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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
 _____________________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share
ZG
The Nasdaq Global Select Market
Class C Capital Stock, par value $0.0001 per share
Z
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  


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

 
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  
As of July 31, 2019, 58,486,480 shares of Class A common stock, 6,217,447 shares of Class B common stock, and 141,903,904 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 June 30, 2019
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
2
 
2
 
3
 
4
 
5
 
7
 
8
Item 2.
26
Item 3.
48
Item 4.
49
 
 
 
 
 
 
 
 
Item 1.
50
Item 1A.
51
Item 2.
52
Item 6.
53
 
 
 
 
54
 

i

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.

1

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)
 
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
766,698

 
$
651,058

Short-term investments
673,029

 
903,867

Accounts receivable, net of allowance for doubtful accounts of $4,809 and $4,838 at June 30, 2019 and December 31, 2018, respectively
82,261

 
66,083

Mortgage loans held for sale
38,653

 
35,409

Inventory
552,823

 
162,829

Prepaid expenses and other current assets
62,062

 
61,067

Restricted cash
43,882

 
12,385

Total current assets
2,219,408

 
1,892,698

Contract cost assets
46,271

 
45,819

Property and equipment, net
145,932

 
135,172

Right of use assets
210,080

 

Goodwill
1,984,907

 
1,984,907

Intangible assets, net
202,824

 
215,904

Other assets
16,498

 
16,616

Total assets
$
4,825,920

 
$
4,291,116

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,028

 
$
7,471

Accrued expenses and other current liabilities
68,520

 
63,101

Accrued compensation and benefits
32,001

 
31,388

Revolving credit facilities
409,799


116,700

Warehouse lines of credit
30,057

 
33,018

Deferred revenue
37,080

 
34,080

Deferred rent, current portion

 
1,740

Lease liabilities, current portion
18,794

 

Total current liabilities
604,279

 
287,498

Deferred rent, net of current portion

 
19,945

Lease liabilities, net of current portion
211,593

 

Long-term debt
716,819

 
699,020

Deferred tax liabilities and other long-term liabilities
15,123

 
17,474

Total liabilities
1,547,814

 
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; 58,474,815 and 58,051,448 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
6

 
6

Class B common stock, $0.0001 par value; 15,000,000 shares authorized; 6,217,447 shares issued and outstanding as of June 30, 2019 and December 31, 2018
1

 
1

Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 141,821,374 and 139,635,370 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
14

 
14

Additional paid-in capital
4,088,470

 
3,939,842

Accumulated other comprehensive income (loss)
896

 
(905
)
Accumulated deficit
(811,281
)
 
(671,779
)
Total shareholders’ equity
3,278,106

 
3,267,179

Total liabilities and shareholders’ equity
$
4,825,920

 
$
4,291,116

See accompanying notes to condensed consolidated financial statements.

2

Table of Contents

ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data, unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019

2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
IMT
$
323,669

 
$
305,941

 
$
621,941

 
$
586,797

Homes
248,924

 

 
377,396

 

Mortgages
26,985

 
19,305

 
54,345

 
38,328

Total revenue
599,578

 
325,246

 
1,053,682

 
625,125

Cost of revenue (exclusive of amortization) (1):
 
 
 
 
 
 
 
IMT
26,059

 
24,290

 
50,310

 
46,884

Homes
240,732

 

 
363,151

 
86

Mortgages
4,430

 
1,237

 
9,108

 
2,476

Total cost of revenue
271,221

 
25,527

 
422,569

 
49,446

Sales and marketing
187,433

 
147,727

 
349,020

 
285,018

Technology and development
120,330

 
100,376

 
228,100

 
194,309

General and administrative
82,839

 
60,579

 
178,613

 
116,652

Acquisition-related costs

 
632

 

 
659

Integration costs
293

 

 
645

 

Total costs and expenses
662,116

 
334,841

 
1,178,947

 
646,084

Loss from operations
(62,538
)
 
(9,595
)
 
(125,265
)
 
(20,959
)
Other income
9,458

 
3,089

 
18,626

 
5,535

Interest expense
(18,897
)
 
(7,187
)
 
(35,363
)
 
(14,260
)
Loss before income taxes
(71,977
)
 
(13,693
)
 
(142,002
)
 
(29,684
)
Income tax benefit

 
10,600

 
2,500

 
8,000

Net loss
$
(71,977
)
 
$
(3,093
)
 
$
(139,502
)
 
$
(21,684
)
Net loss per share — basic and diluted
$
(0.35
)
 
$
(0.02
)
 
$
(0.68
)
 
$
(0.11
)
Weighted-average shares outstanding — basic and diluted
205,754

 
194,155

 
205,137

 
192,807

 ____________________
(1) Amortization of website development costs and intangible assets included in technology and development
$
14,656

 
$
21,020

 
$
29,056

 
$
43,569

See accompanying notes to condensed consolidated financial statements.


