| Summary of Significant Accounting Policies | Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include Zillow
Group, Inc. and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
These consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting principles
(“GAAP”).
Effective February 17, 2015, Zillow Group acquired Trulia, and
each of Zillow, Inc. and Trulia became wholly owned subsidiaries of
Zillow Group. For financial reporting and accounting purposes,
Zillow was the acquirer of Trulia. The results presented in the
Consolidated Financial Statements and the Notes to Consolidated
Financial Statements reflect those of Zillow prior to the
completion of the acquisition of Trulia on February 17, 2015,
and Trulia’s results of operations have been included
prospectively after February 17, 2015. Market Leader revenue
is included in our results of operations from February 17,
2015 through the date of divestiture of September 30,
2015.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make certain estimates, judgments and
assumptions that affect the reported amounts of assets and
liabilities and the related disclosures at the date of the
financial statements, as well as the reported amounts of revenue
and expenses during the periods presented. On an ongoing basis, we
evaluate our estimates, including those related to website and
software development costs, recoverability of long-lived assets and
intangible assets with definite lives, share-based compensation,
income taxes, business combinations, and the recoverability of
goodwill and indefinite-lived intangible assets, among others. To
the extent there are material differences between these estimates,
judgments, or assumptions and actual results, our financial
statements will be affected.
Reclassifications
Certain immaterial reclassifications have been made in the
consolidated statements of operations to conform data for prior
periods to the current format. The Company reclassified
certain technology-related costs and expenses between expense
categories. Amounts previously reported in the consolidated
statement of operations for the year ended December 31, 2016
were revised herein as shown below (in thousands):
As Reported As Revised Effect of Change
Cost of revenue (exclusive of amortization) $ 71,591 $ 69,262 $ (2,329 )
Sales and marketing 380,919 382,419 1,500
Technology and development 273,066 255,583 (17,483 )
General and administrative 313,695 332,007 18,312
Amounts previously reported in the consolidated statement of
operations for the year ended December 31, 2015 were revised
herein as shown below (in thousands):
As Reported As Revised Effect of Change
Cost of revenue (exclusive of amortization) $ 61,614 $ 60,127 $ (1,487 )
Sales and marketing 307,089 308,125 1,036
Technology and development 198,565 184,477 (14,088 )
General and administrative 170,445 184,984 14,539
Certain immaterial reclassifications have been made in the
consolidated balance sheets and statements of cash flows to conform
data for prior periods to the current format.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to
concentrations of credit risk, consist primarily of cash and cash
equivalents, investments and accounts receivable. We place cash and
cash equivalents and investments with major financial institutions,
which management assesses to be of high credit quality, in order to
limit exposure of our investments.
Credit risk with respect to accounts receivable is dispersed due to
the large number of customers. There were no customers that
comprised 10% or more of our total accounts receivable as of
December 31, 2017 and 2016. Further, our credit risk on
accounts receivable is mitigated by the relatively short payment
terms that we offer. Collateral is not required for accounts
receivable. We maintain an allowance for doubtful accounts such
that receivables are stated at net realizable value.
Cash and Cash Equivalents
Cash includes demand deposits with banks or financial institutions.
Cash equivalents include short-term, highly liquid investments that
are both readily convertible to known amounts of cash, and so near
their maturity that they present minimal risk of changes in value
because of changes in interest rates. Our cash equivalents include
only investments with original maturities of three months or less.
We regularly maintain cash in excess of federally insured limits at
financial institutions.
Short-term Investments
Our investments consist of fixed income securities, which include
U.S. and foreign government agency securities, corporate notes and
bonds, commercial paper, municipal securities and certificates of
deposit, and are classified as available-for-sale available-for-sale Available-for-sale
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable are generally due within 30 days and are
recorded net of the allowance for doubtful accounts. We consider
accounts outstanding longer than the contractual terms past due. We
review accounts receivable on a regular basis and estimate an
amount of losses for uncollectible accounts based on our historical
collections experience, age of the receivable, knowledge of the
customer and the condition of the general economy and industry as a
whole. We record changes in our estimate to the allowance for
doubtful accounts through bad debt expense and relieve the
allowance when accounts are ultimately determined to be
uncollectible. Bad debt expense is included in general and
administrative expenses.
Property and Equipment
Property and equipment is recorded at cost and depreciated using
the straight-line method over the estimated useful lives of the
related assets. The useful lives are as follows:
Computer equipment 3 years
Office equipment, furniture and fixtures 5 to 7 years
Leasehold improvements Shorter of expected useful life or lease
term
Maintenance and repair costs are charged to expense as incurred.
