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, 2017March 31, 2020☐ | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-36853
(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) |
1301 Second Avenue, Floor 31,
Seattle, Washington 98101
(Address of principal executive offices) (Zip Code)
(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 | | ☐ |
| | | | | | |
Large acceleratedNon-accelerated filer | | ☒☐ | | Accelerated filerSmaller reporting company | | ☐ |
| | | |
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
OctoberApril 30,
2017, 56,306,3692020, 59,476,313 shares of Class A common stock, 6,217,447 shares of Class B common stock, and
126,352,820147,230,433 shares of Class C capital stock were outstanding.
Quarterly Report on Form 10-Q
For the Three Months Ended
September 30, 2017March 31, 2020
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Item 1. | | | | | 2 | |
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Item 2. | | | | | 23 | |
Item 3. | | | | | 40 | |
Item 4. | | | | | 41 | |
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Item 1. | | | | | 42 | |
Item 1A. | | | | | 43 | |
Item 2. | | | | | 44 | |
Item 6. | | | | | 45 | |
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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. 2019 and in Part II, Item IA (Risk Factors) in this Quarterly Report on Form 10-Q, including, but not limited to:
•the impact of the novel coronavirus (“COVID-19”) pandemic and any associated economic downturn on our future financial position, operations and financial performance;
•the magnitude, duration and severity of the COVID-19 pandemic;
•the impact of actions taken by governments, businesses, and individuals in response to the COVID-19 pandemic;
•the current and future health and stability of the economy and residential housing market, including any extended slowdown in the real estate markets as a result of COVID-19;
•changes in laws or regulations applicable to our business, employees, products or services, including current and future laws, regulations and orders that limit our ability to operate in light of COVID-19;
•changes in general economic and financial conditions that reduce demand for our products and services, lower our profit margins or reduce our access to credit;
•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;
•ability to obtain or maintain licenses and permits to support our current and future businesses;
•actual or anticipated changes to our products and services;
•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)
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 | |
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| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,567,710 | | | $ | 1,141,263 | |
Short-term investments | 993,258 | | | 1,280,989 | |
Accounts receivable, net of allowance for doubtful accounts of $4,495 and $4,522 at March 31, 2020 and December 31, 2019, respectively | 71,782 | | | 67,005 | |
Mortgage loans held for sale | 36,848 | | | 36,507 | |
Inventory | 533,989 | | | 836,627 | |
Prepaid expenses and other current assets | 57,635 | | | 58,117 | |
Restricted cash | 56,428 | | | 89,646 | |
Total current assets | 3,317,650 | | | 3,510,154 | |
Contract cost assets | 46,565 | | | 45,209 | |
Property and equipment, net | 188,032 | | | 170,489 | |
Right of use assets | 205,688 | | | 212,153 | |
Goodwill | 1,984,907 | | | 1,984,907 | |
Intangible assets, net | 112,274 | | | 190,567 | |
Other assets | 16,624 | | | 18,494 | |
Total assets | $ | 5,871,740 | | | $ | 6,131,973 | |
Liabilities and shareholders’ equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 17,819 | | | $ | 8,343 | |
Accrued expenses and other current liabilities | 88,897 | | | 85,442 | |
Accrued compensation and benefits | 32,838 | | | 37,805 | |
Borrowings under credit facilities | 466,647 | | | 721,951 | |
Deferred revenue | 35,347 | | | 39,747 | |
Lease liabilities, current portion | 20,290 | | | 17,592 | |
Convertible senior notes, current portion | 9,637 | | | 9,637 | |
Total current liabilities | 671,475 | | | 920,517 | |
Lease liabilities, net of current portion | 216,122 | | | 220,445 | |
Long-term debt | 1,565,949 | | | 1,543,402 | |
Deferred tax liabilities and other long-term liabilities | 2,433 | | | 12,188 | |
Total liabilities | 2,455,979 | | | 2,696,552 | |
Commitments and contingencies (Note 16) | | | |
Shareholders’ equity: | | | |
Preferred stock, $0.0001 par value; 30,000,000 shares authorized; no shares issued and outstanding | — | | | — | |
Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized; 59,476,188 and 58,739,989 shares issued and outstanding as of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019 | 1 | | | 1 | |
Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 147,219,504 and 144,109,419 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | 15 | | | 14 | |
Additional paid-in capital | 4,551,866 | | | 4,412,200 | |
Accumulated other comprehensive income | 4,286 | | | 340 | |
Accumulated deficit | (1,140,413) | | | (977,140) | |
Total shareholders’ equity | 3,415,761 | | | 3,435,421 | |
Total liabilities and shareholders’ equity | $ | 5,871,740 | | | $ | 6,131,973 | |
See accompanying notes to
the condensed consolidated financial statements.
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 March 31, | | |
| 2020 | | 2019 |
Revenue: | | | |
Homes | $ | 769,873 | | | $ | 128,472 | |
IMT | 330,666 | | | 298,272 | |
Mortgages | 25,282 | | | 27,360 | |
Total revenue | 1,125,821 | | | 454,104 | |
Cost of revenue (exclusive of amortization) (1): | | | |
Homes | 732,199 | | | 122,419 | |
IMT | 24,318 | | | 24,251 | |
Mortgages | 5,155 | | | 4,678 | |
Total cost of revenue | 761,672 | | | 151,348 | |
Sales and marketing | 204,648 | | | 161,587 | |
Technology and development | 134,918 | | | 107,770 | |
General and administrative | 92,285 | | | 95,774 | |
Impairment costs | 76,800 | | | — | |
Integration costs | — | | | 352 | |
Total costs and expenses | 1,270,323 | | | 516,831 | |
Loss from operations | (144,502) | | | (62,727) | |
Other income | 9,593 | | | 9,168 | |
Interest expense | (37,592) | | | (16,466) | |
Loss before income taxes | (172,501) | | | (70,025) | |
Income tax benefit | 9,228 | | | 2,500 | |
Net loss | $ | (163,273) | | | $ | (67,525) | |
Net loss per share — basic and diluted | $ | (0.78) | | | $ | (0.33) | |
Weighted-average shares outstanding — basic and diluted | 210,674 | | | 204,514 | |
____________________ (1) Amortization of website development costs and intangible assets included in technology and development | $ | 17,184 | | | $ | 14,400 | |
See accompanying notes to
the condensed consolidated financial statements.
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 | |
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Net unrealized gains (losses) on investments | | | 99 | | | | (179 | ) | | | (103 | ) | | | 669 | |
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Total other comprehensive income (loss) | | | 99 | | | | (179 | ) | | | (103 | ) | | | 669 | |
| | | | | | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 9,305 | | | $ | 6,628 | | | $ | (17,348 | ) | | $ | (196,278 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
Net loss | $ | (163,273) | | | $ | (67,525) | |
Other comprehensive income: | | | |
Unrealized gains on investments | 3,602 | | | 1,144 | |
Reclassification adjustment for net investment losses included in net loss | 434 | | | — | |
Net unrealized gains on investments | 4,036 | | | 1,144 | |
Currency translation adjustments | (90) | | | (42) | |
Total other comprehensive income | 3,946 | | | 1,102 | |
Comprehensive loss | $ | (159,327) | | | $ | (66,423) | |
See accompanying notes to
the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 December 31, 2019 | 209,066,855 | | | $ | 21 | | | $ | 4,412,200 | | | $ | (977,140) | | | $ | 340 | | | $ | 3,435,421 | |
Issuance of common and capital stock upon exercise of stock options | 3,207,375 | | | 1 | | | 92,201 | | | — | | | — | | | 92,202 | |
Vesting of restricted stock units | 638,909 | | | — | | | — | | | — | | | — | | | — | |
Share-based compensation expense | — | | | — | | | 47,465 | | | — | | | — | | | 47,465 | |
Net loss | — | | | — | | | — | | | (163,273) | | | — | | | (163,273) | |
Other comprehensive income | — | | | — | | | — | | | — | | | 3,946 | | | 3,946 | |
Balance at March 31, 2020 | 212,913,139 | | | $ | 22 | | | $ | 4,551,866 | | | $ | (1,140,413) | | | $ | 4,286 | | | $ | 3,415,761 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock, Class B Common Stock and Class C Capital Stock | | | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
| | | | | | | | | | | |
| Shares | | Amount | | | | | | | | |
Balance at December 31, 2018 | 203,904,265 | | | $ | 21 | | | $ | 3,939,842 | | | $ | (671,779) | | | $ | (905) | | | $ | 3,267,179 | |
Issuance of common and capital stock upon exercise of stock options | 729,788 | | | — | | | 13,564 | | | — | | | — | | | 13,564 | |
Vesting of restricted stock units | 496,347 | | | — | | | — | | | — | | | — | | | — | |
Shares and value of restricted stock units withheld for tax liability | (68) | | | — | | | (2) | | | — | | | — | | | (2) | |
Share-based compensation expense | — | | | — | | | 68,814 | | | — | | | — | | | 68,814 | |
Net loss | — | | | — | | | — | | | (67,525) | | | — | | | (67,525) | |
Other comprehensive income | — | | | — | | | — | | | — | | | 1,102 | | | 1,102 | |
Balance at March 31, 2019 | 205,130,332 | | | $ | 21 | | | $ | 4,022,218 | | | $ | (739,304) | | | $ | 197 | | | $ | 3,283,132 | |
See accompanying notes to the condensed consolidated financial statements.
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, 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 | | | $ | — | |
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
Operating activities | | | |
Net loss | $ | (163,273) | | | $ | (67,525) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 29,026 | | | 20,525 | |
Share-based compensation expense | 43,795 | | | 66,124 | |
Amortization of right of use assets | 6,465 | | | 4,440 | |
Amortization of contract cost assets | 8,415 | | | 8,746 | |
Amortization of discount and issuance costs on convertible senior notes maturing in 2021, 2023, 2024 and 2026 | 22,547 | | | 8,840 | |
Impairment costs | 76,800 | | | — | |
Deferred income taxes | (9,228) | | | (2,500) | |
Loss on disposal of property and equipment and other assets | 1,952 | | | 1,704 | |
Credit loss expense | 558 | | | 128 | |
Net loss on investment securities | 434 | | | — | |
Accretion of bond discount | (473) | | | (1,733) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (5,335) | | | (4,650) | |
Mortgage loans held for sale | (341) | | | 5,940 | |
Inventory | 302,593 | | | (162,325) | |
Prepaid expenses and other assets | (2,916) | | | (8,537) | |
Lease liabilities | (1,625) | | | (7,010) | |
Contract cost assets | (9,771) | | | (9,103) | |
Accounts payable | 7,673 | | | (133) | |
Accrued expenses and other current liabilities | 4,588 | | | 328 | |
Accrued compensation and benefits | (4,967) | | | (1,088) | |
Deferred revenue | (4,400) | | | 2,025 | |
Other long-term liabilities | (527) | | | 290 | |
Net cash provided by (used in) operating activities | 301,990 | | | (145,514) | |
Investing activities | | | |
Proceeds from maturities of investments | 296,272 | | | 302,187 | |
Proceeds from sales of investments | 53,997 | | | — | |
Purchases of investments | (58,459) | | | (176,412) | |
Purchases of property and equipment | (32,966) | | | (14,202) | |
Purchases of intangible assets | (4,503) | | | (3,269) | |
Net cash provided by investing activities | 254,341 | | | 108,304 | |
Financing activities | | | |
Proceeds from borrowings on credit facilities | 34,460 | | | 129,328 | |
Repayments of borrowings on credit facilities | (294,150) | | | — | |
Net borrowings (repayments) on warehouse lines of credit and repurchase agreement | 4,386 | | | (5,025) | |
Proceeds from exercise of stock options | 92,202 | | | 13,564 | |
Value of equity awards withheld for tax liability | — | | | 2 | |
Net cash provided by (used in) financing activities | (163,102) | | | 137,869 | |
Net increase in cash, cash equivalents and restricted cash during period | 393,229 | | | 100,659 | |
Cash, cash equivalents and restricted cash at beginning of period | 1,230,909 | | | 663,443 | |
Cash, cash equivalents and restricted cash at end of period | $ | 1,624,138 | | | $ | 764,102 | |
Supplemental disclosures of cash flow information | | | |
Cash paid for interest | $ | 17,038 | | | $ | 4,956 | |
Noncash transactions: | | | |
Capitalized share-based compensation | $ | 3,670 | | | $ | 2,690 | |
Write-off of fully depreciated property and equipment | $ | 4,143 | | | $ | 6,269 | |
Write-off of fully amortized intangible assets | $ | — | | | $ | 3,200 | |
Property and equipment purchased on account | $ | 9,445 | | | $ | 4,792 | |
See accompanying notes to
the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Description of Business
Zillow Group, Inc. operates, the leadinglargest portfolio of real estate and home-related information marketplacesbrands on mobile and the web, is building an on-demand real estate experience. Whether selling, buying, renting or financing, customers can turn to the businesses of its flagship brand, Zillow, to find and get into their next home with a complementary portfoliospeed, certainty and ease.
In addition to Zillow’s for-sale and rental listings, Zillow Offers buys and sells homes directly in dozens of brandsmarkets across the country, allowing sellers control over their timeline. Zillow Closing Services now offers title and productsescrow services as another important step to help consumers find vital information about homesunify the real estate transaction. Zillow Home Loans, our affiliate lender, provides our customers with an easy option to get pre-approved and connect with local professionals. Zillow Group’s brands focus on all stages of thesecure financing for their next home lifecycle: renting, buying, selling and financing. The Zillow Group portfolio ofpurchase.
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. We also own and operate a number of business brands for real estate, rental and mortgage professionals, includingwhich include 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: public health crises, like the COVID-19 pandemic; 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; outcomesthe 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; actual or anticipated changes to our products and services; changes in government regulation affecting our business; outcomes of legal proceedings; natural disasters and catastrophic events; scaling and adaptation of existing technology and network infrastructure; management of our growth; our ability to attract and retain qualified employees and key personnel; our 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
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,
2016,2019, which was filed with the SEC on February
7, 2017.19, 2020. The condensed consolidated balance sheet as of December 31,
2016,2019, 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,March 31, 2020, and our results of operations,
and comprehensive
income (loss) for the threeloss, shareholders’ equity and
nine month periods ended September 30, 2017 and 2016, and our cash flows for the
ninethree month periods ended
September 30, 2017March 31, 2020 and
2016.2019. The results of the three
and nine month
periodsperiod ended
September 30, 2017March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31,
20172020 or for any interim period or for any other future year.
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 COVID-19 pandemic has introduced significant additional uncertainty with respect to estimates, judgments and assumptions, which may materially impact 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. Amountsestimates 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.
listed, among others.
Recently
IssuedAdopted Accounting Standards
Not Yet AdoptedIn 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. Thisrequirements for capitalizing implementation costs incurred in cloud computing arrangements that are service contracts with the accounting guidance shortensthat provides for the amortization period for certain callable debt securities purchased at a premium by requiringcapitalization 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 besame 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 onEntities are permitted to apply either a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We expector prospective transition approach to adopt this guidance. We adopted this guidance on January 1, 2019.2020 using the prospective transition approach under which we apply the guidance to all eligible costs incurred subsequent to adoption. Under the guidance, we capitalize eligible implementation costs associated with cloud computing arrangements that are service contracts within prepaid expenses and other current assets or other long-term assets in our condensed consolidated balance sheets, depending on the length of the underlying cloud computing contract. We have not yet determinedamortize these costs on a straight-line basis over the impactterm of the hosting arrangement. The adoption of this guidance will have on our financial position, results of operations or cash flows.In December 2016, the FASB issued guidance to narrow the definition of a business. This guidance assists entities with evaluating when a set of transferred assets and activities is a business. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. This guidance must be applied prospectively to transactions occurring within the period of adoption. We expect to adopt this guidance on January 1, 2018. We dodid not expect the adoption of this guidance to have a material impact on our financial position, results of operations or cash flows.
In
November 2016,August 2018, the FASB issued guidance
on the classificationrelated to disclosure requirements for fair value measurements. This guidance removes, modifies and
presentation ofadds disclosures related to certain assets and liabilities measured at fair value. The amendments on changes in
restricted cash onunrealized gains and losses, the
statementrange and weighted average of
cash flows.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.
The adoption of this guidance requires a retrospective transition method to each period presented. We
expect to adoptadopted this guidance on January 1,
2018.2020. We
dohave not
expecthistorically recorded material amounts of Level 3 assets and liabilities or material transfers of assets or liabilities between levels within the fair value hierarchy and therefore, the adoption of this guidance
todid not have a material impact on our
statements of cash flows.disclosures. Refer to Note 3 for further information regarding the assets and liabilities we measure at fair value.
In June 2016, and subsequently amended in April 2019, May 2019 and November 2019, the FASB issued guidance on the measurement of credit losses on financial instruments.assets. 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 requiredto measure and recognize expected credit losses for certain financial instruments and financial assets, including trade receivables. This guidance requires an entity to recognize an allowance that reflects the entity’s current estimate of credit losses throughexpected 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 adoptadopted this guidance on January 1, 2020.2020 with no material impact to our financial position, results of operation or cash flows.
Recently Issued Accounting Standards Not Yet Adopted
In March 2020, the FASB issued guidance which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. This guidance is optional for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. This guidance is effective from March 12, 2020 through December 31, 2022. Entities may elect to adopt the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. We expect to apply some of the expedients and exceptions provided in this guidance to our credit facilities, warehouse line of credit and master repurchase agreement, all of which reference LIBOR in the applicable interest rate. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.
In February 2016, the FASB issued guidance on leases. This guidance requires the recognition of a right-of-use 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 to our office space operating leases, as we will be required to recognize lease assets and lease liabilities on our consolidated balance sheet. We continue to assess the potential impacts of this guidance, including the impact the adoption of this guidance will have on our 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. We continue to assess the impact the adoption of this guidance will have on our financial position, results of operations, cash flows and disclosures.
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—1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2—2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.
•Level 3—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 themarkets. The fair value measurement of certificates of depositcommercial 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 assetsour short-term investments is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Restricted cash — Restricted cash consists of cash received from the resale of homes through Zillow Offers which may be used to repay amounts borrowed on our credit facilities (see Note 12) 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 credit facilities are outstanding and amounts are held in escrow.
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. This adjustment is effected through the pull-through rate, which represents the probability that an interest rate lock commitment will ultimately result in a closed loan.
The pull-through rate is based on estimated changes in market conditions, loan stage and historical borrower behavior. Pull-through rates are directly related to the fair value of IRLCs as an increase in the pull-through rate, in isolation, would result in an increase in the fair value measurement. Conversely, a decrease in the pull-through rate, in isolation, would result in a decrease in the fair value measurement. Changes in the fair value of IRLCs are included within Mortgages revenue in our condensed consolidated statements of operations.
The following table presents the range and weighted average pull-through rates used in determining the fair value of IRLCs as of the periods presented:
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Range | 43% - 100% | | 56% - 100% |
Weighted average | 75% | | 78% |
Forward contracts — The fair value of mandatory loan sales commitments and derivative instruments such as forward sales of mortgage-backed securities that are utilized as economic hedging instruments are calculated by reference to quoted prices for similar assets.
