proceeds from issuance of 2021 Notes, net of issuance costs | | | — | | | | 447,784 | | | | — | |
Premiums paid for Capped Call Confirmations | | | — | | | | (36,616 | ) | | | — | |
Partial repurchase of 2020 Notes | | | — | | | | (370,235 | ) | | | — | |
Proceeds from exercise of stock options | | | 98,071 | | | | 31,211 | | | | 24,423 | |
Value of equity awards withheld for tax liability | | | (365 | ) | | | (616 | ) | | | (8,150 | ) |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 97,706 | | | | 71,528 | | | | 16,273 | |
Net increase in cash and cash equivalents during period | | | 108,503 | | | | 14,454 | | | | 103,373 | |
Cash and cash equivalents at beginning of period | | | 243,592 | | | | 229,138 | | | | 125,765 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 352,095 | | | $ | 243,592 | | | $ | 229,138 | |
| | | | | | | | | | | | |
| | | |
Supplemental disclosures of cash flow information | | | | | | | | | | | | |
Cash paid for interest | | $ | 9,198 | | | $ | 6,325 | | | $ | 6,325 | |
Noncash transactions: | | | | | | | | | | | | |
Value of Class A common stock issued in connection with an acquisition | | $ | — | | | $ | — | | | $ | 1,883,728 | |
Capitalized share-based compensation | | $ | 11,236 | | | $ | 10,061 | | | $ | 10,319 | |
Write-off of fully depreciated property and equipment | | $ | 15,004 | | | $ | 14,564 | | | $ | 26,242 | |
Write-off of fully amortized intangible assets | | $ | 5,473 | | | $ | 9,293 | | | $ | — | |
See accompanying notes to consolidated financial statements.
ZILLOW GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Description of Business
Zillow Group, Inc.
operateshouses one of the
leadinglargest portfolios of real estate
and home-related information marketplacesbrands on mobile and the
web, with a complementary portfolio of brandsweb. Zillow Group is committed to leveraging its proprietary data, technology and
productsinnovations to
help consumers find vital information about homes and connect with local professionals. Zillow Group’s brands focus on all stages of themake home
lifecycle: renting, buying, selling,
financing and renting a seamless, on-demand experience for customers. As its flagship brand, Zillow now offers a fully integrated home shopping experience that includes access to for sale and rental listings, Zillow Offers, which provides a hassle-free way to buy and sell eligible homes directly through Zillow, and beginning in October 2018, Zillow Home Loans (formerly Mortgage Lenders of America, L.L.C.), Zillow’s affiliated lender that provides an easy way to receive mortgage pre-approvals and financing.
The Zillow Group portfolio ofOther consumer brands
includes real estate and rental marketplaces Zillow,include Trulia, StreetEasy, HotPads, Naked Apartments and
RealEstate.com.Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions to help real estate
rental and mortgage professionalspartners maximize business opportunities and connect with millions of
consumers. We also own and operate a number ofcustomers. Zillow Group business brands for real estate, rental and mortgage professionals,
includinginclude Mortech, dotloop, Bridge Interactive and New Home Feed. Zillow, Inc. was incorporated as a Washington corporation in December 2004, and we launched the initial version of our website, Zillow.com, in February 2006. Zillow Group, Inc. was incorporated as a Washington corporation in July 2014 in connection with our acquisition of Trulia, Inc. (“Trulia”). Upon the closing of the Trulia acquisition in February 2015, each of Zillow, Inc. and Trulia became wholly owned subsidiaries of Zillow Group.
Certain Significant Risks and Uncertainties
We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: rates of revenue growth; our ability to manage advertising inventory or pricing; engagement and usage of our products; our investment of resources to pursue strategies that may not prove effective; competition in our market; the stability of the residential real estate market and the impact of interest rate changes; changes in technology, products, markets or services by us or our competitors; addition or loss of significant customers; our ability to maintain or establish relationships with listings and data providers; our ability to obtain or maintain licenses and permits to support our current and future businesses; actual or anticipated changes to our products and services; changes in government regulation affecting our business; outcomes of legal proceedings; natural disasters and catastrophic events; scaling and adaptation of existing technology and network infrastructure; management of our growth; our ability to attract and retain qualified employees and key personnel; our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments; protection of customers’ information and other privacy concerns; protection of our brand and intellectual property; and intellectual property infringement and other claims, among other things.
Note 2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include Zillow Group, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).
Effective February 17, 2015, Zillow Group acquired Trulia, and each of Zillow, Inc. and Trulia became wholly owned subsidiaries of Zillow Group. For financial reporting and accounting purposes, Zillow was the acquirer of Trulia. The results presented in the Consolidated Financial Statements and the Notes to Consolidated Financial Statements reflect those of Zillow prior to the completion of the acquisition of Trulia on February 17, 2015, and Trulia’s results of operations have been included prospectively after February 17, 2015. Market Leader revenue is included in our results of operations from February 17, 2015 through the date of divestiture of September 30, 2015.
The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related
disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to the net realizable value of inventory, amortization period and recoverability of contract cost assets, website and software development costs, recoverability of long-lived assets and intangible assets with definite lives, share-based compensation, income taxes, business combinations and the recoverability of goodwill and indefinite-lived intangible assets, among others. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected.
Reclassifications
Certain immaterial reclassifications have been made in the consolidated statements of operations to conform data for prior periods to the current format. The Company reclassified certain technology-related costs and expenses between expense categories. Amounts previously reported in the consolidated statement of operations for the year ended December 31, 2016 were revised herein as shown below (in thousands):
| | | | | | | | | | | | |
| | | As Reported | | | As Revised | | | Effect of Change | |
Cost of revenue (exclusive of amortization) | | $ | 71,591 | | | $ | 69,262 | | | $ | (2,329 | ) |
Sales and marketing | | | 380,919 | | | | 382,419 | | | | 1,500 | |
Technology and development | | | 273,066 | | | | 255,583 | | | | (17,483 | ) |
General and administrative | | | 313,695 | | | | 332,007 | | | | 18,312 | |
Amounts previously reported in the consolidated statement of operations for the year ended December 31, 2015 were revised herein as shown below (in thousands):
| | | | | | | | | | | | |
| | | As Reported | | | As Revised | | | Effect of Change | |
Cost of revenue (exclusive of amortization) | | $ | 61,614 | | | $ | 60,127 | | | $ | (1,487 | ) |
Sales and marketing | | | 307,089 | | | | 308,125 | | | | 1,036 | |
Technology and development | | | 198,565 | | | | 184,477 | | | | (14,088 | ) |
General and administrative | | | 170,445 | | | | 184,984 | | | | 14,539 | |
Certain immaterial reclassifications have been made in the consolidated balance sheets and statements of cash flows to conform data for prior periods to the current format.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents, investments,
accounts receivable and
accounts receivable.mortgage loans held for sale. We place cash and cash equivalents and investments with major financial institutions, which management assesses to be of high credit quality, in order to limit exposure of our investments.
Credit risk with respect to accounts receivable is dispersed due to the large number of customers. There were no customers that comprised 10% or more of our total accounts receivable as of December 31,
20172019 and
2016.2018. Further, our credit risk on accounts receivable is mitigated by the relatively short payment terms that we offer. Collateral is not required for accounts receivable. We maintain an allowance for doubtful accounts such that receivables are stated at net realizable value.
Similarly, our credit risk on mortgage loans held for sale is dispersed due to a large number of customers. Further, our credit risk on mortgage loans held for sale is mitigated by the fact that we typically sell mortgages on the secondary market within a relatively short period of time after the loan is originated.
Cash and Cash Equivalents
Cash includes demand deposits with banks or financial institutions. Cash equivalents include short-term, highly liquid investments that are both readily convertible to known amounts of cash, and so near their maturity that they present minimal risk of changes in value because of changes in interest rates. Our cash equivalents include only investments with original maturities of three months or less. We regularly maintain cash in excess of federally insured limits at financial institutions.
Our investments consist of fixed income securities, which include U.S.
and foreign government agency securities, corporate notes and bonds, commercial paper,
treasury bills, municipal securities and certificates of deposit, and are classified as
available-for-sale securities. As the investments are available to support current operations, our
available-for-sale securities are classified as short-term investments.
Available-for-sale securities are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive
lossincome (loss) in shareholders’ equity, while realized gains and losses and other-than-temporary impairments are reported as a component of net loss based on specific identification. An impairment charge is recorded in the consolidated statements of operations for declines in fair value below the cost of an individual investment that are deemed to be other than temporary. We assess whether a decline in value is temporary based on the length of time that the fair market value has been below cost, the severity of the decline and the intent and ability to hold or sell the investment. We did
not0t identify any investments as other-than-temporarily impaired as of December 31,
20172019 or
2016.2018.
Restricted Cash
Restricted cash consists of amounts funded to the reserve and collection accounts related to our credit facilities (see Note 15) and amounts held in escrow related to funding home purchases in our mortgage originations business.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represent our unconditional right to consideration. Accounts receivable are generally due within 30 days and are recorded net of the allowance for doubtful accounts. We consider accounts outstanding longer than the contractual terms past due. We review accounts receivable on a regular basis and estimate an amount of losses for uncollectible accounts based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. We record changes in our estimate to the allowance for doubtful accounts through bad debt expense and relieve the allowance when accounts are ultimately determined to be uncollectible. Bad debt expense is included in general and administrative expenses.
Mortgage Loans Held for Sale
Mortgage loans held for sale include residential mortgages originated for sale in the secondary market in connection with our October 2018 acquisition of Zillow Home Loans. We have elected the fair value option for all mortgage loans held for sale as election of this option allows for a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Mortgage loans held for sale are initially recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loans are sold. Net origination costs and fees associated with mortgage loans are recognized as incurred. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers. Interest income is earned from the date a mortgage loan is originated until the loan is sold and is classified within Other income in the consolidated statements of operations.
Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage market on a servicing released, nonrecourse basis, which limits exposure to nonperformance by loan buyer counterparties although we remain liable for certain limited representations and warranties related to loan sales, such as non-compliance with defined loan origination or documentation standards, including misstatement in the loan documents, early payoff or default on early payments. Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on mortgages we have sold based on claims that we breached our limited representations and warranties. We have established reserves for probable losses.
Loan Commitments and Related Derivatives
We are party to interest rate lock commitments (“IRLCs”), which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria in connection with our October 2018 acquisition of Zillow Home Loans. IRLCs are accounted for as derivative instruments recorded at fair value with gains and losses recognized in revenue in the consolidated statements of operations. We manage our interest rate risk related to IRLCs and mortgage loans held for sale through the use of derivative instruments, generally forward contracts on mortgage-backed securities (“MBS”), which are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price, and mandatory loan commitments, which are an obligation by an investor to buy loans at a specified price within a specified time period. We do not enter into or hold derivatives for trading or speculative purposes and our derivatives are not designated as hedging instruments. Changes in the fair value of our derivative financial instruments are recognized in revenue in our consolidated statements of operations, and the fair values are reflected in other assets or other liabilities, as applicable. The net change in fair value was not significant for the years ended December 31, 2019 and 2018.
There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on IRLCs are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and mandatory loan commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 90 days.
Inventory
Inventory is comprised of homes acquired through our Zillow Offers program and is stated at the lower of cost or net realizable value. Homes are removed from inventory on a specific identification basis when they are resold. Stated cost includes consideration paid to acquire and update each home including associated allocated overhead costs. Work-in-progress inventory includes homes undergoing updates and finished goods inventory includes homes ready for resale. Unallocated overhead costs are expensed as incurred and included in cost of revenue. For our Homes segment, selling costs, such as real estate agent commissions, escrow and title fees, and staging costs, as well as holding costs incurred during the period that homes are listed for sale, including utilities, taxes and maintenance are expensed as incurred and classified within sales and marketing expenses in the consolidated statements of operations. We recorded $22.6 million and $1.9 million in holding costs for the years ended December 31, 2019 and 2018, respectively.
Each quarter we review the value of homes held in inventory for indicators that net realizable value is lower than cost. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized in cost of revenue and the value of the corresponding asset is reduced.
Contract Cost Assets
We capitalize certain incremental costs of obtaining contracts with customers which we expect to recover. These costs relate to commissions paid to sales personnel, primarily for our Premier Agent and Premier Broker programs. As a practical expedient, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. Capitalized commission costs are recorded as contract cost assets in our consolidated balance sheets. Contract cost assets are amortized to expense on a straight-line basis over a period that is consistent with the transfer to the customer of the products or services to which the asset relates, generally the estimated life of the customer relationship. Amortization expense related to contract cost assets is included in sales and marketing expenses in our consolidated statements of operations. In determining the estimated life of our customer relationships, we consider quantitative and qualitative data, including, but not limited to, historical customer data, recent changes or expected changes in product or service offerings, and changes in how we monetize our products and services. The amortization period for capitalized contract costs related to our Premier Agent and Premier Broker programs ranges from two to three years.
We monitor our contract cost assets for impairment and recognize an impairment loss in the consolidated statements of operations to the extent the carrying amount of the asset recognized exceeds the amount of consideration that we expect to
receive in the future and that we have received but have not recognized in revenue less the costs that relate directly to providing those goods or services that have not yet been recognized as expenses. Write-offs of contract cost assets were not material for the years ended December 31, 2019 and December 31, 2018. Refer to Note 7 for more information regarding contract cost assets.
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. The useful lives are as follows:
| | | | | | | | |
Computer equipment | | 2 to 3 years |
Office equipment, furniture and fixtures | | 5 to 7 years |
Leasehold improvements | | Shorter of expected useful life or lease term |
Maintenance and repair costs are charged to expense as incurred. Major improvements, which extend the useful life of the related asset, are capitalized. Upon disposal of a fixed asset, we record a gain or loss based on the
differencesdifference between the proceeds received and the net book value of the disposed asset.
Website and Software Development Costs
The costs incurred in the preliminary stages of
website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized in property and equipment and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives. Amortization expense related to capitalized website and software development costs is included in technology and development expense.
Capitalized development activities placed in service are amortized over the expected useful lives of those releases, currently estimated at one to twofive years. The estimated useful lives of website and software development activities are reviewed frequently and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing functionality.
Construction-in-progress primarily consists of website development costs that are capitalizable, but for which the associated applications had not been placed in service.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition, and is not amortized. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired.
Typically,In our evaluation of goodwill, we
choose to forgo the initialtypically first perform a qualitative assessment
and perform a quantitative analysis to
assist in our annual evaluation. If impairment exists,determine whether the carrying value of
each reporting unit is greater than its fair value. If it is more likely than not that the
goodwillcarrying value of a reporting unit is
reduced togreater than its fair value,
throughwe perform a quantitative assessment and an impairment charge
is recorded in our statements of
operations.operations for the excess of carrying value of the reporting unit over its fair value.
During the years ended December 31, 2019, 2018, and 2017 we did not record any impairments related to goodwill. Refer to Note 10 for additional information related to goodwill.
Our
trade names and trademarks indefinite-lived intangible asset is not amortized, and we assess the asset for impairment on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that the asset may be impaired. On an interim basis we consider if there are any events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset, including, but not limited to, costs that could have a negative effect on future expected earnings and cash flows, changes in certain key performance metrics, and changes in management, key personnel, strategy or customers. In our evaluation of our trade names and trademarks indefinite-lived intangible asset, we typically first perform a qualitative assessment to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired. If so, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of the carrying value of the indefinite-lived intangible
assetsasset over
theirits fair value.
During
We did 0t record any non-cash impairments related to the indefinite-lived Trulia trade names and trademarks intangible asset during the year ended December 31,
2019. During the years ended December 31, 2018 and 2017, we recorded
anon-cash impairment impairments for
$69.0 million and $174.0 million,
respectively, related to the
$351.0 million indefinite-lived
intangible asset that we recorded in connection with our February 2015 acquisition of Trulia
for Trulia’s trade names and
trademarks.trademarks intangible asset. For additional information about the
non-cash impairment, impairments, see Note
911 to our consolidated financial statements.
We purchase and license data content from multiple data providers. This data content consists of U.S. county data about home details (e.g., the number of bedrooms, bathrooms, square footage) and other information relating to the purchase price of homes, both current and historical, as well as imagery, mapping and parcel data that is displayed on our mobile applications and websites. Our home details data not only provides information about a home and its related transactions which is displayed on our mobile applications and websites, but is also used in our proprietary valuation algorithms to produce Zestimates, Rent Zestimates and Zillow Home Value Indexes. License agreement terms vary by vendor. In some instances, we retain perpetual rights to this information after the contract ends; in other instances, the information and data are licensed only during the fixed term of the agreement. Additionally, certain data license agreements provide for uneven payment amounts throughout the
life of the contract term.
We capitalize payments made to third parties for data licenses that we expect to
provide future economic benefitrecover through
the recovery of the costs of these arrangements via the generation of
our revenue and margins. For data license contracts that include uneven payment amounts, we capitalize the payments as they are made as an intangible asset and the total contract value is typically amortized on a straight-line basis over the term of the contract, which is equivalent to the estimated useful life of the asset. We evaluate data content contracts for potential capitalization at the inception of the arrangement as well as each time periodic payments to third parties are made.
The amortization period for the capitalized purchased content is based on our best estimate of the useful life of the asset, which is approximately five years. The determination of the useful life includes consideration of a variety of factors including, but not limited to, our assessment of the expected use of the asset and contractual provisions that may limit the useful life, as well as an assessment of when the data is expected to become obsolete based on our estimates of the diminishing value of the data over time. We evaluate the useful life of the capitalized purchased data content each reporting period to determine whether events and circumstances warrant
a revision to the remaining useful life. If we determine the estimate of the asset’s useful life requires modification, the carrying amount of the asset is amortized prospectively over the revised useful life. The capitalized purchased data content is amortized on a straight-line basis as the pattern of delivery of the economic benefits of the data cannot reliably be determined because we do not have the ability to reliably predict future traffic to our mobile applications and websites.
Under certain other data agreements, the underlying data is obtained on a subscription basis with consistent monthly or quarterly recurring payment terms over the contractual period. Upon the expiration of such arrangements, we no longer have the right to access the related data, and therefore, the costs incurred under such contracts are not capitalized and are expensed as payments are made. We would immediately lose rights to data under these arrangements if we were to cancel the subscription and/or cease making payments under the subscription arrangements.
We also capitalize costs related to the license of certaininternal-use software from third parties, including certain licenses of software in cloud computing arrangements. Additionally, we capitalize costs incurred during the application development stage related to the development ofinternal-use software and enterprise cloud computing services. We expense costs as incurred related to the planning and post-implementation phases of development. Capitalizedinternal-use software costs are amortized on a straight-line basis over the estimated useful life of the asset, which is currently three years, on a straight-line basis.one to five years.
Intangibles-in-progress consist of purchased content and software that are capitalizable but have not been placed in service.
We also have intangible assets for developed technology, customer relationships, trade names and trademarks and advertising relationships which we recorded in connection with acquisitions. Purchased intangible assets with a determinable economic life are carried at cost, less accumulated amortization. These intangible assets are amortized over the estimated useful life of the asset on a straight-line basis.
Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets
We evaluate intangible assets and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. We group assets for purposes of such review at the lowest level for
which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. If this comparison indicates impairment, the amount of impairment to be recognized is calculated as the difference between the carrying value and the fair value of the asset group.
Deferred revenue consists of prepaid advertising fees received or billed in advance of
the delivery or completion of the services,satisfying our performance obligations and prepaid but unrecognized subscription
revenue, and for amounts received in instances when revenue recognition criteria have not been met.revenue. Deferred revenue is recognized when
the services are provided and all revenue recognition criteria have been met.Deferred Rent
Foror as we satisfy our operating leases, we recognize rent expense on a straight-line basis over the terms of the leases and, accordingly, we record the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. For office spaceobligations under an operating lease that is subleased to a third party for which we intend to reoccupy the space at a future date, rent expense is recognized net of sublease income. Landlord-funded leasehold improvements are also recorded as deferred rent liabilities and are amortized as a reduction of rent expense over thenon-cancelable term of the related operating lease.
contracts with customers.
We recognize identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that we identify adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. We recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
We recognize revenue when (i) persuasive evidenceor as we satisfy our performance obligations by transferring control of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. We consider a signed agreement, a binding insertion order or other similar documentation reflecting the terms and conditions under whichpromised products or services will be providedto our customers in an amount that reflects the consideration to which we expect to be persuasive evidenceentitled in exchange for those products or services.
As a practical expedient, we do not adjust the promised amount of an arrangement. Collectability is assessed based on a number of factors, including payment history andconsideration for the creditworthinesseffects of a customer. If itsignificant financing component as the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service is determined that collection isone year or less.
We do not reasonably assured,disclose the transaction price related to remaining performance obligations for (i) contracts with an original expected duration of one year or less and (ii) contracts for which we recognize revenue is not recognized until collection becomes reasonably assured,at the amount to which we have the right to invoice for performance completed to date. The remaining duration of our performance obligations is generally upon receiptless than one year.
In our Homes segment, we generate revenue from the resale of
cash.Wehomes on the open market through our Zillow Offers program.
In our IMT segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to businesses and professionals primarily associated with the residential real estate mortgage and rental industries. These professionals include real estate mortgage and rental professionals and brand advertisers. Our twothree primary revenue categories within our IMT segment are marketplacePremier Agent, Rentals and Other.
In our Mortgages segment, we generate revenue from the sale of advertising services to mortgage lenders and display revenue. Incremental direct costs incurredother mortgage professionals, mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans, as well as Mortech mortgage software solutions.
Homes Revenue. Homes revenue is derived from the resale of homes on the open market through our Zillow Offers program. Homes revenue is recognized at the time of the closing of the home sale when title to and possession of the property are transferred to the acquisition or origination of a customer contract in a transaction that results in the deferralbuyer. The amount of revenue are expensed as incurred.Marketplace Revenue. Marketplace revenue consists primarilyrecognized for each home sale is equal to the sale price of the home net of resale concessions and credits to the buyer and does not reflect real estate agent commissions, closing or other costs associated with the transaction.
Premier Agent revenue, other real estate revenue and mortgages revenue. In addition, Market Leader revenue is included in our results of operations in Marketplace revenue from February 17, 2015 through the date of divestiture of September 30, 2015.Revenue.
Premier Agent revenue is derived from our Premier Agent and Premier Broker programs. Our Premier Agent and Premier Broker programs offer a suite of marketing and business technology products and services to help real estate agents and brokers achieve their advertising needs,goals, while growing and managing their businesses and brands. All Premier Agents and Premier Brokers receive access to a dashboard portal on our mobile application orand website that provides individualized program performance analytics, self-service ad buying tools and our free customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent or Premier Broker through our mobile and web platforms.We offerplatforms and our flagship
account management tools. The marketing and business technology products and services promised to Premier Agents and Premier Brokers are delivered over time, as the customer simultaneously receives and consumes the benefit of the performance obligations.
Premier Agent
advertising product and
our Premier Broker advertising
productproducts, which include the delivery of impressions and validated consumer connections, or leads, are primarily offered on a
cost per impressionshare of voice basis.
Payment is received prior to the delivery of impressions and connections. Impressions are delivered when
a soldan advertisement appears on pages viewed by users of our mobile applications and
websites. In 2016, we began testingwebsites and
implementationconnections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. We do not promise any minimum or maximum number of
impressions or connections to customers, but instead control when and how many impressions to deliver based on a
new auction-based pricing method for our Premier Agent product by which wecustomer’s share of voice. We determine the
cost per impression deliverednumber of impressions and connections to deliver to Premier Agents and Premier Brokers in each zip code
based uponusing a market-based pricing method in consideration of the total amount spent by Premier Agents
and Premier Brokers to purchase impressions
and connections in the zip code during the month.
This results in the delivery of impressions and connections over time in proportion to each Premier Agent’s and Premier Broker’s share of voice. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly prepaid spend in that zip code as a percentage of the total monthly prepaid spend of all Premier Agents and Premier Brokers in that zip code, and includes both the share of impressions delivered as advertisements appearing on pages viewed by users of our mobile applications and websites, as well as the proportion of consumer connections a Premier Agent or Premier Broker receives. The
cost per impression that we chargenumber of impressions and connections delivered for a given spend level is dynamic
–- as demand for
impressionsadvertising in a zip code increases or decreases, the
cost per impressionnumber of impressions and connections delivered to a Premier Agent or Premier Broker in that zip code
may be increaseddecreases or
decreased. This new auction-based pricing method complements our self-serve account interface, which we introduced to Premier Agents over the course of2016. The interface includes account management tools that allow agent advertisers to independently control their budgets, impression buys, and the duration of their advertising commitment. increases accordingly.
