UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~

2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36853

ZILLOW GROUP, INC.

(Exact name of registrant as specified in its charter)



Washington		47-1645716
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


~~1301 Second Avenue, Floor 31, Seattle, Washington~~		~~98101~~
~~(Address of principal executive offices)~~		~~(Zip Code)~~

~~(206)~~

1301 Second Avenue, Floor 31,

Seattle, Washington98101

(Address of principal executive offices) (Zip Code)

(206) 470-7000

@ZillowGroup

(Registrant’s telephone number, including area code)

_____________________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share	ZG	The Nasdaq Global Select Market
Class C Capital Stock, par value $0.0001 per share	Z	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐


		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October ~~30, 2017, 56,306,369~~31, 2019, 58,524,004 shares of Class A common stock, 6,217,447 shares of Class B common stock, and ~~126,352,820~~142,711,993 shares of Class C capital stock were outstanding.

ZILLOW GROUP, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended September 30, ~~2017~~

2019

TABLE OF CONTENTS



		Page
	~~Page~~
		PART I – FINANCIAL INFORMATION

~~Item 1.~~		~~Financial Statements (unaudited)~~
2Item 1.	Financial Statements (unaudited)	3
		Condensed Consolidated Balance Sheets	3
		2
		Condensed Consolidated Statements of Operations	4
		3
		Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss	5
	Condensed Consolidated Statements of Shareholders’ Equity	4	6
		Condensed Consolidated Statements of Cash Flows	8
		5
		Notes to Condensed Consolidated Financial Statements		6	9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		23	29
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55
			40
~~Item 4.~~		~~Controls and Procedures~~		41

		PART II – OTHER INFORMATION

~~Item 1.~~		~~Legal Proceedings~~
42Item 1.	Legal Proceedings	56
Item 1A.		Risk Factors		43	57
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 6.	Exhibits	59
			44
~~Item 6.~~		~~Exhibits~~Signatures		45

		~~Signatures~~61		46

Table of Contents

As used in this Quarterly Report on Form 10-Q, the terms “Zillow Group,” “the Company,” “we,” “us” and “our” refer to Zillow Group, Inc., unless the context indicates otherwise.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those risks, uncertainties and assumptions described in Part 1,I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~ 2018, including, but not limited to:

•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;

•acquisitions, strategic partnerships, joint ventures, capital-raising activities, or other corporate transactions or commitments by us or our competitors;

•actual or anticipated changes in technology, products, markets or services by us or our competitors;

•changes in laws or regulations applicable to our business, employees, products or services;

•ability to obtain or maintain licenses and permits to support our current and future businesses;

•the current and future health and stability of the residential housing market;

•ability to maintain or establish relationships with listings and data providers;

•fluctuations in the valuation of companies perceived by investors to be comparable to us; and

•issuance of new or updated research or reports by securities analysts.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

WHERE YOU CAN FIND MORE INFORMATION

Our filings with the Securities and Exchange Commission, or SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available on our website at www.zillowgroup.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this quarterly report on Form 10-Q or any other document we file with the SEC.

Investors and others should note that Zillow Group announces material financial information to its investors using its press releases, SEC filings and public conference calls and webcasts. Zillow Group intends to also use the following channels as a means of disclosing information about Zillow Group, its services and other matters and for complying with its disclosure obligations under Regulation FD:

Zillow Group Investor Relations Webpage (http://investors.zillowgroup.com)

Zillow Group Investor Relations Blog (http://www.zillowgroup.com/ir-blog)

Zillow Group Twitter Account (https://twitter.com/zillowgroup)

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 quarterly report on Form 10-Q 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.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data, unaudited)

   September 30,
2017 December 31,
2016
Assets

Current assets:

Cash and cash equivalents
   $ 319,942 $ 243,592
Short-term investments
   361,038 262,870
Accounts receivable, net of allowance for doubtful accounts of $3,990 and $1,337 at September 30, 2017 and December 31, 2016, respectively
   53,951 40,527
Prepaid expenses and other current assets
   30,014 34,817


Total current assets
   764,945 581,806
Restricted cash
   1,053 1,053
Property and equipment, net
   110,741 98,288
Goodwill
   1,931,260 1,923,480
Intangible assets, net
   505,696 527,464
Other assets
   27,006 17,586


Total assets
   $ 3,340,701 $ 3,149,677


Liabilities and shareholders’ equity

Current liabilities:

Accounts payable
   $ 4,915 $ 4,257
Accrued expenses and other current liabilities
   55,598 38,427
Accrued compensation and benefits
   25,252 24,057
Deferred revenue
   31,060 29,154
Deferred rent, current portion
   1,930 1,347


Total current liabilities
   118,755 97,242
Deferred rent, net of current portion
   17,787 15,298
Long-term debt
   380,795 367,404
Deferred tax liabilities and other long-term liabilities
   134,372 136,146


Total liabilities
   651,709 616,090
Commitments and contingencies (Note 14)

Shareholders’ equity:

Preferred stock, $0.0001 par value; 30,000,000 shares authorized as of September 30,
2017 and December 31, 2016; no shares issued and outstanding as of September 30,
2017 and December 31, 2016
   —   —
Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized as of
September 30, 2017 and December 31, 2016; 56,280,716 and 54,402,809 shares issued
and outstanding as of September 30, 2017 and December 31, 2016, respectively
   6 5
Class B common stock, $0.0001 par value; 15,000,000 shares authorized as of
September 30, 2017 and December 31, 2016; 6,217,447 shares
issued and outstanding as of September 30, 2017 and December 31, 2016
   1 1
Class C capital stock, $0.0001 par value; 600,000,000 shares authorized as of
September 30, 2017 and December 31, 2016; 126,285,524 and 121,838,462 shares
issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
   13 12
Additional paid-in capital
   3,204,383 3,030,854
Accumulated other comprehensive loss
   (345 ) (242 )
Accumulated deficit
   (515,066 ) (497,043 )


Total shareholders’ equity
   2,688,992 2,533,587


Total liabilities and shareholders’ equity
   $ 3,340,701 $ 3,149,677



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	1,791,918		$	651,058
Short-term investments	531,679			903,867
Accounts receivable, net of allowance for doubtful accounts of $4,464 and $4,838 at September 30, 2019 and December 31, 2018, respectively	77,674			66,083
Mortgage loans held for sale	36,762			35,409
Inventory	879,353			162,829
Prepaid expenses and other current assets	66,413			61,067
Restricted cash	75,004			12,385
Total current assets	3,458,803			1,892,698
Contract cost assets	46,047			45,819
Property and equipment, net	154,251			135,172
Right of use assets	218,564			—
Goodwill	1,984,907			1,984,907
Intangible assets, net	197,527			215,904
Other assets	15,889			16,616
Total assets	$	6,075,988		$	4,291,116
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	9,717		$	7,471
Accrued expenses and other current liabilities	76,061			63,101
Accrued compensation and benefits	33,540			31,388
Revolving credit facilities	698,280			116,700
Warehouse lines of credit	30,116			33,018
Deferred revenue	41,955			34,080
Deferred rent, current portion	—			1,740
Lease liabilities, current portion	17,937			—
Total current liabilities	907,606			287,498
Deferred rent, net of current portion	—			19,945
Lease liabilities, net of current portion	223,989			—
Long-term debt	1,478,719			699,020
Deferred tax liabilities and other long-term liabilities	13,796			17,474
Total liabilities	2,624,110			1,023,937
Commitments and contingencies (Note 17)
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; 58,522,404 and 58,051,448 shares issued and outstanding as of September 30, 2019 and December 31, 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 September 30, 2019 and December 31, 2018	1			1
Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 142,689,395 and 139,635,370 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	14			14
Additional paid-in capital	4,327,003			3,939,842
Accumulated other comprehensive income (loss)	784			(905		)
Accumulated deficit	(875,930		)	(671,779		)
Total shareholders’ equity	3,451,878			3,267,179
Total liabilities and shareholders’ equity	$	6,075,988		$	4,291,116

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 2017 2016
Revenue
   $ 281,839 $ 224,592 $ 794,464 $ 618,977
Costs and expenses:

Cost of revenue (exclusive of amortization) (1)
   22,152 17,608 62,644 50,556
Sales and marketing
   107,108 93,180 344,266 291,910
Technology and development
   83,389 64,496 234,798 188,263
General and administrative
   54,226 42,625 153,038 284,175
Acquisition-related costs
   218 93 366 890
Gain on divestiture of business
   —   (1,251 ) —   (1,251 )


Total costs and expenses
   267,093 216,751 795,112 814,543


Income (loss) from operations
   14,746 7,841 (648 ) (195,566 )
Other income
   1,407 561 3,970 1,995
Interest expense
   (6,906 ) (1,595 ) (20,526 ) (4,740 )


Income (loss) before income taxes
   9,247 6,807 (17,204 ) (198,311 )
Income tax benefit (expense)
   (41 ) —   (41 ) 1,364


Net income (loss)
   $ 9,206 $ 6,807 $ (17,245 ) $ (196,947 )


Net income (loss) per share — basic and diluted
   $ 0.05 $ 0.04 $ (0.09 ) $ (1.10 )
Weighted-average shares outstanding — basic
   187,692 180,583 185,447 179,577
Weighted-average shares outstanding — diluted
   196,425 189,661 185,447 179,577


(1) Amortization of website development costs and intangible assets included in technology and development
   $ 13,442 $ 22,006 $ 59,862 $ 64,931



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue:
Homes	$	384,626		$	11,018		$	762,022		$	11,018
IMT	335,290			313,638			957,231			900,435
Mortgages	25,292			18,438			79,637			56,766
Total revenue	745,208			343,094			1,798,890			968,219
Cost of revenue (exclusive of amortization) (1):
Homes	370,796			10,226			733,947			10,312
IMT	24,318			25,186			74,628			72,070
Mortgages	4,721			1,260			13,829			3,736
Total cost of revenue	399,835			36,672			822,404			86,118
Sales and marketing	181,347			128,734			530,367			413,752
Technology and development	123,974			105,314			352,074			299,623
General and administrative	88,493			70,743			267,106			187,395
Impairment costs	—			10,000			—			10,000
Acquisition-related costs	—			1,405			—			2,064
Integration costs	5			523			650			523
Total costs and expenses	793,654			353,391			1,972,601			999,475
Loss from operations	(48,446		)	(10,297		)	(173,711		)	(31,256		)
Other income	8,999			7,773			27,625			13,308
Interest expense	(26,502		)	(12,668		)	(61,865		)	(26,928		)
Loss before income taxes	(65,949		)	(15,192		)	(207,951		)	(44,876		)
Income tax benefit	1,300			14,700			3,800			22,700
Net loss	$	(64,649	)	$	(492	)	$	(204,151	)	$	(22,176	)
Net loss per share — basic and diluted	$	(0.31	)	$	—		$	(0.99	)	$	(0.11	)
Weighted-average shares outstanding — basic and diluted	207,002			202,416			205,766			195,208
____________________ (1) Amortization of website development costs and intangible assets included in technology and development	$	15,835		$	18,165		$	44,891		$	61,735

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME (LOSS)~~

LOSS

(in thousands, unaudited)

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017    2016 2017 2016
Net income (loss)
   $ 9,206    $ 6,807 $ (17,245 ) $ (196,947 )
Other comprehensive income (loss):

Unrealized gains (losses) on investments
   99    (179 ) (103 ) 664
Reclassification adjustment for net losses from investments included in net loss
   —      —   —   5




Net unrealized gains (losses) on investments
   99    (179 ) (103 ) 669




Total other comprehensive income (loss)
   99    (179 ) (103 ) 669




Comprehensive income (loss)
   $ 9,305    $ 6,628 $ (17,348 ) $ (196,278 )



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(64,649	)	$	(492	)	$	(204,151	)	$	(22,176	)
Other comprehensive income (loss):
Unrealized gains (losses) on investments	(143		)	(428		)	1,752			(537		)
Currency translation adjustments	31			42			(63		)	(24		)
Total other comprehensive income (loss)	(112		)	(386		)	1,689			(561		)
Comprehensive loss	$	(64,761	)	$	(878	)	$	(202,462	)	$	(22,737	)

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

SHAREHOLDERS’ EQUITY

(in thousands, except share data, unaudited)

   Nine Months Ended
September 30,
   2017 2016
Operating activities

Net loss
   $ (17,245 ) $ (196,947 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of amounts assumed in connection with acquisitions:

Depreciation and amortization
   81,576 74,852
Share-based compensation expense
   84,162 81,152
Amortization of discount and issuance costs on 2021 Notes
   13,391 —
Release of valuation allowance on certain deferred tax assets
   —   (1,364 )
Loss on disposal of property and equipment
   4,085 3,416
Gain on divestiture of business
   —   (1,360 )
Bad debt expense
   5,861 1,715
Deferred rent
   3,072 312
Amortization of bond premium
   451 1,171
Changes in operating assets and liabilities:

Accounts receivable
   (19,272 ) (11,770 )
Prepaid expenses and other assets
   4,434 5,197
Accounts payable
   224 3,296
Accrued expenses and other current liabilities
   13,174 (8,746 )
Accrued compensation and benefits
   1,194 13,016
Deferred revenue
   1,775 5,645
Other long-term liabilities
   41 (21 )


Net cash provided by (used in) operating activities
   176,923 (30,436 )
Investing activities

Proceeds from maturities of investments
   204,520 158,828
Purchases of investments
   (303,241 ) (126,986 )
Proceeds from sales of investments
   —   4,963
Decrease in restricted cash
   —   1,962
Purchases of property and equipment
   (51,580 ) (45,732 )
Purchases of intangible assets
   (9,377 ) (7,827 )
Purchase of cost method investment
   (10,000 ) —
Proceeds from divestiture of a business
   579 3,200
Cash paid for acquisitions, net
   (11,147 ) (16,319 )


Net cash used in investing activities
   (180,246 ) (27,911 )
Financing activities

Proceeds from exercise of stock options
   80,010 20,461
Value of equity awards withheld for tax liability
   (337 ) (492 )


Net cash provided by financing activities
   79,673 19,969
Net increase (decrease) in cash and cash equivalents during period
   76,350 (38,378 )
Cash and cash equivalents at beginning of period
   243,592 229,138


Cash and cash equivalents at end of period
   $ 319,942 $ 190,760



Supplemental disclosures of cash flow information

Cash paid for interest
   $ 4,458 $ 3,163
Noncash transactions:

Capitalized share-based compensation
   $ 8,915 $ 7,809
Write-off of fully depreciated property and equipment
   $ 12,685 $ 11,585
Write-off of fully amortized intangible assets
   $ 5,454 $ —



	Class A Common Stock, Class B Common Stock and Class C Capital Stock				Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total Shareholders’ Equity

	Shares		Amount
Balance at July 1, 2019	206,513,636		$	21	$	4,088,470		$	(811,281	)	$	896		$	3,278,106
Issuance of common and capital stock upon exercise of stock options	347,261		—		8,017			—			—			8,017
Vesting of restricted stock units	568,355		—		—			—			—			—
Shares and value of restricted stock units withheld for tax liability	(6	)	—		—			—			—			—
Share-based compensation expense	—		—		45,192			—			—			45,192
Premiums paid for Capped Call Confirmations	—		—		(150,530		)	—			—			(150,530		)
Equity component of issuance of 2024 Notes and 2026 Notes, net of issuance costs of $4,430	—		—		335,854			—			—			335,854
Net loss	—		—		—			(64,649		)	—			(64,649		)
Other comprehensive loss	—		—		—			—			(112		)	(112		)
Balance at September 30, 2019	207,429,246		$	21	$	4,327,003		$	(875,930	)	$	784		$	3,451,878



	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 July 1, 2018	195,449,104		$	20	$	3,428,541		$	(573,605	)	$	(1,275	)	$	2,853,681
Issuance of common and capital stock upon exercise of stock options	697,301		—		14,970			—			—			14,970
Vesting of restricted stock units	453,958		—		—			—			—			—
Shares and value of restricted stock units withheld for tax liability	(27	)	—		(2		)	—			—			(2		)
Share-based compensation expense	—		—		43,730			—			—			43,730
Issuance of Class C capital stock in connection with equity offering, net of issuance costs of $13,425	6,557,017		—		360,345			—			—			360,345
Premiums paid for capped call confirmations	—		—		(29,414		)	—			—			(29,414		)
Equity component of issuance of convertible notes maturing in 2023, net of issuance costs of $2,047	—		—		76,587			—			—			76,587
Net loss	—		—		—			(492		)	—			(492		)
Other comprehensive loss	—		—		—			—			(386		)	(386		)
Balance at September 30, 2018	203,157,353		$	20	$	3,894,757		$	(574,097	)	$	(1,661	)	$	3,319,019



	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 January 1, 2019	203,904,265		$	21	$	3,939,842		$	(671,779	)	$	(905	)	$	3,267,179
Issuance of common and capital stock upon exercise of stock options	1,891,111		—		41,014			—			—			41,014
Vesting of restricted stock units	1,633,962		—		—			—			—			—
Shares and value of restricted stock units withheld for tax liability	(92	)	—		(3		)	—			—			(3		)
Share-based compensation expense	—		—		160,826			—			—			160,826
Premiums paid for Capped Call Confirmations	—		—		(150,530		)	—			—			(150,530		)
Equity component of issuance of 2024 Notes and 2026 Notes, net of issuance costs of $4,430	—		—		335,854			—			—			335,854
Net loss	—		—		—			(204,151		)	—			(204,151		)
Other comprehensive income	—		—		—			—			1,689			1,689
Balance at September 30, 2019	207,429,246		$	21	$	4,327,003		$	(875,930	)	$	784		$	3,451,878



	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 January 1, 2018	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	5,177,060		—		114,623			—			—			114,623
Vesting of restricted stock units	1,288,746		—		—			—			—			—
Shares and value of restricted stock units withheld for tax liability	(1,345	)	—		(67		)	—			—			(67		)
Share-based compensation expense	—		—		118,037			—			—			118,037
Portion of conversion recorded in additional paid-in-capital in connection with partial conversion of convertible 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		—		360,345						—			360,345
Premiums paid for capped call confirmations	—		—		(29,414		)	—			—			(29,414		)
Equity component of issuance of convertible notes maturing in 2023, net of issuance costs of $2,047	—		—		76,587			—			—			76,587
Net loss	—		—		—			(22,176		)	—			(22,176		)
Other comprehensive loss	—		—		—			—			(561		)	(561		)
Balance at September 30, 2018	203,157,353		$	20	$	3,894,757		$	(574,097	)	$	(1,661	)	$	3,319,019

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

Nine Months Ended
September 30,
2019
2018
Operating activities

Net loss $ (204,151 )
$ (22,176 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization 63,888

76,301
Share-based compensation expense 151,884

111,366
Amortization of right of use assets 16,710

—
Amortization of contract cost assets 26,722

27,227
Amortization of discount and issuance costs on convertible senior notes maturing in 2021, 2023, 2024 and 2026 29,868

17,990
Impairment costs —

10,000
Deferred income taxes (3,800 )
(22,700 )
Loss on disposal of property and equipment 5,744

3,129
Bad debt expense 1,894

1,053
Deferred rent —

(3,116 )
Accretion of bond discount (5,241 )
(2,172 )
Changes in operating assets and liabilities:

Accounts receivable (13,485 )
(12,994 )
Mortgage loans held for sale (1,353 )
—
Inventory (716,524 )
(43,257 )
Prepaid expenses and other assets (5,848 )
(15,012 )
Lease liabilities (15,029 )
—
Contract cost assets (26,950 )
(32,143 )
Accounts payable 2,999

2,254
Accrued expenses and other current liabilities 12,241

(3,751 )
Accrued compensation and benefits 2,152

6,503
Deferred revenue 7,875

4,041
Other long-term liabilities 122

—
Net cash provided by (used in) operating activities (670,282 )
102,543
Investing activities

Proceeds from maturities of investments 859,142

261,675
Purchases of investments (479,963 )
(848,838 )
Purchases of property and equipment (45,140 )
(44,482 )
Purchases of intangible assets (15,123 )
(8,179 )
Cash paid for acquisition, net —

(2,000 )
Net cash provided by (used in) investing activities 318,916

(641,824 )
Financing activities

Proceeds from issuance of convertible notes, net of issuance costs 1,085,686

364,020
Premiums paid for capped call confirmations (150,530 )
(29,414 )
Proceeds from issuance of Class C capital stock, net of issuance costs —

360,345
Proceeds from borrowing on revolving credit facilities 581,580

24,674
Net repayments on warehouse lines of credit (2,902 )
—
Proceeds from exercise of stock options 41,014

114,623
Value of equity awards withheld for tax liability (3 )
(67 )
Net cash provided by financing activities 1,554,845

834,181
Net increase in cash, cash equivalents and restricted cash during period 1,203,479

294,900
Cash, cash equivalents and restricted cash at beginning of period 663,443

352,095
Cash, cash equivalents and restricted cash at end of period $ 1,866,922

$ 646,995
Supplemental disclosures of cash flow information

Cash paid for interest $ 25,837

$ 4,800
Noncash transactions:

Capitalized share-based compensation $ 8,942

$ 6,674
Write-off of fully depreciated property and equipment $ 28,951

$ 18,687
Write-off of fully amortized intangible assets $ 9,959

$ 10,797

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization and Description of Business

Zillow Group, Inc. ~~operates~~houses one of the ~~leading~~largest portfolios of real estate ~~and home-related information marketplaces~~brands on mobile and the ~~web, with a complementary portfolio of brands~~web. Zillow Group is committed to leveraging its proprietary data, technology and ~~products~~innovations to ~~help consumers find vital information about homes and connect with local professionals. Zillow Group’s brands focus on all stages of the~~make home ~~lifecycle: renting,~~ buying, selling, financing and renting a seamless, on-demand experience for consumers. 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 new, hassle-free way to buy and sell 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 of~~Other 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~~ professionals maximize business opportunities and connect with millions of consumers. WeZillow Group also ~~own and operate~~operates a number of business brands for real estate, rental and mortgage professionals, including 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; ~~outcomes~~the stability of ~~legal proceedings;~~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; 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 investment of resources to pursue strategies that may not prove effective;~~ 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

Basis of Presentation

The accompanying condensed consolidated financial statements include Zillow Group, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes included in Zillow Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, which was filed with the SEC on February ~~7, 2017.~~21, 2019. The condensed consolidated balance sheet as of December 31, ~~2016,~~2018, included herein, was derived from the audited financial statements of Zillow Group, Inc. as of that date.