The following tables present the balances of assets
and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents: | | | | | | | |
Money market funds | $ | 1,356,139 | | | $ | 1,356,139 | | | $ | — | | | $ | — | |
Commercial paper | 9,389 | | | — | | | 9,389 | | | — | |
Short-term investments: | | | | | | | |
U.S. government agency securities | 713,581 | | | — | | | 713,581 | | | — | |
Commercial paper | 103,646 | | | — | | | 103,646 | | | — | |
Treasury bills | 82,578 | | | — | | | 82,578 | | | | — | |
Corporate notes and bonds | 69,265 | | | — | | | 69,265 | | | — | |
Municipal securities | 23,192 | | | — | | | 23,192 | | | — | |
Certificates of deposit | 996 | | | — | | | 996 | | | | — | |
Mortgage origination-related: | | | | | | | |
Mortgage loans held for sale | 36,848 | | | — | | | 36,848 | | | — | |
IRLCs | 2,225 | | | — | | | — | | | 2,225 | |
Forward contracts - other current liabilities | 2,039 | | | — | | | 2,039 | | | — | |
Total | $ | 2,399,898 | | | $ | 1,356,139 | | | $ | 1,041,534 | | | $ | 2,225 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | |
| Total | | Level 1 | | Level 2 |
Cash equivalents: | | | | | |
Money market funds | $ | 872,431 | | | $ | 872,431 | | | $ | — | |
U.S. government agency securities | 35,009 | | | — | | | 35,009 | |
Commercial paper | 31,113 | | | — | | | 31,113 | |
Treasury bills | 6,441 | | | — | | | 6,441 | |
Corporate notes and bonds | 1,065 | | | — | | | 1,065 | |
Certificates of deposit | 249 | | | — | | | 249 | |
Short-term investments: | | | | | |
U.S. government agency securities | 862,154 | | | — | | | 862,154 | |
Corporate notes and bonds | 159,431 | | | — | | | 159,431 | |
Commercial paper | 150,267 | | | — | | | 150,267 | |
Treasury bills | 80,003 | | | — | | | 80,003 | |
Municipal securities | 27,889 | | | — | | | 27,889 | |
Certificates of deposit | 1,245 | | | — | | | 1,245 | |
Mortgage origination-related: | | | | | | | | |
Mortgage loans held for sale | 36,507 | | | — | | | 36,507 | |
IRLCs | 937 | | | — | | | 937 | |
Forward contracts - other current assets | 7 | | | — | | | 7 | |
Forward contracts - other current liabilities | (60) | | | — | | | (60) | |
Total | $ | 2,264,688 | | | $ | 872,431 | | | $ | 1,392,257 | |
The following table presents the changes in our IRLCs during the three months ended March 31, 2020 (in thousands):
| | | | | |
Balance as of January 1, 2020 (1) | $ | 937 | |
Issuances | 5,208 | |
Transfers | (5,349) | |
Fair value changes recognized in earnings | 1,429 | |
Balance as of March 31, 2020 | $ | 2,225 | |
(1) Amount represents transfers of IRLCs from Level 2 to Level 3 within the fair value hierarchy as of January 1, 2020. | |
At March 31, 2020, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $89.3 million and $116.2 million for our IRLCs and forward contracts, respectively. At December 31, 2019, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $34.3 million and $64.7 million for our IRLCs and forward contracts, respectively. We do not have the right to offset our forward contract derivative positions.
See Note
912 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.We did not have any Level 3 assets as of September 30, 2017 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.
convertible senior notes.
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 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Market Value |
Cash | $ | 202,182 | | | $ | — | | | $ | — | | | $ | 202,182 | |
Cash equivalents: | | | | | | | |
Money market funds | 1,356,139 | | | — | | | — | | | 1,356,139 | |
Commercial paper | 9,389 | | | — | | | — | | | 9,389 | |
Short-term investments: | | | | | | | |
U.S. government agency securities | 709,163 | | | 4,418 | | | — | | | 713,581 | |
Commercial paper | 103,646 | | | — | | | — | | | 103,646 | |
Treasury bills | 82,485 | | | 93 | | | — | | | 82,578 | |
Corporate notes and bonds | 69,348 | | | 21 | | | (104) | | | 69,265 | |
Municipal securities | 23,176 | | | 31 | | | (15) | | | 23,192 | |
Certificates of deposit | 996 | | | — | | | — | | | 996 | |
Restricted cash | 56,428 | | | — | | | — | | | 56,428 | |
Total | $ | 2,612,952 | | | $ | 4,563 | | | $ | (119) | | | $ | 2,617,396 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Market Value |
Cash | $ | 194,955 | | | $ | — | | | $ | — | | | $ | 194,955 | |
Cash equivalents: | | | | | | | |
Money market funds | 872,431 | | | — | | | — | | | 872,431 | |
U.S. government agency securities | 35,011 | | | — | | | (2) | | | 35,009 | |
Commercial paper | 31,113 | | | — | | | — | | | 31,113 | |
Treasury bills | 6,441 | | | — | | | — | | | 6,441 | |
Corporate notes and bonds | 1,065 | | | — | | | — | | | 1,065 | |
Certificates of deposit | 249 | | | — | | | — | | | 249 | |
Short-term investments: | | | | | | | | |
U.S. government agency securities | 861,862 | | | 365 | | | (73) | | | 862,154 | |
Corporate notes and bonds | 159,382 | | | 91 | | | (42) | | | 159,431 | |
Commercial paper | 150,267 | | | — | | | — | | | 150,267 | |
Treasury bills | 79,989 | | | 14 | | | — | | | 80,003 | |
Municipal securities | 27,836 | | | 56 | | | (3) | | | 27,889 | |
Certificates of deposit | 1,245 | | | — | | | — | | | 1,245 | |
Restricted cash | 89,646 | | | — | | | — | | | 89,646 | |
Total | $ | 2,511,492 | | | $ | 526 | | | $ | (120) | | | $ | 2,511,898 | |
All available-for-sale investments as of March 31, 2020 have a contractual maturity date of one year or less.
Note 5. Accounts Receivable, net
The opening balance of accounts receivable, net was $67.0 million as of January 1, 2020.
The following table presents available-for-sale investments by contractual maturity datethe changes in the allowance for doubtful accounts (in thousands):
| | | | | |
Balance as of January 1, 2020 | $ | 4,522 | |
Credit loss expense | 558 | |
Less: write-offs, net of recoveries and other adjustments | (585) | |
Balance as of March 31, 2020 | $ | 4,495 | |
Note 6. Inventory
The following table presents the components of inventory, net of applicable lower of cost or net realizable value adjustments, as of
September 30, 2017the dates presented (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 | |
| | | | | | | | |
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Work-in-process | $ | 117,521 | | | $ | 152,171 | |
Finished goods | 416,468 | | | 684,456 | |
Inventory | $ | 533,989 | | | $ | 836,627 | |
Note 7. Contract Cost Assets
As of March 31, 2020 and December 31, 2019, we had $46.6 million and $45.2 million, respectively, of contract cost assets. During the three months ended March 31, 2020 and 2019, we did 0t incur any impairment losses. We recorded amortization expense related to contract cost assets of $8.4 million and $8.7 million during the three months ended March 31, 2020 and 2019, 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 | |
| | | | | | | | |
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Website development costs | $ | 153,201 | | | $ | 149,648 | |
Leasehold improvements | 101,970 | | | 81,981 | |
Construction-in-progress | 46,442 | | | 45,337 | |
Office equipment, furniture and fixtures | 40,612 | | | 36,582 | |
Computer equipment | 31,549 | | | 31,942 | |
Property and equipment | 373,774 | | | 345,490 | |
Less: accumulated amortization and depreciation | (185,742) | | | (175,001) | |
Property and equipment, net | $ | 188,032 | | | $ | 170,489 | |
We recorded depreciation expense related to property and equipment (other than website development costs) of $14.0$11.8 million and $3.5$6.0 million respectively, during the three months ended September 30, 2017March 31, 2020 and 2016, and $21.72019, respectively.
We capitalized $12.5 million and
$9.9$10.0 million
respectively, during the nine months ended September 30, 2017 and 2016.We capitalized $13.4 million and $13.0 million, respectively, in website development costs during the three months ended September 30, 2017March 31, 2020 and 2016, and $39.8 million and $38.1 million, respectively, during the nine months ended September 30, 2017 and 2016.2019, respectively. Amortization expense for website development costs included in technology and development expenses was $10.1$5.4 million and $10.4$3.4 million respectively, during the three months ended September 30, 2017March 31, 2020 and 2016, and $30.0 million and $29.4 million, respectively, during the nine months ended September 30, 2017 and 2016.
Construction-in-progress primarily consists2019, respectively.
Note
6. Acquisition and9. Equity
InvestmentsAcquisition
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 eventsMarch 31, 2020. 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 haveorderly transactions for identical or similar investments of the same issuer. During the three months ended March 31, 2020, we recognized a non-cash impairment of $5.3 million related to this investment. In connection with our assessment of the investment for impairment indicators as a result of COVID-19’s significant adverse effectimpact on the fair values of our cost method investments as of September 30, 2017,real estate industry, we identified factors that led us to conclude that the investment was impaired and it is not practicable to estimate the fair valuesvalue of the investments giveninvestment was less than the carrying value. The most significant of such factors related to the future expected cash flows of the investee. Accordingly, we performed an analysis to determine the fair valuesvalue of the investments are not readily determinable, aninvestment and concluded that our best estimate of its fair value was $4.7 million. This is considered a Level 3 measurement under the fair values ofvalue hierarchy. The equity investment is classified within other assets in 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 sheets.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 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | |
| Cost | | Accumulated Amortization | | Net |
Trade names and trademarks | $ | 36,500 | | | $ | — | | | $ | 36,500 | |
Customer relationships | 102,600 | | | (77,571) | | | 25,029 | |
Developed technology | 107,200 | | | (84,361) | | | 22,839 | |
Software | 37,476 | | | (22,745) | | | 14,731 | |
Intangibles-in-progress | 7,298 | | | — | | | 7,298 | |
Purchased content | 48,925 | | | (43,181) | | | 5,744 | |
Lender licenses | 400 | | | (267) | | | 133 | |
Total | $ | 340,399 | | | $ | (228,125) | | | $ | 112,274 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | |
| Cost | | Accumulated Amortization | | Net |
Customer relationships | $ | 102,600 | | | $ | (73,770) | | | $ | 28,830 | |
Developed technology | 107,200 | | | (81,383) | | | 25,817 | |
Software | 35,527 | | | (20,843) | | | 14,684 | |
Purchased content | 47,298 | | | (40,636) | | | 6,662 | |
Intangibles-in-progress | 6,391 | | | — | | | 6,391 | |
Lender licenses | 400 | | | (217) | | | 183 | |
Total | $ | 299,416 | | | $ | (216,849) | | | $ | 82,567 | |
Amortization expense recorded for intangible assets for the three months ended
September 30, 2017March 31, 2020 and
20162019 was
$13.4$11.8 million and
$11.6$11.0 million,
respectively. Amortization expense recorded for intangible assets for the nine months ended September 30, 2017respectively, and
2016 was $39.9 million and $35.5 million, respectively. Thesethese amounts are included in technology and development expenses.
As
Intangibles-in-progress consists of September 30, 2017 and December 31, 2016, wesoftware that is capitalizable but has not been placed in service.
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
ishas not
historically been subject to amortization.
Intangibles-in-progress consist of purchased content and software that are capitalizable but have not been placed in service.
Note 9. Convertible Senior Notes
Convertible Senior Notes due in 2021
On December 12, 2016, Zillow Group issued $460.0 million aggregate principal amount of 2.00% Convertible Senior Notes due 2021 (the “2021 Notes”), which amount includes the exercise in full The carrying value of the $60.0Trulia trade names and trademarks intangible asset was $36.5 million over-allotment option,as of March 31, 2020 and $108.0 million as of December 31, 2019.
During the three months ended March 31, 2020, we recognized a non-cash impairment charge of $71.5 million related to
Citigroup Global Markets Inc. asour indefinite-lived Trulia trade names and trademarks intangible asset. The impairment charge is included in Impairment costs within our IMT and Mortgages segments. In March 2020, we identified factors directly related to the
initial purchaserCOVID-19 pandemic that led us to conclude it was more likely than not that the $108.0 million carrying value of the
2021 Notesasset exceeded its fair value. The most significant of such factors was a shortfall in
a private offeringprojected revenue related to the
initial purchaser in reliance onTrulia brand compared to previous projections used to determine the
exemption from the registration requirements provided by Section 4(a)(2)carrying value of the
Securities Act of 1933, as amended (the “Securities Act”)intangible asset, primarily driven by a reduction in expected future marketing and advertising spend for
resale to qualified institutional buyers as defined in, and pursuant to, Rule 144A under the Securities Act. The 2021 Notes bear interest at a fixed rate of 2.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2017. The 2021 Notes are convertible into cash, shares of our Class C capital stock or a combination thereof, at the Company’s election. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased, redeemed, or converted in accordance with their terms.The 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 (see additional information below under “Trulia’s Convertible Senior Notes due 2020”) in privately negotiated transactions. In addition, the Company used approximately $36.6 million of the net proceeds from the issuance of the 2021 Notes to pay the cost of the capped call transactionsTrulia. Accordingly, with the initial purchaser of the 2021 Notes and two additional financial institutions (“Capped Call Confirmations”) as discussed further below. The Company used the remainder of the net proceeds for general corporate purposes.
Prior to the close of business on the business day immediately preceding September 1, 2021, the 2021 Notes are convertible at the option of the holders of the 2021 Notes only under certain conditions, none of which conditions have been satisfied as of September 30, 2017. On or after September 1, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2021 Notes may convert their 2021 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2021 Notes by paying or delivering, as the case may be, cash, shares of Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The conversion rate will initially be 19.0985 shares of Class C capital stock per $1,000 principal amount of 2021 Notes (equivalent to an initial conversion price of approximately $52.36 per share of Class C capital stock). The conversion rate is subject to customary adjustments upon the occurrence of certain events. The Company may redeem for cash all or part of the 2021 Notes, at its option, on or after December 6, 2019, under certain circumstances at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indenture governing the 2021 Notes). 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 governing the 2021 Notes), holders of the 2021 Notes may require the Company to repurchase for cash all or part of their 2021 Notes at a repurchase price equal to 100% of the principal amount of the 2021 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date (as defined in the indenture governing the 2021 Notes). In addition, if certain fundamental changes occur, the Company may be required in certain circumstances to increase the conversion rate for any 2021 Notes converted in connection with such fundamental changes by a specified number of shares of its Class C capital stock. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the 2021 Notes, as described in the indenture governing the notes. There are no financial covenants associated with the 2021 Notes.
We may not redeem the 2021 Notes prior to December 6, 2019. We may redeem the 2021 Notes for cash, at our option, in whole or in part on or after December 6, 2019, if the last reported sale price per share of our Class C capital stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
In accounting for the issuance of the 2021 Notes, the Company separated the 2021 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair valueassistance 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 deductingthird-party valuation specialist, we performed a quantitative analysis to determine the fair value of the liability component fromintangible asset and concluded that our best estimate of its fair value was $36.5 million. The valuation was prepared using an income approach based on the parrelief-from-royalty method and relied on inputs with unobservable market prices including projected revenue, royalty rate, discount rate, and estimated tax rate, and therefore is considered a Level 3 measurement under the fair value of the 2021 Notes. The difference between the principal amount of the 2021 Noteshierarchy. In connection with this impairment analysis, we evaluated our expected future reduced marketing and the liability component represents the debt discount, 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 millionadvertising spend related to the issuance ofTrulia trade names and trademarks intangible asset and concluded that this asset no longer has an indefinite life. We will amortize the 2021 Notes, including approximately $11.5remaining $36.5 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 were recorded as a direct deduction from the related debt liability in the condensed consolidated balance sheet and amortized to interest expense over the term of the 2021 Notes, and transaction costs attributable to the equity component were nettedcarrying value on an accelerated basis commensurate 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 million, which is comprisedprojected cash flows over a useful life 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 in accrued expenses and other current liabilities in the condensed consolidated balance sheet.
10 years.
Note 11. Deferred Revenue
The following table presents the changes in deferred revenue for the periods presented (in thousands):
| | | | | |
| Three Months Ended March 31, 2020 |
Balance as of January 1, 2020 | $ | 39,747 | |
Deferral of revenue | 253,729 | |
Less: Revenue recognized | (258,129) | |
Balance as of March 31, 2020 | $ | 35,347 | |
During the three months ended March 31, 2020, we recognized as revenue a total of $36.0 million pertaining to amounts that were recorded in deferred revenue as of January 1, 2020.
Note 12. Debt
The following table presents the carrying values of Zillow Group’s debt as of the periods presented (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Homes Segment | | | | | | |
Credit facilities: | | | | | | |
Goldman Sachs Bank USA | | $ | 52,623 | | | $ | 39,244 | |
Citibank, N.A. | | 137,590 | | | 296,369 | |
Credit Suisse AG, Cayman Islands | | 241,621 | | | 355,911 | |
Total Homes Segment debt | | 431,834 | | | | 691,524 | |
Mortgages Segment | | | | | | | |
Repurchase agreement: | | | | | | | |
Citibank, N.A. | | 4,540 | | | 394 | |
Warehouse line of credit: | | | | | | | |
Comerica Bank | | 30,273 | | | 30,033 | |
Total Mortgages Segment debt | | 34,813 | | | | 30,427 | |
Convertible Senior Notes | | | | | | | |
1.375% convertible senior notes due 2026 | | 332,129 | | | | 327,187 | |
0.75% convertible senior notes due 2024 | | 498,666 | | | | 490,538 | |
1.50% convertible senior notes due 2023 | | 314,233 | | | | 310,175 | |
2.00% convertible senior notes due 2021 | | 420,921 | | | | 415,502 | |
2.75% convertible senior notes due 2020 | | 9,637 | | | | 9,637 | |
Total convertible senior notes | | 1,575,586 | | | | 1,553,039 | |
Total | | $ | 2,042,233 | | | | $ | 2,274,990 | |
Homes Segment
To provide capital for Zillow Offers, we utilize credit facilities that are classified as current liabilities in our condensed consolidated balance sheets. We classify these credit facilities as current liabilities as amounts drawn to purchase homes are typically repaid as homes are sold, which we expect to be within one year. The following table summarizes certain details related to our credit facilities (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | |
Lender | | Final Maturity Date | | Maximum Borrowing Capacity | | Weighted Average Interest Rate |
Goldman Sachs Bank USA | | April 20, 2022 | | $ | 500,000 | | | 4.13 | % |
Citibank, N.A. | | January 31, 2022 | | 500,000 | | | 4.99 | % |
Credit Suisse AG, Cayman Islands | | July 31, 2021 | | 500,000 | | | 4.95 | % |
| | Total | | $ | 1,500,000 | | | |
Undrawn amounts available under the credit facilities included in the table above are not committed, meaning the applicable lender is not committed to, but may in its discretion, advance loan funds in excess of the outstanding principal amountborrowings. The final maturity dates are inclusive of extensions which are subject to agreement by the respective lender.