3

Table of Contents

ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(71,977
)
 
$
(3,093
)
 
$
(139,502
)
 
$
(21,684
)
Other comprehensive income (loss):
 
 
 
 

 

Unrealized gains (losses) on investments
751

 
223

 
1,895

 
(109
)
Currency translation adjustments
(52
)
 
(44
)
 
(94
)
 
(66
)
Total other comprehensive income (loss)
699

 
179

 
1,801

 
(175
)
Comprehensive loss
$
(71,278
)
 
$
(2,914
)
 
$
(137,701
)
 
$
(21,859
)
See accompanying notes to condensed consolidated financial statements.

4

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
Income
 
Total
Shareholders’
Equity
 
 
Shares
 
Amount
 
 
Balance at April 1, 2019
205,130,332

 
$
21

 
$
4,022,218

 
$
(739,304
)
 
$
197

 
$
3,283,132

 
Issuance of common and capital stock upon exercise of stock options
814,062

 

 
19,433

 

 

 
19,433

 
Vesting of restricted stock units
569,260

 

 

 

 

 

 
Shares and value of restricted stock units withheld for tax liability
(18
)
 

 
(1
)
 

 

 
(1
)
 
Share-based compensation expense

 

 
46,820

 

 

 
46,820

 
Net loss

 

 

 
(71,977
)
 

 
(71,977
)
 
Other comprehensive income

 

 

 

 
699

 
699

 
Balance at June 30, 2019
206,513,636

 
$
21

 
$
4,088,470

 
$
(811,281
)
 
$
896

 
$
3,278,106

 
 
Class A Common
Stock, Class B
Common Stock and
Class C Capital Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
 
 
Shares
 
Amount
 
 
Balance at April 1, 2018
192,944,326

 
$
20

 
$
3,340,387

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

 
Issuance of common and capital stock upon exercise of stock options
2,065,545

 

 
46,747

 

 

 
46,747

 
Vesting of restricted stock units
439,944

 

 

 

 

 

 
Shares and value of restricted stock units withheld for tax liability
(711
)
 

 
(37
)
 

 

 
(37
)
 
Share-based compensation expense

 

 
41,444

 

 

 
41,444

 
Net loss

 

 

 
(3,093
)
 

 
(3,093
)
 
Other comprehensive income

 

 

 

 
179

 
179

 
Balance at June 30, 2018
195,449,104

 
$
20

 
$
3,428,541

 
$
(573,605
)
 
$
(1,275
)
 
$
2,853,681















5

Table of Contents

 
 
Class A Common
Stock, Class B
Common Stock and
Class C Capital Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
 
Shares
 
Amount
 
 
Balance at January 1, 2019
203,904,265

 
$
21

 
$
3,939,842

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

 
Issuance of common and capital stock upon exercise of stock options
1,543,850

 

 
32,997

 

 

 
32,997

 
Vesting of restricted stock units
1,065,607

 

 

 

 

 

 
Shares and value of restricted stock units withheld for tax liability
(86
)
 

 
(3
)
 

 

 
(3
)
 
Share-based compensation expense

 

 
115,634

 

 

 
115,634

 
Net loss

 

 

 
(139,502
)
 

 
(139,502
)
 
Other comprehensive income

 

 

 

 
1,801

 
1,801

 
Balance at June 30, 2019
206,513,636

 
$
21

 
$
4,088,470

 
$
(811,281
)
 
$
896

 
$
3,278,106


 
 
Class A Common
Stock, Class B
Common Stock and
Class C Capital Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
 
 
Shares
 
Amount
 
 
Balance at January 1, 2018
190,115,148

 
$
20

 
$
3,254,146

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

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

 

 

 
40,322

 

 
40,322

 
Issuance of common and capital stock upon exercise of stock options
4,479,759

 

 
99,653

 

 

 
99,653

 
Vesting of restricted stock units
834,788

 

 

 

 

 

 
Shares and value of restricted stock units withheld for tax liability
(1,318
)
 

 
(65
)
 

 

 
(65
)
 
Share-based compensation expense

 

 
74,307

 

 

 
74,307

 
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

 

 

 
(21,684
)
 

 
(21,684
)
 
Other comprehensive loss

 

 

 

 
(175
)
 
(175
)
 
Balance at June 30, 2018
195,449,104

 
$
20

 
$
3,428,541

 
$
(573,605
)
 
$
(1,275
)
 
$
2,853,681

See accompanying notes to condensed consolidated financial statements.