We began testing this auction-based pricing method for our Premier Agent product to better align our revenue opportunities with increasing traffic levels to our mobile and web platforms and leveraging increasing demand by real estate agents for access to home shoppers who use our mobile applications and websites. In the fourth quarter of 2016, we implemented this method broadly for all existing and new agent advertisers, including brokerages and other teams. With this auction-based pricing method, weprimarily recognize revenue related to our dynamic impression-basedthe Premier Agent and Premier Broker products and services based on the contractual maximummonthly prepaid spend recognized on a straight-line basis during the monthly billing period over which the products and services are provided. This methodology best depicts how we satisfy our performance obligations to customers, as we continuously transfer control of the performance obligations to the customer over time. Given a Premier Agent or Premier Broker typically prepays their monthly spend and the monthly spend is refunded on a pro-rata basis upon cancellation of the contract by a customer at any point in time, we have determined that Premier Agent and Premier Broker contracts are effectively daily contracts, and each performance obligation is satisfied over time as each day lapses. We have not allocated the transaction price to each performance obligation within our Premier Agent and Premier Broker arrangements, as the amounts recognized would be the same irrespective of any allocation.
In October 2018, we began testing a new pricing model, Flex, for Premier Agent and Premier Broker advertising services in limited markets. With the Flex model, Premier Agents and Premier Brokers are provided with validated leads at no upfront cost, and they pay a performance advertising fee only when a real estate transaction is closed with one of their leads. With this pricing model, the transaction price represents variable consideration as the amount to which we expect to be entitled varies based on the number of validated leads that convert into real estate transactions and the value of those transactions. During this testing phase, we recognize revenue when we receive payment for a real estate transaction closed with a Flex lead. We will continuously reevaluate this determination and the point at which we may begin to estimate variable consideration and record revenue as performance obligations are transferred.
Rentals Revenue. Rentals revenue includes the sale of advertising and a suite of tools to rental professionals, landlords and other market participants. Rentals revenue primarily includes revenue generated by advertising sold to property managers, landlords and other rental professionals on a cost per lead, cost per click, cost per lease, cost per listing or cost per impression basis. We recognize revenue as leads, clicks and impressions are provided to rental professionals, or as rental listings are published on our mobile applications and websites, which is the amount for which we have the right to invoice. The number of leases generated through our rentals pay per lease product during the period is accounted for as variable consideration, and we estimate the amount of variable consideration based on the expected number of qualified leases secured during the period. We do not believe that a significant reversal in the amount of cumulative revenue recognized will occur once the uncertainty related to the number of leases secured is subsequently resolved.
Rentals revenue also includes revenue generated from our rental applications product through which potential renters can submit applications to multiple rental properties over a 30-day period for a flat service fee. We recognize revenue for the rental applications product on a straight-line basis during the contractual period over which the services are delivered. Our Premier Agentcustomer has the right to access and Premier Broker products include multiple deliverables which are accounted for as a single unitsubmit the rental application.
Other real estateRevenue. Other revenue primarily includes revenue generated by Zillow Group Rentals,new construction and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals, including our new construction marketing solutions. Zillow Group Rentals includes our rentals marketplace and suite of tools for rental professionals. Rentals revenue primarily includes revenue generated by advertising sold to property managers and other rental professionals on a cost per lead, cost per lease and cost per click generated basis whereby we recognize revenue as leads are delivered to rental professionals or as qualified leases are confirmed. Our new construction marketing solutions allow home builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis, wherebyand revenue is recognized based on the contractual spend on a straight-line basis during the contractual period over which the servicescommunities are delivered. advertised on our mobile applications and websites. New construction revenue also includes revenue generated on a cost per impression basis whereby we recognize revenue as impressions are delivered to users interacting with our mobile applications and websites, which is the amount for which we have the right to invoice. Consideration for new construction products is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.
Mortgages Revenue.Mortgages revenue primarily includes marketing products sold to mortgage professionals on a cost per lead basis, including our Long FormCustom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service, and beginning in the fourth quarter of 2018, also includes revenue generated by Zillow Home Loans, our affiliated mortgage lender, and revenue generated by Mortech.
Zillow Group operates Custom Quote and Connect through its wholly owned subsidiary, Zillow Group Marketplace, Inc., a licensed mortgage broker. For our Connect and Custom Quote services. Mortgagescost per lead marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through our mortgages platform, which is the amount for which we have the right to invoice. For our subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, we contact a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend recognized on a straight-line basis during the contractual period over which the service is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.
Mortgage origination revenue reflects both origination fees and the corresponding sale, or expected future sale, of a loan. When an interest rate lock commitment is made to a customer, we record the expected gain on sale of the mortgage, plus the estimated earnings from the expected sale of the associated servicing rights, adjusted for a pull-through percentage (which is defined as the likelihood that an interest rate lock commitment will be originated), as revenue. Revenue from loan origination fees is recognized at the time the related real estate transactions are completed, usually upon the close of escrow and when we fund mortgage loans. Once funded, mortgage loans held for sale are recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loan is sold. Net origination costs associated with mortgage loans are recognized as incurred. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers.
Mortgage loans are sold with limited recourse provisions, which can result in repurchases of loans previously sold to investors or payments to reimburse investors for loan losses. Based on historical experience, discussions with our mortgage purchasers, analysis of the volume of mortgages we originated and the current housing and credit conditions, we estimate and record a loss reserve for mortgage loans held in our portfolio and mortgage loans held for sale, as well as known and projected mortgage loan repurchase requests on loans previously sold. These have historically not been significant to our financial statements.
Mortgage revenue also includes revenue generated by Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform, for which we recognize revenue on a straight-line basis during the contractual period over which the services are delivered. For our Long Form and Custom Quote cost per lead mortgage marketing products, generally, participating qualified mortgage professionals make a prepayment to gain access to consumers interested in connecting with mortgage professionals. In Zillow Group’s Long Form platform, consumers answer a seriesprovided.
There were no customers that generated 10% or more of our total revenue in the years ended December 31,
2017, 20162019, 2018 or
2015.2017.
Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries,
and benefits,
bonuses and share-based compensation expense,
and bonuses, as well as
credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships, depreciation expense and costs associated with
the operation ofhosting our
data center and mobile applications and websites.
For our Homes segment, our cost of revenue also consists of the consideration paid to acquire and make certain repairs and updates to each home, including associated overhead costs, as well as inventory valuation adjustments. For our IMT and Mortgages segments, cost of revenue also includes credit card fees and ad serving costs paid to third parties. For our Mortgages segment, our cost of revenue consists of lead acquisition costs and direct costs to originate loans, including underwriting and processing costs.
Technology and Development
Technology and development expenses consist of headcount expenses, including salaries, benefits,
bonuses and share-based compensation expense
and bonuses for
salaried employees and contractorsindividuals engaged in the design, development and testing of our
products, mobile applications and websites and
equipmentthe tools and
maintenance costs.applications that support our products. Technology and development expenses also
include equipment and maintenance costs and depreciation expense. Finally, technology and development expenses include amortization costs related to capitalized website and development activities, amortization of software, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our mobile applications and websites,
and amortization of intangible assets recorded in connection with acquisitions, including developed technology and customer relationships, amongst
others, and depreciation expense.others.
Research and development costs are expensed as incurred and are recorded in technology and development expenses. For the years ended December 31,
2017, 20162019, 2018 and
2015,2017, expenses attributable to research and development for our business totaled
$343.7 million, $298.1 million and $193.0 million,
$170.1 million and $116.2 million, respectively.
We measure compensation expense for all share-based awards at fair value on the date of grant and recognize compensation expense over the service period on a straight-line basis for awards expected to vest.
We use the Black-Scholes-Merton option-pricing model to determine the fair value for option awards. In valuing our option awards, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives.
In addition, through December 31, 2016, we made assumptions about estimated forfeiture rates. Beginning on January 1, 2017, we elected toWe account for forfeitures as they occur. Risk-free interest rates are derived from U.S. Treasury securities as of the option award grant date. Expected dividend yield
is based on our historical cash dividend payments, which have been zero to date. The expected volatility for our Class A common stock and Class C capital stock is estimated using our historical volatility. The weighted-average expected life of the option awards is estimated based on our historical exercise data. Prior to January 1, 2017, forfeiture rates were estimated using historical actual forfeiture trends as well as our judgment of future forfeitures. These rates were evaluated at least quarterly and any change in share-based compensation expense was recognized in the period of the change. We considered many factors when estimating expected forfeitures, including employee class and historical experience.
For issuances of restricted stock units and restricted units, we determine the fair value of the award based on the market value of our Class A common stock or Class C capital stock, as applicable, at the date of grant.
Advertising costs are expensed as incurred. For the years ended December 31,
2017, 20162019, 2018 and
2015,2017, expenses attributable to advertising totaled
$156.5$185.2 million,
$120.2$193.5 million and
$103.4$166.5 million, respectively. Advertising costs are recorded in sales and marketing expenses.
We use the asset and liability approach for accounting and reporting income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance against deferred tax assets would be established if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets are not expected to be realized.
We establish reserves fortax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate. To the extent that the final tax outcome of these matters is different than the
amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. Interest and penalties related to unrecognized tax benefits are recorded as income tax expense.
On December 22, 2017,
Recently Adopted Accounting Standards
In February 2018, the
U.S. government enacted comprehensiveFinancial Accounting Standards Board (“FASB”) issued guidance on income tax
legislation underaccounting related to the Tax Cuts and Jobs Act (the “Tax Act”).
The Tax Act makes broad and complex changesThis guidance permits a reclassification from accumulated other comprehensive income (loss) to accumulated deficit for the adjustment of deferred taxes due to the
U.S. tax code, including but not limited to: (1) reducingreduction of the
U.S. federalhistorical corporate
income tax rate
from 35 percent to
21 percent; (2) requiring companies to pay aone-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the
newly enacted corporate
alternative minimum tax (“AMT”) and how AMT credits are utilized; and (5) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Shortly after enactment, implementation guidance was released by the Securities and Exchange Commission that requires a company to reflect the income tax
effects of those aspects ofrate under the Tax
Act for which the accounting under the accounting rules is complete. To the extent that a company’s accounting forAct. It also requires certain
income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, it should record a provisional estimate in the financial statements. Further, the implementation guidance also provides for a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting pursuant to the accounting rules.Recently Adopted Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an
entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. Thisdisclosures regarding these reclassifications. The guidance is effective for interim and annual goodwill impairment tests in fiscal yearsreporting periods beginning after December 15, 2019,2018, and early adoption is permitted. This guidance must be applied either on a prospective basis.basis in the period of adoption or retrospectively to each period in which the effect of the change in the corporate income tax rate is recognized. We adopted this guidance for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017.2019. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance requires a retrospective transition method to each period presented. We adopted this guidance in the interim period ending on September 30, 2016. The adoption of this guidance did not have any impact on our statements of cash flows. In connection with the December 2016 partial repurchase of the 2020 Notes (see Note 11), payments related to the debt extinguishment costs have been classified as a cash outflow for financing activities.
In March 2016, the FASB issued guidance on several aspects of the accounting for share-based payment transactions, including the income tax consequences, impact of forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. We adopted this guidance on January 1, 2017 and elected to account for forfeitures as they occur using the modified retrospective approach through a cumulative-effect adjustment of approximately $0.8 million to beginning accumulated deficit. We also recognized our previously unrecognized excess tax benefits related to share-based payment awards using the modified retrospective approach, which resulted in no net impact to beginning accumulated deficit. The previously unrecognized excess tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance. Without the valuation allowance, our deferred tax asset would have increased by $126.0 million. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
Recently Issued Accounting Standards Not Yet Adopted
In March 2017, the FASB issued guidance related to the premium amortization on purchased callable debt securities. This guidance shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. This guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We
expect to adoptadopted this guidance on January 1, 2019.
We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.In December 2016, the FASB issued guidance to narrow the definition of a business. This guidance assists entities with evaluating when a set of transferred assets and activities is a business. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. This guidance must be applied prospectively to transactions occurring within the period of adoption. We adopted this guidance on January 1, 2018. The adoption of this guidance isdid not expected to have anya material impact on our financial position, results of operations or cash flows.
In June 2016, the FASB issued guidance on the measurement of credit losses on financial instruments. This guidance requires the use of an expected loss impairment model for instruments measured at amortized cost. Foravailable-for-sale debt securities, an entity is required to recognize credit losses through an allowance for credit losses rather than as a write-down. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. The adoption of this guidance requires a cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the guidance is effective. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.
In February 2016, the FASB issued guidance on leases. This guidance requires the recognition of a
right-of-use right of use asset and lease liability on the balance sheet for all leases. This guidance also requires more detailed disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for interim and annual reporting periods beginning after December 15,
2018. In July 2018,
the FASB issued certain targeted improvements to the accounting and
should be applied through a modified retrospective transition approachdisclosure requirements for leases,
existingincluding an additional optional transition method that allows entities to initially apply the new standard at
or entered into after, the
beginningadoption date and recognize a cumulative-effect adjustment to the opening balance of
the earliest comparative period presentedretained earnings in the
financial statements,period of adoption without restating prior periods. When adopting the lease guidance, an entity may elect a practical expedient package, under which it need not reassess (a) whether any expired or existing contracts are or contain leases; (b) the lease classification for any expired or existing leases; and
early adoption is permitted.(c) initial direct costs for any existing leases. These three practical expedients must be elected as a package and must be consistently applied to all existing leases at the date of adoption. We
expect to adopt thisadopted the new guidance
on leases on January 1,
2019. We anticipate2019 using the optional transition method and elected to adopt the practical expedient package. Under this
guidance willapproach, we did not restate the prior financial statements presented. Based on our lease portfolio as of December 31, 2018, we recorded on our consolidated balance sheet right of use assets of $106.5 million as well as operating lease liabilities of $129.0 million, and we removed the existing deferred rent balance of $22.5 million. The adoption of the standard did not have a material impact on our
financial position, primarily due to our office space operating leases, as we will be required to recognize lease assets and lease liabilities on our consolidated
balance sheet. We continue to assess the potential impacts of this guidance, including the impact the adoption of this guidance will have on our resultsstatements of operations and cash flows.
Recently Issued Accounting Standards Not Yet Adopted
In January 2016,August 2018, the FASB issued guidance onrelated to a customer’s accounting for implementation costs incurred in hosting arrangements. The guidance conforms the recognitionrequirements for capitalizing implementation costs incurred in cloud computing arrangements that are service contracts with the accounting guidance that provides for the capitalization of costs incurred to develop or obtain internal-use software. Under the guidance, implementation costs that are capitalized should be characterized in financial statements in the same manner as other service costs and measurement of financial instruments. This guidance generally requires equity investments, except those accounted for underassets related to service costs and amortized over the equity method of accounting or those that result in consolidationterm of the investee, to be measured at fair value with changes in fair value recognized in net income. This guidance also requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements.hosting arrangement. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017,2019, and early adoption is permitted. Entities are permitted and the guidance must be applied prospectively to equity investments that exist as of the adoption date.apply either a retrospective or prospective transition approach to adopt this guidance. We adopted this guidance on January 1, 2018. The2020 using the prospective transition approach under which we apply the guidance to all eligible costs incurred subsequent to adoption. Under this new guidance, we record the implementation costs incurred in cloud computing arrangements that are service contracts within prepaid expenses and other current assets or other long-term assets in our consolidated balance sheets, depending on the length of the underlying cloud computing contract. We amortize these costs on a straight-line basis over the term of the hosting arrangement unless another systematic and rational basis is more representative of the pattern in which we expect to benefit from access to the hosted software. We do not expect the adoption of this guidance is not expected to have anya material impact on our financial position, results of operations or cash flows, as we expect to measure our equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investmentflows.
In May 2014,August 2018, the FASB issued newguidance related to disclosure requirements for fair value measurements. This guidance removes, modifies and adds disclosures related to certain assets and liabilities measured at fair value. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim and annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. We adopted this guidance on revenue from contracts with customers. TheJanuary 1, 2020. We have not historically recorded material amounts of Level 3 assets and liabilities or material transfers of assets or liabilities between levels within the fair value hierarchy and therefore do not anticipate the adoption of this guidance states thatto have any impact on our financial statement disclosures.
In June 2016, and subsequently amended in April 2019, May 2019 and November 2019, the FASB issued guidance on the measurement of credit losses on financial assets. This guidance will require an entity
shouldto measure and recognize
revenueexpected credit losses for certain financial instruments and financial assets, including trade receivables. This guidance requires an entity to
depict the transfer of promised goods or services to customers inrecognize an
amountallowance that reflects the
considerationentity’s current estimate of credit losses expected to
be incurred over the life of the financial instrument on initial recognition and at each reporting period, whereas current guidance employs an incurred loss methodology. This guidance is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. The adoption of this guidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the
entity expects to be entitled in exchange for those goods or services. It also states that an entity should recognize as an asset the incremental costs of obtaining a contract that the entity expects to recover and amortize the costs consistent with the transfer to the customer of the good or services to which the asset relates. The guidance
requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.is adopted. We
expect to adoptadopted this guidance
effectiveon January 1,
2018 using the modified retrospective transition approach applying this guidance to all contracts at the date of initial application, which is expected to result in an adjustment to accumulated deficit for the cumulative effect of applying the guidance.2020. We have substantially completed our
assessmentevaluation of the
impactsnecessary changes to our accounting policies, processes and systems as a result of
the new guidance on our financial statements. We do not expect a material adjustment to accumulated deficit from the adoption of the guidance
related to revenue recognition. However, we continue to assessand determined that the
standard will primarily impact
the new guidance may have in future periods related toour trade accounts receivable and certain
agreements. We have also substantially completed our assessment of the impacts of the new guidance on incremental costs of obtaining a contract with a customer andavailable-for-sale investments. Upon adoption, we expect to record
ana cumulative-effect adjustment to
decrease accumulated deficit as of January 1,
20182020 to reflect estimated credit losses for
approximately $40 million to $45 million related to the accounting for the cost of sales commissions, primarily related to sales commissions for our Premier Agent and Premier Broker advertising products. Historically, we expensed these sales commission costs as incurred, but under the new guidance, the cost of certain sales commissions will be recorded as an asset and recognized as an operating expense over the periodtrade receivables that
weare not currently aged. We do not expect
to recover the costs. We are implementing key control activities related to the new guidance, particularly related to evaluating the impact of the standard on products with more than one performance obligation, products with variable consideration, and the determination of the amortization period for contract costs. We have concluded that upon adoption of the new guidance, we will not need to implementnew information technology systems. We continue to assess the impact the adoption of this guidance willto have a material impact on our disclosures.
financial position, results of operations or cash flows. Note 3. Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.
•Level 3—Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.
We applied the following methods and assumptions in estimating our fair value measurements:
Cash equivalents—Cash equivalents are comprised of highly liquid investments, including money market funds, corporate notes and bonds, commercial paper, U.S. government agency securities and certificates of deposit, with original maturities of three months or less. The fair value measurement of money market funds is based on quoted market prices in active markets. The fair value measurement of corporate notes and bonds, commercial paper, U.S. government agency securities, treasury bills and certificates of deposit is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Short-term investments—Our investments consist of fixed income securities, which include U.S. and foreign government agency securities, corporate notes and bonds, commercial paper, municipal securities and certificates of deposit. — The fair value measurement of these assetsour short-term investments is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Restricted cash — Restricted cash consists of cash received from the resale of homes through Zillow Offers which may be used to repay amounts borrowed on our credit facilities (see Note 15) and amounts held in escrow related to funding home purchases in our mortgage origination business. The carrying value of restricted cash approximates fair value due to the short period of time amounts borrowed on the revolving credit facilities are outstanding.
Mortgage loans held for sale — The fair value of mortgage loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics.
Interest rate lock commitments — The fair value of IRLCs is calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics. Expired commitments are excluded from the fair value measurement. We generally only issue IRLCs for products that meet specific purchaser guidelines. Since not all IRLCs will become closed loans, we adjust our fair value measurements for the estimated amount of IRLCs that will not close.
Forward contracts — The fair value of mandatory loan sales commitments and derivative instruments such as forward sales of mortgage-backed securities that are utilized as economic hedging instruments are calculated by reference to quoted prices for similar assets.
The following tables present the balances of assets
and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):
| | | | | | | | | | | | |
| | | December 31, 2017 | |
| | | Total | | | Level 1 | | | Level 2 | |
Cash equivalents: | | | | | | | | | | | | |
Money market funds | | $ | 233,508 | | | $ | 233,508 | | | $ | — | |
Corporate notes and bonds | | | 6,199 | | | | — | | | | 6,199 | |
Commercial paper | | | 3,987 | | | | — | | | | 3,987 | |
U.S. government agency securities | | | 1,748 | | | | — | | | | 1,748 | |
Certificates of deposit | | | 249 | | | | — | | | | 249 | |
Short-term investments: | | | | | | | | | | | | |
U.S. government agency securities | | | 298,758 | | | | — | | | | 298,758 | |
Corporate notes and bonds | | | 44,607 | | | | — | | | | 44,607 | |
Commercial paper | | | 39,325 | | | | — | | | | 39,325 | |
Municipal securities | | | 11,459 | | | | — | | | | 11,459 | |
Certificates of deposit | | | 10,297 | | | | — | | | | 10,297 | |
Foreign government securities | | | 5,998 | | | | — | | | | 5,998 | |
| | | | | | | | | | | | |
Total | | $ | 656,135 | | | $ | 233,508 | | | $ | 422,627 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, 2016 | |
| | | Total | | | Level 1 | | | Level 2 | |
Cash equivalents: | | | | | | | | | | | | |
Money market funds | | $ | 166,527 | | | $ | 166,527 | | | $ | — | |
Certificates of deposit | | | 460 | | | | — | | | | 460 | |
Short-term investments: | | | | | | | | | | | | |
U.S. government agency securities | | | 162,312 | | | | — | | | | 162,312 | |
Corporate notes and bonds | | | 61,483 | | | | — | | | | 61,483 | |
Commercial paper | | | 14,952 | | | | — | | | | 14,952 | |
Municipal securities | | | 11,912 | | | | — | | | | 11,912 | |
Certificates of deposit | | | 7,279 | | | | — | | | | 7,279 | |
Foreign government securities | | | 5,985 | | | | — | | | | 5,985 | |
| | | | | | | | | | | | |
Total | | $ | 430,910 | | | $ | 166,527 | | | $ | 264,383 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | |
| Total | | Level 1 | | Level 2 |
| Cash equivalents: | | | | | |
| Money market funds | $ | 872,431 | | | $ | 872,431 | | | $ | — | |
| U.S. government agency securities | 35,009 | | | — | | | 35,009 | |
| Commercial paper | 31,113 | | | — | | | 31,113 | |
| Treasury bills | 6,441 | | | — | | | 6,441 | |
| Corporate notes and bonds | 1,065 | | | — | | | 1,065 | |
| Certificates of deposit | 249 | | | — | | | 249 | |
| Short-term investments: | | | | | |
| U.S. government agency securities | 862,154 | | | — | | | 862,154 | |
| Corporate notes and bonds | 159,431 | | | — | | | 159,431 | |
| Commercial paper | 150,267 | | | — | | | 150,267 | |
| Treasury bills | 80,003 | | | — | | | 80,003 | |
| Municipal securities | 27,889 | | | — | | | 27,889 | |
| Certificates of deposit | 1,245 | | | — | | | 1,245 | |
| Mortgage origination-related: | | | | | | | | |
| Mortgage loans held for sale | 36,507 | | | — | | | 36,507 | |
| IRLCs | 937 | | | — | | | 937 | |
| Forward contracts - other current assets | 7 | | | — | | | 7 | |
| Forward contracts - other current liabilities | (60) | | | — | | | (60) | |
| Total | $ | 2,264,688 | | | $ | 872,431 | | | $ | 1,392,257 | |
| | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | | |
| | Total | | Level 1 | | Level 2 |
| Cash equivalents: | | | | | |
| Money market funds | $ | 541,575 | | | $ | 541,575 | | | $ | — | |
| Commercial paper | 3,999 | | | — | | | 3,999 | |
| Short-term investments: | | | | | |
| U.S. government agency securities | 646,496 | | | — | | | 646,496 | |
| Corporate notes and bonds | 112,933 | | | — | | | 112,933 | |
| Commercial paper | 85,506 | | | — | | | 85,506 | |
| Municipal securities | 39,306 | | | — | | | 39,306 | |
| Foreign government securities | 14,915 | | | — | | | 14,915 | |
| Certificates of deposit | 4,711 | | | — | | | 4,711 | |
| Mortgage origination-related: | | | | | |
| Mortgage loans held for sale | 35,409 | | | — | | | 35,409 | |
| IRLCs | 847 | | | — | | | 847 | |
| Forward contracts - other current liabilities | (125) | | | — | | | (125) | |
| Total | $ | 1,485,572 | | | $ | 541,575 | | | $ | 943,997 | |
At December 31, 2019, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $34.3 million and $64.7 million for our IRLCs and forward contracts, respectively. At December 31, 2018, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $26.7 million and $28.8 million for our IRLCs and forward contracts, respectively. We do not have the right to offset our forward contract derivative positions.