Major improvements, which extend the useful life of the related
asset, are capitalized. Upon disposal of a fixed asset, we record a
gain or loss based on the differences between the proceeds received
and the net book value of the disposed asset.
Website and Software Development Costs
The costs incurred in the preliminary stages of 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 two 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.
Recoverability of Goodwill and Indefinite-Lived Intangible
Assets
Goodwill represents the excess of the cost of an acquired business
over the fair value of the assets acquired at the date of
acquisition, and is not amortized. We assess the impairment of
goodwill on an annual basis, in our fourth quarter, or whenever
events or changes in circumstances indicate that goodwill may be
impaired. Typically, we choose to forgo the initial qualitative
assessment and perform a quantitative analysis to assist in our
annual evaluation. If impairment exists, the carrying value of the
goodwill is reduced to fair value through an impairment charge
recorded in our statements of operations.
Our indefinite-lived intangible asset is not amortized, and we
assess the asset for impairment on an annual basis, in our fourth
quarter, or whenever events or changes in circumstances indicate
that the asset may be impaired. On an interim basis we consider if
there are any events and circumstances that could affect the
significant inputs used to determine the fair value of the
indefinite-lived intangible asset, including, but not limited to,
costs that could have a negative effect on future expected earnings
and cash flows, changes in certain key performance metrics, and
changes in management, key personnel, strategy or customers. In our
evaluation of our trade names and trademarks indefinite-lived
intangible asset, we typically first perform a qualitative
assessment to determine whether the fair value of the
indefinite-lived intangible asset is more likely than not impaired.
If so, we perform a quantitative assessment and an impairment
charge is recorded in our statements of operations for the excess
of the carrying value of the indefinite-lived intangible assets
over their fair value.
During the year ended December 31, 2017, we recorded a
non-cash non-cash
Intangible Assets
We purchase and license data content from multiple data providers.
This data content consists of U.S. county data about home details
(e.g., the number of bedrooms, bathrooms, square footage) and other
information relating to the purchase price of homes, both current
and historical, as well as imagery, mapping and parcel data that is
displayed on our mobile applications and websites. Our home details
data not only provides information about a home and its related
transactions which is displayed on our mobile applications and
websites, but is also used in our proprietary valuation algorithms
to produce Zestimates, Rent Zestimates and Zillow Home Value
Indexes. License agreement terms vary by vendor. In some instances,
we retain perpetual rights to this information after the contract
ends; in other instances, the information and data are licensed
only during the fixed term of the agreement. Additionally, certain
data license agreements provide for uneven payment amounts
throughout the life of the contract term.
We capitalize payments made to third parties for data licenses that
we expect to provide future economic 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 the total contract value is typically
amortized on a straight-line basis over the term of the contract,
which is equivalent to the estimated useful life of the asset. We
evaluate data content contracts for potential capitalization at the
inception of the arrangement as well as each time periodic payments
to third parties are made.
The amortization period for the capitalized purchased content is
based on our best estimate of the useful life of the asset, which
is approximately five years. The determination of the useful life
includes consideration of a variety of factors including, but not
limited to, our assessment of the expected use of the asset and
contractual provisions that may limit the useful life, as well as
an assessment of when the data is expected to become obsolete based
on our estimates of the diminishing value of the data over time. We
evaluate the useful life of the capitalized purchased data content
each reporting period to determine whether events and circumstances
warrant a revision to the remaining useful life. If we determine
the estimate of the asset’s useful life requires
modification, the carrying amount of the asset is amortized
prospectively over the revised useful life. The capitalized
purchased data content is amortized on a straight-line basis as the
pattern of delivery of the economic benefits of the data cannot
reliably be determined because we do not have the ability to
reliably predict future traffic to our mobile applications and
websites.
Under certain other data agreements, the underlying data is
obtained on a subscription basis with consistent monthly or
quarterly recurring payment terms over the contractual period. Upon
the expiration of such arrangements, we no longer have the right to
access the related data, and therefore, the costs incurred under
such contracts are not capitalized and are expensed as payments are
made. We would immediately lose rights to data under these
arrangements if we were to cancel the subscription and/or cease
making payments under the subscription arrangements.
We also capitalize costs related to the license of certain
internal-use internal-use internal-use
We also have intangible assets for developed technology, customer
relationships, trade names and trademarks and advertising
relationships which we recorded in connection with acquisitions.
Purchased intangible assets with a determinable economic life are
carried at cost, less accumulated amortization. These intangible
assets are amortized over the estimated useful life of the asset on
a straight-line basis.
