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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM
10-Q
_____________________________________________________
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2020
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number:
001-36853
_____________________________________________________
ZILLOW GROUP, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
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Washington
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47-1645716
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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1301 Second Avenue
,
Floor 31
,
Seattle
,
Washington
98101
(Address of principal executive offices) (Zip Code)
(
206
)
470-7000
@ZillowGroup
(Registrant’s telephone number, including area code)
_____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Class A Common Stock, par value $0.0001 per share
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ZG
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The Nasdaq Global Select Market
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Class C Capital Stock, par value $0.0001 per share
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Z
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The Nasdaq Global Select Market
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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 every Interactive Data File required to be submitted 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 such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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☒
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Accelerated filer
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☐
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Non-accelerated filer
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☐
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Smaller reporting company
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☐
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Emerging growth company
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☐
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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 July 30, 2020,
60,002,842
shares of Class A common stock,
6,217,447
shares of Class B common stock, and
160,765,729
shares of Class C capital stock were outstanding.
ZILLOW GROUP, INC.
Quarterly Report on Form 10-Q
For the Three Months Ended June 30, 2020
TABLE OF CONTENTS
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Page
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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Item 1.
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Item 1A.
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Item 2.
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Item 6.
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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 I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A (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;
•
the impact of pending or future litigation; and
•
issuance of new or updated research or reports by securities analysts.
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
WHERE YOU CAN FIND MORE INFORMATION
Our filings with the Securities and Exchange Commission, or SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, are available on our website at www.zillowgroup.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this quarterly report on Form 10-Q or any other document we file with the SEC.
Investors and others should note that Zillow Group announces material financial information to its investors using its press releases, SEC filings and public conference calls and webcasts. Zillow Group intends to also use the following channels as a means of disclosing information about Zillow Group, its services and other matters and for complying with its disclosure obligations under Regulation FD:
•
Zillow Group Investor Relations Webpage (http://investors.zillowgroup.com)
•
Zillow Group Investor Relations Blog (http://www.zillowgroup.com/ir-blog)
•
Zillow Group Twitter Account (https://twitter.com/zillowgroup)
The information Zillow Group posts through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following Zillow Group’s press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q or any other document we file with the SEC, and the inclusion of our website addresses and Twitter account are as inactive textual references only.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data, unaudited)
|
|
|
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|
|
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|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,045,474
|
|
|
$
|
1,141,263
|
|
|
Short-term investments
|
1,491,167
|
|
|
1,280,989
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $
2,282
and $
4,522
at June 30, 2020 and December 31, 2019, respectively
|
66,878
|
|
|
67,005
|
|
|
Mortgage loans held for sale
|
75,021
|
|
|
36,507
|
|
|
Inventory
|
135,401
|
|
|
836,627
|
|
|
Prepaid expenses and other current assets
|
56,373
|
|
|
58,117
|
|
|
Restricted cash
|
33,620
|
|
|
89,646
|
|
|
Total current assets
|
3,903,934
|
|
|
3,510,154
|
|
|
Contract cost assets
|
47,747
|
|
|
45,209
|
|
|
Property and equipment, net
|
195,747
|
|
|
170,489
|
|
|
Right of use assets
|
199,422
|
|
|
212,153
|
|
|
Goodwill
|
1,984,907
|
|
|
1,984,907
|
|
|
Intangible assets, net
|
106,990
|
|
|
190,567
|
|
|
Other assets
|
11,041
|
|
|
18,494
|
|
|
Total assets
|
$
|
6,449,788
|
|
|
$
|
6,131,973
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
14,307
|
|
|
$
|
8,343
|
|
|
Accrued expenses and other current liabilities
|
74,646
|
|
|
85,442
|
|
|
Accrued compensation and benefits
|
34,520
|
|
|
37,805
|
|
|
Borrowings under credit facilities
|
187,032
|
|
|
721,951
|
|
|
Deferred revenue
|
44,514
|
|
|
39,747
|
|
|
Lease liabilities, current portion
|
22,789
|
|
|
17,592
|
|
|
Convertible senior notes, current portion
|
9,637
|
|
|
9,637
|
|
|
Total current liabilities
|
387,445
|
|
|
920,517
|
|
|
Lease liabilities, net of current portion
|
214,752
|
|
|
220,445
|
|
|
Convertible senior notes, net of current portion
|
1,810,341
|
|
|
1,543,402
|
|
|
Deferred tax liabilities and other long-term liabilities
|
14,192
|
|
|
12,188
|
|
|
Total liabilities
|
2,426,730
|
|
|
2,696,552
|
|
|
Commitments and contingencies (Note 17)
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
Preferred stock, $
0.0001
par value;
30,000,000
shares authorized;
no
shares issued and outstanding
|
—
|
|
|
—
|
|
|
Class A common stock, $
0.0001
par value;
1,245,000,000
shares authorized;
59,850,004
and
58,739,989
shares issued and outstanding as of June 30, 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
|
1
|
|
|
1
|
|
|
Class C capital stock, $
0.0001
par value;
600,000,000
shares authorized;
159,974,485
and
144,109,419
shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
|
16
|
|
|
14
|
|
|
Additional paid-in capital
|
5,246,371
|
|
|
4,412,200
|
|
|
Accumulated other comprehensive income
|
1,525
|
|
|
340
|
|
|
Accumulated deficit
|
(
1,224,861
)
|
|
|
(
977,140
)
|
|
|
Total shareholders’ equity
|
4,023,058
|
|
|
3,435,421
|
|
|
Total liabilities and shareholders’ equity
|
$
|
6,449,788
|
|
|
$
|
6,131,973
|
|
See accompanying notes to the condensed consolidated financial statements.
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Homes
|
$
|
454,252
|
|
|
$
|
248,924
|
|
|
$
|
1,224,125
|
|
|
$
|
377,396
|
|
|
IMT
|
280,339
|
|
|
323,669
|
|
|
611,005
|
|
|
621,941
|
|
|
Mortgages
|
33,761
|
|
|
26,985
|
|
|
59,043
|
|
|
54,345
|
|
|
Total revenue
|
768,352
|
|
|
599,578
|
|
|
1,894,173
|
|
|
1,053,682
|
|
|
Cost of revenue (exclusive of amortization) (1):
|
|
|
|
|
|
|
|
|
Homes
|
431,788
|
|
|
240,732
|
|
|
1,163,987
|
|
|
363,151
|
|
|
IMT
|
23,387
|
|
|
26,059
|
|
|
47,705
|
|
|
50,310
|
|
|
Mortgages
|
5,896
|
|
|
4,430
|
|
|
11,051
|
|
|
9,108
|
|
|
Total cost of revenue
|
461,071
|
|
|
271,221
|
|
|
1,222,743
|
|
|
422,569
|
|
|
Sales and marketing
|
155,598
|
|
|
187,433
|
|
|
360,246
|
|
|
349,020
|
|
|
Technology and development
|
128,857
|
|
|
120,330
|
|
|
263,775
|
|
|
228,100
|
|
|
General and administrative
|
85,511
|
|
|
82,839
|
|
|
177,796
|
|
|
178,613
|
|
|
Impairment costs
|
—
|
|
|
—
|
|
|
76,800
|
|
|
—
|
|
|
Integration costs
|
—
|
|
|
293
|
|
|
—
|
|
|
645
|
|
|
Total costs and expenses
|
831,037
|
|
|
662,116
|
|
|
2,101,360
|
|
|
1,178,947
|
|
|
Loss from operations
|
(
62,685
)
|
|
|
(
62,538
)
|
|
|
(
207,187
)
|
|
|
(
125,265
)
|
|
|
Gain on partial extinguishment of 2021 Notes
|
6,391
|
|
|
—
|
|
|
6,391
|
|
|
—
|
|
|
Other income
|
10,115
|
|
|
9,458
|
|
|
19,708
|
|
|
18,626
|
|
|
Interest expense
|
(
37,590
)
|
|
|
(
18,897
)
|
|
|
(
75,182
)
|
|
|
(
35,363
)
|
|
|
Loss before income taxes
|
(
83,769
)
|
|
|
(
71,977
)
|
|
|
(
256,270
)
|
|
|
(
142,002
)
|
|
|
Income tax benefit (expense)
|
(
679
)
|
|
|
—
|
|
|
8,549
|
|
|
2,500
|
|
|
Net loss
|
$
|
(
84,448
)
|
|
|
$
|
(
71,977
)
|
|
|
$
|
(
247,721
)
|
|
|
$
|
(
139,502
)
|
|
|
Net loss per share — basic and diluted
|
$
|
(
0.38
)
|
|
|
$
|
(
0.35
)
|
|
|
$
|
(
1.15
)
|
|
|
$
|
(
0.68
)
|
|
|
Weighted-average shares outstanding — basic and diluted
|
219,467
|
|
|
205,754
|
|
|
215,070
|
|
|
205,137
|
|
____________________
(1) Amortization of website development costs and intangible assets included in technology and development
|
$
|
18,857
|
|
|
$
|
14,656
|
|
|
$
|
36,041
|
|
|
$
|
29,056
|
|
See accompanying notes to the condensed consolidated financial statements.
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net loss
|
$
|
(
84,448
)
|
|
|
$
|
(
71,977
)
|
|
|
$
|
(
247,721
)
|
|
|
$
|
(
139,502
)
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments
|
(
2,806
)
|
|
|
751
|
|
|
796
|
|
|
1,895
|
|
|
Reclassification adjustment for net investment (gains) losses included in net loss
|
(
62
)
|
|
|
—
|
|
|
372
|
|
|
—
|
|
|
Net unrealized gains (losses) on investments
|
(
2,868
)
|
|
|
751
|
|
|
1,168
|
|
|
1,895
|
|
|
Currency translation adjustments
|
107
|
|
|
(
52
)
|
|
|
17
|
|
|
(
94
)
|
|
|
Total other comprehensive income (loss)
|
(
2,761
)
|
|
|
699
|
|
|
1,185
|
|
|
1,801
|
|
|
Comprehensive loss
|
$
|
(
87,209
)
|
|
|
$
|
(
71,278
)
|
|
|
$
|
(
246,536
)
|
|
|
$
|
(
137,701
)
|
|
See accompanying notes to the condensed consolidated financial statements.
ZILLOW GROUP, INC.
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 April 1, 2020
|
212,913,139
|
|
|
$
|
22
|
|
|
$
|
4,551,866
|
|
|
$
|
(
1,140,413
)
|
|
|
$
|
4,286
|
|
|
$
|
3,415,761
|
|
|
Issuance of common and capital stock upon exercise of stock options
|
3,117,483
|
|
|
—
|
|
|
92,783
|
|
|
—
|
|
|
—
|
|
|
92,783
|
|
|
Vesting of restricted stock units
|
775,249
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares and value of restricted stock units withheld for tax liability
|
(
6
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
57,171
|
|
|
—
|
|
|
—
|
|
|
57,171
|
|
|
Issuance of Class C capital stock in connection with equity offering, net of issuance costs of $
10,877
|
8,800,000
|
|
|
1
|
|
|
411,522
|
|
|
—
|
|
|
—
|
|
|
411,523
|
|
|
Equity component of issuance of 2025 Notes, net of issuance costs of $
3,279
|
—
|
|
|
—
|
|
|
154,813
|
|
|
—
|
|
|
—
|
|
|
154,813
|
|
|
Partial repurchase of 2021 Notes
|
753,936
|
|
|
—
|
|
|
(
21,784
)
|
|
|
—
|
|
|
—
|
|
|
(
21,784
)
|
|
|
Partial unwind of capped call transactions for 2021 Notes
|
(
317,865
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(
84,448
)
|
|
|
—
|
|
|
(
84,448
)
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
2,761
)
|
|
|
(
2,761
)
|
|
|
Balance at June 30, 2020
|
226,041,936
|
|
|
$
|
23
|
|
|
$
|
5,246,371
|
|
|
$
|
(
1,224,861
)
|
|
|
$
|
1,525
|
|
|
$
|
4,023,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 April 1, 2019
|
205,130,332
|
|
|
$
|
21
|
|
|
$
|
4,022,218
|
|
|
$
|
(
739,304
)
|
|
|
$
|
197
|
|
|
$
|
3,283,132
|
|
|
Issuance of common and capital stock upon exercise of stock options
|
814,062
|
|
|
—
|
|
|
19,433
|
|
|
—
|
|
|
—
|
|
|
19,433
|
|
|
Vesting of restricted stock units
|
569,260
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares and value of restricted stock units withheld for tax liability
|
(
18
)
|
|
|
—
|
|
|
(
1
)
|
|
|
—
|
|
|
—
|
|
|
(
1
)
|
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
46,820
|
|
|
—
|
|
|
—
|
|
|
46,820
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(
71,977
)
|
|
|
—
|
|
|
(
71,977
)
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
699
|
|
|
699
|
|
|
Balance at June 30, 2019
|
206,513,636
|
|
|
$
|
21
|
|
|
$
|
4,088,470
|
|
|
$
|
(
811,281
)
|
|
|
$
|
896
|
|
|
$
|
3,278,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 January 1, 2020
|
209,066,855
|
|
|
$
|
21
|
|
|
$
|
4,412,200
|
|
|
$
|
(
977,140
)
|
|
|
$
|
340
|
|
|
$
|
3,435,421
|
|
|
Issuance of common and capital stock upon exercise of stock options
|
6,324,858
|
|
|
1
|
|
|
184,984
|
|
|
—
|
|
|
—
|
|
|
184,985
|
|
|
Vesting of restricted stock units
|
1,414,158
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares and value of restricted stock units withheld for tax liability
|
(
6
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
104,636
|
|
|
—
|
|
|
—
|
|
|
104,636
|
|
|
Issuance of Class C capital stock in connection with equity offering, net of issuance costs of $
10,877
|
8,800,000
|
|
|
1
|
|
|
411,522
|
|
|
—
|
|
|
—
|
|
|
411,523
|
|
|
Equity component of issuance of 2025 Notes, net of issuance costs of $
3,279
|
—
|
|
|
—
|
|
|
154,813
|
|
|
—
|
|
|
—
|
|
|
154,813
|
|
|
Partial repurchase of 2021 Notes
|
753,936
|
|
|
—
|
|
|
(
21,784
)
|
|
|
—
|
|
|
—
|
|
|
(
21,784
)
|
|
|
Partial unwind of capped call transactions for 2021 Notes
|
(
317,865
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(
247,721
)
|
|
|
—
|
|
|
(
247,721
)
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,185
|
|
|
1,185
|
|
|
Balance at June 30, 2020
|
226,041,936
|
|
|
$
|
23
|
|
|
$
|
5,246,371
|
|
|
$
|
(
1,224,861
)
|
|
|
$
|
1,525
|
|
|
$
|
4,023,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common
Stock, Class B
Common Stock and
Class C Capital Stock
|
|
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
203,904,265
|
|
|
$
|
21
|
|
|
$
|
3,939,842
|
|
|
$
|
(
671,779
)
|
|
|
$
|
(
905
)
|
|
|
$
|
3,267,179
|
|
|
Issuance of common and capital stock upon exercise of stock options
|
1,543,850
|
|
|
—
|
|
|
32,997
|
|
|
—
|
|
|
—
|
|
|
32,997
|
|
|
Vesting of restricted stock units
|
1,065,607
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares and value of restricted stock units withheld for tax liability
|
(
86
)
|
|
|
—
|
|
|
(
3
)
|
|
|
—
|
|
|
—
|
|
|
(
3
)
|
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
115,634
|
|
|
—
|
|
|
—
|
|
|
115,634
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(
139,502
)
|
|
|
—
|
|
|
(
139,502
)
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,801
|
|
|
1,801
|
|
|
Balance at June 30, 2019
|
206,513,636
|
|
|
$
|
21
|
|
|
$
|
4,088,470
|
|
|
$
|
(
811,281
)
|
|
|
$
|
896
|
|
|
$
|
3,278,106
|
|
See accompanying notes to the condensed consolidated financial statements.