The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of September 30, ~~2017,~~2019, our results of operations, comprehensive loss and ~~comprehensive income (loss)~~shareholders’ equity for the three and nine month periods ended September 30, ~~2017~~2019 and ~~2016,~~2018, and our cash flows for the nine month periods ended September 30, ~~2017~~2019 and ~~2016.~~2018. The results of the three and nine month periods ended September 30, ~~2017~~2019 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2017~~2019 or for any interim period or for any other future year.

Use of Estimates

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 ~~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, 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 condensed 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 condensed consolidated statement of operations for the three months ended September 30, 2016 were revised herein as shown below (in thousands):

   As Reported    As Revised    Effect of Change
Cost of revenue (exclusive of amortization)
   $ 18,254    $ 17,608    $ (646 )
Sales and marketing
   92,794    93,180    386
Technology and development
   69,171    64,496    (4,675 )
General and administrative
   37,690    42,625    4,935

~~Amounts previously reported in the condensed consolidated statement of operations for the nine months ended September 30, 2016 were revised herein as shown below (in thousands):~~

   As Reported    As Revised    Effect of Change
Cost of revenue (exclusive of amortization)
   $ 51,926    $ 50,556    $ (1,370 )
Sales and marketing
   290,810    291,910    1,100
Technology and development
   201,009    188,263    (12,746 )
General and administrative
   271,159    284,175    13,016

~~Certain immaterial reclassifications have been made in the statement of cash flows to conform data for prior periods to the current format.~~

Recently Issued Accounting Standards Not Yet Adopted

In ~~March 2017,~~August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance related to a customer’s accounting for implementation costs incurred in hosting arrangements. The guidance conforms the ~~premium amortization on purchased callable debt securities. This~~requirements for capitalizing implementation costs incurred in cloud computing arrangements that are service contracts with the accounting guidance ~~shortens~~that provides for the ~~amortization period for certain callable debt securities purchased at a premium by requiring~~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 ~~premium be~~same manner as other service costs and assets related to service costs and amortized toover the ~~earliest call date.~~term of the hosting arrangement. This guidance is effective for interim and annual reporting periods beginning after December 15, ~~2018,~~2019, and early adoption is permitted. ~~This guidance must be applied on~~Entities are permitted to apply either a ~~modified~~ retrospective ~~basis through a cumulative-effect adjustment directly~~or prospective transition approach to ~~retained earnings as of the beginning of the period of adoption.~~adopt this guidance. We expect to adopt this guidance on January 1, ~~2019.~~2020 using the prospective transition approach, under which we will apply the guidance to all eligible costs incurred subsequent to adoption. We have not ~~yet determined~~historically incurred material amounts of implementation costs for cloud computing arrangements, however, we are continuing to assess the impact the adoption of this guidance will have on our financial position, results of operations orand cash flows.

In ~~December 2016,~~August 2018, the FASB issued guidance related to ~~narrow the definition of a business.~~disclosure requirements for fair value measurements. This guidance ~~assists entities with evaluating when a set of transferred~~removes, modifies and adds disclosures related to certain assets and ~~activities is a business.~~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 ~~reporting~~ periods beginning after December 15, ~~2017,~~2019, and early adoption is permitted. ~~This guidance must be applied prospectively to transactions occurring within the period of adoption.~~ We expect to adopt this guidance on January 1, ~~2018.~~2020. We dohave not ~~expect~~historically recorded material amounts of Level 3 assets and liabilities or material transfers of assets or liabilities between levels within the fair value hierarchy. However, we are continuing to assess the impact the adoption of this guidance towill have ~~a material impact~~ on our financial ~~position, results of operations or cash flows.~~

~~In November 2016, the FASB issued guidance on the classification and presentation of changes in restricted cash on 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 expect to adopt this guidance on January 1, 2018. We do not expect the adoption of this guidance to have a material impact on our statements of cash flows.

disclosures.

In June 2016, and subsequently amended in April 2019 and May 2019, the FASB issued guidance on the measurement of credit losses on financial ~~instruments.~~assets. This guidance will require an entity to measure and recognize expected credit losses for certain financial instruments and financial assets, including trade receivables. This guidance requires ~~the use of an expected loss impairment model for instruments measured at amortized cost. For available-for-sale debt securities,~~ an entity ~~is required~~ to recognize an allowance that reflects the entity’s current estimate of credit losses ~~through~~expected to be incurred over the life of the financial instrument on initial recognition and at each reporting period, whereas current guidance employs an ~~allowance for credit losses rather than as a write-down.~~incurred loss methodology. 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.~~adopted. We expect to adopt this guidance on January 1, 2020. We ~~have not yet determined the impact~~are currently evaluating necessary changes to our accounting policies, processes and systems as a result of the adoption of ~~this~~the 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 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 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and early adoption is permitted. We expect to adopt this guidance on January 1, 2019. We anticipate this guidance will have a material impact on our financial position, primarily ~~due~~related to our ~~office space operating leases, as we will be required to recognize lease assets~~trade accounts receivable 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 results of operations and cash flows, if any.

In January 2016, the FASB issued guidance on the recognition and measurement of financial instruments. This guidance generally requires equity investments, except those accounted for under the equity method of accounting or those that result in consolidation 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. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, early adoption is permitted, and the guidance must be applied prospectively to equity investments that exist as of the adoption date. We expect to adopt this guidance on January 1, 2018. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations or cash flows.

In May 2014, the FASB issued new guidance on revenue recognition. The guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also 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. The effective date of this guidance is for interim and annual reporting periods beginning after December 15, 2017, as the FASB approved an optional one-year deferral of the effective date, and the guidance must be applied retrospectively or modified retrospectively. We will adopt this guidance on January 1, 2018 using the modified retrospective transition approach. This will result in an adjustment to accumulated deficit for the cumulative effect, if any, of applying the guidance as of the adoption date. Under this approach, we will not restate the prior financial statements presented. The guidance requires us to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018 as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any. While we continue to assess all potential impacts of this new guidance, we currently expect a significant impact related to the accounting for the cost of sales commissions. Under the new guidance, the cost of certain sales commissions will be recorded as an asset and recognized as an operating expense over the period that we expect to recover the costs (the average customer life). Currently we expense the cost of all sales commissions as incurred. We also continue to assess the impact of the guidance on our current product offerings. We continue to implement key control activities related to the new guidance, particularly related to evaluating the impact of the standard on new products or products with more than one performance obligation, the determination of average customer life, and the new disclosure requirements. Further, we have concluded that upon adoption of the new guidance, we will not need to implement new information technology systems.available-for-sale investments. We continue to assess the impact the adoption of this guidance will have on our financial position, results of operations and cash ~~flows and disclosures.~~

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 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, and the~~markets. The fair value measurement of certificates of deposit and commercial paper 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.

~~Investments~~

Short-term investments — Our investments consist of fixed income securities, which include U.S. and foreign government agency securities, corporate notes and bonds, municipal securities, commercial paper and certificates of deposit. The fair value measurement of ~~these assets~~our 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 revolving credit facilities (see Note 13) 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 interest rate lock commitments (“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 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):

   September 30, 2017
   Total    Level 1    Level 2
Cash equivalents:

Money market funds
   $ 188,622    $ 188,622    $ —
Certificates of deposit
   996    —      996
Short-term investments:

U.S. government agency securities
   255,541    —      255,541
Corporate notes and bonds
   44,759    —      44,759
Commercial paper
   37,554    —      37,554
Municipal securities
   8,836    —      8,836
Certificates of deposit
   8,355    —      8,355
Foreign government securities
   5,993    —      5,993
Restricted cash
   1,053    —      1,053






Total
   $ 551,709    $ 188,622    $ 363,087

   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
   6,226    —      6,226
Foreign government securities
   5,985    —      5,985
Restricted cash
   1,053    —      1,053






Total
   $ 430,910    $ 166,527    $ 264,383



	September 30, 2019
	Total			Level 1		Level 2
Cash equivalents:
Money market funds	$	1,353,600		$	1,353,600	$	—
Certificates of deposit	742			—		742
Short-term investments:
U.S. government agency securities	350,665			—		350,665
Commercial paper	68,915			—		68,915
Corporate notes and bonds	63,585			—		63,585
Treasury bills	29,911			—		29,911
Municipal securities	18,603			—		18,603
Mortgage origination-related:
Mortgage loans held for sale	36,762			—		36,762
IRLCs	1,503			—		1,503
Forward contracts - other current assets	84			—		84
Forward contracts - other current liabilities	(184		)	—		(184		)
Total	$	1,924,186		$	1,353,600	$	570,586



	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 September 30, 2019, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $57.9 million and $99.8 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 913 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 ~~not~~0t have ~~any~~material Level 3 assets or liabilities as of September 30, ~~2017~~2019 or December 31, ~~2016. There were no liabilities measured at fair value on a recurring basis as of September 30, 2017 or December 31, 2016.~~

2018.

Note 4. Cash and Cash Equivalents, Short-term Investments and Restricted Cash

Our investments are classified as available-for-sale securities and are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive loss in shareholders’ equity, while realized gains and losses and other-than-temporary impairments are reported as a component of net income (loss) based on specific identification.

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 restricted cash as of the dates presented (in thousands):

   September 30, 2017
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Estimated
Fair Market
Value
Cash
   $ 130,324    $ —      $ —      $ 130,324
Cash equivalents:

Money market funds
   188,622    —      —      188,622
Certificates of deposit
   996    —      —      996
Short-term investments:

U.S. government agency securities
   255,903    2    (364 )    255,541
Corporate notes and bonds
   44,794    —      (35 )    44,759
Commercial paper
   37,554    —      —      37,554
Municipal securities
   8,840    —      (4 )    8,836
Certificates of deposit
   8,353    2    —      8,355
Foreign government securities
   5,998    —      (5 )    5,993
Restricted cash
   1,053    —      —      1,053








Total
   $ 682,437    $ 4    $ (408 )    $ 682,033








   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
   6,226    —      —      6,226
Foreign government securities
   5,995    —      (10 )    5,985
Restricted cash
   1,053    —      —      1,053








Total
   $ 507,711    $ 34    $ (230 )    $ 507,515



	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Market Value
Cash	$	437,576	$	—	$	—		$	437,576
Cash equivalents:
Money market funds	1,353,600		—		—			1,353,600
Certificates of deposit	742		—		—			742
Short-term investments:
U.S. government agency securities	350,153		514		(2		)	350,665
Commercial paper	68,915		—		—			68,915
Corporate notes and bonds	63,419		166		—			63,585
Treasury bills	29,900		11		—			29,911
Municipal securities	18,511		92		—			18,603
Restricted cash	75,004		—		—			75,004
Total	$	2,397,820	$	783	$	(2	)	$	2,398,601



	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

All available-for-sale investments as of September 30, 2019 have a contractual maturity date of one year or less.

Note 5. Accounts Receivable, net

The opening balance of accounts receivable, net was $66.1 million as of January 1, 2019.

The following table presents ~~available-for-sale investments by contractual maturity date~~the changes in the allowance for doubtful accounts (in thousands):



Balance as of January 1, 2019	$	4,838
Bad debt expense	1,894
Less: write-offs, net of recoveries and other adjustments	(2,268		)
Balance as of September 30, 2019	$	4,464

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):



	September 30, 2019		December 31, 2018
Work-in-process	$	196,295	$	45,943
Finished goods	683,058		116,886
Inventory	$	879,353	$	162,829

Note 7. Contract Cost Assets

As of September 30, ~~2017 (in thousands):~~

   Amortized
Cost    Estimated Fair
Market Value
Due in one year or less
   $ 244,619    $ 244,436
Due after one year through two years
   116,823    116,602




Total
   $ 361,442    $ 361,038




2019 and December 31, 2018, we had $46.0 million and $45.8 million, respectively, of contract cost assets. During the three and nine month periods ended September 30, 2019 and 2018, we recorded 0 impairment losses. We recorded amortization expense related to contract cost assets of $8.8 million and $8.9 million during the three months ended September 30, 2019 and 2018, respectively, and $26.7 million and $27.2 million during the nine months ended September 30, 2019 and 2018, respectively.

Note 5.8. Property and Equipment, net

The following table presents the detail of property and equipment as of the dates presented (in thousands):

   September 30,
2017    December 31,
2016
Website development costs
   $ 121,966    $ 102,130
Computer equipment
   28,462    28,175
Leasehold improvements
   47,995    37,923
Construction-in-progress
   23,688    19,470
Office equipment, furniture and fixtures
   23,519    19,254




Property and equipment
   245,630    206,952
Less: accumulated amortization and depreciation
   (134,889 )    (108,664 )




Property and equipment, net
   $ 110,741    $ 98,288



	September 30, 2019			December 31, 2018
Website development costs	$	151,314		$	149,891
Leasehold improvements	79,216			65,012
Office equipment, furniture and fixtures	34,801			39,510
Computer equipment	33,349			22,477
Construction-in-progress	26,519			29,037
Property and equipment	325,199			305,927
Less: accumulated amortization and depreciation	(170,948		)	(170,755		)
Property and equipment, net	$	154,251		$	135,172

We recorded depreciation expense related to property and equipment (other than website development costs) of ~~$14.0~~$6.1 million and ~~$3.5~~$5.1 million ~~respectively,~~ during the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$21.7~~$18.5 million and ~~$9.9~~$14.2 million ~~respectively,~~ during the nine months ended September 30, ~~2017~~2019 and ~~2016.~~

2018, respectively.

We capitalized ~~$13.4~~$10.8 million and ~~$13.0~~$8.0 million ~~respectively,~~ in website development costs during the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$39.8~~$31.1 million and ~~$38.1~~$26.6 million ~~respectively,~~ during the nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018, respectively. Amortization expense for website development costs included in technology and development expenses was ~~$10.1~~$4.8 million and ~~$10.4~~$6.2 million ~~respectively,~~ during the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$30.0~~$11.8 million and ~~$29.4~~$24.2 million ~~respectively,~~ during the nine months ended September 30, ~~2017~~2019 and ~~2016.~~

~~Construction-in-progress primarily consists of website development costs that are capitalizable, but for which the associated applications had not been placed in service.~~

2018, respectively.

Note ~~6. Acquisition and~~9. Equity ~~Investments~~

~~Acquisition~~

On September 6, 2017, Zillow, Inc. acquired New Home Feed, Inc. (formerly known as Graphic Language, Inc.), a California corporation which operates the New Home Feed business, pursuant to an Agreement and Plan of Merger 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. Our acquisition of New Home Feed has been 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 $3.8 million and an identifiable intangible asset of $1.9 million, and we recorded a deferred tax liability of $0.2 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 condensed 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 condensed consolidated financial statements.

~~Equity Investments~~

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 condensed consolidated balance sheet.

Investment

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 condensed 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 September 30, ~~2017.~~

~~As there were no identified events~~2019. This investment is an equity security without a readily determinable fair value 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~~orderly transactions for identical or similar investments of the ~~fair values of~~same issuer. There has been no impairment or upward or downward adjustments to our ~~cost method investments~~equity investment as of September 30, ~~2017, and it is not practicable to estimate~~2019 that would impact the ~~fair values~~carrying amount of the ~~investments given~~investment. The equity investment is classified within other assets in the ~~fair values of the investments are not readily determinable, an estimate of the fair values of the cost method investments was not performed.~~

~~Note 7. Goodwill~~

~~The following table presents the change in goodwill from December 31, 2016 through September 30, 2017 (in thousands):~~

Balance as of December 31, 2016
   $ 1,923,480
Goodwill recorded in connection with acquisitions
   7,780


Balance as of September 30, 2017
   $ 1,931,260

condensed consolidated balance sheet.

Note 8.10. Intangible Assets, net

The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):

   September 30, 2017
   Cost    Accumulated
Amortization    Net
Purchased content
   $ 34,010    $ (17,981 )    $ 16,029
Software
   15,605    (7,556 )    8,049
Customer relationships
   103,900    (42,555 )    61,345
Developed technology
   113,380    (50,953 )    62,427
Trade names and trademarks
   4,900    (3,679 )    1,221
Advertising relationships
   9,000    (7,811 )    1,189
MLS home data feeds
   1,100    (955 )    145
Intangibles-in-progress
   4,291    —      4,291






Total
   $ 286,186    $ (131,490 )    $ 154,696

   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



	September 30, 2019
	Cost		Accumulated Amortization			Net
Purchased content	$	45,542	$	(38,095	)	$	7,447
Software	32,959		(18,577		)	14,382
Customer relationships	103,300		(70,354		)	32,946
Developed technology	107,200		(78,284		)	28,916
Lender licenses	400		(167		)	233
Intangibles-in-progress	5,603		—			5,603
Total	$	295,004	$	(205,477	)	$	89,527



	December 31, 2018
	Cost		Accumulated Amortization			Net
Purchased content	$	42,110	$	(30,477	)	$	11,633
Software	24,296		(13,925		)	10,371
Customer relationships	103,900		(60,733		)	43,167
Developed technology	111,980		(72,788		)	39,192
Trade names and trademarks	4,900		(4,683		)	217
Lender licenses	400		(17		)	383
Intangibles-in-progress	2,941		—			2,941
Total	$	290,527	$	(182,623	)	$	107,904

Amortization expense recorded for intangible assets for the three months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$13.4~~$11.1 million and ~~$11.6~~$12.0 million, respectively. Amortization expense recorded for intangible assets for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$39.9~~$33.1 million and ~~$35.5~~$37.6 million, respectively. These amounts are included in technology and development expenses.

~~As of September 30, 2017 and December 31, 2016, we~~

We have an indefinite-lived intangible asset ~~for $351.0 million~~ 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.

The carrying value of the Trulia trade names and trademarks intangible asset was $108.0 million as of September 30, 2019 and December 31, 2018.

Intangibles-in-progress ~~consist~~consists of ~~purchased content and~~ software that ~~are~~is capitalizable but ~~have~~has not been placed in service.

Note 9. 11. Deferred Revenue

The following tables present the changes in deferred revenue for the periods presented (in thousands):



	Three Months Ended September 30, 2019
Balance as of July 1, 2019	$	37,080
Deferral of revenue	300,715
Less: Revenue recognized	(295,840		)
Balance as of September 30, 2019	$	41,955



	Nine Months Ended September 30, 2019
Balance as of January 1, 2019	$	34,080
Deferral of revenue	802,699
Less: Revenue recognized	(794,824		)
Balance as of September 30, 2019	$	41,955

During the three months ended September 30, 2019 we recognized as revenue a total of $34.2 million pertaining to amounts that were recorded in deferred revenue as of July 1, 2019. During the nine months ended September 30, 2019, we recognized as revenue a total of $31.5 million pertaining to amounts that were recorded in deferred revenue as of January 1, 2019.

Note 12. 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 condensed 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 twelve 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 nine months ended September 30, 2019, it became reasonably certain that in a future period we would exercise the first of 2 five years 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 periods presented (in thousands):



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	10,025	$	25,552
Variable lease cost	4,631		14,377
Total lease cost	$	14,656	$	39,929

Cash paid for amounts included in the measurement of lease liabilities for the three and nine month periods ended September 30, 2019 was $7.3 million and $23.6 million, respectively. Right of use assets obtained in exchange for new operating lease obligations for the three and nine month periods ended September 30, 2019 were $14.6 million and $128.3 million, respectively. The weighted average remaining term for our leases as of September 30, 2019 was 8.75 years. The weighted average discount rate for our leases as of September 30, 2019 was 6.5%.

The following table presents the scheduled maturities of our operating lease liabilities by fiscal year as of September 30, 2019 (in thousands):



Remainder of 2019	$	7,776
2020	38,891
2021	43,073
2022	39,686
2023	39,065
All future years	179,179
Total lease payments	347,670
Less: Imputed interest	(105,744		)
Present value of lease liabilities	$	241,926

Operating lease expense for the three and nine month periods ended September 30, 2018, was $5.8 million and $17.2 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 13. Debt

Revolving Credit Facilities

To provide capital for Zillow Offers, we utilize revolving credit facilities that are classified as current liabilities in our condensed consolidated balance sheets. The following table summarizes our revolving credit facilities as of the periods presented (in thousands, except interest rates):



Effective Date	Maximum Borrowing Capacity		Outstanding Borrowings at September 30, 2019		Outstanding Borrowings at December 31, 2018		Weighted Average Interest Rate
July 31, 2018	$	500,000	$	432,484	$	116,700	5.81	%
January 31, 2019	500,000		265,796		—		5.77	%
Total	$	1,000,000	$	698,280	$	116,700

Each credit facility described in the table above provides for a maximum borrowing capacity of $500.0 million. The January 31, 2019 revolving credit facility has a current borrowing capacity of $266.0 million as of September 30, 2019, and has an initial term of two years and may be extended for up to 2 additional periods of six months each, subject to agreement by the lender. The July 31, 2018 revolving credit facility has an initial term of one year and automatically renews on a monthly basis as of July 31, 2019 for up to 24 additional months, subject to agreement by the lender, and has a current borrowing capacity of $442.5 million as of September 30, 2019.

Recourse under each facility is limited to the assets and equity of certain Zillow Group subsidiaries that purchase and sell select residential properties through Zillow Offers. The applicable lender is not committed to, but may in their sole discretion, advance loan funds in excess of the current borrowing capacity. Zillow Group formed certain special purpose entities to effectuate the transactions contemplated by each revolving credit facility (each, an “SPE”). 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.

Outstanding amounts drawn under each credit facility are required to be repaid on the facility termination 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. Inclusion of properties in each facility is subject to various eligibility criteria. For example, a property is no longer eligible under a credit facility if such property exceeds agreed aging criteria. Each of the credit facilities permits only a portion of the financed properties to be owned longer than 180 days, and no financed properties may be owned for longer than one year. Any financed property excluded by such aging criteria will be removed from the eligible property borrowing base, and any resulting shortfall is required to be repaid.

The stated interest rate on our revolving credit facilities is one-month LIBOR plus an applicable margin as defined in the respective credit agreements. Our revolving credit facilities include customary representations and warranties, covenants (including financial covenants applicable to Zillow Group) and provisions regarding events of default. As of September 30, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred. In certain circumstances Zillow Group may be obligated to fund some or all of the payment obligations under the credit agreements. Our revolving credit facilities also require that we establish, maintain and in certain circumstances that Zillow Group fund, certain specified reserve accounts. These reserve accounts include, but are not limited to, interest reserves, insurance, 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 condensed consolidated balance sheets as restricted cash.