Zillow Group formed certain special purpose entities (each, an “SPE”) to purchase and carryingsell residential properties through Zillow Offers. Each SPE is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such SPE are available to satisfy the debts and other obligations of any affiliate or other entity. The credit facilities are secured by the assets and equity of one or more SPEs. These SPEs are variable interest entities and Zillow Group is the primary beneficiary as it has the power to control the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses of the SPEs or the right to receive benefits from the SPEs that could potentially be significant to the SPEs. The SPEs are consolidated within Zillow Group’s condensed consolidated financial statements and primarily increased inventory and borrowings under credit facilities by $534.0 million and $431.8 million, respectively, as of March 31, 2020 and $836.6 million and $691.5 million, respectively, as of December 31, 2019.
Outstanding amounts drawn under each credit facility are required to be repaid on the facility maturity date or earlier if accelerated due to an event of default. Further, each SPE is required to repay any resulting shortfall if the value of the 2021eligible properties owned by such SPE falls below a certain percentage of the principal amount outstanding under the applicable credit facility. Continued inclusion of properties in each credit facility is subject to various eligibility criteria. For example, aging criteria limit the inclusion in the borrowing base of properties owned longer than a specified number of days, and properties owned for longer than one year are generally ineligible.
The stated interest rate on our credit facilities is one-month LIBOR plus an applicable margin as defined in the respective credit agreements. Our credit facilities include customary representations and warranties, provisions regarding events of default and covenants. The terms of these credit facilities and related financing documents require Zillow Group and certain of its subsidiaries, as applicable, to comply with a number of customary financial and other covenants, such as maintaining certain levels of liquidity, tangible net worth, leverage ratios, adequate insurance coverage and market capitalization. As of March 31, 2020, Zillow Group was in compliance with all financial covenants and no event of default had occurred. Except for certain limited circumstances, the credit facilities are non-recourse to Zillow Group. Our credit facilities require that we establish, maintain and in certain circumstances that Zillow Group fund specified reserve accounts. These reserve accounts include, but are not limited to, interest reserves, insurance reserves, tax reserves, renovation cost reserves and reserves for specially permitted liens. Amounts funded to these reserve accounts and the collection accounts have been classified within our condensed consolidated balance sheets as restricted cash.
Mortgages Segment
To provide capital for Zillow Home Loans, we utilize a warehouse line of credit and a master repurchase agreement which are classified as current liabilities in our condensed consolidated balance sheets. The warehouse line of credit and repurchase agreement provide short-term financing between the issuance of a mortgage loan and when Zillow Home Loans sell the loan to an investor. The following table summarizes certain details related to our warehouse line of credit and repurchase agreement (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | |
Lender | | Maturity Date | | Maximum Borrowing Capacity | | Weighted Average Interest Rate |
Citibank, N.A. | | October 27, 2020 | | $ | 75,000 | | | 2.82 | % |
Comerica Bank | | June 27, 2020 | | 50,000 | | | 3.40 | % |
| | Total | | $ | 125,000 | | | |
The repurchase agreement with Citibank, N.A. includes a committed amount of $25.0 million. As of March 31, 2020 and December 31, 2019, $4.5 million and $0.4 million, respectively, in mortgage loans held for sale were pledged as collateral under the facility.
Borrowings on the warehouse line of credit and repurchase agreement bear interest at the one-month LIBOR plus an applicable margin, as defined in the governing credit agreements, and are secured by residential mortgage loans held for sale. The repurchase agreement contains margin call provisions that provide Citibank, N.A. with certain rights in the event of a decline in the market value of the assets purchased under the repurchase agreement.
The warehouse line of credit and repurchase agreement include customary representations and warranties, covenants and provisions regarding events of default. As of March 31, 2020, Zillow Home Loans was in compliance with all financial covenants and no event of default had occurred. The warehouse line of credit and repurchase agreement are recourse to Zillow Home Loans, but non-recourse to Zillow Group or any of its other subsidiaries.
For additional details related to our warehouse line of credit and repurchase agreement, see Note 15 in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Convertible Senior Notes
The following tables summarize certain details related to our outstanding convertible senior notes as of the
datesperiods presented (in
thousands)thousands, except interest rates):
| | | | | | | | | | | | |
| | 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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | March 31, 2020 | | | | December 31, 2019 | | |
Maturity Date | | Aggregate Principal Amount | | Stated Interest Rate | | Effective Interest Rate | | First Interest Payment Date | | Semi-Annual Interest Payment Dates | | Unamortized Debt Discount and Debt Issuance Costs | | Fair Value | | Unamortized Debt Discount and Debt Issuance Costs | | Fair Value |
September 1, 2026 | | $ | 500,000 | | | 1.375 | % | | 8.10 | % | | March 1, 2020 | | | March 1; September 1 | | $ | 167,871 | | | $ | 518,675 | | | $ | 172,813 | | | | $ | 597,380 | |
September 1, 2024 | | 673,000 | | | 0.75 | % | | 7.68 | % | | March 1, 2020 | | | March 1; September 1 | | 174,334 | | | 685,740 | | | 182,462 | | | | 819,378 | |
July 1, 2023 | | 373,750 | | | 1.50 | % | | 6.99 | % | | January 1, 2019 | | | January 1; July 1 | | 59,517 | | | 311,872 | | | 63,575 | | | | 356,464 | |
December 1, 2021 | | 460,000 | | | 2.00 | % | | 7.44 | % | | June 1, 2017 | | | June 1; December 1 | | 39,079 | | | 462,571 | | | 44,498 | | | | 514,312 | |
December 15, 2020 | | 9,637 | | | 2.75 | % | | N/A | | | N/A | | | June 15; December 15 | | — | | | 16,842 | | | — | | | | 16,842 | |
Total | | $ | 2,016,387 | | | | | | | | | | | $ | 440,801 | | | $ | 1,995,700 | | | $ | 463,348 | | | $ | 2,304,376 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | | | | | | | Three Months Ended March 31, 2019 | | | | | | |
Maturity Date | | Contractual Coupon Interest | | Amortization of Debt Discount | | Amortization of Debt Issuance Costs | | Interest Expense | | Contractual Coupon Interest | | Amortization of Debt Discount | | Amortization of Debt Issuance Costs | | Interest Expense |
September 1, 2026 | | $ | 1,719 | | | $ | 4,824 | | | $ | 118 | | | $ | 6,661 | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | |
September 1, 2024 | | 1,248 | | | 7,861 | | | 267 | | | 9,376 | | | — | | | | — | | | | — | | | | — | |
July 1, 2023 | | 1,402 | | | 3,697 | | | 361 | | | 5,460 | | | 1,402 | | | | 3,437 | | | | 336 | | | | 5,175 | |
December 1, 2021 | | 2,300 | | | 4,911 | | | 508 | | | 7,719 | | | 2,300 | | | | 4,591 | | | | 475 | | | | 7,366 | |
December 15, 2020 | | 66 | | | — | | | — | | | 66 | | | 66 | | | | — | | | | — | | | | 66 | |
Total | | $ | 6,735 | | | $ | 21,293 | | | $ | 1,254 | | | $ | 29,282 | | | $ | 3,768 | | | $ | 8,028 | | | $ | 811 | | | $ | 12,607 | |
The convertible notes are senior unsecured obligations and are classified as long-term debt in our condensed consolidated balance sheets with the exception of
September 30, 2017, the
unamortized debt discount and debt issuance costs forconvertible senior notes due December 15, 2020 which are classified within short-term liabilities. Interest on the
2021 Notes will be amortized to interest expense over a remaining period of approximately 50 months.convertible notes is paid semi-annually in arrears. 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 Notesconvertible 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 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 excesseach of the principal amountconvertible senior notes. The convertible senior notes maturing in 2026, 2024, 2023 and 2021 are not redeemable or convertible as of March 31, 2020. The convertible senior notes maturing in 2020 are convertible, at the option of the 2021 Notes in the event that the market priceholder, and redeemable, at our option, as 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. March 31, 2020.
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 ofconvertible senior notes are convertible into cash, shares of Class C capital stock
thator a combination thereof, at our election, and may be settled as described below. The convertible senior notes 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 andmature on their respective maturity date, unless earlier repurchased, redeemed or converted in accordance with their terms.
The following table summarizes the Merger Agreement, Zillow Group entered into a supplemental indenture inconversion and redemption options with respect to the convertible senior notes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Maturity Date | | Early Conversion Date | | Conversion Rate | | Conversion Price | | Optional Redemption Date |
September 1, 2026 | | March 1, 2026 | | 22.9830 | | $ | 43.51 | | | September 5, 2023 |
September 1, 2024 | | March 1, 2024 | | 22.9830 | | 43.51 | | | September 5, 2022 |
July 1, 2023 | | April 1, 2023 | | 12.7592 | | 78.37 | | | July 6, 2021 |
December 1, 2021 | | September 1, 2021 | | 19.0985 | | 52.36 | | | December 6, 2019 |
The following table summarizes certain details related to the 2020 Notescapped call confirmations with respect to the convertible senior notes:
| | | | | | | | | | | | | | |
Maturity Date | | Initial Cap Price | | Cap Price Premium |
September 1, 2026 | | $ | 80.5750 | | | 150 | % |
September 1, 2024 | | 72.5175 | | | 125 | % |
July 1, 2023 | | 105.45 | | | 85 | % |
December 1, 2021 | | 69.19 | | | 85 | % |
For additional details related to our convertible senior notes, see Note 15 in the
aggregate principal amount of $230.0 million, which supplemental indenture provides, among other things, that, atNotes to Consolidated Financial Statements included in our Annual Report on Form 10-K for 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.
2019.
We are subject to federal and state income taxes in the United States and
federal and provincial income taxes in Canada.
During the threeAs of March 31, 2020 and
nine month periods ended September 30, 2017 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. We2019, 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 isare not more likely than not
(a likelihood of more than 50%) that some or all of the deferred tax assets will notto 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$1,137.6 million as of December 31,
2016,2019, which are available to reduce future taxable income. We have accumulated state tax losses of approximately
$13.5$34.3 million (tax effected) as of December 31,
2016.2019.
We recorded an income tax benefit of
$1.4$9.2 million for the
ninethree months ended
September 30, 2016 primarily due toMarch 31, 2020. The income tax benefit was a
deferred tax liability generated in connection with Zillow Group’s February 22, 2016 acquisition of Naked Apartments that can be used to realize certain deferred tax assets 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 of 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 of Class A common stock are entitled to one vote for each share.
Our Class B common stock has no preferences or privileges and is not redeemable. At any time after the date of issuance, each share of Class B common stock, at the option of the holder, may be converted into one share of Class A common stock, or automatically converted into Class A common stock upon the affirmative vote by or written consent of holdersresult of a majority of$9.7 million income tax benefit related to the shares of$71.5 million non-cash impairment we recorded during the Class B common stock. During the ninethree months ended September 30, 2017March 31, 2020 related to the Trulia trade names and trademarks intangible asset. For additional information about the yearnon-cash impairment, see Note 10 to our condensed consolidated financial statements. This income tax benefit was partially offset by an immaterial amount of state income tax expense recorded for the three months ended DecemberMarch 31, 2016, no shares of Class B common stock were converted into Class A common stock at the option of the holders. Holders of Class B common stock are entitled to 10 votes for each share.
Our Class C capital stock has no preferences or privileges, is not redeemable and, except in limited circumstances, is non-voting.
2020.Note
12.14. 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.
The following table summarizes option award activity for the
ninethree 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 | |
March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2020 | 29,634,296 | | | $ | 35.95 | | | 6.28 | | $ | 331,107 | |
Granted | 4,358,433 | | | 49.35 | | | | | |
Exercised | (3,207,375) | | | 28.75 | | | | | |
Forfeited or cancelled | (297,139) | | | 41.01 | | | | | |
Outstanding at March 31, 2020 | 30,488,215 | | | 38.57 | | | 6.87 | | 88,874 | |
Vested and exercisable at March 31, 2020 | 16,563,984 | | | 34.13 | | | 5.12 | | 80,208 | |
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 March 31, | | |
| 2020 | | 2019 |
Expected volatility | 45%-48% | | 46%-47% |
Expected dividend yield | — | | — |
Risk-free interest rate | 0.87%-0.93% | | 2.38%-2.53% |
Weighted-average expected life | 5.00-5.50 years | | 4.75-5.25 years |
Weighted-average fair value of options granted | $20.75 | | $16.77 |
As of
September 30, 2017,March 31, 2020, there was a total of
$161.0$236.2 million in unrecognized compensation cost related to unvested stock options.
The following table summarizes activity for restricted stock units for the
ninethree 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. March 31, 2020:
| | | | | | | | | | | |
| Restricted Stock Units | | Weighted- Average Grant- Date Fair Value |
Unvested outstanding at January 1, 2020 | 7,052,767 | | | $ | 40.01 | |
Granted | 3,323,261 | | | 49.02 | |
Vested | (638,909) | | | 38.49 | |
Forfeited or cancelled | (314,790) | | | 40.71 | |
Unvested outstanding at March 31, 2020 | 9,422,329 | | | 43.27 | |
As of
September 30, 2017,March 31, 2020, there was
$126.1a total of $381.9 million
of totalin 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 March 31, | | |
| 2020 | | 2019 |
Cost of revenue | $ | 1,173 | | | $ | 881 | |
Sales and marketing | 6,993 | | | 5,650 | |
Technology and development | 18,917 | | | 15,508 | |
General and administrative | 16,712 | | | 44,085 | |
Total | $ | 43,795 | | | $ | 66,124 | |
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. 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 received, among other things, a change in the exercise period of his vested stock options outstanding as well as accelerated vesting of outstanding stock options, which have been accounted for as equity modifications. We recorded $26.4 million of share-based compensation expense associated with the modifications in the three months ended March 31, 2019. We measured the modification charge by calculating the incremental fair value of the modified award compared to the fair value of the original award immediately prior to the modification. The value of the modified awards as of the modification date was estimated using the Black-Scholes-Merton option-pricing model, assuming no dividends, expected volatility of 46%-47%, a risk-free interest rate of 2.47%-2.49% and a weighted-average expected life of 3.84-5.25 years.
For additional details related to Mr. Rascoff’s Agreement, see Note 13.18 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Note 15. 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 March 31, | | |
| 2020 | | 2019 |
Weighted-average Class A common stock and Class C capital stock option awards outstanding | 23,663 | | | 19,408 | |
Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding | 7,623 | | | 5,860 | |
Class A common stock issuable upon conversion of the convertible notes maturing in 2020 | 407 | | | 421 | |
Total Class A common stock and Class C capital stock equivalents | 31,693 | | | 25,689 | |
Since the Company expects to settle the principal amount of the outstanding
convertible notes maturing in 2021,
Notes2023, 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 havethe 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 $52.36per 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 | | 15,468 | | | | 43.51 | |
July 1, 2023 | | 4,769 | | | | 78.37 | |
December 1, 2021 | | 8,785 | | | | 52.36 | |
Note
14.16. Commitments and Contingencies
We have entered into various non-cancelable operating lease agreements for certain of our office space and equipment with original lease periods expiring between
20172020 and
2024. We are committed2030. For additional information regarding our lease agreements, see Note 14 in our Notes to
pay a portion ofConsolidated Financial Statements in the
related operating expenses under certain of these lease agreements. Certain of these arrangements have free rent periods or escalating rent payment provisions, and we recognize rent expense under such arrangementsAnnual Report on
a straight-line basis. Operating lease expenseForm 10-K for the
three monthsyear 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 | |
| | | | |
December 31, 2019.
Purchase Commitments
We have entered into
Purchase commitments primarily include various non-cancelable
purchase commitments for content relatedagreements 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 contentand certain cloud computing services 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 | |
| | | | |
the respective date. As of March 31, 2020, the value of homes under contract that have not closed was $14.9 million.
As of
September 30, 2017,March 31, 2020, 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 leasescertain 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.
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$10.0 million and
$3.6$10.2 million,
respectively, as of
September 30, 2017March 31, 2020 and December 31,
2016, respectively.2019.
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 makerecorded 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 andMarch 31, 2020 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.
2019.
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 recordcourt, the Ninth Circuit Court of Appeals issued an
accrual related to this complaint asopinion that, among other things, (i) affirmed the district court’s grant of
summary judgment in favor of Zillow on direct infringement of images on Zillow’s listing site, (ii) affirmed the district court’s grant in favor of Zillow of judgment notwithstanding the verdict on certain images that were displayed on the Zillow Digs site, (iii) remanded consideration of the issue whether VHT’s images on the Zillow Digs site were part of a compilation or individual photos, and (iv) vacated the jury’s finding of willful infringement. On October 7, 2019, the United States Supreme Court denied VHT’s petition for writ of certiorari seeking review of certain rulings by the Ninth Circuit Court of Appeals. On December
31, 2016, as we did not believe9, 2019, the Company filed a
loss was probable. We have recorded an estimated liabilitymotion for
approximately $4.1 million assummary judgment with the district court seeking a ruling that VHT’s images are a compilation, or in the alternative, seeking a dismissal of
September 30, 2017, which is classified in general and administrative expenses in our condensed consolidated statement of operations for the
nine months ended September 30, 2017.case based on a recent United States Supreme Court ruling. We do not believe there is a reasonable possibility that a material loss
in excess of amounts accrued maywill 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,
two2 purported class action lawsuits were filed against us and certain of our executive officers, alleging, among other things, violations of federal securities laws on behalf of a class of those who purchased our common stock between February 12, 2016 and August 8, 2017. One of those purported class actions, captioned Vargosko v. Zillow Group, Inc. et al, was brought in the U.S. District Court for the Central District of California. The other purported class action lawsuit, captioned Shotwell v. Zillow Group, Inc. et al, was brought in the U.S. District Court for the Western District of Washington. The complaints allege, among other things, that during the period between February 12, 2016 and August 8, 2017, we issued materially false and misleading statements regarding our business practices. The complaints seek to recover, among other things, alleged damages sustained by the purported class members as a result of the alleged misconduct.
We anticipate thatIn 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 beand in April 2018, we filed
our motion to dismiss the consolidated amended complaint. In October 2018, our motion to dismiss was granted without prejudice, and in
November 2018, the
first quarter ofplaintiffs filed a second consolidated amended complaint, which we moved to dismiss in December 2018.
On April 19, 2019, our motion to dismiss the second consolidated amended complaint was denied, and we filed our answer to the second amended complaint on May 3, 2019. On October 11, 2019, plaintiffs filed a motion for class certification, and we filed our motion in opposition on March 20, 2020. We
intend to denyhave denied the allegations of wrongdoing and
intend to vigorously defend the claims in
these lawsuits.this lawsuit. We
have not recorded an accrual related to these lawsuits as of 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 waslawsuits 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 plaintiffplaintiffs in the derivative suitsuits (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 intendCertain 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. On February 28, 2020, our motion to dismiss the consolidated shareholder derivative complaint was denied. 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. On December 2, 2019, IBM filed an amended complaint. On December 16, 2019, the Company filed a motion to transfer venue and a motion to dismiss the complaint. We deny the allegations of
any wrongdoing and
intend to vigorously defend the claims in the lawsuit.
We have not recorded an accrualThere is a reasonable possibility that a loss may be incurred related to this
lawsuit ascomplaint; 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.
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. Related Party Transactions
In February 2016, we paid a total of approximately $0.2 million and $0.2 million, respectively, to Mr. Lloyd Frink, our Vice 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 approximately $0.1 million 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.
