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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
 
x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-36853
 
_____________________________________________________
ZILLOW GROUP, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Washington
 
47-1645716
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1301 Second Avenue, Floor 31, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
(206) 470-7000
@ZillowGroup
(Registrant’s telephone number, including area code)
 _____________________________________________________ 
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  x    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  x    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x

 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
☐  
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share
ZG
The Nasdaq Global Select Market
Class C Capital Stock, par value $0.0001 per share
Z
The Nasdaq Global Select Market
As of May 1, 2019, 58,318,212 shares of Class A common stock, 6,217,447 shares of Class B common stock, and 140,633,463 shares of Class C capital stock were outstanding.
 


Table of Contents

ZILLOW GROUP, INC.
Quarterly Report on Form 10-Q
For the Three Months Ended March 31, 2019
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
2
 
2
 
3
 
4
 
5
 
6
 
7
Item 2.
23
Item 3.
39
Item 4.
40
 
 
 
 
 
 
 
 
Item 1.
41
Item 1A.
42
Item 2.
43
Item 6.
44
 
 
 
 
45
 

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Table of Contents

As used in this Quarterly Report on Form 10-Q, the terms “Zillow Group,” “the Company,” “we,” “us” and “our” refer to Zillow Group, Inc., unless the context indicates otherwise.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those risks, uncertainties and assumptions described in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2018. 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.

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Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data, unaudited)
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
736,507

 
$
651,058

Short-term investments
780,963

 
903,867

Accounts receivable, net of allowance for doubtful accounts of $4,942 and $4,838 at March 31, 2019 and December 31, 2018, respectively
70,605

 
66,083

Inventory
325,154

 
162,829

Mortgage loans held for sale
29,469

 
35,409

Prepaid expenses and other current assets
69,292

 
61,067

Restricted cash
27,595

 
12,385

Total current assets
2,039,585

 
1,892,698

Contract cost assets
46,176

 
45,819

Property and equipment, net
142,146

 
135,172

Right of use assets
102,056

 

Goodwill
1,984,907

 
1,984,907

Intangible assets, net
207,933

 
215,904

Other assets
16,763

 
16,616

Total assets
$
4,539,566

 
$
4,291,116

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,708

 
$
7,471

Accrued expenses and other current liabilities
63,212

 
63,101

Accrued compensation and benefits
30,300

 
31,388

Revolving credit facilities
246,028


116,700

Warehouse lines of credit
27,991

 
33,018

Deferred revenue
36,105

 
34,080

Deferred rent, current portion

 
1,740

Lease liabilities, current portion
19,561

 

Total current liabilities
430,905

 
287,498

Deferred rent, net of current portion

 
19,945

Lease liabilities, net of current portion
102,405

 

Long-term debt
707,860

 
699,020

Deferred tax liabilities and other long-term liabilities
15,264

 
17,474

Total liabilities
1,256,434

 
1,023,937

Commitments and contingencies (Note 17)

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.0001 par value; 30,000,000 shares authorized; no shares issued and outstanding

 

Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized; 58,315,359 and 58,051,448 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
6

 
6

Class B common stock, $0.0001 par value; 15,000,000 shares authorized; 6,217,447 shares issued and outstanding as of March 31, 2019 and December 31, 2018
1

 
1

Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 140,597,526 and 139,635,370 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
14

 
14

Additional paid-in capital
4,022,218

 
3,939,842

Accumulated other comprehensive income (loss)
197

 
(905
)
Accumulated deficit
(739,304
)
 
(671,779
)
Total shareholders’ equity
3,283,132

 
3,267,179

Total liabilities and shareholders’ equity
$
4,539,566

 
$
4,291,116

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data, unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Revenue:
 
 
 
IMT
$
298,272

 
$
280,856

Homes
128,472

 

Mortgages
27,360

 
19,023

Total revenue
454,104

 
299,879

Cost of revenue (exclusive of amortization) (1):
 
 
 
IMT
24,251

 
22,594

Homes
122,419

 
86

Mortgages
4,678

 
1,239

Total cost of revenue
151,348

 
23,919

Sales and marketing
161,587

 
137,291

Technology and development
107,770

 
93,933

General and administrative
95,774

 
56,073

Acquisition-related costs

 
27

Integration costs
352

 

Total costs and expenses
516,831

 
311,243

Loss from operations
(62,727
)
 
(11,364
)
Other income
9,168

 
2,446

Interest expense
(16,466
)
 
(7,073
)
Loss before income taxes
(70,025
)
 
(15,991
)
Income tax benefit (expense)
2,500

 
(2,600
)
Net loss
$
(67,525
)
 
$
(18,591
)
Net loss per share — basic and diluted
$
(0.33
)
 
$
(0.10
)
Weighted-average shares outstanding — basic and diluted
204,514

 
191,464

 ____________________
(1) Amortization of website development costs and intangible assets included in technology and development
$
14,400

 
$
22,549

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Net loss
$
(67,525
)
 
$
(18,591
)
Other comprehensive income (loss):
 
 
 
Unrealized gains (losses) on investments
1,144

 
(332
)
Currency translation adjustments
(42
)
 
(22
)
Total other comprehensive income (loss)
1,102

 
(354
)
Comprehensive loss
$
(66,423
)
 
$
(18,945
)
See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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
Loss
 
Total
Shareholders’
Equity
 
 
Shares
 
Amount
 
 
Balance at December 31, 2018
203,904,265

 
$
21

 
$
3,939,842

 
$
(671,779
)
 
$
(905
)
 
$
3,267,179

 
Issuance of common and capital stock upon exercise of stock options
729,788

 

 
13,564

 

 

 
13,564

 
Vesting of restricted stock units
496,347

 

 

 

 

 

 
Shares and value of restricted stock units withheld for tax liability
(68
)
 

 
(2
)
 

 

 
(2
)
 
Share-based compensation expense

 

 
68,814

 

 

 
68,814

 
Net loss

 

 

 
(67,525
)
 

 
(67,525
)
 
Other comprehensive income

 

 

 

 
1,102

 
1,102

 
Balance at March 31, 2019
205,130,332

 
$
21

 
$
4,022,218

 
$
(739,304
)
 
$
197

 
$
3,283,132

 
 
Class A Common
Stock, Class B
Common Stock and
Class C Capital Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
 
 
Shares
 
Amount
 
 
Balance at December 31, 2017
190,115,148

 
$
20

 
$
3,254,146

 
$
(592,243
)
 
$
(1,100
)
 
$
2,660,823

 
Cumulative-effect adjustment from adoption of guidance on revenue from contracts with customers

 

 

 
40,322

 

 
40,322

 
Issuance of common and capital stock upon exercise of stock options
2,414,214

 

 
52,906

 

 

 
52,906

 
Vesting of restricted stock units
394,844

 

 

 

 

 

 
Shares and value of restricted stock units withheld for tax liability
(607
)
 

 
(28
)
 

 

 
(28
)
 
Share-based compensation expense

 

 
32,863

 

 

 
32,863

 
Portion of conversion recorded in additional paid-in-capital in connection with partial conversion of convertible notes maturing in 2020
20,727

 

 
500

 
 
 

 
500

 
Net loss

 

 

 
(18,591
)
 

 
(18,591
)
 
Other comprehensive loss

 

 

 

 
(354
)
 
(354
)
 
Balance at March 31, 2018
192,944,326

 
$
20

 
$
3,340,387

 
$
(570,512
)
 
$
(1,454
)
 
$
2,768,441



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Table of Contents

ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(67,525
)
 
$
(18,591
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
20,525

 
26,906

Share-based compensation expense
66,124

 
30,741

Amortization of right of use assets
4,440

 