For additional details related to our revolving credit facilities, see Note 22 herein and Note 14 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Warehouse Lines of Credit

To provide capital for Zillow Home Loans, we utilize warehouse lines of credit that are classified as current liabilities in our condensed consolidated balance sheets. The following table summarizes our warehouse lines of credit as of the periods presented (in thousands, except interest rates):



Maturity Date	Maximum Borrowing Capacity		Outstanding Borrowings at September 30, 2019		Outstanding Borrowings at December 31, 2018		Weighted Average Interest Rate
October 15, 2019	$	50,000	$	—	$	14,125	4.89	%
June 27, 2020	50,000		30,116		18,892		4.51	%
Total	$	100,000	$	30,116	$	33,017

On July 11, 2019, Zillow Home Loans extended the term of its $50.0 million warehouse line of credit previously maturing on July 15, 2019 such that it now matures on October 15, 2019.

On June 28, 2019, Zillow Home Loans amended and restated its warehouse line of credit previously maturing on June 29, 2019. The amended and restated credit agreement extends the term of the original agreement for one year, through June 27, 2020, and continues to provide for a maximum borrowing capacity of $50.0 million with availability under the warehouse line of credit limited depending on the types of loans originated.

Borrowings on the warehouse lines of credit bear interest at the one-month LIBOR plus an applicable margin, as defined in the credit agreements governing each of the warehouse lines of credit. The warehouse lines of credit include customary representations and warranties, covenants and provisions regarding events of default. As of September 30, 2019, Zillow Home Loans was in compliance with all financial covenants and no event of default had occurred.

For additional details related to our warehouse lines of credit, see Note 22.

Convertible Senior Notes

~~Convertible Senior Notes~~

The following table summarizes our outstanding convertible senior notes as of the periods presented (in thousands, except interest rates):

Maturity Date Aggregate Principal Amount
Fair Value at
September 30, 2019
Fair Value at December 31, 2018 Stated Interest Rate Effective Interest Rate
September 1, 2026 $ 500,000
$ 469,375
$ —
1.375 % 8.10 %
September 1, 2024 600,000
573,900
—
0.75 % 7.67 %
July 1, 2023 373,750
328,818
321,855
1.50 % 6.99 %
December 1, 2021 460,000
455,492
446,200
2.00 % 7.44 %
December 15, 2020 9,637
16,842
16,744
2.75 % N/A
Total $ 1,943,387
$ 1,844,427
$ 784,799

The convertible notes are senior unsecured obligations and are classified as long-term debt in our condensed consolidated balance sheets. Interest on the convertible notes is paid semi-annually. As of September 30, 2019 and December 31, 2018, respectively, the total unamortized debt discount and debt issuance costs for our outstanding senior convertible notes were $464.7 million and $144.4 million. 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 2021,

2023, 2024 and 2026 are not redeemable or convertible as of September 30, 2019. The convertible senior notes maturing in 2020 are convertible, at the option of the holder, and redeemable, at our option, as of September 30, 2019.

On ~~December 12, 2016,~~September 9, 2019, Zillow Group issued ~~$460.0~~$600.0 million aggregate principal amount of ~~2.00%~~ Convertible Senior Notes due ~~2021~~2024 (the ~~“2021~~“2024 Notes”)~~, which~~ and $500.0 million aggregate principal 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~~Convertible Senior Notes due 2026 (the “2026 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.~~buyers. The ~~2021~~2024 Notes bear interest at a fixed rate of ~~2.00%~~0.75% per year, and the 2026 Notes bear interest at a fixed rate of 1.375% per year, each payable ~~semiannually~~semi-annually in arrears on ~~June~~March 1 and ~~December~~September 1 of each year, beginning on ~~June~~March 1, ~~2017.~~2020. The ~~2021~~2024 Notes and 2026 Notes are convertible into cash, shares of ~~our~~ Class C capital stock or a combination thereof, at our election, and may be settled as described below. The 2024 Notes and the ~~Company’s election. The 2021~~2026 Notes are senior, unsecured obligations of the Company, and will mature on ~~December~~September 1, ~~2021,~~2024 and September 1, 2026, respectively, unless earlier repurchased, redeemed or converted in accordance with their terms.

The net proceeds from the issuance of the ~~2021~~2024 Notes were approximately ~~$447.8~~$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. The Company~~expenses payable by the Company. We used approximately ~~$370.2~~$75.2 million of the net proceeds from the issuance of the ~~2021~~2024 Notes to repurchase a portion of the outstanding 2020 Notes (see additional information below under “Trulia’s Convertible Senior Notes due 2020”) in privately negotiated transactions. In addition, the Company usedand approximately ~~$36.6~~$75.4 million of the net proceeds from the issuance of the ~~2021~~2026 Notes to pay the cost of the capped call transactions entered into in connection with the ~~initial purchaser of the 2021 Notes and two additional financial institutions~~issuances (“Capped Call Confirmations”) ~~as discussed further~~described below. The Company ~~used~~intends to use the

remainder of the net proceeds for general corporate ~~purposes.~~

purposes, which may include working capital, sales and marketing activities, general and administrative matters and capital expenditures.

Prior to the close of business on the business day immediately preceding ~~September~~March 1, ~~2021,~~2024 (for the ~~2021~~2024 Notes) or March 1, 2026 (for the 2026 Notes), the 2024 Notes ~~are~~and the 2026 Notes will 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 September 30, 2017.~~conditions. On or after ~~September~~March 1, ~~2021,~~2024 (for the 2024 Notes) or March 1, 2026 (for the 2026 Notes), until the close of business on the second scheduled trading day immediately preceding the applicable maturity date, holders ~~of the 2021 Notes~~ may convert their ~~2021~~2024 Notes or 2026 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the ~~2021~~2024 Notes and the 2026 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 rate for the 2024 Notes and 2026 Notes will initially be ~~19.0985~~22.9830 shares of Class C capital stock per $1,000 principal amount of ~~2021~~2024 Notes or 2026 Notes (equivalent to an initial conversion price of approximately ~~$52.36~~$43.51 per share of Class C capital stock). The conversion rate isand the corresponding 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 ~~2021~~2024 Notes or 2026 Notes, at its option, on or after ~~December 6, 2019,~~September 5, 2022 (for the 2024 Notes) or September 5, 2023 (for the 2026 Notes), under certain circumstances, at a redemption price equal to 100% of the principal amount of the ~~2021~~2024 Notes or 2026 Notes, to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the ~~indenture~~indentures governing the ~~2021~~2024 Notes and 2026 Notes). 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 ~~indenture~~indentures governing the ~~2021~~2024 Notes and the 2026 Notes), holders ~~of the 2021 Notes~~ may require the Company to repurchase for cash all or part of their ~~2021~~2024 Notes or 2026 Notes, as applicable, at a repurchase price equal to 100% of the principal amount of the ~~2021 Notes~~notes to be ~~repurchased,~~purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date (as defined in the ~~indenture~~indentures governing the ~~2021~~2024 Notes and the 2026 Notes). In addition, if certain fundamental changes occur, the Company may be required, in certain circumstances, to increase the conversion rate for any ~~2021~~2024 Notes or 2026 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~~2024 Notes or 2026 Notes, as described in the ~~indenture~~indentures governing the ~~notes.~~2024 Notes and 2026 Notes. There are no financial covenants associated with the ~~2021~~2024 Notes or 2026 Notes.

The Capped Call Confirmations are expected generally to reduce the potential dilution of our Class C capital stock upon any conversion of the 2024 Notes or 2026 Notes and/or offset the cash payments the Company is required to make in excess of the principal amount of such notes in the event that the market price of the Class C capital stock is greater than the strike price of the Capped Call Confirmations (which initially corresponds to the initial conversion price of such notes and is subject to certain adjustments under the terms of the Capped Call Confirmations), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Confirmations. The Capped Call Confirmations with respect to the 2024 Notes have an initial cap price of $72.5175 per share, which represents a premium of approximately 125% over the closing price of the Company’s Class C capital stock on the Nasdaq Global Select Market on September 4, 2019, and is subject to certain adjustments under the terms of the Capped Call Confirmations. The Capped Call Confirmations with respect to the 2026 Notes have an initial cap price of $80.5750 per share, which represents a premium of approximately 150% over the closing price of the Company’s Class C capital stock on The Nasdaq Global Select Market on September 4, 2019, and is subject to certain adjustments under the terms of the Capped Call Confirmations. The Capped Call Confirmations will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2024 Notes or 2026 Notes, the number of shares of Class C capital stock that will underlie such notes. The Capped Call Confirmations do not meet the criteria for separate accounting as a derivative as they are indexed to our own stock. The premiums paid for the Capped Call Confirmations have been included as a net reduction to additional paid-in capital within shareholders’ equity.

We may not redeem the ~~2021~~2024 Notes prior to ~~December 6, 2019.~~September 5, 2022 or the 2026 Notes prior to September 5, 2023. We may redeem ~~the 2021 Notes~~ for cash all or any portion of the 2024 Notes or 2026 Notes, at our option, in whole or in part on or after ~~December 6, 2019,~~September 5, 2022 for the 2024 Notes or on or after September 5, 2023 for the 2026 Notes 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~~2024 Notes and the 2026 Notes, the Company separated the ~~2021~~2024 Notes and the 2026 Notes 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 ~~2021 Notes.~~2024 Notes and the 2026 Notes, respectively. The difference between the principal ~~amount~~amounts of the ~~2021~~2024 Notes and the 2026 Notes and their liability ~~component~~components represents ~~the~~their respective debt ~~discount,~~discounts, which is recorded as a direct deduction from the related debt liability in the consolidated balance sheet and amortized to interest expense using the effective interest method over the term of the 2021 Notes. The equity component of the 2021 Notes of approximately $91.4 million is included in additional paid-in capital in the condensed consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.

The Company incurred transaction costs of approximately $12.2 million related 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. In accounting for the transaction costs, the Company allocated the total amount 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 wereare recorded as a direct deduction from the related debt liability in the condensed consolidated balance sheet and amortized to interest expense using the effective interest method over the term of the ~~2021~~2024 Notes and ~~transaction~~ the 2026 Notes. The equity components of the 2024 Notes and 2026 Notes of $163.6 million and $172.3 million, respectively, net of issuance

costs ~~attributable to the equity component were netted with the equity component in shareholders’ equity.~~

~~Interest expense related to the 2021 Notes for the three months ended September 30, 2017 was $6.8~~of $2.1 million ~~which is comprised of approximately $4.5 million related to the amortization of debt discount and debt issuance costs~~ and $2.3 million, for the contractual coupon interest. Interest expense related to the 2021 Notes for the nine months ended September 30, 2017 was $20.3 million, which is comprised of approximately $13.4 million related to the amortization of debt discount and debt issuance costs and $6.9 million for the contractual coupon interest. Accrued interest related to the 2021 Notes as of September 30, 2017 and December 31, 2016 was $3.1 million and $0.5 million, respectively, ~~and is recorded~~are included in ~~accrued expenses and other current liabilities~~additional paid-in capital in the condensed consolidated balance ~~sheet.~~

~~The following table presents~~sheet and are not remeasured as long as they continue to meet the ~~outstanding principal amount~~conditions for equity classification.

For additional details related to our 2024 Notes, please see Note 22. For additional details related to our convertible senior notes maturing in 2020, 2021, and ~~carrying value of~~2023, see Note 14 in the ~~2021~~ Notes ~~as of the dates presented (in thousands):~~

   Outstanding
Principal
Amount    Unamortized
Debt Discount
and Debt
Issuance Costs    Carrying
Value
September 30, 2017
   $ 460,000    $ (89,342 )    $ 370,658
December 31, 2016
   $ 460,000    $ (102,733 )    $ 357,267

~~As of September 30, 2017, the unamortized debt discount and debt issuance costs~~to Consolidated Financial Statements included in our Annual Report on Form 10-K for the ~~2021 Notes will be amortized to interest expense over a remaining period of approximately 50 months.~~

The estimated fair value of the 2021 Notes was $498.1 million and $474.2 million, respectively, as of September 30, 2017 and December 31, 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 Confirmations are expected generally to reduce the potential dilution of our Class C capital stock upon any conversion of 2021 Notes and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2021 Notes in the event that the market price of the Class C capital stock is greater than the strike price of the Capped Call Confirmations (which initially corresponds to the initial conversion price of the 2021 Notes and is subject to certain adjustments under the terms of the Capped Call Confirmations), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Confirmations. The Capped Call Confirmations have an initial cap price of $69.19 per share, which represents a premium of approximately 85% over the closing price of the Company’s Class C capital stock on The NASDAQ Global Select Market on December 6, 2016, and is subject to certain adjustments under the terms of the Capped Call Confirmations. The Capped 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. The Capped Call Confirmations do not meet the criteria for separate accounting as a derivative as they are indexed to our own stock. The premiums paid for the Capped Call Confirmations have been included as a net reduction to additional paid-in capital within shareholders’ equity.

~~Trulia’s Convertible Senior Notes due in 2020~~

In connection with the February 2015 acquisition of Trulia, 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 additional paid-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 thefiscal 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 three months ended September 30, 2017 and 2016 was $0.1 million and $1.6 million, respectively. Interest expense related to the 2020 Notes for the nine months ended September 30, 2017 and 2016 was $0.2 million and $4.7 million, respectively. Accrued interest related to the 2020 Notes as of September 30, 2017 and December 31, 2016 was not material.

The carrying value of the 2020 Notes was $10.1 million as of September 30, 2017 and December 31, 2016. The estimated fair value of the 2020 Notes was $17.6 million and $17.3 million, respectively, as of September 30, 2017 and December 31, 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.

2018.

Note ~~10.~~14. Income Taxes

We are subject to federal and state income taxes in the United States and in Canada. ~~During the three and nine month periods ended~~As of September 30, ~~2017~~2019 and ~~2016, we did not have a material amount of current taxable income, and we are not projecting a material amount of current taxable income for the year ending~~ December 31, ~~2017. We~~2018, we have provided a ~~full~~ valuation allowance against our net deferred tax assets ~~as of September 30, 2017 and December 31, 2016 because,~~that we believe, based on the weight of available evidence, ~~it is~~are not more likely than not ~~(a likelihood of more than 50%) that some or all of the deferred tax assets will not~~to be realized. Therefore, no material current tax liability or expense has been recorded in the condensed consolidated financial statements. We have accumulated federal tax losses of approximately ~~$893.3~~$1,081.7 million as of December 31, ~~2016,~~2018, which are available to reduce future taxable income. We have accumulated state tax losses of approximately ~~$13.5~~$32.5 million (tax effected) as of December 31, ~~2016.~~

2018.

We recorded an income tax benefit of ~~$1.4~~$1.3 million for the three months ended September 30, 2019 and an income tax benefit of $3.8 million for the nine months ended September 30, ~~2016 primarily due to a deferred~~2019.

We recorded an income tax ~~liability generated in connection with Zillow Group’s February 22, 2016 acquisition~~benefit of ~~Naked Apartments that can be used to realize certain deferred tax assets~~$14.7 million for ~~which we had previously provided a full allowance.~~

~~Note 11. Shareholders’ Equity~~

~~Preferred Stock~~

~~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 no preferred stock issued and outstanding as ofthree months ended September 30, ~~2017 or December 31, 2016.~~

~~Common and Capital Stock~~

~~Our Class A common stock has no preferences or privileges and is not redeemable. Holders~~2018, which was calculated as the difference between the income tax benefit of ~~Class A common stock are entitled to one vote~~$22.7 million recorded 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 one 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 nine months ended September 30, ~~2017~~2018 and the ~~year~~income tax benefit of $8.0 million recorded for the six months ended ~~December 31, 2016, no shares~~June 30, 2018. The $22.7 million tax benefit recorded for the nine months ended September 30, 2018 was comprised of ~~Class B common stock were converted into Class A common stock at~~a $1.9 million income tax benefit, which was calculated using an estimate of our annual effective tax rate of 4.3% applied to our loss before income taxes of $44.9 million for the ~~option~~nine months ended September 30, 2018 and a $20.8 million discrete income tax benefit as a result of the ~~holders. Holders~~treatment of ~~Class B common~~ stock ~~are entitled~~compensation windfall deductions and the impact from the Tax Cuts and Jobs Act (the “Tax Act”) related to ~~10 votes~~IRC Section 162(m). Our estimated annual effective tax rate for ~~each share.~~

~~Our Class C capital stock has no preferences or privileges, is not redeemable~~the nine months ended September 30, 2018 was primarily impacted by the release in valuation allowance resulting from indefinite-lived deferred tax assets and ~~except~~their ability to offset indefinite-lived intangible deferred tax liabilities.

applying the written binding contracts requirement under the Tax Act and 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 was considered complete and we recorded a $5.9 million discrete tax benefit adjustment related to this item for the nine months ended September 30, 2018.

Note ~~12.~~15. Share-Based Awards

In connection with our February 2015 acquisition of Trulia, we assumed the obligations of Zillow, Inc. 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. 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. 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 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, advisors 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 of termination by reason of death, disability or retirement. Options granted under the 2011 Plan typically expire seven or 10 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 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.

Option Awards

The following table summarizes option award activity for the nine months ended September 30, ~~2017:~~

   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, 2017
   29,628,443    $ 24.11    5.97    $ 376,004
Granted
   4,330,797    35.83
Exercised
   (5,260,391 )    15.21
Forfeited or cancelled
   (1,172,856 )    32.27



Outstanding at September 30, 2017
   27,525,993    27.31    5.87    359,650
Vested and exercisable at September 30, 2017
   13,985,706    24.77    4.47    218,956

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	7,401,975		39.52
Exercised	(1,891,111	)	21.69
Forfeited or cancelled	(1,840,756	)	41.36
Outstanding at September 30, 2019	30,980,218		35.67		6.37	59,722
Vested and exercisable at September 30, 2019	18,305,093		32.26		4.78	55,130

The fair value of options granted 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:

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 2017 2016
Expected volatility
   46% 50% 46%-49% 50%-51%
Expected dividend yield
   —   —   —   —
Risk-free interest rate
   1.70% 0.98% 1.67%-1.84% 0.98%-1.12%
Weighted-average expected life
   4.25 years 4.00 years 4.25-4.75 years 3.75-4.25 years
Weighted-average fair value of options granted
   $15.79 $14.29 $14.40 $9.20



	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Expected volatility	45%	42%	45%-47%	42%-45%
Expected dividend yield	—	—	—	—
Risk-free interest rate	1.61%	2.84%	1.61%-2.53%	2.52%-2.84%
Weighted-average expected life	5.00 years	4.50 years	4.75-5.25 years	4.50-5.00 years
Weighted-average fair value of options granted	$14.15	$19.21	$16.55	$20.89

As of September 30, ~~2017,~~2019, there was a total of ~~$161.0~~$193.0 million in unrecognized compensation cost related to unvested stock options.

Restricted Stock Units

The following table summarizes activity for restricted stock units for the nine months ended September 30, ~~2017:~~

   Restricted
Stock Units    Weighted-
Average Grant-
Date Fair
Value
Unvested outstanding at January 1, 2017
   3,780,577    $ 28.54
Granted
   2,218,754    36.78
Vested
   (1,059,105 )    29.04
Forfeited or cancelled
   (721,000 )    31.34



Unvested outstanding at September 30, 2017
   4,219,226    32.27

~~The fair value of the outstanding restricted stock units will be recorded as share-based compensation expense over the vesting period.~~ 2019:



	Restricted Stock Units		Weighted- Average Grant- Date Fair Value
Unvested outstanding at January 1, 2019	5,266,324		$	42.19
Granted	4,492,544		37.79
Vested	(1,633,962	)	40.41
Forfeited or cancelled	(933,917	)	41.38
Unvested outstanding at September 30, 2019	7,190,989		39.95

As of September 30, ~~2017,~~2019, there was ~~$126.1~~a total of $265.6 million ~~of total~~in unrecognized compensation cost related to unvested restricted stock units.

Share-Based Compensation Expense

The following table presents the effects of share-based compensation expense in our condensed consolidated statements of operations during the periods presented (in thousands):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Cost of revenue
   $ 1,014    $ 894    $ 2,942    $ 2,662
Sales and marketing
   5,914    5,968    17,694    17,566
Technology and development
   10,438    8,035    29,329    23,160
General and administrative
   11,208    12,388    34,197    37,764








Total
   $ 28,574    $ 27,285    $ 84,162    $ 81,152



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Cost of revenue	$	1,062	$	969	$	2,878	$	3,180
Sales and marketing	6,588		5,911		19,039		17,413
Technology and development	18,034		15,031		51,942		40,920
General and administrative	16,444		19,771		78,025		49,853
Total	$	42,128	$	41,682	$	151,884	$	111,366

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 nine months ended September 30, 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 ~~13.~~16. Net ~~Income (Loss)~~Loss Per Share

Basic net income (loss) per share is computed by dividing net income (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 income (loss) per share, undistributed earnings are allocated assuming all earnings during the period were distributed.

Diluted net income (loss) per share is computed by dividing net income (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 Class A common stock and Class C capital stock underlying 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 2020 Notes using the if-converted method.

~~For the periods presented, the following table reconciles the denominators used in the basic and diluted net income (loss) per share calculations (in thousands):~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Denominator for basic calculation
   187,692    180,583    185,447    179,577
Effect of dilutive securities:

Option awards
   7,401    7,928    —      —
Unvested restricted stock units
   1,332    1,150    —      —








Denominator for dilutive calculation
   196,425    189,661    185,447    179,577

For the periods presented, the following Class A common stock and Class C capital stock equivalents were excluded from the calculations of diluted net ~~income (loss)~~loss per share because their effect would have been antidilutive (in thousands):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Weighted-average Class A common stock and Class C capital stock option awards outstanding
   6,542    8,456    28,671    17,874
Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding
   199    235    4,311    3,559
Class A common stock issuable upon conversion of the 2020 Notes
   438    10,026    438    10,026








Total Class A common stock and Class C capital stock equivalents
   7,179    18,717    33,420    31,459



	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Weighted-average Class A common stock and Class C capital stock option awards outstanding	18,900	21,766	19,394	23,508
Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding	6,964	5,072	6,690	4,891
Class A common stock issuable upon conversion of the convertible notes maturing in 2020	424	410	424	410
Total Class A common stock and Class C capital stock equivalents	26,288	27,248	26,508	28,809

Since the Company expects to settle the principal amount of the outstanding convertible notes maturing in 2021, ~~Notes~~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 ~~approximately 8.8 million shares will have~~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 athe period exceeds the conversion price ~~of $52.36~~per share. The following table presents the conversion spread and conversion price per share ~~for the 2021 Notes.~~

~~In the event~~ of liquidation, dissolution, distribution of assets or winding-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 income (loss) per share under the two-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.~~

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	13,790	43.51
July 1, 2023	4,769	78.37
December 1, 2021	8,785	52.36

Note ~~14.~~17. Commitments and Contingencies

Lease Commitments

We have entered into various non-cancelable operating lease agreements for certain of our office space and equipment with original lease periods expiring between ~~2017~~2019 and ~~2024. We are committed to pay a portion of the related operating expenses under certain of these~~2030. For additional information regarding our lease agreements. Certain of these arrangements have free rent periods or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis. Operating lease expense for the three months ended September 30, 2017 and 2016 was $5.7 million and $4.3 million, respectively. Operating lease expense for the nine months ended September 30, 2017 and 2016 was $15.8 million and $12.1 million, respectively.