Note 16. Self-Insurance
Beginning on January 1, 2016, we are self-insured for medical benefits for all qualifying Zillow Group employees. The medical plan carries a stop-loss policy which will protect 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. We record estimates of the total costs of claims incurred based on an analysis of historical data and independent estimates. Our liability for self-insured medical claims is included within accrued compensation and benefits in our consolidated balance sheet and was $2.6 million as of September 30, 2017 and $1.7 million as of December 31, 2016.
Note 17. 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 $6.4 million and $4.9 million, respectively, for the three months ended September 30, 2017March 31, 2020 and 2016 was $3.0 million and $2.4 million, respectively. The total expense related to the Zillow Group 401(k) Plan for the nine months ended September 30, 2017 and 2016 was $8.9 million and $7.1 million, respectively.2019.
Note 18. Segment Information and Revenue
We have one3 operating and reportable segmentsegments, which hashave been identified based on howthe way in which our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. The chief executive officer acts as the chief operating decision-maker and reviews financial and operational information for the Homes, Internet, Media & Technology (“IMT”) and Mortgages segments.
The Homes segment includes the financial results from Zillow Group’s purchase and sale of homes directly through Zillow Offers and the financial results from title and escrow services through Zillow Closing Services. The IMT segment includes the financial results for the Premier Agent, rentals, new construction marketplaces, dotloop, and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals. The Mortgages segment includes financial results for advertising sold to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and the sale of mortgages on an entity-wide basis. Therethe secondary market as well as Mortech mortgage software solutions.
Revenue and costs are
nodirectly attributed to our segments when possible. However, due to the integrated structure of our business, certain costs incurred by one segment
managers whomay benefit the other segments. These costs primarily include headcount-related expenses, general and administrative expenses including executive, finance, accounting, legal, human resources, recruiting and facilities costs, product development and data acquisition costs and marketing and advertising costs. These costs are
held accountable for operations, operating results or plans for levels or components.allocated to each segment based on the estimated benefit each segment receives from such expenditures.
The chief executive officer reviews information about
revenue categories, including marketplace revenue and display revenue. The following table presents our revenue categories
duringas well as statement of operations data inclusive of loss before income taxes by segment. This information is included in the following table 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 March 31, 2020 | | | | | | Three Months Ended March 31, 2019 | | | | |
| Homes | | IMT | | Mortgages | | Homes | | IMT | | Mortgages |
Revenue: | | | | | | | | | | | |
Zillow Offers | $ | 769,112 | | | $ | — | | | $ | — | | | $ | 128,472 | | | $ | — | | | $ | — | |
Premier Agent | — | | | 242,106 | | | — | | | — | | | 217,735 | | | — | |
Other | 761 | | | 88,560 | | | — | | | — | | | 80,537 | | | — | |
Mortgages | — | | | — | | | 25,282 | | | — | | | — | | | 27,360 | |
Total revenue | 769,873 | | | 330,666 | | | 25,282 | | | 128,472 | | | 298,272 | | | 27,360 | |
Costs and expenses: | | | | | | | | | | | |
Cost of revenue | 732,199 | | | 24,318 | | | 5,155 | | | 122,419 | | | 24,251 | | | 4,678 | |
Sales and marketing | 71,589 | | | 120,173 | | | 12,886 | | | 20,862 | | | 126,654 | | | 14,071 | |
Technology and development | 32,538 | | | 95,028 | | | 7,352 | | | 12,281 | | | 87,969 | | | 7,520 | |
General and administrative | 23,421 | | | 58,754 | | | 10,110 | | | 14,357 | | | 70,850 | | | 10,567 | |
Impairment costs | — | | | 73,900 | | | 2,900 | | | | — | | | — | | | — | |
Integration costs | — | | | — | | | — | | | — | | | — | | | 352 | |
Total costs and expenses | 859,747 | | | 372,173 | | | 38,403 | | | 169,919 | | | 309,724 | | | 37,188 | |
Loss from operations | (89,874) | | | (41,507) | | | (13,121) | | | (41,447) | | | (11,452) | | | (9,828) | |
Segment other income | — | | | — | | | 202 | | | — | | | — | | | 313 | |
Segment interest expense | (8,084) | | | — | | | (226) | | | (3,758) | | | — | | | (101) | |
Loss before income taxes (1) | $ | (97,958) | | | $ | (41,507) | | | $ | (13,145) | | | $ | (45,205) | | | $ | (11,452) | | | $ | (9,616) | |
(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 March 31, | | |
| 2020 | | 2019 |
Total segment loss before income taxes | $ | (152,610) | | | $ | (66,273) | |
Corporate interest expense | (29,282) | | | (12,607) | |
Corporate other income | 9,391 | | | 8,855 | |
Consolidated loss before income taxes | $ | (172,501) | | | $ | (70,025) | |
Certain corporate items are not directly attributable to any of our segments, including interest income earned on our short-term investments included in Other income and interest costs on our convertible senior notes included in Interest expense.
Item 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
containeddescribed in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, including in the section titled “Note Regarding Forward-Looking Statements,” and also those factors discussed in Part
II, Item 1A (Risk Factors) of this report, as well as in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31,
2016.2019.
Zillow Group, Inc. operates, the leadinglargest portfolio of real estate and home-related information marketplacesbrands on mobile and the web, is building an on-demand real estate experience. Whether selling, buying, renting or financing, customers can turn to the businesses of its flagship brand, Zillow, to find and get into their next home with a complementary portfoliospeed, certainty and ease.
In addition to Zillow’s for-sale and rental listings, Zillow Offers buys and sells homes directly in dozens of brandsmarkets across the country, allowing sellers control over their timeline. Zillow Closing Services now offers title and productsescrow services as another important step to help consumers find vital information about homesunify the real estate transaction. Zillow Home Loans, our affiliate lender, provides our customers with an easy option to get pre-approved and connect with local professionals. Zillow Group’s brands focus on all stages of thesecure financing for their next home lifecycle: renting, buying, selling and financing. The Zillow Group portfolio ofpurchase.
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. We also own and operate a number of business brands for real estate, rental and mortgage professionals, includingwhich include Mortech, dotloop, Bridge Interactive and New Home Feed.
Our living database
Reportable Segments and Revenue Overview
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 more than 110 million U.S. homes—including homes directly through the Zillow Offers service and the financial results from the title and escrow services provided through Zillow Closing Services. 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.
The Homes segment primarily generates revenue through our Zillow Offers service from the resale of homes for rent and homes not currently on the market—attractsopen market. We began buying homes through Zillow Offers in April 2018, and we began selling homes in July 2018. Other Homes revenue relates to revenue associated with title and escrow services provided through Zillow Closing Services which launched in the second half of 2019.
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 primarily 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 communityagent advertiser’s share of users. Individuals and businesses that use Zillow’stotal 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 updatedand connections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. Connections and impressions are each provided as part of our advertising services for Premier Agent and Premier Brokers; we do not charge a separate fee for these consumer leads.
In October 2018, we began testing a new Flex pricing model for Premier Agent and Premier Broker advertising services in limited markets. We plan to continue testing this pricing model in select markets with high-performing partners in the future. With the Flex model, Premier Agents and Premier Brokers are provided with impressions and connections at no upfront cost, and they pay a performance advertising fee only when a real estate transaction is closed with one of those leads.
Other IMT revenue includes revenue generated by rentals, 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. Rentals revenue 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-leadingrental applications product, whereby potential renters can submit applications to multiple properties for a flat service fee. New construction revenue primarily includes advertising services sold to home builders on a cost per residential community or cost per impression basis. Display revenue consists of graphical mobile and web advertising sold to advertisers promoting their brands on our mobile applications that enable consumersand websites.
In our Mortgages segment, we generate revenue from advertising sold to accessmortgage 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, and from Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform. We also generate revenue through our websites.mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans.
During the three months ended March 31, 2020, we generated total revenue of $1,125.8 million, as compared to $454.1 million in the three months ended March 31, 2019, an increase of $671.7 million, or 148%. This increase was primarily the result of a $641.4 million, or 499% increase in Homes segment revenue, a $32.4 million or 11% increase in IMT segment revenue driven by a $24.4 million, or 11%, increase in Premier Agent revenue and an $8.0 million, or 10%, increase in Other IMT revenue. These increases were partially offset by a $2.1 million, or 8%, decrease in Mortgages segment revenue. Visits increased 5% to 2,117.6 million for the three months ended March 31, 2020 from 2,019.8 million for the three months ended March 31, 2019. There were approximately
175.2192.5 million average monthly unique users of our mobile applications and websites for the three months ended
September 30, 2017 comparedMarch 31, 2020, representing year-over-year growth of 6%. The number of homes sold through Zillow Offers increased 478% to
164.5 million average monthly unique users2,394 for the three months ended
September 30, 2016, representing year-over-year growth of 6%.We generate revenueMarch 31, 2020 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 websites414 for the three months ended September 30, 2017, representing year-over-year growth of 6%. Visits increased 19% to 1,667.1 million for the three months ended September 30, 2017 from 1,403.8 million for the three months ended September 30, 2016.
In September 2017, we acquired New Home Feed. New Home Feed is a leading provider of listing management and syndication tools for the new construction industry. For additional information about the acquisition of New Home Feed, see Note 6 to our condensed consolidated financial statements.
March 31, 2019.
As of
September 30, 2017,March 31, 2020, we had
3,0605,338 full-time employees compared to
2,7765,249 full-time employees as of December 31,
2016.2019.
COVID-19 Impact
In December 2019, a novel strain of coronavirus, COVID-19, was reported and has subsequently spread worldwide. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic and resulting global and economic disruptions have affected our business, as well as those of our customers and real estate partners, and there are no reliable estimates of how long the pandemic will last or the magnitude of its long-term impact. In light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we have taken certain measures intended to serve the needs of our customers and real estate partners, while also protecting our business and the safety of our employees, our customers and the communities in which we operate. These measures include pausing home buying through Zillow Offers, offering certain product discounts, temporarily closing offices, pausing hiring except for critical roles, pausing the majority of our advertising spending and reducing other discretionary spending. At the same time, we are striving to continue our business operations to the extent possible during these unprecedented times, including through the implementation of proactive work from home policies and acceleration of development and implementation of various technology initiatives to better enable virtual shopping and real estate transactions. As reflected in the discussion below, the impact of the pandemic and actions taken in response to it had varying effects on our key metrics and results of operations for the three months ended March 31, 2020, primarily in the last month of the period. The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods and is expected to be significant. The extent of the impact of COVID-19 on our business is highly uncertain and difficult to predict, as information is rapidly evolving with respect to the duration and severity of the pandemic.
Management has identified
visits, unique users and
visitsthe number of homes sold through Zillow Offers as relevant to investors’ and others’ assessment of our financial condition and results of operations.
Although there was an increase in both visits and unique users for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, both metrics were adversely impacted by the COVID-19 pandemic beginning in March 2020, although they have subsequently improved during April 2020. COVID-19 may continue to adversely impact the number of visits and unique users to our mobile applications and websites in future periods, which we would expect to result in a decline in revenue in future periods.
In addition, on March 23, 2020, we announced that Zillow Offers would temporarily pause home buying in all markets in response to local public health orders related to COVID-19 and to help protect the safety and health of our employees, customers and partners. To the extent possible, we continue to update, list and sell homes in inventory through Zillow Offers. Although the duration and impact of COVID-19 is uncertain, we expect that this temporary pause in home buying and other potential effects of COVID-19 on residential real estate transactions will adversely impact the number of homes sold in future periods, which we expect will result in a decline in revenue in future periods.
Visits
The number of visits is an important metric because it is an indicator of consumers’ level of engagement with our mobile applications, websites and other services. We believe highly engaged consumers are more likely to participate in our Zillow Offers program or use Zillow Homes Loans or more likely to be transaction-ready real estate market participants and therefore more sought-after by our real estate partners.
We define a visit as a group of interactions by users with the Zillow, Trulia and StreetEasy mobile applications and websites, as we monetize our Premier Agent and Premier Broker products on these mobile applications and websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. Visits can occur on the same day, or over several days, weeks or months.
Zillow and StreetEasy measure visits with Google Analytics, and Trulia measures visits with Adobe Analytics. Visits to Trulia end after thirty minutes of user inactivity. Visits to Zillow and StreetEasy end either: (i) after thirty minutes of user inactivity or at midnight; or (ii) through a campaign change. A visit ends through a campaign change if a visitor arrives via one campaign or source (for example, via a search engine or referring link on a third-party website), leaves the mobile application or website, and then returns via another campaign or source.
The following table presents the number of visits to our mobile applications and websites for the periods presented (in millions):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | 2019 to 2020 % Change |
| 2020 | | 2019 | | |
Visits | 2,117.6 | | | 2,019.8 | | | 5 | % |
Measuring unique users is important to us because
much of our
marketplace revenue depends in part on our ability to enable real estate, rental and mortgage professionals to connect with our
users,customers - home buyers and
our display revenue depends in part on the number of impressions delivered to our users.sellers, renters, and individuals with or looking for a mortgage. Growth in consumer traffic to our mobile applications and websites increases the number of impressions,
clicks, connections, leads and
clicksother events we can monetize
to generate revenue. For example, our Homes segment revenue depends in
part on users accessing our
marketplacemobile applications and websites to engage in the sale and purchase of homes with Zillow Group, and Premier Agent revenue and display revenue
categories. In addition, our community ofdepend on advertisements being served to users
improves the quality of our
living database of homes with their contributions, which in turn attracts more users.mobile applications and websites.
We count a unique user the first time an individual accesses one of our mobile applications using a mobile device during a calendar month and the first time an individual accesses one of our websites using a web browser during a calendar month. If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. If an individual accesses more than one of our mobile applications within a given month, the first access to each mobile application is counted as a separate unique user. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain. Zillow, StreetEasy, HotPads and Naked Apartments and RealEstate.com (as of June 2017) measure unique users with Google Analytics, and Trulia measures unique users with Adobe Analytics.
Due to third-party technological limitations, user software settings, or user behavior, Google 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 | % |
Visits
may assign a unique cookie to different instances of access by the same individual to our mobile applications and websites. In such instances, Google Analytics would count different instances of access by the same individual as separate unique users. Accordingly, reliance on the number of unique users counted by Google Analytics may overstate the actual number of unique users who access our mobile applications and websites during the period.
The following table presents our average monthly unique users for the periods presented (in millions):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | 2019 to 2020 % Change |
| 2020 | | 2019 | | |
Average Monthly Unique Users | 192.5 | | | 181.1 | | | 6 | % |
Homes Sold
The number of visitshomes sold through Zillow Offers is an important metric becauseas it is an indicator of consumers’ levelcustomers’ adoption of engagement withthe Zillow Offers service as well as our mobile applicationsability to generate revenue through the service. Growth in the number of homes sold through Zillow Offers suggests increased adoption of the service by home buyers and websites. generally results in growth in the amount of our Homes segment revenue.
The following table presents the number of homes sold through Zillow Offers for the periods presented:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | 2019 to 2020 % Change |
| 2020 | | 2019 | | |
Number of Homes Sold | 2,394 | | | 414 | | | 478 | % |
Basis of Presentation
Revenue
We believe highly engaged consumers are more likelyrecognize 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 transaction-ready real estate market participants and therefore more sought-after byentitled in exchange for those products or services.
In our
agent and other real estate professional advertisers.We define a visit as a groupHomes segment, we generate revenue from the resale of interactions by users with the Zillow, Trulia, StreetEasy (as of March 2017) and RealEstate.com (as of June 2017) mobile applications and websites, as we monetize our Premier Agent and Premier Broker products on these mobile applications and websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. Visits can occurhomes on the same day, or over several days, weeks or months.
open market and through our title and escrow services. Our two revenue categories within our Homes segment are Zillow StreetEasyOffers and RealEstate.com measure visits with Google Analytics, and Trulia measures visits with Adobe Analytics. Visits to Trulia end after thirty minutes of user inactivity. Visits to Zillow, StreetEasy and RealEstate.com end either: (i) after thirty minutes of user inactivity or at midnight; or (ii) through a campaign change. A visit ends through a campaign change if a visitor arrives via one campaign or source (for example, via a search engine or referring link on a third-party website), leaves the mobile application or website, and then returns via another campaign or source.
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | | 2016 to 2017 % Change | |
| | 2017 | | | 2016 | | |
| | (in millions) | | | | |
Visits | | | 1,667.1 | | | | 1,403.8 | | | | 19 | % |
Basis of Presentation
Revenue
WeOther.
In our IMT segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to
businesses and professionals primarily associated with the residential real estate
mortgagebusinesses, professionals and
rental industries.consumers. These professionals include real estate,
mortgagerental and
rentalnew construction brand advertisers, professionals and
brand advertisers.consumers. Our two
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 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 Segment
Zillow Offers Revenue. Zillow Offers revenue is derived from the resale of homes on the open market. We recognize revenue 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 agent commissions, closing or other costs associated with the transaction.
Other Revenue. Other Homes revenue is primarily generated through Zillow Closing Services, which offers title and mortgages revenue.escrow services to home buyers and sellers, including title search procedures for title insurance policies, escrow and other closing services. Title search, which is recorded net of amounts remitted to third-party insurance underwriters, and title and escrow closing fees, are recognized as revenue upon closing of the underlying real estate transaction.
IMT Segment
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 and website that provides individualized program performance analytics, self-service ad buying tools and our free customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent or Premier Broker through our mobile and web platforms.We offerplatforms and our flagship account management tools. The marketing and business technology products and services promised to Premier Agents and Premier Brokers are delivered over time, as the customer simultaneously receives and consumes the benefit of the performance obligations.
Premier Agent
advertising product and
our Premier Broker advertising
productproducts, which include the delivery of impressions and validated consumer connections, or leads, are primarily offered on a
cost per impressionshare of voice basis.
Payment is received prior to the delivery of impressions and connections. Impressions are delivered when
a soldan advertisement appears on pages viewed by users of our mobile applications and
websites. From 2012 through the endwebsites 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 quarterimpressions or connections to customers, but instead control when and how many impressions and connections to deliver based on a customer’s share of
2016, we had primarily charged customers for our Premier Agent product based onvoice. We determine the number of impressions
delivered on our buyer’s agent list in zip codes purchased and
a contracted maximum cost per impression. Ourconnections to deliver to Premier
AgentAgents and Premier
Broker products include multiple deliverables which are accounted for as a single unit of accounting, as the delivery or performance of the undelivered elements is based on traffic to our mobile applications and websites. With this pricing method, we recognized revenue related to our impression-based Premier Agent and Premier Broker products based on the lesser of (i) the actual number of impressions delivered on our buyer’s agent list during the period multiplied by the contracted maximum cost per impression, or (ii) the contractual maximum spend on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months or twelve months and 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 the cost per impression deliveredBrokers in each zip code based uponusing a market-based pricing method in consideration of the total amount spent by Premier Agents and Premier Brokers to purchase impressions and connections in the zip code during the month. This results in the delivery of impressions and connections over time in proportion to each Premier Agent’s and Premier Broker’s share of voice. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly prepaid spend in that zip code as a percentage of the total monthly prepaid spend of all Premier Agents and Premier Brokers in that zip code, and includes both the share of impressions delivered as advertisements appearing on pages viewed by users of our mobile applications and websites, as well as the proportion of consumer connections a Premier Agent or Premier Broker receives. The cost per impression that we chargenumber of impressions and connections delivered for a given spend level is dynamic –- as demand for impressionsadvertising in a zip code increases or decreases, the cost per impressionnumber of impressions and connections delivered to a Premier Agent or Premier Broker in that zip code may be increaseddecreases or decreased. This new auction-based pricing method complements our self-serve account interface, which we introduced to Premier Agents over the course of 2016. The interface includes account management tools that allow agent advertisers to independently control their budgets, impression buys, and the duration of their advertising commitment. increases accordingly.