6

Table of Contents

ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Six Months Ended
June 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(139,502
)
 
$
(21,684
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
41,728

 
52,926

Share-based compensation expense
109,756

 
69,684

Amortization of right of use assets
10,572

 

Amortization of contract cost assets
17,880

 
18,309

Amortization of discount and issuance costs on convertible notes maturing in 2023 and 2021
17,799

 
9,504

Deferred income taxes
(2,500
)
 
(8,000
)
Loss on disposal of property and equipment
3,878

 
2,106

Bad debt expense
706

 
(352
)
Deferred rent

 
(2,845
)
Accretion of bond discount
(3,695
)
 
(504
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(16,884
)
 
(9,335
)
Mortgage loans held for sale
(3,244
)
 

Inventory
(389,994
)
 
(5,666
)
Prepaid expenses and other assets
(2,015
)
 
(14,697
)
Lease liabilities
(11,946
)
 

Contract cost assets
(18,332
)
 
(21,371
)
Accounts payable
1,256

 
1,855

Accrued expenses and other current liabilities
6,952

 
(5,189
)
Accrued compensation and benefits
613

 
4,309

Deferred revenue
3,000

 
4,002

Other long-term liabilities
149

 

Net cash provided by (used in) operating activities
(373,823
)
 
73,052

Investing activities
 
 
 
Proceeds from maturities of investments
539,312

 
172,573

Purchases of investments
(302,891
)
 
(230,276
)
Purchases of property and equipment
(29,672
)
 
(31,212
)
Purchases of intangible assets
(8,927
)
 
(4,777
)
Net cash provided by (used in) investing activities
197,822

 
(93,692
)
Financing activities
 
 
 
Proceeds from borrowing on revolving credit facilities
293,099



Net repayments on warehouse lines of credit
(2,961
)
 

Proceeds from exercise of stock options
32,997

 
99,656

Value of equity awards withheld for tax liability
3

 
(66
)
Net cash provided by financing activities
323,138

 
99,590

Net increase in cash, cash equivalents and restricted cash during period
147,137

 
78,950

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

 
352,095

Cash, cash equivalents and restricted cash at end of period
$
810,580

 
$
431,045

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
16,616

 
$
4,733

Noncash transactions:
 
 
 
Capitalized share-based compensation
$
5,878

 
$
4,623

Write-off of fully depreciated property and equipment
$
9,867

 
$
13,293

Write-off of fully amortized intangible assets
$
3,311

 
$
10,797

See accompanying notes to condensed consolidated financial statements.

7


ZILLOW GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Description of 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. 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 June 30, 2019, our results of operations, comprehensive loss and shareholders’ equity for the three and six month periods ended June 30, 2019 and 2018, and our cash flows for the six month periods ended June 30, 2019 and 2018. The results of the three and six month periods ended June 30, 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.

8


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 Issued Accounting Standards Not Yet Adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance related to a customer’s accounting for implementation costs incurred in hosting arrangements. The guidance 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.
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, and subsequently amended in April 2019 and May 2019, the FASB issued guidance on the measurement of credit losses on financial instruments. This guidance will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. This guidance requires an entity to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument on initial recognition and at each reporting period. 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 commercial paper is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

9


Short-term investments — The fair value measurement of our short-term investments is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Restricted cash — Restricted cash consists of cash received from the resale of homes through Zillow Offers which may be used to repay amounts borrowed on our revolving credit facilities (see Note 13) and amounts held in escrow related to funding home purchases in our mortgage origination business. The carrying value of restricted cash approximates fair value due to the short period of time amounts borrowed on the revolving credit facilities are outstanding.
Mortgage loans held for sale — The fair value of mortgage loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics.
Interest rate lock commitments — The fair value of interest rate lock commitments (“IRLCs”) is calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics. Expired commitments are excluded from the fair value measurement. We generally only issue IRLCs for products that meet specific purchaser guidelines. Since not all IRLCs will become closed loans, we adjust our fair value measurements for the estimated amount of IRLCs that will not close.
Forward contracts — The fair value of mandatory loan sales commitments and derivative instruments such as forward sales of mortgage-backed securities that are utilized as hedging instruments are calculated by reference to quoted prices for similar assets.
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):
 
June 30, 2019
 
Total
 
Level 1
 
Level 2
Cash equivalents:
 
 
 
 
 
Money market funds
$
641,436

 
$
641,436

 
$

Short-term investments:
 
 
 
 
 
U.S. government agency securities
446,736

 

 
446,736

Corporate notes and bonds
94,922

 

 
94,922

Commercial paper
87,062

 