Amortization of contract cost assets
8,746

 
9,296

Amortization of discount and issuance costs on convertible notes maturing in 2023 and 2021
8,840

 
4,708

Deferred income taxes
(2,500
)
 
2,600

Loss on disposal of property and equipment
1,704

 
1,803

Bad debt expense
128

 
(267
)
Deferred rent

 
(3,090
)
Accretion of bond discount
(1,733
)
 
(137
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(4,650
)
 
105

Inventory
(162,325
)
 

Mortgage loans held for sale
5,940

 

Prepaid expenses and other assets
(8,537
)
 
(19,923
)
Lease liabilities
(7,010
)
 

Contract cost assets
(9,103
)
 
(11,440
)
Accounts payable
(133
)
 
1,672

Accrued expenses and other current liabilities
328

 
(6,747
)
Accrued compensation and benefits
(1,088
)
 
3,637

Deferred revenue
2,025

 
3,379

Other long-term liabilities
290

 

Net cash provided by (used in) operating activities
(145,514
)
 
24,652

Investing activities
 
 
 
Proceeds from maturities of investments
302,187

 
61,386

Purchases of investments
(176,412
)
 
(76,729
)
Purchases of property and equipment
(14,202
)
 
(15,791
)
Purchases of intangible assets
(3,269
)
 
(1,098
)
Net cash provided by (used in) investing activities
108,304

 
(32,232
)
Financing activities
 
 
 
Proceeds from borrowing on revolving credit facilities
129,328



Net repayments on warehouse lines of credit
(5,025
)
 

Proceeds from exercise of stock options
13,564

 
52,906

Value of equity awards withheld for tax liability
2

 
(28
)
Net cash provided by financing activities
137,869

 
52,878

Net increase in cash, cash equivalents and restricted cash during period
100,659

 
45,298

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

 
352,095

Cash, cash equivalents and restricted cash at end of period
$
764,102

 
$
397,393

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
4,956

 
$

Noncash transactions:
 
 
 
Capitalized share-based compensation
$
2,690

 
$
2,120

Write-off of fully depreciated property and equipment
$
6,269

 
$
7,379

Write-off of fully amortized intangible assets
$
3,200

 
$
10,687

See accompanying notes to condensed consolidated financial statements.

6


ZILLOW GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Description of Business
Zillow Group, Inc. operates the largest portfolio of real estate and home-related brands on mobile and the web which focus on all stages of the home lifecycle: renting, buying, selling and financing. Zillow Group is committed to empowering consumers with unparalleled data, inspiration and knowledge around homes and connecting them with great real estate professionals. The Zillow Group portfolio of consumer brands includes Zillow, Trulia, Zillow Home Loans, StreetEasy, HotPads, Naked Apartments, RealEstate.com and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions to help real estate professionals maximize business opportunities and connect with millions of consumers. Zillow Offers provides homeowners in certain metropolitan areas with the opportunity to receive offers to purchase their home from Zillow. When Zillow buys a home, it makes certain repairs and lists the home for resale on the open market. Zillow also provides consumers with the opportunity to receive mortgage financing through Zillow Home Loans, a licensed mortgage lender. Zillow Group operates a number of business brands for real estate, rental and mortgage professionals, including Mortech, dotloop, Bridge Interactive and New Home Feed. Zillow, Inc. was incorporated as a Washington corporation in December 2004, and we launched the initial version of our website, Zillow.com, in February 2006. Zillow Group, Inc. was incorporated as a Washington corporation in July 2014 in connection with our acquisition of Trulia, Inc. (“Trulia”). Upon the closing of the Trulia acquisition in February 2015, each of Zillow, Inc. and Trulia became wholly owned subsidiaries of Zillow Group.
Certain Significant Risks and Uncertainties
We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: rates of revenue growth; our ability to manage advertising inventory or pricing; engagement and usage of our products; our investment of resources to pursue strategies that may not prove effective; competition in our market; the stability of the residential real estate market and the impact of interest rate changes; 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, 2018, which was filed with the SEC on February 21, 2019. The condensed consolidated balance sheet as of December 31, 2018, included herein, was derived from the audited financial statements of Zillow Group, Inc. as of that date.
The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of March 31, 2019, our results of operations, comprehensive loss and cash flows for the three month periods ended March 31, 2019 and 2018. The results of the three month period ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any interim period or for any other future year.

7


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 and indefinite-lived intangible assets, among others. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.
Recently Adopted Accounting Standards
In February 2018, the Financial Accounting Standards Board (“FASB”) issued guidance on income tax accounting related to the Tax Cuts and Jobs Act (the “Tax Act”). This guidance permits a reclassification from accumulated other comprehensive income (loss) to accumulated deficit for the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate under the Tax Act. It also requires certain disclosures regarding these reclassifications. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. This guidance must be applied either on a prospective basis in the period of adoption or retrospectively to each period in which the effect of the change in the corporate income tax rate is recognized. We adopted this guidance on January 1, 2019. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In March 2017, the FASB issued guidance related to the premium amortization on purchased callable debt securities. This guidance shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. This guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We adopted this guidance on January 1, 2019. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In February 2016, the FASB issued guidance on leases. This guidance requires the recognition of a right of use asset and lease liability on the balance sheet for all leases. This guidance also requires more detailed disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. In July 2018, the FASB issued certain targeted improvements to the accounting and disclosure requirements for leases, including an additional optional transition method that allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. When adopting the lease guidance, an entity may elect a practical expedient package, under which it need not reassess (a) whether any expired or existing contracts are or contain leases; (b) the lease classification for any expired or existing leases; and (c) initial direct costs for any existing leases. These three practical expedients must be elected as a package and must be consistently applied to all existing leases at the date of adoption. We adopted the new guidance on leases on January 1, 2019 using the optional transition method and elected to adopt the practical expedient package. Under this approach, we did not restate the prior financial statements presented. Based on our lease portfolio as of December 31, 2018, we recorded on our consolidated balance sheet right of use assets of $106.5 million as well as operating lease liabilities of $129.0 million, and we removed the existing deferred rent balance of $22.5 million. The adoption of the standard did not have a material impact to our condensed consolidated statements of operations.
Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the FASB issued guidance related to a customer’s accounting for implementation costs incurred in hosting arrangements. The guidance aligns the requirements for capitalizing implementation costs incurred in cloud computing arrangements with the requirements for capitalizing costs to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. This guidance may be applied either retrospectively or prospectively. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.

8


In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. This guidance removes, modifies and adds disclosures related to fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim and annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial statement disclosures.
In June 2016, the FASB issued guidance on the measurement of credit losses on financial instruments. This guidance requires the use of an expected loss impairment model for instruments measured at amortized cost. For available-for-sale debt securities, an entity is required to recognize credit losses through an allowance for credit losses rather than as a write-down. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. The adoption of this guidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.
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 corporate notes and bonds, commercial paper, U.S. government agency securities and certificates of deposit is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Short-term investments — 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 is used to repay amounts borrowed on our revolving credit facilities (see Note 13) and amounts held in escrow related to funding home purchases in our mortgage origination business. The carrying value of restricted cash approximates fair value due to the short period of time amounts borrowed on the revolving credit facilities are outstanding.
Mortgage loans held for sale—The fair value of mortgage loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics.
Interest rate lock commitments—The fair value of interest rate lock commitments (“IRLCs”) is calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics. Expired commitments are excluded from the fair value measurement. We generally only issue IRLCs for products that meet specific purchaser guidelines. Since not all IRLCs will become closed loans, we adjust our fair value measurements for the estimated amount of IRLCs that will not close.