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Operating activities
|
|
|
|
|
Net loss
|
$
|
(
247,721
)
|
|
|
$
|
(
139,502
)
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
Depreciation and amortization
|
55,199
|
|
|
41,728
|
|
|
Share-based compensation expense
|
96,146
|
|
|
109,756
|
|
|
Amortization of right of use assets
|
12,731
|
|
|
10,572
|
|
|
Amortization of contract cost assets
|
17,070
|
|
|
17,880
|
|
|
Amortization of discount and issuance costs on convertible senior notes maturing in 2021, 2023, 2024, 2025 and 2026
|
47,746
|
|
|
17,799
|
|
|
Gain on partial extinguishment of 2021 Notes
|
(
6,391
)
|
|
|
—
|
|
|
Impairment costs
|
76,800
|
|
|
—
|
|
|
Deferred income taxes
|
(
8,549
)
|
|
|
(
2,500
)
|
|
|
(Gain) loss on disposal of property and equipment and other assets
|
(
2,658
)
|
|
|
3,878
|
|
|
Credit loss expense
|
1,614
|
|
|
706
|
|
|
Net loss on investment securities
|
372
|
|
|
—
|
|
|
Accretion of bond discount
|
(
303
)
|
|
|
(
3,695
)
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
(
1,487
)
|
|
|
(
16,884
)
|
|
|
Mortgage loans held for sale
|
(
38,514
)
|
|
|
(
3,244
)
|
|
|
Inventory
|
701,145
|
|
|
(
389,994
)
|
|
|
Prepaid expenses and other assets
|
(
771
)
|
|
|
(
2,015
)
|
|
|
Lease liabilities
|
(
495
)
|
|
|
(
11,946
)
|
|
|
Contract cost assets
|
(
19,608
)
|
|
|
(
18,332
)
|
|
|
Accounts payable
|
7,504
|
|
|
1,256
|
|
|
Accrued expenses and other current liabilities
|
(
8,741
)
|
|
|
6,952
|
|
|
Accrued compensation and benefits
|
(
3,285
)
|
|
|
613
|
|
|
Deferred revenue
|
4,767
|
|
|
3,000
|
|
|
Other long-term liabilities
|
10,049
|
|
|
149
|
|
|
Net cash provided by (used in) operating activities
|
692,620
|
|
|
(
373,823
)
|
|
|
Investing activities
|
|
|
|
|
Proceeds from maturities of investments
|
701,266
|
|
|
539,312
|
|
|
Proceeds from sales of investments
|
116,394
|
|
|
—
|
|
|
Purchases of investments
|
(
1,026,233
)
|
|
|
(
302,891
)
|
|
|
Purchases of property and equipment
|
(
54,653
)
|
|
|
(
29,672
)
|
|
|
Purchases of intangible assets
|
(
11,408
)
|
|
|
(
8,927
)
|
|
|
Proceeds from sale of equity investment
|
10,000
|
|
|
—
|
|
|
Net cash provided by (used in) investing activities
|
(
264,634
)
|
|
|
197,822
|
|
|
Financing activities
|
|
|
|
|
Proceeds from issuance of 2025 Notes, net of issuance costs
|
553,282
|
|
|
—
|
|
|
Proceeds from issuance of Class C capital stock, net of issuance costs
|
411,522
|
|
|
—
|
|
|
Partial extinguishment of 2021 Notes
|
(
194,670
)
|
|
|
—
|
|
|
Proceeds from borrowings on credit facilities
|
43,200
|
|
|
293,099
|
|
|
Repayments of borrowings on credit facilities
|
(
617,506
)
|
|
|
—
|
|
|
Net borrowings (repayments) on warehouse lines of credit and repurchase agreement
|
39,387
|
|
|
(
2,961
)
|
|
|
Proceeds from exercise of stock options
|
184,984
|
|
|
32,997
|
|
|
Value of equity awards withheld for tax liability
|
—
|
|
|
3
|
|
|
Net cash provided by financing activities
|
420,199
|
|
|
323,138
|
|
|
Net increase in cash, cash equivalents and restricted cash during period
|
848,185
|
|
|
147,137
|
|
|
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
|
$
|
2,079,094
|
|
|
$
|
810,580
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
Cash paid for interest
|
$
|
29,201
|
|
|
$
|
16,616
|
|
|
Noncash transactions:
|
|
|
|
|
Capitalized share-based compensation
|
$
|
8,490
|
|
|
$
|
5,878
|
|
|
Write-off of fully depreciated property and equipment
|
$
|
6,942
|
|
|
$
|
9,867
|
|
|
Write-off of fully amortized intangible assets
|
$
|
—
|
|
|
$
|
3,311
|
|
|
Property and equipment purchased on account
|
$
|
5,305
|
|
|
$
|
2,408
|
|
See accompanying notes to the condensed consolidated financial statements.
ZILLOW GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1.
Organization and Description of Business
Zillow Group, Inc., the largest portfolio of real estate brands on mobile and the web, is building a trusted, on-demand real estate experience. Whether selling, buying, renting or financing, customers can turn to the Zillow family of businesses to find and get into their next home with speed, certainty and ease.
In addition to Zillow’s for-sale and rental listings, Zillow Offers buys and sells homes directly in dozens of markets across the country, allowing sellers control over their timeline. Zillow Closing Services offers customers title and escrow services to support a more seamless transaction experience. Zillow Home Loans, our affiliate lender, provides our customers with an easy option to get pre-approved and secure financing for their next home purchase.
Other consumer brands include Trulia, StreetEasy, HotPads, Naked Apartments and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions which 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; the stability of the residential real estate market and the impact of interest rate changes; changes in technology, products, markets or services by us or our competitors; addition or loss of significant customers; our ability to maintain or establish relationships with listings and data providers; our ability to obtain or maintain licenses and permits to support our current and future businesses; actual or anticipated changes to our products and services; changes in government regulation affecting our business; outcomes of legal proceedings; natural disasters and catastrophic events; scaling and adaptation of existing technology and network infrastructure; management of our growth; our ability to attract and retain qualified employees and key personnel; our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments; protection of customers’ information and other privacy concerns; protection of our brand and intellectual property; and intellectual property infringement and other claims, among other things.
Note 2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include Zillow Group, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes included in Zillow Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 19, 2020. The condensed consolidated balance sheet as of December 31, 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 June 30, 2020, our results of operations, comprehensive loss and shareholders’ equity for the three and six month periods ended June 30, 2020 and 2019, and our cash flows for the six month periods ended June 30, 2020 and 2019. The results of the three and six month periods ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any interim period or for any other future year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to 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, among others. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The COVID-19 pandemic has introduced significant additional uncertainty with respect to estimates, judgments and assumptions, which may materially impact the estimates previously listed, among others.
Recently Issued Accounting Standards Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (“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. While the goal of the reference rate reform transition is for it to be economically neutral to entities, we have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.
Note 3.
Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.
•
Level 3 — Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.
We applied the following methods and assumptions in estimating our fair value measurements:
Cash equivalents
— The fair value measurement of money market funds is based on quoted market prices in active markets. The fair value measurement of treasury bills are based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Short-term investments
— The fair value measurement of our short-term investments is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Restricted cash
— Restricted cash consists of cash received from the resale of homes through Zillow Offers which may be used to repay amounts borrowed on our 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Range
|
40
% -
100
%
|
|
56
% -
100
%
|
|
Weighted average
|
70
%
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,784,896
|
|
|
$
|
1,784,896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Treasury bills
|
70,189
|
|
|
—
|
|
|
70,189
|
|
|
—
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Treasury bills
|
963,231
|
|
|
—
|
|
|
963,231
|
|
|
—
|
|
|
U.S. government agency securities
|
465,715
|
|
|
—
|
|
|
465,715
|
|
|
—
|
|
|
Corporate notes and bonds
|
30,213
|
|
|
—
|
|
|
30,213
|
|
|
—
|
|
|
Municipal securities
|
16,538
|
|
|
—
|
|
|
16,538
|
|
|
—
|
|
|
Commercial paper
|
14,972
|
|
|
—
|
|
|
14,972
|
|
|
—
|
|
|
Certificates of deposit
|
498
|
|
|
—
|
|
|
498
|
|
|
—
|
|
|
Mortgage origination-related:
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
75,021
|
|
|
—
|
|
|
75,021
|
|
|
—
|
|
|
IRLCs
|
5,091
|
|
|
—
|
|
|
—
|
|
|
5,091
|
|
|
Forward contracts - other current liabilities
|
961
|
|
|
—
|
|
|
961
|
|
|
—
|
|
|
Total
|
$
|
3,427,325
|
|
|
$
|
1,784,896
|
|
|
$
|
1,637,338
|
|
|
$
|
5,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and six month periods ended June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2020 (1)
|
|
Balance, beginning of the period
|
$
|
2,225
|
|
|
$
|
937
|
|
|
Issuances
|
10,142
|
|
|
15,507
|
|
|
Transfers
|
(
8,586
)
|
|
|
(
13,142
)
|
|
|
Fair value changes recognized in earnings
|
1,310
|
|
|
1,789
|
|
|
Balance, end of period
|
$
|
5,091
|
|
|
$
|
5,091
|
|
|
(1) Beginning balance represents transfers of IRLCs from Level 2 to Level 3 within the fair value hierarchy as of January 1, 2020.
|
|
|
|
At June 30, 2020, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $
168.9
million and $
214.9
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 12 for the carrying amount and estimated fair value of our convertible senior notes.
Note 4.
Cash and Cash Equivalents, Short-term Investments and Restricted Cash
The following tables present the amortized cost, gross unrealized gains and losses and estimated fair market value of our cash and cash equivalents, available-for-sale investments and restricted cash as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Market
Value
|
|
Cash
|
$
|
190,389
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,389
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
1,784,896
|
|
|
—
|
|
|
—
|
|
|
1,784,896
|
|
|
Treasury bills
|
70,189
|
|
|
—
|
|
|
—
|
|
|
70,189
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Treasury bills
|
963,200
|
|
|
41
|
|
|
(
10
)
|
|
|
963,231
|
|
|
U.S. government agency securities
|
463,806
|
|
|
1,909
|
|
|
—
|
|
|
465,715
|
|
|
Corporate notes and bonds
|
30,094
|
|
|
119
|
|
|
—
|
|
|
30,213
|
|
|
Municipal securities
|
16,519
|
|
|
19
|
|
|
—
|
|
|
16,538
|
|
|
Commercial paper
|
14,972
|
|
|
—
|
|
|
—
|
|
|
14,972
|
|
|
Certificates of deposit
|
498
|
|
|
—
|
|
|
—
|
|
|
498
|
|
|
Restricted cash
|
33,620
|
|
|
—
|
|
|
—
|
|
|
33,620
|
|
|
Total
|
$
|
3,568,183
|
|
|
$
|
2,088
|
|
|
$
|
(
10
)
|
|
|
$
|
3,570,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2020 have a contractual maturity date of one year or less.
Note 5.
Accounts Receivable, net
The following table presents the changes in the allowance for doubtful accounts for the six months ended June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
Balance as of January 1, 2020
|
$
|
4,522
|
|
|
Credit loss expense
|
1,614
|
|
|
Less: write-offs, net of recoveries and other adjustments
|
(
3,854
)
|
|
|
Balance as of June 30, 2020
|
$
|
2,282
|
|
Note 6.
Inventory
The following table presents the components of inventory, net of applicable lower of cost or net realizable value adjustments, as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Work-in-process
|
$
|
12,164
|
|
|
$
|
152,171
|
|
|
Finished goods
|
123,237
|
|
|
684,456
|
|
|
Inventory
|
$
|
135,401
|
|
|
$
|
836,627
|
|
Note 7.
Contract Cost Assets
During the three and six month periods ended June 30, 2020 and 2019, we did
no
t incur any impairment losses to our contract cost assets. We recorded amortization expense related to contract cost assets of $
8.7
million and $
9.2
million during the three months ended June 30, 2020 and 2019, respectively, and $
17.1
million and $
17.9
million during the six months ended June 30, 2020 and 2019, respectively.
Note 8.
Property and Equipment, net
The following table presents the detail of property and equipment as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Website development costs
|
$
|
157,468
|
|
|
$
|
149,648
|
|
|
Leasehold improvements
|
107,139
|
|
|
81,981
|
|
|
Construction-in-progress
|
51,482
|
|
|
45,337
|
|
|
Office equipment, furniture and fixtures
|
42,236
|
|
|
36,582
|
|
|
Computer equipment
|
31,801
|
|
|
31,942
|
|
|
Property and equipment
|
390,126
|
|
|
345,490
|
|
|
Less: accumulated amortization and depreciation
|
(
194,379
)
|
|
|
(
175,001
)
|
|
|
Property and equipment, net
|
$
|
195,747
|
|
|
$
|
170,489
|
|
We recorded depreciation expense related to property and equipment (other than website development costs) of $
7.1
million and $
6.4
million during the three months ended June 30, 2020 and 2019, respectively, and $
18.9
million and $
12.4
million during the six months ended June 30, 2020 and 2019, respectively.
We capitalized $
15.4
million and $
10.3
million in website development costs during the three months ended June 30, 2020 and 2019, respectively, and $
27.9
million and $
20.3
million during the six months ended June 30, 2020 and 2019, respectively. Amortization expense for website development costs included in technology and development expenses was $
6.0
million and $
3.6
million during the three months ended June 30, 2020 and 2019, respectively, and $
11.4
million and $
7.0
million during the six months ended June 30, 2020 and 2019, respectively.
Note 9.
Equity 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. In March 2020, we recognized a non-cash impairment charge of $
5.3
million related to this investment. The impairment charge is included in Impairment costs within our IMT segment for the six months ended June 30, 2020. In connection with our assessment of the investment for impairment indicators as a result of COVID-19’s significant adverse impact on the real estate industry, we identified factors that led us to conclude that the investment was impaired and the fair value of the investment was less than the carrying value. The most significant of such factors related to the future expected cash flows of the investee. Accordingly, we performed an analysis to determine the fair value of the investment and concluded that our best estimate of its fair value was $
4.7
million. In June 2020, we sold our
10
% equity interest for $
10.0
million in cash. We recorded a gain on the sale of the investment of $
5.3
million for the three and six month periods ended June 30, 2020 which is classified within Other income in our condensed consolidated statements of operations.
Note 10.
Intangible Assets, net
The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Trade names and trademarks
|
$
|
36,500
|
|
|
$
|
(
1,274
)
|
|
|
$
|
35,226
|
|
|
Customer relationships
|
102,600
|
|
|
(
81,372
)
|
|
|
21,228
|
|
|
Developed technology
|
107,200
|
|
|
(
87,340
)
|
|
|
19,860
|
|
|
Software
|
40,744
|
|
|
(
25,031
)
|
|
|
15,713
|
|
|
Intangibles-in-progress
|
10,054
|
|
|
—
|
|
|
10,054
|
|
|
Purchased content
|
50,552
|
|
|
(
45,726
)
|
|
|
4,826
|
|
|
Lender licenses
|
400
|
|
|
(
317
)
|
|
|
83
|
|
|
Total
|
$
|
348,050
|
|
|
$
|
(
241,060
)
|
|
|
$
|
106,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2020 and 2019 was $
13.1
million and $
11.0
million, respectively, and $
24.9
million and $
22.0
million for the six months ended June 30, 2020 and 2019, respectively. These amounts are included in technology and development expenses.
During March 2020, we recognized a non-cash impairment charge of $
71.5
million related to our Trulia trade names and trademarks intangible asset, which historically had not been subject to amortization. The impairment charge is included in Impairment costs within our IMT and Mortgages segments for the six months ended June 30, 2020. 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. In connection with this impairment analysis, we evaluated our expected future reduced 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. During the three months ended June 30, 2020 we began amortizing the remaining $
36.5
million carrying value on an accelerated basis commensurate with the projected cash flows expected to be generated by the intangible asset over a useful life of
10
years. The carrying value of the Trulia trade names and trademarks intangible asset was $
35.2
million as of June 30, 2020 and $
108.0
million as of December 31, 2019.
Note 11.
Deferred Revenue
The following tables present the changes in deferred revenue for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Balance as of April 1, 2020
|
$
|
35,347
|
|
|
Deferral of revenue
|
222,895
|
|
|
Less: Revenue recognized
|
(
213,728
)
|
|
|
Balance as of June 30, 2020
|
$
|
44,514
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
|
Balance as of January 1, 2020
|
$
|
39,747
|
|
|
Deferral of revenue
|
476,624
|
|
|
Less: Revenue recognized
|
(
471,857
)
|
|
|
Balance as of June 30, 2020
|
$
|
44,514
|
|
During the three months ended June 30, 2020 we recognized as revenue a total of $
33.8
million pertaining to amounts that were recorded in deferred revenue as of April 1, 2020. During the six months ended June 30, 2020 we recognized as revenue a total of $
36.6
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Homes Segment
|
|
|
|
|
|
Credit facilities:
|
|
|
|
|
|
Goldman Sachs Bank USA
|
|
$
|
19,632
|
|
|
$
|
39,244
|
|
|
Citibank, N.A.
|
|
33,037
|
|
|
296,369
|
|
|
Credit Suisse AG, Cayman Islands
|
|
64,549
|
|
|
355,911
|
|
|
Total Homes Segment debt
|
|
117,218
|
|
|
691,524
|
|
|
Mortgages Segment
|
|
|
|
|
|
Repurchase agreement:
|
|
|
|
|
|
Citibank, N.A.
|
|
33,918
|
|
|
394
|
|
|
Warehouse line of credit:
|
|
|
|
|
|
Comerica Bank
|
|
35,896
|
|
|
30,033
|
|
|
Total Mortgages Segment debt
|
|
69,814
|
|
|
30,427
|
|
|
Convertible Senior Notes
|
|
|
|
|
|
1.375
% convertible senior notes due 2026
|
|
337,171
|
|
|
327,187
|
|
|
2.75
% convertible senior notes due 2025
|
|
401,786
|
|
|
—
|
|
|
0.75
% convertible senior notes due 2024
|
|
507,039
|
|
|
490,538
|
|
|
1.50
% convertible senior notes due 2023
|
|
318,348
|
|
|
310,175
|
|
|
2.00
% convertible senior notes due 2021
|
|
245,997
|
|
|
415,502
|
|
|
2.75
% convertible senior notes due 2020
|
|
9,637
|
|
|
9,637
|
|
|
Total convertible senior notes
|
|
1,819,978
|
|
|
1,553,039
|
|
|
Total
|
|
$
|
2,007,010
|
|
|
$
|
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
|
|
|
3.91
|
%
|
|
Citibank, N.A.
|
|
January 31, 2022
|
|
500,000
|
|
|
4.69
|
%
|
|
Credit Suisse AG, Cayman Islands
|
|
July 31, 2021
|
|
500,000
|
|
|
4.62
|
%
|
|
|
|
Total
|
|
$
|
1,500,000
|
|
|
|
Undrawn amounts available under the credit facilities included in the table above are not committed, meaning the applicable lender is not committed to, but may in its discretion, advance loan funds in excess of the outstanding borrowings. The final maturity dates are inclusive of extensions which are subject to agreement by the respective lender.