See Note
1115 for the carrying amount and estimated fair value of the Company’s
Convertible Senior Notes due in 2021 and Trulia’s Convertible Senior Notes due in 2020.convertible senior notes.
We did
not0t have any Level 3 assets as of December 31,
20172019 or
2016.2018. There were
no0 material liabilities measured at fair value as of December 31,
20172019 or
2016.2018.
Note 4. Cash and Cash Equivalents,
and Short-term Investments
and Restricted Cash
The following tables present the amortized cost, gross unrealized gains and losses and estimated fair market value of our cash and cash equivalents,
available-for-sale investments and
short-term investmentsrestricted cash as of the dates presented (in thousands):
| | | | | | | | | | | | | | | | |
| | | December 31, 2017 | |
| | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated
Fair
Market
Value | |
Cash | | $ | 106,404 | | | $ | — | | | $ | — | | | $ | 106,404 | |
Cash equivalents: | | | | | | | | | | | | | | | | |
Money market funds | | | 233,508 | | | | — | | | | — | | | | 233,508 | |
Corporate notes and bonds | | | 6,200 | | | | — | | | | (1 | ) | | | 6,199 | |
Commercial paper | | | 3,987 | | | | — | | | | — | | | | 3,987 | |
U.S. government agency securities | | | 1,748 | | | | — | | | | — | | | | 1,748 | |
Certificates of deposit | | | 249 | | | | — | | | | — | | | | 249 | |
Short-term investments: | | | | | | | | | | | | | | | | |
U.S. government agency securities | | | 299,814 | | | | — | | | | (1,056 | ) | | | 298,758 | |
Corporate notes and bonds | | | 44,661 | | | | 1 | | | | (55 | ) | | | 44,607 | |
Commercial paper | | | 39,325 | | | | — | | | | — | | | | 39,325 | |
Municipal securities | | | 11,494 | | | | — | | | | (35 | ) | | | 11,459 | |
Certificates of deposit | | | 10,296 | | | | 2 | | | | (1 | ) | | | 10,297 | |
Foreign government securities | | | 6,000 | | | | — | | | | (2 | ) | | | 5,998 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 763,686 | | | $ | 3 | | | $ | (1,150 | ) | | $ | 762,539 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | December 31, 2016 | |
| | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated
Fair
Market
Value | |
Cash | | $ | 76,605 | | | $ | — | | | $ | — | | | $ | 76,605 | |
Cash equivalents: | | | | | | | | | | | | | | | | |
Money market funds | | | 166,527 | | | | — | | | | — | | | | 166,527 | |
Certificates of deposit | | | 460 | | | | — | | | | — | | | | 460 | |
Short-term investments: | | | | | | | | | | | | | | | | |
U.S. government agency securities | | | 162,438 | | | | 31 | | | | (157 | ) | | | 162,312 | |
Corporate notes and bonds | | | 61,530 | | | | 3 | | | | (50 | ) | | | 61,483 | |
Commercial paper | | | 14,952 | | | | — | | | | — | | | | 14,952 | |
Municipal securities | | | 11,925 | | | | — | | | | (13 | ) | | | 11,912 | |
Certificates of deposit | | | 7,279 | | | | — | | | | — | | | | 7,279 | |
Foreign government securities | | | 5,995 | | | | — | | | | (10 | ) | | | 5,985 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 507,711 | | | $ | 34 | | | $ | (230 | ) | | $ | 507,515 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Market
Value |
| Cash | $ | 194,955 | | | $ | — | | | $ | — | | | $ | 194,955 | |
| Cash equivalents: | | | | | | | |
| Money market funds | 872,431 | | | — | | | — | | | 872,431 | |
| U.S. government agency securities | 35,011 | | | — | | | (2) | | | 35,009 | |
| Commercial paper | 31,113 | | | — | | | — | | | 31,113 | |
| Treasury bills | 6,441 | | | — | | | — | | | 6,441 | |
| Corporate notes and bonds | 1,065 | | | — | | | — | | | 1,065 | |
| Certificates of deposit | 249 | | | — | | | — | | | 249 | |
| Short-term investments: | | | | | | | |
| U.S. government agency securities | 861,862 | | | 365 | | | (73) | | | 862,154 | |
| Corporate notes and bonds | 159,382 | | | 91 | | | (42) | | | 159,431 | |
| Commercial paper | 150,267 | | | — | | | — | | | 150,267 | |
| Treasury bills | 79,989 | | | 14 | | | — | | | 80,003 | |
| Municipal securities | 27,836 | | | 56 | | | (3) | | | 27,889 | |
| Certificates of deposit | 1,245 | | | — | | | — | | | 1,245 | |
| Restricted cash | 89,646 | | | — | | | — | | | 89,646 | |
| Total | $ | 2,511,492 | | | $ | 526 | | | $ | (120) | | | $ | 2,511,898 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | | | | |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Market
Value |
| Cash | $ | 105,484 | | | $ | — | | | $ | — | | | $ | 105,484 | |
| Cash equivalents: | | | | | | | |
| Money market funds | 541,575 | | | — | | | — | | | 541,575 | |
| Commercial paper | 3,999 | | | — | | | — | | | 3,999 | |
| Short-term investments: | | | | | | | |
| U.S. government agency securities | 647,266 | | | 51 | | | (821) | | | 646,496 | |
| Corporate notes and bonds | 113,109 | | | 1 | | | (177) | | | 112,933 | |
| Commercial paper | 85,506 | | | — | | | — | | | 85,506 | |
| Municipal securities | 39,316 | | | 23 | | | (33) | | | 39,306 | |
| Foreign government securities | 14,929 | | | — | | | (14) | | | 14,915 | |
| Certificates of deposit | 4,711 | | | 1 | | | (1) | | | 4,711 | |
| Restricted cash | 12,385 | | | — | | | — | | | 12,385 | |
| Total | $ | 1,568,280 | | | $ | 76 | | | $ | (1,046) | | | $ | 1,567,310 | |
The following table presents
available-for-sale investments by contractual maturity date as of December 31,
20172019 (in thousands):
| | | | | | | | |
| | | Amortized
Cost | | | Estimated Fair
Market Value | |
Due in one year or less | | $ | 263,315 | | | $ | 262,855 | |
Due after one year through two years | | | 148,275 | | | | 147,589 | |
| | | | | | | | |
Total | | $ | 411,590 | | | $ | 410,444 | |
| | | | | | | | |
| | | | | | | | | | | |
| Amortized Cost | | Estimated Fair Market Value |
| Due in one year or less | $ | 1,254,763 | | | $ | 1,255,186 | |
| Due after one year through two years | 25,818 | | | 25,803 | |
| Total | $ | 1,280,581 | | | $ | 1,280,989 | |
Note 5. Accounts Receivable,
Netnet
The following table presents the detail of accounts receivable as of the dates presented (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Accounts receivable | | $ | 51,334 | | | $ | 32,258 | |
Unbilled accounts receivable | | | 8,403 | | | | 9,606 | |
Less: allowance for doubtful accounts | | | (5,341 | ) | | | (1,337 | ) |
| | | | | | | | |
Accounts receivable, net | | $ | 54,396 | | | $ | 40,527 | |
| | | | | | | | |
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| Accounts receivable | $ | 60,579 | | | $ | 61,134 | |
| Unbilled accounts receivable | 10,948 | | | 9,787 | |
| Less: allowance for doubtful accounts | (4,522) | | | (4,838) | |
| Accounts receivable, net | $ | 67,005 | | | $ | 66,083 | |
The following table presents the changes in the allowance for doubtful accounts for the periods presented (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Allowance for doubtful accounts: | | | | | | | | | | | | |
Balance, beginning of period | | $ | 1,337 | | | $ | 3,378 | | | $ | 2,811 | |
Additions charged to expense | | | 7,349 | | | | 2,681 | | | | 3,235 | |
Less: write-offs, net of recoveries and other adjustments | | | (3,345 | ) | | | (4,722 | ) | | | (2,668 | ) |
| | | | | | | | | | | | |
Balance, end of period | | $ | 5,341 | | | $ | 1,337 | | | $ | 3,378 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Allowance for doubtful accounts: | | | | | |
| Balance, beginning of period | $ | 4,838 | | | $ | 5,341 | | | $ | 1,337 | |
| Additions charged to expense | 2,772 | | | 869 | | | 7,349 | |
| Less: write-offs, net of recoveries and other adjustments | (3,088) | | | (1,372) | | | (3,345) | |
| Balance, end of period | $ | 4,522 | | | $ | 4,838 | | | $ | 5,341 | |
Note 6. Inventory
The following table presents the components of inventory, net of applicable lower of cost or net realizable value adjustments, as of the dates presented (in thousands):
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| Work-in-process | $ | 152,171 | | | $ | 45,943 | |
| Finished goods | 684,456 | | | 116,886 | |
| Inventory | $ | 836,627 | | | $ | 162,829 | |
Note 7. Contract Cost Assets
As of December 31, 2019 and December 31, 2018, we had $45.2 million and $45.8 million, respectively, of contract cost assets. Write-offs of contract cost assets that we determined were not recoverable during the years ended December 31, 2019 and 2018 were not material. We recorded amortization expense related to contract cost assets of $35.3 million and $36.0 million during the years ended December 31, 2019 and 2018, respectively.
Note
6.8. Property and Equipment,
Netnet
The following table presents the detail of property and equipment as of the dates presented (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Website development costs | | $ | 130,072 | | | $ | 102,130 | |
Computer equipment | | | 30,071 | | | | 28,175 | |
Leasehold improvements | | | 47,321 | | | | 37,923 | |
Construction-in-progress | | | 28,150 | | | | 19,470 | |
Office equipment, furniture and fixtures | | | 22,887 | | | | 19,254 | |
| | | | | | | | |
Property and equipment | | | 258,501 | | | | 206,952 | |
Less: accumulated amortization and depreciation | | | (146,230 | ) | | | (108,664 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 112,271 | | | $ | 98,288 | |
| | | | | | | | |
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| Website development costs | $ | 149,648 | | | $ | 149,891 | |
| Leasehold improvements | 81,981 | | | 65,012 | |
| Construction-in-progress | 45,337 | | | 29,037 | |
| Office equipment, furniture and fixtures | 36,582 | | | 39,510 | |
| Computer equipment | 31,942 | | | 22,477 | |
| Property and equipment | 345,490 | | | 305,927 | |
| Less: accumulated amortization and depreciation | (175,001) | | | (170,755) | |
| Property and equipment, net | $ | 170,489 | | | $ | 135,172 | |
We recorded depreciation expense related to property and equipment (other than website development costs) of
$15.6$24.9 million,
$13.5$19.5 million and
$12.2$15.6 million, respectively, during the years ended December 31,
2017, 20162019, 2018 and
2015.2017.
We capitalized
$49.9$42.3 million,
$49.5$34.1 million and
$46.1$49.9 million, respectively, in website development costs during the years ended December 31,
2017, 20162019, 2018 and
2015.2017. Amortization expense for website development costs included in technology and development expenses was
$40.0$17.0 million,
$40.0$28.6 million and
$23.9$40.0 million, respectively, for the years ended December 31,
2017, 20162019, 2018 and
2015.Construction-in-progress primarily consists of website development costs that are capitalizable, but for which the associated applications had not been placed in service.
2017.Note
7.9. Acquisitions and Equity Investments
Acquisition of
New Home FeedMortgage Lenders of America
On September 6, 2017,October 31, 2018, Zillow Group’s wholly owned subsidiary, ZGM Holdco, Inc., acquired New Home Feed, Inc. (formerly known as Graphic Language, Inc.the outstanding equity of Mortgage Lenders of America, L.L.C. (“MLOA”), a California corporation which operates the New Home Feed business, pursuant to an Agreement and Plan of Mergernational mortgage lender headquartered in Overland Park, Kansas for an immaterial amount. New Home Feed is a listing management technology that allows builders to input, manage and syndicate their listings across Zillow Group and partner sites. approximately $66.7 million in cash.
Our acquisition of
New Home Feed has beenMLOA was accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values as of
September 6, 2017. We acquired goodwill of $3.6 million and an identifiable intangible asset of $1.9 million.Acquisition-related costs incurred related to the acquisition of New Home Feed, which primarily included legal and accounting fees and other external costs directly related to the acquisition, were expensed as incurred and were not material.
The results of operations related to the acquisition of New Home Feed have been included in our consolidated financial statements since the date of acquisition, and are not significant. Pro forma financial information for the acquisition accounted for as a business combination has not been presented, as the effects were not material to our consolidated financial statements.
Acquisition of Hamptons Real Estate Online
On January 11, 2017, Zillow, Inc. acquired substantially all of the operating assets of RealNet Solutions, Inc., a New York corporation, RealNetDB, LLC, a New York limited liability company, Hamptons Real Estate Online, Inc., a New York corporation, and HREO.com, LLC, a New York limited liability company (collectively, “HREO”), pursuant to an Asset Purchase Agreement entered into by Zillow, Inc., HREO, each of the equity owners of HREO, and an individual acting as representative of the HREO equity holders. HREO is a Hamptons-focused real estate portal which provides buyers and renters with a specialized search experience and access to the area’s most comprehensivefor-sale,for-rent, and vacant land listings. HREO’s listing entry and distribution software, RealNet and Open RealNet Exchange, provides real estate professionals with tools to manage and market their listings. Our acquisition of HREO has been accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values as of January 11, 2017. We acquired goodwill of $4.0 million, identifiable intangible assets of $2.1 million and net liabilities of approximately $0.1 million.
Acquisition-related costs incurred related to the acquisition of HREO, which primarily included legal and accounting fees and other external costs directly related to the acquisition, were expensed as incurred and were not material.
The results of operations related to the acquisition of HREO have been included in our consolidated financial statements since the date of acquisition, and are not significant. Pro forma financial information for the acquisition accounted for as a business combination has not been presented, as the effects were not material to our consolidated financial statements.
Acquisition of Bridge Interactive Group
In July 2016, Zillow, Inc., Bridge Interactive Group, LLC, a Georgia limited liability company (“Bridge Interactive”), each of the members of Bridge Interactive, and an individual acting as the seller representative, entered into a Securities Purchase Agreement pursuant to which Zillow, Inc. acquired all of the outstanding ownership interests of Bridge Interactive on August 1, 2016. Bridge Interactive is a creator of broker and multiple listing service (MLS) back-office software. Our acquisition of Bridge Interactive has been accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values as of August 1, 2016.
Acquisition-related costs incurred, which primarily included legal and accounting fees and other external costs directly related to the acquisition, were expensed as incurred and were not material.
The results of operations related to the acquisition of Bridge Interactive have been included in our consolidated financial statements since the date of acquisition, and are not significant. Pro forma financial information for the acquisition accounted for as a business combination has not been presented, as the effects were not material to our consolidated financial statements.
Acquisition of Naked Apartments
In February 2016, Zillow, Inc., Nectarine Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Zillow, Inc. (“Merger Sub”), Naked Apartments, Inc., a Delaware corporation (“Naked Apartments”), and an individual acting as the stockholder representative, entered into an Agreement and Plan of Merger (the “Naked Apartments Merger Agreement”), pursuant to which Zillow, Inc. acquired Naked Apartments on February 22, 2016 for approximately $13.2 million in cash. Under the terms and subject to the conditions of the Naked Apartments Merger Agreement, Merger Sub merged with and into Naked Apartments, with Naked Apartments remaining as the surviving company and a wholly owned subsidiary of Zillow, Inc. Naked Apartments is New York City’s largest rentals-only platform.
Our acquisition of Naked Apartments has been accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values as of February 22, 2016.October 31, 2018. Goodwill, which represents the expected synergies from combining the acquired assets and the operations of the acquirer, as well as intangible assets that do not qualify for separate recognition, is measured as of the acquisition date as the excess of consideration transferred, which is also measured at fair value, and the net of the fair values of the assets acquired and the liabilities assumed as of the acquisition date.
The goodwill recognized in conjunction with this business combination was initially allocated to our Internet, Media & Technology (“IMT”) segment. However, beginning January 1, 2019, we have 3 operating and reportable segments, which have been identified
based on the way in which our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. In conjunction with this segment change, we reallocated goodwill to each segment based on the relative fair value of the segments impacted by the change. Refer to Note 10 for the allocation of goodwill to each of our reportable segments.
The total
purchase price has beenconsideration paid upon acquisition was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. Based upon the fair values determined by us, in which we considered or relied in part upon a valuation report of a third-party expert, the total purchase price was allocated as follows (in thousands):
| | | | |
Current assets | | $ | 371 | |
Identifiable intangible assets | | | 3,700 | |
Goodwill | | | 10,610 | |
Current liabilities | | | (101 | ) |
Deferred tax liabilities | | | (1,416 | ) |
| | | | |
Total purchase price | | $ | 13,164 | |
| | | | |
| | | | | |
| Cash and cash equivalents | $ | 10,796 | |
| Restricted cash | 753 | |
| Mortgage loans available for sale | 34,248 | |
| Property, plant and equipment | 1,315 | |
| Intangible assets | 2,600 | |
| Goodwill | 53,831 | |
| Other acquired assets | 3,079 | |
| Accounts payable | (1,953) | |
| Accrued expenses | (2,591) | |
| Warehouse lines of credit | (32,536) | |
| Other assumed liabilities | (2,855) | |
| Total purchase price | $ | 66,687 | |
Acquisition-related costs incurred, which primarily included legal,
and accounting,
feesregulatory and other external costs directly related to the acquisition,
are included within Acquisition-related costs within our consolidated statements of operations and were expensed as incurred and were not material.
The results of operations related to the acquisition of
Naked ApartmentsMLOA have been included in our consolidated financial statements since the date of
acquisition, and are not significant. Proacquisition. On an unaudited pro forma
financial informationbasis, revenue would have been approximately 3.0% higher for the
year ended December 31, 2018 and 5.0% higher for the year-ended December 31, 2017 if the acquisition
accounted forwould have been consummated as
a business combinationof January 1, 2017. Unaudited pro forma earnings information has not been presented as the effects were not material to our consolidated financial statements.
Acquisition of Trulia
Effective February 17, 2015, pursuant to the Merger Agreement dated as of July 28, 2014 by and among Zillow, Zillow Group and Trulia, following the consummation of the transactions contemplated by the Merger Agreement, each of Zillow and Trulia became wholly owned subsidiaries of Zillow Group. With the addition of
Trulia, we expanded our audience and added another consumer brand that offers buyers, sellers, homeowners and renters access to information about homes and real estate for free, and provides advertising and software solutions that help real estate professionals grow their business.
At the effective time of the merger, each share of Zillow Class A common stock was converted into the right to receive one share of fully paid and nonassessable Zillow Group Class A common stock, and each share of Zillow Class B common stock was converted into the right to receive one share of fully paid and nonassessable Zillow Group Class B common stock. Generally, each Zillow stock option and restricted stock unit outstanding (whether or not vested or exercisable) as of the effective time of the merger was assumed by Zillow Group and converted into a corresponding equity award to purchase or acquire shares of Zillow Group Class A common stock, subject to the same terms, conditions and restrictions as the original option or award. Any unvested shares of Zillow Class A common stock subject to a repurchase option, risk of forfeiture or other condition as of the effective time of the merger were exchanged for shares of Zillow Group Class A common stock that were also unvested and subject to the same repurchase option, risk of forfeiture or other condition. Each Zillow restricted unit outstanding as of the effective time of the merger was assumed by Zillow Group and converted into the right to receive Zillow Group Class A common stock, subject to the same terms, conditions and restrictions as the original restricted unit.
At the effective time of the merger, each share of Trulia common stock was converted into the right to receive 0.444 of a share of fully paid and nonassessable Zillow Group Class A common stock. Generally, each Trulia stock option, restricted stock unit, and stock appreciation right outstanding (whether or not vested or exercisable) as of the effective time of the merger was assumed by Zillow Group and converted into a corresponding equity award to purchase, acquire shares of, or participate in the appreciation in the price of Zillow Group Class A common stock, subject to the same terms, conditions and restrictions as the original option or award, subject to specified adjustments to reflect the effect of the Trulia exchange ratio. Each outstanding unvested Trulia stock option and restricted stock unit held by a member of the Trulia board of directors immediately prior to the effective time of the merger who was not an employee of Trulia or any subsidiary of Trulia became fully vested immediately prior to the effective time of the merger in accordance with the terms of the applicable award agreements.
Our acquisition of Trulia has been accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values as of February 17, 2015. Goodwill, which represents the expected synergies from combining the acquired assets and the operations of the acquirer, as well as intangible assets that do not qualify for separate recognition, is measured as of the acquisition date as the excess of consideration transferred, which is also measured at fair value, and the net of the fair values of the assets acquired and the liabilities assumed as of the acquisition date.
In all cases in which Zillow Group’s closing stock price is a determining factor in arriving at the amount of merger consideration, the stock price assumed is the closing price of Zillow Class A common stock on Nasdaq on February 17, 2015 ($109.14 per share, unadjusted for the August 2015 stock split effected in the form of a dividend). The purchase price to effect the acquisition of Trulia of approximately $2.0 billion is summarized in the following table (in thousands):
| | | | |
Value of Class A common stock issued | | $ | 1,883,728 | |
Substituted stock options and stock appreciation rights assumed by Zillow Group attributable topre-combination service | | | 54,853 | |
Substituted restricted stock units assumed by Zillow Group attributable topre-combination service | | | 27,798 | |
Cash paid in lieu of fractional outstanding shares | | | 41 | |
| | | | |
Total purchase price | | $ | 1,966,420 | |
| | | | |
A total of 17,259,704 shares of Zillow Group Class A common stock were issued in connection with the acquisition of Trulia. Trulia stockholders did not receive any fractional shares of Zillow Group Class A common stock in connection with the acquisition. Instead of receiving any fractional shares, each holder of Trulia common stock was paid an amount in cash (without interest) equal to such fractional amount multiplied by the last reported sale price of Zillow Class A common stock on Nasdaq on the last complete trading day prior to the date of the effective time of the merger.
A portion of the purchase price has been attributed to the substitution of Trulia’s stock options, restricted stock units and stock appreciation rights outstanding as of February 17, 2015, for corresponding stock options, restricted stock units and stock appreciation rights to purchase, vest in or participate in the appreciation in the price of shares of Zillow Group Class A common stock, all at an exchange ratio of 0.444. The fair value of Trulia’s share-based awards assumed in connection with the acquisition, including stock options, restricted stock units and stock appreciation rights, which relate to post-combination service will be recorded by Zillow Group as share-based compensation expense ratably over the remaining related vesting period of the respective award. The share-based compensation expense related to stock options and stock appreciation rights assumed is estimated at the acquisition date using the Black-Scholes-Merton option-pricing model, assuming no dividends, expected volatility of 53%, a risk-free interest rate of 1.10%, and an expected life of three years. For restricted stock units assumed, Zillow Group used the market value of Zillow’s Class A common stock on the date of acquisition to determine the fair value of the award.