~~Future minimum payments for all operating leases as of September 30, 2017 are as follows (in thousands):~~

Remainder of 2017
   $ 6,266
2018
   25,510
2019
   24,579
2020
   25,006
2021
   25,322
All future years
   61,755


Total future minimum lease payments
   $ 168,438

agreements, see Note 12.

Purchase Commitments

~~We have entered into~~

Purchase commitments primarily include various non-cancelable ~~purchase commitments for content related~~agreements to our mobile applications and websites. 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 contract term.

We capitalize payments made to third parties for data licenses that we expect to provide future economic benefit 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 amortize the total contract value over the estimated useful life. For contracts in which we have perpetual rights to the data and expect to utilize the data beyond the life of the contract, the total contract value is amortized on a straight-line basis over the life of the contract plus two years, which is equivalent to the estimated useful life of the asset. For contracts in which we either do not have access to the data beyond the contractual term or do not expect to utilize the data beyond the life of the contract, the total contract value is amortized on a straight-line basis over the term of the contract. 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 ranges from approximately five to nine years. 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.

~~As of September 30, 2017, we had non-cancelable~~ purchase ~~commitments for~~ content related to our mobile applications and websites ~~totaling $144.4 million. The amounts due for this content~~as well as homes we are under contract to purchase through Zillow Offers but that have not closed as of ~~September 30, 2017 are as follows (in thousands):~~

Remainder of 2017
   $ 8,265
2018
   32,750
2019
   33,500
2020
   33,500
2021
   32,000
2022
   4,375


Total future purchase commitments
   $ 144,390

~~Letters of Credit~~

the respective date. As of September 30, ~~2017,~~2019, the value of homes under contract that have not closed was $221.1 million.

Letters of Credit

As of September 30, 2019, we have outstanding letters of credit of approximately ~~$5.2~~$16.9 million, ~~$1.8 million, $1.5 million and $1.1 million, respectively,~~ which secure our lease obligations in connection with ~~the operating leases~~certain of our ~~San Francisco, Seattle, New York and Denver~~ office spaces. Certain of the letters of credit are unsecured obligations, and certain of the letters of credit are secured by certificates of deposit held as collateral in our name at a financial institution. The secured letters of credit are classified as restricted cash in our consolidated balance sheet.

space operating leases.

Surety Bonds

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~~$10.1 million and ~~$3.6~~$8.9 million, respectively, as of September 30, ~~2017~~2019 and December 31, ~~2016, respectively.~~

2018.

Legal Proceedings

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 records 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 doeshave not ~~require Zillow, Inc. to make~~recorded 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 settlement 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 have recorded a liability related to the settlement for $6.0 millionmaterial accruals as of September 30, ~~2017 and~~2019 or December 31, ~~2016. 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 and 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 record~~court, the Ninth Circuit Court of Appeals issued an ~~accrual related to this complaint as~~opinion that, among other things, (i) affirmed the district court’s grant of ~~December 31, 2016, as we did not believe~~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 ~~loss was probable. We have recorded an estimated liability~~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 ~~approximately $4.1 million as~~writ of ~~September 30, 2017, which is classified in general and administrative expenses in our condensed consolidated statement~~certiorari seeking review of ~~operations for~~certain rulings by the ~~nine months ended September 30, 2017.~~Ninth Circuit Court of Appeals. 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. We continue to cooperate with the CFPB in connection with requests for information. 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 intends 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 our co-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 September 30, 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, ~~two~~2 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. ~~We anticipate that~~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. In 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 be~~and 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 of~~plaintiffs 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 deny~~have 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 September 30, 2017, as we~~ do not believe a loss related to this complaint is probable.

In October and November 2017 aand January and February 2018, 4 shareholder derivative ~~lawsuit was~~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.~~Company and certain other relief, such as reform to corporate governance practices. The ~~plaintiff~~plaintiffs in the derivative ~~suit~~suits (in which the Company is a nominal defendant) ~~alleges,~~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 ~~that~~ as a result of the breach of such fiduciary duties, the Company was damaged, and ~~that~~ defendants were unjustly enriched. ~~The defendants intend~~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. On 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 two 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. Plaintiffs opposed our motion to dismiss on October 7, 2019 and we filed our reply to plaintiffs’ opposition to our motion to dismiss on November 6, 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 seven 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. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit. ~~We have not recorded an accrual~~There is a reasonable possibility that a loss may be incurred related to this ~~lawsuit as~~complaint; however, the possible loss or range of ~~September 30, 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.

Indemnifications

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 ~~15.~~18. Related Party Transactions

~~In February 2016,~~

On April 3, 2019, we ~~paid~~entered into a ~~total~~Charter Service Agreement with Executive Jet Management, Inc. for the occasional use by us of ~~approximately $0.2 million and $0.2 million, respectively, to~~an aircraft owned by an entity that is owned by Mr. Lloyd Frink, our ~~Vice~~Executive 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 April 2016, we paid~~travel. We recognized approximately $0.1 million and $0.3 million in expenses pursuant to the Charter Service Agreement for ~~a tax “gross-up” payment to Mr. Barton to cover~~ the ~~imputed income associated with one of his Hart-Scott-Rodino Antitrust Improvements Act of 1976 filings, which filing was required due to Mr. Barton’s ownership of Zillow, Inc.’s common stock.~~

three- and nine-month periods ended September 30, 2019, respectively.

Note ~~16.~~19. Self-Insurance

~~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 protect~~provides 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 condensed consolidated balance ~~sheet~~sheets and was ~~$2.6~~$3.6 million and $3.9 million, respectively, as of September 30, ~~2017~~2019 and ~~$1.7 million as of~~ December 31, ~~2016.~~

2018.

Note ~~17.~~20. Employee Benefit Plan

~~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 $5.6 million and $4.1 million, respectively, for the three months ended September 30, ~~2017~~2019 and ~~2016 was $3.0~~2018, and $15.7 million and ~~$2.4~~$11.9 million, ~~respectively. The total expense related to the Zillow Group 401(k) Plan~~respectively, for the nine months ended September 30, ~~2017~~2019 and ~~2016 was $8.9 million and $7.1 million, respectively.~~

2018.

Note ~~18.~~21. Segment Information and Revenue

Beginning January 1, 2019, we have ~~one~~3 operating and reportable ~~segment~~segments, which ~~has~~have been identified based on ~~how~~the 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 Internet, Media & Technology (“IMT”), Homes and Mortgages segments.

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 Homes segment includes the financial results from Zillow Group’s purchase and sale of homes directly. 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. There~~the 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 who~~may 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 ~~during~~as 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):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Marketplace revenue:

Premier Agent
   $ 197,054    $ 158,322    $ 562,081    $ 439,957
Other real estate
   44,778    28,799    117,427    72,847
Mortgages
   20,869    19,775    62,075    54,621








Total Marketplace revenue
   262,701    206,896    741,583    567,425
Display revenue
   19,138    17,696    52,881    51,552








Total revenue
   $ 281,839    $ 224,592    $ 794,464    $ 618,977



	Three Months Ended September 30, 2019								Three Months Ended September 30, 2018
	Homes			IMT		Mortgages			Homes			IMT		Mortgages
Revenue:
Homes	$	384,626		$	—	$	—		$	11,018		$	—	$	—
Premier Agent	—			240,698		—			—			232,703		—
Rentals	—			44,430		—			—			37,319		—
Other	—			50,162		—			—			43,616		—
Mortgages	—			—		25,292			—			—		18,438
Total revenue	384,626			335,290		25,292			11,018			313,638		18,438
Costs and expenses:
Cost of revenue	370,796			24,318		4,721			10,226			25,186		1,260
Sales and marketing	49,186			118,514		13,647			4,650			117,522		6,562
Technology and development	20,651			94,656		8,667			6,128			93,930		5,256
General and administrative	22,174			55,749		10,570			6,010			60,678		4,055
Impairment costs	—			—		—			—			10,000		—
Acquisition-related costs	—			—		—			—			—		1,405
Integration costs	—			—		5			—			—		523
Total costs and expenses	462,807			293,237		37,610			27,014			307,316		19,061
Income (loss) from operations	(78,181		)	42,053		(12,318		)	(15,996		)	6,322		(623		)
Segment other income	—			—		344			—			—		—
Segment interest expense	(9,689		)	—		(280		)	(432		)	—		—
Income (loss) before income taxes (1)	$	(87,870	)	$	42,053	$	(12,254	)	$	(16,428	)	$	6,322	$	(623	)



	Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2018
	Homes			IMT		Mortgages			Homes			IMT			Mortgages
Revenue:
Homes	$	762,022		$	—	$	—		$	11,018		$	—		$	—
Premier Agent	—			690,394		—			—			677,320			—
Rentals	—			124,938		—			—			99,670			—
Other	—			141,899		—			—			123,445			—
Mortgages	—			—		79,637			—			—			56,766
Total revenue	762,022			957,231		79,637			11,018			900,435			56,766
Costs and expenses:
Cost of revenue	733,947			74,628		13,829			10,312			72,070			3,736
Sales and marketing	107,457			380,608		42,302			7,035			384,241			22,476
Technology and development	51,130			276,886		24,058			12,154			270,978			16,491
General and administrative	54,339			181,270		31,497			11,964			163,303			12,128
Impairment costs	—			—		—			—			10,000			—
Acquisition-related costs	—			—		—			—			27			2,037
Integration costs	—			—		650			—			—			523
Total costs and expenses	946,873			913,392		112,336			41,465			900,619			57,391
Income (loss) from operations	(184,851		)	43,839		(32,699		)	(30,447		)	(184		)	(625		)
Segment other income	—			—		1,059			—			—			—
Segment interest expense	(19,346		)	—		(668		)	(432		)	—			—
Income (loss) before income taxes (1)	$	(204,197	)	$	43,839	$	(32,308	)	$	(30,879	)	$	(184	)	$	(625	)

(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, unaudited):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Total segment loss before income taxes	$	(58,071	)	$	(10,729	)	$	(192,666	)	$	(31,688	)
Corporate interest expense	(16,533		)	(12,236		)	(41,851		)	(26,496		)
Corporate other income	8,655			7,773			26,566			13,308
Consolidated loss before income taxes	$	(65,949	)	$	(15,192	)	$	(207,951	)	$	(44,876	)

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.

Note 22. Subsequent Events

Issuance of Additional 0.75% Convertible Senior Notes due in 2024

On October 9, 2019, the Company issued $73.0 million aggregate principal amount of 0.75% Convertible Senior Notes due 2024 (the “Additional 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 2024 Notes. For additional details related to the 2024 Notes, please see Note 13. The Additional Notes have the same terms, and were issued under the same indenture, as the 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 to pay the cost of the capped call transactions entered into in connection with the issuance of the Additional Notes. The Additional Notes will be separated into liability and equity components, with the liability component classified as long-term debt and the equity component, reflecting the conversion option, included in additional paid-in capital in our consolidated balance sheet. The premiums paid for the capped call confirmations will be included as a net reduction to additional paid-in capital within shareholders’ equity.

Extension of Warehouse Line of Credit

On October 11, 2019, Zillow Home Loans extended the term of its $50.0 million warehouse line of credit previously maturing on October 15, 2019 such that it now matures on October 31, 2019.

Entry into Revolving Credit Agreement

On October 21, 2019, certain of Zillow Group’s wholly owned subsidiaries entered into a credit agreement with Goldman Sachs Bank USA, as the lender, and certain other parties thereto (the “GS Credit Agreement”). The GS Credit Agreement provides for a maximum borrowing capacity of $500.0 million (the “Maximum Amount”) subject to the satisfaction of certain conditions, through a credit facility secured by a pledge of the assets and equity of certain subsidiaries that purchase and sell select residential properties through Zillow Offers. The lender has the discretion to determine the borrowing capacity available under the credit facility, up to the Maximum Amount. The GS Credit Agreement has an initial term of two years which may be extended for 1 additional period of six months, subject to the satisfaction of certain conditions. The stated interest rate is one-month LIBOR plus an applicable margin. The GS Credit Agreement includes customary representations and warranties, covenants (including financial covenants applicable to Zillow Group), and provisions regarding events of default. The GS Credit Agreement includes repayment terms similar to the repayment terms under our other two credit facilities that finance the purchase of residential properties through Zillow Offers. The GS Credit Agreement will be classified within current liabilities in our consolidated balance sheet.

Recourse under the credit facility is limited to the assets and equity of certain Zillow Group subsidiaries that purchase and sell select residential properties through Zillow Offers. Zillow Group formed certain special purpose entities to effectuate the transactions contemplated by the GS Credit Agreement (each, an “SPE”). 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. In certain circumstances Zillow Group may be obligated to fund some or all of the payment obligations under the credit facility.

Entry into Master Repurchase Agreement

On October 29, 2019, Zillow Home Loans, LLC (“Zillow Homes Loans”) entered into a master repurchase agreement (the “Repurchase Agreement”) with Citibank, N.A. (“Citibank”) to provide funding for mortgage loans. 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 provides for a maximum borrowing capacity of $75.0 million, including a committed amount of $25.0 million. The Repurchase Agreement matures on October 27, 2020 and includes customary representations and warranties, covenants and provisions regarding events of default. Transactions under the Repurchase Agreement bear interest at the one-month LIBOR plus an applicable margin, as defined in the Repurchase Agreement. We have not yet determined the impact this Repurchase Agreement will have on our financial statements.

Item 2. 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 condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. 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 ~~contained~~described 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 Quarterly Report on Form 10-Q, including in the section titled “Note Regarding Forward-Looking Statements,” and also those factors discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2018.

Overview of our Business

Zillow Group, Inc. ~~operates~~houses one of the ~~leading~~largest portfolios of real estate ~~and home-related information marketplaces~~brands on mobile and the ~~web, with a complementary portfolio of brands~~web. Zillow Group is committed to leveraging its proprietary data, technology and ~~products~~innovations to ~~help consumers find vital information about homes and connect with local professionals. Zillow Group’s brands focus on all stages of the~~make home ~~lifecycle: renting,~~ buying, selling, financing and renting a seamless, on-demand experience for consumers. 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 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 of~~Other 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~~ professionals maximize business opportunities and connect with millions of consumers. WeZillow Group also ~~own and operate~~operates a number of business brands for real estate, rental and mortgage professionals, including 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~~January 1, 2019, Zillow Group has three reportable segments: the Homes segment, the Internet, Media & Technology (“IMT”) segment and the Mortgages segment. The Homes segment includes the financial results from Zillow Group’s purchase and sale of homes directly through the Zillow Offers service. The IMT segment includes the financial results for ~~sale,~~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 Mortech mortgage software solutions.

In our Homes segment, we generate revenue from the resale of homes ~~for rent and homes not currently~~ on the ~~market—attracts~~open market through our Zillow Offers service. We began buying homes through the Zillow Offers service in April 2018, and we began selling homes in July 2018.

Premier Agent revenue is generated by the sale of advertising services, as well as marketing and technology products and services, to help real estate agents and brokers grow and manage their businesses. We offer these products and services through our Premier Agent and Premier Broker programs. Premier Agent and Premier Broker advertising products, which include the delivery of impressions and validated consumer connections, or leads, are sold on a share of voice basis. Impressions and leads are distributed to Premier Agents and Premier Brokers in proportion to their share of voice, or an ~~active and vibrant community~~agent advertiser’s share of ~~users. Individuals and businesses that use Zillow’s~~total advertising purchased in a particular zip code. Impressions are delivered when an advertisement of a Premier Agent or Premier Broker appears on pages viewed by users of our mobile applications and websites ~~have updated~~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. With the Flex model, Premier Agent 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 ~~more than 74 million homes, creating exclusive home profiles not available anywhere else. These profiles include detailed information about homes, including property facts,~~a cost per lead, cost per click, cost per lease or cost per listing information and purchase and sale data. Using complex, proprietary automated valuation models, we provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on approximately 100 million U.S. homes. We provide this information to our users where, when and how they want it,basis. Rentals revenue also includes revenue generated through our ~~industry-leading~~rental applications product, whereby potential renters can submit applications to multiple properties over a 30-day period for a flat service fee.

Other revenue primarily includes revenue generated by new construction and display advertising, as well as revenue from the sale of various other advertising and business technology solutions for real estate professionals, including dotloop. New construction revenue primarily includes advertising services sold to home builders on a cost per residential community basis.

Display revenue primarily consists of graphical mobile and web advertising sold to advertisers promoting their brands on our mobile applications ~~that enable consumers~~and websites.

In our Mortgages segment, we generate revenue from advertising sold to ~~access~~mortgage lenders and other mortgage professionals on a cost per lead or subscription basis, including our ~~information when they are curbside, viewing homes,~~Connect and Custom Quote services, through ~~our websites.~~mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans and from Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.

During the three months ended September 30, 2019, we generated total revenue of $745.2 million, as compared to $343.1 million in the three months ended September 30, 2018, an increase of $402.1 million, or 117%. This increase was primarily the result of the addition of $373.6 million in Homes revenue, an $8.0 million, or 3% increase in Premier Agent revenue, a $7.1 million, or 19% increase in Rentals revenue, a $6.9 million, or 37% increase in Mortgages revenue and a $6.5 million, or 15%increase in Other revenue. There were approximately ~~175.2~~195.6 million average monthly unique users of our mobile applications and websites for the three months ended September 30, ~~2017 compared to 164.5 million average monthly unique users for the three months ended September 30, 2016,~~2019, representing year-over-year growth of ~~6%.~~

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 two primary revenue categories are marketplace revenue and display revenue.

Marketplace revenue consists of Premier Agent revenue, other real estate revenue and mortgages revenue. Premier Agent revenue is generated by the sale of advertising under our Premier Agent and Premier Broker programs, which offer a suite of marketing and business technology products and services to help real estate agents and brokers grow and manage their businesses and brands. We offer our flagship Premier Agent advertising product and our Premier Broker advertising product on a cost per impression basis. Impressions are delivered when a sold advertisement appears on pages viewed by users of our mobile applications and websites. Other real estate revenue primarily includes revenue generated by Zillow Group Rentals, through which we offer advertising products in our rentals marketplace and a suite of tools for rental professionals, New Construction, which includes advertising services for homebuilders, as well as revenue from the sale of various other advertising and business software solutions and services and technology solutions for real estate professionals. Mortgages revenue primarily includes advertising sold to mortgage lenders and other mortgage professionals, as well as revenue generated by Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.

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.

During the three months ended September 30, 2017, we generated revenue of $281.8 million, as compared to $224.6 million in the three months ended September 30, 2016, an increase of 25%. This increase was primarily the result of a $38.7 million, or 24%, increase in Premier Agent revenue, and a $16.0 million, or 55%, increase in other real estate revenue. There were approximately 175.2 million average monthly unique users of our mobile applications and websites for the three months ended September 30, 2017, representing year-over-year growth of 6%5%. Visits increased ~~19%~~11% to ~~1,667.1~~2,104.9 million for the three months ended September 30, ~~2017~~2019 from ~~1,403.8~~1,888.9 million for the three months ended September 30, ~~2016.~~

In2018.

On September ~~2017,~~9, 2019, we ~~acquired New Home Feed. New Home Feed is a leading provider~~issued $600.0 million aggregate principal amount of ~~listing management~~0.75% Convertible Senior Notes due 2024 (the “2024 Notes”) and ~~syndication tools~~$500.0 million aggregate principal amount of 1.375% Convertible Senior Notes due 2026 (the “2026 Notes”). The net proceeds from the issuances of the 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 Zillow Group. We used approximately $75.2 million of the net proceeds from the 2024 Notes and approximately $75.4 million of the net proceeds from the 2026 Notes to pay the cost of the capped call transactions entered into in connection with the issuances. We intend to use the remainder of the net proceeds for ~~the new construction industry. For additional information about the acquisition of New Home Feed, see Note 6 to our condensed consolidated financial statements.~~

general corporate purposes, which may include working capital, sales and marketing activities, general and administrative matters and capital expenditures.

As of September 30, ~~2017,~~2019, we had ~~3,060~~5,168 full-time employees compared to ~~2,776~~4,336 full-time employees as of December 31, ~~2016.~~

2018.

Key Metrics

Management has identified unique users and visits as relevant to investors’ and others’ assessment of our financial condition and results of operations.

Unique Users

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 consumer users - 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 ~~clicks~~other events we can monetize to generate revenue. For example, our Homes segment revenue depends in part on users accessing our ~~marketplace~~mobile 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 of~~depend 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 ~~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
September 30,    2016 to 2017
% Change
   2017    2016
   (in millions)
Average Monthly Unique Users
   175.2    164.5    6 %

Analytics.

The following table presents our average monthly unique users for the periods presented (in millions):

Three Months Ended
September 30,
2018 to 2019
% Change
2019 2018
Average Monthly Unique Users 195.6

186.6
5 %

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 ~~websites.~~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 ~~agent and other~~ real estate ~~professional~~ advertisers.

We define a visit as a group of interactions by users with the Zillow, Trulia ~~StreetEasy (as of March 2017)~~ and ~~RealEstate.com (as of June 2017)~~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 ~~StreetEasy~~ and ~~RealEstate.com~~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 ~~StreetEasy~~ and ~~RealEstate.com~~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.

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in millions)
Visits
   1,667.1    1,403.8    19 %

The following table presents the number of visits to our mobile applications and websites for the periods presented (in millions):



	Three Months Ended September 30,		2018 to 2019 % Change
	2019	2018	2018 to 2019 % Change
Visits	2,104.9	1,888.9	11	%

Basis of Presentation

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 amount that reflects the consideration to which we expect to be entitled in exchange for those products or services.