Recoverability of Intangible Assets with Definite Lives and
Other Long-Lived Assets
We evaluate intangible assets and other long-lived assets for
impairment whenever events or circumstances indicate that they may
not be recoverable. Recoverability is measured by comparing the
carrying amount of an asset group to future undiscounted net cash
flows expected to be generated. We group assets for purposes of
such review at the lowest level for which identifiable cash flows
of the asset group are largely independent of the cash flows of the
other groups of assets and liabilities. If this comparison
indicates impairment, the amount of impairment to be recognized is
calculated as the difference between the carrying value and the
fair value of the asset group.
Deferred Revenue
Deferred revenue consists of prepaid advertising fees received or
billed in advance of the delivery or completion of the services,
prepaid but unrecognized subscription revenue, and for amounts
received in instances when revenue recognition criteria have not
been met. Deferred revenue is recognized when the services are
provided and all revenue recognition criteria have been met.
Deferred Rent
For our operating leases, we recognize rent expense on a
straight-line basis over the terms of the leases and, accordingly,
we record the difference between cash rent payments and the
recognition of rent expense as a deferred rent liability. For
office space under an operating lease that is subleased to a third
party for which we intend to reoccupy the space at a future date,
rent expense is recognized net of sublease income. Landlord-funded
leasehold improvements are also recorded as deferred rent
liabilities and are amortized as a reduction of rent expense over
the non-cancelable
Business Combinations
We recognize identifiable assets acquired and liabilities assumed
at their acquisition date fair values. Goodwill as of the
acquisition date is measured as the excess of consideration
transferred over the net of the acquisition date fair values of the
assets acquired and the liabilities assumed. While we use our best
estimates and assumptions for the purchase price allocation process
to value assets acquired and liabilities assumed at the acquisition
date, our estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period, which may
be up to one year from the acquisition date, we record adjustments
to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill to the extent that we identify
adjustments to the preliminary purchase price allocation. Upon the
conclusion of the measurement period or final determination of the
values of assets acquired or liabilities assumed, whichever comes
first, any subsequent adjustments are recorded to our consolidated
statements of operations. We recognize adjustments to provisional
amounts that are identified during the measurement period in the
reporting period in which the adjustment amounts are
determined.
Revenue Recognition
We recognize revenue when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred or services
have been rendered to the customer, (iii) the fee is fixed or
determinable, and (iv) collectability is reasonably assured.
We consider a signed agreement, a binding insertion order or other
similar documentation reflecting the terms and conditions under
which products or services will be provided to be persuasive
evidence of an arrangement. Collectability is assessed based on a
number of factors, including payment history and the
creditworthiness of a customer. If it is determined that collection
is not reasonably assured, revenue is not recognized until
collection becomes reasonably assured, which is generally upon
receipt of cash.
We generate revenue from the sale of advertising services and our
suite of marketing software and technology solutions to businesses
and professionals primarily associated with the residential real
estate, mortgage and rental industries. These professionals include
real estate, mortgage and rental professionals and brand
advertisers. Our two primary revenue categories are marketplace
revenue and display revenue. Incremental direct costs incurred
related to the acquisition or origination of a customer contract in
a transaction that results in the deferral of revenue are expensed
as incurred.
Marketplace 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, while growing and managing their businesses and
brands. All Premier Agents and Premier Brokers receive access to a
dashboard portal on our mobile application or website that provides
individualized program performance analytics, self-service ad
buying tools and our free customer relationship management, or CRM,
tool that captures detailed information about each contact made
with a Premier Agent or Premier Broker through our mobile and web
platforms.
We offer 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. 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 delivered in each zip code based upon the
total amount spent by Premier Agents to purchase impressions in the
zip code during the month. The cost per impression that we charge
is dynamic – as demand for impressions in a zip code
increases or decreases, the cost per impression in that zip code
may be increased or decreased. This new auction-based pricing
method complements our self-serve account interface, which we
introduced to Premier Agents over the course of 2016. The interface
includes account management tools that allow agent advertisers to
independently control their budgets, impression buys, and the
duration of their advertising commitment. We began testing this
auction-based pricing method for our Premier Agent product to
better align our revenue opportunities with increasing traffic
levels to our mobile and web platforms and leveraging increasing
demand by real estate agents for access to home shoppers who use
our mobile applications and websites. In the fourth quarter of
2016, we implemented this method broadly for all existing and new
agent advertisers, including brokerages and other teams. With this
auction-based pricing method, we recognize revenue related to our
dynamic impression-based Premier Agent and Premier Broker products
based on the contractual maximum spend on a straight-line basis
during the contractual period over which the services are
delivered. Our Premier Agent 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. In our history of building our real estate and other
information marketplaces and product offerings, we have continually
evaluated and utilized various pricing and value delivery
strategies in order to better align our revenue opportunities with
the growth in usage of our mobile and web platforms.