Zillow Group formed certain special purpose entities (each, an “SPE”) to purchase and sell residential properties through Zillow Offers. Each SPE is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such SPE are available to satisfy the debts and other obligations of any affiliate or other entity. The credit facilities are secured by the assets and equity of one or more SPEs. These SPEs are variable interest entities and Zillow Group is the primary beneficiary as it has the power to control the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses of the SPEs or the right to receive benefits from the SPEs that could potentially be significant to the SPEs. The SPEs are consolidated within Zillow Group’s condensed consolidated financial statements. The collective inventory and credit facility borrowings of the SPEs were $
135.4
million and $
117.2
million, respectively, as of June 30, 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 eligible properties owned by such SPE falls below a certain percentage of the principal amount outstanding under the applicable credit facility. Continued inclusion of properties in each credit facility is subject to various eligibility criteria. For example, aging criteria limit the inclusion in the borrowing base of properties owned longer than a specified number of days, and properties owned for longer than one year are 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 and leverage ratios. As of June 30, 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 sells 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
|
|
|
1.88
|
%
|
|
Comerica Bank
|
|
June 26, 2021
|
|
50,000
|
|
|
2.81
|
%
|
|
|
|
Total
|
|
$
|
125,000
|
|
|
|
On June 27, 2020, Zillow Home Loans amended its warehouse line of credit with Comerica Bank previously maturing on June 27, 2020 to extend the term of the original agreement for one year through June 26, 2021.
The warehouse line of credit with Comerica Bank is committed. The repurchase agreement with Citibank, N.A. includes a committed amount of $
25.0
million. As of June 30, 2020 and December 31, 2019, $
33.9
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, and in certain cases include a LIBOR floor, as defined in the governing 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 June 30, 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, and have no 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 periods presented (in thousands, except interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 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
|
|
$
|
162,829
|
|
|
$
|
705,000
|
|
|
$
|
172,813
|
|
|
$
|
597,380
|
|
|
May 15, 2025
|
|
565,000
|
|
|
2.75
|
%
|
|
10.32
|
%
|
|
November 15, 2020
|
|
May 15; November 15
|
|
163,214
|
|
|
659,756
|
|
|
—
|
|
|
—
|
|
|
September 1, 2024
|
|
673,000
|
|
|
0.75
|
%
|
|
7.68
|
%
|
|
March 1, 2020
|
|
March 1; September 1
|
|
165,961
|
|
|
957,659
|
|
|
182,462
|
|
|
819,378
|
|
|
July 1, 2023
|
|
373,750
|
|
|
1.50
|
%
|
|
6.99
|
%
|
|
January 1, 2019
|
|
January 1; July 1
|
|
55,402
|
|
|
388,113
|
|
|
63,575
|
|
|
356,464
|
|
|
December 1, 2021
|
|
265,330
|
|
|
2.00
|
%
|
|
7.43
|
%
|
|
June 1, 2017
|
|
June 1; December 1
|
|
19,333
|
|
|
326,688
|
|
|
44,498
|
|
|
514,312
|
|
|
December 15, 2020
|
|
9,637
|
|
|
2.75
|
%
|
|
N/A
|
|
N/A
|
|
June 15; December 15
|
|
—
|
|
|
16,842
|
|
|
—
|
|
|
16,842
|
|
|
Total
|
|
$
|
2,386,717
|
|
|
|
|
|
|
|
|
|
|
$
|
566,739
|
|
|
$
|
3,054,058
|
|
|
$
|
463,348
|
|
|
$
|
2,304,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
Three Months Ended June 30, 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
|
|
|
$
|
4,922
|
|
|
$
|
120
|
|
|
$
|
6,761
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
May 15, 2025
|
|
2,007
|
|
|
3,148
|
|
|
168
|
|
|
5,323
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
September 1, 2024
|
|
1,262
|
|
|
8,095
|
|
|
278
|
|
|
9,635
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
July 1, 2023
|
|
1,402
|
|
|
3,749
|
|
|
366
|
|
|
5,517
|
|
|
1,402
|
|
|
3,496
|
|
|
342
|
|
|
5,240
|
|
|
December 1, 2021
|
|
1,803
|
|
|
3,945
|
|
|
408
|
|
|
6,156
|
|
|
2,300
|
|
|
4,677
|
|
|
484
|
|
|
7,461
|
|
|
December 15, 2020
|
|
66
|
|
|
—
|
|
|
—
|
|
|
66
|
|
|
66
|
|
|
—
|
|
|
—
|
|
|
66
|
|
|
Total
|
|
$
|
8,259
|
|
|
$
|
23,859
|
|
|
$
|
1,340
|
|
|
$
|
33,458
|
|
|
$
|
3,768
|
|
|
$
|
8,173
|
|
|
$
|
826
|
|
|
$
|
12,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
Six Months Ended June 30, 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
|
|
$
|
3,438
|
|
|
$
|
9,746
|
|
|
$
|
238
|
|
|
$
|
13,422
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
May 15, 2025
|
|
2,007
|
|
|
3,148
|
|
|
168
|
|
|
5,323
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
September 1, 2024
|
|
2,510
|
|
|
15,956
|
|
|
545
|
|
|
19,011
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
July 1, 2023
|
|
2,804
|
|
|
7,446
|
|
|
727
|
|
|
10,977
|
|
|
2,804
|
|
|
6,933
|
|
|
678
|
|
|
10,415
|
|
|
December 1, 2021
|
|
4,103
|
|
|
8,856
|
|
|
916
|
|
|
13,875
|
|
|
4,600
|
|
|
9,268
|
|
|
959
|
|
|
14,827
|
|
|
December 15, 2020
|
|
132
|
|
|
—
|
|
|
—
|
|
|
132
|
|
|
132
|
|
|
—
|
|
|
—
|
|
|
132
|
|
|
Total
|
|
$
|
14,994
|
|
|
$
|
45,152
|
|
|
$
|
2,594
|
|
|
$
|
62,740
|
|
|
$
|
7,536
|
|
|
$
|
16,201
|
|
|
$
|
1,637
|
|
|
$
|
25,374
|
|
The convertible notes are senior unsecured obligations. The convertible senior notes maturing in 2026, 2025, 2024, 2023 and 2021 (the “Notes”) are classified as long-term debt based on their contractual maturity dates in our condensed consolidated balance sheets. The convertible senior notes maturing in 2020 are classified within current liabilities.
For more than
20
trading days during the
30
consecutive trading days ended June 30, 2020, the last reported sale price of our Class C capital stock exceeded
130
% of the conversion price of the convertible senior notes due in 2024 and 2026 (the “2024 Notes” and “2026 Notes”, respectively). Accordingly, the 2024 Notes and 2026 Notes became convertible at the option of the holders from July 1 through September 30, 2020. The convertible senior notes maturing in 2025, 2023 and 2021 are not redeemable or convertible as of June 30, 2020. The convertible senior notes maturing in 2020 are convertible, at the option of the holder, and redeemable, at our option, as of June 30, 2020.
Interest on the convertible notes is paid semi-annually in arrears. The estimated fair value of the convertible senior notes was determined through consideration of quoted market prices. The fair value is classified as Level 3 due to the limited trading activity for each of the convertible senior notes.
The Notes are convertible into cash, shares of Class C capital stock or a combination thereof, at our election, and may be settled as described below. The Notes will mature on their respective maturity date, unless earlier repurchased, redeemed or converted in accordance with their terms.
The following table summarizes the conversion and redemption options with respect to the Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Early Conversion Date
|
|
Conversion Rate
|
|
Conversion Price
|
|
Optional Redemption Date
|
|
September 1, 2026
|
|
March 1, 2026
|
|
22.9830
|
|
$
|
43.51
|
|
|
September 5, 2023
|
|
May 15, 2025
|
|
November 15, 2024
|
|
14.8810
|
|
67.20
|
|
|
May 22, 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 capped call confirmations with respect to certain of 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
|
%
|
On May 15, 2020, we issued $
500.0
million aggregate principal amount of
2.75
% Convertible Senior Notes due 2025 (the “Initial 2025 Notes”) and on May 19, 2020 we issued $
65.0
million aggregate principal amount of
2.75
% Convertible Senior Notes due 2025 (the “Additional Notes” and, together with the Initial 2025 Notes, the “2025 Notes”). The Additional Notes were sold pursuant to the underwriters’ option to purchase additional 2025 Notes granted in connection with the offering of the Initial 2025 Notes.
The net proceeds from the issuance of the 2025 Notes were approximately $
553.3
million, after deducting underwriting discounts and commissions and offering expenses paid by Zillow Group. We used a portion of the net proceeds from the issuance of the 2025 Notes to repurchase $
194.7
million aggregate principal of the convertible senior notes due 2021 (the “2021 Notes”) in privately negotiated transactions. The 2021 Notes were repurchased for $
194.7
million in cash and
753,936
shares of Class C capital stock for an aggregate purchase price of $
230.9
million. The repurchase of the 2021 Notes was accounted for as a debt extinguishment. We allocated $
172.9
million of the repurchase price to the liability component based on the fair value of the liability component immediately prior to settlement. The fair value of the liability component was calculated using a discounted cash flow analysis with a market interest rate of a similar liability that does not have an associated convertible feature. The remaining consideration of $
58.0
million was allocated to the equity component. As a result, we recognized a $
179.3
million reduction to long-term debt representing the carrying value of the liability component as of the date of the partial repurchase of the 2021 Notes, a $
58.0
million reduction to additional paid-in capital representing the equity component of the partially repurchased 2021 Notes and a $
6.4
million gain on partial extinguishment of 2021 Notes representing the excess of the carrying value of the liability component over the fair value of the liability component of the repurchased 2021 Notes.
In connection with the repurchase of a portion of the 2021 Notes, we partially terminated the capped call transactions entered into in connection with the issuance of the 2021 Notes for an amount corresponding to the aggregate principal amount of the 2021 Notes that were repurchased. As a result of the partial settlement of the capped call transactions, we received
317,865
shares of our Class C capital stock equal to a value of approximately $
14.8
million based on the trading price of our Class C capital stock at the time of the unwind. Under applicable Washington State law, the acquisition of a corporation’s own shares is not disclosed separately as treasury stock in the financial statements and such shares are treated as authorized but unissued shares. We record acquisitions of our shares of capital stock as a reduction to capital stock at the par value of the shares reacquired, then to additional paid-in capital until it is depleted to a nominal amount, with any further excess recorded to retained earnings. We recorded an offsetting increase to additional paid-in capital for the partial unwind of the capped call transactions.
We intend to use the remainder of the net proceeds from the 2025 Notes for general corporate purposes, which may include general and administrative matters and capital expenditures.
Prior to the close of business on the business day immediately preceding November 15, 2024, the 2025 Notes are convertible at the option of the holders of the 2025 Notes only under certain conditions. On or after November 15, 2024, until the close of business on the second scheduled trading day immediately preceding May 15, 2025, holders of the 2025 Notes may convert the 2025 Notes at their option at the conversion rate then in effect, irrespective of these conditions. Zillow Group will settle conversions of the 2025 Notes by paying or delivering, as the case may be, cash, shares of its Class C capital stock, or a combination of cash and shares of its Class C capital stock, at its election. The conversion rate will initially be 14.8810 shares of Class C capital stock per $1,000 principal amount of 2025 Notes (equivalent to an initial conversion price of approximately $
67.20
per share of Class C capital stock). The conversion rate and the corresponding initial conversion price are subject to customary adjustments upon the occurrence of certain events. Zillow Group may redeem for cash all or part of the 2025 Notes, at its option, on or after May 22, 2023, under certain circumstances, at a redemption price equal to
100
% of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indenture governing the 2025 Notes, the “Indenture”). We may not redeem the 2025 Notes prior to May 22, 2023. We may redeem, for cash, all or any portion of the 2025 Notes, at our option, on or after May 22, 2023 if the last reported sale price per share of our Class C capital stock has been at least
130
% of the conversion price then in effect for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading day period. The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.
If Zillow Group undergoes a fundamental change (as defined in the Indenture), holders of the 2025 Notes may require us to repurchase for cash all or part of their 2025 Notes at a repurchase price equal to
100
% of the principal amount of the 2025 Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date (as defined in the Indenture). In addition, if certain fundamental changes occur or if Zillow Group delivers a notice of redemption, we may be required, in certain circumstances, to increase the conversion rate for any 2025 Notes converted in connection with such fundamental changes or notice of redemption by a specified number of shares of our Class C capital stock. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the 2025 Notes, as described in the Indenture. There are no financial covenants associated with the 2025 Notes.
In accounting for the issuance of the 2025 Notes, we separated the 2025 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2025 Notes. The difference between the principal amount of the 2025 Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the condensed consolidated balance sheet and amortized to interest expense using the effective interest method over the term of the 2025 Notes. The equity component of the 2025 Notes of approximately $
154.8
million, net of issuance costs of $
3.3
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.
For additional details related to our convertible senior notes, see Note 15 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 13.
Income Taxes
We are subject to federal and state income taxes in the United States and federal and provincial income taxes in Canada. As of June 30, 2020 and December 31, 2019, we have provided a valuation allowance against our net deferred tax assets that we believe, based on the weight of available evidence, are not more likely than not to be realized. Therefore, no material current tax liability or expense has been recorded in the condensed consolidated financial statements. We have accumulated federal tax losses of approximately $
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 income tax expense of $
0.7
million for the three months ended June 30, 2020 and an income tax benefit of $
8.5
million for the six months ended June 30, 2020. The income tax benefit for the six months ended June 30, 2020 was primarily 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 six months ended June 30, 2020.
Note 14.
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 June 30, 2020 or December 31, 2019.
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 holders of a majority of the shares of the Class B common stock. 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.
On May 15, 2020, Zillow Group issued and sold
8,000,000
shares of Class C capital stock, and on May 19, 2020, issued and sold an additional
800,000
shares of Class C capital stock pursuant to the exercise of the underwriters’ option to purchase additional shares. The
8,800,000
shares of Class C capital stock were issued and sold at a public offering price of $
48.00
per share. We received net proceeds of $
411.5
million after deducting underwriting discounts and commissions and offering expenses paid by us.
In connection with the partial repurchase of the 2021 Notes, we issued
753,936
shares of Class C capital stock at a price of $
48.00
per share with a total value of $
36.2
million to settle the conversion spread for the notes repurchased. Additionally, we unwound a portion of the capped call transactions related to the 2021 Notes whereby we received
317,865
shares of our Class C capital stock equal to a value of approximately $
14.8
million based on the trading price of our Class C capital stock at the time of the unwind. See Note 12 for further discussion of the partial repurchase of the 2021 Notes and the corresponding capped call unwind.
Note 15.
Share-Based Awards
Zillow Group, Inc. 2020 Incentive Plan
On June 9, 2020, the Zillow Group, Inc. 2020 Incentive Plan (the “2020 Plan”) became effective, which replaces the Zillow Group, Inc. Amended and Restated 2011 Incentive Plan (the “2011 Plan”).
12,400,000
shares of Class C capital stock are authorized and available for issuance under the 2020 Plan. In addition, shares previously available for new grants under the 2011 Plan as of June 9, 2020 and shares subject to outstanding awards under the 2011 Plan as of June 9, 2020 that on or after that date cease to be subject to such awards (other than by reason of exercise or settlement of the awards in vested or nonforfeitable shares) are also available for issuance under the 2020 Plan. The number of shares authorized under the 2020 Plan will be increased on the first day of each calendar year, beginning January 1, 2021 and ending on (and including) January 1, 2030, by an amount equal to the lesser of (a)
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 the immediately preceding calendar year and (b) a number of shares determined by our board of directors. The 2020 Plan is administered by the compensation committee of the board of directors. Under the terms of the 2020 Plan, the compensation committee may grant equity awards, including incentive stock options, nonqualified stock options, restricted stock, restricted stock units, restricted units, stock appreciation rights, performance shares or performance units to employees, officers, directors, consultants, agents, advisors and independent contractors of Zillow Group and its subsidiaries. The board of directors has also authorized certain senior executive officers to grant equity awards under the 2020 Plan, within limits prescribed by our board of directors. The 2020 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 2020 Plan are granted with an exercise price per share not less than
100
% of the fair market value of our Class C capital stock on the grant date, with the exception of substituted option awards granted in connection with acquisitions, and are exercisable at such times and under such conditions as determined by the compensation committee. Any portion of an option that is not vested and exercisable on the date of a participant’s termination of service expires on such date. Employees generally forfeit their rights to exercise vested options
3
months following their termination of employment or
12
months following termination by reason of death, disability or retirement. Options granted under the 2020 Plan expire no later than
ten years
from the grant date and typically vest either
25
% after
12
months and quarterly thereafter over the next
three years
or quarterly over a period of
four years
.
Restricted stock units granted under the 2020 Plan typically vest either
25
% after
12
months and quarterly thereafter over the next
three years
or quarterly over a period of
four 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.
Options and restricted stock units that remain outstanding under the 2011 Plan have vesting and exercisability terms consistent with those described above for awards granted under the 2020 Plan.
Option Awards
The following table summarizes option award activity for the six months ended June 30, 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
|
4,833,605
|
|
|
49.24
|
|
|
|
|
|
|
Exercised
|
(
6,324,858
)
|
|
|
29.25
|
|
|
|
|
|
|
Forfeited or cancelled
|
(
674,462
)
|
|
|
40.76
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
27,468,581
|
|
|
39.71
|
|
|
6.74
|
|
493,801
|
|
|
Vested and exercisable at June 30, 2020
|
14,708,916
|
|
|
35.84
|
|
|
4.96
|
|
320,951
|
|
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
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Expected volatility
|
51
%
|
|
45
%
|
|
45
%-
51
%
|
|
45
%-
47
%
|
|
Expected dividend yield
|
—
|
|
—
|
|
—
|
|
—
|
|
Risk-free interest rate
|
0.33
%
|
|
2.00
%
|
|
0.33
%-
0.93
%
|
|
2.00
%-
2.53
%
|
|
Weighted-average expected life
|
5.00
years
|
|
5.00
years
|
|
5.00
-
5.50
years
|
|
4.75
-
5.25
years
|
|
Weighted-average fair value of options granted
|
$
20.21
|
|
$
16.96
|
|
$
20.69
|
|
$
16.79
|
As of June 30, 2020, there was a total of $
218.2
million in unrecognized compensation cost related to unvested stock options.