In our Homes segment, we generate revenue from the resale of homes 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~~businesses and ~~rental industries.~~professionals. These professionals include real estate, ~~mortgage~~rental and ~~rental~~new construction professionals and brand advertisers. Our ~~two~~three primary revenue categories within our IMT segment are ~~marketplace revenue and display revenue.~~

~~Marketplace Revenue.~~~~Marketplace revenue for the three and nine month periods ended September 30, 2017 and 2016 consisted 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 full sale price of the home net of resale concessions and credits to the buyer and does not reflect real estate ~~revenue and mortgages revenue.~~

agent commissions, closing or other costs associated with the 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 or 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 offer~~platforms 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 ~~product~~products, which include the delivery of impressions and validated consumer connections, or leads, are primarily offered on a ~~cost per impression~~share of voice basis. Payment is received prior to the delivery of impressions and connections. Impressions are delivered when ~~a sold~~an advertisement appears on pages viewed by users of our mobile applications and ~~websites. From 2012 through the end~~websites and connections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. We do not promise any minimum or maximum number of ~~the third quarter~~impressions to customers, but instead control when and how many impressions to deliver based on a customer’s share of ~~2016, we had primarily charged customers for our Premier Agent product based on~~voice. We determine the number of impressions and connections to deliver to Premier Agents and Premier Brokers in each zip code using 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 ~~buyer’s agent list~~mobile applications and websites, as well as the proportion of consumer connections a Premier Agent or Premier Broker receives. The number of impressions and connections delivered for a given spend level is dynamic - as demand for advertising in a zip ~~codes purchased~~code increases or decreases, the number of impressions and connections delivered to a ~~contracted maximum cost per impression. Our~~Premier Agent or Premier Broker in that zip code decreases or increases accordingly.

We primarily recognize revenue related to the Premier Agent and Premier Broker products ~~include multiple deliverables~~and services based on the monthly prepaid spend recognized on a straight-line basis during the monthly billing period over which the products and services are ~~accounted for~~provided. This methodology best depicts how we satisfy our performance obligations to customers, as ~~a single unit of accounting, as the delivery or performance~~we continuously transfer control of the ~~undelivered elements~~performance obligations to the customer over time. Given a Premier Agent or Premier Broker typically prepays their monthly spend and the monthly spend is ~~based~~refunded on ~~traffic to our mobile applications and websites. With this pricing method,~~a pro-rata basis upon cancellation of the contract by a customer at any point in time, we ~~recognized revenue related to our impression-based~~have determined that Premier Agent and Premier Broker ~~products~~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 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 ~~lesser of (i) the actual~~ 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 basi

s. We recognize revenue as leads, clicks and impressions ~~delivered~~are provided to rental professionals, or as rental listings are published on our ~~buyer’s agent list~~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 ~~multiplied by~~is accounted for as variable consideration, and we estimate the ~~contracted maximum cost per impression, or (ii)~~amount of variable consideration based on the ~~contractual maximum spend~~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, typically over a period of six months or twelve months~~customer has the right to access and ~~then month-to-month thereafter.~~

~~In 2016, we began testing and implementation of a new auction-based pricing method for our Premier Agent product by which we determine~~submit the cost per impression delivered in each zip code based upon the total amount spent by Premier Agents to purchase impressions in the zip code during the month. The cost per impression that we charge is dynamic – as demand for impressions in a zip code increases or decreases, the cost per impression in that zip code may be increased 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. 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, we recognize revenue related to our dynamic impression-based Premier Agent and Premier Broker products based on the contractual maximum spend on a straight-line basis during the contractual period over which the services are delivered. 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.

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 estate~~Revenue. 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 ~~homebuilders~~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, ~~whereby~~and revenue is recognized ~~based on the contractual spend~~ on a straight-line basis during the contractual period over which the ~~services~~communities 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 Form~~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 ~~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.

Beginning in the fourth quarter of 2018, mortgages revenue also includes revenue generated by Zillow Home Loans, Zillow’s affiliated mortgage lender. We elect the fair value option for our mortgage loans held for sale, which 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 closed. 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 in the secondary mortgage market within a short period of time after origination.

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. Through Long Form, 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.

~~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.

provided.

Costs and Expenses

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 of~~hosting 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 segment, 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.

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 also 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 contractors~~individuals engaged in the design, development and testing of our mobile applications and websites and the tools and applications that support our products. Technology and development expenses also include equipment and maintenance costs. 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. Technology and development expenses also include 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.

Acquisition-related Costs.Acquisition-related costs consist of investment banking, legal, accounting, tax and regulatory filing fees associated with effecting acquisitions.

Integration Costs. Integration costs consist of expenses incurred to incorporate operations, systems, technology and rights and responsibilities of acquired companies, during both pre-closing and post-closing periods, into Zillow Group’s business. For the three and nine month periods ended September 30, 2019, integration costs primarily include consulting-related expenses incurred in connection with the integration of Zillow Home Loans.

Other Income

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.

Interest Expense

~~Interest~~

Our corporate interest expense consists of interest on ~~the~~Trulia’s Convertible Senior Notes due in 2020 ~~Notes~~(the “2020 Notes”) we guaranteed in connection with our February 2015 acquisition of Trulia, interest on the Convertible Senior Notes due in 2021 (the “2021 Notes”) we issued in December 2016, interest on the Convertible Senior Notes due in 2023 (the “2023 Notes”) we issued in July 2018, and interest on the ~~2021~~2024 Notes and the 2026 Notes we issued in ~~December 2016.~~September 2019. Interest is payable on the 2020 Notes at the rate of 2.75% semi-annually on June 15 and December 15 of each year. Interest is payable on the 2021 Notes at the rate of 2.00% semi-annually on June 1 and December 1 of each year.

Interest is payable on the 2023 Notes at the rate of 1.50% semi-annually on January 1 and July 1 of each year. Interest is payable on the 2024 Notes at the rate of 0.75% semi-annually on March 1 and September 1 of each year. Interest is payable on the 2026 Notes at the rate of 1.375% semi-annually on March 1 and September 1 of each year.

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 a floating rate based on the one-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 credit related to our Zillow Home Loans business. Each warehouse line of credit provides for a current and maximum borrowing capacity of $50.0 million, or $100.0 million in total. Borrowings on the warehouse lines of credit bear interest at the one-month LIBOR rate plus an applicable margin, as defined in the credit agreements.

Income Taxes

We are subject to federal and state income taxes in the United States and in Canada. ~~During the three and nine month periods ended~~As of September 30, ~~2017,~~2019 and ~~2016,~~December 31, 2018, we ~~did not have a material amount of current taxable income. We~~ have provided a ~~full~~ valuation allowance against our net deferred tax assets ~~as of September 30, 2017 and December 31, 2016 because,~~that we believe, based on the weight of available evidence, ~~it is~~are not more likely than not ~~(a likelihood of more than 50%) that some or all of the deferred tax assets will not~~to be realized. Therefore, no material ~~related~~current tax liability or expense has been recorded in the condensed consolidated financial statements.

We have accumulated federal tax losses of approximately $1,081.7 million as of December 31, 2018, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $32.5 million (tax effected) as of December 31, 2018.

We recorded an income tax benefit of $1.3 million for the three months ended September 30, 2019 and an income tax benefit of $3.8 million for the nine months ended September 30, 2019.

We recorded an income tax benefit of $14.7 million for the three months ended September 30, 2018, which was calculated as the difference between the income tax benefit of $22.7 million recorded for the nine months ended September 30, 2018 and the income tax benefit of $8.0 million recorded for the six months ended June 30, 2018. The $22.7 million tax benefit recorded for the nine months ended September 30, 2018 was comprised of a $1.9 million income tax benefit, which was calculated using an estimate of our annual effective tax rate of 4.3% applied to our loss before income taxes of $44.9 million for the nine months ended September 30, 2018 and a $20.8 million discrete income tax benefit as a result of the treatment of stock compensation windfall deductions and the impact from the Tax Cuts and Jobs Act (the “Tax Act”) related to IRC Section 162(m). Our estimated annual effective tax rate for the nine months ended September 30, 2018 was primarily impacted by the release in valuation allowance resulting from indefinite-lived deferred tax assets and their ability to offset indefinite-lived intangible deferred tax liabilities.

As of September 30, 2018, we had completed our accounting for the income tax effects related to the deduction limitations on compensation under the Tax Act and recorded a discrete tax benefit adjustment of $3.3 million during the three months ended September 30, 2018. The Internal Revenue Service provided further guidance in applying the written binding contracts requirement under the Tax Act and 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 was considered complete and we recorded a $5.9 million discrete tax benefit adjustment related to this item for the nine months ended September 30, 2018.

Results of Operations

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. Revenue for the Homes segment includes the full 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 periods may not be indicative of future performance.

The following tables present our results of operations for the periods indicated and as a percentage of total ~~revenue:~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
   (in thousands, except per share data, unaudited)
Statements of Operations Data:

Revenue
   $ 281,839    $ 224,592    $ 794,464    $ 618,977
Costs and expenses:

Cost of revenue (exclusive of amortization) (1)(2)
   22,152    17,608    62,644    50,556
Sales and marketing (1)
   107,108    93,180    344,266    291,910
Technology and development (1)
   83,389    64,496    234,798    188,263
General and administrative (1)
   54,226    42,625    153,038    284,175
Acquisition-related costs
   218    93    366    890
Gain on divestiture of business
   —      (1,251 )    —      (1,251 )








Total costs and expenses
   267,093    216,751    795,112    814,543








Income (loss) from operations
   14,746    7,841    (648 )    (195,566 )
Other income
   1,407    561    3,970    1,995
Interest expense
   (6,906 )    (1,595 )    (20,526 )    (4,740 )








Income (loss) before income taxes
   9,247    6,807    (17,204 )    (198,311 )
Income tax benefit (expense)
   (41 )    —      (41 )    1,364








Net income (loss)
   $ 9,206    $ 6,807    $ (17,245 )    $ (196,947 )








Net income (loss) per share — basic and diluted
   $ 0.05    $ 0.04    $ (0.09 )    $ (1.10 )
Weighted-average shares outstanding — basic
   187,692    180,583    185,447    179,577
Weighted-average shares outstanding — diluted
   196,425    189,661    185,447    179,577
Other Financial Data:

Adjusted EBITDA (3)
   $ 70,957    $ 59,463    $ 165,456    $ (39,923 )
   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
   (in thousands, unaudited)
(1) Includes share-based compensation as follows:

Cost of revenue
   $ 1,014    $ 894    $ 2,942    $ 2,662
Sales and marketing
   5,914    5,968    17,694    17,566
Technology and development
   10,438    8,035    29,329    23,160
General and administrative
   11,208    12,388    34,197    37,764








Total
   $ 28,574    $ 27,285    $ 84,162    $ 81,152








(2) Amortization of website development costs and intangible assets included in technology and development
   $ 13,442    $ 22,006    $ 59,862    $ 64,931
(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 U.S. generally accepted accounting principles, or GAAP. Adjusted EBITDA for the nine months ended September 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.

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 2017 2016
   (unaudited)
Percentage of Revenue:

Revenue
   100 % 100 % 100 % 100 %
Costs and expenses:

Cost of revenue (exclusive of amortization)
   8 8 8 8
Sales and marketing
   38 41 43 47
Technology and development
   30 29 30 30
General and administrative
   19 19 19 46
Acquisition-related costs
   —   —   —   —
Gain on divestiture of business
   0 (1 ) 0 —


Total costs and expenses
   95 97 100 132


Income (loss) from operations
   5 3 —   (32 )
Other income
   —   —   —   —
Interest expense
   (2 ) (1 ) (3 ) (1 )


Income (loss) before income taxes
   3 3 (2 ) (32 )
Income tax benefit (expense)
   —   0 —   —


Net income (loss)
   3 % 3 % (2 %) (32 %)

revenue (in thousands, except per share and percentage data, unaudited):

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Statements of Operations Data:
Revenue:
Homes $ 384,626
$ 11,018
$ 762,022
$ 11,018
IMT 335,290
313,638
957,231
900,435
Mortgages 25,292
18,438
79,637
56,766
Total revenue 745,208
343,094
1,798,890
968,219
Cost of revenue (exclusive of amortization) (1)(2):
Homes 370,796
10,226
733,947
10,312
IMT 24,318
25,186
74,628
72,070
Mortgages 4,721
1,260
13,829
3,736
Total cost of revenue 399,835
36,672
822,404
86,118
Sales and marketing (1) 181,347
128,734
530,367
413,752
Technology and development (1) 123,974
105,314
352,074
299,623
General and administrative (1) 88,493
70,743
267,106
187,395
Impairment costs —
10,000
—
10,000
Acquisition-related costs —
1,405
—
2,064
Integration costs 5
523
650
523
Total costs and expenses 793,654
353,391
1,972,601
999,475
Loss from operations (48,446 ) (10,297 ) (173,711 ) (31,256 )
Other income 8,999
7,773
27,625
13,308
Interest expense (26,502 ) (12,668 ) (61,865 ) (26,928 )
Loss before income taxes (65,949 ) (15,192 ) (207,951 ) (44,876 )
Income tax benefit 1,300
14,700
3,800
22,700
Net loss $ (64,649 ) $ (492 ) $ (204,151 ) $ (22,176 )
Net loss per share — basic and diluted $ (0.31 ) $ —
$ (0.99 ) $ (0.11 )
Weighted-average shares outstanding — basic and diluted 207,002
202,416
205,766
195,208
Other Financial Data:
Segment income (loss) before income taxes
Homes segment $ (87,870 ) $ (16,428 ) $ (204,197 ) $ (30,879 )
IMT segment $ 42,053
$ 6,322
$ 43,839
$ (184 )
Mortgages segment $ (12,254 ) $ (623 ) $ (32,308 ) $ (625 )
Adjusted EBITDA (3)
Homes segment $ (67,825 ) $ (13,409 ) $ (158,801 ) $ (25,274 )
IMT segment 91,102
75,363
216,204
181,764
Mortgages segment (7,435 ) 4,211
(15,342 ) 11,985
Total Adjusted EBITDA $ 15,842
$ 66,165
$ 42,061
$ 168,475

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
(1) Includes share-based compensation as follows:
Cost of revenue $ 1,062

$ 969

$ 2,878

$ 3,180
Sales and marketing 6,588

5,911

19,039

17,413
Technology and development 18,034

15,031

51,942

40,920
General and administrative 16,444

19,771

78,025

49,853
Total $ 42,128

$ 41,682

$ 151,884

$ 111,366
(2) Amortization of website development costs and intangible assets included in technology and development $ 15,835
$ 18,165
$ 44,891
$ 61,735
(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.

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Percentage of Revenue:
Revenue:
Homes 52 % 3 % 42 % 1 %
IMT 45
91
53
93
Mortgages 3
5
4
6
Total revenue 100
100
100
100
Cost of revenue (exclusive of amortization):
Homes 50
3
41
1
IMT 3
7
4
7
Mortgages 1
—
1
—
Total cost of revenue 54
11
46
9
Sales and marketing 24
38
29
43
Technology and development 17
31
20
31
General and administrative 12
21
15
19
Impairment costs 0
3
0
1
Acquisition-related costs 0
—
0
—
Integration costs —
—
—
—
Total costs and expenses 107
103
110
103
Loss from operations (7 ) (3 ) (10 ) (3 )
Other income 1
2
2
1
Interest expense (4 ) (4 ) (3 ) (3 )
Loss before income taxes (9 ) (4 ) (12 ) (5 )
Income tax benefit —
4
—
2
Net loss (9 )% — % (11 )% (2 )%

Adjusted EBITDA

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 Quarterly Report on Form ~~10-Q, a non-GAAP financial measure.~~10-Q. 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 Quarterly Report on Form 10-Q ~~because it is a~~as they are key ~~metric~~metrics 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 are non-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 costs;

Adjusted EBITDA does not reflect acquisition-related costs;

~~Adjusted EBITDA does not reflect the gain on divestiture of business;~~

Adjusted EBITDA does not reflect interest expense or other income;

Adjusted EBITDA does not reflect income 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 presents~~tables 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:~~

   Three Months Ended    Nine Months Ended
   September 30,    September 30,
   2017    2016    2017    2016
   (in thousands, unaudited)
Reconciliation of Adjusted EBITDA to Net Income (Loss):

Net income (loss)
   $ 9,206    $ 6,807    $ (17,245 )    $ (196,947 )
Other income
   (1,407 )    (561 )    (3,970 )    (1,995 )
Depreciation and amortization expense
   27,419    25,495    81,576    74,852
Share-based compensation expense
   28,574    27,285    84,162    81,152
Acquisition-related costs
   218    93    366    890
Gain on divestiture of business
   —      (1,251 )    —      (1,251 )
Interest expense
   6,906    1,595    20,526    4,740
Income tax benefit (expense)
   41    —      41    (1,364 )








Adjusted EBITDA (1)
   $ 70,957    $ 59,463    $ 165,456    $ (39,923 )

~~(1)~~

Adjusted EBITDA for the nine month period ended September 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.

presented (in thousands, unaudited):



	Three Months Ended September 30, 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			$	(64,649	)
Income tax benefit	N/A			N/A		N/A			N/A			(1,300		)
Income (loss) before income taxes	$	(87,870	)	$	42,053	$	(12,254	)	$	(7,878	)	$	(65,949	)
Other income	—			—		(344		)	(8,655		)	(8,999		)
Depreciation and amortization expense	2,331			18,362		1,467			—			22,160
Share-based compensation expense	8,025			30,687		3,416			—			42,128
Interest expense	9,689			—		280			16,533			26,502
Adjusted EBITDA	$	(67,825	)	$	91,102	$	(7,435	)	$	—		$	15,842



	Three Months Ended September 30, 2018
	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			$	(492	)
Income tax benefit	N/A			N/A		N/A			N/A			(14,700		)
Income (loss) before income taxes	$	(16,428	)	$	6,322	$	(623	)	$	(4,463	)	$	(15,192	)
Other income	—			—		—			(7,773		)	(7,773		)
Depreciation and amortization expense	368			22,053		954			—			23,375
Share-based compensation expense	2,219			36,988		2,475			—			41,682
Impairment costs	—			10,000		—			—			10,000
Acquisition-related costs	—			—		1,405			—			1,405
Interest expense	432			—		—			12,236			12,668
Adjusted EBITDA	$	(13,409	)	$	75,363	$	4,211		$	—		$	66,165



	Nine Months Ended September 30, 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			$	(204,151	)
Income tax benefit	N/A			N/A		N/A			N/A			(3,800		)
Income (loss) before income taxes	$	(204,197	)	$	43,839	$	(32,308	)	$	(15,285	)	$	(207,951	)
Other income	—			—		(1,059		)	(26,566		)	(27,625		)
Depreciation and amortization expense	5,384			54,264		4,240			—			63,888
Share-based compensation expense	20,666			118,101		13,117			—			151,884
Interest expense	19,346			—		668			41,851			61,865
Adjusted EBITDA	$	(158,801	)	$	216,204	$	(15,342	)	$	—		$	42,061



	Nine Months Ended September 30, 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			$	(22,176	)
Income tax benefit	N/A			N/A			N/A			N/A			(22,700		)
Loss before income taxes	$	(30,879	)	$	(184	)	$	(625	)	$	(13,188	)	$	(44,876	)
Other income	—			—			—			(13,308		)	(13,308		)
Depreciation and amortization expense	608			72,168			3,525			—			76,301
Share-based compensation expense	4,565			99,753			7,048			—			111,366
Impairment costs	—			10,000			—			—			10,000
Acquisition-related costs	—			27			2,037			—			2,064
Interest expense	432			—			—			26,496			26,928
Adjusted EBITDA	$	(25,274	)	$	181,764		$	11,985		$	—		$	168,475

(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.

Three Months Ended September 30, ~~2017~~2019 Compared to Three Months Ended September 30, ~~2016~~

2018

Revenue

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Revenue:

Marketplace revenue:

Premier Agent
   $ 197,054    $ 158,322    24 %
Other real estate
   44,778    28,799    55 %
Mortgages
   20,869    19,775    6 %





Total Marketplace revenue
   262,701    206,896    27 %
Display revenue
   19,138    17,696    8 %





Total revenue
   $ 281,839    $ 224,592    25 %

   Three Months Ended
September 30,
   2017 2016
Percentage of Total Revenue:

Marketplace revenue:

Premier Agent
   70 % 70 %
Other real estate
   16 13
Mortgages
   7 9


Total Marketplace revenue
   93 92
Display revenue
   7 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, unaudited):



	Three Months Ended September 30,				2018 to 2019 % Change
	2019		2018		2018 to 2019 % Change
Homes	$	384,626	$	11,018	3,391	%
IMT Revenue:
Premier Agent	240,698		232,703		3	%
Rentals	44,430		37,319		19	%
Other	50,162		43,616		15	%
Total IMT revenue	335,290		313,638		7	%
Mortgages	25,292		18,438		37	%
Total revenue	$	745,208	$	343,094	117	%

The following table presents Zillow Group’s revenue by category and by segment as percentages of total revenue for the periods presented (unaudited):



	Three Months Ended September 30,
	2019		2018
Percentage of Total Revenue:
Homes	52	%	3	%
IMT Revenue:
Premier Agent	32		68
Rentals	6		11
Other	7		13
Total IMT revenue	45		91
Mortgages	3		5
Total revenue	100	%	100	%

Total revenue increased by ~~$57.2~~$402.1 million, or ~~25%~~117%, for the three months ended September 30, ~~2017~~2019 compared to the three months ended September 30, ~~2016. Marketplace~~2018. The increase in total revenue ~~increased by 27%, and display~~was primarily attributable to our Zillow Offers business, which began selling homes in July of 2018. Homes revenue ~~increased by 8%.~~grew to $384.6 million for the three months ended September 30, 2019 from $11.0 million for the three months ended September 30, 2018, an increase of $373.6 million. There were approximately ~~175.2~~195.6 million average monthly unique users of our mobile applications and websites for the three months ended September 30, ~~2017~~2019 compared to ~~164.5~~186.6 million average monthly unique users for the three months ended September 30, ~~2016,~~2018, representing year-over-year growth of 6%5%. ~~This increase in unique users~~Visits increased the number of impressions and clicks we monetized in 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 areas11% 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 revenue by more than $0.8 million for the quarterly period ended September 30, 2017. We expect Premier Agent revenue for

the three months ended December 31, 2017 will be impacted by approximately $1.0 million due to relief initiatives. We also experienced a temporary decline in traffic to our mobile applications and websites from consumers in impacted areas during September 2017, which may have impacted the number of unique users and visits for the three months ended September 30, 2017, and may impact the number of unique users and visits for the three months ended December 31, 2017.

~~Marketplace revenue grew to $262.7~~2,104.9 million for the three months ended September 30, ~~2017~~2019 from ~~$206.9~~1,888.9 million for the three months ended September 30, ~~2016, an increase~~2018. The increases in unique users and visits increased the number of ~~$55.8 million. Marketplace~~impressions, leads, clicks and other events we monetized across our revenue ~~represented 93% of total~~categories.