The total purchase price has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. Based upon the fair values determined by us, in which we considered or relied in part upon a valuation report of a third-party expert, the total purchase price was allocated as follows (in thousands):
| | | | |
Cash and cash equivalents | | $ | 173,447 | |
Accounts receivable | | | 13,093 | |
Prepaid expenses and other current assets | | | 20,833 | |
Restricted cash | | | 6,946 | |
Property and equipment | | | 30,189 | |
Other assets | | | 434 | |
Identifiable intangible assets | | | 549,000 | |
Goodwill | | | 1,736,362 | |
Accounts payable, accrued expenses and other current liabilities | | | (51,258 | ) |
Accrued compensation and benefits | | | (8,324 | ) |
Deferred revenue | | | (8,300 | ) |
Long-term debt | | | (230,000 | ) |
Debt premium recorded in additionalpaid-in capital | | | (126,386 | ) |
Deferred tax liabilities and other long-term liabilities | | | (139,616 | ) |
| | | | |
Total purchase price | | $ | 1,966,420 | |
| | | | |
The fair value of identifiable intangible assets acquired consisted of the following (in thousands):
| | | | | | | | |
| | | Estimated
Fair
Value | | | Estimated
Useful Life
(in years) | |
Trulia trade names and trademarks | | $ | 351,000 | | | | Indefinite | |
Market Leader trade names and trademarks | | | 2,000 | | | | 2 | |
Customer relationships | | | 92,000 | | | | 3-7 | |
Developed technology | | | 91,000 | | | | 3-7 | |
Advertising relationships | | | 9,000 | | | | 3 | |
MLS home data feeds | | | 4,000 | | | | 3 | |
| | | | | | | | |
Total | | $ | 549,000 | | | | | |
| | | | | | | | |
The fair value of the intangible assets acquired was determined by Zillow Group, and Zillow Group considered or relied in part upon a valuation report of a third-party expert. Zillow Group used an income approach to measure the fair value of the trade names and trademarks and the developed technology based on the relief-from-royalty method. Zillow Group used an income approach to measure the fair value of the customer relationships based on the excess earnings method, whereby the fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. Zillow Group used an income approach to measure the fair value of the advertising relationships based on a with and without analysis, whereby the fair value is estimated based on the present value of cash flows the combined business is expected to generate with and without the advertising relationships. Zillow Group used a cost approach to measure the fair value of the MLS home data feeds based on the estimated cost to replace the data feed library. These fair value measurements were based on Level 3 measurements under the fair value hierarchy.
A portion of the total purchase price was allocated to Trulia’s 2020 Notes (see Note 11). In accordance with the accounting guidance related to business combinations, the 2020 Notes are recognized at fair value as of the effective date of the acquisition. The fair value of the 2020 Notes as of the date of acquisition was approximately $356.4 million. The fair value of the 2020 Notes as of the date of acquisition was determined by Zillow Group, and Zillow Group considered or relied in part upon a valuation report of a third-party expert. The fair value of the 2020 Notes was determined through combination of the use of a binomial lattice valuation model and consideration of quoted market prices. The fair value is classified as Level 3 due to the use of significant unobservable inputs such as implied volatility of Zillow Group’s Class A common stock, discount spread and the limited trading activity for the 2020 Notes. Given the fair value of the 2020 Notes as of the date of acquisition of $356.4 million was at a substantial premium to the principal amount of $230.0 million, the premium amount of $126.4 million has been recorded as additionalpaid-in capital in the consolidated balance sheet as of the effective date of the acquisition. Accordingly, Zillow Group has recognized the liability component of the 2020 Notes at the stated par amount in the consolidated balance sheet as of the effective date of the acquisition. The conversion feature included in the 2020 Notes is not required to be bifurcated and separately accounted for as it meets the equity scope exception given the conversion feature (i) is indexed to Zillow Group’s Class A common stock and (ii) would be classified in shareholder’s equity. Further, the 2020 Notes do not permit or require Zillow Group to settle the debt in cash (in whole or in part) upon conversion.
A portion of the total purchase price was allocated to deferred tax liabilities primarily related to an indefinite-lived intangible asset generated in connection with the acquisition. Due to the recognition of a $351.0 million indefinite-lived Trulia trade name and trademark intangible asset as of the effective date of the acquisition, a deferred tax liability of $139.5 million was recognized which cannot be offset by the recognized deferred tax assets.
The results of operations related to the acquisition of Trulia have been included in our consolidated financial statements since the date of acquisition of February 17, 2015. However, disclosure of the amounts of revenue and earnings of the acquiree since the acquisition date is impracticable because discrete financial information is not available due to the rapid integration of Zillow’s and Trulia’s operations.
Unaudited Pro Forma Financial Information
The following unaudited pro forma condensed combined financial information gives effect to the acquisition of Trulia as if it were consummated on January 1, 2014 (the beginning of the comparable prior reporting period in the year of acquisition). The unaudited pro forma condensed combined financial information is presented for informational purposes only. The unaudited pro forma condensed combined financial information does not represent true historical financial information. Further, the unaudited pro forma condensed combined financial information is not intended to represent or be indicative of the results of operations that would have been reported had the acquisition occurred on January 1, 2014 and should not be taken as representative of future results of operations of the combined company.
The following table presents the unaudited pro forma condensed combined financial information for the periods presented, except for the financial information presented for the years ended December 31, 2017 and 2016 which is presented on anas-reported basis (in thousands):
| | | | | | | | | | | | |
| | | Year Ended
December 31, | |
| | | 2017 | | | 2016 | | | 2015 (1) | |
Revenue | | $ | 1,076,794 | | | $ | 846,589 | | | $ | 679,935 | |
Net loss | | $ | (94,420 | ) | | $ | (220,438 | ) | | $ | (91,055 | ) |
(1) | The pro forma net loss for the year ended December 31, 2015 includes pro forma adjustments for $49.3 million to eliminate direct and incremental acquisition-related costs reflected in the historical financial statements, $37.3 million to eliminate share-based compensation expense attributable to substituted equity awards and to record additional share-based compensation expense attributable to substituted equity awards, $35.7 million to eliminate restructuring costs associated with the acquisition of Trulia reflected in the historical financial statements and $2.4 million to record additional amortization expense for acquired intangible assets. |
In June 2017, we purchased an equity interest in a privately held corporation for approximately $10.0
million, which is accounted for as a cost method investment and classified within other assets in the consolidated balance sheet.million.
In October 2016, we purchased a 10% equity interest in a privately held variable interest entity within the real estate industry for $10.0
million, which is accounted for as a cost method investment and classified within other assets in the consolidated balance sheet. In October 2016, we also entered into an immaterial commercial agreement with this entity.million. The entity is financed through its business operations. We are not the primary beneficiary of the entity, as we do not direct the activities that most significantly impact the entity’s economic performance. Therefore, we do not consolidate the entity. Our maximum exposure to loss is $10.0 million, the carrying amount of the investment as of December 31,
2017.As there were no identified events2019.
These investments are equity securities without readily determinable fair values which we account for at cost minus any impairment, plus or
minus changes resulting from observable price changes in
circumstances that may have a significant adverse effect on the fair values of our cost methodorderly transactions for identical or similar investments
as of December 31, 2017, and it is not practicable to estimate the fair values of the
investments given the fair values of the investments are not readily determinable, an estimate of the fair values of the cost method investments was not performed.We assess our cost method investments for impairment whenever events or changes in circumstances indicate that the assets may be impaired. The factors we consider in our evaluation of potential impairment of our cost method investments, include, but are not limited to a significant deterioration in the earnings performance or business prospects of the investee, or factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operation or working capital deficiencies. No impairment was identified for our cost method investments forsame issuer. During the year ended December 31, 2017.
2018, we recognized a non-cash impairment charge of $10.0 million related to our June 2017 investment. The impairment charge is included in Impairment costs within our consolidated statements of operations. During the third quarter of 2018, in connection with our quarterly qualitative assessment of this investment for impairment indicators, we identified factors that led us to conclude that the investment was impaired and the fair value of the investment was less than the carrying value. The most significant of such factors was related to the business prospects of the investee. Accordingly, we performed an analysis to determine the fair value of the investment and concluded that our best estimate of its fair value was $0.0 million. This is considered a Level 3 measurement under the fair value hierarchy.
There has been 0 impairment or upward or downward adjustments to our October 2016 equity investment as of December 31, 2019 that would impact the carrying amount of the investment. The equity investment is classified within other assets in the consolidated balance sheets.
Beginning January 1, 2019, we have 3 operating and reportable segments, which have been identified based on the way in which our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. In conjunction with this segment change, we reallocated goodwill to each reporting unit based on the relative fair value of the reporting units impacted by the segment change. The following table presents goodwill by reportable segment as of the period presented (in thousands):
| | | | | |
| December 31, 2019 |
| Homes | $ | — | |
| IMT | 1,786,416 | |
| Mortgages | 198,491 | |
| Total | $ | 1,984,907 | |
There was no change in the total balance of goodwill fromduring 2019.
The goodwill balance as of December 31,
2016 through December 31, 2017 (in thousands): | | | | |
Balance as of December 31, 2016 | | $ | 1,923,480 | |
Goodwill recorded in connection with acquisitions | | | 7,596 | |
| | | | |
Balance as of December 31, 2017 | | $ | 1,931,076 | |
| | | | |
2018 was fully attributable to our IMT segment.
Note
9.11. Intangible Assets,
net
The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):
| | | | | | | | | | | | |
| | | December 31, 2017 | |
| | | Cost | | | Accumulated
Amortization | | | Net | |
Purchased content | | $ | 35,260 | | | $ | (20,480 | ) | | $ | 14,780 | |
Software | | | 18,957 | | | | (8,899 | ) | | | 10,058 | |
Customer relationships | | | 103,900 | | | | (46,365 | ) | | | 57,535 | |
Developed technology | | | 113,380 | | | | (56,664 | ) | | | 56,716 | |
Trade names and trademarks | | | 4,900 | | | | (3,943 | ) | | | 957 | |
Advertising relationships | | | 9,000 | | | | (8,525 | ) | | | 475 | |
Intangibles-in-progress | | | 2,190 | | | | — | | | | 2,190 | |
| | | | | | | | | | | | |
Total | | $ | 287,587 | | | $ | (144,876 | ) | | $ | 142,711 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, 2016 | |
| | | Cost | | | Accumulated
Amortization | | | Net | |
Purchased content | | $ | 35,205 | | | $ | (15,508 | ) | | $ | 19,697 | |
Software | | | 9,712 | | | | (4,773 | ) | | | 4,939 | |
Customer relationships | | | 103,200 | | | | (30,952 | ) | | | 72,248 | |
Developed technology | | | 110,080 | | | | (36,341 | ) | | | 73,739 | |
Trade names and trademarks | | | 4,900 | | | | (2,877 | ) | | | 2,023 | |
Advertising relationships | | | 9,000 | | | | (5,598 | ) | | | 3,402 | |
MLS home data feeds | | | 1,100 | | | | (684 | ) | | | 416 | |
| | | | | | | | | | | | |
Total | | $ | 273,197 | | | $ | (96,733 | ) | | $ | 176,464 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | |
| | Cost | | Accumulated
Amortization | | Net |
| Customer relationships | $ | 102,600 | | | $ | (73,770) | | | $ | 28,830 | |
| Developed technology | 107,200 | | | (81,383) | | | 25,817 | |
| Purchased content | 47,298 | | | (40,636) | | | 6,662 | |
| Intangibles-in-progress | 6,391 | | | — | | | 6,391 | |
| Software | 35,527 | | | (20,843) | | | 14,684 | |
| Lender licenses | 400 | | | (217) | | | 183 | |
| Total | $ | 299,416 | | | $ | (216,849) | | | $ | 82,567 | |
| | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | | |
| | Cost | | Accumulated
Amortization | | Net |
| Customer relationships | $ | 103,900 | | | $ | (60,733) | | | $ | 43,167 | |
| Developed technology | 111,980 | | | (72,788) | | | 39,192 | |
| Purchased content | 42,110 | | | (30,477) | | | 11,633 | |
| Software | 24,296 | | | (13,925) | | | 10,371 | |
| Intangibles-in-progress | 2,941 | | | — | | | 2,941 | |
| Lender licenses | 400 | | | (17) | | | 383 | |
| Trade names and trademarks | 4,900 | | | (4,683) | | | 217 | |
| Total | $ | 290,527 | | | $ | (182,623) | | | $ | 107,904 | |
Amortization expense recorded for intangible assets for the years ended December 31,
2019, 2018 and 2017
2016 and 2015 was
$54.3$44.9 million,
$47.0$50.8 million and
$39.3$54.3 million, respectively, and these amounts are included in technology and development expenses.
Intangibles-in-progress consists of software that is capitalizable but has not been placed in service.
Estimated future amortization expense for intangible assets, including amortization related to future commitments (see Note
16)20), as of December 31,
20172019 is as follows (in thousands):
| | | | |
2018 | | $ | 47,588 | |
2019 | | | 40,055 | |
2020 | | | 36,808 | |
2021 | | | 32,350 | |
2022 | | | 5,442 | |
| | | | |
Total future amortization expense | | $ | 162,243 | |
| | | | |
| | | | | |
| 2020 | $ | 43,986 | |
| 2021 | 36,867 | |
| 2022 | 7,231 | |
| 2023 | 587 | |
| Total future amortization expense | $ | 88,671 | |
We have an indefinite-lived intangible asset that we recorded in connection with our February 2015 acquisition of Trulia for Trulia’s trade names and trademarks that is not subject to amortization.
See Note 7 for further details related to the acquisition. The carrying value
of the of the Trulia trade names and trademarks intangible asset was
$177.0$108.0 million
and $351.0 million, respectively, as of December 31,
20172019 and
2016.2018.
During the year ended December 31, 2018, we recognized a non-cash impairment charge of $69.0 million related to our indefinite-lived Trulia trade names and trademarks intangible asset. The impairment charge is included in Impairment costs within our IMT and Mortgages segments for $65.0 million and $4.0 million, respectively. In connection with our annual budgeting process that was substantially completed during the three months ended December 31, 2018, we identified factors that led us to conclude it was more likely than not that the $177.0 million carrying value of the asset exceeded its fair value. The most significant of such factors was a shortfall in projected revenue related to the Trulia brand compared to projections at the time the intangible asset was remeasured as of October 1, 2017. Accordingly, with the assistance of a third-party valuation specialist, we performed a quantitative analysis to determine the fair value of the intangible asset and concluded that our best estimate of its fair value was $108.0 million. The valuation was prepared using an income approach based on the relief-from-royalty method and relied on inputs with unobservable market prices including the assumed revenue growth rates, royalty rate, discount rate, and estimated tax rate, and therefore is considered a Level 3 measurement under the fair value hierarchy.
During the year ended December 31, 2017, we recognized anon-cash impairment charge of $174.0 million related to our indefinite-lived Trulia trade names and trademarks intangible asset. The impairment charge is included in Impairment and restructuring costs within our consolidated statements of operations.IMT and Mortgages segments for $161.9 million and $12.1 million, respectively. In connection with our qualitative assessment of the recoverability of this asset during our annual impairment test as of October 1, 2017, we identified factors that led us to conclude it was more likely than not that the $351.0 million carrying value of the asset exceeded its fair value. The most significant of such factors was a shortfall in projected revenue related to the Trulia brand compared to projections at the time the intangible asset was initially recorded in February 2015. Accordingly, with the assistance of a third-party valuation specialist, we performed a quantitative analysis to determine the fair value of the intangible asset and concluded that our best estimate of its fair value was $177.0 million. The valuation was prepared using an income approach based on the relief-from-royalty method and relied on inputs with unobservable market prices including the assumed revenue growth rates, royalty rate, discount rate, and estimated tax rate, and therefore is considered a Level 3 measurement under the fair value hierarchy.
In connection with thisour impairment analysis,analyses in 2019, we evaluated our planned future use of the Trulia trade names and trademarks intangible asset and concluded that it remains appropriate to consider this asset to have an indefinite life.
Note
10.12. Accrued Expenses and Other Current Liabilities
The following table presents the detail of accrued expenses and other current liabilities as of the dates presented (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Accrued marketing and advertising | | $ | 17,180 | | | $ | 7,978 | |
Accrued purchased content | | | 5,984 | | | | 8,382 | |
Accrued estimated legal liabilities and legal fees | | | 9,052 | | | | 2,257 | |
Merger consideration payable to former stockholders of certain acquired entities | | | 5,904 | | | | 5,904 | |
Other accrued expenses and other current liabilities | | | 23,253 | | | | 13,906 | |
| | | | | | | | |
Total accrued expenses and other current liabilities | | $ | 61,373 | | | $ | 38,427 | |
| | | | | | | | |
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Accrued marketing and advertising | $ | 18,343 | | | $ | 18,559 | |
| Taxes payable | 6,287 | | | 1,381 | |
| Merger consideration payable to former stockholders of certain acquired entities | 6,117 | | | 5,904 | |
| Accrued interest expense | 4,501 | | | 794 | |
| Accrued estimated legal liabilities and legal fees | 3,882 | | | 7,305 | |
| Accrued purchased content | 156 | | | 4,256 | |
| Other accrued expenses and other current liabilities | 46,156 | | | 24,902 | |
| Total accrued expenses and other current liabilities | $ | 85,442 | | | $ | 63,101 | |
Note 11. 13. Deferred Revenue
The following table presents the change in deferred revenue for the periods presented (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, | | |
| 2019 | | 2018 |
| Balance as of the beginning of the period | $ | 34,080 | | | $ | 31,918 | |
| Deferral of revenue during the period | 1,049,634 | | | 982,647 | |
| Less: Revenue recognized during the period | (1,043,967) | | | (980,485) | |
| Balance as of the end of the period | $ | 39,747 | | | $ | 34,080 | |
During the year ended December 31, 2019 we recognized as revenue a total of $32.7 million pertaining to amounts that were recorded in deferred revenue as of December 31, 2018. During the year ended December 31, 2018, we recognized as revenue a total of $28.8 million pertaining to amounts that were recorded in deferred revenue as of December 31, 2017.
Note 14. Leases
Our lease portfolio is primarily composed of operating leases for our office space. We have lease agreements that include lease components (e.g., fixed rent) and non-lease components (e.g., common area maintenance), which are accounted for as a single component, as we have elected the practical expedient to group lease and non-lease components. We also elected the practical expedient to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term.
Our leases have remaining lease terms ranging from less than one year to eleven years, some of which include options to extend the lease term for up to an additional ten years. For example, our largest leases, which include our corporate headquarters in Seattle, Washington and office space in New York, New York and San Francisco, California, include options to renew the existing leases for either 1 or 2 periods of five years. When determining if a renewal option is reasonably certain of being exercised at lease commencement, we consider several factors, including but not limited to, contract-based, asset-based and entity-based factors. We reassess the term of existing leases if there is a significant event or change in circumstances within our control that affects whether we are reasonably certain to exercise an option to extend a lease. Examples of such events or changes include construction of significant leasehold improvements or other modifications or customizations to the underlying asset, relevant business decisions or subleases. In most cases, we have concluded that renewal options are not reasonably certain of being exercised, therefore, such renewals are not included in the right of use asset and lease liability.
During the year ended December 31, 2019, it became reasonably certain that in a future period we would exercise the first of 2 five year renewal options related to the office space lease for our corporate headquarters in Seattle, Washington, due to the construction of significant leasehold improvements. Therefore, the payments associated with the renewal are included in the measurement of the lease liability and right of use asset.
As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. For those leases that existed as of January 1, 2019, we used our incremental borrowing rate based on information available at that date. We apply a portfolio approach for determining the incremental borrowing rate based on the applicable lease terms and the current economic environment, and we utilize the assistance of third-party specialists to assist us in determining our yield curve.
The components of our operating lease expense were as follows for the year ended December 31, 2019 (in thousands):
| | | | | |
| Operating lease cost | $ | 35,837 | |
| Variable lease cost | 11,231 | |
| Total lease cost | $ | 47,068 | |
Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2019 was $31.8 million. Right of use assets obtained in exchange for new operating lease obligations for the year ended December 31, 2019 were $128.4 million. The weighted average remaining term for our leases as of December 31, 2019 was 8.50 years. The weighted average discount rate for our leases as of December 31, 2019 was 6.5%.
The following table presents the scheduled maturities of our operating lease liabilities by fiscal year as of December 31, 2019 (in thousands):
| | | | | |
| 2020 | $ | 38,914 | |
| 2021 | 43,073 | |
| 2022 | 40,760 | |
| 2023 | 40,991 | |
| 2024 | 36,040 | |
| All future years | 143,140 | |
| Total lease payments | 342,918 | |
| Less: Imputed interest | (104,881) | |
| Present value of lease liabilities | $ | 238,037 | |
Operating lease expense for the years ended December 31, 2018 and 2017 was $23.7 million and $21.4 million, respectively. The following table presents our future minimum payments for all operating leases as of December 31, 2018, including future minimum payments for operating leases that had not yet commenced as of December 31, 2018 totaling $112.9 million (in thousands):
| | | | | |
| 2019 | $ | 29,085 | |
| 2020 | 38,060 | |
| 2021 | 40,099 | |
| 2022 | 37,721 | |
| 2023 | 36,458 | |
| All future years | 85,462 | |
| Total future minimum lease payments | $ | 266,885 | |
Note 15. Debt
The following table presents the carrying values of Zillow Group’s debt as of the periods presented (in thousands):
| | | | | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Homes Segment | | | | |
| Credit facilities: | | | | |
| Goldman Sachs Bank USA | | $ | 39,244 | | | $ | — | |
| Citibank, N.A. | | 296,369 | | | — | |
| Credit Suisse AG, Cayman Islands | | 355,911 | | | 116,700 | |
| Total Homes Segment debt | | 691,524 | | | 116,700 | |
| Mortgages Segment | | | | |
| Repurchase agreement: | | | | | | | |
| Citibank, N.A. | | 394 | | | — | |
| Warehouse lines of credit: | | | | |
| Comerica Bank | | 30,033 | | | 18,892 | |
| People’s United Bank, N.A. | | — | | | 14,125 | |
| Total Mortgages Segment debt | | 30,427 | | | 33,017 | |
| Convertible Senior Notes | | | | |
| 1.375% convertible senior notes due 2026 | | 327,187 | | | — | |
| 0.75% convertible senior notes due 2024 | | 490,538 | | | — | |
| 1.50% convertible senior notes due 2023 | | 310,175 | | | 294,738 | |
| 2.0% convertible senior notes due 2021 | | 415,502 | | | 394,645 | |
| 2.75% convertible senior notes due 2020 | | 9,637 | | | 9,637 | |
| Total convertible senior notes | | 1,553,039 | | | 699,020 | |
| Total | | $ | 2,274,990 | | | $ | 848,737 | |
Homes Segment
To provide capital for Zillow Offers, we utilize credit facilities that are classified as current liabilities in our consolidated balance sheets. We classify these credit facilities as current liabilities as amounts drawn to purchase homes are typically repaid as homes are sold, which we expect to be within one year. The following table summarizes certain details related to our credit facilities (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | |
| Lender | | Final Maturity Date | | Maximum Borrowing Capacity | | Weighted Average Interest Rate |
| Goldman Sachs Bank USA | | April 20, 2022 | | $ | 500,000 | | | 4.41 | % |
| Citibank, N.A. | | January 31, 2022 | | 500,000 | | | 5.54 | % |
| Credit Suisse AG, Cayman Islands | | July 31, 2021 | | 500,000 | | | 5.63 | % |
| | Total | | $ | 1,500,000 | | | |
Undrawn amounts available under the credit facilities included in the table above are not committed, meaning the applicable lender is not committed to, but may in its discretion, advance loan funds in excess of the outstanding borrowings. The final maturity dates are inclusive of extensions which are subject to agreement by the respective lender. The Goldman Sachs Bank USA credit facility has an initial term of two years which may be extended for 1 additional period of six months, subject to certain conditions. The Citibank, N.A. credit facility has an initial term of two years and may be extended for up to 2 additional periods of six months each. The Credit Suisse AG, Cayman Islands Branch credit facility has an initial term of one year and then automatically renews on a monthly basis for up to 24 additional months.
Zillow Group formed certain special purpose entities (each, an “SPE”) to purchase and sell residential properties through Zillow Offers. Each SPE is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such SPE are available to satisfy the debts and other obligations of any affiliate or other entity. The credit facilities are secured by the assets and equity of one or more SPEs. These SPEs are variable interest entities and Zillow Group is the primary beneficiary as it has the power to control the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses of the SPEs or the right to receive benefits from the SPEs that could potentially be significant to the SPEs. The SPEs are consolidated within Zillow Group’s consolidated financial statements and primarily increased inventory and borrowings under credit facilities by $836.6 million and $691.5 million, respectively, as of December 31, 2019 and $162.8 million and $116.7 million, respectively, as of December 31, 2018.