Restricted Stock Units
The following table summarizes activity for restricted stock units for the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
|
Weighted-
Average Grant-
Date Fair
Value
|
|
Unvested outstanding at January 1, 2020
|
7,052,767
|
|
|
$
|
40.01
|
|
|
Granted
|
3,665,016
|
|
|
49.30
|
|
|
Vested
|
(
1,414,158
)
|
|
|
40.65
|
|
|
Forfeited
|
(
513,401
)
|
|
|
41.62
|
|
|
Unvested outstanding at June 30, 2020
|
8,790,224
|
|
|
43.69
|
|
As of June 30, 2020, there was a total of $
356.6
million in unrecognized compensation cost related to unvested restricted stock units.
Share-Based Compensation Expense
The following table presents the effects of share-based compensation expense in our condensed consolidated statements of operations during the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Cost of revenue
|
$
|
1,119
|
|
|
$
|
936
|
|
|
$
|
2,292
|
|
|
$
|
1,816
|
|
|
Sales and marketing
|
9,116
|
|
|
6,801
|
|
|
16,109
|
|
|
12,451
|
|
|
Technology and development
|
21,666
|
|
|
18,399
|
|
|
40,583
|
|
|
33,908
|
|
|
General and administrative
|
20,450
|
|
|
17,496
|
|
|
37,162
|
|
|
61,581
|
|
|
Total
|
$
|
52,351
|
|
|
$
|
43,632
|
|
|
$
|
96,146
|
|
|
$
|
109,756
|
|
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 during the six months ended June 30, 2019. For additional details, see Note 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 16.
Net Loss Per Share
For the periods presented, the following Class A common stock and Class C capital stock equivalents were excluded from the calculations of diluted net loss per share because their effect would have been antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Weighted-average Class A common stock and Class C capital stock option awards outstanding
|
25,202
|
|
|
19,502
|
|
|
22,649
|
|
|
19,656
|
|
|
Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding
|
9,086
|
|
|
7,230
|
|
|
8,354
|
|
|
6,548
|
|
|
Class A common stock issuable upon conversion of the convertible notes maturing in 2020
|
400
|
|
|
411
|
|
|
400
|
|
|
411
|
|
|
Class C capital stock issuable upon conversion of the convertible notes maturing in 2021, 2024 and 2026
|
7,232
|
|
|
—
|
|
|
7,316
|
|
|
—
|
|
|
Total Class A common stock and Class C capital stock equivalents
|
41,920
|
|
|
27,143
|
|
|
38,719
|
|
|
26,615
|
|
Since we expect to settle the principal amount of the outstanding Notes in cash, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread for each of the notes has a dilutive impact on diluted net income per share when the market price of the Company’s Class C capital stock at the end of the period exceeds the conversion price per share.
The following table presents the conversion spread and conversion price per share of Class C capital stock for each of the convertible senior notes (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Conversion Spread
|
|
Conversion Price per Share
|
|
September 1, 2026
|
|
11,492
|
|
|
$
|
43.51
|
|
|
May 15, 2025
|
|
8,408
|
|
|
67.20
|
|
|
September 1, 2024
|
|
15,468
|
|
|
43.51
|
|
|
July 1, 2023
|
|
4,769
|
|
|
78.37
|
|
|
December 1, 2021
|
|
5,067
|
|
|
52.36
|
|
Note 17.
Commitments and Contingencies
Lease Commitments
We have entered into various non-cancelable operating lease agreements for certain of our office space and equipment with original lease periods expiring between 2020 and 2030. For additional information regarding our lease agreements, see Note 14 in our Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2019.
Purchase Commitments
Purchase commitments primarily include various non-cancelable agreements to purchase content related to our mobile applications and websites and certain cloud computing services as well as homes we are under contract to purchase through Zillow Offers but that have not closed as of the respective date.
The amounts due for non-cancelable purchase commitments, excluding homes under contract, as of June 30, 2020, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
2020
|
$
|
8,254
|
|
|
2021
|
17,627
|
|
|
2022
|
3,043
|
|
|
2023
|
507
|
|
|
Total future purchase commitments
|
$
|
29,431
|
|
As of June 30, 2020, the value of homes under contract that have not closed was $
51.9
million.
Letters of Credit
As of June 30, 2020, we have outstanding letters of credit of approximately $
16.9
million, which secure our lease obligations in connection with certain of our office space operating leases.
Surety Bonds
In the course of business, we are required to provide financial commitments in the form of surety bonds to third parties as a guarantee of our performance on and our compliance with certain obligations. If we were to fail to perform or comply with these obligations, any draws upon surety bonds issued on our behalf would then trigger our payment obligation to the surety bond issuer. We have outstanding surety bonds issued for our benefit of approximately $
9.8
million and $
10.2
million, respectively, as of June 30, 2020 and December 31, 2019.
Legal Proceedings
We are involved in a number of legal proceedings concerning matters arising in connection with the conduct of our business activities, some of which are at preliminary stages and some of which seek an indeterminate amount of damages. We regularly evaluate the status of legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made if accruals are not appropriate. For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in preliminary stages; (ii) specific damages have not been sought; (iii) damages sought are, in our view, unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories presented. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial position, results of operations or cash flow. For the matters discussed below, we have not recorded any material accruals as of June 30, 2020 or December 31, 2019.
In July 2015, VHT, Inc. (“VHT”) filed a complaint against us in the United States 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 March 15, 2019, after we 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, the Ninth Circuit Court of Appeals issued an opinion 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 6, 2019, the Company filed a motion for summary judgment with the District Court seeking a ruling that VHT’s images are a compilation, or in the alternative, seeking a dismissal of the case based on a recent United States Supreme Court ruling. On May 8, 2020, the District Court denied the Company’s motion for summary judgment and granted VHT’s motion for summary judgment on the issue of whether the remaining photos were a compilation. We do not believe there is a reasonable possibility that a material loss will be incurred related to this lawsuit.
In August and September 2017,
two
purported class action lawsuits were filed against us and certain of our executive officers, alleging, among other things, violations of federal securities laws on behalf of a class of those who purchased our common stock between February 12, 2016 and August 8, 2017. One of those purported class actions, captioned
Vargosko v. Zillow Group, Inc. et al
, was brought in the U.S. District Court for the Central District of California. The other purported class action lawsuit, captioned
Shotwell v. Zillow Group, Inc. et al
, was brought in the U.S. District Court for the Western District of Washington. The complaints allege, among other things, that during the period between February 12, 2016 and August 8, 2017, we issued materially false and misleading statements regarding our business practices. The complaints seek to recover, among other things, alleged damages sustained by the purported class members as a result of the alleged misconduct. In November 2017, an amended complaint was filed against us and certain of our executive officers in the
Shotwell v. Zillow Group
purported 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, and in April 2018, we filed our motion to dismiss the consolidated amended complaint. In October 2018, our motion to dismiss was granted without prejudice, and in November 2018, the plaintiffs filed a second consolidated amended complaint, which we moved to dismiss in December 2018. On April 19, 2019, our motion to dismiss the second consolidated amended complaint was denied, and we filed our answer to the second amended complaint on May 3, 2019. On October 11, 2019, plaintiffs filed a motion for class certification, and we filed our motion in opposition on March 20, 2020. The plaintiffs filed a reply in further support of their motion on May 29, 2020. We have denied the allegations of wrongdoing and intend to vigorously defend the claims in this lawsuit. We do not believe a loss related to this lawsuit is probable.
In October and November 2017 and January and February 2018,
four
shareholder derivative lawsuits were filed in the U.S. District Court for the Western District of Washington and the Superior Court of the State of Washington, King County, against certain of our executive officers and directors seeking unspecified damages on behalf of the Company and certain other relief, such as reform to corporate governance practices. The plaintiffs in the derivative suits (in which the Company is a nominal defendant) allege, among other things, that the defendants breached their fiduciary duties in connection with oversight of the Company’s public statements and legal compliance, and as a result of the breach of such fiduciary duties, the Company was damaged, and defendants were unjustly enriched. Certain of the plaintiffs also allege, among other things, violations of Section 14(a) of the Securities Exchange Act of 1934 and waste of corporate assets. On February 5, 2018, the U.S. District Court for the Western District of Washington consolidated the
two
federal 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
four
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. On May 18, 2020 we filed an answer in the consolidated federal derivative lawsuit. Our answer in the consolidated state derivative matter is due on August 24, 2020. 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, we filed a motion to transfer venue and/or to dismiss the complaint. The Company’s motion to transfer venue to the United States District Court for the Western District of Washington was granted on May 28, 2020. We filed our answer with counterclaims in response to the amended complaint on June 11, 2020. On July 2, 2020, IBM filed a motion to dismiss our counterclaims. In response to IBM’s motion, on July 22, 2020, we filed an amended answer with counterclaims. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit. There is a reasonable possibility that a loss may be incurred related to this complaint; however, the possible loss or range of loss is not estimable.
On July 21, 2020, IBM filed a second action against us in the United States District Court for the Western District of Washington, alleging, among other things that the Company has infringed and continues to willfully infringe five patents held by IBM and seeks unspecified damages. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit. We do not believe a loss related to this lawsuit is probable.
In addition to the matters discussed above, from time to time, we are involved in litigation and claims that arise in the ordinary course of business. Although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements and out of intellectual property infringement claims made by third parties. In addition, we have agreements that indemnify certain issuers of surety bonds against losses that they may incur as a result of executing surety bonds on our behalf. For our indemnification arrangements, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments. In addition, we have indemnification agreements with certain of our directors and executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations may vary.
Note 18.
Employee Benefit Plan
We have a defined contribution 401(k) retirement plan covering Zillow Group employees who have met certain eligibility requirements (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 $
5.2
million, respectively, for the three months ended June 30, 2020 and 2019, and $
12.8
million and $
10.1
million, respectively, for the six months ended June 30, 2020 and 2019.
Note 19.
Segment Information and Revenue
We have
three
operating and reportable segments, which have been identified based on the way in which our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. 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 and new construction marketplaces, dotloop and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals. The Mortgages segment includes financial results for advertising sold to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and the sale of mortgages on the secondary market, as well as Mortech mortgage software solutions.
Revenue and costs are directly attributed to our segments when possible. However, due to the integrated structure of our business, certain costs incurred by one segment may benefit the other segments. These costs primarily include headcount-related expenses, general and administrative expenses including executive, finance, accounting, legal, human resources, recruiting and facilities costs, product development and data acquisition costs and marketing and advertising costs. These costs are allocated to each segment based on the estimated benefit each segment receives from such expenditures.
The chief executive officer reviews information about our revenue categories as well as statement of operations data inclusive of income (loss) before income taxes by segment.
This information is included in the following tables for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
|
|
|
|
Three Months Ended
June 30, 2019
|
|
|
|
|
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Zillow Offers
|
$
|
453,816
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
248,924
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Premier Agent
|
—
|
|
|
191,962
|
|
|
—
|
|
|
—
|
|
|
231,961
|
|
|
—
|
|
|
Other
|
436
|
|
|
88,377
|
|
|
—
|
|
|
—
|
|
|
91,708
|
|
|
—
|
|
|
Mortgages
|
—
|
|
|
—
|
|
|
33,761
|
|
|
—
|
|
|
—
|
|
|
26,985
|
|
|
Total revenue
|
454,252
|
|
|
280,339
|
|
|
33,761
|
|
|
248,924
|
|
|
323,669
|
|
|
26,985
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
431,788
|
|
|
23,387
|
|
|
5,896
|
|
|
240,732
|
|
|
26,059
|
|
|
4,430
|
|
|
Sales and marketing
|
47,877
|
|
|
96,026
|
|
|
11,695
|
|
|
37,409
|
|
|
135,440
|
|
|
14,584
|
|
|
Technology and development
|
28,918
|
|
|
93,176
|
|
|
6,763
|
|
|
18,198
|
|
|
94,261
|
|
|
7,871
|
|
|
General and administrative
|
21,902
|
|
|
53,884
|
|
|
9,725
|
|
|
17,808
|
|
|
54,671
|
|
|
10,360
|
|
|
Integration costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
293
|
|
|
Total costs and expenses
|
530,485
|
|
|
266,473
|
|
|
34,079
|
|
|
314,147
|
|
|
310,431
|
|
|
37,538
|
|
|
Income (loss) from operations
|
(
76,233
)
|
|
|
13,866
|
|
|
(
318
)
|
|
|
(
65,223
)
|
|
|
13,238
|
|
|
(
10,553
)
|
|
|
Segment other income
|
—
|
|
|
5,300
|
|
|
385
|
|
|
—
|
|
|
—
|
|
|
402
|
|
|
Segment interest expense
|
(
3,825
)
|
|
|
—
|
|
|
(
307
)
|
|
|
(
5,899
)
|
|
|
—
|
|
|
(
287
)
|
|
|
Income (loss) before income taxes (1)
|
$
|
(
80,058
)
|
|
|
$
|
19,166
|
|
|
$
|
(
240
)
|
|
|
$
|
(
71,122
)
|
|
|
$
|
13,238
|
|
|
$
|
(
10,438
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
|
|
|
|
|
Six Months Ended
June 30, 2019
|
|
|
|
|
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Zillow Offers
|
$
|
1,222,928
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
377,396
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Premier Agent
|
—
|
|
|
434,068
|
|
|
—
|
|
|
—
|
|
|
449,696
|
|
|
—
|
|
|
Other
|
1,197
|
|
|
176,937
|
|
|
—
|
|
|
—
|
|
|
172,245
|
|
|
—
|
|
|
Mortgages
|
—
|
|
|
—
|
|
|
59,043
|
|
|
—
|
|
|
—
|
|
|
54,345
|
|
|
Total revenue
|
1,224,125
|
|
|
611,005
|
|
|
59,043
|
|
|
377,396
|
|
|
621,941
|
|
|
54,345
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
1,163,987
|
|
|
47,705
|
|
|
11,051
|
|
|
363,151
|
|
|
50,310
|
|
|
9,108
|
|
|
Sales and marketing
|
119,466
|
|
|
216,199
|
|
|
24,581
|
|
|
58,271
|
|
|
262,094
|
|
|
28,655
|
|
|
Technology and development
|
61,456
|
|
|
188,204
|
|
|
14,115
|
|
|
30,479
|
|
|
182,230
|
|
|
15,391
|
|
|
General and administrative
|
45,323
|
|
|
112,638
|
|
|
19,835
|
|
|
32,165
|
|
|
125,521
|
|
|
20,927
|
|
|
Impairment costs
|
—
|
|
|
73,900
|
|
|
2,900
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Integration costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
645
|
|
|
Total costs and expenses
|
1,390,232
|
|
|
638,646
|
|
|
72,482
|
|
|
484,066
|
|
|
620,155
|
|
|
74,726
|
|
|
Income (loss) from operations
|
(
166,107
)
|
|
|
(
27,641
)
|
|
|
(
13,439
)
|
|
|
(
106,670
)
|
|
|
1,786
|
|
|
(
20,381
)
|
|
|
Segment other income
|
—
|
|
|
5,300
|
|
|
587
|
|
|
—
|
|
|
—
|
|
|
715
|
|
|
Segment interest expense
|
(
11,909
)
|
|
|
—
|
|
|
(
533
)
|
|
|
(
9,657
)
|
|
|
—
|
|
|
(
388
)
|
|
|
Income (loss) before income taxes (1)
|
$
|
(
178,016
)
|
|
|
$
|
(
22,341
)
|
|
|
$
|
(
13,385
)
|
|
|
$
|
(
116,327
)
|
|
|
$
|
1,786
|
|
|
$
|
(
20,054
)
|
|
(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
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Total segment loss before income taxes
|
$
|
(
61,132
)
|
|
|
$
|
(
68,322
)
|
|
|
$
|
(
213,742
)
|
|
|
$
|
(
134,595
)
|
|
|
Corporate interest expense
|
(
33,458
)
|
|
|
(
12,711
)
|
|
|
(
62,740
)
|
|
|
(
25,318
)
|
|
|
Corporate other income
|
4,430
|
|
|
9,056
|
|
|
13,821
|
|
|
17,911
|
|
|
Gain on partial extinguishment of 2021 Notes
|
6,391
|
|
|
—
|
|
|
6,391
|
|
|
—
|
|
|
Consolidated loss before income taxes
|
$
|
(
83,769
)
|
|
|
$
|
(
71,977
)
|
|
|
$
|
(
256,270
)
|
|
|
$
|
(
142,002
)
|
|
Certain corporate items are not directly attributable to any of our segments, including the gain on the partial extinguishment of the 2021 Notes, 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 described in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, including in the section titled “Note Regarding Forward-Looking Statements,” and also those factors discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2019 as well as in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q.
Overview of our Business
Zillow Group, Inc., the largest portfolio of real estate brands on mobile and the web, is building a trusted, on-demand real estate experience. Whether selling, buying, renting or financing, customers can turn to the Zillow family of businesses to find and get into their next home with speed, certainty and ease.
In addition to Zillow’s for-sale and rental listings, Zillow Offers buys and sells homes directly in dozens of markets across the country, allowing sellers control over their timeline. Zillow Closing Services offers customers title and escrow services to support a more seamless transaction experience. Zillow Home Loans, our affiliate lender, provides our customers with an easy option to get pre-approved and secure financing for their next home purchase.
Other consumer brands include Trulia, StreetEasy, HotPads, Naked Apartments and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions which include Mortech, dotloop, Bridge Interactive and New Home Feed.
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 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 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 on the open 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 agent advertiser’s share of total advertising purchased in a particular zip code. Impressions are delivered when an advertisement of a Premier Agent or Premier Broker appears on pages viewed by users of our mobile applications and websites and connections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. Connections and impressions are each provided as part of our advertising services for Premier Agent and Premier Brokers; we do not charge a separate fee for these consumer leads.