We
began testing this auction-based pricing method for our Premier Agent product to better align our revenue opportunities with increasing traffic levels to our mobile and web platforms and leveraging increasing demand by real estate agents for access to home shoppers who use our mobile applications and websites. In the fourth quarter of 2016, we implemented this method broadly for all existing and new agent advertisers, including brokerages and other teams. With this auction-based pricing method, weprimarily recognize revenue related to
our dynamic impression-basedthe Premier Agent and Premier Broker products
and services based on the
contractual maximummonthly prepaid spend
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 contractualmonthly billing period over which the products and services are delivered.
Otherprovided. This methodology best depicts how we satisfy our performance obligations to customers, as we continuously transfer control of the performance obligations to the customer over time. Given a Premier Agent or Premier Broker typically prepays their monthly spend and the monthly spend is refunded on a pro-rata basis upon cancellation of the contract by a customer at any point in time, we have determined that Premier Agent and Premier Broker contracts are effectively daily contracts, and each performance obligation is satisfied over time as each day lapses. We have not allocated the transaction price to each performance obligation within our Premier Agent and Premier Broker arrangements, as the amounts recognized would be the same irrespective of any allocation.
In October 2018, we began testing a new pricing model, Flex, for Premier Agent and Premier Broker advertising services in limited markets. With the Flex model, Premier Agents and Premier Brokers are provided with validated leads at no upfront cost and pay a performance advertising fee only when a real estate transaction is closed with one of the leads. With this pricing model, the transaction price represents variable consideration, as the amount to which we expect to be entitled varies based on the number of validated leads that convert into real estate transactions and the value of those transactions. During this testing phase, we recognize revenue when we receive payment for a real estate transaction closed with a Flex lead. We will continuously reevaluate this determination and the point at which we may begin to estimate variable consideration and record revenue as performance obligations are transferred.
Other Revenue. Other IMT revenue primarily includes revenue generated by Zillow Group Rentals,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 Groupprofessionals. Rentals revenue includes our rentals marketplacethe sale of advertising and a suite of tools forto rental professionals.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 lease andclick, cost per click generated basis whereby welease, cost per listing or cost per impression basis. We recognize revenue as leads, clicks and impressions are deliveredprovided to rental professionals, or as rental listings are published on our mobile applications and websites, which is the amount for which we have the right to invoice. The number of leases generated through our rentals pay per lease product during the period is accounted for as variable consideration, and we estimate the amount of variable consideration based on the expected number of qualified leases are confirmed. 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 customer has the right to access and submit the rental application.
Our new construction marketing solutions allow
homebuildershome builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis,
wherebyand revenue is recognized
based on the contractual spend on a straight-line basis during the contractual period over which the
servicescommunities are
delivered.advertised on our mobile applications and websites. New construction revenue also includes revenue generated on a cost per impression basis whereby we recognize revenue as impressions are delivered to users interacting with our mobile applications and websites, which is the amount for which we have the right to invoice. Consideration for new construction products is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.
Mortgages Segment
Mortgages Revenue.Mortgages revenue primarily includes marketing products sold to mortgage professionals on a cost per lead basis, including our Long FormCustom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service, revenue generated by Zillow Home Loans, our affiliated mortgage lender, and revenue generated by Mortech. Zillow Group operates Custom Quote and Connect through its wholly owned subsidiary, Zillow Group Marketplace, Inc., a licensed mortgage broker. For our Connect and Custom Quote services. cost per lead marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through our mortgages platform, which is the amount for which we have the right to invoice. For our subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, we contact a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend recognized on a straight-line basis during the contractual period over which the service is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.
Mortgage origination revenue recorded within our Mortgages segment reflects both origination fees and the corresponding sale, or expected future sale, of a loan. When an interest rate lock commitment is made to a customer, we record the expected gain on sale of the mortgage, plus the estimated earnings from the expected sale of the associated servicing rights, adjusted for a pull-through percentage (which is defined as the likelihood that an interest rate lock commitment will be originated), as revenue. Revenue from loan origination fees is recognized at the time the related real estate transactions are completed, usually upon the close of escrow and when we fund mortgage loans. Once funded, mortgage loans held for sale are recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loan is sold. Net origination costs and fees associated with mortgage loans are recognized as incurred. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers.
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 seriesprovided.
Cost of Revenue. Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries, benefits, bonuses and share-based compensation expense, and bonuses, as well as credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships, depreciation expense and costs associated with the operation ofhosting our data center and mobile applications and websites. For our Homes segment, our cost of revenue also consists of the consideration paid to acquire and make certain repairs and updates to each home, including associated overhead costs, as well as inventory valuation adjustments. For our IMT and Mortgages segments, cost of revenue also includes credit card fees and ad serving costs paid to third parties. For our Mortgages segment, our cost of revenue also consists of direct costs to originate loans, including underwriting and processing costs.
Sales and Marketing.Sales and marketing expenses consist of advertising costs and other sales expenses related to promotional and marketing activities, as well as headcount expenses, including salaries, commissions, benefits, bonuses and share-based compensation expense and bonuses for sales, sales support, customer support, marketing and public relations employees and depreciation expense. For our Homes segment, sales and marketing expenses also consist of selling costs, such as real estate agent commissions, escrow and title fees, and staging costs, as well as holding costs incurred during the period that homes are listed for sale, including utilities, taxes and maintenance. During the three months ended March 31, 2020, Homes segment expenses also include certain expenses attributable to our efforts to pause home buying in response to the COVID-19 pandemic. For our Mortgages segment, sales and marketing expenses include headcount expenses for loan officers and specialists supporting Zillow Home Loans.
Technology and Development.Technology and development expenses consist of headcount expenses, including salaries, benefits, bonuses and share-based compensation expense and bonuses for salaried employees and contractorsindividuals engaged in the design, development and testing of our products, mobile applications and websites and equipmentthe tools and maintenance costs.applications that support our products. Technology and development expenses also include amortization costs related to capitalized website and development activities, amortization of software, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our mobile applications and websites, and amortization of intangible assets recorded in connection with acquisitions, including developed technology and customer relationships, amongst others. Technologyothers, equipment and development expenses also includemaintenance costs and depreciation expense.
General and Administrative.General and administrative expenses consist of headcount expenses, including salaries, benefits, bonuses and share-based compensation expense and bonuses for executive, finance, accounting, legal, human resources, recruiting, corporate information technology costs and other administrative support. General and administrative expenses also include legal settlement costs and estimated legal liabilities, legal, accounting and other third-party professional service fees, rent expense, depreciation expense and bad debt expense.Acquisition-related
Impairment Costs. Impairment costs for the three months ended March 31, 2020 consist of a $71.5 million non-cash impairment related to the Trulia trade names and trademarks intangible asset and a $5.3 million non-cash impairment related to our October 2016 equity investment. For additional information about the impairments, see Note 9 and Note 10 to our condensed consolidated financial statements.
Integration Costs.Acquisition-relatedIntegration costs consist of investment banking, legal, accounting, tax,expenses incurred to incorporate operations, systems, technology and regulatory filing fees associatedrights and responsibilities of acquired companies, during both pre-closing and post-closing periods, into Zillow Group’s business. For the three months ended March 31, 2019, integration costs primarily include consulting-related expenses incurred in connection with acquisitions.the integration of Zillow Home Loans.
Other income consists primarily of interest income earned on our cash, cash equivalents and short-term investments.
For our Mortgages segment, Other income includes interest income earned on mortgage loans held for sale.
Our corporate interest expense consists of interest on theTrulia’s convertible senior notes due in 2020 Notesthat we guaranteed in connection with our February 2015 acquisition of Trulia, and interest on the convertible senior notes due in 2021, 2023, 2024 and 2026. Our corporate interest expense also includes the amortization of the debt discount and deferred issuance costs for the convertible senior notes due in 2021, 2023, 2024 and 2026. Refer to Note 12 of our Notes we issuedto Condensed Consolidated Financial Statements in December 2016. Interest is payablePart I of this Quarterly Report on Form 10-Q for stated interest rates and interest payment dates for each of our convertible senior notes.
For our Homes segment, interest expense includes interest on borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on the 2020 Notescredit facilities related to our Zillow Offers business. Borrowings on these credit facilities bear interest at the rate of 2.75% semi-annually on June 15 and December 15 of each year. Interest is payableone-month LIBOR plus an applicable margin as defined in the credit agreements.
For our Mortgages segment, interest expense includes interest on the
2021 Noteswarehouse lines of credit and beginning in the fourth quarter of 2019, interest on the master repurchase agreement, related to our Zillow Home Loans business. Borrowings on the warehouse lines of credit and master repurchase agreement bear interest at the
rate of 2.00% semi-annually on June 1 and December 1 of each year.one-month LIBOR plus an applicable margin as defined in the agreements.
We are subject to federal and state income taxes in the United States and
federal and provincial income taxes in Canada.
During the threeAs of March 31, 2020 and
nine month periods ended September 30, 2017, and 2016,December 31, 2019, 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 isare not more likely than not
(a likelihood of more than 50%) that some or all of the deferred tax assets will notto be realized. Therefore, no material
relatedcurrent tax liability or expense has been recorded in the
condensed consolidated financial statements.
We have accumulated federal tax losses of approximately $1,137.6 million as of December 31, 2019, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $34.3 million (tax effected) as of December 31, 2019.
We recorded an income tax benefit of $9.2 million for the three months ended March 31, 2020. The income tax benefit was a result of a $9.7 million income tax benefit related to the $71.5 million non-cash impairment we recorded during the three months ended March 31, 2020 related to the Trulia trade names and trademarks intangible asset. For additional information about the non-cash impairment, see Note 10 to our condensed consolidated financial statements. This income tax benefit was partially offset by an immaterial amount of state income tax expense recorded for the three months ended March 31, 2020.
Given the unprecedented uncertainty surrounding COVID-19, including the unknown duration and severity of the pandemic and related economic disruption and the unknown overall impact on customer demand, we are unable to forecast the full impact on our business. As a result, financial performance for prior and current 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 March 31, | | |
| 2020 | | 2019 |
Statements of Operations Data: | | | |
Revenue: | | | |
Homes | $ | 769,873 | | | $ | 128,472 | |
IMT | 330,666 | | | 298,272 | |
Mortgages | 25,282 | | | 27,360 | |
Total revenue | 1,125,821 | | | 454,104 | |
Cost of revenue (exclusive of amortization) (1)(2): | | | |
Homes | 732,199 | | | 122,419 | |
IMT | 24,318 | | | 24,251 | |
Mortgages | 5,155 | | | 4,678 | |
Total cost of revenue | 761,672 | | | 151,348 | |
Sales and marketing (1) | 204,648 | | | 161,587 | |
Technology and development (1) | 134,918 | | | 107,770 | |
General and administrative (1) | 92,285 | | | 95,774 | |
Impairment costs | 76,800 | | | | — | |
Integration costs | — | | | | 352 | |
Total costs and expenses | 1,270,323 | | | 516,831 | |
Loss from operations | (144,502) | | | (62,727) | |
Other income | 9,593 | | | 9,168 | |
Interest expense | (37,592) | | | (16,466) | |
Loss before income taxes | (172,501) | | | (70,025) | |
Income tax benefit | 9,228 | | | 2,500 | |
Net loss | $ | (163,273) | | | $ | (67,525) | |
Net loss per share — basic and diluted | $ | (0.78) | | | $ | (0.33) | |
Weighted-average shares outstanding — basic and diluted | 210,674 | | | 204,514 | |
Other Financial Data: | | | |
Segment loss before income taxes: | | | |
Homes segment | $ | (97,958) | | | $ | (45,205) | |
IMT segment | (41,507) | | | (11,452) | |
Mortgages segment | (13,145) | | | (9,616) | |
Total segment loss before income taxes | $ | (152,610) | | | $ | (66,273) | |
Adjusted EBITDA (3): | | | |
Homes segment | $ | (74,995) | | | $ | (34,524) | |
IMT segment | 85,717 | | | 61,047 | |
Mortgages segment | (5,603) | | | (2,601) | |
Total Adjusted EBITDA | $ | 5,119 | | | $ | 23,922 | |
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
(1) Includes share-based compensation as follows: | | | |
Cost of revenue | $ | 1,173 | | | $ | 881 | |
Sales and marketing | 6,993 | | | 5,650 | |
Technology and development | 18,917 | | | 15,508 | |
General and administrative | 16,712 | | | 44,085 | |
Total | $ | 43,795 | | | $ | 66,124 | |
(2) Amortization of website development costs and intangible assets included in technology and development | $ | 17,184 | | | $ | 14,400 | |
(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 loss before income taxes for each segment. | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
Percentage of Revenue: | | | |
Revenue: | | | |
Homes | 68 | % | | 28 | % |
IMT | 29 | | | 66 | |
Mortgages | 2 | | | 6 | |
Total revenue | 100 | | | 100 | |
Cost of revenue (exclusive of amortization): | | | |
Homes | 65 | | | 27 | |
IMT | 2 | | | 5 | |
Mortgages | — | | | 1 | |
Total cost of revenue | 68 | | | 33 | |
Sales and marketing | 18 | | | 36 | |
Technology and development | 12 | | | 24 | |
General and administrative | 8 | | | 21 | |
Impairment costs | 7 | | | 0 | |
Integration costs | 0 | | | — | |
Total costs and expenses | 113 | | | 114 | |
Loss from operations | (13) | | | (14) | |
Other income | 1 | | | 2 | |
Interest expense | (3) | | | (4) | |
Loss before income taxes | (15) | | | (15) | |
Income tax benefit | 1 | | | 1 | |
Net loss | (15) | % | | (15) | % |
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 loss before income
(loss),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 aas they are key metricmetrics used by our management and board of directors to measure operating performance and trends and to prepare and
approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.
Our use of Adjusted EBITDA
in total and for each segment has limitations as an analytical tool, and you should not consider
itthese measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;
•Although depreciation and amortization 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 acquisition-relatedimpairment 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, loss before income
(loss)taxes for each segment and our other GAAP results.
The following
table presentstables present a reconciliation of Adjusted EBITDA to
the most directly comparable GAAP financial measure, which is net
loss on a consolidated basis and loss before income
(loss)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 March 31, 2020 | | | | | | | | |
| 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 | | | $ | (163,273) | |
Income tax benefit | N/A | | | N/A | | | N/A | | | N/A | | | (9,228) | |
Loss before income taxes | $ | (97,958) | | | $ | (41,507) | | | $ | (13,145) | | | $ | (19,891) | | | $ | (172,501) | |
Other income | — | | | — | | | (202) | | | (9,391) | | | (9,593) | |
Depreciation and amortization expense | 3,575 | | | 23,777 | | | 1,674 | | | — | | | 29,026 | |
Share-based compensation expense | 11,304 | | | 29,547 | | | 2,944 | | | — | | | 43,795 | |
Impairment costs | — | | | 73,900 | | | 2,900 | | | — | | | 76,800 | |
Interest expense | 8,084 | | | — | | | 226 | | | 29,282 | | | 37,592 | |
Adjusted EBITDA | $ | (74,995) | | | $ | 85,717 | | | $ | (5,603) | | | $ | — | | | $ | 5,119 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 | | | | | | | | |
| 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 | | | $ | (67,525) | |
Income tax benefit | N/A | | | N/A | | | N/A | | | N/A | | | (2,500) | |
Loss before income taxes | $ | (45,205) | | | $ | (11,452) | | | $ | (9,616) | | | $ | (3,752) | | | $ | (70,025) | |
Other income | — | | | — | | | (313) | | | (8,855) | | | (9,168) | |
Depreciation and amortization expense | 1,321 | | | 17,594 | | | 1,610 | | | — | | | 20,525 | |
Share-based compensation expense | 5,602 | | | 54,905 | | | 5,617 | | | — | | | 66,124 | |
Interest expense | 3,758 | | | — | | | 101 | | | 12,607 | | | 16,466 | |
Adjusted EBITDA | $ | (34,524) | | | $ | 61,047 | | | $ | (2,601) | | | $ | — | | | $ | 23,922 | |
(1) We use 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, 2017March 31, 2020 Compared to Three Months Ended
September 30, 2016March 31, 2019
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 March 31, | | | | 2019 to 2020 % Change |
| 2020 | | 2019 | | |
Homes revenue: | | | | | | | | |
Zillow Offers | $ | 769,112 | | | $ | 128,472 | | | 499 | % |
Other | 761 | | | — | | | N/A | |
Total Homes revenue | 769,873 | | | 128,472 | | | 499 | % |
IMT revenue: | | | | | |
Premier Agent | 242,106 | | | 217,735 | | | 11 | % |
Other | 88,560 | | | 80,537 | | | 10 | % |
Total IMT revenue | 330,666 | | | 298,272 | | | 11 | % |
Mortgages | 25,282 | | | 27,360 | | | (8) | % |
Total revenue | $ | 1,125,821 | | | $ | 454,104 | | | 148 | % |
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 March 31, | | |
| 2020 | | 2019 |
Percentage of Total Revenue: | | | |
Homes revenue: | | | | | |
Zillow Offers | 68 | % | | 28 | % |
Other | — | | | 0 | |
Total Homes revenue | 68 | | | 28 | |
IMT revenue: | | | |
Premier Agent | 22 | | | 48 | |
Other | 8 | | | 18 | |
Total IMT revenue | 29 | | | 66 | |
Mortgages | 2 | | | 6 | |
Total revenue | 100 | % | | 100 | % |
Total revenue increased by $57.2$671.7 million, or 25%148%, for the three months ended September 30, 2017March 31, 2020 compared to the three months ended September 30, 2016. MarketplaceMarch 31, 2019. The increase in total revenue was primarily attributable to our Zillow Offers business. Total Homes segment revenue grew to $769.9 million for the three months ended March 31, 2020 from $128.5 million for the three months ended March 31, 2019, an increase of $641.4 million. This was primarily driven by an increase in the number of homes sold to 2,394 for the three months ended March 31, 2020 compared to 414 for the three months ended March 31,2019. Visits increased by 27%, and display revenue increased by 8%.5% to 2,117.6 million for the three months ended March 31, 2020 from 2,019.8 million for the three months ended March 31, 2019. There were approximately 175.2192.5 million average monthly unique users of our mobile applications and websites for the three months ended September 30, 2017March 31, 2020 compared to 164.5181.1 million average monthly unique users for the three months ended September 30, 2016,March 31, 2019, representing year-over-year growth of 6%. This increaseThe increases in visits and unique users increased the number of impressions, leads, clicks and clicksother events we monetized inacross our marketplace and display revenue categories. In connection with the hurricanes that occurred during the summer
Homes Segment
Zillow Offers Revenue. Zillow Offers revenue by more than $0.8 million for the quarterly period ended September 30, 2017. We expect Premier Agent revenue forthe 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 $262.7was $769.1 million for the three months ended September 30, 2017 from $206.9March 31, 2020 due to the sale of 2,394 homes at an average selling price of $321.3 thousand per home. For the three months ended March 31, 2019, Zillow Offers revenue was $128.5 million due to the sale of 414 homes at an average selling price of $310.4 thousand per home. The increase in Zillow Offers revenue was due to an increase in the number of homes sold in the period as customer adoption of Zillow Offers increased in geographic areas in which it is currently operating and as Zillow Offers expanded into new geographic markets. As of March 31, 2020, Zillow Offers had operations in 24 metropolitan areas.