Outstanding amounts drawn under each credit facility are required to be repaid on the facility maturity date or earlier if accelerated due to an event of default. Further, each SPE is required to repay any resulting shortfall if the value of the eligible properties owned by such SPE falls below a certain percentage of the principal amount outstanding under the applicable credit facility. Continued inclusion of properties in each credit facility is subject to various eligibility criteria. For example, aging criteria limit the inclusion in the borrowing base of properties owned longer than a specified number of days, and properties owned for longer than one year are ineligible.
The stated interest rate on our credit facilities is one-month LIBOR plus an applicable margin as defined in the respective credit agreements. Our credit facilities include customary representations and warranties, provisions regarding events of default and covenants. The terms of these credit facilities and related financing documents require Zillow Group and certain of its subsidiaries, as applicable, to comply with a number of customary financial and other covenants, such as maintaining certain levels of liquidity, tangible net worth, leverage ratios, adequate insurance coverage and market capitalization. As of December 31, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred. Except for certain limited circumstances, the credit facilities are non-recourse to Zillow Group. Our credit facilities require that we establish, maintain and in certain circumstances that Zillow Group fund specified reserve accounts. These reserve accounts include, but are not limited to, interest reserves, insurance reserves, tax reserves, renovation cost reserves and reserves for specially permitted liens. Amounts funded to these reserve accounts and the collection accounts have been classified within our consolidated balance sheets as restricted cash.
Mortgages Segment
To provide capital for Zillow Home Loans, we utilize warehouse lines of credit and a master repurchase agreement which are classified as current liabilities in our consolidated balance sheets. The facilities provide short-term financing between the issuance of a mortgage loan and when Zillow Home Loans sell the loan to an investor. The following table summarizes certain details related to our warehouse lines of credit and repurchase agreement (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | |
| Lender | | Maturity Date | | Maximum Borrowing Capacity | | Weighted Average Interest Rate |
| Citibank, N.A. | | October 27, 2020 | | $ | 75,000 | | | 3.29 | % |
| Comerica Bank | | June 27, 2020 | | 50,000 | | | 4.22 | % |
| People’s United Bank, N.A. | | October 15, 2019 | | 50,000 | | | 4.89 | % |
On October 29, 2019, Zillow Home Loans entered into a master repurchase agreement (the “Repurchase Agreement”) with Citibank, N.A. (“Citibank”) to provide short-term funding for mortgage loans and replaced the borrowing capacity of the warehouse line previously provided by People’s United Bank, N.A. On June 28, 2019, Zillow Home Loans amended and restated its warehouse line of credit with Comerica Bank previously maturing on June 29, 2019. The amended and restated credit agreement extended the term of the original agreement for one year and continues to provide for a committed maximum borrowing capacity of $50.0 million.
In accordance with the Repurchase Agreement, Citibank agrees to pay Zillow Home Loans a negotiated purchase price for eligible loans and Zillow Home Loans simultaneously agrees to repurchase such loans from Citibank under a specified timeframe at an agreed upon price that includes interest. The Repurchase Agreement includes a committed amount of $25.0 million, and includes customary representations and warranties, covenants and provisions regarding events of default. As of December 31, 2019, $0.4 million in mortgage loans held for sale were pledged as collateral under the facility, and Zillow Home Loans was in compliance with all financial covenants and no event of default had occurred.
Transactions under the Repurchase Agreement bear interest at the one-month LIBOR plus an applicable margin, as defined in the Repurchase Agreement, and are secured by residential mortgage loans available for sale. The Repurchase Agreement contains margin call provisions that provide Citibank with certain rights in the event of a decline in the market value of the assets purchased under the Repurchase Agreement. The Repurchase Agreement is recourse to Zillow Home Loans, but non-recourse to Zillow Group or any of its other subsidiaries.
Borrowings on the warehouse lines of credit bear interest at the one-month LIBOR plus an applicable margin, as defined in the governing credit agreements. The warehouse lines of credit include customary representations and warranties, covenants and provisions regarding events of default. As of December 31, 2019, Zillow Home Loans was in compliance with all financial covenants and no event of default had occurred. The warehouse lines of credit are recourse to Zillow Home Loans, but non-recourse to Zillow Group or any of its other subsidiaries.
The following tables summarize certain details related to our outstanding convertible senior notes as of the periods presented (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | December 31, 2019 | | | | December 31, 2018 | | |
| Maturity Date | | Aggregate Principal Amount | | Stated Interest Rate | | Effective Interest Rate | | First Interest Payment Date | | Semi-Annual Interest Payment Dates | | Unamortized Debt Discount and Debt Issuance Costs | | Fair Value | | Unamortized Debt Discount and Debt Issuance Costs | | Fair Value |
| September 1, 2026 | | $ | 500,000 | | | 1.375 | % | | 8.10 | % | | March 1, 2020 | | | March 1; September 1 | | $ | 172,813 | | | $ | 597,380 | | | $ | — | | | $ | — | |
| September 1, 2024 | | 673,000 | | | 0.75 | % | | 7.68 | % | | March 1, 2020 | | | March 1; September 1 | | 182,462 | | | 730,500 | | | — | | | — | |
| July 1, 2023 | | 373,750 | | | 1.50 | % | | 6.99 | % | | January 1, 2019 | | | January 1; July 1 | | 63,575 | | | 356,464 | | | 79,012 | | | 321,855 | |
| December 1, 2021 | | 460,000 | | | 2.00 | % | | 7.44 | % | | June 1, 2017 | | | June 1; December 1 | | 44,498 | | | 514,312 | | | 65,355 | | | 446,200 | |
| December 15, 2020 | | 9,637 | | | 2.75 | % | | N/A | | | N/A | | | June 15; December 15 | | — | | | 16,842 | | | — | | | 16,744 | |
| Total | | $ | 2,016,387 | | | | | | | | | | | $ | 463,348 | | | $ | 2,215,498 | | | $ | 144,367 | | | $ | 784,799 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | | | | | | | Year Ended December 31, 2018 | | | | | | |
| Maturity Date | | Contractual Coupon Interest | | Amortization of Debt Discount | | Amortization of Debt Issuance Costs | | Interest Expense | | Contractual Coupon Interest | | Amortization of Debt Discount | | Amortization of Debt Issuance Costs | | Interest Expense |
| September 1, 2026 | | $ | 2,139 | | | $ | 5,869 | | | $ | 144 | | | $ | 8,152 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| September 1, 2024 | | 1,539 | | | 9,482 | | | 325 | | | 11,346 | | | — | | | — | | | — | | | — | |
| July 1, 2023 | | 5,606 | | | 14,047 | | | 1,374 | | | 21,027 | | | 2,788 | | | 6,655 | | | 650 | | | 10,093 | |
| December 1, 2021 | | 9,200 | | | 18,899 | | | 1,957 | | | 30,056 | | | 9,200 | | | 17,571 | | | 1,817 | | | 28,588 | |
| December 15, 2020 | | 265 | | | — | | | — | | | 265 | | | 265 | | | — | | | — | | | 265 | |
| Total | | $ | 18,749 | | | $ | 48,297 | | | $ | 3,800 | | | $ | 70,846 | | | $ | 12,253 | | | $ | 24,226 | | | $ | 2,467 | | | $ | 38,946 | |
The convertible notes are senior unsecured obligations and are classified as long-term debt in our consolidated balance sheets with the exception of the convertible senior notes due December 15, 2020 which are classified within short-term liabilities. Interest on the convertible notes is paid semi-annually in arrears. The estimated fair value of the convertible senior notes was determined through consideration of quoted market prices. The fair value is classified as Level 3 due to the limited trading activity for each of the convertible senior notes. The convertible senior notes maturing in 2026, 2024, 2023 and 2021 are not redeemable or convertible as of December 31, 2019. The convertible senior notes maturing in 2020 are convertible, at the option of the holder, and redeemable, at our option, as of December 31, 2019.
On September 9, 2019, Zillow Group issued $600.0 million aggregate principal amount of Convertible Senior Notes due
2024 (the “Initial 2024 Notes”) and $500.0 million aggregate principal amount of Convertible Senior Notes due 2026 (the “2026 Notes”) in
2021a private offering to qualified institutional buyers. The net proceeds from the issuance of the Initial 2024 Notes were approximately $592.2 million and the net proceeds from the issuance of the 2026 Notes were approximately $493.5 million, in each case after deducting fees and expenses payable by the Company. The Company used approximately $75.2 million of the net proceeds from the issuance of the Initial 2024 Notes and approximately $75.4 million of the net proceeds from the issuance of the 2026 Notes to pay the cost of the capped call transactions entered into in connection with the
issuances, described below. On October 9, 2019, the Company issued $73.0 million aggregate principal amount of 0.75% Convertible Senior Notes due 2024 (the “Additional Notes” and, together with the Initial 2024 Notes, the “2024 Notes”). The Additional Notes were sold pursuant to the initial purchasers’ partial exercise of their option to purchase such notes, granted in connection with the offering of the Initial 2024 Notes. The Additional Notes have the same terms, and were issued under the same indenture, as the Initial 2024 Notes. The net proceeds from the offering of the Additional Notes were approximately $72.0 million, after deducting fees and expenses payable by the Company. The Company used approximately $9.1 million of the net proceeds from the issuance of the Additional Notes to pay the cost of the capped call transactions entered into in connection with the issuance of the Additional Notes.
On July 3, 2018, Zillow Group issued $373.8 million aggregate principal amount of Convertible Senior Notes due 2023 (the “2023 Notes”), which includes $48.8 million principal amount of 2023 Notes sold pursuant to the underwriters’ option to purchase additional 2023 Notes. The net proceeds from the issuance of the 2023 Notes were approximately $364.0 million, after deducting fees and expenses payable by the Company. We used approximately $29.4 million of the net proceeds from the issuance of the 2023 Notes to pay the cost of capped call transactions entered into in connection with the issuances, described below.
On December 12, 2016, Zillow Group issued $460.0 million aggregate principal amount of 2.00% Convertible Senior Notes due 2021 (the “2021 Notes”), which
amount includes the exercise
in full of the $60.0 million over-allotment option, to
Citigroup Global Markets Inc. as the initial purchaser of the 2021 Notes in a private offering to
the initial purchaser in reliance on the exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) for resale to qualified institutional
buyers as defined in, and pursuant to, Rule 144A under the Securities Act. The 2021 Notes bear interest at a fixed rate of 2.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2017. The 2021 Notes are convertible into cash, shares of our Class C capital stock or a combination thereof, at the Company’s election. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased, redeemed, or converted in accordance with their terms.buyers. The net proceeds from the issuance of the 2021 Notes were approximately $447.8 million, after deducting fees and expenses. Theexpenses payable by the Company. In December 2016, the Company used approximately $370.2 millionofmillion of the net proceeds from the issuance of the
2021 Notes to repurchase a portion$219.9 million aggregate principal amount of the outstandingTrulia’s convertible senior notes due in 2020 Notes (see additional information below under “Trulia’s Convertible Senior Notes due 2020”) in privately negotiated transactions. In addition, the Company used approximately $36.6 million of the net proceeds from the issuance of the 2021 Notes to pay the cost of the capped call transactions with the initial purchaser of the 2021 Notes and two additional financial institutions, (“Capped Call Confirmations”) as discussed furtherdescribed below.
The Company
has used
or intends to use the remainder of the net proceeds
of the 2026 Notes, 2024 Notes, 2023 Notes, and 2021 Notes (together the “Notes”) for general corporate
purposes.purposes, which may include working capital, sales and marketing activities, general and administrative matters and capital expenditures.
The Notes are convertible into cash, shares of Class C capital stock or a combination thereof, at our election, and may be settled as described below. The Notes will mature on their respective Maturity Date, unless earlier repurchased, redeemed or converted in accordance with their terms.
The following table summarizes the conversion and redemption options with respect to the Notes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Early Conversion Date | | Conversion Rate | | Conversion Price | | Optional Redemption Date |
| September 1, 2026 | | March 1, 2026 | | 22.9830 | | $ | 43.51 | | | September 5, 2023 |
| September 1, 2024 | | March 1, 2024 | | 22.9830 | | 43.51 | | | September 5, 2022 |
| July 1, 2023 | | April 1, 2023 | | 12.7592 | | 78.37 | | | July 6, 2021 |
| December 1, 2021 | | September 1, 2021 | | 19.0985 | | 52.36 | | | December 6, 2019 |
Prior to the close of business on the business day immediately preceding September 1, 2021, the 2021applicable Early Conversion Date, the Notes arewill be convertible at the option of the holders of the 2021 Notes only under certain conditions, none of which conditions have been satisfied as of December 31, 2017.conditions. On or after September 1, 2021,the applicable Early Conversion Date, until the close of business on the second scheduled trading day immediately preceding the maturity date,applicable Maturity Date, holders of the 2021 Notes may convert their 2021the Notes at their option at the conversion rateapplicable Conversion Rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2021 Notes by paying or delivering, as the case may be, cash, shares of its Class C capital stock, or a combination of cash and shares of its Class C capital stock, at its election. The conversion rateapplicable Conversion Rate for each series of Notes will initially be 19.0985the conversion rate of shares of Class C capital stock per $1,000 principal amount of 2021the Notes (equivalent to an initial conversion price of approximately $52.36Conversion Price per share of Class C capital stock). The conversion rate isapplicable Conversion Rate and the corresponding initial Conversion Price will be subject to customary adjustments upon the occurrence of certain events.adjustment in some events but will not be adjusted for any accrued and unpaid interest. The Company may redeem for cash all or part of the 2021respective series of Notes, at its option, on or after December 6, 2019,the applicable Optional Redemption Date, under certain circumstances, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indentureindentures governing the 2021 Notes). We may not redeem a series of Notes prior to the applicable Optional Redemption Date. We may redeem for cash all or any portion of a series of Notes, at our option, in whole or in part on or after the applicable Optional Redemption Date if the last reported sale price per share of our Class C capital stock has been at least 130% of the Conversion
Price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period. The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.
If the Company undergoes a fundamental change (as defined in the
indentureindentures governing the
2021 Notes), holders
of the 2021 Notes may require the Company to repurchase for cash all or part of
their 2021a series of Notes,
as applicable, at a repurchase price equal to 100% of the principal amount of the
2021 Notesnotes to be
repurchased,purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date (as defined in the
indentureindentures governing the
2021 Notes). In addition, if certain fundamental changes occur, the Company may be required, in certain circumstances, to increase the conversion rate for any
2021of the Notes converted in connection with such fundamental changes by a specified number of shares of its Class C capital stock. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the
2021 Notes, as described in the
indentureindentures governing the
notes.Notes. There are no financial covenants associated with the
2021 Notes.
We may not redeem the 2021 Notes prior to December 6, 2019. We may redeem the 2021 Notes for cash, at our option, in whole or in part on or after December 6, 2019, if the last reported sale price per share of our Class C capital stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
In accounting for the issuance of the
2021 Notes, the Company separated the
2021 Notes into liability and equity components. The carrying amount of the liability component
for each of the Notes was calculated by measuring the fair value of a similar liability that does not have an associated
conversionconvertible feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the
2021 Notes. The difference between the principal
amountamounts of the
2021 Notes and
thetheir liability
componentcomponents represents
thetheir respective debt
discount,discounts, which
isare recorded as a direct deduction from the related debt liability in the consolidated balance
sheetsheets and amortized to interest expense using the effective interest method over the term of the
2021 Notes. The equity
componentcomponents of the
2021 Notes,
net of
approximately $91.4 million isissuance costs, are included in additional
paid-in capital in the consolidated balance
sheetsheets and
isare not remeasured as long as
it continuesthey continue to meet the conditions for equity classification.
The Company incurred transactionequity components of the 2026 Notes, 2024 Notes, 2023 Notes and 2021 Notes of $172.3 million, $183.5 million, $76.6 million and $91.4 million, respectively, are net of issuance costs of approximately $12.2$2.3 million, $2.4 million, $2.0 million and $2.5 million, respectively.
The following table summarizes certain details related to the
issuance of the 2021 Notes, including approximately $11.5 million in feescapped call confirmations with respect to the
initial purchaser, which amount was paid out of the gross proceeds from the note offering. In accounting for the transaction costs, the Company allocated the totalamount incurred to the liability and equity components using the same proportions as the proceeds from the 2021 Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the consolidated balance sheet and amortized to interest expense over the term of the 2021 Notes, and transaction costs attributable to the equity component were netted with the equity component in shareholders’ equity.
Interest expense related to the 2021 Notes for the year ended December 31, 2017 was $27.2 million, which is comprised of approximately $18.0 millionrelated to the amortization of debt discount and debt issuance costs and $9.2 millionfor the contractual coupon interest. Interest expense related to the 2021 Notes for the year ended December 31, 2016 was $1.3 million, which is comprised of approximately $0.9 millionrelated to the amortization of debt discount and debt issuance costs and $0.5 million for the contractual coupon interest. Notes:
| | | | | | | | | | | | | | |
| Maturity Date | | Initial Cap Price | | Cap Price Premium |
| September 1, 2026 | | $ | 80.5750 | | | 150 | % |
| September 1, 2024 | | 72.5175 | | | 125 | % |
| July 1, 2023 | | 105.45 | | | 85�� | % |
| December 1, 2021 | | 69.19 | | | 85 | % |
The
effective interest rate on the liability component of the 2021 Notes is 7.44%for the years ended December 31, 2017 and 2016. Accrued interest related to the 2021 Notes was $0.8 million and $0.5 million, respectively, as of December 31, 2017 and 2016, and is recorded in accrued expenses and other current liabilities in the consolidated balance sheet.The following table presents the outstanding principal amount and carrying value of the 2021 Notes as of the dates presented (in thousands):
| | | | | | | | | | | | |
| | | Outstanding
Principal
Amount | | | Unamortized
Debt Discount
and Debt
Issuance Costs | | | Carrying
Value | |
December 31, 2017 | | $ | 460,000 | | | $ | (84,721 | ) | | $ | 375,279 | |
December 31, 2016 | | $ | 460,000 | | | $ | (102,733 | ) | | $ | 357,267 | |
As of December 31, 2017, the unamortized debt discount and debt issuance costs for the 2020 Notes will be amortized to interest expense over a remaining period of approximately 47 months.
The estimated fair value of the 2021 Notes was $509.0 million and $474.2 million, respectively, as of December 31, 2017 and 2016. The estimated fair value of the 2021 Notes was determined through consideration of quoted market prices. The fair value is classified as Level 3 due to the limited trading activity for the 2021 Notes.
The Capped Call Confirmationscapped call confirmations are expected generally to reduce the potential dilution of our Class C capital stock upon any conversion of 2021the Notes and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2021 Notessuch notes in the event that the market price of the Class C capital stock is greater than the strike price of the Capped Call Confirmationscapped call confirmations (which initially corresponds to the initial conversion priceConversion Price of the 2021 Notessuch notes and is subject to certain adjustments under the terms of the Capped Call Confirmations)capped call confirmations), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Confirmations.capped call confirmations. The Capped Call Confirmationscapped call confirmations with respect to the Notes have an initial cap price of $69.19Initial Cap Price per share, which represents a premium of approximately 85%(“Cap Price Premium”) over the relevant historical closing price of the Company’s Class C capital stock on Thethe Nasdaq Global Select Market, on December 6, 2016, and is subject to certain adjustments under the terms of the Capped Call Confirmations.capped call confirmations. The Capped Call Confirmationscapped call confirmations will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2021 Notes, the number of shares of Class C capital stock that will underlie the 2021 Notes. In addition, the Capped Call Confirmations provide for the Company to elect, subject to certain conditions, for the Capped Call Confirmations to remain outstanding (with certain modifications) following its election to redeem the 2021 Notes, notwithstanding any conversions of 2021 Notes in connection with such redemption.notes. The Capped Call Confirmationscapped call confirmations do not meet the criteria for separate accounting as a derivative as they are indexed to our own stock. The capped call premiums paid for the Capped Call Confirmations have been included as a net reduction to additionalpaid-in capital within shareholders’ equity.
Trulia’s Convertible Senior Notes due in 2020
In connection with the February 2015 acquisition of Trulia (see
Note
7), a portion of the total purchase price was allocated to Trulia’s Convertible Senior Notes due in 2020 (the “2020 Notes”), which are unsecured senior obligations. Pursuant to and in accordance with the Merger Agreement, Zillow Group entered into a supplemental indenture in respect of the 2020 Notes in the aggregate principal amount of $230.0 million, which supplemental indenture provides, among other things, that, at the effective time of the Trulia Merger, (i) each outstanding 2020 Note is no longer convertible into shares of Trulia common stock and is convertible solely into shares of Zillow Group Class A common stock, pursuant to, and in accordance with, the terms of the indenture governing the 2020 Notes, and (ii) Zillow Group guaranteed all of the obligations of Trulia under the 2020 Notes and related indenture. The aggregate principal amount of the 2020 Notes is due on December 15, 2020 if not earlier converted or redeemed. Interest is payable on the 2020 Notes at the rate of 2.75% semi-annually on June 15 and December 15 of each year.In December 2016, the Company used approximately $370.2 million of the net proceeds from the issuance of the 2021 Notes discussed above to repurchase $219.9 million aggregate principal of the 2020 Notes in privately negotiated transactions. The repurchase of the 2020 Notes was accounted for as a debt extinguishment, and the consideration transferred was allocated between the liability and equity components by determining the intrinsic value of the conversion option immediately prior to the debt extinguishment and allocating that portion of the repurchase price to additionalpaid-in capital for $127.6 million with the residual repurchase price allocated to the liability component. The partial repurchase of the 2020 Notes resulted in the recognition of a $22.8 million loss on debt extinguishment for the year ended December 31, 2016.
Holders of the 2020 Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding the maturity date. Regarding the supplemental indenture in respect of the 2020 Notes, the conversion ratio immediately prior to the effective time of the Trulia Merger of 27.8303 shares of Trulia common stock per $1,000 principal amount of notes was adjusted to 12.3567 shares of our Class A common stock per $1,000 principal amount of notes based on the exchange ratio of 0.444 per the Merger Agreement. This was equivalent to an initial conversion price of approximately $80.93 per share of our Class A common stock. Regarding the August 2015 distribution of shares of our Class C capital stock as a dividend to our Class A and Class B common shareholders, the conversion ratio has been further adjusted to 41.4550 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $24.12 per share of our Class A common stock. The conversion ratio will be adjusted for certain dilutive events and will be increased in the case of corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the indenture governing the notes). The conversion option of the 2020 Notes has no cash settlement provisions. The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.
The holders of the 2020 Notes will have the ability to require us to repurchase the notes in whole or in part upon the occurrence of an event that constitutes a “Fundamental Change” (as defined in the indenture governing the notes, including such events as a “change in control” or “termination of trading”, subject to certain exceptions). In such case, the repurchase price would be 100% of the principal amount of the 2020 Notes plus accrued and unpaid interest, if any, to, but excluding, the Fundamental Change repurchase date. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the notes. There are no financial covenants associated with the 2020 Notes.
The 2020 Notes are redeemable, at our option, in whole or in part on or after December 20, 2018, if the last reported sale price per share of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
Interest expense related to the 2020 Notes for the years ended December 31, 2017 and 2016 was $0.3 million and $6.1 million, respectively. Accrued interest related to the 2020 Notes as of December 31, 2017
and 2016 was not material. Accrued interest is recorded in accrued expenses and other current liabilities in our consolidated balance sheet.
The carrying value of the 2020 Notes was $10.1 million as of December 31, 2017 and 2016. The estimated fair value of the 2020 Notes was $17.6 million and $17.3 million, respectively, as of December 31, 2017 and 2016. The estimated fair value of the 2020 Notes was determined through consideration of quoted market prices. The fair value is classified as Level 3 due to the limited trading activity for the 2020 Notes.
Note 12.16. Income Taxes
We are subject to federal and state income taxes in the United States and federal and provincial income taxes in Canada. For
We recorded an income tax benefit of $4.3 million for the yearsyear ended December 31, 2019. The majority of the income tax benefit is a result of federal and state interest expense limitation carryforwards that are indefinite-lived deferred tax assets that can be offset against our indefinite-lived deferred tax liabilities. In addition, net operating losses generated after December 31, 2017 2016also can be offset against the indefinite-lived deferred tax liabilities. These items contributed to a release of the valuation allowance and 2015,the recognition of an income tax benefit for the year ended December 31, 2019.
We recorded an income tax benefit of $31.1 million for the year ended December 31, 2018. Approximately $15.4 million of the income tax benefit resulted from the $69.0 million non-cash impairment we did not have a material amount of current taxable income.Onrecorded during the year ended December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes31, 2018 related to the U.S.indefinite-lived Trulia trade names and trademarks intangible asset.