Homes Segment

Homes revenue was $384.6 million for the three months ended September 30, ~~2017 compared~~2019 due to ~~92%~~the sale of ~~total~~1,211 homes at an average selling price of $317.6 thousand per home. For the three months ended September 30, 2018, Homes revenue was $11.0 million as a result of the sale of 36 homes at an average selling price of $306.1 thousand per home. The increase in Homes revenue was due to an increase in the number of homes sold in the period as consumer adoption of Zillow Offers increases in geographic areas in which it is currently operating and as Zillow Offers expands into new geographic markets. As of September 30, 2019, Zillow Offers was operating in 19 metropolitan areas.

IMT Segment

Premier Agent Revenue. Premier Agent revenue grew to $240.7 million for the three months ended September 30, ~~2016. The~~2019 from $232.7 million for the three months ended September 30, 2018, an increase ~~in marketplace revenue was primarily attributable to the $38.7~~of $8.0 million, or ~~24%, increase in Premier Agent revenue.~~3%. Premier Agent revenue was positively impacted by an increase in visits. ~~Visits~~As discussed above, visits increased ~~19%~~11% to ~~1,667.1~~2,104.9 million for the three months ended September 30, ~~2017~~2019 from ~~1,403.8~~1,888.9 million for the three months ended September 30, ~~2016. This~~2018. 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 three months ended September 30, 2019.

Premier Agent revenue per visit ~~increased~~decreased by 5%7% to ~~$0.118~~$0.114 for the three months ended September 30, ~~2017~~2019 from ~~$0.113~~$0.123 for the three months ended September 30, ~~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 implementation~~primarily a result of ~~the new pricing method for~~changes 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 ~~for~~of 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 ~~flagship~~mobile 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 ~~which~~some 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 ~~determine~~made 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 ~~delivered~~and 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. Revenue generated from Premier Agent accounts which have advertised with Zillow Group for more than one year grew by 45% for the three months ended September 30, ~~2017 as compared~~2019 also included an immaterial 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 expect to extend the ~~three months ended September 30, 2016.~~

~~The increase~~testing of this pricing model to two additional regions during the fourth quarter of 2019, and we may extend the testing of this pricing model to additional regions in ~~marketplace~~the future.

Rentals Revenue. Rentals revenue was ~~also attributable to growth in other real estate revenue, which increased by $16.0~~$44.4 million ~~or 55%,~~ for the three months ended September 30, ~~2017~~2019 compared to $37.3 million for the three months ended September 30, ~~2016.~~2018, an increase of $7.1 million, or 19%. The increase in ~~other real estate~~Rentals revenue was positively impacted by an increase in quarterly revenue per average monthly rental listing, which increased 22% to approximately $1,113 for the three months ended September 30, 2019 from approximately $911 for the three months ended September 30, 2018. We calculate quarterly revenue per average monthly rental listing by dividing total Rentals revenue for the period by the average monthly 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 41,245 average monthly rental listings for the three months ended September 30, 2019 from 40,962 average monthly rental listings for the three months ended September 30, 2018. 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, lease or listing that we monetize. Finally, the increase in Rentals revenue was also driven in part by the 11% increase in visits to 2,104.9 million for the three months ended September 30, 2019, which increases the likelihood a consumer will contact a rental professional and, in turn, increases the likelihood of a lead, click, impression or lease that we monetize.

Other Revenue. Other revenue was $50.2 million for the three months ended September 30, 2019 compared to $43.6 million for the three months ended September 30, 2018, an increase of $6.5 million, or 15%. The increase in Other revenue was primarily a result of a ~~56%~~20% increase in revenue generated by ~~Zillow Group Rentals.~~our new construction marketing solutions. Growth in ~~Zillow Group Rentals~~new construction revenue was primarily attributable to ~~increases~~higher spend 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 of~~ our cost per ~~lead, cost per lease~~impression product and ~~cost per click advertising products, as well as enhancements to our marketing products that improve the ways~~increases in ~~which consumers~~adoption 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 Construction~~new construction platform.

~~The increase in marketplace~~

Mortgages Segment

Mortgages revenue was ~~also attributable to growth in mortgages revenue, which increased by $1.1~~$25.3 million ~~or 6%,~~ for the three months ended September 30, ~~2017~~2019 compared to $18.4 million for the three months ended September 30, ~~2016.~~2018, an increase of $6.9 million, or 37%. The increase in mortgages revenue was primarily a result of ~~a 31%~~the addition of revenue generated by Zillow Home Loans, Zillow’s affiliated mortgage lender, which we acquired in the fourth quarter of 2018.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Revenue

The following table presents Zillow Group’s revenue by category and by segment for the periods presented (in thousands, unaudited):



	Nine Months Ended September 30,				2018 to 2019 % Change
	2019		2018		2018 to 2019 % Change
Homes	$	762,022	$	11,018	6,816	%
IMT Revenue:
Premier Agent	690,394		677,320		2	%
Rentals	124,938		99,670		25	%
Other	141,899		123,445		15	%
Total IMT revenue	957,231		900,435		6	%
Mortgages	79,637		56,766		40	%
Total revenue	$	1,798,890	$	968,219	86	%

The following table presents Zillow Group’s revenue by category and by segment as percentages of total revenue for the periods presented (unaudited):



	Nine Months Ended September 30,
	2019		2018
Percentage of Total Revenue:
Homes	42	%	1	%
IMT Revenue:
Premier Agent	38		70
Rentals	7		10
Other	8		13
Total IMT revenue	53		93
Mortgages	4		6
Total revenue	100	%	100	%

Total revenue increased by $830.7 million, or 86%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase in total revenue was primarily attributable to our Zillow Offers business, which began selling homes in July of 2018. Homes revenue was $762.0 million for the nine months ended September 30, 2019 compared to $11.0 million for the nine months ended September 30, 2018. There were approximately 195.6 million average ~~revenue per loan information request~~monthly unique users of our mobile applications and websites for the three months ended September 30, ~~2017~~2019 compared to ~~the three months ended September 30, 2016. The increase in~~186.6 million 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 5.5 million mortgage loan information requests submitted by consumersmonthly unique users for the three months ended September 30, ~~2017 compared to 6.9~~2018, representing year-over-year growth of 5%. The increase in unique users increased the number of impressions, leads, clicks and other events we monetized across our revenue categories.

Homes Segment

Homes revenue was $762.0 million ~~mortgage loan information requests submitted by consumers~~ for the ~~three~~nine months ended September 30, ~~2016,~~2019 due to the sale of 2,411 homes at an average selling price of $316.0 thousand per home. Homes revenue was $11.0 million for the nine months ended September 30, 2018 due to the sale of 36 homes at an average selling price of $306.1 thousand per home.

IMT Segment

Premier Agent Revenue. Premier Agent revenue grew to $690.4 million for the nine months ended September 30, 2019 from $677.3 million for the nine months ended September 30, 2018, an increase of $13.1 million, or 2%. Premier Agent revenue was positively impacted by an increase in visits. Visits increased 13% to 6,306.0 million for the nine months ended September 30, 2019 from 5,574.3 million for the nine months ended September 30, 2018. The increase in visits increased the number of impressions we could monetize in our Premier Agent marketplace. Year-over-year Premier Agent revenue growth slowed, which we believe was primarily due to changes made to our Premier Agent and Premier Broker advertising programs in 2018 to improve lead quality and consumer connections, which led to an increase in advertiser churn, or exit from our advertising platform. Advertiser churn has normalized throughout 2019.

During the nine months ended September 30, 2019, Premier Agent revenue also included an immaterial amount of revenue generated from our initial testing of a ~~decrease~~new pricing model for Premier Agent and Premier Broker advertisers, Flex, in limited markets.

Rentals Revenue. Rentals revenue was $124.9 million for the nine months ended September 30, 2019 compared to $99.7 million for the nine months ended September 30, 2018, an increase of ~~20%~~$25.3 million, or 25%. ~~We believe the decrease~~Rentals revenue was positively impacted by an increase in the number of ~~loan information requests submitted by consumers~~average monthly rental listings on our mobile applications and websites, which increased 6% to 40,237 average monthly rental listings for the nine months ended September 30, 2019 from 38,125 average monthly rental listings for the nine months ended September 30, 2018. The quarterly revenue per average monthly rental listing increased 20% to approximately $1,047 for the nine months ended September 30, 2019 from approximately $871 for the nine months ended September 30, 2018. The increase in quarterly revenue per average monthly rental listing is primarily due to an increase in the adoption of 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~~rental applications product ~~feature change creates a better experience for consumers and more valuable loan information requests~~as well as an increase in the number of impressions delivered for our ~~lender advertisers.~~

~~Display~~Rentals cost per impression product. The increase in Rentals revenue was ~~$19.1~~also driven in part by the 13% increase in visits to 6,306.0 million for the nine months ended September 30, 2019.

Other Revenue. Other revenue was $141.9 million for the nine months ended September 30, 2019 compared to $123.4 million for the nine months ended September 30, 2018, an increase of $18.5 million, or 15%. The increase in Other revenue was primarily a result of a 28% increase in revenue generated by our new construction marketing solutions. Growth in new construction revenue was primarily attributable to increases in adoption by and advertising sales to new home builders through our new construction platform.

Mortgages Segment

Mortgages revenue was $79.6 million for the nine months ended September 30, 2019 compared to $56.8 million for the nine months ended September 30, 2018, an increase of $22.9 million, or 40%. The increase in mortgages revenue was primarily a result of the addition of revenue generated by Zillow Home Loans, Zillow’s affiliated mortgage lender, which we acquired in the fourth quarter of 2018.

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Segment Results of Operations

The following table presents Zillow Group’s segment results for the periods presented (in thousands, unaudited):



	Three Months Ended September 30, 2019								Three Months Ended September 30, 2018
	Homes			IMT		Mortgages			Homes			IMT		Mortgages
Revenue	$	384,626		$	335,290	$	25,292		$	11,018		$	313,638	$	18,438
Costs and expenses:
Cost of revenue	370,796			24,318		4,721			10,226			25,186		1,260
Sales and marketing	49,186			118,514		13,647			4,650			117,522		6,562
Technology and development	20,651			94,656		8,667			6,128			93,930		5,256
General and administrative	22,174			55,749		10,570			6,010			60,678		4,055
Impairment costs	—			—		—			—			10,000		—
Acquisition-related costs	—			—		—			—			—		1,405
Integration costs	—			—		5			—			—		523
Total costs and expenses	462,807			293,237		37,610			27,014			307,316		19,061
Income (loss) from operations	(78,181		)	42,053		(12,318		)	(15,996		)	6,322		(623		)
Other income	—			—		344			—			—		—
Interest expense	(9,689		)	—		(280		)	(432		)	—		—
Income (loss) before income taxes (1)	$	(87,870	)	$	42,053	$	(12,254	)	$	(16,428	)	$	6,322	$	(623	)

(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, unaudited):



	Three Months Ended September 30,
	2019			2018
Total segment loss before income taxes	$	(58,071	)	$	(10,729	)
Corporate interest expense	(16,533		)	(12,236		)
Corporate other income	8,655			7,773
Consolidated loss before income taxes	$	(65,949	)	$	(15,192	)

Homes Segment

Cost of Revenue. Cost of revenue was $370.8 million for the three months ended September 30, ~~2017~~2019 compared to ~~$17.7~~$10.2 million for the three months ended September 30, ~~2016,~~2018, an increase of ~~$1.4~~$360.6 million. Display revenue represented 7% of total revenue for the three months ended September 30, 2017 compared to 8% of total revenue for the three months ended September 30, 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.

~~Cost of Revenue~~

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Cost of revenue
   $ 22,152    $ 17,608    26 %

~~Cost of revenue was $22.2 million for the three months ended September 30, 2017 compared to $17.6 million for the three months ended September 30, 2016, an increase of $4.5 million, or 26%.~~ The increase in cost of revenue was primarily attributable to ~~a $2.2 million increase in revenue share~~home acquisition and renovation costs a $1.4 million increase in data center and connectivity costs, a $0.4 million increase in headcount-related expenses, including share-based compensation expense, and a $0.5 million increase in various miscellaneous expenses.related to the 1,211 homes that we sold during the period compared to the sale of 36 homes during the three months ended September 30, 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 ~~Marketing~~

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Sales and marketing
   $ 107,108    $ 93,180    15 %

Marketing. Sales and marketing expenses were ~~$107.1~~$49.2 million for the three months ended September 30, ~~2017~~2019 compared to ~~$93.2~~$4.7 million for the three months ended September 30, ~~2016,~~2018, an increase of ~~$13.9 million, or 15%.~~$44.5 million. The increase in sales and marketing expenses was primarily attributable to ~~increased~~a $16.4 million increase in selling expenses directly attributable to the resale of homes, an $11.9 million increase in headcount-related expenses, including share-based compensation expense, a $7.4 million increase in holding costs, a $5.2 million increase in marketing and advertising expenses ~~of $6.8~~and a $3.6 million ~~primarily related to advertising spend during the peak residential real estate transaction period 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 $5.0 million, including share-based compensation expense, due primarily to significant growth in the size of our sales team. The increase in ~~sales~~miscellaneous expenses.

Sales and marketing expenses ~~was also attributable to a $1.4~~include $7.7 million ~~increase~~ in ~~consulting~~holding costs ~~to support our advertising initiatives~~for the three months ended September 30, 2019 and ~~a $0.7~~$0.3 million ~~increase~~ in ~~various miscellaneous expenses.~~ holding costs for the three months ended September 30, 2018.

We expect our sales and marketing expenses to increase in absolute dollars in future ~~years~~periods 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 ~~Development~~

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Technology and development
   $ 83,389    $ 64,496    29 %

Development. Technology and development expenses, which include research and development costs, were ~~$83.4~~$20.7 million for the three months ended September 30, ~~2017~~2019 compared to ~~$64.5~~$6.1 million for the three months ended September 30, ~~2016,~~2018, an increase of ~~$18.9~~$14.5 million. The increase in technology and development expenses was primarily due to an $11.2 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment, a $1.2 million increase in data acquisition costs, a $1.0 million increase in depreciation and amortization expense and a $1.1 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 $22.2 million for the three months ended September 30, 2019 compared to $6.0 million for the three months ended September 30, 2018, an increase of $16.2 million. The increase in general and administrative expenses was primarily due to a $9.6 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 a $2.6 million increase in building lease-related expenses including rent, utilities and insurance, a $1.2 million increase in professional services fees, a $1.0 million increase software and hardware costs and a $1.8 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 business.

Interest Expense. Interest expense was $9.7 million for the three months ended September 30, 2019 compared to $0.4 million for the three months ended September 30, 2018, an increase of $9.3 million. The increase in interest expense was attributable to borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our revolving credit facilities. We expect interest expense to increase in absolute dollars in future periods as we continue to expand our Homes business.

IMT Segment

Cost of Revenue. Cost of revenue was $24.3 million for the three months ended September 30, 2019 compared to $25.2 million for the three months ended September 30, 2018, a decrease of $0.9 million, or ~~29%~~3%. The decrease in cost of revenue was primarily due to a $1.0 million decrease in headcount-related expenses, including share-based compensation expense, and a $0.8 million decrease in miscellaneous expenses, partially offset by a $1.1 million increase in other direct product costs.

Sales and Marketing. Sales and marketing expenses were $118.5 million for the three months ended September 30, 2019 compared to $117.5 million for the three months ended September 30, 2018, an increase of $1.0 million, or 1%. The increase in sales and marketing expenses was primarily attributable to a $3.2 million increase in professional services fees and a $0.8 million increase in headcount-related expenses, including share-based compensation expense, partially offset by a $2.7 million decrease in marketing and advertising expenses.

Technology and Development. Technology and development expenses, which include research and development costs, were $94.7 million for the three months ended September 30, 2019 compared to $93.9 million for the three months ended September 30, 2018, an increase of $0.7 million, or 1%. Approximately ~~$13.2~~$1.5 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 ~~$3.6~~$1.2 million increase in ~~other non-capitalizable data content expense,~~software and hardware costs. These increases were partially offset by a ~~$1.4~~$3.2 million ~~increase~~decrease in ~~the~~depreciation and amortization ~~of purchased data content intangible assets,~~expense.

General and ~~a $0.7~~Administrative. General and administrative expenses were $55.7 million ~~increase in various miscellaneous expenses.~~

~~Amortization expense included in technology and development for capitalized website development costs and software was $11.2 million and $11.3 million, respectively,~~ for the three months ended September 30, ~~2017 and 2016. Amortization expense included in technology and development related~~2019 compared to ~~intangible assets recorded in connection with acquisitions was $9.8~~$60.7 million ~~and $9.6 million, respectively,~~ for the three months ended September 30, ~~2017~~2018, a decrease of $4.9 million, or 8%. The decrease in general and ~~2016. Other data content~~administrative expenses was primarily due to a $6.2 million decrease in headcount-related expenses, including share-based compensation expense, ~~was $10.1~~and a $1.3 million decrease in miscellaneous expenses, partially offset by a $2.6 million increase in building lease-related expenses including rent, utilities and ~~$6.5 million, respectively,~~insurance.

Impairment Costs. There were no impairment costs for the three months ended September 30, ~~2017 and 2016. Amortization expense included in technology and development for purchased data content intangible assets was $2.5 million and $1.1 million, respectively,~~2019. Impairment costs for the three months ended September 30, 2018 consisted of the $10.0 million non-cash impairment related to our June 2017 equity investment.

Mortgages Segment

Cost of Revenue. Cost of revenue was $4.7 million for the three months ended September 30, 2019 compared to $1.3 million for the three months ended September 30, 2018, an increase of $3.5 million. The increase in cost of revenue was primarily attributable to our October 2018 acquisition of Zillow Home Loans and ~~2016.~~includes a $2.5 million increase in headcount-related expenses, including share-based compensation expense and a $0.5 million increase in mortgage loan processing costs. We expect 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 and expansion of Zillow Home Loans.

Sales and Marketing. Sales and marketing expenses were $13.6 million for the three months ended September 30, 2019 compared to $6.6 million for the three months ended September 30, 2018, an increase of $7.1 million, or 108%. The increase in sales and marketing expenses was primarily attributable to a $5.5 million increase in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans, and a $1.0 million increase in marketing and advertising 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 $8.7 million for the three months ended September 30, 2019 compared to $5.3 million for the three months ended September 30, 2018, an increase of $3.4 million, or 65%. The increase in technology and development expenses was primarily a result of a $2.6 millionincrease in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans. We expect our technology and development expenses to increase in absolute dollars ~~over time~~in future periods as we continue to build new ~~mobile~~website functionality and ~~website functionality.~~

other technologies that will facilitate the origination of mortgages in Zillow Home Loans.

General and ~~Administrative~~

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
General and administrative
   $ 54,226    $ 42,625    27 %

Administrative. General and administrative expenses were ~~$54.2~~$10.6 million for the three months ended September 30, ~~2017~~2019 compared to ~~$42.6~~$4.1 million for the three months ended September 30, ~~2016,~~2018, an increase of ~~$11.6 million, or 27%.~~$6.5 million. The increase in general and administrative expenses was primarily due ~~in part~~ to a ~~$3.6~~$4.2 million increase in ~~estimated legal liabilities,~~headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans. In addition, there was a ~~$1.9 million increase in city and state taxes, a $1.8~~$0.7 million increase in building lease-related expenses including rent, utilities and insurance and a ~~$1.4~~$1.6 million increase in travel and meals expense, a $1.1 million increase in bad debt expense, a $1.1 million increase in headcount-related expenses, including share-based compensation expense, driven primarily by growth in headcount in shared corporate services to support our engineering and other teams, and a $0.7 million increase 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.

Acquisition-Related ~~Costs~~

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Acquisition-related costs
   $ 218    $ 93    134 %

Costs. There were no acquisition-related costs for the three months ended September 30, 2019. Acquisition-related costs were ~~$0.2~~$1.4 million for the three months ended September 30, ~~2017, primarily as a result~~2018 and related to our acquisition of Zillow Home Loans.

Corporate Items

Certain corporate items are not directly attributable to any of our ~~September 2017 acquisition of New Home Feed,~~segments, including ~~legal~~interest income earned on our short-term investments included in Other income and ~~accounting fees. Acquisition-related~~interest costs ~~were $0.1~~on our convertible senior notes included in Interest expense.

Interest Expense. Interest expense was $16.5 million for the three months ended September 30, ~~2016, primarily as a result of our August 2016 acquisition of Bridge Interactive Group, including legal and accounting fees.~~

~~Gain on Divestiture of Business~~

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Gain on divestiture of business
   $ —    $ 1,251    N/A

~~There was no gain on divestiture of business for the three months ended September 30, 2017. The gain on divestiture of business of $1.3~~2019 compared to $12.2 million for the three months ended September 30, ~~2016 relates~~2018, an increase of $4.3 million, or 35%. This increase was primarily a result of the issuance of the 2024 Notes and 2026 Notes on September 9, 2019. We expect that our corporate interest expense will increase in future periods related to the ~~August 2016 sale~~contractual coupon interest and amortization of debt discount and debt issuance costs that will be recognized in interest expense for the 2024 Notes and 2026 Notes. For additional information regarding the convertible senior notes, see Note 13 to our condensed consolidated financial statements.

Other Income. Other income not directly attributable to any of our ~~Diverse Solutions business.~~

~~Interest Expense~~

   Three Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Interest expense
   $ 6,906    $ 1,595    333 %

~~Interest expense~~segments was ~~$6.9~~$8.7 million for the three months ended September 30, ~~2017,~~2019 compared to ~~$1.6~~$7.8 million for the three months ended September 30, ~~2016.~~

~~For the three months ended September 30, 2017, interest expense primarily relates~~2018, an increase of $0.9 million. This

increase was due to the ~~2021 Notes that were issued~~higher average balance of our short-term investment portfolio coupled with higher interest rates earned on ~~December 12, 2016. The 2021 Notes bear~~our portfolio generating an increase in 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.~~

For the three months ended September 30, 2016, interest expense relates to the 2020 Notes that we guaranteed in connection with the February 2015 acquisition of Trulia, which accrue interest at a fixed rate of 2.75% annually.

~~For additional information regarding the 2020 Notes and the 2021 Notes, see Note 9 to our condensed consolidated financial statements.~~

income.