Beginning on March 23, 2020, as part of Zillow Group’s ongoing efforts to protect the health and safety of our employees, customers, partners and business in light of COVID-19, we have paused home buying activities in all Zillow Offers markets. Although we continue to update, list and sell homes in inventory, where possible, we expect this pause in home buying will result in a material decrease in Zillow Offers revenue in the future until we resume home buying activities. We are developing plans for restoring Zillow Offers home buying at a graduated pace and expect to begin home buying within the next few weeks. However, given the unknown duration and severity of the COVID-19 pandemic and related economic disruption, we do not know when we will resume home buying activities through Zillow Offers in all markets or how quickly the business will re-accelerate once we resume Zillow Offers full operations.
Other Revenue. Other revenue within the Homes segment was $0.8 million for the three months ended September 30, 2016, an increaseMarch 31, 2020 and relates to revenue generated by Zillow Closing Services which launched in the second half of $55.8 million. Marketplace2019.
IMT Segment
Premier Agent Revenue. Premier Agent revenue represented 93% of total revenuegrew to $242.1 million for the three months ended September 30, 2017 compared to 92% of total revenueMarch 31, 2020 from $217.7 million for the three months ended September 30, 2016. TheMarch 31, 2019, an increase in marketplace revenue was primarily attributable to the $38.7of $24.4 million, or 24%, increase in Premier Agent revenue.11%. Premier Agent revenue was positively impacted by an increase in visits. VisitsAs discussed above, visits increased 19%5% to 1,667.12,117.6 million for the three months ended September 30, 2017March 31, 2020 from 1,403.82,019.8 million for the three months ended September 30, 2016. ThisMarch 31, 2019. The increase in visits increased the number of impressions and leads we could monetize in our Premier Agent marketplace.
Premier Agent revenue per visit increased by
5%6% to
$0.118$0.114 for the three months ended
September 30, 2017March 31, 2020 from
$0.113$0.108 for the three months ended
September 30, 2016.March 31, 2019. 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
Premier Agent revenue was also positively impacted by the full implementation of the new pricing method for our Premier Agent product, which may have increased the demand for our advertising platform. As discussed above, during the year ended December 31, 2016, we began meaningful testing and implementation of a new auction-based pricing method for our Premier Agent product, our flagship 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. We believe the increase in Premier Agent revenue
per visit 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%primarily a result of improved advertiser retention for the three months ended
September 30, 2017 as comparedMarch 31, 2020 in comparison to the three months ended
September 30, 2016.The increase in marketplace revenue was also attributableMarch 31, 2019. In 2018, we transitioned to growth in other real estate revenue,a new lead validation and distribution process for Premier Agent and Premier Broker advertisers which increased by $16.0 million,advertiser churn, or 55%,reduction in spend or exit from the platform, in the third and fourth quarters of 2018. In 2019, we made adjustments to the Premier Agent and
Premier Broker programs to help address this churn. However, for the three months ended September 30, 2017 comparedMarch 31, 2019, the increased advertiser churn continued to negatively impact Premier Agent revenue and revenue per visit.
Premier Agent revenue for the three months ended September 30, 2016.March 31, 2020 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 plan to continue testing this pricing model in select markets with high-performing partners in the future.
In response to the rapidly unfolding situation regarding COVID-19 and to actively support our Premier Agent partners during this period of uncertainty, effective March 23, 2020, we offered Premier Agent advertisers who participate in our market-based pricing program a 50% discount on their next monthly bill. This discount also applied to any new bookings through April 22, 2020. Beginning April 23, 2020, we have provided, and expect to continue to provide, targeted market-based discounts, throughout the second quarter. We expect the combined impact of these discounts to negatively affect Premier Agent revenue in the second quarter of 2020.
Other Revenue. Other IMT revenue was $88.6 million for the three months ended March 31, 2020 compared to $80.5 million for the three months ended March 31, 2019, an increase of $8.0 million, or 10%. The increase in other real estateOther revenue was primarily a result of a 56%16% increase in revenue generated by Zillow Group Rentals.our rentals marketplace. Growth in Zillow Group Rentalsrentals revenue was primarily attributable to increases in consumerthe adoption of our rentals information marketplaces, which in turnapplication product and increased the likelihood of a lead, lease, or click that we monetize, and advertiser adoption ofspend on 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.product. Other real estate revenue was also positively impacted by increased advertising sales to new home builders through our New Construction platform.Thea 20% increase in marketplacerevenue generated by our new construction marketing solutions. Growth in new construction revenue was also attributableprimarily related to growthhigher spend in mortgagesour cost per impression product.
In response to the COVID-19 pandemic, we have offered temporary discounts on certain of our other IMT products to help mitigate the impact of the virus on our customers and expect to continue to provide certain additional discounts throughout the second quarter. We expect these discounts to negatively impact other IMT revenue which increased by $1.1in the second quarter of 2020.
Mortgages Segment
MortgagesRevenue. Mortgages revenue was $25.3 million or 6%, for the three months ended SeptemberMarch 31, 2020 compared to $27.4 million for the three months ended March 31, 2019, a decrease of $2.1 million, or 8%. The majority of the decrease in mortgages revenue was a result of a decrease in revenue generated by Zillow Home Loans as we continue to strategically transition our loan offerings from higher margin Federal Housing Administration and Veterans Affairs government loans to more conventional loan products eligible for sale to Fannie Mae and Freddie Mac in order to ultimately serve a larger total addressable market.
We expect our mortgages revenue to decrease during the three months ended June 30, 20172020 compared to the three months ended September 30, 2016. The increase in mortgages revenue wasMarch 31, 2020 primarily as a result of a 31% increasediscounts offered beginning toward the end of March 2020 for our Connect service in our average revenue per loan information requestresponse to the COVID-19 pandemic. While the impact of these discounts was not significant for the three months ended September 30, 2017 comparedMarch 31, 2020, we expect these discounts to the three 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 monetizeadversely impact our mortgages products more efficiently. There were approximately 5.5 million mortgage loan information requests submitted by consumersrevenue for the three months ended SeptemberJune 30, 2017 compared2020.
Three Months Ended March 31, 2020 Compared to 6.9 million mortgage loan information requests submitted by consumersThree Months Ended March 31, 2019
Segment Results of Operations
The following table presents Zillow Group’s segment results for the three months ended September 30, 2016, a decreaseperiods presented (in thousands, unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | | | | | | Three Months Ended March 31, 2019 | | | | |
| Homes | | IMT | | Mortgages | | Homes | | IMT | | Mortgages |
Revenue | $ | 769,873 | | | $ | 330,666 | | | $ | 25,282 | | | $ | 128,472 | | | $ | 298,272 | | | $ | 27,360 | |
Costs and expenses: | | | | | | | | | | | |
Cost of revenue | 732,199 | | | 24,318 | | | 5,155 | | | 122,419 | | | 24,251 | | | 4,678 | |
Sales and marketing | 71,589 | | | 120,173 | | | 12,886 | | | 20,862 | | | 126,654 | | | 14,071 | |
Technology and development | 32,538 | | | 95,028 | | | 7,352 | | | 12,281 | | | 87,969 | | | 7,520 | |
General and administrative | 23,421 | | | 58,754 | | | 10,110 | | | 14,357 | | | 70,850 | | | 10,567 | |
Impairment costs | — | | | 73,900 | | | 2,900 | | | — | | | — | | | — | |
Integration costs | — | | | — | | | — | | | — | | | — | | | 352 | |
Total costs and expenses | 859,747 | | | 372,173 | | | 38,403 | | | 169,919 | | | 309,724 | | | 37,188 | |
Loss from operations | (89,874) | | | (41,507) | | | (13,121) | | | (41,447) | | | (11,452) | | | (9,828) | |
Other income | — | | | — | | | 202 | | | — | | | — | | | 313 | |
Interest expense | (8,084) | | | — | | | (226) | | | (3,758) | | | — | | | (101) | |
Loss before income taxes (1) | $ | (97,958) | | | $ | (41,507) | | | $ | (13,145) | | | $ | (45,205) | | | $ | (11,452) | | | $ | (9,616) | |
(1) The following table presents the reconciliation of 20%. We believetotal segment loss before income taxes to consolidated loss before income taxes for the decrease in the numberperiods presented (in thousands, unaudited):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
Total segment loss before income taxes | $ | (152,610) | | | $ | (66,273) | |
Corporate interest expense | (29,282) | | | (12,607) | |
Corporate other income | 9,391 | | | 8,855 | |
Consolidated loss before income taxes | $ | (172,501) | | | $ | (70,025) | |
Homes Segment
Cost of loan information requests submitted by consumers is due to our strategic decision to improve loan information request quality by requiring consumers to provide more information before a loan information request is submitted. We believe our mortgage product feature change creates a better experience for consumers and more valuable loan information requests for our lender advertisers.DisplayRevenue.
Cost of revenue was $19.1$732.2 million for the three months ended September 30, 2017March 31, 2020 compared to $17.7$122.4 million for the three months ended September 30, 2016,March 31, 2019, an increase of $1.4$609.8 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 increasehome acquisition and renovation costs related to the 2,394 homes that we sold during the period compared to the sale of 414 homes during the three months ended March 31, 2019. Due to the pause in revenue share costs, a $1.4 million increaseZillow Offers home buying activities that began on March 23, 2020 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. Weresponse to the COVID-19 pandemic, we expect our cost of revenue to increasedecrease in absolute dollars in the future years as we continueexpect to incur more expenses that are associated with growth in revenue.
resell fewer homes until we resume home-buying activities.
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$71.6 million for the three months ended September 30, 2017March 31, 2020 compared to $93.2$20.9 million for the three months ended September 30, 2016,March 31, 2019, an increase of $13.9 million, or 15%.$50.7 million. The increase in sales and marketing expenses was primarily attributable to increased marketing and advertisinga $27.5 million increase in selling expenses of $6.8 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 additionattributable to the increasesresale of homes, an $11.3 million increase in headcount-related expenses, including share-based compensation expense, $5.7 million in expenses attributable to our efforts to pause home buying in response to the COVID-19 pandemic, a $3.0 million increase in holding costs and a $2.1 million increase 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 salesexpenses.
Sales and marketing expenses was also attributableinclude $5.3 million in holding costs for the three months ended March 31, 2020 and $2.3 million in holding costs for the three months ended March 31, 2019.
Due to
a $1.4 million increasethe pause in
consulting costsZillow Offers home buying activities beginning on March 23, 2020 in response to
support our advertising initiatives and a $0.7 million increase in various miscellaneous expenses. Wethe COVID-19 pandemic, we expect
our sales and marketing expenses to
increasedecrease in absolute dollars in
the future
years as we
continueexpect to
expand our sales teamhold and
invest more resources in extending our audience through marketing and advertising initiatives.resell fewer homes until we resume home-buying activities.
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$32.5 million for the three months ended September 30, 2017March 31, 2020 compared to $64.5$12.3 million for the three months ended September 30, 2016,March 31, 2019, an increase of $18.9$20.3 million. The increase in technology and development expenses was primarily due to a $16.4 million or 29%. Approximately $13.2 million of the increase related to growth in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering teams to support currentthe Homes segment, a $2.0 million increase in depreciation and future product initiatives.amortization expense, a $0.7 million increase in data acquisition costs and a $0.5 million increase in software and hardware costs. General and Administrative. General and administrative expenses were $23.4 million for the three months ended March 31, 2020 compared to $14.4 million for the three months ended March 31, 2019, an increase of $9.0 million. The increase in general and administrative expenses was primarily due to a $5.8 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 $3.6$1.3 million increase in other non-capitalizable data content expense,building lease-related expenses including rent, utilities and insurance, a $1.4$0.7 million increase in the amortization of purchased data content intangible assets,software and hardware costs and a $0.7 million increase in various miscellaneous expenses.Amortizationbusiness related taxes.
Interest Expense. Interest expense included in technology and development for capitalized website development costs and software was $11.2$8.1 million and $11.3 million, respectively, for the three months ended September 30, 2017 and 2016. Amortization expense included in technology and development relatedMarch 31, 2020 compared to intangible assets recorded in connection with acquisitions was $9.8$3.8 million and $9.6 million, respectively, for the three months ended September 30, 2017 and 2016. Other data contentMarch 31, 2019, an increase of $4.3 million. The increase in interest expense was $10.1attributable to borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our credit facilities.
Due to the pause in Zillow Offers home buying activities beginning on March 23, 2020 in response to the COVID-19 pandemic, we expect interest expense to decrease in absolute dollars in the future as we reduce the number of homes financed on our credit facilities until we resume home-buying activities.
IMT Segment
Cost of Revenue. Cost of revenue remained flat at $24.3 million and $6.5 million, respectively, for the three months ended September 30, 2017March 31, 2020 and 2016. Amortization expense included in technology2019. This was primarily due to cost saving measures put into place to scale our businesses efficiently while continuing to support revenue growth.
Sales and development for purchased data content intangible assets was $2.5Marketing. Sales and marketing expenses were $120.2 million and $1.1 million, respectively, for the three months ended September 30, 2017March 31, 2020 compared to $126.7 million for the three months ended March 31, 2019, a decrease of $6.5 million, or 5%. The decrease in sales and 2016.marketing expenses was primarily attributable to a $10.3 million decrease in marketing and advertising expenses and a $1.2 million decrease in travel expenses as we paused non-essential travel for workers in response to the COVID-19 pandemic. The decrease in sales and marketing expenses was partially offset by a $3.3 million increase in depreciation expense and a $2.0 million increase in headcount related expenses, including stock-compensation expense. Due to the pause of most advertising spend in response to the COVID-19 pandemic, we expect sales and marketing expenses to decrease in absolute dollars in future periods.
Technology and Development. Technology and development expenses, which include research and development costs, were $95.0 million for the three months ended March 31, 2020 compared to $88.0 million for the three months ended March 31, 2019, an increase of $7.1 million, or 8%. Approximately $3.1 millionof the increase related to growth in headcount-related expenses, including share-based compensation expense. In addition, there was a $2.9 million increase in depreciation and amortization expense and a $2.4 million increase in data acquisition costs, partially offset by a $1.3 million decrease in professional services.
General and Administrative. General and administrative expenses were $58.8 million for the three months ended March 31, 2020 compared to $70.9 million for the three months ended March 31, 2019, a decrease of $12.1 million, or 17%. The decrease in general and administrative expenses for the three months ended March 31, 2020 was primarily due to a $21.9 million decrease in headcount-related expenses driven by the recognition of $23.3 million of share-based compensation expense in the IMT segment in 2019 in connection with the modification of certain outstanding equity awards related to the departure of Spencer Rascoff in February 2019, who served as Zillow Group’s Chief Executive Officer beginning in 2010. For additional information regarding the equity modification, see Note 14 in our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. This decrease in general and administrative expenses was offset by an increase in estimated legal liabilities of approximately $3.7 million, a $2.0 million increase in building lease-related expenses, including rent, utilities and insurance, a $1.9 increase in business related taxes, a $0.7 million increase in professional services expenses and a $0.5 million increase in credit loss expense.
Impairment Costs. Impairment costs recorded to the IMT segment for the three months ended March 31, 2020 consist of $68.6 million of the total $71.5 million non-cash impairment related to the Trulia trade names and trademarks intangible asset and a $5.3 million non-cash impairment related to our October 2016 equity investment. For additional information about these
impairments, see Note 9 and Note 10 in our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
Mortgages Segment
Cost of Revenue. Cost of revenue was $5.2 million for the three months ended March 31, 2020 compared to $4.7 million for the three months ended March 31, 2019, an increase of $0.5 million, or 10%. The increase in cost of revenue was primarily attributable to a $0.8 million increase in headcount-related expenses, including share-based compensation expense, partially offset by a $0.3 million decrease in miscellaneous expenses. We expect cost of revenue to increase in absolute dollars in future periods as we continue to incur expenses associated with growth in revenue and expansion of Zillow Home Loans.
Sales and Marketing. Sales and marketing expenses were $12.9 million for the three months ended March 31, 2020 compared to $14.1 million for the three months ended March 31, 2019, a decrease of $1.2 million, or 8%. The decrease in sales and marketing expenses was primarily attributable to a $1.5 million decrease in marketing and advertising expenses. We expect our sales and marketing expenses to decrease in absolute dollars in future periods due to the pause in marketing spend in response to the COVID-19 pandemic.
Technology and Development. Technology and development expenses, which include research and development costs, were $7.4 million for the three months ended March 31, 2020 compared to $7.5 million for the three months ended March 31, 2019, a decrease of 2%. The decrease in technology and development expenses was primarily a result of a $0.6 milliondecrease in data acquisition costs, partially offset by a $0.5 million increase in headcount-related expenses, including share-based compensation expense. We expect our technology and development expenses to increase in absolute dollars over timein future periods as we continue to build new mobilewebsite functionality and website functionality.other technologies that will facilitate the origination of mortgages in Zillow Home Loans.
General and 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$10.1 million for the three months ended September 30, 2017March 31, 2020 compared to $42.6$10.6 million for the three months ended September 30, 2016, an increaseMarch 31, 2019, a decrease of $11.6$0.5 million, or 27%4%. The increasedecrease in general and administrative expenses was primarily due in part to a $3.6$1.2 million decrease in headcount-related expenses, including share-based compensation expense. This decrease was partially offset by a $0.3 million increase in estimated legal liabilities,expenses and a $1.9 million increase in city and state taxes, a $1.8$0.2 million increase in building lease-related expenses including rent, utilities and insurance, a $1.4 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.insurance. 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 | % |
Acquisition-related
Impairment Costs. Impairment costs were $0.2recorded to the Mortgages segment for the three months ended March 31, 2020 consist of $2.9 million of the total $71.5 million impairment related to the Trulia trade names and trademarks intangible asset. For additional information about this impairment, see Note 10 in our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
Corporate Items
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.
Interest Expense. Interest expense was $29.3 million for the three months ended September 30, 2017, primarily as a result of our September 2017 acquisition of New Home Feed, including legal and accounting fees. Acquisition-related costs were $0.1March 31, 2020 compared to $12.6 million for the three months ended March 31, 2019, an increase of $16.7 million, or 132%. This increase was primarily due to the September 30, 2016, primarily as a result2019 issuance of the convertible senior notes due in 2026 and the September 2019 and October 2019 issuances of the convertible senior notes due in 2024. For additional information regarding the convertible senior notes, see Note 12 of our August 2016 acquisitionNotes to Condensed Consolidated Financial Statements in Part I of Bridge Interactive Group, including legal and accounting fees.Gainthis Quarterly Report on DivestitureForm 10-Q.
Other Income. Other income not directly attributable to any 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 | |
Thereour segments was no gain on divestiture of business for the three months ended September 30, 2017. The gain on divestiture of business of $1.3$9.4 million for the three months ended September 30, 2016 relatesMarch 31, 2020 compared to the August 2016 sale 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 was $6.9$8.9 million for the three months ended September 30, 2017, compared to $1.6 million for the three months ended September 30, 2016.