 
87,062

Municipal securities
33,352

 

 
33,352

Foreign government securities
5,997

 

 
5,997

Certificates of deposit
1,481

 

 
1,481

Treasury bills
3,479

 

 
3,479

Mortgage origination-related:
 
 
 
 
 
Mortgage loans held for sale
38,653

 

 
38,653

IRLCs
1,186

 

 
1,186

Forward contracts - other current assets
32

 

 
32

Forward contracts - other current liabilities
(225
)
 

 
(225
)
        Total
$
1,354,111

 
$
641,436

 
$
712,675


10


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

 
$
541,575

 
$

Commercial paper
3,999

 

 
3,999

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

 

 
646,496

Corporate notes and bonds
112,933

 

 
112,933

Commercial paper
85,506

 

 
85,506

Municipal securities
39,306

 

 
39,306

Foreign government securities
14,915

 

 
14,915

Certificates of deposit
4,711

 

 
4,711

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

 

 
35,409

IRLCs
847

 

 
847

Forward contracts - other current liabilities
(125
)
 

 
(125
)
        Total
$
1,485,572

 
$
541,575

 
$
943,997


At June 30, 2019, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $45.7 million and $80.6 million for our IRLCs and forward contracts, respectively. At December 31, 2018, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $26.7 million and $28.8 million for our IRLCs and forward contracts, respectively. We do not have the right to offset our forward contract derivative positions.
See Note 13 for the carrying amount and estimated fair value of the Company’s convertible senior notes.
We did not have material Level 3 assets or liabilities as of June 30, 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):
 
June 30, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
Cash
$
125,262

 
$

 
$

 
$
125,262

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
641,436

 

 

 
641,436

Short-term investments:
 
 
 
 
 
 
 
U.S. government agency securities
446,098

 
668

 
(30
)
 
446,736

Corporate notes and bonds
94,739

 
184

 
(1
)
 
94,922

Commercial paper
87,062

 

 

 
87,062

Municipal securities
33,253

 
99

 

 
33,352

Foreign government securities
5,996

 
1

 

 
5,997

Certificates of deposit
1,481

 

 

 
1,481

Treasury bills
3,475

 
4

 

 
3,479

Restricted cash
43,882

 

 

 
43,882

        Total
$
1,482,684

 
$
956

 
$
(31
)
 
$
1,483,609


11


 
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 June 30, 2019 (in thousands):
 
Amortized
Cost
 
Estimated Fair
Market Value
Due in one year or less
$
651,437

 
$
652,206

Due after one year through two years
20,667

 
20,823

Total
$
672,104

 
$
673,029


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
706

Less: write-offs, net of recoveries and other adjustments
(735
)
Balance as of June 30, 2019
$
4,809


Note 6. Inventory
The following table presents the components of inventory, net of applicable lower of cost or net realizable value adjustments, as of the dates presented (in thousands):
 
June 30,
2019
 
December 31,
2018
Work-in-progress
$
174,272

 
$
45,943

Finished goods
378,551

 
116,886

Inventory
$
552,823

 
$
162,829



12


Note 7. Contract Cost Assets
As of June 30, 2019 and December 31, 2018, we had $46.3 million and $45.8 million, respectively, of contract cost assets. During the three and six month periods ended June 30, 2019 and 2018, we recorded no impairment losses. We recorded amortization expense related to contract cost assets of $9.2 million and $9.0 million during the three months ended June 30, 2019 and 2018, respectively, and $17.9 million and $18.3 million during the six months ended June 30, 2019 and 2018, respectively.
Note 8. Property and Equipment, net
The following table presents the detail of property and equipment as of the dates presented (in thousands):
 
June 30,
2019
 
December 31,
2018
Website development costs
$
153,905

 
$
149,891

Leasehold improvements
77,737

 
65,012

Office equipment, furniture and fixtures
43,484

 
39,510

Construction-in-progress
27,293

 
29,037

Computer equipment
23,024

 
22,477

Property and equipment
325,443

 
305,927

Less: accumulated amortization and depreciation
(179,511
)
 
(170,755
)
Property and equipment, net
$
145,932

 
$
135,172


We recorded depreciation expense related to property and equipment (other than website development costs) of $6.4 million and $4.9 million during the three months ended June 30, 2019 and 2018, respectively, and $12.4 million and $9.1 million during the six months ended June 30, 2019 and 2018, respectively.