Nine Months Ended September 30, ~~2017~~2019 Compared to Nine Months Ended September 30, ~~2016~~

~~Revenue~~

   Nine Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Revenue:

Marketplace revenue:

Premier Agent
   $ 562,081    $ 439,957    28 %
Other real estate
   117,427    72,847    61 %
Mortgages
   62,075    54,621    14 %





Total Marketplace revenue
   741,583    567,425    31 %
Display revenue
   52,881    51,552    3 %





Total revenue
   $ 794,464    $ 618,977    28 %

   Nine Months Ended
September 30,
   2017 2016
Percentage of Total Revenue:

Marketplace revenue:

Premier Agent
   71 % 71 %
Other real estate
   15 12
Mortgages
   8 9


Total Marketplace revenue
   93 92
Display revenue
   7 8


Total revenue
   100 % 100 %

~~Overall revenue increased by $175.5 million, or 28%,~~2018

Segment Results of Operations

The following table presents Zillow Group’s segment results for the ~~nine months ended September 30, 2017 compared~~periods presented (in thousands, unaudited):



	Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2018
	Homes			IMT		Mortgages			Homes			IMT			Mortgages
Revenue	$	762,022		$	957,231	$	79,637		$	11,018		$	900,435		$	56,766
Costs and expenses:
Cost of revenue	733,947			74,628		13,829			10,312			72,070			3,736
Sales and marketing	107,457			380,608		42,302			7,035			384,241			22,476
Technology and development	51,130			276,886		24,058			12,154			270,978			16,491
General and administrative	54,339			181,270		31,497			11,964			163,303			12,128
Impairment costs	—			—		—			—			10,000			—
Acquisition-related costs	—			—		—			—			27			2,037
Integration costs	—			—		650			—			—			523
Total costs and expenses	946,873			913,392		112,336			41,465			900,619			57,391
Income (loss) from operations	(184,851		)	43,839		(32,699		)	(30,447		)	(184		)	(625		)
Other income	—			—		1,059			—			—			—
Interest expense	(19,346		)	—		(668		)	(432		)	—			—
Income (loss) before income taxes (1)	$	(204,197	)	$	43,839	$	(32,308	)	$	(30,879	)	$	(184	)	$	(625	)

(1) The following table presents the reconciliation of total segment loss before income taxes to consolidated loss before income taxes for the ~~nine months ended September 30, 2016. Marketplace~~periods presented (in thousands):



	Nine Months Ended September 30,
	2019			2018
Total segment loss before income taxes	$	(192,666	)	$	(31,688	)
Corporate interest expense	(41,851		)	(26,496		)
Corporate other income	26,566			13,308
Consolidated loss before income taxes	$	(207,951	)	$	(44,876	)

Homes Segment

Cost of Revenue. Cost of revenue ~~increased by 31%, and display revenue increased by 3%.~~

~~Marketplace revenue grew to $741.6~~was $733.9 million for the nine months ended September 30, ~~2017 from $567.4~~2019 compared to $10.3 million for the nine months ended September 30, ~~2016, an~~2018. The increase in cost of ~~$174.2 million. Marketplace revenue represented 93% of total~~ revenue for the nine months ended September 30, ~~2017 compared~~2019 was primarily attributable to ~~92%~~the increase in acquisition and renovation costs as a result of ~~total revenue for~~the increase in the number of homes sold from 36 homes during the nine months ended September 30, ~~2016. The increase in marketplace revenue was primarily attributable~~2018 to 2,411 homes during the ~~$122.1 million, or 28%, increase in Premier Agent revenue. Premier Agent revenue was positively impacted by an increase in visits. Visits increased 18% to 4,878.8~~nine months ended September 2019.

Sales and Marketing. Sales and marketing expenses were $107.5 million for the nine months ended September 30, ~~2017 from 4,133.5~~2019 compared to $7.0 million for the nine months ended September 30, ~~2016. This~~2018, an increase of $100.4 million. The increase in ~~visits increased~~sales and marketing expenses was primarily attributable to a $32.6 million increase in selling expenses directly attributable to the ~~number~~resale of ~~impressions we could monetize~~homes, a $31.7 million increase in ~~our Premier Agent marketplace. Premier Agent revenue per visit increased by 8% to $0.115~~headcount-related expenses, including share-based compensation expense, a $14.0 million increase in holding costs, a $12.7 million increase in marketing and advertising expenses, a $2.8 million increase in travel expenses, a $2.0 million increase in professional services fees and a $4.6 million increase in miscellaneous expenses.

Sales and marketing expenses include $14.3 million in holding costs for the nine months ended September 30, ~~2017 from $0.106~~2019 and $0.3 million in holding costs for the nine months ended September 30, ~~2016. We believe Premier Agent revenue was also positively impacted by the full implementation of the new pricing method for our Premier Agent product,~~2018.

Technology and Development. Technology and development expenses, which ~~may have increased the demand for our advertising platform. As discussed above, during the year ended December 31, 2016, we began meaningful testing~~include research and implementation of a new auction-based pricing method for our Premier Agent product, our flagship advertising product, 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. 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.

The increase in marketplace revenue was also attributable to growth in other real estate revenue, which increased by $44.6 million, or 61%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase in other real estate revenue was primarily a result of a 73% 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, lease, or click that we monetize, and advertiser adoption of our cost per lead, cost per lease and cost per click 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. Other real estate revenue was also positively impacted by increased advertising sales to new home builders through our New Construction platform.

The increase in marketplace revenue was also attributable to growth in mortgages revenue, which increased by $7.5 million, or 14%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase in mortgages revenue was primarily a result of a 62% increase in our average revenue per loan information request for the nine months ended September 30, 2017 compared to the nine months ended September 30, 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. Theredevelopment costs, were approximately 17.3 million mortgage loan information requests submitted by consumers for the nine months ended September 30, 2017 compared to 24.8 million mortgage loan information requests submitted by consumers for the nine months ended September 30, 2016, a decrease of 30%. 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.

~~Display revenue was $52.9~~$51.1 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$51.6~~$12.2 million for the nine months ended September 30, ~~2016,~~2018, an increase of ~~$1.3~~$39.0 million. ~~Display revenue represented 6% of total revenue for the nine months ended September 30, 2017 compared to 8% of total revenue for the nine months ended September 30, 2016.~~ The increase in ~~display revenue~~technology and development expenses was primarily due to a ~~result of the~~$30.9 million increase in ~~unique users, which resulted~~headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment, a $2.7 million increase in data acquisition costs, a ~~greater number of impressions~~$2.3 million increase in depreciation and ~~clicks we monetized.~~

~~Cost of Revenue~~

   Nine Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Cost of revenue
   $ 62,644    $ 50,556    24 %

~~Cost of revenue was $62.6~~amortization expense, a $1.2 million increase in professional services fees and a $1.9 million increase in miscellaneous expenses.

General and Administrative. General and administrative expenses were $54.3 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$50.6~~$12.0 million for the nine months ended September 30, ~~2016,~~2018, an increase of ~~$12.1~~$42.4 million. The increase in general and administrative expenses was primarily due to a $25.5 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 a $6.2 million increase in building lease-related expenses including rent, utilities and insurance, a $2.9 million increase in professional services fees, a $2.5 million increase in software and hardware costs, a $1.7 million increase in travel expense and a $3.6 million increase in miscellaneous expenses.

Interest Expense. Interest expense was $19.3 million for the nine months ended September 30, 2019 compared to $0.4 million for the nine months ended September 30, 2018, an increase of $18.9 million. The increase in interest expense was attributable to borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our revolving credit facilities.

IMT Segment

Cost of Revenue. Cost of revenue was $74.6 million for the nine months ended September 30, 2019 compared to $72.1 million for the nine months ended September 30, 2018, an increase of $2.6 million, or ~~24%~~4%. The increase in cost of revenue was primarily attributable to a ~~$6.6 million increase in revenue share costs, a $3.1~~$4.4 million increase in data center and connectivity costs and a ~~$0.9~~$1.0 million increase in miscellaneous expenses, partially offset by a $2.8 million decrease in headcount-related expenses, including share-based compensation ~~expense, a $0.6 million increase in software and hardware costs, and a $0.9 million increase in various miscellaneous expenses.~~

expense.

Sales and ~~Marketing~~

   Nine Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Sales and marketing
   $ 344,266    $ 291,910    18 %

Marketing. Sales and marketing expenses were ~~$344.3~~$380.6 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$291.9~~$384.2 million for the nine months ended September 30, ~~2016, an increase~~2018, a decrease of ~~$52.4~~$3.6 million, or ~~18%~~1%. The ~~increase~~decrease in sales and marketing expenses was primarily attributable to ~~increased~~a $19.9 million decrease in marketing and advertising expenses, ~~$30.5~~partially offset by a $10.2 million ~~primarily related to advertising spend to attract consumers across online~~increase in professional services fees and ~~offline channels, which supports our growth initiatives.~~

~~In addition to the increases~~a $5.8 million increase in ~~marketing and advertising,~~ headcount-related expenses, ~~increased $15.1 million,~~ including share-based compensation expense, due primarily to significant growth in the size of our sales team. The increase in sales and marketing expenses was also attributable to a $2.4 million increase in tradeshows and conferences expense and related travel costs, a $1.9 million increase in consulting costs to support our advertising initiatives, a $1.0 million increase in software, hardware and connectivity costs, and a $1.5 million increase in various miscellaneous expenses.

expense.

Technology and ~~Development~~

   Nine Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Technology and development
   $ 234,798    $ 188,263    25 %

Development. Technology and development expenses, which include research and development costs, were ~~$234.8~~$276.9 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$188.3~~$271.0 million for the nine months ended September 30, ~~2016,~~2018, an increase of ~~$46.5~~$5.9 million, or ~~25%~~2%. Approximately ~~$33.1~~$14.3 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 ~~$7.0~~$3.4 million increase in software and hardware costs, a $2.8 millionincrease in other non-capitalizable data content ~~expense,~~expenses, a ~~$3.8~~$1.7 million increase in ~~amortization~~the gain on disposal of ~~purchased data content intangible~~ assets and a ~~$2.6~~$1.3 million increase in ~~various~~ miscellaneous expenses.

~~Amortization expense included~~ These increases were partially offset by a $17.6 million decrease in ~~technology~~depreciation and development for capitalized website development costs and software was $33.0 million and $32.4 million, respectively, for the nine months ended September 30, 2017 and 2016. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $29.5 million and $28.9 million, respectively, for the nine months ended September 30, 2017 and 2016. Other data content expense was $25.8 million and $18.8 million, respectively, for the nine months ended September 30, 2017 and 2016. Amortization expense included in technology and development for purchased data content intangible assets was $7.5 million and $3.6 million, respectively, for the nine months ended September 30, 2017 and 2016.

amortization expense.

General and ~~Administrative~~

   Nine Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
General and administrative
   $ 153,038    $ 284,175    (46 %)

Administrative. General and administrative expenses were ~~$153.0~~$181.3 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$284.2~~$163.3 million for the nine months ended September 30, ~~2016, a decrease~~2018, an increase of ~~$131.1~~$18.0 million, or ~~46%~~11%. The ~~decrease~~increase in general and administrative expenses was primarily due to a ~~result of~~$17.3 million increase in headcount-related expenses driven primarily by the ~~settlement~~recognition of a ~~lawsuit with Move Inc. and certain related entities (collectively, “Move”)~~total of $23.3 million of share-based compensation expense in ~~June 2016 whereby~~ the ~~Company paid $130.0 million~~IMT segment during the nine months ended September 30, 2019 in connection with ~~a release~~the modification of ~~all claims. In addition, there was a $30.4 million decrease in professional services fees, primarily as a result of our settlement of litigation with Move, as we incurred $28.8 million in legal costs~~certain outstanding equity awards related to the departure of 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. For additional information regarding the equity modification, see Note 15 to our ~~litigation with Move~~condensed consolidated financial statements.

Impairment Costs. There were no impairment costs for the nine months ended September 30, ~~2016. These decreases were partially offset by~~2019. Impairment costs for the nine months ended September 30, 2018 consisted of the $10.0 million non-cash impairment related to our June 2017 equity investment.

Mortgages Segment

Cost of Revenue. Cost of revenue was $13.8 million for the nine months ended September 30, 2019 compared to $3.7 million for the nine months ended September 30, 2018, an increase of $10.1 million. The increase in cost of revenue was primarily attributable to our October 2018 acquisition of Zillow Home Loans, and includes a ~~$5.7~~$6.0 million increase in ~~estimated legal liabilities,~~headcount-related expenses, including share-based compensation expense, a ~~$5.6~~$1.6 million increase in mortgage loan processing costs, a $0.9 million increase in lead acquisition costs and a $1.6 million increase in miscellaneous expenses.

Sales and Marketing. Sales and marketing expenses were $42.3 million for the nine months ended September 30, 2019 compared to $22.5 million for the nine months ended September 30, 2018, an increase of $19.8 million, or 88%. The increase in sales and marketing expenses was primarily attributable to a $15.6 million increase in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans, a $2.4 million increase in marketing and advertising expenses and a $1.8 million increase in miscellaneous expenses.

Technology and Development. Technology and development expenses, which include research and development costs, were $24.1 million for the nine months ended September 30, 2019 compared to $16.5 million for the nine months ended September 30, 2018, an increase of $7.6 million, or 46%. The increase in technology and development expenses was primarily a result of a $6.0 millionincrease in headcount-related expenses, including share-based compensation expense, related to our October 2018 acquisition of Zillow Home Loans and a $1.6 million increase in miscellaneous expenses.

General and Administrative. General and administrative expenses were $31.5 million for the nine months ended September 30, 2019 compared to $12.1 million for the nine months ended September 30, 2018, an increase of $19.4 million. The increase in general and administrative expenses was primarily due to a $13.6 million increase in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans. In addition, there was a $1.8 million increase in building lease-related expenses including rent, utilities and insurance, a ~~$4.5~~$1.1 million increase in ~~headcount-related expenses, including share-based compensation expense, driven primarily by growth in headcount in shared corporate~~professional services ~~to support our engineering and other teams,~~fees, a ~~$4.3 million increase in city and state taxes, a $4.1 million increase in bad debt expense, a $1.5~~$1.1 million increase in software and hardware costs ~~a $1.3 million increase in the loss on disposal of assets,~~ and a ~~$2.3~~$1.8 million increase in miscellaneous ~~general and administrative~~ expenses.

Acquisition-Related ~~Costs~~

   Nine Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Acquisition-related costs
   $ 366    $ 890    (59 %)

Costs. There were no acquisition-related costs for the nine months ended September 30, 2019. Acquisition-related costs were ~~approximately $0.4~~$2.0 million for the nine months ended September 30, ~~2017, primarily as a result~~2018 and related to our acquisition of Zillow Home Loans.

Corporate Items

Certain corporate items are not directly attributable to any of our ~~January 2017 acquisition of HREO~~segments, including interest income earned on our short-term investments included in Other income and interest costs on our ~~September 2017 acquisition of New Home Feed, including legal and accounting fees. Acquisition-related costs were $0.9~~convertible senior notes included in Interest expense.

Interest Expense. Interest expense was $41.9 million for the nine months ended September 30, ~~2016, primarily as a result of our February 2016 acquisition of Naked Apartments and our August 2016 acquisition of Bridge Interactive Group, including legal and accounting fees.~~

~~Gain on Divestiture of Business~~

   Nine Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Gain on divestiture of business
   $ —    $ 1,251    N/A

~~There was no gain on divestiture of business for the nine months ended September 30, 2017. The gain on divestiture of business was $1.3~~2019 compared to $26.5 million for the nine months ended September 30, ~~2016 and relates~~2018, an increase of $15.4 million, or 58%. This increase was primarily due to the ~~August 2016 sale~~July 2018 issuance of our ~~Diverse Solutions business.~~

~~Interest Expense~~

   Nine Months Ended
September 30,    2016 to 2017
% Change
   2017    2016
   (in thousands, unaudited)
Interest expense
   $ 20,526    $ 4,740    333 %

~~Interest~~convertible senior notes maturing in 2023. Beginning in September 2019, interest expense also related to the 2024 Notes and 2026 Notes that were issued on September 9, 2019. For additional information regarding the convertible senior notes, see Note 13 to our condensed consolidated financial statements.

Other Income. Other income not directly attributable to any of our segments was ~~$20.5~~$26.6 million for the nine months ended September 30, ~~2017,~~2019 compared to ~~$4.7~~$13.3 million for the nine months ended September 30, ~~2016.~~

~~For~~2018, an increase of $13.3 million. This increase is primarily due to an increase in the ~~nine months ended September 30, 2017,~~balance of our short-term investment portfolio generating an increase in interest expense primarily relates to the 2021 Notes that were issued on December 12, 2016. 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.

For the nine months ended September 30, 2016, interest expense relates to the 2020 Notes that we guaranteed in connection with the February 2015 acquisition of Trulia, which accrue interest at a fixed rate of 2.75% annually.

~~For additional information regarding the 2020 Notes and the 2021 Notes, see Note 9 to our condensed consolidated financial statements.~~

income.

Liquidity and Capital Resources

As of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, we had cash and cash equivalents, investments and restricted cash ~~and investments~~ of ~~$682.0~~$2,398.6 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, commercial paper and certificates of ~~deposit with original maturities of three months or less.~~deposit. Investments ~~as of September 30, 2017 and December 31, 2016 consisted~~consist of fixed income securities, which include U.S. government agency securities, corporate notes and bonds, commercial paper, municipal securities, foreign government securities, ~~commercial paper and~~ certificates of ~~deposit.~~deposit and treasury bills. Restricted cash consists of amounts funded to the reserve and collection accounts related to our revolving 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. 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~~

The expansion of Zillow Group’s purchase of homes in ~~a stock-for-stock transaction. The total purchase price~~the Zillow Offers program and sale of ~~Trulia was approximately $2.0 billion. Our February 2015 acquisition of Trulia had~~homes on the open market continues to have a significant impact on our liquidity ~~financial position~~ and ~~results of operations.~~

~~Further,~~capital resources as a ~~result~~cash and inventory intensive initiative. We primarily use debt financing to fund a portion of the purchase price of homes and certain related costs. As of September 30, 2019, we have $698.3 million of total outstanding borrowings on revolving credit facilities to provide capital for Zillow Offers with a total maximum borrowing capacity of $1,000.0 million. For additional information regarding the revolving credit facilities, see Note 13 and Note 22 to our condensed consolidated financial statements.

The October 31, 2018 acquisition of Zillow ~~Group entered into~~Home Loans also continues to impact our liquidity and capital resources as a ~~supplemental indenture~~cash intensive business that funds mortgage loans originated for resale in ~~respect~~the secondary market. We primarily use debt financing to fund the mortgage loan originations. On June 28, 2019, Zillow Home Loans amended and restated the warehouse line of credit previously maturing on June 29, 2019. The amended and restated credit agreement extends the term of the original agreement for one year through June 27, 2020, ~~Notes in~~and continues to provide for a maximum borrowing capacity of $50.0 million with availability under the ~~aggregate principal amount~~warehouse line of ~~$230.0 million, which supplemental indenture provides, among other things, that, at~~credit limited depending on the ~~effective time~~types 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~~loans originated. On July 11, 2019, Zillow ~~Group Class A common stock, pursuant to, and in accordance with,~~Home Loans extended the terms of its $50.0 million warehouse line of credit previously maturing on July 15, 2019 such that it now matures on October 15, 2019. As of September 30, 2019, we have $30.1 million of total outstanding borrowings on warehouse lines of credit to provide capital for Zillow Home Loans with a total maximum borrowing capacity of $100.0 million. For additional information regarding financing for Zillow Home Loans, see Note 13 and Note 22 to our condensed consolidated financial statements.

As of September 30, 2019, we have outstanding a total of $1,943.4 million aggregate principal of senior convertible notes. The convertible notes are senior unsecured obligations, and interest on the ~~indenture governing~~convertible notes is paid semi-annually. For additional information regarding the ~~2020~~senior convertible notes, see Note 13 to our condensed consolidated financial statements.

On September 9, 2019, Zillow Group issued the 2024 Notes and ~~(ii) Zillow Group guaranteed all~~the 2026 Notes (together, the “Notes”) in a private offering to qualified institutional buyers. The net proceeds from the offering of the ~~obligations of Trulia under~~2024 Notes were approximately $592.2 million and the ~~2020 Notes and related indenture. The aggregate principal amount~~net proceeds from the offering of the ~~2020~~2026 Notes ~~is due on December 15, 2020 if not earlier converted or redeemed. Interest is~~were approximately $493.5 million, in each case after deducting fees and expenses payable onby 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~~Company. We used approximately ~~$370.2~~$75.2 million of the net proceeds from the ~~issuance~~2024 Notes and approximately $75.4 of the ~~2021~~net proceeds from the 2026 Notes ~~discussed below~~ to ~~repurchase $219.9 million aggregate principal~~pay the cost of the ~~2020 Notes~~capped call transactions entered into in ~~privately negotiated transactions.~~

Interest 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, whichNotes 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.

~~For additional information regarding the 2020 Notes, see Note 9 to our condensed 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~~March 1 and ~~December~~September 1 of each year, beginning on ~~June~~March 1, ~~2017.~~2020. 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~~2024 Notes and 2026 Notes will mature on ~~December~~September 1, ~~2021,~~2024 and September 1, 2026, respectively, unless earlier repurchased, redeemed, or converted in accordance with their terms. The Company incurred transaction costs of approximately $12.2 million related 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 9 to our condensed 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~~March 1, ~~2021,~~2024 (for the ~~2021~~2024 Notes) or March 1, 2026 (for the 2026 Notes), the Notes ~~are~~will 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 September 30, 2017.~~conditions. On or after ~~September~~March 1, ~~2021,~~2024 (for the 2024 Notes) or March 1, 2026 (for the 2026 Notes), 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 the Company’s Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The conversion rate for the Notes will initially be ~~19.0985~~22.9830 shares of Class C capital stock per $1,000 principal amount of ~~2021~~ Notes (equivalent to an initial conversion price of approximately ~~$52.36~~$43.51 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,~~September 5, 2022 for the 2024 Notes or on or after September 5, 2023 for the 2026 Notes, 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~~indentures 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 913 to our condensed 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:~~

   Nine Months Ended
September 30,
   2017    2016
   (in thousands, unaudited)
Cash Flow Data:

Net cash provided by (used in) operating activities
   $ 176,923    $ (30,436 )
Net cash used in investing activities
   (180,246 )    (27,911 )
Net cash provided by financing activities
   79,673    19,969

presented (in thousands, unaudited):

Nine Months Ended
September 30,
2019 2018
Cash Flow Data:
Net cash provided by (used in) operating activities $ (670,282 ) $ 102,543
Net cash provided by (used in) investing activities 318,916
(641,824 )
Net cash provided by financing activities 1,554,845
834,181

Cash Flows Provided By (Used In) Operating Activities

Our operating cash flows result primarily from cash received from real estate professionals, ~~mortgage~~rental professionals, ~~rental~~mortgage professionals and brand ~~advertisers.~~advertisers, as well as cash received from consumers for sales of homes through Zillow Offers and sales of mortgages originated by Zillow Home Loans to third parties. 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 ~~benefits~~compensation 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 nine months ended September 30, ~~2017,~~2019, net cash ~~provided by~~used in operating activities was ~~$176.9~~$670.3 million. This was primarily driven by a net loss of ~~$17.2~~$204.2 million, adjusted by share-based compensation expense of $151.9 million, depreciation and amortization expense of ~~$81.6 million, share-based compensation expense of $84.2~~$63.9 million, amortization of the discount and issuance costs on the convertible notes maturing in 2021, ~~Notes~~2023, 2024 and 2026 of ~~$13.4~~$29.9 million, ~~an increase in bad debt expense~~amortization of ~~$5.9~~contract cost assets of $26.7 million, amortization of right of use assets of $16.7 million, a loss on disposal of property and equipment of ~~$4.1~~$5.7 million, accretion of bond discount of $5.2 million and a $3.8 million change in deferred

~~rent of $3.1 million.~~ income taxes. Changes in operating assets and liabilities increased cash ~~provided by~~used in operating activities by ~~$1.6~~$753.8 million. The changes in operating assets and liabilities are primarily due to a ~~$19.3~~$716.5 million increasein inventory due to the purchase of homes through Zillow Offers, a $27.0 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $15.0 million decrease in lease liabilities, a $13.5 million increase in accounts receivable due primarily to an increase in revenue, a ~~$13.2~~$5.8 million increase ~~in accrued expenses and other current liabilities and a $4.4 million decrease~~ in prepaid expenses and other assets driven primarily by the timing of ~~payments.~~

payments and a $1.4 million increase in mortgage loans held for sale, partially offset by a $12.2 million increase in accrued expenses and other current liabilities driven primarily by the timing of payments and a $7.9 million increase in deferred revenue.