From 2012 through the end of the third quarter of 2016, we had
primarily charged customers for our Premier Agent product based on
the number of impressions delivered on our buyer’s agent list
in zip codes purchased and a contracted maximum cost per
impression. With this pricing method, we recognized revenue related
to our impression-based Premier Agent product based on the lesser
of (i) the actual number of impressions delivered on our
buyer’s agent list during the period multiplied by the
contracted maximum cost per impression, or (ii) the
contractual maximum spend on a straight-line basis during the
contractual period over which the services are delivered, typically
over a period of six months or twelve months and then month-to-month
We continue to support some legacy Trulia Premier Agent products,
which are primarily sold on a fixed fee subscription basis for
periods that generally range from six months to 12 months.
Subscription advertising revenue for Trulia’s products
included in Premier Agent revenue is recognized on a straight-line
basis during the contractual period over which the services are
delivered.
Other real estate revenue primarily includes revenue generated by
Zillow Group Rentals, as well as revenue from the sale of various
other marketing and business products and services to real estate
professionals, including our new construction marketing solutions.
Zillow Group Rentals includes our rentals marketplace and suite of
tools for rental professionals. Rentals revenue primarily includes
revenue generated by advertising sold to property managers and
other rental professionals on a cost per lead, cost per lease and
cost per click generated basis whereby we recognize revenue as
leads are delivered to rental professionals or as qualified leases
are confirmed. Our new construction marketing solutions allow home
builders to showcase their available inventory to home shoppers.
New construction revenue primarily includes revenue generated by
advertising sold to builders on a cost per residential community
basis whereby revenue is recognized based on the contractual spend
on a straight-line basis during the contractual period over which
the services are delivered.
Mortgages revenue primarily includes marketing products sold to
mortgage professionals on a cost per lead basis, including our
Long Form and Custom Quote services. Mortgages revenue also
includes revenue generated by Mortech, which provides
subscription-based mortgage software solutions, including a product
and pricing engine and lead management platform, for which we
recognize revenue on a straight-line basis during the contractual
period over which the services are delivered. For our Long Form and
Custom Quote cost per lead mortgage marketing products, generally,
participating qualified mortgage professionals make a prepayment to
gain access to consumers interested in connecting with mortgage
professionals. In Zillow Group’s Long Form platform,
consumers answer a series of questions to find a local lender, and
mortgage professionals receive consumer contact information.
Consumers who request rates for mortgage loans in Custom Quotes are
presented with customized quotes from participating mortgage
professionals. We only charge mortgage professionals a fee when
users contact mortgage professionals through Long Form or Custom
Quotes. Mortgage professionals who exhaust their initial
prepayment can then prepay additional funds to continue to
participate in the marketplace. We recognize revenue when a user
contacts a mortgage professional through Zillow Group’s
mortgages platform.
Market Leader revenue primarily includes revenue from the sale of a
comprehensive premium
software-as-a-service
Display Revenue.
There were no customers that generated 10% or more of our total
revenue in the years ended December 31, 2017, 2016 or
2015.
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 and benefits and share-based
compensation expense and bonuses, as well as credit card fees, ad
serving costs paid to third parties, revenue-sharing costs related
to our commercial business relationships, depreciation expense and
costs associated with the operation of our data center and mobile
applications and websites.
Technology and Development
Technology and development expenses consist of headcount expenses,
including salaries, benefits, share-based compensation expense and
bonuses for salaried employees and contractors engaged in the
design, development and testing of our mobile applications and
websites, and equipment and maintenance costs. Technology and
development expenses also include amortization costs related to
capitalized website and development activities, amortization of
software, amortization of certain intangibles and other data
agreement costs related to the purchase of data used to populate
our mobile applications and websites, amortization of intangible
assets recorded in connection with acquisitions, including
developed technology and customer relationships, amongst others,
and depreciation expense.
Research and development costs are expensed as incurred and are
recorded in technology and development expenses. For the years
ended December 31, 2017, 2016 and 2015, expenses attributable
to research and development for our business totaled
$193.0 million, $170.1 million and $116.2 million,
respectively.
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 on a straight-line basis for awards expected to
vest.