We capitalized $10.3 million and $10.0 million in website development costs during the three months ended June 30, 2019 and 2018, respectively, and $20.3 million and $18.6 million during the six months ended June 30, 2019 and 2018, respectively. Amortization expense for website development costs included in technology and development expenses was $3.6 million and $8.4 million during the three months ended June 30, 2019 and 2018, respectively, and $7.0 million and $18.0 million during the six months ended June 30, 2019 and 2018, respectively.
Note 9. Equity Investment
In October 2016, we purchased a 10% equity interest in a privately held variable interest entity within the real estate industry for $10.0 million. 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 June 30, 2019.
This investment is an equity security without a readily determinable fair value which we account for at cost minus any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. There has been no impairment or upward or downward adjustments to our equity investment as of June 30, 2019 that would impact the carrying amount of the investment. The equity investment is classified within other assets in the condensed consolidated balance sheet.

13


Note 10. Intangible Assets, net
The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):
 
June 30, 2019
 
Cost
 
Accumulated
Amortization
 
Net
Purchased content
$
43,886

 
$
(35,555
)
 
$
8,331

Software
28,807

 
(16,850
)
 
11,957

Customer relationships
103,600

 
(67,257
)
 
36,343

Developed technology
109,080

 
(76,869
)
 
32,211

Trade names and trademarks
4,400

 
(4,400
)
 

Lender licenses
400

 
(117
)
 
283

Intangibles-in-progress
5,699

 

 
5,699

Total
$
295,872

 
$
(201,048
)
 
$
94,824

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

 
$
(30,477
)
 
$
11,633

Software
24,296

 
(13,925
)
 
10,371

Customer relationships
103,900

 
(60,733
)
 
43,167

Developed technology
111,980

 
(72,788
)
 
39,192

Trade names and trademarks
4,900

 
(4,683
)
 
217

Lender licenses
400

 
(17
)
 
383

Intangibles-in-progress
2,941

 

 
2,941

Total
$
290,527

 
$
(182,623
)
 
$
107,904


Amortization expense recorded for intangible assets for the three months ended June 30, 2019 and 2018 was $11.0 million and $12.6 million, respectively. Amortization expense recorded for intangible assets for the six months ended June 30, 2019 and 2018 was $22.0 million and $25.6 million, respectively. These amounts are included in technology and development expenses.
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 June 30, 2019 and December 31, 2018.
Intangibles-in-progress consists of software that is capitalizable but has not been placed in service.

14


Note 11. Deferred Revenue
The following tables present the changes in deferred revenue for the periods presented (in thousands):
 
Three Months Ended
June 30, 2019
Balance as of April 1, 2019
$
36,105

Deferral of revenue
259,132

Less: Revenue recognized
(258,157
)
Balance as of June 30, 2019
$
37,080


 
Six Months Ended
June 30, 2019
Balance as of January 1, 2019
$
34,080

Deferral of revenue
501,984

Less: Revenue recognized
(498,984
)
Balance as of June 30, 2019
$
37,080


During the three months ended June 30, 2019 we recognized as revenue a total of $33.0 million pertaining to amounts that were recorded in deferred revenue as of April 1, 2019. During the six months ended June 30, 2019, we recognized as revenue a total of $30.9 million pertaining to amounts that were recorded in deferred revenue as of January 1, 2019.
Note 12. Leases
Our lease portfolio is primarily composed of operating leases for our office space. We have lease agreements that include lease components (e.g., fixed rent) and non-lease components (e.g., common area maintenance), which are accounted for as a single component, as we have elected the practical expedient to group lease and non-lease components. We also elected the practical expedient to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the condensed consolidated statements of operations on a straight-line basis over the lease term.
Our leases have remaining lease terms ranging from less than one year to twelve years, some of which include options to extend the lease term for up to an additional ten years. For example, our largest leases, which include our corporate headquarters in Seattle, Washington and office space in New York, New York and San Francisco, California, include options to renew the existing leases for either one or two periods of five years. When determining if a renewal option is reasonably certain of being exercised at lease commencement, we consider several factors, including but not limited to, contract-based, asset-based and entity-based factors. We reassess the term of existing leases if there is a significant event or change in circumstances within our control that affects whether we are reasonably certain to exercise an option to extend a lease. Examples of such events or changes include construction of significant leasehold improvements or other modifications or customizations to the underlying asset, relevant business decisions or subleases. In most cases, we have concluded that renewal options are not reasonably certain of being exercised, therefore, such renewals are not included in the right of use asset and lease liability.
During the three months ended June 30, 2019, it became reasonably certain that in a future period we would exercise the first of two five years renewal options related to the office space lease for our corporate headquarters in Seattle, Washington, due to the construction of significant leasehold improvements. Therefore, the payments associated with the renewal are now included in the measurement of the lease liability and right of use asset.
As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. For those leases that existed as of January 1, 2019, we used our incremental borrowing rate based on information available at that date. We apply a portfolio approach for determining the incremental borrowing rate based on the applicable lease terms and the current economic environment, and we utilize the assistance of third-party specialists to assist us in determining our yield curve.
The components of our operating lease expense were as follows for the periods presented (in thousands):