For the three months ended September 30, 2017, 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 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.
Nine Months Ended September 30, 2017 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%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Marketplace revenue increased by 31%, and display revenue increased by 3%.
Marketplace revenue grew to $741.6 million for the nine months ended September 30, 2017 from $567.4 million for the nine months ended September 30, 2016,March 31, 2019, an increase of $174.2$0.5 million. Marketplace revenue represented 93% of total revenue for the nine months ended September 30, 2017 compared to 92% of total revenue for the nine months ended September 30, 2016. The increase in marketplace revenue was primarily attributable to 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 million for the nine months ended September 30, 2017 from 4,133.5 million for the nine months ended September 30, 2016. This increase in visits increased the number of impressions we could monetize in our Premier Agent marketplace. Premier Agent revenue per visit increased by 8% to $0.115 for the nine months ended September 30, 2017 from $0.106 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, which may have increased the demand for our advertising platform. As discussed above, during the year ended December 31, 2016, we began meaningful testing and implementation of a new auction-based pricing method for our Premier Agent product, our flagship 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. There 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 million for the nine months ended September 30, 2017 compared to $51.6 million for the nine months ended September 30, 2016, an increase of $1.3 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 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
| | | | | | | | | | | | |
| | 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 million for the nine months ended September 30, 2017 compared to $50.6 million for the nine months ended September 30, 2016, an increase of $12.1 million, or 24%. The increase in cost of revenue was primarily attributable to a $6.6 million increase in revenue share costs, a $3.1 million increase in data center and connectivity costs, a $0.9 million increase 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.
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 | % |
Sales and marketing expenses were $344.3 million for the nine months ended September 30, 2017 compared to $291.9 million for the nine months ended September 30, 2016, an increase of $52.4 million, or 18%. The increase in sales and marketing expenses was primarily attributable to increased marketing and advertising expenses $30.5 million, primarily related to advertising spend to attract consumers across online and offline channels, which supports our growth initiatives.
In addition to the increases in marketing and advertising, headcount-related expenses increased $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.
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 | % |
Technology and development expenses, which include research and development costs, were $234.8 million for the nine months ended September 30, 2017 compared to $188.3 million for the nine months ended September 30, 2016, an increase of $46.5 million, or 25%. Approximately $33.1 million of 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 million increase in other non-capitalizable data content expense, a $3.8 million increase in amortization of purchased data content intangible assets, and a $2.6 million increase in various miscellaneous expenses.
Amortization expense included in technology 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.
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 | %) |
General and administrative expenses were $153.0 million for the nine months ended September 30, 2017 compared to $284.2 million for the nine months ended September 30, 2016, a decrease of $131.1 million, or 46%. The decrease in general and administrative expenses was primarily a result of the settlement of a lawsuit with Move Inc. and certain related entities (collectively, “Move”) in June 2016 whereby the Company paid $130.0 million in connection with a release 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 related to our litigation with Move for the nine months ended September 30, 2016. These decreases were partially offset by a $5.7 million increase in estimated legal liabilities, a $5.6 million increase in building lease-related expenses including rent, utilities and insurance, a $4.5 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, a $4.3 million increase in city and state taxes, a $4.1 million increase in bad debt expense, a $1.5 million increase in software and hardware costs, a $1.3 million increase in the loss on disposal of assets, and a $2.3 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 | %) |
Acquisition-related costs were approximately $0.4 million for the nine months ended September 30, 2017, primarily as a result of our January 2017 acquisition of HREO and our September 2017 acquisition of New Home Feed, including legal and accounting fees. Acquisition-related costs were $0.9 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 million for the nine months ended September 30, 2016 and relates to the August 2016 sale 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 expense was $20.5 million for the nine months ended September 30, 2017, compared to $4.7 million for the nine months ended September 30, 2016.
For the nine months ended September 30, 2017, 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.
Liquidity and Capital Resources
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, we had cash and cash equivalents, investments and restricted cash and investments of $682.0$2,617.4 million and $507.5$2,511.9 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions, money market funds and certificates of deposit with original maturities of three months or less.commercial paper. Investments as of September 30, 2017 and December 31, 2016 consistedconsist 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 credit facilities and amounts held in escrow related to funding home purchases in our mortgage origination business. Amounts on
deposit with third-party financial institutions exceed the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable. As of March 31, 2020, Zillow Group and its subsidiaries were in compliance with all debt covenants specified in the facilities described below. As previously noted, the COVID-19 pandemic and related economic disruptions have resulted in unprecedented uncertainty. While we believe we have a strong balance sheet and have taken appropriate prudent measures to preserve liquidity and maintain our customers, including pausing home buying through Zillow Offers, offering certain product discounts, pausing hiring except for critical roles, pausing the majority of our advertising spending and reducing other discretionary spending, the extent of the impact of COVID-19 on our business is highly uncertain and difficult to predict. The COVID-19 pandemic has and will continue to disrupt our revenue and operating cash flow levels and may disrupt future access to capital through debt or equity markets.
The expansion of Zillow Group’s purchase of homes through the Zillow Offers program and sale of homes on the open market has continued to have a significant impact on our liquidity and capital resources as a cash and inventory intensive business. We primarily use debt financing through credit facilities to fund a portion of the purchase price of homes and certain related costs. As previously noted, due to the pause in Zillow Offers home buying activities beginning on March 23, 2020 in response to the COVID-19 pandemic, we expect to decrease in the future the amounts drawn on our credit facilities as we reduce the number of homes financed until we resume home-buying activities. As of March 31, 2020, we have $431.8 million of total outstanding borrowings on credit facilities to provide capital for Zillow Offers with a total maximum borrowing capacity of $1,500.0 million.
As of March 31, 2020, we have outstanding a total of $2,016.4 million aggregate principal of convertible senior notes. The convertible notes are senior unsecured obligations, and interest on the convertible notes is paid semi-annually.
The October 31, 2018 acquisition of Zillow Home Loans continues to impact our liquidity and capital resources as a cash intensive business that funds mortgage loans originated for resale in the secondary market. We primarily use debt financing to fund the mortgage loan originations. As of March 31, 2020, we have $34.8 million of total outstanding borrowings on our warehouse line of credit and master repurchase agreement with a total maximum borrowing capacity of $125.0 million.
For additional information regarding our debt, see Note 12 of our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
We believe that cash from operations and cash
and cash equivalents and investment balances will be sufficient to meet our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months.
On February 17, 2015, we acquired Trulia in a stock-for-stock transaction. The total purchase price of Trulia was approximately $2.0 billion. Our February 2015 acquisition of Trulia had a significant impact on our liquidity, financial position and results of operations.
Further, as a result of the acquisition, Zillow Group entered into a supplemental indenture in respect of the 2020 Notes in the aggregate principal amount of $230.0 million, which supplemental indenture provides, among other things, that, at the effective time of the Trulia acquisition, (i) each outstanding 2020 Note is no longer convertible into shares of Trulia common stock and is convertible solely into shares of Zillow Group Class A common stock, pursuant to, and in accordance with, the terms of the indenture governing the 2020 Notes, and (ii) Zillow Group guaranteed all of the obligations of Trulia under the 2020 Notes and related indenture. The aggregate principal amount of the 2020 Notes is due on December 15, 2020 if not earlier converted or redeemed. Interest is payable on the 2020 Notes at the rate of 2.75% semi-annually on June 15 and December 15 of each year. In December 2016, the Company used approximately $370.2 million of the net proceeds from the issuance of the 2021 Notes discussed below to repurchase $219.9 million aggregate principal of the 2020 Notes in privately negotiated transactions.
Holders of the 2020 Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding the maturity date. In connection with the supplemental indenture in respect of the 2020 Notes, the conversion ratio immediately prior to the effective time of the Trulia Merger of 27.8303 shares of Trulia common stock per $1,000 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. In connection with the August 2015 distribution of shares of our Class C capital stock as a dividend to our Class A and Class B common shareholders, the conversion ratio has been further adjusted to 41.4550 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $24.12 per share of our Class A common stock. The conversion ratio will be adjusted for certain dilutive events and will be increased in the case of corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the indenture governing the notes). The conversion option of the 2020 Notes has no cash settlement provisions. The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.
The 2020 Notes are redeemable, at our option, in whole or in part on or after December 20, 2018, if the last reported sale price per share of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
For additional information regarding the 2020 Notes, see Note 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 1 and December 1 of each year, beginning on June 1, 2017. The 2021 Notes are convertible into cash, shares of our Class C capital stock or a combination thereof, at the Company’s election. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased, redeemed, or converted in accordance with their terms. The Company incurred transaction costs of approximately $12.2 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 1, 2021, the 2021 Notes are convertible at the option of the holders of the 2021 Notes only under certain conditions, none of which conditions have been satisfied as of September 30, 2017. On or after September 1, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2021 Notes may convert their 2021 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2021 Notes by paying or delivering, as the case may be, cash, shares of Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The conversion rate will initially be 19.0985 shares of Class C capital stock per $1,000 principal amount of 2021 Notes (equivalent to an initial conversion price of approximately $52.36 per share of Class C capital stock). The conversion rate is subject to customary adjustments upon the occurrence of certain events. The Company may redeem for cash all or part of the 2021 Notes, at its option, on or after December 6, 2019, under certain circumstances at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indenture governing the 2021 Notes).
We may not redeem the 2021 Notes prior to December 6, 2019. We may redeem the 2021 Notes for cash, at our option, in whole or in part on or after December 6, 2019, if the last reported sale price per share of our Class C capital stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
For additional information regarding the 2021 Notes, see Note 9 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):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
Cash Flow Data: | | | |
Net cash provided by (used in) operating activities | $ | 301,990 | | | $ | (145,514) | |
Net cash provided by investing activities | 254,341 | | | 108,304 | |
Net cash provided by (used in) financing activities | (163,102) | | | 137,869 | |
Cash Flows Provided By (Used In) Operating Activities
Our operating cash flows result primarily from cash received from real estate professionals,
mortgagerental professionals,
rentalmortgage professionals and brand
advertisers.advertisers, as well as cash received from customers for sales of homes through Zillow Offers and sales of mortgages originated by Zillow Home Loans. Our primary uses of cash from operating activities include payments for
homes purchased through Zillow Offers, marketing and advertising activities,
mortgages funded through Zillow Home Loans and employee
benefitscompensation and
compensation.benefits. Additionally, uses of cash from operating activities include costs associated with operating our mobile applications and websites and other general corporate expenditures.
For the
ninethree months ended
September 30, 2017,March 31, 2020, net cash provided by operating activities was
$176.9$302.0 million. This was primarily driven by a net loss of
$17.2$163.3 million, adjusted by
non-cash impairment costs of $76.8 million, share-based compensation expense of $43.8 million, depreciation and amortization expense of
$81.6 million, share-based compensation expense of $84.2$29.0 million, amortization of the discount and issuance costs on the
convertible notes maturing in 2021,
Notes2023, 2024 and 2026 of
$13.4$22.5 million,
an increasea $9.2 million change in
bad debt expensedeferred income taxes, amortization of
$5.9contract cost assets of $8.4 million,
amortization of right of use assets of $6.5 million and a loss on disposal of property and equipment of
$4.1 million, and a change in deferredrent of $3.1$2.0 million. Changes in operating assets and liabilities increased cash
provided by operating activities by $1.6$285.0 million. The changes in operating assets and liabilities are primarily related to a $302.6 million decreasein inventory due to the sale of homes and a decrease in home purchases through Zillow Offers during the three months ended March 31, 2020, a $9.8 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $7.7 million increase in accounts payable and a $4.6 million increase in accrued expenses and other liabilities driven by the timing of payments, a $5.3 million increase in accounts receivable due primarily to an increase in revenue, a $5.0 million decrease in accrued compensation and benefits, a $4.4 million decrease in deferred revenue and a $2.9 million increase in prepaid expenses and other current assets driven primarily by the timing of payments.
For the three months ended March 31, 2019, net cash provided by operating activities was $145.5 million. This was primarily driven by a net loss of $67.5 million, adjusted by share-based compensation expense of $66.1 million, depreciation and amortization expense of $20.5 million, amortization of the discount and issuance costs on the convertible senior notes maturing in 2023 and 2021 of $8.8 million, amortization of contract cost assets of $8.7 million, amortization of right of use assets of $4.4 million, a $2.5 million change in deferred income taxes, accretion of bond discount of $1.7 million, and a loss on disposal of property and equipment of $1.7 million. Changes in operating assets and liabilities decreased cash provided by operating activities by $184.3 million. The changes in operating assets and liabilities are primarily due to a
$19.3$162.3 million increase in inventory due to the purchase of homes through Zillow Offers, a $9.1 million increase in contract cost assets due primarily to the capitalization of sales commissions, an $8.5 million increase in prepaid expenses and other assets driven primarily by the timing of payments, a $7.0 million increase in lease liabilities, and a $4.7 million increase in accounts receivable due primarily to an increase in revenue,
partially offset by a
$13.2 million increase in accrued expenses and other current liabilities and a $4.4$5.9 million decrease in
prepaid expenses and other assets driven primarily by the timing of payments.For the nine months ended September 30, 2016, net cash used in operating activities was $30.4 million. This was primarily driven by a net loss of $196.9 million, including the impact of the settlement of a lawsuitmortgage loans held for $130.0 million in June 2016, adjusted by share-based compensation expense of $81.2 million, depreciation and amortization expense of $74.9 million, 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. Changes in operating assets and liabilities increased cash provided by operating activities by $6.6 million. The increase in operating assets and liabilities is primarily due to a $13.0 million increase in accrued compensation and benefits due primarily to an increase in sales commissions and 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.
sale.
Cash Flows
Used InProvided By Investing Activities
Our primary investing activities include the purchase and sale or maturity of investments and the purchase of property and equipment and intangible assets,assets.
For the
purchase of cost method investments,three months ended March 31, 2020, net cash
paid in connection with acquisitions and proceeds from divestiture of a business.For the nine months ended September 30, 2017, net cash used inprovided by investing activities was $180.2$254.3 million. This was primarily the result of $98.7$291.8 million of net purchasesproceeds from maturities and sales of investments $61.0and $37.5 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
ninethree months ended
September 30, 2016,March 31, 2019, net cash
used inprovided by investing activities was
$27.9$108.3 million. This was primarily the result of
$53.6$125.8 million of net proceeds from maturities of investments and $17.5 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
(Used in) Financing Activities
For the nine months ended September 30, 2017 and 2016, our
Net cash provided by (used in) financing activities has primarily related toresulted from the exercise of employee option awards. Theawards and equity awards withheld for tax liabilities, proceeds from and repayments of borrowings on our credit facilities related to Zillow Offers and proceeds from borrowings on warehouse lines of credit and the master repurchase agreement related to Zillow Home Loans.
For the three months ended March 31, 2020, cash used in financing activities was $163.1 million, including $259.7 million of net repayments of borrowings on our credit facilities related to Zillow Offers, partially offset by $92.2 million of proceeds from the exercise of option awards forand $4.4 million of net borrowings on our warehouse line of credit and master repurchase agreement related to Zillow Home Loans.
For the
ninethree months ended
September 30, 2017March 31, 2019, cash provided by financing activities was $137.9 million, including $129.3 million of proceeds from borrowings on our credit facilities related to Zillow Offers and
2016 were $80.0$13.6 million
and $20.5of proceeds from the exercise of option awards, partially offset by $5.0 million
respectively.of net repayments of borrowings on our warehouse lines of credit related to Zillow Home Loans.
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$10.0 million as of
September 30, 2017.March 31, 2020. 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
1416 of our Notes to
our condensed consolidated financial statementsCondensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q 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, 2019, except for the categories of contractual obligations included in the table
provides a summary ofbelow, 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.
March 31, 2020 (in thousands, unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due By Period | | | | | | | | |
| Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| | | | | | | | | |
Homes under contract (1) | 14,900 | | | 14,900 | | | — | | | — | | | — | |
Homes segment credit facilities (2) | 431,834 | | | 431,834 | | | — | | | — | | | — | |
Mortgages segment credit facilities (3) | 34,813 | | | 34,813 | | | — | | | — | | | — | |
____________________ (1) We have obligations to purchase homes under contract through our Zillow Offers business. (2) Includes principal amounts due for amounts borrowed under the credit facilities used to provide capital for our Zillow Offers business. Amounts exclude an immaterial amount of estimated interest payments. (3) Includes principal amounts due for amounts borrowed under the warehouse line of credit and master repurchase agreement to finance mortgages originated through Zillow Home Loans. Amounts exclude an immaterial amount of estimated interest payments.
| | | | | | | | | |
As of
September 30, 2017,March 31, 2020, 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.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$10.0 million as of
September 30, 2017.March 31, 2020.
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 consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For information
We believe that the assumptions and estimates associated with revenue recognition, the net realizable value of inventory, amortization period and recoverability of contract cost assets, website and software development costs, recoverability of long-lived assets and intangible assets with definite lives, share-based compensation, and the recoverability of goodwill and indefinite-lived intangible assets, have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates, see Part II, Item 7 (Management’s Discussionestimates.
Revenue Recognition
We recognize revenue when or as we satisfy our performance obligations by transferring control of the 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.
As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component as the period between our transfer of a promised product or service to a customer and Analysiswhen the customer pays for that product or service is one year or less.
We do not disclose the transaction price related to remaining performance obligations for (i) contracts with an original expected duration of Financial Conditionone year or less and Results of Operations)(ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for performance completed to date. The remaining duration of our Annualperformance obligations is generally less than one year.
In our Homes segment, we generate revenue from the resale of homes on the open market and through our title and escrow services. Our two revenue categories within our Homes segment are Zillow Offers and Other.
In our IMT segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to residential real estate businesses, professionals and consumers. These professionals include real estate, rental and new construction brand advertisers, professionals and consumers. Our two revenue categories within our IMT segment are Premier Agent 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 Segment
Zillow Offers Revenue. Zillow Offers revenue is derived from the resale of homes on the open market. We recognize revenue 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 agent commissions, closing or other costs associated with the transaction.
Other Revenue. Other Homes revenue is primarily generated through Zillow Closing Services, which offers title and escrow services to home buyers and sellers, including title search procedures for title insurance policies, escrow and other closing services. Title search, which is recorded net of amounts remitted to third-party insurance underwriters, and title and escrow closing fees are recognized as revenue upon closing of the underlying real estate transaction.
IMT Segment
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 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 and website that provides individualized program performance analytics, our 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 and our 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 and Premier Broker advertising products, which include the delivery of impressions and validated consumer connections, or leads, are primarily offered on a share of voice basis. Payment is received prior to the delivery of impressions and connections. Impressions are delivered when an advertisement appears on pages viewed by users of our mobile applications and 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 impressions or connections to customers, but instead control when and how many impressions and connections to deliver based on a customer’s share of 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 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 code increases or decreases, the number of impressions and connections delivered to a 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 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 provided. This methodology best depicts how we satisfy our performance obligations to customers, as we continuously transfer control of the performance obligations to the customer over time. Given a Premier Agent or Premier Broker typically prepays their monthly spend and the monthly spend is refunded on a pro-rata basis upon cancellation of the
contract by a customer at any point in time, we have determined that Premier Agent and Premier Broker contracts are effectively daily contracts, and each performance obligation is satisfied over time as each day lapses. We have not allocated the transaction price to each performance obligation within our Premier Agent and Premier Broker arrangements, as the amounts recognized would be the same irrespective of any allocation.