In October 2018, we began testing a new Flex pricing model for Premier Agent and Premier Broker advertising services in limited markets. We plan to continue testing this pricing model in select markets with high-performing partners in the future, including offering it alongside our legacy market-based pricing model. 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 a cost per lead, cost per click, cost per lease or cost per listing basis. Rentals revenue also includes revenue generated through our rental applications product, whereby potential renters can submit applications to multiple properties for a flat service fee. 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 and websites.
In our Mortgages segment, we generate revenue from advertising sold to mortgage lenders and other mortgage professionals on a cost per lead or subscription basis, including our Connect and Custom Quote services, and through mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans. We also generate revenue from Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.
During the three months ended June 30, 2020, we generated total revenue of $768.4 million, as compared to $599.6 million in the three months ended June 30, 2019, an increase of $168.8 million, or 28%. As further described below, our revenue was negatively impacted by the effects of COVID-19 during the three months ended June 30, 2020. This increase was primarily the result of a $205.3 million, or 82%, increase in Homes segment revenue, and a $6.8 million, or 25%, increase in Mortgages segment revenue. These increases were partially offset by a $43.3 million, or 13%, decrease in IMT segment revenue driven by a $40.0 million, or 17%, decrease in Premier Agent revenue primarily due to temporary discounts offered to support our customers and real estate partners in response to the COVID-19 pandemic, and a $3.3 million, or 4%, decrease in Other IMT revenue. Visits increased 14% to 2,491.1 million for the three months ended June 30, 2020 from 2,181.4 million for the three months ended June 30, 2019. There were approximately 218.1 million average monthly unique users of our mobile applications and websites for the three months ended June 30, 2020, representing year-over-year growth of 12%. The number of homes sold through Zillow Offers increased 83% to 1,437 for the three months ended June 30, 2020 from 786 for the three months ended June 30, 2019.
On May 15, 2020, we issued $500.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “Initial 2025 Notes”) and issued and sold 8,000,000 shares of our Class C capital stock. On May 19, 2020, we issued an additional $65.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “Additional Notes” and, together with the Initial 2025 Notes, the “2025 Notes”) and issued and sold an additional 800,000 shares of our Class C capital stock, both pursuant to the underwriters’ option to purchase additional 2025 Notes and Class C capital stock, respectively. The net proceeds from the issuances of the 2025 Notes and our Class C capital stock were approximately $553.3 million and $411.5 million, respectively, after deducting underwriting discounts and commissions and offering expenses paid by Zillow Group. We used a portion of the net proceeds from the issuance of the 2025 Notes to repurchase $194.7 million aggregate principal of the convertible senior notes due 2021 (the “2021 Notes”) in privately negotiated transactions. The 2021 Notes were repurchased for $194.7 million in cash and 753,936 shares of Class C capital stock. In connection with the repurchase of a portion of the 2021 Notes, we partially terminated the capped call transactions related to the 2021 Notes whereby we received 317,865 shares of our Class C capital stock. We intend to use the remainder of the net proceeds from the 2025 Notes and the net proceeds from the equity issuance for general corporate purposes, which may include general and administrative matters and capital expenditures.
As of June 30, 2020, we had 5,344 full-time employees compared to 5,249 full-time employees as of December 31, 2019.
COVID-19 Impact
In December 2019, a novel strain of coronavirus, COVID-19, was reported and 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. In response to the COVID-19 pandemic, 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.
We have taken meaningful actions to support our customers and partners, including implementing a variety of relief initiatives to help them navigate their financial challenges. Effective March 23, 2020, we began offering Premier Agent advertisers who participate in our market-based pricing program a 50% discount on their subsequent monthly bill. This discount also applied to any new bookings through April 22, 2020. Additionally, we provided other targeted market-based discounts and offered temporary discounts on certain of our other IMT and Mortgage marketplace products throughout the second quarter.
On March 23, 2020, we announced that Zillow Offers would temporarily pause home buying in all markets in response to local public health orders and to help protect the safety and health of our employees, customers and partners. Where able, we continued to make updates to, list and sell homes in inventory. On May 18, 2020, we resumed home buying in certain Zillow Offers markets with enhanced health and safety protocols and increased usage of virtual technology. For example, buyers can virtually walk through Zillow-owned homes through proprietary 3D home tours, which are available on all listings. In some markets, buyers can use self-tour technology to visit a home unassisted. As of June 30, 2020, we had resumed home buying in 15 of our 24 markets and are now active in all 24 markets beginning in August 2020.
To preserve our liquidity in response to the COVID-19 pandemic, we temporarily paused hiring for non-critical roles, paused the majority of our advertising spending and reduced other discretionary spending. However, we expect to increase our hiring and marketing and advertising activities throughout the remainder of 2020 to support our strategic business initiatives. In May of 2020 we strengthened our financial position through our issuance of $565.0 million aggregate principle amount of 2025 Notes for net proceeds of $553.3 million, of which we used $194.7 million to repurchase certain of our 2021 Notes, and we issued 8,800,000 shares of Class C capital stock for net proceeds of $411.5 million, as further described above. In addition, we expect our liquidity to be positively impacted by certain provisions included in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) that was signed into law on March 27, 2020 and provides tax provisions and other stimulus measures to affected companies. The impact of the CARES Act has not been material to our results of operations for the three and six month periods ended June 30, 2020. However, under the CARES Act we expect to defer certain employer payroll tax payments until 2021 and 2022. We deferred a total of $10.6 million of such payments as of June 30, 2020.
We have also taken action to promote the health and safety of our employees during the COVID-19 pandemic, and we quickly transitioned the vast majority of our employees to work remotely in March 2020 and subsequently announced that most employees will have flexibility to work from home indefinitely. We expect office re-openings to be a gradual process over many months beginning in the second half of 2020 and that our offices will continue to provide our distributed workforce with a place to work, learn and collaborate.
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 and six month periods ended June 30, 2020. The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods as the extent of the impact of COVID-19 on our business continues to be uncertain and difficult to predict. While we have begun to see our business and the business of our customers and real estate partners recover from the initial economic effects of the pandemic, we expect the impact of the COVID-19 pandemic to continue to affect our financial results for the foreseeable future. The extent to which COVID-19 continues to impact our results and financial position will depend on future developments, which are uncertain and cannot be predicted, including new information that may emerge concerning the severity of the COVID-19 pandemic and the actions taken to contain it or treat its impact.
Key Metrics
Management has identified visits, unique users and the 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 June 30, 2020 as compared to the three months ended June 30, 2019, both metrics were adversely impacted by the COVID-19 pandemic beginning in March 2020, although they subsequently improved beginning in April 2020. COVID-19 may adversely impact the number of visits and unique users to our mobile applications and websites in future periods.
As discussed above, on March 23, 2020, we announced that Zillow Offers would temporarily pause home buying in all markets in response to local public health orders and to help protect the safety and health of our employees, customers and partners. Where able, we continued to make updates to, list and sell homes in inventory. We began resuming the purchase of homes in certain markets in May of 2020, had resumed home buying in 15 of our 24 markets as of June 30, 2020 and are now active in all 24 markets beginning in August 2020. While we have resumed home buying in certain Zillow Offers markets, we expect the decline in home buying and other potential effects of COVID-19 on residential real estate transactions may adversely impact the number of homes sold in future periods, which we expect would 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, use Zillow Homes Loans or be transaction-ready real estate market participants and therefore are more sought-after by our Premier Agent and Premier Broker real estate partners.
We define a visit as a group of interactions by users with the Zillow, Trulia and StreetEasy 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):
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Three Months Ended
June 30,
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2019 to 2020
% Change
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2020
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2019
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Visits
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2,491.1
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2,181.4
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14
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%
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Unique Users
Measuring unique users is important to us because much of our revenue depends in part on our ability to connect home buyers and sellers, renters and individuals with or looking for a mortgage to real estate, rental and mortgage professionals, products and services. Growth in consumer traffic to our mobile applications and websites increases the number of impressions, clicks, connections, leads and other events we can monetize to generate revenue. For example, our Homes segment revenue depends in part on users accessing our mobile applications and websites to engage in the sale and purchase of homes with Zillow Offers, and Premier Agent revenue and display revenue depend on advertisements being served to users of our 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 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 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):
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Three Months Ended
June 30,
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2019 to 2020
% Change
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2020
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2019
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Average Monthly Unique Users
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218.1
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194.3
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12
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%
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Homes Sold
The number of homes sold through Zillow Offers is an important metric as it is an indicator of customers’ adoption of the Zillow Offers service as well as our ability 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 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:
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Three Months Ended
June 30,
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2019 to 2020
% Change
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2020
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2019
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Number of Homes Sold
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1,437
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786
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83
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%
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Basis of Presentation
Revenue
We recognize revenue when or as we satisfy our performance obligations by transferring control of promised products or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services.
In our Homes segment, we generate revenue from the resale of homes on the open market 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 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 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 Connect services, 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 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. 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.
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 provided.
Costs and Expenses
Cost of Revenue.
Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries, benefits, bonuses and share-based compensation expense, as well as revenue-sharing costs related to our commercial business relationships, depreciation expense and costs associated with hosting our 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, headcount expenses, including salaries, commissions, benefits, bonuses and share-based compensation expense for sales, sales support, customer support, including the customer connections team, 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 six months ended June 30, 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 for individuals engaged in the design, development and testing of our products, mobile applications and websites and the tools and 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, amortization of intangible assets recorded in connection with acquisitions, including trade names and trademarks, developed technology and customer relationships, amongst others, equipment and maintenance costs and depreciation expense.
General and Administrative.
General and administrative expenses consist of headcount expenses, including salaries, benefits, bonuses and share-based compensation expense for executive, finance, accounting, legal, human resources, recruiting, corporate information technology costs and other administrative support. General and administrative expenses also include legal settlement costs and estimated legal liabilities, legal, accounting and other third-party professional service fees, rent expense, depreciation expense and bad debt expense.
Impairment Costs
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Impairment costs for the six months ended June 30, 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.
Integration costs consist of expenses incurred to incorporate operations, systems, technology and rights and responsibilities of acquired companies, during both pre-closing and post-closing periods, into Zillow Group’s business. For the three and six month periods ended June 30, 2019, integration costs primarily include consulting-related expenses incurred in connection with the integration of Zillow Home Loans.
Gain on Partial Extinguishment of 2021 Notes
The gain on the partial extinguishment of the 2021 Notes recorded for the three and six month periods ended June 30, 2020 relates to the partial repurchase of the 2021 Notes in May 2020 in connection with the issuance of the 2025 Notes. For additional information on the repurchase, see Note 12 to our condensed consolidated financial statements.
Other Income
Other income consists primarily of interest income earned on our cash, cash equivalents and short-term investments. For the six months ended June 30, 2020, Other income for our IMT segment included a $5.3 million gain on the sale of our October 2016 equity investment. For additional information on the sale, see Note 9 to our condensed consolidated financial statements. For our Mortgages segment, Other income includes interest income earned on mortgage loans held for sale.
Interest Expense
Our corporate interest expense consists of interest on Trulia’s convertible senior notes due in 2020 that we guaranteed in connection with our February 2015 acquisition of Trulia and interest on the convertible senior notes due in 2021, 2023, 2024, 2025 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, 2025 and 2026. Refer to Note 12 of our Notes to Condensed Consolidated Financial Statements in Part 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 credit facilities related to our Zillow Offers business. Borrowings on these credit facilities bear interest at the one-month LIBOR plus an applicable margin as defined in the credit agreements.
For our Mortgages segment, interest expense includes interest on the warehouse lines of credit 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 one-month LIBOR plus an applicable margin, and in certain cases are subject to a LIBOR floor, as defined in the agreements.
Income Taxes
We are subject to federal and state income taxes in the United States and federal and provincial income taxes in Canada. As of June 30, 2020 and December 31, 2019, we have provided a valuation allowance against our net deferred tax assets that we believe, based on the weight of available evidence, are not more likely than not to be realized. Therefore, no material current tax liability or expense has been recorded in the condensed consolidated financial statements. We have accumulated federal tax losses of approximately $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 income tax expense of $0.7 million for the three months ended June 30, 2020 and an income tax benefit of $8.5 million for the six months ended June 30, 2020. The income tax benefit for the six months ended June 30, 2020 was primarily 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 six months ended June 30, 2020.
Results of Operations
Given the 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 (in thousands, except per share and percentage data, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Homes
|
$
|
454,252
|
|
|
$
|
248,924
|
|
|
$
|
1,224,125
|
|
|
$
|
377,396
|
|
|
IMT
|
280,339
|
|
|
323,669
|
|
|
611,005
|
|
|
621,941
|
|
|
Mortgages
|
33,761
|
|
|
26,985
|
|
|
59,043
|
|
|
54,345
|
|
|
Total revenue
|
768,352
|
|
|
599,578
|
|
|
1,894,173
|
|
|
1,053,682
|
|
|
Cost of revenue (exclusive of amortization) (1)(2):
|
|
|
|
|
|
|
|
|
Homes
|
431,788
|
|
|
240,732
|
|
|
1,163,987
|
|
|
363,151
|
|
|
IMT
|
23,387
|
|
|
26,059
|
|
|
47,705
|
|
|
50,310
|
|
|
Mortgages
|
5,896
|
|
|
4,430
|
|
|
11,051
|
|
|
9,108
|
|
|
Total cost of revenue
|
461,071
|
|
|
271,221
|
|
|
1,222,743
|
|
|
422,569
|
|
|
Sales and marketing (1)
|
155,598
|
|
|
187,433
|
|
|
360,246
|
|
|
349,020
|
|
|
Technology and development (1)
|
128,857
|
|
|
120,330
|
|
|
263,775
|
|
|
228,100
|
|
|
General and administrative (1)
|
85,511
|
|
|
82,839
|
|
|
177,796
|
|
|
178,613
|
|
|
Impairment costs
|
—
|
|
|
—
|
|
|
76,800
|
|
|
—
|
|
|
Integration costs
|
—
|
|
|
293
|
|
|
—
|
|
|
645
|
|
|
Total costs and expenses
|
831,037
|
|
|
662,116
|
|
|
2,101,360
|
|
|
1,178,947
|
|
|
Loss from operations
|
(62,685)
|
|
|
(62,538)
|
|
|
(207,187)
|
|
|
(125,265)
|
|
|
Gain on partial extinguishment of 2021 Notes
|
6,391
|
|
|
—
|
|
|
6,391
|
|
|
—
|
|
|
Other income
|
10,115
|
|
|
9,458
|
|
|
19,708
|
|
|
18,626
|
|
|
Interest expense
|
(37,590)
|
|
|
(18,897)
|
|
|
(75,182)
|
|
|
(35,363)
|
|
|
Loss before income taxes
|
(83,769)
|
|
|
(71,977)
|
|
|
(256,270)
|
|
|
(142,002)
|
|
|
Income tax benefit (expense)
|
(679)
|
|
|
—
|
|
|
8,549
|
|
|
2,500
|
|
|
Net loss
|
$
|
(84,448)
|
|
|
$
|
(71,977)
|
|
|
$
|
(247,721)
|
|
|
$
|
(139,502)
|
|
|
Net loss per share — basic and diluted
|
$
|
(0.38)
|
|
|
$
|
(0.35)
|
|
|
$
|
(1.15)
|
|
|
$
|
(0.68)
|
|
|
Weighted-average shares outstanding — basic and diluted
|
219,467
|
|
|
205,754
|
|
|
215,070
|
|
|
205,137
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
Segment income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
Homes segment
|
$
|
(80,058)
|
|
|
$
|
(71,122)
|
|
|
$
|
(178,016)
|
|
|
$
|
(116,327)
|
|
|
IMT segment
|
19,166
|
|
|
13,238
|
|
|
(22,341)
|
|
|
1,786
|
|
|
Mortgages segment
|
(240)
|
|
|
(10,438)
|
|
|
(13,385)
|
|
|
(20,054)
|
|
|
Total segment loss before income taxes
|
$
|
(61,132)
|
|
|
$
|
(68,322)
|
|
|
$
|
(213,742)
|
|
|
$
|
(134,595)
|
|
|
Adjusted EBITDA (3):
|
|
|
|
|
|
|
|
|
Homes segment
|
$
|
(60,908)
|
|
|
$
|
(56,452)
|
|
|
$
|
(135,903)
|
|
|
$
|
(90,976)
|
|
|
IMT segment
|
71,862
|
|
|
64,055
|
|
|
157,579
|
|
|
125,102
|
|
|
Mortgages segment
|
4,885
|
|
|
(5,306)
|
|
|
(718)
|
|
|
(7,907)
|
|
|
Total Adjusted EBITDA
|
$
|
15,839
|
|
|
$
|
2,297
|
|
|
$
|
20,958
|
|
|
$
|
26,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(1) Includes share-based compensation as follows:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
1,119
|
|
|
$
|
936
|
|
|
$
|
2,292
|
|
|
$
|
1,816
|
|
|
Sales and marketing
|
9,116
|
|
|
6,801
|
|
|
16,109
|
|
|
12,451
|
|
|
Technology and development
|
21,666
|
|
|
18,399
|
|
|
40,583
|
|
|
33,908
|
|
|
General and administrative
|
20,450
|
|
|
17,496
|
|
|
37,162
|
|
|
61,581
|
|
|
Total
|
$
|
52,351
|
|
|
$
|
43,632
|
|
|
$
|
96,146
|
|
|
$
|
109,756
|
|
|
(2) Amortization of website development costs and intangible assets included in technology and development
|
$
|
18,857
|
|
|
$
|
14,656
|
|
|
$
|
36,041
|
|
|
$
|
29,056
|
|
|
(3) See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP, which is net loss on a consolidated basis and income (loss) before income taxes for each segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Percentage of Revenue:
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Homes
|
59
|
%
|
|
42
|
%
|
|
65
|
%
|
|
36
|
%
|
|
IMT
|
36
|
|
|
54
|
|
|
32
|
|
|
59
|
|
|
Mortgages
|
4
|
|
|
5
|
|
|
3
|
|
|
5
|
|
|
Total revenue
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
Cost of revenue (exclusive of amortization):
|
|
|
|
|
|
|
|
|
Homes
|
56
|
|
|
40
|
|
|
61
|
|
|
34
|
|
|
IMT
|
3
|
|
|
4
|
|
|
3
|
|
|
5
|
|
|
Mortgages
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
Total cost of revenue
|
60
|
|
|
45
|
|
|
65
|
|
|
40
|
|
|
Sales and marketing
|
20
|
|
|
31
|
|
|
19
|
|
|
33
|
|
|
Technology and development
|
17
|
|
|
20
|
|
|
14
|
|
|
22
|
|
|
General and administrative
|
11
|
|
|
14
|
|
|
9
|
|
|
17
|
|
|
Impairment costs
|
0
|
|
|
0
|
|
|
4
|
|
|
0
|
|
|
Integration costs
|
0
|
|
|
—
|
|
|
0
|
|
|
—
|
|
|
Total costs and expenses
|
108
|
|
|
110
|
|
|
111
|
|
|
112
|
|
|
Loss from operations
|
(8)
|
|
|
(10)
|
|
|
(11)
|
|
|
(12)
|
|
|
Gain on partial extinguishment of 2021 Notes
|
1
|
|
|
0
|
|
|
—
|
|
|
0
|
|
|
Other income
|
1
|
|
|
2
|
|
|
1
|
|
|
2
|
|
|
Interest expense
|
(5)
|
|
|
(3)
|
|
|
(4)
|
|
|
(3)
|
|
|
Loss before income taxes
|
(11)
|
|
|
(12)
|
|
|
(14)
|
|
|
(13)
|
|
|
Income tax benefit (expense)
|
—
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
Net loss
|
(11)
|
%
|
|
(12)
|
%
|
|
(13)
|
%
|
|
(13)
|
%
|
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA in total and for each segment, each a non-GAAP financial measure, within this Quarterly Report on Form 10-Q. We have provided a reconciliation below of Adjusted EBITDA in total to net loss and Adjusted EBITDA by segment to income (loss) before income taxes for each segment, the most directly comparable GAAP financial measures.