9


Forward contracts—The fair value of mandatory loan sales commitments and derivative instruments such as forward sales of mortgage-backed securities that are utilized as hedging instruments are calculated by reference to quoted prices for similar assets.
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):
 
March 31, 2019
 
Total
 
Level 1
 
Level 2
Cash equivalents:
 
 
 
 
 
Money market funds
$
578,037

 
$
578,037

 
$

Commercial paper
9,940

 

 
9,940

Short-term investments:
 
 
 
 
 
U.S. government agency securities
531,006

 

 
531,006

Corporate notes and bonds
115,682

 

 
115,682

Commercial paper
82,755

 

 
82,755

Municipal securities
33,331

 

 
33,331

Foreign government securities
14,965

 

 
14,965

Certificates of deposit
3,224

 

 
3,224

Mortgage origination-related:
 
 
 
 
 
Mortgage loans held for sale
29,469

 

 
29,469

Interest rate lock commitments
1,257

 

 
1,257

Forward contracts - other current assets
19

 

 
19

Forward contracts - other current liabilities
(226
)
 

 
(226
)
        Total
$
1,399,459

 
$
578,037

 
$
821,422

 
December 31, 2018
 
Total
 
Level 1
 
Level 2
Cash equivalents:
 
 
 
 
 
Money market funds
$
541,575

 
$
541,575

 
$

Commercial paper
3,999

 

 
3,999

Short-term investments:
 
 
 
 
 
U.S. government agency securities
646,496

 

 
646,496

Corporate notes and bonds
112,933

 

 
112,933

Commercial paper
85,506

 

 
85,506

Municipal securities
39,306

 

 
39,306

Foreign government securities
14,915

 

 
14,915

Certificates of deposit
4,711

 

 
4,711

Mortgage origination-related:
 
 
 
 
 
Mortgage loans held for sale
35,409

 

 
35,409

Interest rate lock commitments
847

 

 
847

Forward contracts - other current liabilities
(125
)
 

 
(125
)
        Total
$
1,485,572

 
$
541,575

 
$
943,997


At March 31, 2019, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $41.6 million and $49.7 million for our interest rate lock commitments and forward contracts, respectively. At December 31, 2018, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $26.7 million and $28.8 million for our interest rate lock commitments and forward contracts, respectively. We do not have the right to offset our forward contract derivative positions.
See Note 13 for the carrying amount and estimated fair value of the Company’s Convertible Senior Notes due in 2023, Convertible Senior Notes due in 2021 and Trulia’s Convertible Senior Notes due in 2020.

10


We did not have any material Level 3 assets or liabilities as of March 31, 2019 or December 31, 2018.
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):
 
March 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
Cash
$
148,530

 
$

 
$

 
$
148,530

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
578,037

 

 

 
578,037

Commercial paper
9,940

 

 

 
9,940

Short-term investments:
 
 
 
 
 
 
 
U.S. government agency securities
530,938

 
268

 
(200
)
 
531,006

Corporate notes and bonds
115,648

 
65

 
(31
)
 
115,682

Commercial paper
82,755

 

 

 
82,755

Municipal securities
33,263

 
74

 
(6
)
 
33,331

Foreign government securities
14,963

 
2

 

 
14,965

Certificates of deposit
3,224

 

 

 
3,224

Restricted cash
27,595

 

 

 
27,595

        Total
$
1,544,893

 
$
409

 
$
(237
)
 
$
1,545,065

 
December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
Cash
$
105,484

 
$

 
$

 
$
105,484

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
541,575

 

 

 
541,575

Commercial paper
3,999

 

 

 
3,999

Short-term investments:
 
 
 
 
 
 
 
U.S. government agency securities
647,266

 
51

 
(821
)
 
646,496

Corporate notes and bonds
113,109

 
1

 
(177
)
 
112,933

Commercial paper
85,506

 

 

 
85,506

Municipal securities
39,316

 
23

 
(33
)
 
39,306

Foreign government securities
14,929

 

 
(14
)
 
14,915

Certificates of deposit
4,711

 
1

 
(1
)
 
4,711

Restricted cash
12,385

 

 

 
12,385

        Total
$
1,568,280

 
$
76

 
$
(1,046
)
 
$
1,567,310


The following table presents available-for-sale investments by contractual maturity date as of March 31, 2019 (in thousands):
 
Amortized
Cost
 
Estimated Fair
Market Value
Due in one year or less
$
723,241

 
$
723,207

Due after one year through two years
57,550

 
57,756

Total
$
780,791

 
$
780,963



11


Note 5. Accounts Receivable, net
The opening balance of accounts receivable, net was $66.1 million as of January 1, 2019.
The following table presents the changes in the allowance for doubtful accounts (in thousands):
Balance as of January 1, 2019
$
4,838

Bad debt expense
128

Less: write-offs, net of recoveries and other adjustments
(24
)
Balance as of March 31, 2019
$
4,942


Note 6. Inventory
The components of inventory, net of applicable lower of cost or net realizable value write-downs, were as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Work-in-progress
$
76,283

 
$
45,943

Finished goods
248,871

 
116,886

Inventory
$
325,154

 
$
162,829

We have not recorded any inventory write-downs for the three months ended March 31, 2019.
Note 7. Contract Cost Assets
As of March 31, 2019 and December 31, 2018, we had $46.2 million and $45.8 million, respectively, of contract cost assets. During the three months ended March 31, 2019 and 2018, we recorded no impairment losses. During the three months ended March 31, 2019 and 2018, we recorded $8.7 million and $9.3 million, respectively, of amortization expense related to contract cost assets.
Note 8. Property and Equipment, net
The following table presents the detail of property and equipment as of the dates presented (in thousands):
 
March 31,
2019
 
December 31,
2018
Website development costs
$
149,558

 
$
149,891

Computer equipment
22,675

 
22,477

Leasehold improvements
74,888

 
65,012

Construction-in-progress
26,027

 
29,037

Office equipment, furniture and fixtures
42,401

 
39,510

Property and equipment
315,549

 
305,927

Less: accumulated amortization and depreciation
(173,403
)
 
(170,755
)
Property and equipment, net
$
142,146

 
$
135,172


We recorded depreciation expense related to property and equipment (other than website development costs) of $6.0 million and $4.2 million, respectively, during the three months ended March 31, 2019 and 2018.

We capitalized $10.0 million and $8.6 million, respectively, in website development costs during the three months ended March 31, 2019 and 2018. Amortization expense for website development costs included in technology and development expenses was $3.4 million and $9.5 million, respectively, during the three months ended March 31, 2019 and 2018.

12


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. The entity is financed through its business operations. We are not the primary beneficiary of the entity, as we do not direct the activities that most significantly impact the entity’s economic performance. Therefore, we do not consolidate the entity. Our maximum exposure to loss is $10.0 million, the carrying amount of the investment as of March 31, 2019. There has been no impairment or upward or downward adjustments to our equity investment as of March 31, 2019 that would impact the carrying amount of the investment. The equity investment is classified within other assets in the condensed consolidated balance sheet.
Note 10. Intangible Assets, net
The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):
 
March 31, 2019
 
Cost
 
Accumulated
Amortization
 
Net
Purchased content
$
42,224

 
$
(33,017
)
 
$
9,207

Software
24,770

 
(15,339
)
 
9,431

Customer relationships
103,600

 
(63,861
)
 
39,739

Developed technology
109,080

 
(73,459
)
 
35,621

Trade names and trademarks
4,400

 
(4,400
)
 

Zillow Home Loans lender licenses
400

 
(67
)
 
333

Intangibles-in-progress
5,602

 

 
5,602

Total
$
290,076

 
$
(190,143
)
 
$
99,933

 
December 31, 2018
 
Cost
 
Accumulated
Amortization
 
Net
Purchased content
$
42,110

 
$
(30,477
)
 
$
11,633

Software
24,296

 
(13,925
)
 
10,371

Customer relationships
103,900

 
(60,733
)
 
43,167

Developed technology
111,980

 
(72,788
)
 
39,192

Trade names and trademarks
4,900

 
(4,683
)
 
217

Zillow Home Loans lender licenses
400

 
(17
)
 
383

Intangibles-in-progress
2,941

 

 
2,941

Total
$
290,527

 
$
(182,623
)
 
$
107,904


Amortization expense recorded for intangible assets for the three months ended March 31, 2019 and 2018 was $11.0 million and $13.0 million, respectively.
We have an indefinite-lived intangible asset that we recorded in connection with our February 2015 acquisition of Trulia for Trulia’s trade names and trademarks that is not subject to amortization. The carrying value of the Trulia trade names and trademarks intangible asset was $108.0 million as of March 31, 2019 and December 31, 2018.
Intangibles-in-progress consists of software that is capitalizable but has not been placed in service.