15


 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Operating lease cost
$
9,004

 
$
15,527

Variable lease cost
4,965

 
9,746

     Total lease cost
$
13,969

 
$
25,273


Cash paid for amounts included in the measurement of lease liabilities for the three and six month periods ended June 30, 2019 was $7.2 million and $16.3 million, respectively. Right of use assets obtained in exchange for new operating lease obligations for the three and six month periods ended June 30, 2019 were $113.7 million. The weighted average remaining term for our leases as of June 30, 2019 was 9 years. The weighted average discount rate for our leases as of June 30, 2019 was 6.5%.
Maturities of our operating lease liabilities by fiscal year were as follows as of June 30, 2019 (in thousands):
Remainder of 2019
$
15,106

2020
37,558

2021
41,089

2022
37,173

2023
34,990

All future years
164,992

     Total lease payments
330,908

Less: Imputed interest
(100,521
)
     Present value of lease liabilities
$
230,387


Operating lease expense for the three and six month periods ended June 30, 2018, was $5.6 million and $11.4 million, respectively. The following table presents our future minimum payments for all operating leases as of December 31, 2018, including future minimum payments for operating leases that had not yet commenced as of December 31, 2018 totaling $112.9 million (in thousands):
2019
$
29,085

2020
38,060

2021
40,099

2022
37,721

2023
36,458

All future years
85,462

Total future minimum lease payments
$
266,885


Note 13. Debt
Revolving Credit Facilities
To provide capital for Zillow Offers, we utilize revolving credit facilities that are classified as current liabilities in our condensed consolidated balance sheets. The following table summarizes our revolving credit facilities as of the periods presented (in thousands, except interest rates):
Effective Date
 
Maximum Borrowing Capacity
 
Outstanding Borrowings at
June 30, 2019
 
Outstanding Borrowings at December 31, 2018
 
Weighted Average Interest Rate
July 31, 2018
 
$
500,000

 
$
265,097

 
$
116,700

 
5.97
%
January 31, 2019
 
500,000

 
144,702

 

 
5.95
%
Total
 
$
1,000,000

 
$
409,799

 
$
116,700

 
 


16


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 $145.0 million as of June 30, 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. The credit agreement has an initial term of two years and may be extended for up to two additional periods of six months each, 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 has an initial term of one year and automatically renews on a monthly basis as of July 31, 2019 for up to 24 additional months, subject to agreement by the directing lender. The revolving credit facility has a current borrowing capacity of $275.1 million as of June 30, 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 June 30, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred. In certain circumstances Zillow Group may be obligated to fund some or all of the payment obligations under the credit agreement. Further, borrowings against any eligible property are due upon its sale or at maturity of the applicable facility, or if the property’s ownership period exceeds the agreed aging criteria. Each of the credit facilities permits only a portion of the financed properties to be owned longer than 180 days, and no financed properties may be owned for longer than one year. Any financed property excluded by such aging criteria will drop out of the borrowing base, and the applicable borrower will be required to repay any resulting overadvance. 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
June 30, 2019
 
Outstanding Borrowings at December 31, 2018
 
Weighted Average Interest Rate
July 15, 2019
 
$
50,000

 
$
15,722

 
$
14,125

 
4.95
%
June 27, 2020
 
50,000

 
14,335

 
18,892

 
4.95
%
Total
 
$
100,000

 
$
30,057

 
$
33,017

 
 

On June 28, 2019, Zillow Home Loans amended and restated its warehouse line of credit previously maturing on June 29, 2019. The amended and restated credit agreement extends the term of the original agreement for one year, through June 27, 2020, and continues to provide for a maximum borrowing capacity of $50.0 million with availability under the warehouse line of credit limited depending on the types of loans originated.
Borrowings on the warehouse lines of credit bear interest at the one-month LIBOR plus an applicable margin, as defined in the credit agreements governing the warehouse lines of credit. The warehouse lines of credit include customary representations and warranties, covenants and provisions regarding events of default. As of June 30, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred.