For additional information about the non-cash impairment, see Note 11 to our consolidated financial statements. The remaining portion of our income tax code, including but not limited to: (1) reducingbenefit was primarily the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay aone-time transition tax on certain untaxed earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and how AMT credits are utilized; and (5) changing rules related to uses and limitationsresult of net operating loss carryforwards created in tax years beginninglosses generated after December 31, 2017. Shortly after enactment, implementation guidance was released by2017 with an indefinite carryforward period due to the SecuritiesTax Act. Thus, net operating losses for the year ended December 31, 2018 could be offset against our indefinite-lived deferred tax liabilities, which resulted in the release of our valuation allowance and Exchange Commission that requires a company to reflectthe recognition of an income tax benefit for the year ended December 31, 2018. During the year ended December 31, 2018, we completed our accounting for the income tax effects of those aspects ofdeduction limitations on compensation under the Tax Act. The Internal Revenue Service provided further guidance regarding the written binding contracts requirement under the Tax Act, and we determined that certain of our executives’ compensation previously eligible to be deducted for whichtax purposes under Section 162(m) of the accounting underInternal Revenue Code were considered grandfathered. Therefore, we continued to deduct this compensation during the accountingyear ended December 31, 2018. Based on the clarification of these rules, is complete. To the extent thatwe recorded a company’s accounting for certain$5.9 million income tax effects ofbenefit for the Tax Act is incomplete but the company is able to determine a reasonable estimate, it should record a provisional estimate in the financial statements. Further, the implementation guidance also provides for a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting pursuant to the accounting rules. ended December 31, 2018.
We recorded an income tax benefit of $89.6 million for the year ended December 31, 2017. Approximately $66.0 million of the income tax benefit
relatesrelated to a $174.0 million
non-cash impairment we recorded during the year ended December 31, 2017 related to the
$351.0 million indefinite-lived
intangible asset that we recorded in connection with our February 2015 acquisition of Trulia
for Trulia’s trade names and
trademarks.trademarks intangible asset. For additional information about the
non-cash impairment, see Note
911 to our consolidated financial statements. The remaining $23.6 million of the income tax benefit primarily relates to our initial analysis of the impact of the rate decrease included in the Tax Act for the impact of the reduction in our net deferred tax liability related to our indefinite-lived intangible asset.
As of December 31, 2017, we have not completed our accounting for the income tax effects of certain elements of the Tax Act and we have recorded provisional adjustments where we were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete, including as related to the deduction limitations on compensation.Income tax expense was not material for the year ended December 31, 2016. We recorded an income tax benefit of $4.6 million for the year ended December 31, 2015 due to a deferred tax liability generated in connection with Zillow’s August 20, 2015 acquisition of DotLoop, Inc. that can be used to realize certain deferred tax assets for which we had previously provided a full allowance.
The following table summarizes the components of our income tax
(benefit) expensebenefit for the periods presented (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Federal | | $ | (84,238 | ) | | $ | 1,248 | | | $ | 2,838 | |
State | | | (5,348 | ) | | | (1,378 | ) | | | 1,807 | |
| | | | | | | | | | | | |
Deferred income tax (benefit) expense | | $ | (89,586 | ) | | $ | (130 | ) | | $ | 4,645 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Current income tax expense: | | | | | |
| State | $ | 304 | | | $ | — | | | $ | — | |
| Foreign | 99 | | | 161 | | | — | |
| Total current income tax expense | 403 | | | 161 | | | — | |
| Deferred income tax benefit: | | | | | |
| Federal | (1,631) | | | (28,502) | | | (84,238) | |
| State | (2,856) | | | (2,441) | | | (5,348) | |
| Foreign | (174) | | | (320) | | | — | |
| Total deferred income tax benefit | (4,661) | | | (31,263) | | | (89,586) | |
| Total income tax benefit | $ | (4,258) | | | $ | (31,102) | | | $ | (89,586) | |
The following table presents a reconciliation of the federal statutory rate and our effective tax rate for the periods presented:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Tax expense at federal statutory rate | | | (35.0 | )% | | | (35.0 | )% | | | (35.0 | )% |
State income taxes, net of federal tax benefit | | | (4.4 | ) | | | (1.9 | ) | | | (2.3 | ) |
Nondeductible expenses | | | 0.8 | | | | 4.9 | | | | 2.8 | |
Share-based compensation | | | (20.6 | ) | | | (0.2 | ) | | | 1.2 | |
Research and development credits | | | (6.3 | ) | | | (1.5 | ) | | | (4.1 | ) |
Divestiture of businesses | | | — | | | | — | | | | 2.3 | |
Enactment of Tax Act | | | (13.1 | ) | | | — | | | | — | |
Other | | | 2.2 | | | | (0.9 | ) | | | (1.0 | ) |
Valuation allowance | | | 27.7 | | | | 34.7 | | | | 33.1 | |
| | | | | | | | | | | | |
Effective tax rate | | | (48.7 | )% | | | 0.1 | % | | | (3.0 | )% |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Tax expense at federal statutory rate | (21.0) | % | | (21.0) | % | | (35.0) | % |
| State income taxes, net of federal tax benefit | (3.0) | | | (5.9) | | | (4.4) | |
| Nondeductible expenses | — | | | — | | | 0.8 | |
| Share-based compensation | (0.9) | | | (16.5) | | | (20.6) | |
| Section 162(m) of Internal Revenue Code | 1.1 | | | 1.0 | | | — | |
| Research and development credits | (7.2) | | | (8.4) | | | (6.3) | |
| Meals and entertainment | 1.1 | | | 1.8 | | | — | |
| Return to provision adjustments | 0.5 | | | (4.2) | | | — | |
| Enactment of Tax Act | — | | | (1.9) | | | (13.1) | |
| Other | (0.6) | | | 0.4 | | | 2.2 | |
| Valuation allowance | 28.6 | | | 34.0 | | | 27.7 | |
| Effective tax rate | (1.4) | % | | (20.7) | % | | (48.7) | % |
Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Deferred tax assets: | | | | | | | | |
Federal and state net operating loss carryforwards | | $ | 234,316 | | | $ | 208,029 | |
Share-based compensation | | | 47,655 | | | | 67,482 | |
Depreciation and amortization | | | — | | | | 3,123 | |
Start-up and organizational costs | | | 146 | | | | 300 | |
Research and development credits | | | 35,793 | | | | 24,295 | |
Other tax credits | | | 910 | | | | 1,358 | |
Accruals and reserves | | | 2,729 | | | | 1,814 | |
Deferred rent | | | 5,484 | | | | 5,882 | |
Other deferred tax assets | | | 8,342 | | | | 14,544 | |
| | | | | | | | |
Total deferred tax assets | | | 335,375 | | | | 326,827 | |
Deferred tax liabilities: | | | | | | | | |
Website and software development costs | | | (13,202 | ) | | | (15,851 | ) |
Goodwill. | | | (688 | ) | | | (363 | ) |
Intangible assets | | | (69,241 | ) | | | (192,830 | ) |
Discount on 2021 Notes not deductible for tax | | | (19,374 | ) | | | (34,384 | ) |
Depreciation and amortization | | | (2,425 | ) | | | — | |
| | | | | | | | |
Total deferred tax liabilities | | | (104,930 | ) | | | (243,428 | ) |
Net deferred tax assets before valuation allowance | | | 230,445 | | | | 83,399 | |
Less: valuation allowance | | | (274,810 | ) | | | (217,351 | ) |
| | | | | | | | |
Net deferred tax liabilities | | $ | (44,365 | ) | | $ | (133,952 | ) |
| | | | | | | | |
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Federal and state net operating loss carryforwards | $ | 273,171 | | | $ | 259,629 | |
| Share-based compensation | 75,704 | | | 55,280 | |
| Research and development credits | 70,970 | | | 48,805 | |
| Lease liabilities | 58,899 | | | — | |
| Other tax credits | 910 | | | 910 | |
| Accruals and reserves | 3,891 | | | 3,000 | |
| Inventory | 17,819 | | | 3,574 | |
| Depreciation and amortization | 2,032 | | | — | |
| Deferred rent | — | | | 4,842 | |
| Other deferred tax assets | 55,851 | | | 10,792 | |
| Total deferred tax assets | 559,247 | | | 386,832 | |
| Deferred tax liabilities: | | | |
| Website and software development costs | (20,681) | | | (14,685) | |
| Goodwill | (1,951) | | | (598) | |
| Intangible assets | (38,032) | | | (45,035) | |
| Right of use assets | (52,486) | | | — | |
| Discount on 2021 Notes, 2023 Notes, 2024 Notes and 2026 Notes not deductible for tax | (108,114) | | | (31,450) | |
| Depreciation and amortization | — | | | (888) | |
| Total deferred tax liabilities | (221,264) | | | (92,656) | |
| Net deferred tax assets before valuation allowance | 337,983 | | | 294,176 | |
| Less: valuation allowance | (346,877) | | | (307,599) | |
| Net deferred tax liabilities | $ | (8,894) | | | $ | (13,423) | |
Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31,
20172019 and
20162018 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The
valuation allowance increased by $57.5$39.3 million and $54.6$32.8 million, respectively, during the years ended December 31, 20172019 and 2016.
2018.
We have accumulated federal tax losses of approximately
$1,014.0$1,137.6 million and
$893.3$1,081.7 million, respectively, as of December 31,
20172019 and
2016,2018, which are available to reduce future taxable income. We have accumulated state tax losses of approximately
$21.4$34.3 million and
$13.5$32.5 million (tax effected), respectively, as of December 31,
20172019 and
2016.2018. Additionally, we have net research and development credit carryforwards of
$35.8$71.0 million and
$24.3$48.8 million, respectively, as of December 31,
20172019 and
2016,2018, which are available to reduce future tax liabilities. The tax loss and research and development credit carryforwards begin to expire in 2025. Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its
pre-change net operating loss carryforwards and other
pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. In connection with our August 2013 public offering of our Class A Common stock, we experienced an ownership change that triggered Sections 382 and 383, which may limit our ability to utilize net operating loss and tax credit carryforwards. In connection with our February 2015 acquisition of Trulia, Trulia experienced an ownership change that triggered Section 382 and 383, which may limit Zillow Group’s ability to utilize Trulia’s net operating loss and tax credit carryforwards.
We are currently not under audit in any tax jurisdiction. Tax years from
20142016 through
20172019 are currently open for audit by federal and state taxing authorities.
Changes for unrecognized tax benefits for the periods presented are as follows (in thousands):
| | | | |
Balance at January 1, 2015 | | $ | 6,493 | |
Gross increases—prior and current period tax positions | | | 3,577 | |
Gross increases—assumed in connection with February 2015 acquisition of Trulia | | | 3,910 | |
| | | | |
Balance at December 31, 2015 | | $ | 13,980 | |
| | | | |
Gross increases—current period tax positions | | | 2,619 | |
Gross decreases—prior period tax positions | | | (1,204 | ) |
| | | | |
Balance at December 31, 2016 | | $ | 15,395 | |
| | | | |
Gross increases—current period tax positions | | | 5,216 | |
Gross increases—prior period tax positions | | | 1,002 | |
| | | | |
Balance at December 31, 2017 | | $ | 21,613 | |
| | | | |
| | | | | |
| Balance at January 1, 2017 | $ | 15,395 | |
| Gross increases—prior and current period tax positions | 5,216 | |
| Gross increases—prior period tax positions | 1,002 | |
| Balance at December 31, 2017 | $ | 21,613 | |
| Gross increases—current period tax positions | 6,421 | |
| Gross increases—prior period tax positions | 591 | |
| Balance at December 31, 2018 | $ | 28,625 | |
| Gross increases—current period tax positions | 9,021 | |
| Gross increases—prior period tax positions | 1,786 | |
| Balance at December 31, 2019 | $ | 39,432 | |
At December 31, 2017,2019, the total amount of unrecognized tax benefits of $21.6$39.4 million is recorded as a reduction to our deferred tax asset. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as income tax expense and are zero.0.
Note
13.17. Shareholders’ Equity
Our board of directors has the authority to fix and determine and to amend the number of shares of any series of preferred stock that is wholly unissued or to be established and to fix and determine and to amend the designation, preferences, voting powers and limitations, and the relative, participating, optional or other rights, of any series of shares of preferred stock that is wholly unissued or to be established, subject in each case to certain approval rights of holders of our outstanding Class B common stock. There was
no0 preferred stock issued and outstanding as of December 31,
20172019 or December 31,
2016.2018.
Our Class A common stock has no preferences or privileges and is not redeemable. Holders of Class A common stock are entitled to
one1 vote for each share.
Our Class B common stock has no preferences or privileges and is not redeemable. At any time after the date of issuance, each share of Class B common stock, at the option of the holder, may be converted into
one1 share of Class A common stock, or automatically converted into Class A common stock upon the affirmative vote by or written consent of holders of a majority of the shares of the Class B common stock. During the years ended December 31,
2019, 2018 and 2017,
2016 and 2015, no0 shares of Class B common stock were converted into Class A common stock at the option of the holders. Holders of Class B common stock are entitled to 10 votes for each share.
Our Class C capital stock has no preferences or privileges, is not redeemable and, except in limited circumstances, is
non-voting. 0n-voting. On July 3, 2018, Zillow Group issued and sold 6,557,017 shares (of which 855,263 shares were related to the exercise
of the underwriters’ option to purchase additional shares) of our Class C capital stock at a public offering price of $57.00 per share. We received net proceeds of $360.3 million after deducting underwriting discounts and commissions and offering expenses payable by us.
The following shares of common and capital stock have been reserved for future issuance as of the dates presented:
| | | | | | | | |
| | | December 31,
2017 | | | December 31,
2016 | |
Option awards outstanding | | | 26,645,206 | | | | 29,628,443 | |
Restricted stock units outstanding | | | 4,016,405 | | | | 3,780,577 | |
Class A common stock and Class C capital stock available for grant under 2011 Plan | | | 5,076,898 | | | | 2,887,262 | |
Shares issuable upon conversion of outstanding Class B common stock | | | 6,217,447 | | | | 6,217,447 | |
| | | | | | | | |
Total | | | 41,955,956 | | | | 42,513,729 | |
| | | | | | | | |
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| Option awards outstanding | 29,634,296 | | | 27,310,110 | |
| Restricted stock units outstanding | 7,052,767 | | | 5,266,324 | |
| Class A common stock and Class C capital stock available for grant under 2011 Plan | 1,466,856 | | | 3,675,082 | |
| Class C capital stock available for grant under the 2019 Equity Inducement Plan | 7,898,167 | | | — | |
| Shares issuable upon conversion of outstanding Class B common stock | 6,217,447 | | | 6,217,447 | |
| Total | 52,269,533 | | | 42,468,963 | |
Note
14.18. Share-Based Awards
In connection with our February 2015 acquisition of Trulia, we assumed the obligations of Zillow and Trulia outstanding under
pre-existing stock plans. We intend that future equity grants will be made under Zillow Group’s 2011 Amended and Restated Incentive Plan (as amended and/or restated from time to time, the “2011 Plan”) only (or a successor thereto).
Zillow Group, Inc. 2019 Equity Inducement Plan
On August 8, 2019, the 2019 Equity Inducement Plan (“Inducement Plan”) became effective. Subject to adjustment from time to time as provided in the Inducement Plan, 10,000,000 shares of Class C capital stock are available for issuance under the Inducement Plan. Shares issued under the Inducement Plan shall be drawn from authorized and unissued shares of Class C capital stock. The purpose of the Inducement Plan is to attract, retain and motivate certain new employees of the Company and its subsidiaries by providing them the opportunity to acquire a proprietary interest in the Company and to align their interests and efforts to the long-term interests of the Company’s shareholders. Each award under the Inducement Plan is intended to qualify as an employment inducement award pursuant to Listing Rule 5635(c) of the corporate governance rules of the NASDAQ Stock Market. The Inducement Plan is administered by the compensation committee of the board of directors. Under the terms of the Inducement Plan, the compensation committee may grant equity awards, including incentive stock options, nonqualified stock options, restricted stock, restricted stock units or restricted units to new employees of the Company and its subsidiaries. The Inducement Plan provides that in the event of a stock dividend, stock split or similar event, the maximum number and kind of securities available for issuance under the plan will be proportionally adjusted.
Options under the Inducement Plan are granted with an exercise price per share not less than 100% of the fair market value of our stock on the date of grant, with the exception of substituted option awards granted in connection with acquisitions, and are exercisable at such times and under such conditions as determined by the compensation committee. Any portion of an option that is not vested and exercisable on the date of a participant’s termination of service expires on such date. Employees generally forfeit their rights to exercise vested options 3 months following their termination of employment or 12 months following termination by reason of death, disability or retirement. Options granted under the Inducement Plan expire ten years from the grant date and vest 25% after 12 months and quarterly thereafter over the next three years.
Restricted stock units granted under the Inducement Plan vest 25% after 12 months and quarterly thereafter over the next three years. Any portion of a restricted stock unit that is not vested on the date of a participant’s termination of service expires on such date.
Zillow Group, Inc. Amended and Restated 2011 Incentive Plan
On July 19, 2011, the 2011 Plan became
effective and serves as the successor to Zillow, Inc.’s 2005 Equity Incentive Plan (the “2005 Plan”). Shareholders last approved the 2011 Plan on June 15, 2016.effective. In addition to the share reserve of 18,400,000 shares, the number of shares available for issuance under the 2011 Plan automatically increases on the first day of each of our fiscal years by a number of shares equal to the least of (a) 3.5% of our outstanding Class A common stock, Class B common stock, and Class C capital stock on a fully diluted basis as of the end of our immediately preceding fiscal year, (b) 10,500,000 shares, and (c) a lesser amount determined by our board of directors; provided, however, that any shares from any increases in previous years that are not actually issued will continue to be available for issuance under the 2011 Plan. In addition, shares previously available for grant under
theZillow, Inc.’s 2005
Equity Incentive Plan
(the “2005 Plan”), but not issued or subject to outstanding awards under the 2005 Plan as of July 19, 2011, and shares subject to outstanding awards under the 2005 Plan that subsequently cease to be subject to such awards (other than by reason of exercise of the awards) are available for grant under the 2011 Plan. The 2011 Plan is administered by the compensation committee of the board of directors. Under the terms of the 2011 Plan, the compensation committee may grant equity awards, including incentive stock options, nonqualified stock options, restricted stock, restricted stock units or restricted units to employees, officers, directors, consultants, agents,
advisorsadvisers and independent contractors. The board of directors
has also authorized certain senior executive officers to grant equity awards under the 2011 Plan, within limits prescribed by our board of directors. The 2011 Plan provides that in the event of a stock dividend, stock split or similar event, the maximum number and kind of securities available for issuance under the plan will be proportionally adjusted.
Options under the 2011 Plan are granted with an exercise price per share not less than 100% of the fair market value of our stock on the date of grant, with the exception of substituted option awards granted in connection with acquisitions, and are exercisable at such times and under such conditions as determined by the compensation committee. Under the 2011 Plan, the maximum term of an option is ten years from the date of grant. Any portion of an option that is not vested and exercisable on the date of a participant’s termination of service expires on such date. Employees generally forfeit their rights to exercise vested options after 3 months following their termination of employment or 12 months in the event offollowing termination by reason of death, disability or retirement. Options granted under the 2011 Plan typically expire seven or 10ten years from the grant date and typically vest either 25% after 12 months and ratably thereafter over the next 36 months or quarterly over a period of four years, though certain options have been granted with alternative vesting schedules.
Restricted stock units granted under the 2011 Plan typically vest either 25% after 12 months and quarterly thereafter over the next three years, quarterly over a period of four years, or 12.5% after 6 months and quarterly thereafter for the next 3.5 years. Any portion of a restricted stock unit that is not vested on the date of a participant’s termination of service expires on such date.
In March 2016, Zillow Group established an equity choice program pursuant to which Zillow Group grants restricted stock units and option awards to acquire shares of Class C capital stock to certain employees to retain and recognize their efforts on behalf of Zillow Group.
Trulia 2005 Stock Incentive Plan
Trulia granted options under its 2005 Stock Incentive Plan (as amended, “the 2005 Plan”) until September 2012 when the 2005 Plan was terminated. Stock options issued prior to the plan termination remained outstanding in accordance with their terms. Under the terms of the 2005 Plan, Trulia had the ability to grant incentive and nonqualified stock options, stock appreciation rights, restricted stock awards and restricted stock units. Options granted under the 2005 Plan generally vest at a rate of 25% after 12 months and ratably thereafter over the next 36 months and expire 10 years from the grant date. Certain options vest monthly over two to four years.
Trulia 2012 Equity Incentive Plan, as Amended and Restated
On September 19, 2012, Trulia’s 2012 Equity Incentive Plan (the “2012 Plan”) became effective. The 2012 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to employees, directors and consultants. Under the 2012 Plan, stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying stock at the grant date. The plan administrator determines the vesting period for each option award on the grant date, and the options generally expire 10 years from the grant date or such shorter term as may be determined for the options.
As noted above, we intend that futureNo new equity
grantsawards will be made under the
2011 Plan only.2012 Plan.
Option Awards
and Stock Appreciation RightsThe following table summarizes option award activity for the year ended December 31,
2017: | | | | | | | | | | | | | | | | |
| | | Number
of Shares
Subject to
Existing
Options and
Stock
Appreciation
Rights | | | Weighted-
Average
Exercise
Price Per
Share | | | Weighted-
Average
Remaining
Contractual
Life (Years) | | | Aggregate
Intrinsic
Value
(in
thousands) | |
Outstanding at January 1, 2017 | | | 29,628,443 | | | $ | 24.11 | | | | 5.97 | | | $ | 376,004 | |
Granted | | | 4,558,215 | | | | 36.12 | | | | | | | | | |
Exercised | | | (6,202,421 | ) | | | 15.81 | | | | | | | | | |
Forfeited or cancelled | | | (1,339,031 | ) | | | 32.05 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2017 | | | 26,645,206 | | | | 27.70 | | | | 5.72 | | | | 355,739 | |
Vested and exercisable at December 31, 2017 | | | 14,653,727 | | | | 25.54 | | | | 4.45 | | | | 227,688 | |
2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number
of Shares
Subject to
Existing
Options | | Weighted-
Average
Exercise
Price Per
Share | | Weighted-
Average
Remaining
Contractual
Life (Years) | | Aggregate
Intrinsic
Value
(in thousands) |
| Outstanding at January 1, 2019 | 27,310,110 | | | $ | 34.04 | | | 6.23 | | $ | 97,941 | |
| Granted | 7,950,882 | | | 39.53 | | | | | |
| Exercised | (2,918,053) | | | 22.43 | | | | | |
| Forfeited or cancelled | (2,708,643) | | | 41.77 | | | | | |
| Outstanding at December 31, 2019 | 29,634,296 | | | 35.95 | | | 6.28 | | 331,107 | |
| Vested and exercisable at December 31, 2019 | 18,587,087 | | | 33.01 | | | 4.86 | | 257,029 | |
The fair value of options granted
excluding certain options granted to the Company’s executives in January and February 2015, is estimated at the date of grant using the Black-Scholes-Merton option-pricing model,
assuming no dividends and with the following assumptions for the periods presented:
| | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
Expected volatility | | 45% – 49% | | 49% – 51% | | 54% – 57% |
Expected dividend yield | | — | | — | | — |
Risk-free interest rate | | 1.67% – 2.06% | | 0.89% – 1.89% | | 1.01% – 1.48% |
Weighted-average expected life | | 4.32 years | | 3.81 years | | 4.26 years |
Weighted-average fair value of options granted | | $14.51 | | $9.42 | | $13.77 |
The assumptions included in the table above exclude stock options and stock appreciation rights assumed in connection with the February 17, 2015 acquisition of Trulia (see Note 7) and unvested stock options substituted in connection with the August 20, 2015 acquisition of DotLoop, Inc.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Expected volatility | 45% – 47% | | | 42% – 45% | | 45% – 49% |
| Expected dividend yield | — | | | — | | | — | |
| Risk-free interest rate | 1.60% – 2.53% | | | 2.52% – 2.84% | | 1.67% – 2.06% |
| Weighted-average expected life | 4.75 – 5.25 years | | 4.50 – 5.00 years | | 4.25 – 4.75 years |
| Weighted-average fair value of options granted | $16.52 | | | $19.11 | | | $14.51 | |
As of December 31,
2017,2019, there was a total of
$143.1$169.1 million in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of
2.62.8 years.