We use the Black-Scholes-Merton option-pricing model to determine
the fair value for option awards. In valuing our option awards, we
make assumptions about risk-free interest rates, dividend yields,
volatility, and weighted-average expected lives. In addition,
through December 31, 2016, we made assumptions about estimated
forfeiture rates. Beginning on January 1, 2017, we
elected to account for forfeitures as they occur. Risk-free
interest rates are derived from U.S. Treasury securities as of the
option award grant date. Expected dividend yield is based on our
historical cash dividend payments, which have been zero to date.
The expected volatility for our Class A common stock and
Class C capital stock is estimated using our historical
volatility. The weighted-average expected life of the option awards
is estimated based on our historical exercise data. Prior to
January 1, 2017, forfeiture rates were estimated using
historical actual forfeiture trends as well as our judgment of
future forfeitures. These rates were evaluated at least quarterly
and any change in share-based compensation expense was recognized
in the period of the change. We considered many factors when
estimating expected forfeitures, including employee class and
historical experience.
For issuances of restricted stock units and restricted units, we
determine the fair value of the award based on the market value of
our Class A common stock or Class C capital stock, as
applicable, at the date of grant.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended
December 31, 2017, 2016 and 2015, expenses attributable to
advertising totaled $156.5 million, $120.2 million and
$103.4 million, respectively. Advertising costs are recorded
in sales and marketing expenses.
Income Taxes
We use the asset and liability approach for accounting and
reporting income taxes, which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences
of temporary differences between the financial statement and tax
bases of assets and liabilities at the applicable enacted tax
rates. A valuation allowance against deferred tax assets would be
established if, based on the weight of available evidence, it is
more likely than not (a likelihood of more than 50%) that some or
all of the deferred tax assets are not expected to be realized.
We establish reserves for tax-related
On December 22, 2017, the U.S. government enacted
comprehensive tax legislation under the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act makes broad and complex changes
to the U.S. tax code, including but not limited to:
(1) reducing the U.S. federal corporate tax rate from
35 percent to 21 percent; (2) requiring companies to
pay a one-time
Recently Adopted Accounting Standards
In January 2017, the Financial Accounting Standards Board
(“FASB”) issued guidance simplifying the test for
goodwill impairment. This standard eliminates Step 2 from the
goodwill impairment test, instead requiring an entity to recognize
a goodwill impairment charge for the amount by which the goodwill
carrying amount exceeds the reporting unit’s fair value. This
guidance is effective for interim and annual goodwill impairment
tests in fiscal years beginning after December 15, 2019, and
early adoption is permitted. This guidance must be applied on a
prospective basis. We adopted this guidance for interim and annual
goodwill impairment tests performed on testing dates after
January 1, 2017. The adoption of this guidance did not have a
material impact on our financial position, results of operations or
cash flows.
In August 2016, the FASB issued guidance on the classification of
certain cash receipts and cash payments in the statement of cash
flows. This guidance is effective for interim and annual reporting
periods beginning after December 15, 2017, and early adoption
is permitted. The adoption of this guidance requires a
retrospective transition method to each period presented. We
adopted this guidance in the interim period ending on
September 30, 2016. The adoption of this guidance did not have
any impact on our statements of cash flows. In connection with the
December 2016 partial repurchase of the 2020 Notes (see Note 11),
payments related to the debt extinguishment costs have been
classified as a cash outflow for financing activities.
In March 2016, the FASB issued guidance on several aspects of the
accounting for share-based payment transactions, including the
income tax consequences, impact of forfeitures, classification of
awards as either equity or liabilities and classification on the
statement of cash flows. This guidance is effective for interim and
annual reporting periods beginning after December 15, 2016,
and early adoption is permitted. We adopted this guidance on
January 1, 2017 and elected to account for forfeitures as they
occur using the modified retrospective approach through a
cumulative-effect adjustment of approximately $0.8 million to
beginning accumulated deficit. We also recognized our previously
unrecognized excess tax benefits related to share-based payment
awards using the modified retrospective approach, which resulted in
no net impact to beginning accumulated deficit. The previously
unrecognized excess tax benefits were recorded as a deferred tax
asset, which was fully offset by a valuation allowance. Without the
valuation allowance, our deferred tax asset would have increased by
$126.0 million. The adoption of this guidance did not have a
material impact on our financial position, results of operations or
cash flows.
Recently Issued Accounting Standards Not Yet
Adopted
In March 2017, the FASB issued guidance related to the premium
amortization on purchased callable debt securities. This guidance
shortens the amortization period for certain callable debt
securities purchased at a premium by requiring that the premium be
amortized to the earliest call date. This guidance is effective for
interim and annual reporting periods beginning after
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