17


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
June 30, 2019
 
Fair Value at December 31, 2018
 
Stated Interest Rate
 
Effective Interest Rate
July 1, 2023
 
$
373,750

 
$
370,095

 
$
321,855

 
1.50
%
 
6.99
%
December 1, 2021
 
460,000

 
521,318

 
446,200

 
2.00
%
 
7.44
%
December 15, 2020
 
9,637

 
16,842

 
16,744

 
2.75
%
 
N/A

Total
 
$
843,387

 
$
908,255

 
$
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 June 30, 2019 and December 31, 2018, respectively, the total unamortized debt discount and debt issuance costs for our outstanding senior convertible notes were $126.6 million and $144.4 million. The convertible senior notes maturing in 2023 and 2021 are not redeemable or convertible as of June 30, 2019. The convertible senior notes maturing in 2020 are convertible, at the option of the holder, and redeemable, at our option, as of June 30, 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 June 30, 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 six months ended June 30, 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
6,721,428

 
40.05

 
 
 
 
Exercised
(1,543,850
)
 
21.37

 
 
 
 
Forfeited or cancelled
(1,419,750
)
 
41.10

 
 
 
 
Outstanding at June 30, 2019
31,067,938

 
35.65

 
6.62
 
367,905

Vested and exercisable at June 30, 2019
17,363,786

 
31.63

 
4.87
 
266,575



18


The fair value of options granted is estimated at the date of grant using the Black-Scholes-Merton option-pricing model, assuming no dividends and with the following assumptions for the periods presented:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019

2018
 
2019
 
2018
Expected volatility
45%
 
43%
 
45%-47%
 
43%-45%
Expected dividend yield
 
 
 
Risk-free interest rate
2.00%
 
2.70%
 
2.00%-2.53%
 
2.52%-2.70%
Weighted-average expected life
5.00 years
 
4.50 years
 
4.75-5.25 years
 
4.50-5.00 years
Weighted-average fair value of options granted
$16.96

$23.30
 
$16.79
 
$21.07

As of June 30, 2019, there was a total of $210.7 million in unrecognized compensation cost related to unvested stock options.
Restricted Stock Units
The following table summarizes activity for restricted stock units for the six months ended June 30, 2019:
 
Restricted
Stock Units
 
Weighted-
Average Grant-
Date Fair
Value
Unvested outstanding at January 1, 2019
5,266,324

 
$
42.19

Granted
3,638,550

 
39.32

Vested
(1,065,607
)
 
39.46

Forfeited or cancelled
(601,829
)
 
41.23

Unvested outstanding at June 30, 2019
7,237,438

 
41.23


As of June 30, 2019, there was a total of $277.0 million in unrecognized compensation cost related to unvested restricted stock units.
Share-Based Compensation Expense
The following table presents the effects of share-based compensation expense in our condensed consolidated statements of operations during the periods presented (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenue
$
936

 
$
1,256

 
$
1,816

 
$
2,211

Sales and marketing
6,801

 
6,340

 
12,451

 
11,502

Technology and development
18,399

 
14,347

 
33,908

 
25,889

General and administrative
17,496

 
17,000

 
61,581

 
30,082

Total
$
43,632

 
$
38,943

 
$
109,756

 
$
69,684


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

19


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 six months ended June 30, 2019. We measured the modification charge by calculating the incremental fair value of the modified award compared to the fair value of the original award immediately prior to the modification. The value of the modified awards as of the modification date was estimated using the Black-Scholes-Merton option-pricing model, assuming no dividends, expected volatility of 46%-47%, a risk-free interest rate of 2.47%-2.49% and a weighted-average expected life of 3.84-5.25 years.
Note 16. Net Loss Per Share
For the periods presented, the following Class A common stock and Class C capital stock equivalents were excluded from the calculations of diluted net loss per share because their effect would have been antidilutive (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Weighted-average Class A common stock and Class C capital stock option awards outstanding
19,502

 
27,428

 
19,656

 
24,393

Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding
7,230

 
5,246

 
6,548

 
4,799

Class A common stock issuable upon conversion of the convertible notes maturing in 2020
411

 
402

 
411

 
402

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

 
997

 

 
997

Total Class A common stock and Class C capital stock equivalents
27,143

 
34,073

 
26,615

 
30,591


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 2030. 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 June 30, 2019, the value of homes under contract that have not closed was $266.2 million.
Letters of Credit
As of June 30, 2019, we have outstanding letters of credit of approximately $16.9 million, which secure our lease obligations in connection with certain of our office space operating leases.
Surety Bonds
In the course of business, we are required to provide financial commitments in the form of surety bonds to third parties as a guarantee of our performance on and our compliance with certain obligations. If we were to fail to perform or comply with these obligations, any draws upon surety bonds issued on our behalf would then trigger our payment obligation to the surety bond issuer. We have outstanding surety bonds issued for our benefit of approximately $9.7 million and $8.9 million, respectively, as of June 30, 2019 and December 31, 2018.