For the nine months ended September 30, ~~2016,~~2018, net cash ~~used in~~provided by operating activities was ~~$30.4~~$102.5 million. This was primarily driven by a net loss of ~~$196.9~~$22.2 million, ~~including the impact of the settlement of a lawsuit for $130.0 million in June 2016,~~ adjusted by share-based compensation expense of ~~$81.2~~$111.4 million, depreciation and amortization expense of ~~$74.9~~$76.3 million, amortization of contract cost assets of $27.2 million, a non-cash change in our deferred income taxes of $22.7 million, amortization of the discount and issuance costs on the convertible notes maturing in 2021 and 2023 of $18.0 million, a non-cash impairment charge of $10.0 million, a change in deferred rent of $3.1 million, and a loss on disposal of property and equipment of $3.4 million, bad debt expense of $1.7 million, a $1.4 million gain on the divestiture of a business and a $1.4 million non-cash change in the valuation allowance related to a deferred tax liability generated in connection with our February 2016 acquisition of Naked Apartments.$3.1 million. Changes in operating assets and liabilities ~~increased~~decreased cash provided by operating activities by ~~$6.6~~$94.4 million. The ~~increase~~changes in operating assets and liabilities isare primarily due to a $43.3 million increasein inventory due to the purchase of homes through Zillow Offers, a $32.1 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $15.0 million increase in prepaid expenses and other assets driven primarily by the timing of payments, a $13.0 million increase in accounts receivable due primarily to an increase in revenue, and a $6.5 million increase in accrued compensation and benefits ~~due~~driven primarily ~~to an increase in sales commissions and~~by the timing of ~~payroll, an $11.8 million increase in accounts receivable driven by an increase in revenue and a $5.6 million increase in deferred revenue driven by an increase in revenue.~~

payments.

Cash Flows ~~Used In~~Provided By (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, net~~and cash paid in connection with ~~acquisitions and proceeds from divestiture of a business.~~

acquisitions.

For the nine months ended September 30, ~~2017,~~2019, net cash ~~used in~~provided by investing activities was ~~$180.2~~$318.9 million. This was primarily the result of ~~$98.7~~$379.2 million of net purchases of investments ~~$61.0~~in connection with investment of a portion of the net proceeds from our September 2019 issuance of the 2024 Notes and 2026 Notes and $60.3 million of purchases for property and equipment and intangible assets, $11.1 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 million in proceeds from our August 2016 sale of our Diverse Solutions business.

assets.

For the nine months ended September 30, ~~2016,~~2018, net cash used in investing activities was ~~$27.9~~$641.8 million. This was primarily the result of ~~$53.6~~$587.2 million of net purchases of investments in connection with investment of a portion of the net proceeds from our July 2018 public offerings of Class C capital stock and convertible notes maturing in 2023 and $52.7 million of purchases for property and equipment and intangible assets and $16.3 million paid in connection with our February 2016 acquisition of Naked Apartments and our August 2016 acquisition of Bridge Interactive Group, partially offset by $36.8 million of net maturities and sales of investments, $3.2 million in proceeds from the divestiture of a business and a $2.0 million decrease in restricted cash.

assets.

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 revolving credit facilities related to Zillow Offers and proceeds from borrowings on warehouse lines of credit related to Zillow Home Loans.

For the nine months ended September 30, ~~2017 and 2016, our~~2019, cash provided by financing activities was $1,554.8 million, which primarily resulted from the net proceeds from the September 2019 issuance of the 2024 Notes and 2026 Notes of $1,085.7 million, partially offset by $150.5 million paid in premiums for the related capped call confirmations. Cash provided by financing activities also included $581.6 million of proceeds from borrowings on our revolving credit facilities related to ~~the exercise~~Zillow Offers and $41.0 million of ~~employee option awards. The~~ proceeds from the exercise of option awards, ~~for~~partially offset by $2.9 million of net repayments on our warehouse lines of credit related to Zillow Home Loans.

For the nine months ended September 30, ~~2017~~2018, net cash provided by financing activities was approximately $834.2 million, which was primarily related to net proceeds from the issuance of the convertible notes maturing in 2023 of $364.0 million, net proceeds from the public offering of our Class C capital stock of $360.3 million, proceeds from the exercise of option awards of $114.6 million, partially offset by approximately $29.4 million paid in premiums for the related capped call confirmations in July 2018, and ~~2016 were $80.0 million and $20.5 million, respectively.~~

proceeds from borrowing on our revolving credit facility related to Zillow Offers of $24.7 million.

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~~$10.1 million as of September 30, ~~2017.~~2019. 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 1417 to our condensed consolidated financial statements under the subsection titled “Surety Bonds”.

Contractual Obligations and Other Commitments

~~The following~~

There have been no material changes outside the ordinary course of business in our commitments under contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, except for the categories of contractual obligations included in the table ~~provides a summary of~~below, which have been updated to reflect our contractual obligations as of September 30, ~~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)
   38,333    9,200    18,400    10,733    —
2020 Notes (3)
   10,137    —      —      10,137    —
Interest on 2020 Notes (4)
   976    279    558    139    —
Operating lease obligations (5)
   168,438    25,521    49,569    49,086    44,262
Purchase obligations (6)
   144,390    32,640    67,000    44,750    —










Total contractual obligations
   $ 822,274    $ 67,640    $ 135,527    $ 574,845    $ 44,262

~~(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 operating lease obligations consist of various operating leases for office space under noncancelable operating lease agreements. For additional information regarding our operating leases, see Note 14 to our condensed 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 14 to our condensed consolidated financial statements.

We have excluded unrecognized tax benefits from the contractual obligations table above because we cannot make a reasonably reliable estimate of the amount and period of payment due primarily to our significant net operating loss carryforwards.

2019 (in thousands, unaudited):



	Payments Due By Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years

2024 Notes (1)	$	600,000	$	—	$	—	$	600,000	$	—
Interest on 2024 Notes (2)	22,125		4,500		9,000		8,625		—
2026 Notes (3)	500,000		—		—		—		500,000
Interest on 2026 Notes (4)	47,552		6,875		13,750		13,750		13,177
Homes under contract (5)	221,114		221,114		—		—		—
Revolving credit facilities (6)	698,280		698,280		—		—		—
Warehouse lines of credit (7)	30,116		30,116		—		—		—
Operating lease obligations (8)	145,953		9,275		33,224		33,777		69,677
____________________ (1) The aggregate principal amount of the 2024 Notes is due on September 1, 2024 if not earlier converted or redeemed. (2) The stated interest rate on the 2024 Notes is 0.75%. (3) The aggregate principal amount of the 2026 Notes is due on September 1, 2026 if not earlier converted or redeemed. (4) The stated interest rate on the 2026 Notes is 1.375%. (5) We have obligations to purchase homes under contract through our Zillow Offers business. (6) Includes principal amounts due for amounts borrowed under the revolving credit facilities used to provide capital for our Zillow Offers business. Amounts exclude an immaterial amount of estimated interest payments. (7) Includes principal amounts due for amounts borrowed under the warehouse lines of credit used to finance Zillow Home Loans. Amounts exclude an immaterial amount of estimated interest payments. (8) Our operating lease obligations consist of office space in New York, New York, Seattle, Washington, Scottsdale, Arizona, Irvine, California, Atlanta, Georgia, Dallas, Texas, Lincoln, Nebraska and Vancouver, British Columbia. For additional information regarding our operating leases, see Note 12 to our condensed consolidated financial statements.

As of September 30, ~~2017,~~2019, we have outstanding letters of credit of approximately ~~$5.2~~$16.9 million, ~~$1.8 million, $1.5 million and $1.1 million, respectively,~~ which secure our lease obligations in connection with certain of the operating leases of our ~~San Francisco, Seattle, New York and Denver~~ office spaces. ~~Certain of the letters of credit are unsecured obligations, and certain of the letters of credit are secured by certificates of deposit held as collateral in our name at a financial institution.~~

2019.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these 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. For information on our critical accounting policies and estimates, see Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2018.

Item 3. 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.

Interest Rate Risk

Under our current investment policy, we invest our excess cash in money market funds, certificates of deposit, U.S. government agency securities, 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.

The following table summarizes our outstanding convertible senior notes as of September 30, ~~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~~2019 (in thousands, except interest rate of 2.00% per year. As of September 30, 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. rates):



Issuance Date	Maturity Date	Aggregate Principal Amount		Stated Interest Rate
September 9, 2019	September 1, 2026	$	500,000	1.375	%
September 9, 2019	September 1, 2024	600,000		0.75	%
July 3, 2018	July 1, 2023	373,750		1.50	%
December 12, 2016	December 1, 2021	460,000		2.00	%
December 17, 2013	December 15, 2020	9,637		2.75	%
Total		$	1,943,387

Since the ~~2020 Notes and 2021 Notes~~convertible senior notes bear interest at fixed rates, we have no direct financial statement risk associated with changes in interest ~~rates.~~rates as of September 30, 2019. However, the fair values of the ~~2020 Notes and 2021 Notes~~convertible senior notes change primarily when the market price of our stock fluctuates or interest rates change.

~~For these reasons,~~

We are subject to market risk by way of changes in interest rates on borrowings under our revolving credit facilities that provide capital for Zillow Offers. As of September 30, 2019, we ~~do not expect~~have outstanding $698.3 million of borrowings on our ~~results of operations or cash flows would be materially affected by~~revolving credit facilities which bear interest at a ~~sudden change~~floating rate based on the one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin. 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 1% increase in LIBOR would increase our annual interest expense by approximately $7.0 million.

We are also subject to market risk by way of changes in interest rates on borrowings under our warehouse lines of credit that provide capital for Zillow Home Loans. As of September 30, 2019, we have outstanding $30.1 million of borrowings on our warehouse lines of credit 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 lines of credit, we estimate that a 1.0% increase in LIBOR would increase our annual interest expense associated with the warehouse lines of credit by approximately $0.3 million.

Inflation Risk

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 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of September 30, ~~2017.~~2019. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective as of September 30, ~~2017.~~

2019.

Changes in Internal Control Over Financial Reporting

During the three months ended September 30, 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 September 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding legal proceedings in which we are involved, see Note 1417 under the subsection titled “Legal Proceedings” in our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

There have not been any material changes to the risk factors affecting our business, financial condition or future results from those set forth in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018. However, you should carefully consider the factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

~~There were~~

Except as previously reported on a current report on Form 8-K, we had no unregistered sales of equity securities during the three months ended September 30, ~~2017.~~

2019.

Item 6. Exhibits

The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.



Exhibit Number		Description


4.1		Indenture dated as of September 9, 2019 by and between Zillow Group, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee (Filed as Exhibit 4.1 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

4.2		Indenture dated as of September 9, 2019 by and between Zillow Group, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee (Filed as Exhibit 4.2 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

4.3		Form of 0.75% Convertible Senior Note due 2024 (incorporated by reference from Exhibit A to Exhibit 4.1 hereto).

4.4		Form of 1.375% Convertible Senior Note due 2026 (incorporated by reference to Exhibit A to Exhibit 4.2 hereto).

10.1*		Zillow Group, Inc. 2019 Equity Inducement Plan (Filed as Exhibit 99.2 to Zillow Group, Inc’s. Form S-8, filed with the Securities and Exchange Commission (SEC File No. 333-233105) on August 8, 2019, and incorporated herein by reference).

10.2*		Form of Stock Option Grant Notice and Stock Option Agreement under the Zillow Group, Inc. 2019 Equity Inducement Plan.

10.3*		Form of Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement under the Zillow Group, Inc. 2019 Equity Inducement Plan.

10.4		Capped Call Confirmation (2024 Notes), dated September 4, 2019, between Zillow Group, Inc. and Morgan Stanley & Co., LLC (Filed as Exhibit 10.1 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

10.5		Capped Call Confirmation (2026 Notes), dated September 4, 2019, between Zillow Group, Inc. and Morgan Stanley & Co., LLC. (Filed as Exhibit 10.2 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

10.6		Capped Call Confirmation (2024 Notes), dated September 4, 2019, between Zillow Group, Inc. and Citibank, N.A. (Filed as Exhibit 10.3 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

10.7		Capped Call Confirmation (2026 Notes), dated September 4, 2019, between Zillow Group, Inc. and Citibank, N.A. (Filed as Exhibit 10.4 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

10.8		Capped Call Confirmation (2024 Notes), dated September 4, 2019, between Zillow Group, Inc. and Goldman Sachs & Co. LLC (Filed as Exhibit 10.5 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

10.9		Capped Call Confirmation (2024 Notes), dated September 4, 2019, between Zillow Group, Inc. and Barclays Bank PLC (Filed as Exhibit 10.6 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

10.10		Capped Call Confirmation (2026 Notes), dated September 4, 2019, between Zillow Group, Inc. and Barclays Bank PLC (Filed as Exhibit 10.7 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

10.11		Capped Call Confirmation (2026 Notes), dated September 4, 2019, between Zillow Group, Inc. and JPMorgan Chase Bank, National Association (Filed as Exhibit 10.8 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2019, and incorporated herein by reference).

31.1		Certification of Chief Executive Officer pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2		Certification of Chief Financial Officer pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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		~~XBRL~~InlineXBRL 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.

SIGNATURES

Pursuant to the requirements 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: November 7, ~~2017~~	2019	ZILLOW GROUP, INC.


	By:	/s/ K~~ATHLEEN~~ P~~HILIPS~~ JENNIFER ROCK
		Name:	~~Kathleen Philips~~Jennifer Rock
		Title:	Chief ~~Financial~~Accounting Officer ~~Chief Legal Officer, and Secretary~~


	September 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	319,942		$	243,592
Short-term investments		361,038			262,870
Accounts receivable, net of allowance for doubtful accounts of $3,990 and $1,337 at September 30, 2017 and December 31, 2016, respectively		53,951			40,527
Prepaid expenses and other current assets		30,014			34,817

Total current assets		764,945			581,806
Restricted cash		1,053			1,053
Property and equipment, net		110,741			98,288
Goodwill		1,931,260			1,923,480
Intangible assets, net		505,696			527,464
Other assets		27,006			17,586

Total assets	$	3,340,701		$	3,149,677

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	4,915		$	4,257
Accrued expenses and other current liabilities		55,598			38,427
Accrued compensation and benefits		25,252			24,057
Deferred revenue		31,060			29,154
Deferred rent, current portion		1,930			1,347

Total current liabilities		118,755			97,242
Deferred rent, net of current portion		17,787			15,298
Long-term debt		380,795			367,404
Deferred tax liabilities and other long-term liabilities		134,372			136,146

Total liabilities		651,709			616,090
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred stock, $0.0001 par value; 30,000,000 shares authorized as of September 30, 2017 and December 31, 2016; no shares issued and outstanding as of September 30, 2017 and December 31, 2016		—			—
Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 56,280,716 and 54,402,809 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively		6			5
Class B common stock, $0.0001 par value; 15,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 6,217,447 shares issued and outstanding as of September 30, 2017 and December 31, 2016		1			1
Class C capital stock, $0.0001 par value; 600,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 126,285,524 and 121,838,462 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively		13			12
Additional paid-in capital		3,204,383			3,030,854
Accumulated other comprehensive loss		(345	)		(242	)
Accumulated deficit		(515,066	)		(497,043	)

Total shareholders’ equity		2,688,992			2,533,587

Total liabilities and shareholders’ equity	$	3,340,701		$	3,149,677


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenue	$	281,839		$	224,592		$	794,464		$	618,977
Costs and expenses:
Cost of revenue (exclusive of amortization) (1)		22,152			17,608			62,644			50,556
Sales and marketing		107,108			93,180			344,266			291,910
Technology and development		83,389			64,496			234,798			188,263
General and administrative		54,226			42,625			153,038			284,175
Acquisition-related costs		218			93			366			890
Gain on divestiture of business		—			(1,251	)		—			(1,251	)

Total costs and expenses		267,093			216,751			795,112			814,543

Income (loss) from operations		14,746			7,841			(648	)		(195,566	)
Other income		1,407			561			3,970			1,995
Interest expense		(6,906	)		(1,595	)		(20,526	)		(4,740	)

Income (loss) before income taxes		9,247			6,807			(17,204	)		(198,311	)
Income tax benefit (expense)		(41	)		—			(41	)		1,364

Net income (loss)	$	9,206		$	6,807		$	(17,245	)	$	(196,947	)

Net income (loss) per share — basic and diluted	$	0.05		$	0.04		$	(0.09	)	$	(1.10	)
Weighted-average shares outstanding — basic		187,692			180,583			185,447			179,577
Weighted-average shares outstanding — diluted		196,425			189,661			185,447			179,577

(1) Amortization of website development costs and intangible assets included in technology and development	$	13,442		$	22,006		$	59,862		$	64,931


	As Reported		As Revised		Effect of Change
Cost of revenue (exclusive of amortization)	$	18,254	$	17,608	$	(646	)
Sales and marketing		92,794		93,180		386
Technology and development		69,171		64,496		(4,675	)
General and administrative		37,690		42,625		4,935


	September 30, 2017
	Total		Level 1		Level 2
Cash equivalents:
Money market funds	$	188,622	$	188,622	$	—
Certificates of deposit		996		—		996
Short-term investments:
U.S. government agency securities		255,541		—		255,541
Corporate notes and bonds		44,759		—		44,759
Commercial paper		37,554		—		37,554
Municipal securities		8,836		—		8,836
Certificates of deposit		8,355		—		8,355
Foreign government securities		5,993		—		5,993
Restricted cash		1,053		—		1,053

Total	$	551,709	$	188,622	$	363,087


	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		6,226		—		6,226
Foreign government securities		5,985		—		5,985
Restricted cash		1,053		—		1,053

Total	$	430,910	$	166,527	$	264,383


	Amortized Cost		Estimated Fair Market Value
Due in one year or less	$	244,619	$	244,436
Due after one year through two years		116,823		116,602

Total	$	361,442	$	361,038


Balance as of December 31, 2016	$	1,923,480
Goodwill recorded in connection with acquisitions		7,780

Balance as of September 30, 2017	$	1,931,260



Maturity Date	Aggregate Principal Amount		Fair Value at September 30, 2019		Fair Value at December 31, 2018		Stated Interest Rate		Effective Interest Rate
September 1, 2026	$	500,000	$	469,375	$	—	1.375	%	8.10	%
September 1, 2024	600,000		573,900		—		0.75	%	7.67	%
July 1, 2023	373,750		328,818		321,855		1.50	%	6.99	%
December 1, 2021	460,000		455,492		446,200		2.00	%	7.44	%
December 15, 2020	9,637		16,842		16,744		2.75	%	N/A
Total	$	1,943,387	$	1,844,427	$	784,799


	Outstanding Principal Amount		Unamortized Debt Discount and Debt Issuance Costs			Carrying Value
September 30, 2017	$	460,000	$	(89,342	)	$	370,658
December 31, 2016	$	460,000	$	(102,733	)	$	357,267


	Restricted Stock Units			Weighted- Average Grant- Date Fair Value
Unvested outstanding at January 1, 2017		3,780,577		$	28.54
Granted		2,218,754			36.78
Vested		(1,059,105	)		29.04
Forfeited or cancelled		(721,000	)		31.34

Unvested outstanding at September 30, 2017		4,219,226			32.27


Remainder of 2017	$	6,266
2018		25,510
2019		24,579
2020		25,006
2021		25,322
All future years		61,755

Total future minimum lease payments	$	168,438


Remainder of 2017	$	8,265
2018		32,750
2019		33,500
2020		33,500
2021		32,000
2022		4,375

Total future purchase commitments	$	144,390


	Three Months Ended September 30,				2016 to 2017 % Change
	2017		2016		2016 to 2017 % Change
	(in millions)
Average Monthly Unique Users		175.2		164.5		6	%


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
	(in thousands, unaudited)
Reconciliation of Adjusted EBITDA to Net Income (Loss):
Net income (loss)	$	9,206		$	6,807		$	(17,245	)	$	(196,947	)
Other income		(1,407	)		(561	)		(3,970	)		(1,995	)
Depreciation and amortization expense		27,419			25,495			81,576			74,852
Share-based compensation expense		28,574			27,285			84,162			81,152
Acquisition-related costs		218			93			366			890
Gain on divestiture of business		—			(1,251	)		—			(1,251	)
Interest expense		6,906			1,595			20,526			4,740
Income tax benefit (expense)		41			—			41			(1,364	)

Adjusted EBITDA (1)	$	70,957		$	59,463		$	165,456		$	(39,923	)


	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)		38,333		9,200		18,400		10,733		—
2020 Notes (3)		10,137		—		—		10,137		—
Interest on 2020 Notes (4)		976		279		558		139		—
Operating lease obligations (5)		168,438		25,521		49,569		49,086		44,262
Purchase obligations (6)		144,390		32,640		67,000		44,750		—

Total contractual obligations	$	822,274	$	67,640	$	135,527	$	574,845	$	44,262