The total intrinsic value of options
and stock appreciation rights exercised during the years ended December 31,
2019, 2018 and 2017
2016 and 2015 was
$156.1$51.1 million,
$51.7$161.4 million and
$67.3$156.1 million, respectively. The fair value of options
and stock appreciation rights vested for the years ended December 31,
2019, 2018 and 2017
2016was $100.1 million, $87.7 million and
2015 was $84.8 million,
$87.9 million and $59.9 million, respectively.
The following table summarizes activity for restricted stock units for the year ended December 31,
2017: | | | | | | | | |
| | | Restricted
Stock Units | | | Weighted-
Average Grant-
Date Fair
Value | |
Unvested outstanding at January 1, 2017 | | | 3,780,577 | | | $ | 28.54 | |
Granted | | | 2,546,748 | | | | 37.42 | |
Vested | | | (1,449,257 | ) | | | 29.53 | |
Forfeited or cancelled | | | (861,663 | ) | | | 31.34 | |
| | | | | | | | |
Unvested outstanding at December 31, 2017 | | | 4,016,405 | | | | 33.22 | |
| | | | | | | | |
2019:
| | | | | | | | | | | |
| Restricted
Stock Units | | Weighted-
Average Grant-
Date Fair
Value |
| Unvested outstanding at January 1, 2019 | 5,266,324 | | | $ | 42.19 | |
| Granted | 5,313,377 | | | 38.18 | |
| Vested | (2,244,631) | | | 40.04 | |
| Forfeited or cancelled | (1,282,303) | | | 41.35 | |
| Unvested outstanding at December 31, 2019 | 7,052,767 | | | 40.01 | |
The total fair value of vested restricted stock units was
$43.7$89.9 million,
$46.5$62.0 million and
$67.3$43.7 million, respectively, for the years ended December 31,
2017, 20162019, 2018 and
2015.2017.
The fair value of the outstanding restricted stock units
is based on the market value of our Class A common stock or Class C capital stock, as applicable on the date of grant, and will be recorded as share-based compensation expense over the vesting period. As of December 31,
2017,2019, there was
$123.4$260.0 million of total unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted-average period of
2.83.0 years.
Share-Based Compensation Expense
The following table presents the effects of share-based compensation expense in our consolidated statements of operations during the periods presented (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Cost of revenue | | $ | 3,884 | | | $ | 3,550 | | | $ | 2,384 | |
Sales and marketing | | | 22,735 | | | | 23,320 | | | | 25,391 | |
Technology and development | | | 39,938 | | | | 31,466 | | | | 26,849 | |
General and administrative | | | 47,014 | | | | 48,582 | | | | 50,590 | |
Impairment and restructuring costs | | | — | | | | — | | | | 14,859 | |
| | | | | | | | | | | | |
| | $ | 113,571 | | | $ | 106,918 | | | $ | 120,073 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Cost of revenue | $ | 3,978 | | | | $ | 4,127 | | | | $ | 3,884 | |
| Sales and marketing | 25,126 | | | | 22,942 | | | | 22,735 | |
| Technology and development | 69,921 | | | | 56,673 | | | | 39,938 | |
| General and administrative | 99,877 | | | | 65,342 | | | | 47,014 | |
| Total | $ | 198,902 | | | | $ | 149,084 | | | | $ | 113,571 | |
On February 21, 2019, Zillow Group announced the appointment of Richard N. Barton as Zillow Group’s Chief Executive Officer, effective February 21, 2019. Mr. Barton succeeds Spencer Rascoff, who served as Zillow Group’s Chief Executive Officer since 2010 and who remains a member of Zillow Group’s board of directors. In connection with Mr. Rascoff’s resignation as Chief Executive Officer, Zillow Group entered into an Executive Departure Agreement and Release (the “Agreement”) with Mr. Rascoff. Pursuant to the Agreement, Mr. Rascoff remained a full-time employee of Zillow Group until March 22, 2019 (the “Departure Date”) in order to provide transition services until such date. Pursuant to the Agreement, Mr. Rascoff received, among other things, accelerated vesting of outstanding stock options held by Mr. Rascoff as of the Departure Date by an additional eighteen months from the Departure Date. Options not vested as of the Departure Date, taking into account the foregoing vesting acceleration, were terminated. Each of Mr. Rascoff’s vested stock options outstanding as of the Departure Date will remain exercisable until, except for any later date contemplated by the following proviso, the earlier of (x) the third anniversary of the Departure Date and (y) the latest day upon which the option would have expired by its original terms under any circumstances (the “Option Expiration Outside Date”); provided, however, that the options will remain exercisable for so long as Mr. Rascoff serves on Zillow Group’s board of directors (but not later than any applicable Option Expiration Outside Date), and if Mr. Rascoff ceases to serve on Zillow Group’s board of directors on or after the third anniversary of the Departure Date, each option will remain exercisable until the earlier of (i) ninety days from the final date of Mr. Rascoff’s service on Zillow Group’s board of directors and (ii) the applicable Option Expiration Outside Date. The change in the exercise period of the options as well as the vesting acceleration pursuant to the Agreement have been accounted for as equity modifications, and we recorded $26.4 million of share-based compensation expense associated with the modifications in the year ended December 31, 2019. We measured the modification charge by calculating the incremental fair value of the modified award compared to the fair value of the original award immediately prior to the modification. The value of the modified awards as of the modification date was estimated using the Black-Scholes-Merton option-pricing model, assuming no dividends, expected volatility of 46%-47%, a risk-free interest rate of 2.47%-2.49% and a weighted-average expected life of 3.84-5.25 years.
Note
15.19. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares (including Class A common stock, Class B common stock and Class C capital stock) outstanding during the period. In the calculation of basic net loss per share, undistributed earnings are allocated assuming all earnings during the period were distributed.
Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares (including Class A common stock, Class B common stock and Class C capital stock) outstanding during the period and potentially dilutive Class A common stock and Class C capital stock equivalents, except in cases where the effect of the Class A common stock or Class C capital stock equivalent would be antidilutive. Potential Class A common stock and Class C capital stock equivalents consist of Class A common stock and Class C capital stock issuable upon exercise of stock options and
stock appreciation rights and Class A common stock and Class C capital stock underlying unvested restricted stock awards and unvested restricted stock units using the treasury stock method. Potential Class A common stock equivalents also include Class A common stock issuable upon conversion of the
convertible senior notes due in 2020
Notes using the
if-converted method.
Since the Company expects to settle the principal amount of the outstanding convertible notes maturing in 2021, 2023, 2024 and 2026 in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread for each of the notes has a dilutive impact on diluted net income per share when the market price of the Company’s Class C capital stock at the end of the period exceeds the conversion price per share. The following table presents the conversion spread and conversion price per share of Class C capital stock for each of the convertible senior notes (in thousands, except per share amounts):
| | | | | | | | | | | | | | |
| Maturity Date | | Conversion Spread | | Conversion Price per Share |
| September 1, 2026 | | 11,492 | | | $ | 43.51 | |
| September 1, 2024 | | 15,468 | | | 43.51 | |
| July 1, 2023 | | 4,769 | | | 78.37 | |
| December 1, 2021 | | 8,785 | | | 52.36 | |
For the periods presented, the following Class A common stock and Class C capital stock equivalents were excluded from the calculations of diluted net loss per share because their effect would have been antidilutive (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Weighted-average Class A common stock and Class C capital stock option awards and stock appreciation rights outstanding | | | 27,998 | | | | 19,993 | | | | 16,607 | |
Weighted-average Class A common stock and Class C capital stock unvested restricted stock awards and restricted stock units outstanding | | | 4,262 | | | | 3,607 | | | | 3,453 | |
Class A common stock issuable upon conversion of the 2020 Notes | | | 435 | | | | 440 | | | | 9,535 | |
| | | | | | | | | | | | |
Total Class A common stock and Class C capital stock equivalents | | | 32,695 | | | | 24,040 | | | | 29,595 | |
| | | | | | | | | | | | |
Since the Company expects to settle the principal amount of the outstanding 2021 Notes in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread of approximately 8.8 million shares will have a dilutive impact on diluted net income per share when the market price of the Company’s Class C capital stock at the end of a period exceeds the conversion price of $52.36 per share for the 2021 Notes.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Weighted-average Class A common stock and Class C capital stock option awards outstanding | 19,183 | | | | 22,736 | | | | 27,998 | |
| Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding | 6,765 | | | | 4,949 | | | | 4,262 | |
| Class A common stock issuable upon conversion of the convertible senior notes due in 2020 | 404 | | | | 400 | | | | 435 | |
| Class C capital stock issuable related to conversion spread on the 2024 and 2026 Notes | 439 | | | | — | | | | — | |
| Total Class A common stock and Class C capital stock equivalents | 26,791 | | | | 28,085 | | | | 32,695 | |
In the event of liquidation, dissolution, distribution of assets orwinding-up of the Company, the holders of all classes of common and capital stock have equal rights to receive all the assets of the Company after the rights of the holders of preferred stock have been satisfied. We have not presented net loss per share under thetwo-class method for our Class A common stock, Class B common stock and Class C capital stock because it would be the same for each class due to equal dividend and liquidation rights for each class.
Note
16.20. Commitments and Contingencies
We have
entered into various
non-cancelable operating
leaseslease agreements for
certain of our office space and
equipment.Seattle, Washington
In March 2011, we entered into aequipment with original lease agreement for office space that housesperiods expiring between 2020 and 2030. For additional information regarding our corporate headquarters in Seattle (as amended from timelease agreements, see Note 14.
Purchase Commitments
Purchase commitments primarily include various non-cancelable agreements to
time, the “Seattle Lease”). Pursuant to the terms of the Seattle Lease, we currently lease a total of 307,237 square feet, and we are obligated to make escalating monthly lease payments that began in December 2012 and continue through December 2024. We will continue to take possession of additional office space pursuant to the Seattle Lease as space becomes available through 2018 under the same terms and conditions.San Francisco, California
In connection with our February 2015 acquisition of Trulia, we assumed a lease agreement for office space in San Francisco (as amended from time to time, the “San Francisco Lease”), which houses Trulia’s corporate headquarters and Zillow’s personnel located in San Francisco. Pursuant to the terms of the San Francisco Lease, we lease a total of 105,897 square feet, and we are obligated to make escalating monthly lease payments through September 2023.
In November 2012, we entered into an operating lease in San Francisco, California for 18,353 square feet under which we are obligated to make escalating monthly lease payments which began in December 2012 and continue through December 2018. In March 2015, we ceased use of this space in connection with our February 2015 acquisition of Trulia, and in May 2015, we sublet this office space to another occupant. Pursuant to the terms of the operating lease and since October 2015, we lease an additional 8,311 square feet of office space under the same terms and conditions, and we also sublet this office space to another occupant.
New York, New York
In February 2014, we entered into an operating lease in New York (as amended from time to time, the “New York Lease”). Pursuant to the terms of the New York Lease, we lease a total of approximately 53,200 square feet, and we are obligated to make escalating monthly lease payments that began in August 2014 and continue through October 2024.
Denver, Colorado
In connection with our February 2015 acquisition of Trulia, we assumed a lease agreement for office space in Denver. Pursuant to the terms of the lease, we lease a total of 64,908 square feet, and we are obligated to make escalating monthly lease payments through October 2021.
Irvine, California
In April 2012, we entered into a lease agreement for office space in Irvine (as amended from time to time, the “Irvine Lease”). Pursuant to the terms of the Irvine Lease, we lease a total of 60,074 square feet under which we are obligated to make escalating monthly lease payments which began in August 2012 and continue through July 2022.
We lease additional office space in Chicago, Illinois, Cincinnati, Ohio, Lincoln, Nebraska, Atlanta, Georgia and Vancouver, British Columbia.
Future minimum payments for all operating leases as of December 31, 2017 are as follows (in thousands):
| | | | |
2018 | | $ | 25,510 | |
2019 | | | 24,579 | |
2020 | | | 25,006 | |
2021 | | | 25,322 | |
2022 | | | 23,032 | |
All future years | | | 38,722 | |
| | | | |
Total future minimum lease payments | | $ | 162,171 | |
| | | | |
Rent expense for the years ended December 31, 2017, 2016 and 2015, was $21.4 million, $16.6 million and $14.9 million, respectively. Total minimum rentals to be received in the future under noncancelable subleases as of December 31, 2017 is $1.6 million.
Purchase Commitments
As of December 31, 2017, we hadnon-cancelablepurchase commitments for content related to our mobile applications and websites totaling $216.8 million.and certain cloud computing services as well as homes we are under contract to purchase through Zillow Offers but that have not closed as of the respective date. The amounts due for this contentnon-cancelable purchase commitments excluding homes under contract as of December 31, 20172019 are as follows (in thousands):
| | | | |
2018 | | $ | 57,822 | |
2019 | | | 63,500 | |
2020 | | | 63,500 | |
2021 | | | 32,000 | |
| | | | |
Total future purchase commitments | | $ | 216,822 | |
| | | | |
| | | | | |
| Purchase Obligations |
| 2020 | $ | 65,375 | |
| 2021 | 32,507 | |
| 2022 | 507 | |
| 2023 | 507 | |
| Total future purchase commitments | $ | 98,896 | |
As of December 31, 2019, the value of homes under contract that have not closed was $163.4 million.
Letters of Credit
As of December 31, 2019 and 2018, we have outstanding letters of credit of approximately $16.9 million which secure our lease obligations in connection with certain of our office space operating leases.
In the course of business, we are required to provide financial commitments in the form of surety bonds to third parties as a guarantee of our performance on and our compliance with certain obligations. If we were to fail to perform or comply with these obligations, any draws upon surety bonds issued on our behalf would then trigger our payment obligation to the surety bond issuer. We have outstanding surety bonds issued for our benefit of approximately
$3.7$10.2 million and
$3.6$8.9 million,
respectively, as of December 31,
20172019 and
2016, respectively.December 31, 2018.
We are involved in a number of legal proceedings concerning matters arising in connection with the conduct of our business activities, some of which are at preliminary stages and some of which seek an indeterminate amount of damages. We regularly evaluate the status of legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made if accruals are not appropriate. For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in preliminary stages; (ii) specific damages have not been sought; (iii) damages sought are, in our view, unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories presented. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial position, results of operations or cash flow.
In March 2015, For the Wage and Hour Division of the U.S. Department of Labor (“DOL”) notified the Company that it was initiating a compliance review to determine the Company’s compliance with one or more federal labor laws enforced by the DOL. Asmatters discussed below, on May 5, 2016, Zillow, Inc. agreed to settle a class action lawsuit which alleged, among other things, claims that we failed to provide meal and rest breaks, failed to pay overtime, and failed to keep accurate recordshave not recorded any material accruals as of employees’ hours worked. The settlement of the class action lawsuit, which was approved by the court on October 3, 2017, was contingent on Zillow, Inc.’s complete resolution of the DOL compliance review. On November 28, 2016, Zillow, Inc. entered into a settlement agreement with the DOL that resolved the DOL’s compliance review. Under the terms of the settlement agreement, Zillow, Inc. agreed that it will make the voluntary payments contemplated by the class action lawsuit settlement and establish and maintain certain procedures to promote future compliance with the Fair Labor Standards Act. The settlement agreement with the DOL does not require Zillow, Inc. to make any payments which are in addition to those contemplated by the class action lawsuit settlement. Zillow, Inc. has not admitted liability with respect to either the DOL settlementDecember 31, 2019 or the class action lawsuit settlement.
In November 2014, a former employee filed a putative class action lawsuit against us in the United States District Court, Central District of California, with the caption Ian Freeman v. Zillow, Inc. The complaint alleged,
among other things, claims that we failed to provide meal and rest breaks, failed to pay overtime, and failed to keep accurate records of employees’ hours worked. After the court granted our two motions to dismiss certain claims, plaintiff filed a second amended complaint that includes claims under the Fair Labor Standards Act. On November 20, 2015, plaintiff filed a motion for class certification. On February 26, 2016, the court granted the plaintiff’s motion for class certification. On May 5, 2016, the parties agreed to settle the lawsuit, which was later memorialized in a settlement agreement executed by the parties on December 2, 2016, with payment by Zillow, Inc. of up to $6.0 million. On June 9, 2016, the Ninth Circuit Court of Appeals granted our petition for permission to appeal the order granting class certification. The settlement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties. On April 10, 2017, the parties executed an amendment to the settlement agreement providing that the settlement class includes all current and former inside sales consultants employed by Zillow, Inc. in (i) its California offices from November 19, 2010 through the date on which the court granted preliminary approval and (ii) its Washington offices from March 1, 2013 through the date on which the court granted preliminary approval. On May 26, 2017, the court granted preliminary approval of the settlement of the class action lawsuit, and on October 3, 2017, the court granted final approval of the settlement of the class action lawsuit. We made the voluntary payments contemplated by the class action settlement agreement in the amount of $6.0 million in October 2017. We do not believe that any additional loss will be incurred related to this matter given the court granted final approval of the settlement of the class action lawsuit in October 2017.
2018.
In July 2015, VHT, Inc. (“VHT”) filed a complaint against us in the U.S. District Court for the Western District of Washington alleging copyright infringement of VHT’s images on the Zillow Digs site. In January 2016, VHT filed an amended complaint alleging copyright infringement of VHT’s images on the Zillow Digs site as well as the Zillow listing site. In December 2016, the court granted a motion for partial summary judgment that dismissed VHT’s claims with respect to the Zillow listing site. A federal jury trial began on January 23, 2017, and on February 9, 2017, the jury returned a verdict finding that the Company had infringed VHT’s copyrights in images displayed or saved to the Digs site. The jury awarded VHT $79,875 in actual damages and approximately $8.2 million in statutory damages. In March 2017, the Company filed motions in the district court seeking judgment for the Company on certain claims that are the subject of the verdict, and for a new trial on others. On June 20, 2017, the judge ruled anddistrict court granted in part our motions, finding that VHT failed to present sufficient evidence to prove direct copyright infringement for a portion of the images, reducing the total damages to approximately $4.1 million. On October 26, 2017,March 15, 2019, after the Company had filed an appeal with the Ninth Circuit Court of Appeals seeking review of the final judgment and certain prior rulings entered by the district court. We did not recordcourt, the Ninth Circuit Court of Appeals issued an accrual related to this complaint asopinion that, among other things, (i) affirmed the district court’s grant of summary judgment in favor of Zillow on direct infringement of images on Zillow’s listing site, (ii) affirmed the district court’s grant in favor of Zillow of judgment notwithstanding the verdict on certain images that were displayed on the Zillow Digs site, (iii) remanded consideration of the
issue whether VHT’s images on the Zillow Digs site were part of a compilation or individual photos, and (iv) vacated the jury’s finding of willful infringement. On October 7, 2019, the United States Supreme Court denied VHT’s petition for writ of certiorari seeking review of certain rulings by the Ninth Circuit Court of Appeals. On December
31, 2016, as we did not believe9, 2019, the Company filed a
loss was probable. We have recorded an estimated liabilitymotion for
approximately $4.1 million assummary judgment with the district court seeking a ruling that VHT’s images are a compilation, or in the alternative, seeking a dismissal of
December 31, 2017, which is classified in general and administrative expenses in our consolidated statement of operations for the
year ended December 31, 2017.case based on a recent United States Supreme Court ruling. We do not believe there is a reasonable possibility that a material loss
in excess of amounts accrued may be
incurred.In April 2017, we received a Civil Investigative Demand from the Consumer Financial Protection Bureau (“CFPB”) requesting information related to our March 2017 response to the CFPB’s February 2017 Notice and Opportunity to Respond and Advise (“NORA”) letter. The NORA letter notified us that the CFPB’s Office of Enforcement was considering whether to recommend that the CFPB take legal action against us, alleging that we violated Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) and Section 1036 of the Consumer Financial Protection Act (“CFPA”). This notice stemmed from an inquiry that commenced in 2015 when we received and responded to an initial Civil Investigative Demand from the CFPB. Based on correspondence from the CFPB in August 2017, we understand that it has concluded its investigation. The CFPB invited us to discuss a possible settlement and indicated that it intended to pursue further action if those discussions do not result in a settlement. We continue to believe that our acts and practices are lawful and that ourco-marketing program allows lenders and agents to comply with RESPA, and we will vigorously defend against any allegations to the contrary. Should the CFPB commence an action against us, it may seek restitution, disgorgement, civil monetary penalties, injunctive relief or other corrective action. We cannot provide assurance that the CFPB will not commence a legal action against us in this matter, nor are we able to predict the likely outcome of any such
action. As of December 31, 2017, we have recorded an accrual for an immaterial amount in connection with this matter. There is a reasonable possibility that a loss in excess of amounts accrued may be incurred; however, the possible loss or range of loss is not estimable. We did not record an accrualincurred related to this matter as of December 31, 2016 because the possible loss or range of loss was not estimable.
complaint.
In August and September 2017,
two2 purported class action lawsuits were filed against us and certain of our executive officers, alleging, among other things, violations of federal securities laws on behalf of a class of those who purchased our common stock between February 12, 2016 and August 8, 2017. One of those purported class actions, captioned Vargosko v. Zillow Group, Inc. et al, was brought in the U.S. District Court for the Central District of California. The other purported class action lawsuit, captioned Shotwell v. Zillow Group, Inc. et al, was brought in the U.S. District Court for the Western District of Washington. The complaints allege, among other things, that during the period between February 12, 2016 and August 8, 2017, we issued materially false and misleading statements regarding our business practices. The complaints seek to recover, among other things, alleged damages sustained by the purported class members as a result of the alleged misconduct. In November 2017, an amended complaint was filed against us and certain of our executive officers in the Shotwell v. Zillow Group class action lawsuit, extending the beginning of the class period to November 17, 2014.
We anticipate thatIn January 2018, the Vargosko v. Zillow Group purported class action lawsuit was transferred to the U.S. District Court for the Western District of Washington and consolidated with the Shotwell v. Zillow Group purported class action lawsuit. In February 2018, the plaintiffs filed a consolidated amended complaint,
will beand in April 2018, we filed
our motion to dismiss the consolidated amended complaint. In October 2018, our motion to dismiss was granted without prejudice, and in
November 2018, the
first quarter ofplaintiffs filed a second consolidated amended complaint, which we moved to dismiss in December 2018.
On April 19, 2019, our motion to dismiss the second consolidated amended complaint was denied, and we filed our answer to the second amended complaint on May 3, 2019. On October 11, 2019, plaintiffs filed a motion for class certification. We
intend to denyhave denied the allegations of wrongdoing and
intend to vigorously defend the claims in
these lawsuits.this lawsuit. We
have not recorded an accrual related to these lawsuits as of December 31, 2017, as we do not believe a loss
related to this complaint is probable.
In October and November 2017 and January and February 2018, four4 shareholder derivative lawsuits were filed in the U.S. District Court for the Western District of Washington and the Superior Court of the State of Washington, King County, against certain of our executive officers and directors seeking unspecified damages on behalf of the Company and certain other relief, such as reform to corporate governance practices. The plaintiffs in the derivative suits (in which the Company is a nominal defendant) allege, among other things, that the defendants breached their fiduciary duties in connection with oversight of the Company’s public statements and legal compliance, and as a result of the breach of such fiduciary duties, the Company was damaged, and defendants were unjustly enriched. Certain of the plaintiffs also allege, among other things, violations of Section 14(a) of the Securities Exchange Act of 1934 and waste of corporate assets. The defendants intendOn February 5, 2018, the U.S. District Court for the Western District of Washington consolidated the 2 shareholder derivative lawsuits pending in that court. On February 16, 2018, the Superior Court of the State of Washington, King County, consolidated the 2 shareholder derivative lawsuits pending in that court. All 4 of the shareholder derivative lawsuits were stayed until our motion to dismiss the second consolidated amended complaint in the securities class action lawsuit discussed above was denied in April 2019. On July 8, 2019, the plaintiffs in the consolidated federal derivative lawsuit filed a consolidated shareholder derivative complaint, which we moved to dismiss on August 22, 2019. We do not believe a loss is probable related to these lawsuits.