20


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 approximately $4.1 million. On March 15, 2019, after the Company had filed an appeal with the Ninth Circuit Court of Appeals seeking review of the final judgment and certain prior rulings entered by the district court, the Ninth Circuit Court of Appeals issued an opinion that, among other things, (i) affirmed the district court’s grant of summary judgment in favor of Zillow on direct infringement of images on Zillow’s listing site, (ii) affirmed the district court’s grant in favor of Zillow of judgment notwithstanding the verdict on certain images that were displayed on the Zillow Digs site, (iii) remanded consideration of the issue whether VHT’s images on the Zillow Digs site were part of a compilation or individual photos, and (iv) vacated the jury’s finding of willful infringement. On June 13, 2019, VHT filed a petition for writ of certiorari with the United States Supreme Court seeking review of certain rulings by the Ninth Circuit Court of Appeals. We have recorded an estimated liability for immaterial amounts related to this matter as of June 30, 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 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. 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 June 30, 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, King County,

21


against certain of our executive officers and directors seeking unspecified damages on behalf of the Company and certain other relief, such as reform to corporate governance practices. The plaintiffs in the derivative suits (in which the Company is a nominal defendant) allege, among other things, that the defendants breached their fiduciary duties in connection with oversight of the Company’s public statements and legal compliance, and as a result of the breach of such fiduciary duties, the Company was damaged, and defendants were unjustly enriched. Certain of the plaintiffs also allege, among other things, violations of Section 14(a) of the Securities Exchange Act of 1934 and waste of corporate assets. On February 5, 2018, the U.S. District Court for the Western District of Washington consolidated the two shareholder derivative lawsuits pending in that court. On February 16, 2018, the Superior Court of the State of Washington, King County, consolidated the two shareholder derivative lawsuits pending in that court. All four of the shareholder derivative lawsuits were stayed until our motion to dismiss the second consolidated amended complaint in the securities class action lawsuit discussed above was denied in April 2019. On July 8, 2019, the plaintiffs in the consolidated federal derivative lawsuit filed a consolidated shareholder derivative complaint, to which the defendants have 45 days to respond. 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 June 30, 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 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. Related Party Transactions
On April 3, 2019, we entered into a Charter Service Agreement with Executive Jet Management, Inc. for the occasional use by us of an aircraft owned by an entity that is owned by Mr. Lloyd Frink, our Executive Chairman and President, for business travel. We recognized approximately $0.2 million in expenses pursuant to the Charter Service Agreement for the three and six month periods ended June 30, 2019.
Note 19. 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 provides protection when cumulative medical claims exceed 125% of expected claims for the plan year with a limit of $1.0 million and from individual claims during the plan year exceeding $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 $3.6 million and $3.9 million, respectively, as of June 30, 2019 and December 31, 2018.
Note 20. Employee Benefit Plan
We have a defined contribution 401(k) retirement plan covering Zillow Group employees who have met certain eligibility requirements (the “Zillow Group 401(k) Plan”). Eligible employees may contribute pretax compensation up to a maximum amount allowable under the Internal Revenue Service limitations. Employee contributions and earnings thereon vest immediately. We currently match up to 4% of employee contributions under the Zillow Group 401(k) Plan. The total expense related to the Zillow Group 401(k) Plan was $5.2 million and $4.0 million, respectively, for the three months ended June 30, 2019 and 2018, and $10.1 million and $7.8 million, respectively, for the six months ended June 30, 2019 and 2018.
Note 21. 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 purchase and sale of homes directly. The Mortgages segment includes financial results for advertising sold to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and the sale of mortgages on the secondary market, as well as Mortech mortgage software solutions.
Revenue and costs are directly attributed to our segments when possible. However, due to the integrated structure of our business, certain costs incurred by one segment may benefit the other segments. These costs primarily include headcount-related expenses, general and administrative expenses including executive, finance, accounting, legal, human resources,

22


recruiting, and facilities costs, product development and data acquisition costs and marketing and advertising costs. These costs are allocated to each segment based on the estimated benefit each segment receives from such expenditures.
The chief executive officer reviews information about our revenue categories as well as statement of operations data inclusive of loss before income taxes by segment. This information is included in the following tables for the periods presented (in thousands):
 
Three Months Ended
June 30, 2019
 
Three Months Ended
June 30, 2018
 
IMT
 
Homes
 
Mortgages
 
IMT
 
Homes
 
Mortgages
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Premier Agent
$
231,961

 
$

 
$

 
$
230,885

 
$

 
$

Rentals
42,670

 

 

 
33,288

 

 

Other
49,038

 

 

 
41,768

 

 

Homes

 
248,924

 

 

 

 

Mortgages