We have included Adjusted EBITDA in total and for each segment in this Quarterly Report on Form 10-Q as they are key metrics used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.
Our use of Adjusted EBITDA in total and for each segment has limitations as an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;
•
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•
Adjusted EBITDA does not reflect impairment costs;
•
Adjusted EBITDA does not reflect the gain on the partial extinguishment of the 2021 Notes;
•
Adjusted EBITDA does not reflect interest expense or other income;
•
Adjusted EBITDA does not reflect income taxes; and
•
Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA in total and for each segment alongside other financial performance measures, including various cash flow metrics, net loss, income (loss) before income taxes for each segment and our other GAAP results.
The following tables present a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, which is net loss on a consolidated basis and income (loss) before income taxes for each segment, for each of the periods presented (in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Corporate Items (2)
|
|
Consolidated
|
|
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) Before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
Net loss (1)
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
$
|
(84,448)
|
|
|
Income tax expense
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
679
|
|
|
Income (loss) before income taxes
|
$
|
(80,058)
|
|
|
$
|
19,166
|
|
|
$
|
(240)
|
|
|
$
|
(22,637)
|
|
|
$
|
(83,769)
|
|
|
Other income
|
—
|
|
|
(5,300)
|
|
|
(385)
|
|
|
(4,430)
|
|
|
(10,115)
|
|
|
Depreciation and amortization expense
|
2,597
|
|
|
22,038
|
|
|
1,538
|
|
|
—
|
|
|
26,173
|
|
|
Share-based compensation expense
|
12,728
|
|
|
35,958
|
|
|
3,665
|
|
|
—
|
|
|
52,351
|
|
|
Gain on partial extinguishment of 2021 Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,391)
|
|
|
(6,391)
|
|
|
Interest expense
|
3,825
|
|
|
—
|
|
|
307
|
|
|
33,458
|
|
|
37,590
|
|
|
Adjusted EBITDA
|
$
|
(60,908)
|
|
|
$
|
71,862
|
|
|
$
|
4,885
|
|
|
$
|
—
|
|
|
$
|
15,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Corporate Items (2)
|
|
Consolidated
|
|
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) Before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
Net loss (1)
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
$
|
(71,977)
|
|
|
Income tax benefit
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
—
|
|
|
Income (loss) before income taxes
|
$
|
(71,122)
|
|
|
$
|
13,238
|
|
|
$
|
(10,438)
|
|
|
$
|
(3,655)
|
|
|
$
|
(71,977)
|
|
|
Other income
|
—
|
|
|
—
|
|
|
(402)
|
|
|
(9,056)
|
|
|
(9,458)
|
|
|
Depreciation and amortization expense
|
1,732
|
|
|
18,308
|
|
|
1,163
|
|
|
—
|
|
|
21,203
|
|
|
Share-based compensation expense
|
7,039
|
|
|
32,509
|
|
|
4,084
|
|
|
—
|
|
|
43,632
|
|
|
Interest expense
|
5,899
|
|
|
—
|
|
|
287
|
|
|
12,711
|
|
|
18,897
|
|
|
Adjusted EBITDA
|
$
|
(56,452)
|
|
|
$
|
64,055
|
|
|
$
|
(5,306)
|
|
|
$
|
—
|
|
|
$
|
2,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 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
|
|
$
|
(247,721)
|
|
|
Income tax benefit
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
(8,549)
|
|
|
Loss before income taxes
|
$
|
(178,016)
|
|
|
$
|
(22,341)
|
|
|
$
|
(13,385)
|
|
|
$
|
(42,528)
|
|
|
$
|
(256,270)
|
|
|
Other income
|
—
|
|
|
(5,300)
|
|
|
(587)
|
|
|
(13,821)
|
|
|
(19,708)
|
|
|
Depreciation and amortization expense
|
6,172
|
|
|
45,815
|
|
|
3,212
|
|
|
—
|
|
|
55,199
|
|
|
Share-based compensation expense
|
24,032
|
|
|
65,505
|
|
|
6,609
|
|
|
—
|
|
|
96,146
|
|
|
Gain on partial extinguishment of 2021 Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,391)
|
|
|
(6,391)
|
|
|
Impairment costs
|
—
|
|
|
73,900
|
|
|
2,900
|
|
|
—
|
|
|
76,800
|
|
|
Interest expense
|
11,909
|
|
|
—
|
|
|
533
|
|
|
62,740
|
|
|
75,182
|
|
|
Adjusted EBITDA
|
$
|
(135,903)
|
|
|
$
|
157,579
|
|
|
$
|
(718)
|
|
|
$
|
—
|
|
|
$
|
20,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Corporate Items (2)
|
|
Consolidated
|
|
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) Before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
Net loss (1)
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
$
|
(139,502)
|
|
|
Income tax benefit
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
(2,500)
|
|
|
Income (loss) before income taxes
|
$
|
(116,327)
|
|
|
$
|
1,786
|
|
|
$
|
(20,054)
|
|
|
$
|
(7,407)
|
|
|
$
|
(142,002)
|
|
|
Other income
|
—
|
|
|
—
|
|
|
(715)
|
|
|
(17,911)
|
|
|
(18,626)
|
|
|
Depreciation and amortization expense
|
3,053
|
|
|
35,902
|
|
|
2,773
|
|
|
—
|
|
|
41,728
|
|
|
Share-based compensation expense
|
12,641
|
|
|
87,414
|
|
|
9,701
|
|
|
—
|
|
|
109,756
|
|
|
Interest expense
|
9,657
|
|
|
—
|
|
|
388
|
|
|
25,318
|
|
|
35,363
|
|
|
Adjusted EBITDA
|
$
|
(90,976)
|
|
|
$
|
125,102
|
|
|
$
|
(7,907)
|
|
|
$
|
—
|
|
|
$
|
26,219
|
|
(1) We use income (loss) before income taxes as our profitability measure in making operating decisions and assessing the performance of our segments, therefore, net loss and income tax benefit (expense) 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 the gain on the partial extinguishment of the 2021 Notes, 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 June 30, 2020 Compared to Three Months Ended June 30, 2019
Revenue
The following table presents Zillow Group’s revenue by category and by segment for the periods presented (in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2019 to 2020
% Change
|
|
|
2020
|
|
2019
|
|
|
|
Homes revenue:
|
|
|
|
|
|
|
Zillow Offers
|
$
|
453,816
|
|
|
$
|
248,924
|
|
|
82
|
%
|
|
Other
|
436
|
|
|
—
|
|
|
N/A
|
|
Total Homes revenue
|
454,252
|
|
|
248,924
|
|
|
82
|
%
|
|
IMT revenue:
|
|
|
|
|
|
|
Premier Agent
|
191,962
|
|
|
231,961
|
|
|
(17)
|
%
|
|
Other
|
88,377
|
|
|
91,708
|
|
|
(4)
|
%
|
|
Total IMT revenue
|
280,339
|
|
|
323,669
|
|
|
(13)
|
%
|
|
Mortgages
|
33,761
|
|
|
26,985
|
|
|
25
|
%
|
|
Total revenue
|
$
|
768,352
|
|
|
$
|
599,578
|
|
|
28
|
%
|
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
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Percentage of Total Revenue:
|
|
|
|
|
Homes revenue:
|
|
|
|
|
Zillow Offers
|
59
|
%
|
|
42
|
%
|
|
Other
|
—
|
|
|
0
|
|
|
Total Homes revenue
|
59
|
|
|
42
|
|
|
IMT revenue:
|
|
|
|
|
Premier Agent
|
25
|
|
|
39
|
|
|
Other
|
12
|
|
|
15
|
|
|
Total IMT revenue
|
36
|
|
|
54
|
|
|
Mortgages
|
4
|
|
|
5
|
|
|
Total revenue
|
100
|
%
|
|
100
|
%
|
Total revenue increased by $168.8 million, or 28%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase in total revenue was primarily attributable to our Zillow Offers business. Total Homes segment revenue grew to $454.3 million for the three months ended June 30, 2020 from $248.9 million for the three months ended June 30, 2019, an increase of $205.3 million. This was primarily driven by an increase in the number of homes sold to 1,437 for the three months ended June 30, 2020 compared to 786 for the three months ended June 30, 2019. Visits increased 14% to 2,491.1 million for the three months ended June 30, 2020 from 2,181.4 million for the three months ended June 30, 2019. There were approximately 218.1 million average monthly unique users of our mobile applications and websites for the three months ended June 30, 2020 compared to 194.3 million average monthly unique users for the three months ended June 30, 2019, representing year-over-year growth of 12%. The increases in visits and unique users increased the number of impressions, leads, clicks and other events we monetized across our revenue categories. The increase in Homes segment revenue was partially offset by a $43.3 million decrease in IMT segment revenue for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to temporary discounts offered to support our customers in response to the COVID-19 pandemic.
Homes Segment
Zillow Offers Revenue.
Zillow Offers revenue was $453.8 million for the three months ended June 30, 2020 due to the sale of 1,437 homes at an average selling price of $315.8 thousand per home. For the three months ended June 30, 2019, Zillow Offers revenue was $248.9 million due to the sale of 786 homes at an average selling price of $316.7 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 June 30, 2020, Zillow Offers had operations in 24 metropolitan areas.
Beginning on March 23, 2020, we paused home buying activities in all Zillow Offers markets, as of June 30, 2020, we had resumed home buying in 15 of our 24 markets and are now active in all 24 markets beginning in August 2020. Although we have resumed home buying and continue to update, list and sell homes in inventory in all markets, we expect the gradual increase in home buying to result in a significant decrease in Zillow Offers revenue in the future until we grow home acquisition and resale volumes in all Zillow Offers markets. Given the unknown duration and severity of the COVID-19 pandemic and related economic disruption, we do not know whether we will have to make further adjustments to our operations or how quickly the business will re-accelerate now that we have resumed home buying activities.
Other Revenue.
Other revenue within the Homes segment was $0.4 million for the three months ended June 30, 2020 and relates to revenue generated by Zillow Closing Services which launched in the second half of 2019.
IMT Segment
Premier Agent Revenue.
Premier Agent revenue was $192.0 million for the three months ended June 30, 2020 compared to $232.0 million for the three months ended June 30, 2019, a decrease of $40.0 million, or 17%. Premier Agent revenue was positively impacted by an increase in visits. As discussed above, visits increased 14% to 2,491.1 million for the three months ended June 30, 2020 from 2,181.4 million for the three months ended June 30, 2019. The increase in visits increased the number of impressions and leads we could monetize in our Premier Agent marketplace. However, Premier Agent revenue was negatively impacted for the three months ended June 30, 2020 by temporary discounts offered to our Premier Agent partners in response to the COVID-19 pandemic. We expect Premier Agent revenue to increase in future periods when the discounts are no longer offered related to the COVID-19 pandemic.
Premier Agent revenue per visit decreased by 28% to $0.077 for the three months ended June 30, 2020 from $0.106 for the three months ended June 30, 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. The decline in Premier Agent revenue per visit was primarily a result of the discounts offered in response to the COVID-19 pandemic described above.
Premier Agent revenue for the three months ended June 30, 2020 and June 30, 2019 also included an insignificant amount of revenue generated from our testing of the Flex pricing model, in limited markets. We plan to continue testing this pricing model in select markets with high-performing partners in the future, including offering it alongside our legacy market-based pricing model.
Other Revenue.
Other IMT revenue was $88.4 million for the three months ended June 30, 2020 compared to $91.7 million for the three months ended June 30, 2019, a decrease of $3.3 million, or 4%. The decrease in Other revenue was primarily the result of a 60% decrease in display revenue as customers decreased discretionary marketing spend during the COVID-19 pandemic. In addition, in response to the COVID-19 pandemic, we have offered temporary discounts on certain of our other IMT products throughout the second quarter to help mitigate the impact of the pandemic on our customers. We expect Other revenue to increase in future quarters when the discounts are no longer provided in response to the COVID-19 pandemic. The decrease in other IMT revenue was partially offset by continued adoption of our rental application product.
Mortgages Segment
Mortgages
Revenue
. Mortgages revenue was $33.8 million for the three months ended June 30, 2020 compared to $27.0 million for the three months ended June 30, 2019, an increase of $6.8 million, or 25%. The majority of the increase in mortgages revenue was a result of an increase in revenue generated by Zillow Home Loans due to increased sales volume reflective of market demand and reduced interest rates. The increase in mortgages revenue was partially offset by insignificant discounts offered during the three months ended June 30, 2020 on our Connect services in response to the COVID-19 pandemic. We expect mortgages revenue to increase in future periods due to higher mortgage origination volumes and low interest rates.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenue
The following table presents Zillow Group’s revenue by category and by segment for the periods presented (in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019 to 2020
% Change
|
|
|
2020
|
|
2019
|
|
|
|
Homes revenue:
|
|
|
|
|
|
|
Zillow Offers
|
$
|
1,222,928
|
|
|
$
|
377,396
|
|
|
224
|
%
|
|
Other
|
1,197
|
|
|
—
|
|
|
N/A
|
|
Total Homes revenue
|
1,224,125
|
|
|
377,396
|
|
|
224
|
%
|
|
IMT revenue:
|
|
|
|
|
|
|
Premier Agent
|
434,068
|
|
|
449,696
|
|
|
(3)
|
%
|
|
Other
|
176,937
|
|
|
172,245
|
|
|
3
|
%
|
|
Total IMT revenue
|
611,005
|
|
|
621,941
|
|
|
(2)
|
%
|
|
Mortgages
|
59,043
|
|
|
54,345
|
|
|
9
|
%
|
|
Total revenue
|
$
|
1,894,173
|
|
|
$
|
1,053,682
|
|
|
80
|
%
|
The following table presents Zillow Group’s revenue by category and by segment as percentages of total revenue for the periods presented (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Percentage of Total Revenue:
|
|
|
|
|
Homes revenue:
|
|
|
|
|
Zillow Offers
|
65
|
%
|
|
36
|
%
|
|
Other
|
—
|
|
|
0
|
|
|
Total Homes revenue
|
65
|
|
|
36
|
|
|
IMT revenue:
|
|
|
|
|
Premier Agent
|
23
|
|
|
43
|
|
|
Other
|
9
|
|
|
16
|
|
|
Total IMT revenue
|
32
|
|
|
59
|
|
|
Mortgages
|
3
|
|
|
5
|
|
|
Total revenue
|
100
|
%
|
|
100
|
%
|
Total revenue increased by $840.5 million, or 80%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase in total revenue was primarily attributable to our Zillow Offers business. Total Homes segment revenue grew to $1,224.1 million for the six months ended June 30, 2020 from $377.4 million for the six months ended June 30, 2019, an increase of $846.7 million. This was primarily driven by an increase in the number of homes sold to 3,831 for the six months ended June 30, 2020 compared to 1,200 for the six months ended June 30, 2019. Visits increased 9% to 4,567.4 million for the six months ended June 30, 2020 from 4,201.2 million for the six months ended June 30, 2019. There were approximately 218.1 million average monthly unique users of our mobile applications and websites for the three months ended June 30, 2020 compared to 194.3 million average monthly unique users for the three months ended June 30, 2019, representing year-over-year growth of 12%. The increases in visits and unique users increased the number of impressions, leads, clicks and other events we monetized across our revenue categories. The increase in Homes segment revenue was partially offset by a $10.9 million decrease in IMT segment revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to temporary discounts offered during the second quarter of 2020 to support our customers in response to the COVID-19 pandemic.
Homes Segment
Zillow Offers Revenue.