13


Note 11. Deferred Revenue
The following table presents the changes in deferred revenue for the periods presented (in thousands):
 
Three Months Ended
March 31, 2019
Balance as of January 1, 2019
$
34,080

Deferral of revenue
242,852

Less: Revenue recognized
(240,827
)
Balance as of March 31, 2019
$
36,105


During the three months ended March 31, 2019, we recognized as revenue a total of $30.7 million pertaining to amounts that were recorded in deferred revenue as of December 31, 2018.
Note 12. Leases
Our lease portfolio is primarily composed of operating leases for our office space. We have lease agreements that include lease components (e.g., fixed rent) and non-lease components (e.g., common area maintenance), which are accounted for as a single component, as we have elected the practical expedient to group lease and non-lease components. We also elected the practical expedient to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the condensed consolidated statements of operations on a straight-line basis over the lease term.
Our leases have remaining lease terms ranging from less than one year to five years, some of which include options to extend the lease term for up to an additional ten years. For example, our largest leases, which include our corporate headquarters in Seattle, Washington and office space in San Francisco, California, include options to extend the existing leases for two periods of five years each.
As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. For those leases that existed as of January 1, 2019, we used our incremental borrowing rate based on information available at that date. We apply a portfolio approach for determining the incremental borrowing rate based on the applicable lease terms and the current economic environment, and we utilize the assistance of third-party specialists to assist us in determining our yield curve.
The components of our operating lease expense are as follows for the three months ended March 31, 2019 (in thousands):
Operating lease cost
$
6,523

Variable lease cost
4,781

     Total lease cost
$
11,304


Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2019 was $9.1 million. The weighted average remaining term for our leases as of March 31, 2019 was 5 years. The weighted average discount rate for our leases as of March 31, 2019 was 5.9%.
Maturities of our operating lease liabilities by fiscal year are as follows as of March 31, 2019 (in thousands):


14


Remainder of 2019
$
19,196

2020
28,550

2021
28,090

2022
24,565

2023
22,388

All future years
19,009

     Total lease payments
141,798

Less: Imputed interest
(19,832
)
     Present value of lease liabilities
$
121,966


As of March 31, 2019, we have additional office space operating leases that have not yet commenced with total lease payments of $112.9 million. Our expectation is that these operating leases will commence during fiscal year 2019 with lease terms of five to eleven years.
The following table presents our future minimum payments for all operating leases as of December 31, 2018, including future minimum payments for operating leases that had not yet commenced as of December 31, 2018 totaling $112.9 million (in thousands):
2019
$
29,085

2020
38,060

2021
40,099

2022
37,721

2023
36,458

All future years
85,462

Total future minimum lease payments
$
266,885


Note 13. Debt
Revolving Credit Facilities
To provide capital for Zillow Offers, we utilize revolving credit facilities that are classified as current liabilities in our condensed consolidated balance sheets. The following table summarizes our revolving credit facilities as of the periods presented (in thousands, except interest rates):
Effective Date
 
Maximum Borrowing Capacity
 
Outstanding Borrowings at
March 31, 2019
 
Outstanding Borrowings at December 31, 2018
 
Weighted Average Interest Rate
July 31, 2018
 
$
500,000

 
$
167,279

 
$
116,700

 
6.00
%
January 31, 2019
 
500,000

 
78,749

 

 
5.99
%
Total
 
$
1,000,000

 
$
246,028

 
$
116,700

 
 

On January 31, 2019, certain wholly owned subsidiaries of Zillow Group entered into a revolving credit agreement with Citibank, N.A., as the directing lender, and certain other parties thereto. The credit agreement provides for a maximum borrowing capacity of $500.0 million (the “Maximum Amount”) with a current borrowing capacity of $79.0 million as of March 31, 2019, which amount may be increased up to the Maximum Amount subject to the satisfaction of certain conditions, through a non-recourse credit facility secured by a pledge of the equity of certain Zillow Group subsidiaries that purchase and sell select residential properties through Zillow Offers. In certain circumstances Zillow Group may be obligated to fund some or all of the payment obligations under the credit agreement. The credit agreement has an initial term of two years and may be extended for up to one additional year subject to agreement by the directing lender. Zillow Group formed certain special purpose entities to effectuate the transactions contemplated by the January 31, 2019 revolving credit facility. Each special purpose entity is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such entity are available to satisfy the debts and other obligations of any affiliate or other entity.
The July 31, 2018 revolving credit facility had an initial term of one year which may be extended for up to two additional years, subject to agreement by the directing lender, and has a current borrowing capacity of $177.3 million as of March 31,

15


2019. Zillow Group formed certain special purpose entities to effectuate the transactions contemplated by the July 31, 2018 revolving credit facility. Each special purpose entity is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such entity are available to satisfy the debts and other obligations of any affiliate or other entity.
The stated interest rate on our revolving credit facilities is one-month LIBOR plus an applicable margin as defined in the respective credit agreements. Our revolving credit facilities include customary representations and warranties, covenants (including financial covenants applicable to Zillow Group), and provisions regarding events of default. As of March 31, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred. Our revolving credit facilities also require that we establish, maintain, and in certain circumstances fund, certain specified reserve accounts. These reserve accounts include, but are not limited to, interest reserves, insurance, tax reserves, renovation cost reserves and special reserves. Amounts funded to these reserve accounts and the collection accounts have been classified within our consolidated balance sheets as restricted cash.
For additional details related to our revolving credit facilities, see Note 14 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Warehouse Lines of Credit
To provide capital for Zillow Home Loans, we utilize warehouse lines of credit that are classified as current liabilities in our condensed consolidated balance sheets. The following table summarizes our warehouse lines of credit as of the periods presented (in thousands, except interest rates):
Maturity Date
 
Maximum Borrowing Capacity
 
Outstanding Borrowings at
March 31, 2019
 
Outstanding Borrowings at December 31, 2018
 
Weighted Average Interest Rate
July 15, 2019
 
$
50,000

 
$
13,300

 
$
14,125

 
5.00
%
June 29, 2019
 
50,000

 
14,691

 
18,892

 
5.00
%
Total
 
$
100,000

 
$
27,991

 
$
33,017

 
 

Borrowings on the lines of credit bear interest at the one-month LIBOR plus an applicable margin, as defined in the credit agreements governing the warehouse lines of credit. The lines of credit include customary representations and warranties, covenants and provisions regarding events of default. As of March 31, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred.
Convertible Senior Notes
The following table summarizes our outstanding convertible senior notes as of the periods presented (in thousands, except interest rates):
Maturity Date
 