In October 2018, we began testing a new pricing model, Flex, for Premier Broker and Premier Agent advertising services in limited markets. With the Flex model, Premier Brokers and Premier Agents are provided with validated leads at no upfront cost and pay a performance advertising fee only when a real estate transaction is closed with one of the leads. With this pricing model, the transaction price represents variable consideration as the amount to which we expect to be entitled varies based on the number of validated leads that convert into real estate transactions and the value of those transactions. During this testing phase, we recognize revenue when we receive payment for a real estate transaction closed with a Flex lead. We will continuously reevaluate this determination and the point at which we may begin to estimate variable consideration and record revenue as performance obligations are transferred. Once we reach the point at which we may begin to estimate variable consideration associated with Flex, we will estimate the transaction price based on the consideration to which we expect to be entitled in exchange for transferring the validated Flex leads. This will include estimates associated with the probability that Flex leads provided will result in closed real estate transactions and the expected value of those transactions.
Other Revenue. Other IMT revenue primarily includes revenue generated by 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. Rentals revenue includes the sale of advertising and a suite of tools to rental professionals, landlords and other market participants. Rentals revenue primarily includes revenue generated by advertising sold to property managers, landlords and other rental professionals on a cost per lead, cost per click, cost per lease, cost per listing or cost per impression basis. We recognize revenue as leads, clicks and impressions are provided to rental professionals, or as rental listings are published on our mobile applications and websites, which is the amount for which we have the right to invoice. The number of leases generated through our rentals pay per lease product during the period is accounted for as variable consideration, and we estimate the amount of variable consideration based on the expected number of qualified leases secured during the period. We do not believe that a significant reversal in the amount of cumulative revenue recognized will occur once the uncertainty related to the number of leases secured is subsequently resolved.
Rentals revenue also includes revenue generated from our rental applications product through which potential renters can submit applications to multiple rental properties over a 30-day period for a flat service fee. We recognize revenue for the rental applications product on a straight-line basis during the contractual period over which the customer has the right to access and submit the rental application.
Our new construction marketing solutions allow home builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis, and revenue is recognized on a straight-line basis during the contractual period over which the communities are advertised on our mobile applications and websites. New construction revenue also includes revenue generated on a cost per impression basis whereby we recognize revenue as impressions are delivered to users interacting with our mobile applications and websites, which is the amount for which we have the right to invoice. Consideration for new construction products is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.
Mortgages Segment
Mortgages Revenue.Mortgages revenue includes marketing products sold to mortgage professionals on a cost per lead basis, including our Custom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service, and also includes revenue generated by Zillow Home Loans, our affiliated mortgage lender, and revenue generated by Mortech.
For our Connect and Custom Quote cost per lead marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads,
when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through our mortgages platform, which is the amount for which we have the right to invoice. For our subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, we contact a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend recognized on a straight-line basis during the contractual period over which the service is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.
Mortgage origination revenue reflects (1) origination fees and (2) the corresponding sale, or expected future sale, of a loan. When an interest rate lock commitment is made to a customer, we record the expected gain on sale of the mortgage, plus the estimated earnings from the expected sale of the associated servicing rights, adjusted for a pull-through percentage (which is defined as the likelihood that an interest rate lock commitment will be originated), as revenue. Revenue from loan origination fees is recognized at the time the related real estate transactions are completed, usually upon the close of escrow and when we fund mortgage loans. Once funded, mortgage loans held for sale are recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loan is sold. Net origination costs and fees associated with mortgage loans are recognized as incurred. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers.
Mortgage loans are sold with limited recourse provisions, which can result in repurchases of loans previously sold to investors or payments to reimburse investors for loan losses. Based on historical experience, discussions with our mortgage purchasers, analysis of the volume of mortgages we originated and current housing and credit market conditions, we estimate and record a loss reserve for mortgage loans held in our portfolio and mortgage loans held for sale, as well as known and projected mortgage loan repurchase requests. These have historically not been significant to our financial statements, but could vary in future periods.
Mortgages revenue also includes revenue generated by Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform, for which we recognize revenue on a straight-line basis during the contractual period over which the services are provided.
Inventory
Inventory is comprised of homes acquired through our Zillow Offers program and is stated at the lower of cost or net realizable value. Homes are removed from inventory on a specific identification basis when they are resold. Stated cost includes consideration paid to acquire and update each home including associated allocated overhead costs. Work-in-progress inventory includes homes undergoing updates and finished goods inventory includes homes ready for resale. Unallocated overhead costs are expensed as incurred and included in cost of revenue. Selling costs include real estate commissions, escrow and title fees, and staging costs, as well as holding costs incurred during the period that homes are listed for sale, including utilities, taxes and maintenance.
Each quarter we review the value of homes held in inventory for indicators that net realizable value is lower than cost. The calculation of net realizable value is based on several estimates which may ultimately vary materially from actual results. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of inventory a critical accounting estimate. In response to the COVID-19 pandemic and the uncertainly surrounding its impact on the real estate industry, we have adjusted certain of our home asset management and resale strategies. We have estimated the impact of these strategies on the value of our inventory as of March 31, 2020. The estimate of this impact requires significant judgement and the ultimate impact of these strategies and COVID-19’s impact on the real estate industry and on our customers’ ability to purchase homes is uncertain, which may cause actual results to vary materially.
When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized in cost of revenue. We estimate that a 1% decrease in the lower of cost or net realizable value of our inventory balances as of March 31, 2020 and 2019 would increase our inventory valuation adjustment by $5.3 million and $3.3 million, respectively.
Contract Cost Assets
We capitalize certain incremental costs of obtaining contracts with customers that we expect to recover. These costs relate to commissions paid to sales personnel, primarily for our Premier Agent and Premier Broker programs. As a practical expedient, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. Capitalized commission costs are recorded as contract cost assets in our condensed consolidated balance sheets. Contract cost assets are amortized to expense on a straight-line basis over a period that is consistent with the transfer to the customer of the products or services to which the asset relates, generally the estimated life of the customer relationship. Amortization expense related to contract cost assets is included in sales and marketing expenses in our consolidated statements of operations. Our determination of the estimated life of the customer relationship involves significant judgment. In determining the estimated life of our customer relationships, we consider quantitative and qualitative data, including, but not limited to, historical customer data, recent changes or expected changes in product or service offerings, and changes in how we monetize our products and services. The amortization period for our Premier Agent and Premier Broker programs ranges from two to three years.
We monitor our contract cost assets for impairment and recognize an impairment loss in the statement of operations to the extent the carrying amount of the asset recognized exceeds the amount of consideration we expect to receive in the future and that we have received but have not recognized in revenue less the costs that relate directly to providing those goods or services that have not yet been recognized as expenses.
Website and Software Development Costs
The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized in property and equipment and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives. Amortization expense related to capitalized website and software development costs is included in technology and development expense.
Capitalized development activities placed in service are amortized over the expected useful lives of those releases, currently estimated at one to five years. The estimated useful lives of website and software development activities are reviewed frequently and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing functionality.
We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our mobile applications and websites, assess the ongoing value of capitalized assets, or determine the estimated useful lives over which the costs are amortized, the amount of website and software development costs we capitalize and amortize could change in future periods.
Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets
We evaluate intangible assets and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. We group assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. If this comparison indicates impairment, the amount of impairment to be recognized is calculated as the difference between the carrying value and the fair value of the asset group.
Unforeseen events, changes in circumstances and market conditions and material differences in estimates of future cash flows could adversely affect the fair value of our assets and could result in an impairment charge. Fair value can be estimated utilizing a number of techniques including quoted market prices, prices for comparable assets, or other valuation processes involving estimates of cash flows, multiples of earnings or revenues, and we may make various assumptions and estimates when performing our impairment assessments, particularly as it relates to cash flow projections. Cash flow estimates are by their nature subjective and include assumptions regarding factors such as recent and forecasted operating performance, revenue trends and operating margins. These estimates could also be adversely impacted by changes in federal, state, or local regulations, economic downturns or developments, pandemics such as COVID-19, or other market conditions affecting our industry.
Share-Based Compensation
We measure compensation expense for all share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest. We use the Black-Scholes-Merton option-pricing model to determine the fair value for option awards and recognize compensation expense on a straight-line basis over the option awards’ vesting period. For restricted stock units and restricted units, we use the market value of our Class A common stock and Class C capital stock, as applicable, on the date of grant to determine the fair value of the award, and we recognize compensation expense on a straight-line basis over the awards’ vesting period.
Determining the fair value of option awards at the grant date requires judgment. If any of the assumptions used in the Black-Scholes-Merton model changes significantly, share-based compensation expense for future option awards may differ materially compared with the awards granted previously. In valuing our option awards, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives.
Risk-free interest rate. Risk-free interest rates are derived from U.S. Treasury securities as of the option award’s grant date.
Expected dividend yields. Expected dividend yields are based on our historical dividend payments, which have been zero to date.
Volatility. The expected volatility for our Class A common stock and Class C capital stock is estimated using our historical volatility.
Expected term. The weighted-average expected life of the option awards is estimated based on our historical exercise data.
We will continue to use judgment in evaluating the expected volatility and expected terms utilized for our share-based compensation expense calculations on a prospective basis. Actual results, and future changes in estimates, may differ substantially from management’s current estimates. As we continue to accumulate additional data related to our Class A common stock and Class C capital stock, we may have refinements to the estimates of our expected volatility and expected terms, which could materially impact our future share-based compensation expense. In future periods, we expect our share-based compensation expense to increase as a result of our existing, unrecognized share-based compensation that will be recognized as the awards vest, and as we grant additional share-based awards to attract and retain employees.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition, and is not amortized. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired. In our evaluation of goodwill, we typically first perform a qualitative assessment to determine whether the carrying value of each reporting unit is greater than its fair value. If it is more likely than not that the carrying value of a reporting unit is greater than its fair value, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of carrying value of the reporting unit over its fair value.
Our indefinite-lived intangible asset has not historically been amortized, and we assess the asset for impairment on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that the asset may be impaired. On an interim basis, we consider if there are any events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset, including, but not limited to, costs that could have a negative effect on future expected earnings and cash flows, changes in certain key performance metrics, and changes in management, key personnel, strategy or customers. In our evaluation of our trade names and trademarks indefinite-lived intangible asset, we typically first perform a qualitative assessment to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired. If so, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of the carrying value of the indefinite-lived intangible assets over their fair value.
During the three months ended March 31, 2020, we recognized a non-cash impairment charge of $71.5 million related to our indefinite-lived Trulia trade names and trademarks intangible asset. The impairment charge is included in Impairment costs within our IMT and Mortgages segments. In March 2020, we identified factors directly related to the COVID-19 pandemic that led us to conclude it was more likely than not that the $108.0 million carrying value of the asset exceeded its fair value. The most significant of such factors was a shortfall in projected revenue related to the Trulia brand compared to previous projections used to determine the carrying value of the intangible asset, primarily driven by a reduction in expected future marketing and advertising spend for Trulia. Accordingly, with the assistance of a third-party valuation specialist, we performed a quantitative analysis to determine the fair value of the intangible asset and concluded that our best estimate of its fair value was $36.5 million. The valuation was prepared using an income approach based on the relief-from-royalty method and relied on inputs with unobservable market prices including projected revenue, royalty rate, discount rate, and estimated tax rate, and therefore is considered a Level 3 measurement under the fair value hierarchy.
Fair value can be estimated utilizing a number of techniques including quoted market prices, prices for comparable assets, or other valuation processes involving estimates of cash flows, multiples of earnings or revenues, and we may make various assumptions and estimates when performing our impairment assessments, particularly as it relates to cash flow projections. Cash flow estimates are by their nature subjective and include assumptions regarding factors such as recent and forecasted operating performance, revenue trends and operating margins. These estimates could also be adversely impacted by changes in federal, state or local regulations, economic downturns, pandemics such as COVID-19, or developments or other market conditions affecting our industry. Changes in these estimates could result in future material impairment losses related to the Trulia trade names and trademarks intangible asset. Given the unprecedented uncertainty surrounding COVID-19, including the unknown impact on customer demand for our products and services related to the Trulia brand, projecting future revenue related to the Trulia brand requires significant judgment, and actual revenue related to the Trulia brand may vary significantly based on the duration and severity of the pandemic and responses to it and future amounts of marketing and advertising spend.
In connection with this impairment analysis, we evaluated our planned future marketing and advertising spend related to the Trulia trade names and trademarks intangible asset and concluded that this asset no longer has an indefinite life. We will amortize the remaining $36.5 million carrying value on an accelerated basis commensurate with the projected cash flows over a useful life of 10 years.
Recently Adopted Accounting Standards and Recently Issued Accounting Standards Not Yet Adopted
For information about our recently adopted accounting standards and recently issued accounting standards not yet adopted, see Note 2 of the accompanying Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-K for the year ended December 31, 2016. 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, 2016.10-Q.
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.
Under our current investment policy, we invest our excess cash in money market funds, certificates of deposit, U.S. government agency securities,
treasury bills, commercial paper, foreign government securities, municipal securities and corporate notes and bonds. Our current investment policy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting our principal at risk.
Our investments are exposed to market risk due to the fluctuation of prevailing interest rates that may reduce the yield on our investments or their fair value. As our investment portfolio is short-term in nature, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio.
As of September 30, 2017,
Our convertible senior notes bear interest at fixed rates. Thus, we have no related direct financial statement risk associated with changes in interest rates. However, the fair values of the convertible senior notes change primarily when the market price of our stock fluctuates or interest rates change. The following table summarizes our 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 fixedconvertible senior notes as of March 31, 2020 (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):
| | | | | | | | | | | | | | |
Maturity Date | | Aggregate Principal Amount | | Stated Interest Rate |
September 1, 2026 | | $ | 500,000 | | | 1.375 | % |
September 1, 2024 | | 673,000 | | | 0.75 | % |
July 1, 2023 | | 373,750 | | | 1.50 | % |
December 1, 2021 | | 460,000 | | | 2.00 | % |
December 15, 2020 | | 9,637 | | | 2.75 | % |
| | $ | 2,016,387 | | | |
Since the
2020 Notes and 2021 Notesconvertible senior notes bear interest at fixed rates, we have no direct financial statement risk associated with changes in interest
rates.rates as of March 31, 2020. However, the fair values of the
2020 Notes and 2021 Notesconvertible senior notes change primarily when the market price of our stock fluctuates or interest rates change.
For
We are subject to market risk by way of changes in interest rates on borrowings under our credit facilities that provide capital for Zillow Offers. As of March 31, 2020 and December 31, 2019, we had outstanding $431.8 million and $691.5 million, respectively, of borrowings on these
reasons, we do not expect our results of operations or cash flows would be materially affected bycredit facilities which bear interest at a
sudden changefloating 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 credit facilities, we estimate that a one percentage point increase in LIBOR would increase our annual interest expense by approximately $4.3 million and $6.9 million as of March 31, 2020 and December 31, 2019, respectively.
We are also subject to market risk by way of changes in interest rates on borrowings under our warehouse line of credit and master repurchase agreement that provide capital for Zillow Home Loans. As of March 31, 2020 and December 31, 2019, we had outstanding $34.8 million and $30.4 million, respectively, of borrowings on our warehouse line of credit and master repurchase agreement which bear interest at a floating rate based on LIBOR plus an applicable margin. We manage the interest rate risk associated with our mortgage loan origination services through the use of forward sales of mortgage-backed securities. Assuming no change in the outstanding borrowings on the warehouse line of credit and master repurchase agreement, we estimate that a one percentage point increase in LIBOR would increase our annual interest expense associated with the warehouse line of credit and master repurchase agreement by an insignificant amount as of March 31, 2020 and December 31, 2019.
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.March 31, 2020. 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.March 31, 2020.
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, 2017March 31, 2020 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 1416 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
Our business is subject to numerous risks. You should carefully consider the following risk factors affecting our business, financial condition or future results fromfactor, in addition to 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. However, you should carefully consider the factors discussed in our Annual Report on Form 10-K, which2019, as any of these risks could materially affectharm our business, results of operations, and future financial conditionperformance. Recovery pursuant to our insurance policies may not be available due to policy definitions of covered losses or future results. Additionalother factors, and available insurance may be insufficient to compensate for damages, expenses, fines, penalties, and other losses we may incur as a result of these and other risks. In addition, 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/orand operating results. If any of these risks occur, the trading price of our common and capital stock could decline, and you could lose all or part of your investment.
Our financial condition and results of operations have been and are expected to continue to be adversely affected by the COVID-19 pandemic.
In December 2019, a novel strain of coronavirus, COVID-19, was reported and has subsequently spread worldwide. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. As a result of COVID-19, significant portions of the United States economy and population have shut down and slowed down due to widespread travel and transportation restrictions, shelter in place and stay at home policies, and closures of commercial spaces and government facilities, including in locations where we maintain operations and a significant number of employees. The current COVID-19 pandemic, its broad impact and preventive measures taken to contain or mitigate the pandemic have had, and are likely to continue to have, significant negative effects on the United States and global economy, employment levels, employee productivity, residential real estate and financial markets. This, in turn, has and may increasingly have a negative impact on our real estate partners, suppliers, demand for our products and services, the ability of customers to effectuate real estate transactions, profit margins, the value of collateral securing loans, our ability to resell loans on the secondary market, access to credit and our ability to operate our business.
In response to these unprecedented circumstances, we have temporarily paused buying homes through Zillow Offers, offered certain product discounts, temporarily closed offices, paused hiring except for critical roles, paused the majority of our advertising spending and reduced discretionary spending. As a result of these or other consequences, the pandemic has and may continue to adversely affect our business, results of operations and financial condition, likely materially.
Our ability to fund our liquidity requirements and operate our business depends on our cash flows from operations as well as our ability to access the capital markets and borrow on our existing credit facilities. For example, the provision of certain product discounts and pause of home buying through Zillow Offers has and may continue to disrupt our revenue and operating cash flow levels. Further, our access to and the availability of financing on acceptable terms may be adversely impacted by the pandemic. For more information on the impact the COVID-19 pandemic has had on our liquidity position and outlook, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
The extent to which the outbreak will impact our operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the magnitude, duration and severity of the outbreak, the actions taken to contain or mitigate the outbreak and any associated economic downturn or extended slowdown in the real estate markets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the three months ended September 30, 2017.March 31, 2020.
The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.
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Exhibit Number | | Description |
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Exhibit
Number 10.1* | | Description
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31.1 | | |
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31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
101.INS | | Inline XBRL Instance Document.Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document). |
| | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
104 | | Cover Page Interactive Data File (embedded within the inline XBRL document). |
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* | | Indicates a management contract or compensatory plan or arrangement. |
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: NovemberMay 7, 2017 | 2020 | | | ZILLOW GROUP, INC. | |
| | | |
| | By: | | By: | | /s/ KATHLEEN PHILIPSJENNIFER ROCK |
| | Name: | | Name: | | Kathleen PhilipsJennifer Rock |
| | Title: | | Title: | | Chief FinancialAccounting Officer Chief Legal Officer, and Secretary |
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