Zillow Offers revenue was $1,222.9 million for the six months ended June 30, 2020 due to the sale of 3,831 homes at an average selling price of $319.2 thousand per home. For the six months ended June 30, 2019, Zillow Offers revenue was $377.4 million due to the sale of 1,200 homes at an average selling price of $314.5 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 June 30, 2020, Zillow Offers had operations in 24 metropolitan areas. As discussed above, although Zillow Offers revenue increased for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, revenue for the six months ended June 30, 2020 was negatively impacted by the COVID-19 pandemic. Beginning on March 23, 2020, we paused home buying activities in all Zillow Offers markets, as of June 30, 2020, we had resumed home buying in 15 of our 24 markets and we are now active in all 24 markets beginning in August 2020.
Other Revenue.
Other revenue within the Homes segment was $1.2 million for the six months ended June 30, 2020 and relates to revenue generated by Zillow Closing Services which launched in the second half of 2019.
IMT Segment
Premier Agent Revenue.
Premier Agent revenue was $434.1 million for the six months ended June 30, 2020 from $449.7 million for the six months ended June 30, 2019, a decrease of $15.6 million, or 3%. Premier Agent revenue was positively impacted by an increase in visits. As discussed above, visits increased 9% to 4,567.4 million for the six months ended June 30, 2020 from 4,201.2 million for the six months ended June 30, 2019. The increase in visits increased the number of impressions and leads we could monetize in our Premier Agent marketplace. However, Premier Agent revenue was negatively impacted for the six months ended June 30, 2020 by discounts offered to our Premier Agent partners in response to the COVID-19 pandemic, as discussed above.
Premier Agent revenue for the six months ended June 30, 2020 and June 30, 2019 also included an insignificant amount of revenue generated from our testing of the Flex pricing model, in limited markets.
Other Revenue.
Other IMT revenue was $176.9 million for the six months ended June 30, 2020 compared to $172.2 million for the six months ended June 30, 2019, an increase of $4.7 million, or 3%. The increase in Other revenue was primarily a result of an 18% increase in revenue generated by our rentals marketplace. Growth in rentals revenue was primarily attributable to the adoption of our rental application product and increased spend on our cost per lease product. The increase in Other IMT revenue was partially offset by a 51% decrease in display revenue, as customers decreased discretionary marketing spend during the COVID-19 pandemic, as well as the impact of COVID-19-related discounts offered during the six months ended June 30, 2020.
Mortgages Segment
Mortgages
Revenue
. Mortgages revenue was $59.0 million for the six months ended June 30, 2020 compared to $54.3 million for the six months ended June 30, 2019, an increase of $4.7 million, or 9%. The growth in mortgages revenue was primarily driven by increases in marketplace and Mortech revenue driven by increased demand for our Connect and Mortech services, primarily due to the low interest-rate environment. The increase in mortgages revenue was also a result of an increase in revenue generated by Zillow Home Loans due to increased sales volume reflective of market demand and reduced interest rates.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Segment Results of Operations
The following table presents Zillow Group’s segment results for the periods presented (in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
|
|
|
|
Three Months Ended
June 30, 2019
|
|
|
|
|
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Revenue
|
$
|
454,252
|
|
|
$
|
280,339
|
|
|
$
|
33,761
|
|
|
$
|
248,924
|
|
|
$
|
323,669
|
|
|
$
|
26,985
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
431,788
|
|
|
23,387
|
|
|
5,896
|
|
|
240,732
|
|
|
26,059
|
|
|
4,430
|
|
|
Sales and marketing
|
47,877
|
|
|
96,026
|
|
|
11,695
|
|
|
37,409
|
|
|
135,440
|
|
|
14,584
|
|
|
Technology and development
|
28,918
|
|
|
93,176
|
|
|
6,763
|
|
|
18,198
|
|
|
94,261
|
|
|
7,871
|
|
|
General and administrative
|
21,902
|
|
|
53,884
|
|
|
9,725
|
|
|
17,808
|
|
|
54,671
|
|
|
10,360
|
|
|
Integration costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
293
|
|
|
Total costs and expenses
|
530,485
|
|
|
266,473
|
|
|
34,079
|
|
|
314,147
|
|
|
310,431
|
|
|
37,538
|
|
|
Income (loss) from operations
|
(76,233)
|
|
|
13,866
|
|
|
(318)
|
|
|
(65,223)
|
|
|
13,238
|
|
|
(10,553)
|
|
|
Other income
|
—
|
|
|
5,300
|
|
|
385
|
|
|
—
|
|
|
—
|
|
|
402
|
|
|
Interest expense
|
(3,825)
|
|
|
—
|
|
|
(307)
|
|
|
(5,899)
|
|
|
—
|
|
|
(287)
|
|
|
Income (loss) before income taxes (1)
|
$
|
(80,058)
|
|
|
$
|
19,166
|
|
|
$
|
(240)
|
|
|
$
|
(71,122)
|
|
|
$
|
13,238
|
|
|
$
|
(10,438)
|
|
(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
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Total segment loss before income taxes
|
$
|
(61,132)
|
|
|
$
|
(68,322)
|
|
|
Corporate interest expense
|
(33,458)
|
|
|
(12,711)
|
|
|
Corporate other income
|
4,430
|
|
|
9,056
|
|
|
Gain on partial extinguishment of 2021 Notes
|
6,391
|
|
|
—
|
|
|
Consolidated loss before income taxes
|
$
|
(83,769)
|
|
|
$
|
(71,977)
|
|
Homes Segment
Cost of Revenue.
Cost of revenue was $431.8 million for the three months ended June 30, 2020 compared to $240.7 million for the three months ended June 30, 2019, an increase of $191.1 million or 79%. The increase in cost of revenue was primarily attributable to home acquisition and renovation costs related to the 1,437 homes that we sold during the period compared to the sale of 786 homes during the three months ended June 30, 2019. Due to the pause in Zillow Offers home buying activities that began on March 23, 2020 in response to the COVID-19 pandemic, we expect cost of revenue to decrease in absolute dollars in the near-term as we expect to resell fewer homes until we grow home acquisition volumes following resuming home buying activities in all Zillow Offers markets. As of June 30, 2020, we had resumed home buying in 15 of our 24 markets and we are now active in all 24 markets beginning in August 2020.
Sales and Marketing.
Sales and marketing expenses were $47.9 million for the three months ended June 30, 2020 compared to $37.4 million for the three months ended June 30, 2019, an increase of $10.5 million or 28%. The increase in sales and marketing expenses was primarily attributable to a $9.4 million increase in selling expenses attributable to the resale of homes and a $6.9 million increase in headcount-related expenses, including share-based compensation expense. The increase was partially offset by a $2.6 million decrease in marketing and advertising costs, a $1.7 million decrease in holding costs and a $1.1 million decrease in travel expenses as we paused non-essential travel for employees in response to the COVID-19 pandemic.
Sales and marketing expenses include $2.6 million in holding costs for the three months ended June 30, 2020 and $4.4 million in holding costs for the three months ended June 30, 2019.
Due to the pause in Zillow Offers home buying activities that began on March 23, 2020 in response to the COVID-19 pandemic, we expect sales and marketing expenses to decrease in absolute dollars in the near-term as we expect to hold and resell fewer homes until we grow home acquisition volumes following resuming home buying activities in all Zillow Offers markets.
Technology and Development.
Technology and development expenses, which include research and development costs, were $28.9 million for the three months ended June 30, 2020 compared to $18.2 million for the three months ended June 30, 2019, an increase of $10.7 million or 59%. The increase in technology and development expenses was primarily due to a $9.5 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment, and a $1.2 million increase in depreciation and amortization expense.
General and Administrative.
General and administrative expenses were $21.9 million for the three months ended June 30, 2020 compared to $17.8 million for the three months ended June 30, 2019, an increase of $4.1 million or 23%. The increase in general and administrative expenses was primarily due to a $3.5 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment.
Interest Expense.
Interest expense was $3.8 million for the three months ended June 30, 2020 compared to $5.9 million for the three months ended June 30, 2019, a decrease of $2.1 million, or 35%. The decrease in interest expense was attributable to the reduced number of homes financed on our credit facilities due to the temporary pause of Zillow Offers home buying activities in response to the COVID-19 pandemic.
Due to the pause in Zillow Offers home buying activities, we expect interest expense to decrease in absolute dollars in the near-term as we have reduced the number of homes financed on our credit facilities. Subsequently, we expect interest expense to increase as we increase our homes inventory following resuming home buying in Zillow Offers markets.
IMT Segment
Cost of Revenue.
Cost of revenue was $23.4 million for the three months ended June 30, 2020 compared to $26.1 million for the three months ended June 30, 2019, a decrease of $2.7 million, or 10%. The decrease in cost of revenue was primarily related to a $1.3 million decrease in ad serving costs and a $0.8 million decrease in software and hardware costs.
Sales and Marketing.
Sales and marketing expenses were $96.0 million for the three months ended June 30, 2020 compared to $135.4 million for the three months ended June 30, 2019, a decrease of $39.4 million, or 29%. The decrease in sales and marketing expenses was primarily attributable to a $35.6 million decrease in marketing and advertising expenses due to the pause of most advertising spend in response to the COVID-19 pandemic. In addition, there was a $3.5 million decrease in travel expenses as we paused non-essential travel for employees in response to the COVID-19 pandemic and a $3.3 million decrease in related trade show and event expenses. The decrease in sales and marketing expenses was partially offset by a $3.0 million increase in headcount related expenses, including share-based compensation expense, as we continue to grow our team. We expect sales and marketing expenses to increase in absolute dollars in the future as we begin to increase our marketing and advertising activities.
Technology and Development.
Technology and development expenses, which include research and development costs, were $93.2 million for the three months ended June 30, 2020 compared to $94.3 million for the three months ended June 30, 2019, a decrease of $1.1 million, or 1%. Technology and development expenses remained relatively consistent due to proactive measures we have taken to reduce costs. We expect technology and development expenses to decrease in absolute dollars in future periods as a result of these cost saving measures.
General and Administrative.
General and administrative expenses were $53.9 million for the three months ended June 30, 2020 compared to $54.7 million for the three months ended June 30, 2019, a decrease of $0.8 million, or 1%. General and administrative expenses remained relatively consistent due to proactive measures we have taken to reduce costs.
Mortgages Segment
Cost of Revenue.
Cost of revenue was $5.9 million for the three months ended June 30, 2020 compared to $4.4 million for the three months ended June 30, 2019, an increase of $1.5 million, or 33%. The increase in cost of revenue was primarily attributable to a $0.9 million increase in headcount-related expenses, including share-based compensation expense. 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 $11.7 million for the three months ended June 30, 2020 compared to $14.6 million for the three months ended June 30, 2019, a decrease of $2.9 million, or 20%. The decrease in sales and marketing expenses was primarily attributable to a $3.8 million decrease in marketing and advertising expenses due to the pause of most advertising spend in response to the COVID-19 pandemic. We expect our sales and marketing expenses to increase in absolute dollars in future periods due to increased marketing and headcount related spend associated with growth in revenue and expansion of Zillow Home Loans.
Technology and Development.
Technology and development expenses, which include research and development costs, were $6.8 million for the three months ended June 30, 2020 compared to $7.9 million for the three months ended June 30, 2019, a decrease of $1.1 million, or 14%. The decrease in technology and development expenses was primarily a result of a $0.7 million
decrease in data acquisition costs.
General and Administrative.
General and administrative expenses were $9.7 million for the three months ended June 30, 2020 compared to $10.4 million for the three months ended June 30, 2019, a decrease of $0.6 million, or 6%. General and administrative expenses remained relatively consistent due to proactive measures we have taken to reduce costs.
Corporate Items
Certain corporate items are not directly attributable to any of our segments, including the gain on the partial extinguishment of the 2021 Notes, 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 $33.5 million for the three months ended June 30, 2020 compared to $12.7 million for the three months ended June 30, 2019, an increase of $20.7 million, or 163%. This increase was primarily due to the September 2019 issuance of the convertible senior notes due in 2026, the September 2019 and October 2019 issuances of the convertible senior notes due in 2024, and the May 2020 issuance of the 2025 Notes. We expect interest expense to increase over time in absolute dollars as we incur additional interest related to the May 2020 issuance of the 2025 Notes. For additional information regarding the convertible senior notes, see Note 12 of our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
Other Income.
Other income not directly attributable to any of our segments was $4.4 million for the three months ended June 30, 2020 compared to $9.1 million for the three months ended June 30, 2019, a decrease of $4.6 million, or 51%. The decrease in Other income is largely due to rebalancing our investment portfolio to lower risk, lower yield investments in light of the COVID-19 pandemic. We expect Other income to decrease in the future as interest rates are projected to remain low through 2020.
Gain on Partial Extinguishment of 2021 Notes.
We recorded a $6.4 million gain on the partial extinguishment of the 2021 Notes during the three months ended June 30, 2020. For additional information on the repurchase, see Note 12 of our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Segment Results of Operations
The following table presents Zillow Group’s segment results for the periods presented (in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
|
|
|
|
|
Six Months Ended
June 30, 2019
|
|
|
|
|
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Revenue
|
$
|
1,224,125
|
|
|
$
|
611,005
|
|
|
$
|
59,043
|
|
|
$
|
377,396
|
|
|
$
|
621,941
|
|
|
$
|
54,345
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
1,163,987
|
|
|
47,705
|
|
|
11,051
|
|
|
363,151
|
|
|
50,310
|
|
|
9,108
|
|
|
Sales and marketing
|
119,466
|
|
|
216,199
|
|
|
24,581
|
|
|
58,271
|
|
|
262,094
|
|
|
28,655
|
|
|
Technology and development
|
61,456
|
|
|
188,204
|
|
|
14,115
|
|
|
30,479
|
|
|
182,230
|
|
|
15,391
|
|
|
General and administrative
|
45,323
|
|
|
112,638
|
|
|
19,835
|
|
|
32,165
|
|
|
125,521
|
|
|
20,927
|
|
|
Impairment costs
|
—
|
|
|
73,900
|
|
|
2,900
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Integration costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
645
|
|
|
Total costs and expenses
|
1,390,232
|
|
|
638,646
|
|
|
72,482
|
|
|
484,066
|
|
|
620,155
|
|
|
74,726
|
|
|
Income (loss) from operations
|
(166,107)
|
|
|
(27,641)
|
|
|
(13,439)
|
|
|
(106,670)
|
|
|
1,786
|
|
|
(20,381)
|
|
|
Other income
|
—
|
|
|
5,300
|
|
|
587
|
|
|
—
|
|
|
—
|
|
|
715
|
|
|
Interest expense
|
(11,909)
|
|
|
—
|
|
|
(533)
|
|
|
(9,657)
|
|
|
—
|
|
|
(388)
|
|
|
Income (loss) before income taxes (1)
|
$
|
(178,016)
|
|
|
$
|
(22,341)
|
|
|
$
|
(13,385)
|
|
|
$
|
(116,327)
|
|
|
$
|
1,786
|
|
|
$
|
(20,054)
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Total segment loss before income taxes
|
$
|
(213,742)
|
|
|
$
|
(134,595)
|
|
|
Corporate interest expense
|
(62,740)
|
|
|
(25,318)
|
|
|
Corporate other income
|
13,821
|
|
|
17,911
|
|
|
Gain on partial extinguishment of 2021 Notes
|
6,391
|
|
|
—
|
|
|
Consolidated loss before income taxes
|
$
|
(256,270)
|
|
|
$
|
(142,002)
|
|
Homes Segment
Cost of Revenue.
Cost of revenue was $1,164.0 million for the six months ended June 30, 2020 compared to $363.2 million for the six months ended June 30, 2019, an increase of $800.8 million. The increase in cost of revenue was primarily attributable to home acquisition and renovation costs related to the 3,831 homes that we sold during the period compared to the sale of 1,200 homes during the six months ended June 30, 2019.
Sales and Marketing.
Sales and marketing expenses were $119.5 million for the six months ended June 30, 2020 compared to $58.3 million for the six months ended June 30, 2019, an increase of $61.2 million. The increase in sales and marketing expenses was primarily attributable to a $37.0 million increase in selling expenses attributable to the resale of homes, an $18.3 million increase in headcount-related expenses, including share-based compensation expense, as we have grown our team to support our Homes segment, and $5.7 million in expenses attributable to our efforts to pause home buying in response to the COVID-19 pandemic.
Sales and marketing expenses include $7.9 million in holding costs for the six months ended June 30, 2020 and $6.7 million in holding costs for the six months ended June 30, 2019.
Technology and Development.
Technology and development expenses, which include research and development costs, were $61.5 million for the six months ended June 30, 2020 compared to $30.5 million for the six months ended June 30, 2019, an increase of $31.0 million. The increase in technology and development expenses was primarily due to a $25.9 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment, and a $3.3 million increase in depreciation and amortization expense.
General and Administrative.
General and administrative expenses were $45.3 million for the six months ended June 30, 2020 compared to $32.2 million for the six months ended June 30, 2019, an increase of $13.2 million or 41%. The increase in general and administrative expenses was primarily due to a $9.2 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 $1.9 million increase in building lease-related expenses including rent, utilities and insurance and a $0.9 million increase in software and hardware costs.
Interest Expense.
Interest expense was $11.9 million for the six months ended June 30, 2020 compared to $9.7 million for the six months ended June 30, 2019, an increase of $2.3 million, or 23%. The increase in interest expense was attributable to borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our credit facilities.
IMT Segment
Cost of Revenue.
Cost of revenue was $47.7 million for the six months ended June 30, 2020 compared to $50.3 million for the six months ended June 30, 2019, a decrease of $2.6 million, or 5%. The decrease in cost of revenue was primarily attributable to a $1.7 million decrease in ad serving costs and a $0.9 million decrease in software and hardware costs. The decreases in cost of revenue were partially offset by a $2.0 million increase in other direct product costs.
Sales and Marketing.
Sales and marketing expenses were $216.2 million for the six months ended June 30, 2020 compared to $262.1 million for the six months ended June 30, 2019, a decrease of $45.9 million, or 18%. The decrease in sales and marketing expenses was primarily attributable to a $45.9 million decrease in marketing and advertising expenses due to the pause of most advertising spend in response to the COVID-19 pandemic, a $4.7 million decrease in travel expenses as we paused non-essential travel for workers in response to the COVID-19 pandemic and a $4.0 million decrease in related trade show and event-related costs. The decrease in sales and marketing expenses was partially offset by a $5.0 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams, and a $3.9 million increase in depreciation expense.