Aggregate Principal Amount
 
Fair Value at
March 31, 2019
 
Fair Value at December 31, 2018
 
Stated Interest Rate
 
Effective Interest Rate
July 1, 2023
 
$
373,750

 
$
341,850

 
$
321,855

 
1.50
%
 
6.99
%
December 1, 2021
 
460,000

 
470,911

 
446,200

 
2.00
%
 
7.44
%
December 15, 2020
 
9,637

 
16,842

 
16,744

 
2.75
%
 
N/A

Total
 
$
843,387

 
$
829,603

 
$
784,799

 
 
 
 

The convertible notes are senior unsecured obligations and are classified as long-term debt in our condensed consolidated balance sheets. Interest on the convertible notes is paid semi-annually. As of March 31, 2019 and December 31, 2018, respectively, the total unamortized debt discount and debt issuance costs for our outstanding senior convertible notes were $135.5 million and $144.4 million. The convertible senior notes maturing in 2023 and 2021 are not redeemable or convertible as of March 31, 2019. The convertible senior notes maturing in 2020 are convertible, at the option of the holder, and redeemable, at our option, as of March 31, 2019.
For additional details related to our convertible senior notes, see Note 14 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Note 14. Income Taxes
We are subject to federal and state income taxes in the United States and in Canada. As of March 31, 2019 and December 31, 2018, 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 $1,081.7 million as of December 31, 2018, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $32.5 million (tax effected) as of December 31, 2018.
Note 15. Share-Based Awards
Option Awards
The following table summarizes option award activity for the three months ended March 31, 2019:
 
Number
of Shares
Subject to
Existing
Options
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at January 1, 2019
27,310,110

 
$
34.04

 
6.23
 
$
97,941

Granted
6,155,283

 
39.97

 
 
 
 
Exercised
(729,788
)
 
18.59

 
 
 
 
Forfeited or cancelled
(993,437
)
 
42.01

 
 
 
 
Outstanding at March 31, 2019
31,742,168

 
35.30

 
6.76
 
122,262

Vested and exercisable at March 31, 2019
16,791,512

 
30.84

 
4.83
 
101,912


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
March 31,
 
2019
 
2018
Expected volatility
46%-47%
 
43%-45%
Expected dividend yield
 
Risk-free interest rate
2.38%-2.53%
 
2.52%-2.65%
Weighted-average expected life
4.75-5.25 years
 
4.50-5.00 years
Weighted-average fair value of options granted
$16.77

$20.88

As of March 31, 2019, there was a total of $229.5 million in unrecognized compensation cost related to unvested stock options.
Restricted Stock Units
The following table summarizes activity for restricted stock units for the three months ended March 31, 2019:
 
Restricted
Stock Units
 
Weighted-
Average Grant-
Date Fair
Value
Unvested outstanding at January 1, 2019
5,266,324

 
$
42.19

Granted
2,749,293

 
39.06

Vested
(496,347
)
 
37.94

Forfeited or cancelled
(273,753
)
 
40.44

Unvested outstanding at March 31, 2019
7,245,517

 
41.36



16


As of March 31, 2019, there was $279.8 million of total unrecognized compensation cost related to unvested restricted stock units.
Share-Based Compensation Expense
The following table presents the effects of share-based compensation in our condensed consolidated statements of operations during the periods presented (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Cost of revenue
$
881

 
$
955

Sales and marketing
5,650

 
5,162

Technology and development
15,508

 
11,542

General and administrative
44,085

 
13,082

Total
$
66,124

 
$
30,741


On February 21, 2019, Zillow Group announced the appointment of Richard N. Barton as Zillow Group’s Chief Executive Officer, effective February 21, 2019. Mr. Barton succeeds Spencer Rascoff, who served as Zillow Group’s Chief Executive Officer since 2010 and who remains a member of Zillow Group’s board of directors. In connection with Mr. Rascoff’s resignation as Chief Executive Officer, Zillow Group entered into an Executive Departure Agreement and Release (the “Agreement”) with Mr. Rascoff. Pursuant to the Agreement, Mr. Rascoff remained a full-time employee of Zillow Group until March 22, 2019 (the “Departure Date”) in order to provide transition services until such date. Pursuant to the Agreement, Mr. Rascoff received, among other things, accelerated vesting of outstanding stock options held by Mr. Rascoff as of the Departure Date by an additional eighteen months from the Departure Date. Options not vested as of the Departure Date, taking into account the foregoing vesting acceleration, were terminated. Each of Mr. Rascoff’s vested stock options outstanding as of the Departure Date will remain exercisable until, except for any later date contemplated by the following proviso, the earlier of (x) the third anniversary of the Departure Date and (y) the latest day upon which the option would have expired by its original terms under any circumstances (the “Option Expiration Outside Date”); provided, however, that the options will remain exercisable for so long as Mr. Rascoff serves on Zillow Group’s board of directors (but not later than any applicable Option Expiration Outside Date), and if Mr. Rascoff ceases to serve on Zillow Group’s board of directors on or after the third anniversary of the Departure Date, each option will remain exercisable until the earlier of (i) ninety days from the final date of Mr. Rascoff’s service on Zillow Group’s board of directors and (ii) the applicable Option Expiration Outside Date. The change in the exercise period of the options as well as the vesting acceleration pursuant to the Agreement have been accounted for as equity modifications, and we recorded $26.4 million of share-based compensation expense associated with the modifications in the three months ended March 31, 2019. We measured the modification charge by calculating the incremental fair value of the modified award compared to the fair value of the original award immediately prior to the modification. The value of the modified awards as of the modification date was estimated using the Black-Scholes-Merton option-pricing model, assuming no dividends, expected volatility of 46%-47%, a risk-free interest rate of 2.47%-2.49% and a weighted-average expected life of 3.84-5.25 years.
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):

17


 
Three Months Ended
March 31,
 
2019
 
2018
Weighted-average Class A common stock and Class C capital stock option awards outstanding
19,408

 
25,222

Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding
5,860

 
4,346

Class A common stock issuable upon conversion of the convertible notes maturing in 2020
421

 
403

Class C capital stock issuable related to conversion spread on the convertible notes maturing in 2021

 
235

Total Class A common stock and Class C capital stock equivalents
25,689

 
30,206


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 2019 and 2024. For additional information regarding our lease agreements, see Note 12.
Purchase Commitments
Purchase commitments primarily include various non-cancelable agreements to purchase content related to our mobile applications and websites as well as homes we are under contract to purchase through Zillow Offers but that have not closed as of the respective date. As of March 31, 2019, the value of homes under contract that have not closed was $140.2 million.
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 $8.6 million and $8.9 million, respectively, as of March 31, 2019 and December 31, 2018.
Legal Proceedings
We are involved in a number of legal proceedings concerning matters arising in connection with the conduct of our business activities, some of which are at preliminary stages and some of which seek an indeterminate amount of damages. We regularly evaluate the status of legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made if accruals are not appropriate. For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in preliminary stages; (ii) specific damages have not been sought; (iii) damages sought are, in our view, unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories presented. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial position, results of operations or cash flow.
In July 2015, VHT, Inc. (“VHT”) filed a complaint against us in the U.S. District Court for the Western District of Washington alleging copyright infringement of VHT’s images on the Zillow Digs site. In January 2016, VHT filed an amended complaint alleging copyright infringement of VHT’s images on the Zillow Digs site as well as the Zillow listing site. In December 2016, the court granted a motion for partial summary judgment that dismissed VHT’s claims with respect to the Zillow listing site. A federal jury trial began on January 23, 2017, and on February 9, 2017, the jury returned a verdict finding that the Company had infringed VHT’s copyrights in images displayed or saved to the Digs site. The jury awarded VHT $79,875 in actual damages and approximately $8.2 million in statutory damages. In March 2017, the Company filed motions in the district court seeking judgment for the Company on certain claims that are the subject of the verdict, and for a new trial on others. On June 20, 2017, the judge ruled and granted in part our motions, finding that VHT failed to present sufficient evidence to prove direct copyright infringement for a portion of the images, reducing the total damages to