On September 17, 2019, International Business Machines Corporation (“IBM”) filed a complaint against us in the United States District Court for the Central District of California, alleging, among other things, that the Company has infringed and continues to willfully infringe 7 patents held by IBM and seeks unspecified damages, including a request that the amount of compensatory damages be trebled, injunctive relief and costs and reasonable attorneys’ fees. On December 2, 2019, IBM filed an amended complaint. On December 16, 2019, the Company filed a motion to transfer venue and a motion to dismiss the complaint. We deny the allegations of
any wrongdoing and
intend to vigorously defend the claims in the lawsuit.
We have not recorded an accrualThere is a reasonable possibility that a loss may be incurred related to
these lawsuits asthis complaint; however, the possible loss or range of
December 31, 2017, as we do not believe a loss is
probable.not estimable.
In addition to the matters discussed above, from time to time, we are involved in litigation and claims that arise in the ordinary course of business. Although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements and out of intellectual property infringement claims made by third parties. In addition, we have agreements that indemnify certain issuers of surety bonds against losses that they may incur as a result of executing surety bonds on our behalf. For our indemnification arrangements, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments. In addition, we have indemnification agreements with certain of our directors and executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations may vary.
Note
17.21. Related Party Transactions
In February 2016,
On April 3, 2019, we
paidentered into a
totalCharter Service Agreement with Executive Jet Management, Inc. for the occasional use by us of
approximately $0.2 million and $0.2 million, respectively, toan aircraft owned by an entity that is owned by Mr. Lloyd Frink, our
ViceExecutive Chairman and President,
and Mr. Richard Barton, our Executive Chairman, for reimbursement of costs incurred by Mr. Frink and Mr. Barton for use of private planes by certain of the Company’s employees and Mr. Frink and Mr. Barton for business
travel in prior years.In February 2015, we paidtravel. We recognized approximately $0.3 million in filing fees directlyexpenses pursuant to the Federal Trade Commission (the “FTC”), on behalf of and in connection with filings made by Mr. Barton underCharter Service Agreement for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), which filings were required due to Mr. Barton’s ownership of Zillow, Inc.’s common stock. In April 2016, we paid approximately $0.1 million for a tax“gross-up” payment to Mr. Barton to cover the imputed income associated with one of his HSR Act filings.
year ended December 31, 2019.
Note
18.22. Self-Insurance
Prior to January 1, 2016, we were self-insured for a portion of our medical and dental benefits for certain employees of Trulia since the date of our acquisition of Trulia in February 2015. Beginning on January 1, 2016, we
We are self-insured for medical benefits and dental benefits for all qualifying Zillow Group employees. The medical plan carries a stop-loss policy which will protectprovides protection when cumulative medical claims exceed 125% of expected claims for the plan year with a limit of $1.0 million and from individual claims during the plan year exceeding $150,000.$500,000. We record estimates of the total costs of claims incurred based on an analysis of historical data and independent estimates. Our liability for self-insured medical claims is included within accrued compensation and benefits in our consolidated balance sheetsheets and was $2.0$3.6 million and $1.7$3.9 million, respectively, as of December 31, 20172019 and 2016.December 31, 2018.
Note
19.23. Employee Benefit Plan
Prior to January 1, 2016, we maintained separate defined contribution 401(k) retirement plans for employees of Zillow, Inc. and Trulia. Effective January 1, 2016, we
We have a single defined contribution 401(k) retirement plan covering Zillow Group employees who have met certain eligibility requirements (“the Zillow(the “Zillow Group 401(k) Plan”). Eligible employees may contribute pretax compensation up to a maximum amount allowable under the Internal Revenue Service limitations. Employee contributions and earnings thereon vest immediately. We currently match up to 4% of employee contributions under the Zillow Group 401(k) Plan. The total expense related to the Zillow Group 401(k) Plan was $12.3$20.8 million, $10.1$16.0 million and $4.2$12.3 million, respectively, for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
Note
20.24. Segment Information and Revenue
We
Beginning January 1, 2019, we have one3 operating and reportable segmentsegments, which hashave been identified based on howthe way in which our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. The chief executive officer acts as the chief operating decision-maker and reviews financial and operational information for the Homes, Internet, Media & Technology (“IMT”) and Mortgages segments.
The Homes segment includes the financial results from Zillow Group’s purchase and sale of homes directly. The IMT segment includes the financial results for the Premier Agent, Rentals and new construction marketplaces, dotloop, and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals. The Mortgages segment includes financial results for advertising sold to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and the sale of mortgages on an entity-wide basis. Therethe secondary market, as well as Mortech mortgage software solutions.
Revenue and costs are
nodirectly attributed to our segments when possible. However, due to the integrated structure of our business, certain costs incurred by one segment
managers whomay benefit the other segments. These costs primarily include headcount-related expenses, general and administrative expenses including executive, finance, accounting, legal, human resources, recruiting, and facilities costs, product development and data acquisition costs and marketing and advertising costs. These costs are
held accountable for operations, operating results or plans for levels or components.allocated to each segment based on the estimated benefit each segment receives from such expenditures.
The chief executive officer reviews information about
revenue categories, including marketplace revenue and display revenue. The following table presents our revenue categories
duringas well as statement of operations data inclusive of loss before income taxes by segment. This information is included in the following tables for the periods presented (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Marketplace revenue: | | | | | | | | | | | | |
Premier Agent | | $ | 761,594 | | | $ | 604,292 | | | $ | 446,921 | |
Other real estate | | | 164,991 | | | | 102,635 | | | | 35,171 | |
Mortgages | | | 80,591 | | | | 71,133 | | | | 44,263 | |
Market Leader | | | — | | | | — | | | | 29,549 | |
| | | | | | | | | | | | |
Total Marketplace revenue | | | 1,007,176 | | | | 778,060 | | | | 555,904 | |
Display revenue | | | 69,618 | | | | 68,529 | | | | 88,773 | |
| | | | | | | | | | | | |
Total revenue | | $ | 1,076,794 | | | $ | 846,589 | | | $ | 644,677 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | | | | | Year Ended December 31, 2018 | | | | | | Year Ended December 31, 2017 | | | | |
| Homes | | IMT | | Mortgages | | Homes | | IMT | | Mortgages | | Homes | | IMT | | Mortgages |
| Revenue: | | | | | | | | | | | | | | | | | |
| Homes | $ | 1,365,250 | | | $ | — | | | $ | — | | | $ | 52,365 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Premier Agent | — | | | 923,876 | | | — | | | — | | | 898,332 | | | — | | | — | | | 761,594 | | | — | |
| Rentals | — | | | 164,173 | | | — | | | — | | | 134,587 | | | — | | | — | | | 102,544 | | | — | |
| Other | — | | | 188,847 | | | — | | | — | | | 168,224 | | | — | | | — | | | 132,065 | | | — | |
| Mortgages | — | | | — | | | 100,691 | | | — | | | — | | | 80,046 | | | — | | | — | | | 80,591 | |
| Total revenue | 1,365,250 | | | 1,276,896 | | | 100,691 | | | 52,365 | | | 1,201,143 | | | 80,046 | | | — | | | | 996,203 | | | | 80,591 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | |
| Cost of revenue | 1,315,345 | | | 98,522 | | | 18,154 | | | 49,392 | | | 96,693 | | | 7,505 | | | — | | | 80,310 | | | 4,893 | |
| Sales and marketing | 171,634 | | | 488,909 | | | 53,585 | | | 17,134 | | | 502,785 | | | 32,702 | | | — | | | 415,739 | | | 32,462 | |
| Technology and development | 78,994 | | | 365,769 | | | 32,584 | | | 21,351 | | | 363,712 | | | 25,755 | | | — | | | 297,007 | | | 22,978 | |
| General and administrative | 81,407 | | | 243,636 | | | 41,133 | | | 22,002 | | | 220,564 | | | 19,587 | | | — | | | 192,581 | | | 18,235 | |
| Impairment costs | — | | | — | | | — | | | — | | | 75,000 | | | 4,000 | | | — | | | 161,850 | | | 12,150 | |
| Acquisition-related costs | — | | | — | | | — | | | — | | | 27 | | | 2,305 | | | — | | | 463 | | | — | |
| Integration costs | — | | | — | | | 650 | | | — | | | — | | | 2,015 | | | — | | | — | | | — | |
| Total costs and expenses | 1,647,380 | | | 1,196,836 | | | 146,106 | | | 109,879 | | | 1,258,781 | | | 93,869 | | | — | | | 1,147,950 | | | 90,718 | |
| Income (loss) from operations | (282,130) | | | 80,060 | | | (45,415) | | | (57,514) | | | (57,638) | | | (13,823) | | | — | | | (151,747) | | | (10,127) | |
| Segment other income | — | | | — | | | 1,409 | | | — | | | — | | | 244 | | | — | | | — | | | — | |
| Segment interest expense | (29,990) | | | — | | | (956) | | | (2,177) | | | — | | | (132) | | | — | | | — | | | — | |
| Income (loss) before income taxes (1) | $ | (312,120) | | | $ | 80,060 | | | $ | (44,962) | | | $ | (59,691) | | | $ | (57,638) | | | $ | (13,711) | | | $ | — | | | $ | (151,747) | | | $ | (10,127) | |
(1) The following table presents the reconciliation of total segment loss before income taxes to consolidated loss before income taxes for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Total segment loss before income taxes | $ | (277,022) | | | $ | (131,040) | | | $ | (161,874) | |
| Corporate interest expense | (70,846) | | | (38,946) | | | (27,517) | |
| Corporate other income | 38,249 | | | 19,026 | | | 5,385 | |
| Consolidated loss before income taxes | $ | (309,619) | | | $ | (150,960) | | | $ | (184,006) | |
Certain corporate items are not directly attributable to any of our segments, including interest income earned on our short-term investments included in Other income and interest costs on our convertible senior notes included in Interest expense.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
(a) The Audit Committee (the “Audit Committee”) of the Board of Directors of the Company conducted a comprehensive, competitive process to determine the Company’s independent registered public accounting firm for the Company’s fiscal year ending December 31, 2017. As a result of this process, the Audit Committee approved the dismissal of Ernst & Young LLP (“EY”), effective upon issuance by EY of its reports on the Company’s consolidated financial statements as of and for the year ended December 31, 2016 and the effectiveness of internal control over financial reporting as of December 31, 2016 included in the filing of the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2016 (“2016 Annual Report”). The 2016 Annual Report was filed on February 7, 2017, and therefore, the effective date of EY’s dismissal is February 7, 2017.
The reports of EY on the Company’s consolidated financial statements for the years ended December 31, 2015 and 2016 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principle.
During the fiscal years ended December 31, 2015 and 2016 and during the subsequent interim period through February 7, 2017, there were no disagreements (as that term is defined in Item 304(a)(1)(iv) of RegulationS-K) between the Company and EY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of EY, would have caused EY to make reference to the subject matter of the disagreements in connection with EY’s report on the Company’s consolidated financial statements for such fiscal years. During the fiscal years ended December 31, 2015 and 2016 and during the subsequent interim period through February 7, 2017, there were no reportable events (as defined in Item 304(a)(1)(v) of RegulationS-K).
The Company provided EY with the statements made by the Company in response to Item 304(a) of RegulationS-K prior to its filing with the Securities and Exchange Commission (“SEC”) and requested that EY provide the Company with letters addressed to the SEC stating whether EY agrees with the statements made by the Company in response to Item 304(a) of RegulationS-K. A copy of these letters, dated August 4, 2016 and February 7, 2017, furnished by EY in response to the Company’s request, are filed as Exhibit 16.1 and Exhibit 16.2 to this report, respectively.
(b) On August 3, 2016, the Audit Committee approved the engagement of Deloitte & Touche LLP (“Deloitte”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ending December 31, 2017. During the two most recent fiscal years ended December 31, 2015 and 2016 and during the subsequent period through the date of the engagement of Deloitte, neither the Company nor anyone acting on its behalf has consulted with Deloitte regarding:
| (i) | The application of accounting principles to a specified transaction, either completed or proposed, or |
| (ii) | The type of audit opinion that might be rendered on the Company’s financial statements, and either a written report was provided to the Company or oral advice was provided that Deloitte concluded was an important factor considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issue; or |
| (iii) | Any matter that was either the subject of a disagreement or a reportable event, as each term is defined in Items 304(a)(1)(iv) or (v) of RegulationS-K, respectively. |
There were no disagreements with Deloitte on accounting and financial disclosure matters from the date of the engagement of Deloitte through the year ended December 31, 2017, or in any period subsequent to such date, through the date of this report.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, with the participation of our management, and under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under
Rule 13a-15(e) and Rule
15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31,
2017.2019.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Rule
13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31,
2017.2019.
We intend to regularly review and evaluate the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and to improve these controls and procedures over time and to correct any deficiencies that we may discover in the future. While we believe the present design of our disclosure controls and procedures and internal control over financial reporting are effective, future events affecting our business may cause us to modify our controls and procedures.
The Company’s independent registered public accounting firm has issued an attestation report regarding its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31,
2017.2019.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2017, the Company implemented a new enterprise resource planning (“ERP”) system to support our procurement and financial reporting processes. We implemented this new ERP system to enhance our overall system of internal control over financial reporting through further automation and integration of business processes. The ERP system was not implemented in response to any identified deficiency or material weakness in the Company’s internal control over financial reporting. As a result of this implementation, we have modified the design and documentation of certain internal control processes and procedures relating to the ERP system.
Other than the ERP system implementation described above, there
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule
13a-15(d) and
15d-15(d) of the Exchange Act that occurred during the three months ended December 31,
20172019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Zillow Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Zillow Group, Inc. (the “Company”) as of December 31,
2017,2019, based on criteria established in Internal
Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2017,2019, based on criteria established in Internal
Control—Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of and for the year ended December 31,
2017,2019, and our report dated February
15, 201819, 2020 expressed an unqualified opinion on those financial
statements.statements and included an explanatory paragraph related to the Company’s change in method of accounting for leases as of January 1, 2019 due to the adoption of the new lease accounting standard.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTEDELOITTE & TOUCHETOUCHE LLP February 15, 201819, 2020
Item 9B. Other Information.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the
20182019 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the
20172019 fiscal year.
We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, principal accounting officer andChief Accounting Officer, controller and persons performing similar functions. The Code of Ethics is posted on our website at http://investors.zillowgroup.com/corporate-governance.cfm. We intend to satisfy the disclosure requirements under Item 5.05 of Form8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics by posting such information on our website at the address specified above.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the 20182019 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 20172019 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the 20182020 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 20172019 fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the 20182020 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 20172019 fiscal year.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the
20182020 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the
20172019 fiscal year.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements We have filed the financial statements listed in the Index to Consolidated Financial Statements as a part of this Annual Report on Form
10-K.(a)(2) Financial Statement Schedules All financial statement schedules have been omitted because they are not applicable, not material or the required information is presented in the financial statements or the notes thereto.
Certain of the following exhibits have heretofore been filed with the Securities and Exchange Commission and are incorporated by reference from the documents described in parentheses. Certain others are filed herewith. The exhibits are numbered in accordance with Item 601 of Regulation
S-K. In reviewing the agreements included as exhibits to this Annual Report on Form
10-K, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreement. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other party or parties to the applicable agreement and (i) should not be treated as categorical statements of fact, but rather as a means of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a manner that is different from what may be viewed as material to you or other investors; and (iv) were made only as of the date of the applicable agreement or other date or dates that may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Annual Report on Form
10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
| | | | | | | | |
Exhibit
Number | | Description |
| | |
Exhibit
Number
2.1+ | | Description
|
| |
2.1+ | | Agreement and Plan of Merger, dated August 16, 2013, by and among Zillow, Inc., NMD Interactive, Inc., d/b/a StreetEasy, Strawberry Acquisition, Inc. and Shareholder Representative Services LLC (Filed as Exhibit 2.1 to Zillow, Inc.’s Current Report on Form8-K filed with the Securities and Exchange Commission on August 19, 2013, and incorporated herein by reference). |
| | |
2.2+3.1 | | Agreement and Plan of Merger, dated July 28, 2014, by and among Zillow, Inc., the Company (f/k/a Zebra Holdco, Inc.) and Trulia, Inc. (Filed as Exhibit 2.1 to Zillow, Inc.’s Current Report on Form8-K filed with the Securities and Exchange Commission (FileNo. 001-35237) on July 29, 2014, and incorporated herein by reference). |
| |
3.1
| | |
| | |
| 3.2 | | |
| | |
Exhibit
Number
| | Description
|
| 4.1 | |
4.1 | | |
| | |
| 4.2 | | |
| | |
| | | | | | | | |
| 4.3 | | |
| | |
| 4.4 | | |
| | |
| 4.5 | | |
| | |
| 4.6 | | |
| | |
| 4.7 | | |
| | |
| 4.8 | | |
| | |
| 4.9 | | |
| | |
| 4.10 | | |
| | |
10.1*4.11 | | Indenture, dated as of July 3, 2018, by and between Zillow Group, Inc. Amended and Restated 2005 Equity Incentive PlanThe Bank of New York Mellon Trust Company, N.A., as trustee (Filed as Exhibit 10.54.1 to Zillow, Inc.Registrant’s Amendment No. 3 to Registration StatementCurrent Report on FormS-1 8-K filed with the Securities and Exchange Commission (SEC FileNo. 333-173570)on June 20, 2011,July 3, 2018, and incorporated herein by reference). |
| | |
| 4.12 | | |
| | |
| 4.13 | | |
| | |
| 4.14 | | |
| | |
| 4.15 | | |
| | |
| 4.16 | | |
| | |
10.2*4.17 | | |
| | |
| | |
Exhibit
Number
| | Description
|
| |
10.4* | | |
| | |
10.5*10.3* | | |
| | |
10.6*10.4* | | |
| | |
10.7*10.5* | | |
| | |
10.8*10.6* | | |
| | |
10.9*10.7* | | |
| | |
10.10*10.8* | | |
| | |
10.11*10.9* | | |
| | |
10.12*10.10* | | |
| | |
10.13*10.11* | | |
| | |
10.14*10.12* | | |
| | |
10.15*10.13* | | |
| | |
10.16*10.14* | | |
| | |
| | | | | | | | |
Exhibit
Number
10.15* | | Description
|
| |
10.17* | | |
| | |
10.18*10.16* | | Executive Employment Agreement by and between Spencer M. Rascoff and Zillow, Inc. (Filed as Exhibit 10.14 to Zillow, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission (SEC File No. 333-173570) on May 23, 2011, and incorporated herein by reference). |
| |
10.19* | | Executive Employment Agreement by and between Kathleen Philips and Zillow, Inc. (Filed as Exhibit 10.16 to Zillow, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission (SEC File No. 333-173570) on May 23, 2011, and incorporated herein by reference). |
| |
10.20* | | |
| | |
10.21*10.17* | | |
| | |
10.22*10.18* | | Letter Agreement dated June 16, 2014 by and between Zillow, Inc. and Greg M. Schwartz (Filed as Exhibit 10.1 to Zillow, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2014, and incorporated herein by reference). |
| |
10.23* | | Letter Agreement dated April 23, 2015 by and between Zillow Group, Inc. and Greg M. Schwartz (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2015, and incorporated herein by reference). |
| |
10.24* | | Amended and Restated Letter Agreement dated August 3, 2015, by and between Zillow Group, Inc. and Greg M. Schwartz (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2015, and incorporated herein by reference). |
| |
10.25* | | Letter Agreement dated February 24, 2016 by and between Zillow Group, Inc. and Greg M. Schwartz (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 29, 2016, and incorporated herein by reference). |
| |
10.26* | | Letter Agreement dated March 6, 2017 by and between Zillow Group, Inc. and Greg M. Schwartz (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 8, 2017, and incorporated herein by reference). |
| |
10.27* | | Executive Employment Agreement, dated February 17, 2015, between Paul Levine and Zillow Group, Inc. (Filed as Exhibit 10.8 to Registrant’s Current Report on Form 8-K12B filed with the Securities and Exchange Commission on February 17, 2015, and incorporated herein by reference). |
| |
10.28* | | Transition Employment Letter Agreement, dated February 17, 2015, by and between Peter Flint and Zillow Group, Inc. (Filed as Exhibit 10.27 to Registrant’s Quarterly Report on Form 10-Q filed on May 12, 2015, and incorporated herein by reference). |
| |
10.29* | | |
| | | | | | | | |
10.4110.29 | | |
| | |
10.4210.30 | | |
| | |
10.4310.31 | | |
| | |
Exhibit
Number
| | Description
|
| 10.32 | |
10.44 | | |
| | |
10.4510.33 | | Settlement Agreement and Release, dated as of June 6, 2016, among Move, Inc., Real Select, Inc., Top Producer Systems Company, National Association of Realtors, Realtors Information Network, Inc., Zillow, Inc., Errol Samuelson, and Curt Beardsley (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2016, and incorporated herein by reference). |
| |
10.46 | | |
| | |
10.4710.34 | | |
| | |
10.4810.35 | | |
| | |
10.4910.36 | | |
| | |
10.5010.37 | | |
| | |
10.5110.38 | | |
| | |
| 10.39 | | |
| | |
| 10.40 | | |
| | |
| 10.41 | | |
| | |
| 10.42 | | |
| | |
| | | | | | | | |
| 10.43 | | |
| | |
| 10.44 | | |
| | |
| 10.45 | | |
| | |
| 10.46 | | |
| | |
| 10.47 | | |
| | |
16.1
10.48* | | |
| | |
| 10.49* | | |
| | |
| 10.50* | | |
| | |
| 10.51* | | |
| | |
| 10.52* | | |
| | |
| 10.53* | | |
| | |
| 10.54* | | |
| | |
| 10.55* | | |
| | |
| 10.56 | | |
| | |
| | |
Exhibit
Number
| | Description
|
| 32.1 | |
32.1# | | |
| | |
32.2#32.2 | | |
| | |
| 101.INS | | Inline XBRL Instance Document.Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document). |
| | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
| 101.PRE | | XBRLInlineXBRL Taxonomy Extension Presentation Linkbase Document. |
+ | | |
| 104 | | Coverage Page Interactive Data File (embedded within the Inline XBRL document). |
| | |
| * | | Indicates a management contract or compensatory plan or arrangement. |
| | |
| + | | Schedules omitted pursuant to Item 601(b)(2) of RegulationS-K. Zillow Group agrees to furnish a supplemental copy of any omitted schedule to the Securities and Exchange Commission upon request. |
* | Indicates a management contract or compensatory plan or arrangement. |
# | Indicates exhibit is furnished, not filed, for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. The certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates it by reference. |
Item 16. Form
10-K Summary.
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| Dated: February 19, 2020 | | ZILLOW GROUP, INC. | |
| | |
Date: February 15, 2018 | | By: | | /S/ KATHLEEN PHILIPS
|
| | Name:By: | | Kathleen Philips/s/ JENNIFER ROCK |
| | Title:Name: | Jennifer Rock |
| | Title: | Chief FinancialAccounting OfficerChief Legal Officer, and Secretary
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on February
15, 2018.19, 2020. | | | | | | | | |
| | |
Signature | | Title |
| | |
/s/ SPENCER M. RASCOFFSpencer M. Rascoff
ICHARD BARTON | | Chief Executive Officer (Principal Executive Officer) and Director |
| Richard Barton | | |
| | |
/s/ KATHLEENALLEN PHILIPSKathleen Philips
ARKER | | Chief Financial Officer Chief Legal Officer, and Secretary (Principal Financial and Accounting Officer) |
| Allen Parker | | |
| | |
/s/ JENNIFERRICHARD BARTONRichard Barton
OCK | | Executive Chairman and Director
Chief Accounting Officer (Principal Accounting Officer) |
| Jennifer Rock | | |
| | |
/s/ LLOYD D. FRINKLloyd D. Frink
| | ViceExecutive Chairman, President and Director
|
| Lloyd D. Frink | | |
| | |
| | Director |
| Erik Blachford | | |
| | |
/s/ APRIL UNDERWOOD | | Director |
| April Underwood | | |
| | |
/s/ APRIL UNDERWOODApril Underwood
JAY C. HOAG | | Director |
| Jay C. Hoag | | |
| | |
/s/ GREGORY B. MAFFEI | | Director |
| Gregory B. Maffei | | |
| | |
/s/ JAY C. HOAGJay C. Hoag
SPENCER M. RASCOFF | | Director |
| Spencer M. Rascoff | | |
| | |
/s/ GREGORY B. MAFFEIGregory B. Maffei
ORDON STEPHENSON | | Director |
| Gordon Stephenson | | |
| | |
/s/ GORDON STEPHENSONGordon Stephenson
AMY BOHUTINSKY | | Director |
| Amy Bohutinsky | | |
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