Technology and Development.
Technology and development expenses, which include research and development costs, were $188.2 million for the six months ended June 30, 2020 compared to $182.2 million for the six months ended June 30, 2019, an increase of $6.0 million, or 3%. The increase in technology and development expenses was primarily attributable to a $6.1 million increase in depreciation and amortization expense and a $3.2 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering teams to support current and future product initiatives. These increases were partially offset by a $2.4 million decrease in professional services fees.
General and Administrative.
General and administrative expenses were $112.6 million for the six months ended June 30, 2020 compared to $125.5 million for the six months ended June 30, 2019, a decrease of $12.9 million, or 10%. The decrease in general and administrative expenses for the six months ended June 30, 2020 was primarily due to a $21.5 million decrease in headcount-related expenses driven primarily 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 15 in our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. Additionally, there was a $1.3 million decrease in travel expenses as we paused non-essential travel for workers in response to the COVID-19 pandemic. The decreases in general and administrative expenses were
partially offset by an increase in estimated legal liabilities of approximately $3.5 million, a $2.0 million increase in building lease-related expenses, including rent, utilities and insurance, a $1.8 million increase in business taxes, a $1.0 million increase in credit loss expense and a $0.5 million increase in depreciation and amortization expense.
Impairment Costs.
Impairment costs recorded to the IMT segment for the six months ended June 30, 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 $11.1 million for the six months ended June 30, 2020 compared to $9.1 million for the six months ended June 30, 2019, an increase of $1.9 million, or 21%. The increase in cost of revenue was primarily attributable to a $1.7 million increase in headcount-related expenses, including share-based compensation expense, as we increased fulfillment hiring to support the increase in volume of loans funded.
Sales and Marketing.
Sales and marketing expenses were $24.6 million for the six months ended June 30, 2020 compared to $28.7 million for the six months ended June 30, 2019, a decrease of $4.1 million, or 14%. The decrease in sales and marketing expenses was primarily attributable to a $5.3 million decrease in marketing and advertising expenses due to the pause of most advertising spend in response to the COVID-19 pandemic, partially offset by a $1.3 million increase in headcount-related expenses, including share-based compensation expenses, driven primarily by the expansion of our leadership team as we continue to expand our Zillow Homes Loans business.
Technology and Development.
Technology and development expenses, which include research and development costs, were $14.1 million for the six months ended June 30, 2020 compared to $15.4 million for the six months ended June 30, 2019, a decrease of 1.3 million, or 8%. The decrease in technology and development expenses was primarily a result of a $1.3 million
decrease in data acquisition costs.
General and Administrative.
General and administrative expenses were $19.8 million for the six months ended June 30, 2020 compared to $20.9 million for the six months ended June 30, 2019, a decrease of $1.1 million, or 5%. The decrease in general and administrative expenses was primarily due to a $1.1 million decrease in headcount-related expenses, including share-based compensation expense, due primarily to our temporary pause in most hiring in response to the COVID-19 pandemic.
Impairment Costs.
Impairment costs recorded to the Mortgages segment for the six months ended June 30, 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 the gain on the partial extinguishment of the 2021 Notes, 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 $62.7 million for the six months ended June 30, 2020 compared to $25.3 million for the six months ended June 30, 2019, an increase of $37.4 million, or 148%. This increase was primarily due to the September 2019 issuance of the convertible senior notes due in 2026, the September 2019 and October 2019 issuances of the convertible senior notes due in 2024 and the May 2020 issuances of the 2025 Notes. For additional information regarding the convertible senior notes, see Note 12 of our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
Other Income.
Other income not directly attributable to any of our segments was $13.8 million for the six months ended June 30, 2020 compared to $17.9 million for the six months ended June 30, 2019, a decrease of $4.1 million, or 23% The decrease in Other income is largely due to rebalancing our investment portfolio to lower risk investments with lower yields in light of the COVID-19 pandemic. We expect Other income to decrease for the foreseeable future as interest rates are projected to remain low throughout 2020.
Gain on Partial Extinguishment of 2021 Notes.
We recorded a $6.4 million gain on the partial extinguishment of the 2021 Notes during the six months ended June 30, 2020. For additional information on the repurchase, see Note 12 of our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
As of June 30, 2020 and December 31, 2019, we had cash and cash equivalents, investments and restricted cash of $3,570.3 million and $2,511.9 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions, money market funds and treasury bills. Investments consist of fixed income securities, which include U.S. government agency securities, corporate notes and bonds, commercial paper, municipal securities, certificates of 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 June 30, 2020, Zillow Group and its subsidiaries were in compliance with all debt covenants specified in the facilities described below.
To preserve our liquidity in response to the COVID-19 pandemic, we have paused hiring for non-critical roles, paused the majority of our advertising spending and have focused on scaling our business with discipline and with a reduction in certain discretionary spending. Additionally, we temporarily paused home buying through Zillow Offers in March of 2020 and have since resumed home buying activities in 15 of our 24 markets as of June 30, 2020 and are now active in all 24 markets beginning in August 2020. In May of 2020 we strengthened our financial position through our issuance of $565.0 million aggregate principle amount of 2025 Notes for net proceeds of $553.3 million, with which we repurchased $194.7 million aggregate principle amount of our 2021 Notes, and we issued 8,800,000 shares of Class C capital stock at a public offering price of $48.00 per share for net proceeds of $411.5 million, as further described above. In addition, we expect our liquidity to be positively impacted by certain provisions included in the CARES Act which provides tax provisions and other stimulus measures to affected companies. The impact of the CARES Act has not been material to our results of operations for the three and six month periods ended June 30, 2020. However, under the CARES Act we expect to defer certain employer payroll tax payments until 2021 and 2022. We deferred a total of $10.6 million of such payments as of June 30, 2020. As previously noted, the COVID-19 pandemic and related economic disruptions have resulted in significant uncertainty and the extent of the impact of COVID-19 on our business continues to be 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 temporarily expect a decrease in the future amounts drawn on our credit facilities as we have reduced the number of homes financed until we grow home acquisition volumes following resuming home buying activities in all Zillow Offers markets. As of June 30, 2020, we had resumed home buying in 15 of our 24 markets and are now active in all markets beginning in August 2020. As of June 30, 2020, we have $117.2 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.
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 June 30, 2020, we have $69.8 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.
As of June 30, 2020, we have outstanding a total of $2,386.7 million aggregate principal of convertible senior notes. The convertible notes are senior unsecured obligations, and interest on the convertible notes is paid semi-annually.
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.
The following table presents selected cash flow data for the periods presented (in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Cash Flow Data:
|
|
|
|
|
Net cash provided by (used in) operating activities
|
$
|
692,620
|
|
|
$
|
(373,823)
|
|
|
Net cash provided by (used in) investing activities
|
(264,634)
|
|
|
197,822
|
|
|
Net cash provided by financing activities
|
420,199
|
|
|
323,138
|
|
Cash Flows Provided By (Used In) Operating Activities
Our operating cash flows result primarily from cash received from real estate professionals, rental professionals, mortgage professionals and brand 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 compensation and 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 six months ended June 30, 2020, net cash provided by operating activities was $692.6 million. This was primarily driven by a net loss of $247.7 million, adjusted by share-based compensation expense of $96.1 million, non-cash impairment costs of $76.8 million, depreciation and amortization expense of $55.2 million, amortization of the discount and issuance costs on the convertible notes maturing in 2021, 2023, 2024, 2025 and 2026 of $47.7 million, amortization of contract cost assets of $17.1 million and amortization of right of use assets of $12.7 million. This was offset by an $8.5 million change in deferred income taxes, a gain on the partial extinguishment of the 2021 Notes of $6.4 million and a gain on disposal of property and equipment and other assets of $2.7 million. Changes in operating assets and liabilities increased cash provided by operating activities by $650.6 million. The changes in operating assets and liabilities are primarily related to a $701.1 million decrease
in inventory due to the sale of homes and a decrease in home purchases through Zillow Offers during the six months ended June 30, 2020, a $10.0 million increase in other long-term liabilities, a $7.5 million increase in accounts payable and a $4.8 million increase in deferred revenue. These changes were partially offset by a $38.5 million increase in mortgage loans held for sale, a $19.6 million increase in contract cost assets due primarily to the capitalization of sales commissions, an $8.7 million decrease in accrued expenses and other liabilities driven by the timing of payments, a $3.3 million decrease in accrued compensation and benefits, and a $1.5 million increase in accounts receivable due primarily to an increase in revenue from products and services which we bill in arrears.
For the six months ended June 30, 2019, net cash used in operating activities was $373.8 million. This was primarily driven by a net loss of $139.5 million, adjusted by share-based compensation expense of $109.8 million, depreciation and amortization expense of $41.7 million, amortization of contract cost assets of $17.9 million, amortization of the discount and issuance costs on the convertible notes maturing in 2023 and 2021 of $17.8 million, amortization of right of use assets of $10.6 million, a loss on disposal of property and equipment of $3.9 million, accretion of bond discount of $3.7 million and a $2.5 million change in deferred income taxes. Changes in operating assets and liabilities increased cash used in operating activities by $430.4 million. The changes in operating assets and liabilities are primarily due to a $390.0 million increase in inventory due to the purchase of homes through Zillow Offers, an $18.3 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $16.9 million increase in accounts receivable due primarily to an increase in revenue, an $11.9 million decrease in lease liabilities, a $3.2 million increase in mortgage loans held for sale and a $2.0 million increase in prepaid expenses and other assets driven primarily by the timing of payments, partially offset by a $7.0 million increase in accrued expenses and other current liabilities driven primarily by the timing of payments, and a $3.0 million increase in deferred revenue.
Cash Flows Provided By (Used In) 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.
For the six months ended June 30, 2020, net cash used in investing activities was $264.6 million. This was the result of $208.6 million of net purchases of investments in connection with investment of a portion of the net proceeds from our May 2020 issuance of the 2025 Notes and offering of our Class C capital stock, and $66.1 million of purchases for property and equipment and intangible assets, partially offset by $10.0 million in proceeds from the sale of an equity investment.
For the six months ended June 30, 2019, net cash provided by investing activities was $197.8 million. This was primarily the result of $236.4 million of net proceeds from maturities of investments and $38.6 million of purchases for property and equipment and intangible assets.
Cash Flows Provided By Financing Activities
Net cash provided by financing activities has primarily resulted from net proceeds from the issuance of convertible notes, net proceeds from equity offerings, the exercise of employee option awards 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 six months ended June 30, 2020, cash provided by financing activities was $420.2 million, which was primarily related to net proceeds from the issuance of the 2025 Notes of $553.3 million, net proceeds from the public offering of our Class C capital stock of $411.5 million, $185.0 million of proceeds from the exercise of option awards and $39.4 million of net borrowings on our warehouse line of credit and master repurchase agreement related to Zillow Home Loans. These cash inflows were partially offset by $617.5 million of net repayments of borrowings on our credit facilities related to Zillow Offers and $194.7 million of cash paid for the partial repurchase of the 2021 Notes.
For the six months ended June 30, 2019, cash provided by financing activities was $323.1 million, including $293.1 million of proceeds from borrowings on our revolving credit facilities related to Zillow Offers and $33.0 million of proceeds from the exercise of option awards, partially offset by $3.0 million 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 $9.8 million as of June 30, 2020. We do not believe that the surety bonds will have a material effect on our liquidity, capital resources, market risk support or credit risk support. For additional information regarding the surety bonds, see Note 17 of our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q under the subsection titled “Surety Bonds”.
Contractual Obligations and Other Commitments
There have been no material changes outside the ordinary course of business in our commitments under contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, except for the categories of contractual obligations included in the table below, which have been updated to reflect our contractual obligations as of June 30, 2020 (in thousands, unaudited):
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Payments Due By Period
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Total
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Less Than 1 Year
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1-3 Years
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3-5 Years
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More Than 5 Years
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2025 Notes (1)
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$
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565,000
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$
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—
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$
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—
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$
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565,000
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$
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—
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Interest on 2025 Notes (2)
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75,702
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15,537
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31,075
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29,090
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—
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2021 Notes (3)
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265,330
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—
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265,330
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—
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—
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Interest on 2021 Notes (4)
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7,518
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5,307
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2,211
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—
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—
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Homes under contract (5)
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51,850
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51,850
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—
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—
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—
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Homes segment credit facilities (6)
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117,218
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117,218
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—
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—
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—
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Purchase obligations (7)
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29,431
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19,126
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10,050
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255
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—
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Mortgages segment credit facilities (8)
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69,814
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69,814
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—
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—
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—
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____________________
(1) The aggregate principal amount of the 2025 Notes is due on May 15, 2025 if not earlier converted or redeemed.
(2) The stated interest rate on the 2025 Notes is 2.75%.
(3) The aggregate principal amount of the 2021 Notes is due on December 1, 2021 if not earlier converted or redeemed.
(4) The stated interest rate on the 2021 Notes is 2.00%.
(5) We have obligations to purchase homes under contract through our Zillow Offers business.
(6) 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.
(7) We have noncancellable purchase obligations for content related to our mobile applications and websites and certain cloud computing costs. For additional information regarding our purchase obligations, see Note 17 of our Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
(8) 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.
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As of June 30, 2020, we have outstanding letters of credit of approximately $16.9 million, which secure our lease obligations in connection with certain of the operating leases of our office spaces.
In the course of business, we are required to provide financial commitments in the form of surety bonds to third parties as a guarantee of our performance on and our compliance with certain obligations. If we were to fail to perform or comply with these obligations, any draws upon surety bonds issued on our behalf would then trigger our payment obligation to the surety bond issuer. We have outstanding surety bonds issued for our benefit of approximately $9.8 million as of June 30, 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 financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For information on our critical accounting policies and estimates, see Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Quarterly Report on Form 10-Q for the three months ended March 31, 2020. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.
Interest Rate Risk
Under our current investment policy, we invest our excess cash in money market funds, certificates of deposit, U.S. government agency securities, treasury bills, commercial paper, 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.
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 convertible senior notes as of June 30, 2020 (in thousands, except interest rates):
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Maturity Date
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Aggregate Principal Amount
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Stated Interest Rate
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September 1, 2026
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$
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500,000
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1.375
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%
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May 15, 2025
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565,000
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2.75
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%
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September 1, 2024
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673,000
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0.75
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%
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July 1, 2023
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373,750
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1.50
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%
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December 1, 2021
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265,330
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2.00
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%
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December 15, 2020
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9,637
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2.75
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%
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$
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2,386,717
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Since the convertible senior notes bear interest at fixed rates, we have no direct financial statement risk associated with changes in interest rates as of June 30, 2020. However, the fair values of the convertible senior notes change primarily when the market price of our stock fluctuates or interest rates change.
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 June 30, 2020 and December 31, 2019, we had outstanding $117.2 million and $691.5 million, respectively, of borrowings on these credit facilities which bear interest at a floating rate based on the one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin. Accordingly, fluctuations in market interest 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 $1.0 million and $6.9 million as of June 30, 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 June 30, 2020 and December 31, 2019, we had outstanding $69.8 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, and in certain cases include a LIBOR floor. 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 $0.5 million as of June 30, 2020 and by an insignificant amount as of December 31, 2019.
Inflation Risk
We do not believe that inflation has had a material effect on our business, results of operations or financial condition. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, results of operations and financial condition.
Foreign Currency Exchange Risk
We do not believe that foreign currency exchange risk has had a material effect on our business, results of operations or financial condition. As we do not maintain a significant balance of foreign currency, we do not believe an immediate 10% increase or decrease in foreign currency exchange rates relative to the U.S. dollar would have a material effect on our business, results of operations or financial condition.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of June 30, 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 June 30, 2020.
Changes in Internal Control Over Financial Reporting
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 June 30, 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 17 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
Our business is subject to numerous risks. You should carefully consider the following risk factor, 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, 2019, as any of these risks could harm our business, results of operations, and future financial performance. Recovery pursuant to our insurance policies may not be available due to policy definitions of covered losses or other 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 may materially adversely affect our business, financial condition and 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 may 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 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, profitability, 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 temporarily paused home buying through Zillow Offers, provided certain product discounts, temporarily closed offices, paused hiring for non-critical roles, paused the majority of our marketing and advertising activities and reduced discretionary spending. Although, among other things, we have resumed home buying in all Zillow Offers markets as of August 2020, expect to increase our hiring, marketing and advertising activities and plan to reopen offices, we cannot predict whether and to what extent we will have to implement additional operational changes in light of COVID-19 in the future. As a result of these and other consequences, the pandemic has and may continue to adversely affect our business, results of operations and financial condition, likely significantly.
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 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 June 30, 2020.
Item 6. Exhibits
The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.
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Exhibit
Number
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Description
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3.1
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4.1
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4.2
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10.1*
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10.2*
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10.3*
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31.1
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31.2
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32.1
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32.2
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101.INS
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Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document).
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101.SCH
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Inline XBRL Taxonomy Extension Schema Document.
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101.CAL
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Inline XBRL Taxonomy Extension Calculation Linkbase Document.
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101.DEF
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Inline XBRL Taxonomy Extension Definition Linkbase Document.
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101.LAB
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Inline XBRL Taxonomy Extension Label Linkbase Document.
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101.PRE
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Inline XBRL Taxonomy Extension Presentation Linkbase Document.
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104
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Cover Page Interactive Data File (embedded within the inline XBRL document).
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*
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Indicates a management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Dated: August 6, 2020
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ZILLOW GROUP, INC.
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By:
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/s/ J
ENNIFER
R
OCK
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Name:
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Jennifer Rock
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Title:
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Chief Accounting Officer
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