18


approximately $4.1 million. On October 26, 2017, the Company 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 oral hearing for the appeal took place on August 28, 2018. On March 15, 2019, 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. We have recorded an estimated liability for immaterial amounts related to this matter as of March 31, 2019 and December 31, 2018. We do not believe there is a reasonable possibility that a material loss in excess of amounts accrued may be incurred.
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 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 May 2018, the plaintiffs filed their opposition to our motion to dismiss the consolidated amended complaint. In June 2018, we filed our reply in support of our motion to dismiss the consolidated amended complaint. In October 2018, our motion to dismiss was granted without prejudice, and the plaintiffs were given 45 days file a second consolidated amended complaint and attempt to cure the defects in their consolidated amended complaint. In November 2018, the plaintiffs filed a second consolidated amended complaint, which we moved to dismiss in December 2018. In January 2019, the plaintiffs filed their opposition to our motion to dismiss the second consolidated amended complaint. In February 2019, we filed our reply in support of our motion to dismiss the second consolidated amended complaint. 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. We have denied the allegations of wrongdoing and intend to vigorously defend the claims in this lawsuit. We have not recorded an accrual related to this lawsuit as of March 31, 2019 and December 31, 2018, as we do not believe a loss 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, 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. All four of the shareholder derivative lawsuits have been stayed until after final resolution of pleading motions and related appeals, if any, in the consolidated securities class action lawsuit discussed above. The defendants intend to deny the allegations of wrongdoing and vigorously defend the claims in these lawsuits. We have not recorded an accrual related to these lawsuits as of March 31, 2019 and December 31, 2018, as we do not believe a loss 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

19


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. Self-Insurance
We are self-insured for medical benefits and dental benefits for all qualifying Zillow Group employees. The medical plan carries a stop-loss policy which will protect when cumulative medical claims exceed 125% of expected claims for the plan year with a limit of $1.0 million and from individual claims during the plan year exceeding $500,000. We record estimates of the total costs of claims incurred based on an analysis of historical data and independent estimates. Our liability for self-insured claims is included within accrued compensation and benefits in our condensed consolidated balance sheets and was $4.1 million and $3.9 million, respectively, as of March 31, 2019 and December 31, 2018.
Note 19. 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 for the three months ended March 31, 2019 and 2018 was $4.9 million and $3.8 million, respectively.
Note 20. Segment Information and Revenue
Beginning January 1, 2019, 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 Internet, Media & Technology (“IMT”), Homes and Mortgages segments.
The IMT segment includes the financial results for the Premier Agent, Rentals and new construction marketplaces, dotloop, and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals. The Homes segment includes the financial results from Zillow Group’s buying and selling of homes directly. The Mortgages segment includes financial results for advertising sold to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and the sale of mortgages on 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 and facilities costs and 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 loss before income taxes by segment. This information is included in the following tables for the periods presented (in thousands):

20


 
Three Months Ended March 31, 2019
 
IMT
 
Homes
 
Mortgages
Revenue:
 
 
 
 
 
Premier Agent
$
217,735

 
$

 
$

Rentals
37,838

 

 

Other
42,699

 

 

Homes

 
128,472

 

Mortgages

 

 
27,360

Total revenue
298,272

 
128,472

 
27,360

Costs and expenses:
 
 
 
 
 
Cost of revenue
24,251

 
122,419

 
4,678

Sales and marketing
126,654

 
20,862

 
14,071

Technology and development
87,969

 
12,281

 
7,520

General and administrative
70,850

 
14,357

 
10,567

Integration costs

 

 
352

Total costs and expenses
309,724

 
169,919

 
37,188

Loss from operations
(11,452
)
 
(41,447
)
 
(9,828
)
Segment other income

 

 
313

Segment interest expense

 
(3,758
)
 
(101
)
Loss before income taxes (1)
$
(11,452
)
 
$
(45,205
)
 
$
(9,616
)
 
Three Months Ended March 31, 2018
 
IMT
 
Homes
 
Mortgages
Revenue:
 
 
 
 
 
Premier Agent
$
213,732

 
$

 
$

Rentals
29,063

 

 

Other
38,061

 

 

Homes

 

 

Mortgages

 

 
19,023

Total revenue
280,856

 

 
19,023

Costs and expenses:
 
 
 
 
 
Cost of revenue
22,594

 
86

 
1,239

Sales and marketing
128,747

 
290

 
8,254

Technology and development
85,917

 
2,236

 
5,780

General and administrative
50,187

 
1,778

 
4,108

Acquisition costs
27

 

 

Total costs and expenses
287,472

 
4,390

 
19,381

Loss from operations and loss before incomes taxes (1)
$
(6,616
)
 
$
(4,390
)
 
$
(358
)
(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):

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Three Months Ended
March 31,
 
2019
 
2018
Total segment loss before income taxes
$
(66,273
)
 
$
(11,364
)
Corporate interest expense
(12,607
)
 
(7,073
)
Corporate other income
8,855

 
2,446

Consolidated loss before income taxes
$
(70,025
)
 
$
(15,991
)

Certain corporate items are not directly attributable to any of our segments, including interest income earned on our short-term investments included in Other income and interest costs on our convertible senior notes included in interest expense.

22


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, 2018.
Overview of our Business
Zillow Group, Inc. houses one of the largest portfolios of real estate brands on mobile and the web. Zillow Group is committed to leveraging its proprietary data, technology and innovations to make home buying, selling, financing and renting a seamless, on-demand experience for consumers. As its flagship brand, Zillow now offers a fully integrated home shopping experience that includes access to for sale and rental listings, Zillow Offers, which provides a new, hassle-free way to buy and sell homes directly through Zillow; and Zillow Home Loans, Zillow’s affiliated lender that provides an easy way to receive mortgage pre-approvals and financing. Other consumer brands include Trulia, StreetEasy, HotPads, Naked Apartments, RealEstate.com and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions to help real estate professionals maximize business opportunities and connect with millions of consumers. Zillow Group also operates a number of business brands for real estate, rental and mortgage professionals, including Mortech, dotloop, Bridge Interactive and New Home Feed.
Reportable Segments and Revenue Overview
As of January 1, 2019, Zillow Group has three reportable segments: the Internet, Media & Technology (“IMT”) segment, the Homes segment and the Mortgages segment. 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 Homes segment includes the financial results from Zillow Group’s buying and selling of homes directly through the Zillow Offers service. 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.
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 are primarily sold on a cost per impression basis. Impressions are delivered when a sold advertisement of a Premier Agent or Premier Broker appears on pages viewed by users of our mobile applications and websites. In April 2018, we began testing a new method of consumer lead validation and distribution to Premier Agent and Premier Broker advertisers. A validated consumer connection is made when a consumer who is interested in connecting with a real estate professional does not select a specific Premier Agent or Premier Broker with whom they want to connect through one of our mobile applications or websites; applying the new model, these validated consumer leads are distributed to Premier Agents and Premier Brokers in proportion to their share of voice, or an agent advertiser’s share of total advertising purchased in a particular zip code. Consumer leads are bundled with impressions as part of our advertising services for Premier Agent and Premier Brokers; we do not charge a separate fee for these consumer leads.
Rentals revenue primarily includes advertising sold to property managers and other rental professionals on a cost per lead, cost per click, cost per lease or cost per listing generated basis. Rentals revenue also includes revenue generated through our rental applications product, whereby potential renters can submit applications to multiple properties over a 30-day period for a flat service fee.
Other revenue primarily includes revenue generated by new construction and display advertising, as well as revenue from the sale of various other advertising and business technology solutions for real estate professionals, including dotloop. New construction revenue primarily includes advertising services sold to home builders on a cost per residential community basis. Display revenue primarily consists of graphical mobile and web advertising sold to advertisers promoting their brands on our mobile applications and websites.
In our Homes segment, we generate revenue from the resale of homes on the open market through our Zillow Offers service. We began buying homes through the Zillow Offers service in April 2018, and we began selling homes in July 2018.

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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, through mortgage originations in Zillow Home Loans and the related sale of mortgages on the secondary market, and from Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.
During the three months ended March 31, 2019, we generated total revenue of $454.1 million, as compared to $299.9 million in the three months ended March 31, 2018, an increase of 51%. This increase was the result of the addition of $128.5 million in Homes revenue, an $8.8 million, or 30% increase in Rentals revenue, an $8.3 million, or 44% increase in Mortgages revenue, a $4.7 million, or 12% increase in Other revenue and a $3.9 million, or 2%, increase in Premier Agent revenue. There were approximately 181.1 million average monthly unique users of our mobile applications and websites for the three months ended March 31, 2019, representing year-over-year growth of 3%. Visits increased 14% to 2,019.8 million for the three months ended March 31, 2019 from 1,764.8 million for the three months ended March 31, 2018.
As of March 31, 2019, we had 4,514 full-time employees compared to 4,336 full-time employees as of December 31, 2018.
Key Metrics
Management has identified unique users and visits as relevant to investors’ and others’ assessment of our financial condition and results of operations.
Unique Users
Measuring unique users is important to us because much of our advertising revenue depends in part on our ability to enable real estate, rental and mortgage professionals to connect with our consumer users - home buyers and sellers, renters, and individuals with or looking for a mortgage. Growth in consumer traffic to our mobile applications and websites increases the number of impressions, clicks, leads and other events we can monetize to generate revenue. For example, Premier Agent revenue and display revenue depend on advertisements being served to users of our mobile applications and websites, and 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 Group. In addition, our community of users improves the quality of our living database of homes with their contributions, which in turn attracts more users.
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, Naked Apartments and RealEstate.com measure unique users with Google Analytics, and Trulia measures unique users with Adobe Analytics.
 
Three Months Ended
March 31,
 
2018 to 2019
% Change
 
2019
 
2018
 
 
(in millions)
 
 
Average Monthly Unique Users
181.1

 
175.5

 
3
%
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 be transaction-ready real estate market participants and therefore more sought-after by our real estate professional advertisers or more likely to participate in our Zillow Offers program or use Zillow Homes Loans.
We define a visit as a group of interactions by users with the Zillow, Trulia, StreetEasy and RealEstate.com mobile applications and websites, as we monetize our Premier Agent and Premier Broker products on these mobile applications and
websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. Visits can occur on the same day, or over several days, weeks or months.
Zillow, StreetEasy and RealEstate.com measure visits with Google Analytics, and Trulia measures visits with Adobe Analytics. Visits to Trulia end after thirty minutes of user inactivity. Visits to Zillow, StreetEasy and RealEstate.com end either: (i) after thirty minutes of user inactivity or at midnight; or (ii) through a campaign change. A visit ends through a campaign change if a visitor arrives via one campaign or source (for example, via a search engine or referring link on a third-party website), leaves the mobile application or website, and then returns via another campaign or source.
 
Three Months Ended
March 31,
 
2018 to 2019
% Change
 
2019
 
2018
 
 
(in millions)
 
 
Visits
2,019.8

 
1,764.8

 
14
%
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 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 and professionals. These professionals include real estate and rental professionals and brand advertisers. Our three primary revenue categories within our IMT segment are Premier Agent, Rentals and Other.
In our Homes segment, we generate revenue from the resale of homes on the open market through our Zillow Offers program.
In our Mortgages segment, we generate revenue from the sale of advertising services to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and the related sale of mortgages on the secondary market as well as Mortech mortgage software solutions.
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 or 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. We have concluded that the marketing and business technology products and services promised to Premier Agents and Premier Brokers represent distinct performance obligations.
We primarily offer our Premier Agent and Premier Broker advertising products on a cost per impression basis, and beginning in April 2018, our Premier Agents and Premier Brokers also receive a proportion of validated consumer connections, or leads. Payment is received prior to the delivery of impressions and connections. Impressions are delivered when a sold advertisement appears on pages viewed by users of our mobile applications and websites. We determine the cost per impression and cost per lead delivered in each zip code using an auction-based pricing method in consideration of the total amount spent by Premier Agents and Premier Brokers to purchase impressions and leads in the zip code during the month. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly budgeted spend in that zip code as a percentage of the total monthly budgeted 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. In April 2018, we began testing a new method of consumer lead validation and distribution to our Premier Agent and Premier Broker advertisers related to our auction-based pricing model. A consumer connection is made when a consumer who is interested in connecting with a real estate professional does not select a specific Premier Agent or Premier Broker with whom they want to connect

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through one of our mobile applications or websites. Applying the new model, these validated consumer leads are distributed to Premier Agents and Premier Brokers in proportion to their share of voice, or an agent advertiser’s share of total advertising purchased in a particular zip code. For both the new and historical Premier Agent and Premier Broker products, the cost per impression and cost per lead that we charge is dynamic - as demand for advertising in a zip code increases or decreases, the cost in that zip code may be increased or decreased accordingly. The price paid for each impression and each lead is representative of the price at which we would sell an impression or lead separately to a customer, or the stand-alone selling price.
We have not allocated the transaction price to each performance obligation as the amounts recognized would be the same irrespective of any allocation. As such, we recognize revenue related to the Premier Agent and Premier Broker products and services based on the contractual spend recognized on a straight-line basis during the contractual 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 throughout the contractual period.
In October 2018, we began testing a new Flex Pricing model for Premier Agent and Premier Broker advertising services in limited markets. With the Flex Pricing model, Premier Agents and Premier Brokers are provided with validated leads at no upfront cost, and they pay a performance advertising fee only when a real estate transaction is closed with one of their leads. With this pricing model, the transaction price represents variable consideration, as the amount to which we expect to be entitled varies based on the number of validated leads that convert into real estate transactions. As our experience with this pricing model is limited, we fully constrain the estimated variable consideration. When a real estate transaction is closed with a Flex Pricing lead and payment is made, the uncertainty is resolved, and revenue is recognized in the period for the satisfied performance obligations. We will continuously reevaluate this determination and will begin estimating variable consideration and recording revenue as performance obligations are transferred when we have concluded we are able to make a reliable estimate.
Rentals Revenue. Rentals revenue includes the sale of advertising in our rentals information marketplace, as well as the sale of our suite of tools for rental professionals. Rentals revenue primarily includes revenue generated by advertising sold to property managers and other rental professionals on a cost per lead, cost per click, cost per lease or cost per listing basis. We recognize revenue as leads or clicks are provided to rental professionals, or as listings from rental professionals 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 marketplace during the period is accounted for as variable consideration, and we estimate these amounts 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.
Beginning in 2018, 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.
Other Revenue. Other revenue primarily includes revenue generated by new construction and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals. 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. Consideration 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.
Homes Revenue. Homes revenue is derived from the resale of homes on the open market through our Zillow Offers program. Homes revenue is recognized at the time of the closing of the home sale when title to and possession of the property are transferred to the buyer. The amount of revenue recognized for each home sale is equal to the full sale price of the home net of resale concessions and credits to the buyer and does not reflect real estate agent commissions, closing or other costs associated with the transaction.
Mortgages Revenue. Mortgages revenue primarily includes marketing products sold to mortgage professionals on a cost per lead basis, including our Custom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service. Zillow Group operates Custom Quote and Connect through its wholly owned subsidiary, Zillow

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Group Marketplace, Inc., a licensed mortgage broker. For our Connect and Custom Quote cost per lead mortgage marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through our mortgages platform, which is the amount for which we have the right to invoice. For our subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, we contact a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend recognized on a straight-line basis during the contractual period over which the service is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.
Beginning in the fourth quarter of 2018, mortgages revenue also includes revenue generated by Zillow Home Loans, Zillow’s affiliated mortgage lender. We elect the fair value option for our mortgage loans held for sale, which are initially recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loans are closed. Net origination costs and fees associated with mortgage loans are recognized as incurred at the time of origination. 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 the operation of our data center and mobile applications and websites. For our IMT and Mortgages segment, cost of revenue also includes credit card fees and ad serving costs paid to third parties. For our Homes segment, our cost of revenue also consists of the consideration paid to acquire, make certain repairs and updates to, and sell each home, including associated overhead costs. For our Mortgages segment, our cost of revenue consists of lead acquisition costs and direct costs to originate loans, including underwriting and processing costs.
Sales and Marketing. Sales and marketing expenses consist of advertising costs and other sales expenses related to promotional and marketing activities, headcount expenses, including salaries, commissions, benefits, share-based compensation expense and bonuses for sales, sales support, customer support, marketing and public relations employees, and depreciation expense. For our Homes segment, sales and marketing expenses also consist of selling costs, such as real estate agent commissions, escrow and title fees, and staging costs, as well as holding costs, including utilities, taxes and maintenance. For our Mortgages segment, sales and marketing expenses also include headcount expenses for loan officers and specialists supporting Zillow Home Loans.
Technology and Development. Technology and development expenses consist of headcount expenses, including salaries, benefits, share-based compensation expense and bonuses for salaried employees and contractors engaged in the design, development and testing of our mobile applications and websites and the tools and applications that support our products. Technology and development expenses also include equipment and maintenance costs. Technology and development expenses also include amortization costs related to capitalized website and development activities, amortization of software, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our mobile applications and websites, and amortization of intangible assets recorded in connection with acquisitions, including developed technology and customer relationships, amongst others. Technology and development expenses also include depreciation expense.

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General and Administrative. General and administrative expenses consist of headcount expenses, including salaries, benefits, share-based compensation expense and bonuses for executive, finance, accounting, legal, human resources, recruiting, corporate information technology costs and other administrative support. General and administrative expenses also include legal settlement costs and estimated legal liabilities, legal, accounting and other third-party professional service fees, rent expense, depreciation expense and bad debt expense.
Acquisition-related Costs. Acquisition-related costs consist of investment banking, legal, accounting, tax and regulatory filing fees associated with effecting acquisitions.
Integration Costs. Integration costs consist of expenses incurred to incorporate operations, systems, technology, and rights and responsibilities of acquired companies, during both pre-closing and post-closing periods, into Zillow Group’s business. For the three months ended March 31, 2019, integration costs primarily include consulting-related expenses incurred in connection with the integration of Zillow Home Loans (formerly Mortgage Lenders of America).
Other Income
Other income consists primarily of interest income earned on our cash, cash equivalents and short-term investments.
Interest Expense
Our corporate interest expense consists of interest on Trulia’s Convertible Senior Notes due in 2020 (the “2020 Notes”) we guaranteed in connection with our February 2015 acquisition of Trulia, interest on the Convertible Senior Notes due in 2021 (the “2021 Notes”) we issued in December 2016 and interest on the Convertible Senior Notes due in 2023 (the “2023 Notes”) we issued in July 2018. Interest is payable on the 2020 Notes at the rate of 2.75% semi-annually on June 15 and December 15 of each year. Interest is payable on the 2021 Notes at the rate of 2.00% semi-annually on June 1 and December 1 of each year. Interest is payable on the 2023 Notes at the rate of 1.50% semi-annually on January 1 and July 1 of each year.
For our Homes segment, interest expense includes interest on borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our revolving credit facilities related to our Zillow Offers business. Borrowings on our revolving credit facilities bear interest at a floating rate based on the one-month LIBOR plus an applicable margin, as defined in the credit agreements.
For our Mortgages segment, interest expense includes interest on the warehouse lines of credit acquired as part of the acquisition of Zillow Home Loans (formerly Mortgage Lenders of America). Each line of credit provides for a current and maximum borrowing capacity of $50.0 million, or $100.0 million in total. Borrowings on the lines of credit bear interest at the one-month LIBOR rate plus an applicable margin, as defined in the credit agreements governing the warehouse line of credit.
Income Taxes
We are subject to federal and state income taxes in the United States and in Canada. As of March 31, 2019 and December 31, 2018, 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 $1,081.7 million as of December 31, 2018, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $32.5 million (tax effected) as of December 31, 2018.

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Results of Operations
In 2018, our business model evolved significantly with the launch of Zillow Offers in April and the acquisition of Zillow Home Loans in October. Zillow Offers, for example, is a cash- and inventory-intensive business with a high cost of revenue as compared with other parts of our operations; the cost of revenue includes the amount we pay to purchase homes. Revenue for the Homes segment includes the full sale prices of homes less resale concessions and credits to the buyer, and does not reflect real estate agent commissions, closing or other associated costs. As a result of this evolution of our business model, financial performance for prior year periods may not be indicative of future performance.
The following tables present our results of operations for the periods indicated and as a percentage of total revenue:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands, except per share data, unaudited)
Statements of Operations Data:
 
 
 
Revenue:
 
 
 
IMT
$
298,272

 
$
280,856

Homes
128,472

 

Mortgages
27,360

 
19,023

Total revenue
454,104

 
299,879

Cost of revenue (exclusive of amortization) (1)(2):
 
 
 
IMT
24,251

 
22,594

Homes
122,419

 
86

Mortgages
4,678

 
1,239

Total cost of revenue
151,348

 
23,919

Sales and marketing (1)
161,587

 
137,291

Technology and development (1)
107,770

 
93,933

General and administrative (1)
95,774

 
56,073

Acquisition-related costs

 
27

Integration costs
352

 

Total costs and expenses
516,831

 
311,243

Loss from operations
(62,727
)
 
(11,364
)
Other income
9,168

 
2,446

Interest expense
(16,466
)
 
(7,073
)
Loss before income taxes
(70,025
)
 
(15,991
)
Income tax benefit (expense)
2,500

 
(2,600
)
Net loss
$
(67,525
)
 
$
(18,591
)
Net loss per share — basic and diluted
$
(0.33
)
 
$
(0.10
)
Weighted-average shares outstanding — basic and diluted
204,514

 
191,464

Other Financial Data:
 
 
 
Adjusted EBITDA (3)
$
23,922

 
$
46,310


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Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands, unaudited)
(1) Includes share-based compensation as follows:
 
 
 
Cost of revenue
$
881

 
$
955

Sales and marketing
5,650

 
5,162

Technology and development
15,508

 
11,542

General and administrative
44,085

 
13,082

Total
$
66,124

 
$
30,741

(2) Amortization of website development costs and intangible assets included in technology and development
$
14,400

 
$
22,549

(3) See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

 
Three Months Ended
March 31,
 
2019
 
2018
 
(unaudited)
Percentage of Revenue:
 
 
 
Revenue:
 
 
 
IMT
66
 %
 
94
 %
Homes
28

 

Mortgages
6

 
6

Total revenue
100

 
100

Cost of revenue (exclusive of amortization):
 
 
 
IMT
5

 
8