NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 customers. 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 hassle-free way to buy and sell eligible homes directly through Zillow, and beginning in October 2018, Zillow Home Loans (formerly Mortgage Lenders of America, L.L.C.), 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 and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions to help real estate partners maximize business opportunities and connect with millions of customers. Zillow Group business brands for real estate, rental and mortgage professionals, include Mortech, dotloop, Bridge Interactive and New Home Feed. Zillow, Inc. was incorporated as a Washington corporation in December 2004, and we launched the initial version of our website, Zillow.com, in February 2006. Zillow Group, Inc. was incorporated as a Washington corporation in July 2014 in connection with our acquisition of Trulia, Inc. (“Trulia”). Upon the closing of the Trulia acquisition in February 2015, each of Zillow, Inc. and Trulia became wholly owned subsidiaries of Zillow Group.
Certain Significant Risks and Uncertainties
We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: rates of revenue growth; our ability to manage advertising inventory or pricing; engagement and usage of our products; our investment of resources to pursue strategies that may not prove effective; competition in our market; the stability of the residential real estate market and the impact of interest rate changes; changes in technology, products, markets or services by us or our competitors; addition or loss of significant customers; our ability to maintain or establish relationships with listings and data providers; our ability to obtain or maintain licenses and permits to support our current and future businesses; actual or anticipated changes to our products and services; changes in government regulation affecting our business; outcomes of legal proceedings; natural disasters and catastrophic events; scaling and adaptation of existing technology and network infrastructure; management of our growth; our ability to attract and retain qualified employees and key personnel; our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments; protection of customers’ information and other privacy concerns; protection of our brand and intellectual property; and intellectual property infringement and other claims, among other things.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include Zillow Group, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).
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.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents, investments, accounts receivable and mortgage loans held for sale. We place cash and cash equivalents and investments with major financial institutions, which management assesses to be of high credit quality, in order to limit exposure of our investments.
Credit risk with respect to accounts receivable is dispersed due to the large number of customers. There were no customers that comprised 10% or more of our total accounts receivable as of December 31, 2019 and 2018. Further, our credit risk on accounts receivable is mitigated by the relatively short payment terms that we offer. Collateral is not required for accounts receivable. We maintain an allowance for doubtful accounts such that receivables are stated at net realizable value.
Similarly, our credit risk on mortgage loans held for sale is dispersed due to a large number of customers. Further, our credit risk on mortgage loans held for sale is mitigated by the fact that we typically sell mortgages on the secondary market within a relatively short period of time after the loan is originated.
Cash and Cash Equivalents
Cash includes demand deposits with banks or financial institutions. Cash equivalents include short-term, highly liquid investments that are both readily convertible to known amounts of cash, and so near their maturity that they present minimal risk of changes in value because of changes in interest rates. Our cash equivalents include only investments with original maturities of three months or less. We regularly maintain cash in excess of federally insured limits at financial institutions.
Short-term Investments
Our investments consist of fixed income securities, which include U.S. government agency securities, corporate notes and bonds, commercial paper, treasury bills, municipal securities and certificates of deposit, and are classified as available-for-sale securities. As the investments are available to support current operations, our available-for-sale securities are classified as short-term investments. Available-for-sale securities are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity, while realized gains and losses and other-than-temporary impairments are reported as a component of net loss based on specific identification. An impairment charge is recorded in the consolidated statements of operations for declines in fair value below the cost of an individual investment that are deemed to be other than temporary. We assess whether a decline in value is temporary based on the length of time that the fair market value has been below cost, the severity of the decline and the intent and ability to hold or sell the investment. We did not identify any investments as other-than-temporarily impaired as of December 31, 2019 or 2018.
Restricted Cash
Restricted cash consists of amounts funded to the reserve and collection accounts related to our credit facilities (see Note 15) and amounts held in escrow related to funding home purchases in our mortgage originations business.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represent our unconditional right to consideration. Accounts receivable are generally due within 30 days and are recorded net of the allowance for doubtful accounts. We consider accounts outstanding longer than the contractual terms past due. We review accounts receivable on a regular basis and estimate an amount of losses for uncollectible accounts based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. We record changes in our estimate to the allowance for doubtful accounts through bad debt expense and relieve the allowance when accounts are ultimately determined to be uncollectible. Bad debt expense is included in general and administrative expenses.
Mortgage Loans Held for Sale
Mortgage loans held for sale include residential mortgages originated for sale in the secondary market in connection with our October 2018 acquisition of Zillow Home Loans. We have elected the fair value option for all mortgage loans held for sale as election of this option allows for a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Mortgage loans held for sale 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 sold. Net origination costs and fees associated with mortgage loans are recognized as incurred. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers. Interest income is earned from the date a mortgage loan is originated until the loan is sold and is classified within Other income in the consolidated statements of operations.
Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage market on a servicing released, nonrecourse basis, which limits exposure to nonperformance by loan buyer counterparties although we remain liable for certain limited representations and warranties related to loan sales, such as non-compliance with defined loan origination or documentation standards, including misstatement in the loan documents, early payoff or default on early payments. Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on mortgages we have sold based on claims that we breached our limited representations and warranties. We have established reserves for probable losses.
Loan Commitments and Related Derivatives
We are party to interest rate lock commitments (“IRLCs”), which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria in connection with our October 2018 acquisition of Zillow Home Loans. IRLCs are accounted for as derivative instruments recorded at fair value with gains and losses recognized in revenue in the consolidated statements of operations. We manage our interest rate risk related to IRLCs and mortgage loans held for sale through the use of derivative instruments, generally forward contracts on mortgage-backed securities (“MBS”), which are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price, and mandatory loan commitments, which are an obligation by an investor to buy loans at a specified price within a specified time period. We do not enter into or hold derivatives for trading or speculative purposes and our derivatives are not designated as hedging instruments. Changes in the fair value of our derivative financial instruments are recognized in revenue in our consolidated statements of operations, and the fair values are reflected in other assets or other liabilities, as applicable. The net change in fair value was not significant for the years ended December 31, 2019 and 2018.
There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on IRLCs are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and mandatory loan commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 90 days.
Inventory
Inventory is comprised of homes acquired through our Zillow Offers program and is stated at the lower of cost or net realizable value. Homes are removed from inventory on a specific identification basis when they are resold. Stated cost includes consideration paid to acquire and update each home including associated allocated overhead costs. Work-in-progress inventory includes homes undergoing updates and finished goods inventory includes homes ready for resale. Unallocated overhead costs are expensed as incurred and included in cost of revenue. For our Homes segment, selling costs, such as real estate agent commissions, escrow and title fees, and staging costs, as well as holding costs incurred during the period that homes are listed for sale, including utilities, taxes and maintenance are expensed as incurred and classified within sales and marketing expenses in the consolidated statements of operations. We recorded $22.6 million and $1.9 million in holding costs for the years ended December 31, 2019 and 2018, respectively.
Each quarter we review the value of homes held in inventory for indicators that net realizable value is lower than cost. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized in cost of revenue and the value of the corresponding asset is reduced.
Contract Cost Assets
We capitalize certain incremental costs of obtaining contracts with customers which we expect to recover. These costs relate to commissions paid to sales personnel, primarily for our Premier Agent and Premier Broker programs. As a practical expedient, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. Capitalized commission costs are recorded as contract cost assets in our consolidated balance sheets. Contract cost assets are amortized to expense on a straight-line basis over a period that is consistent with the transfer to the customer of the products or services to which the asset relates, generally the estimated life of the customer relationship. Amortization expense related to contract cost assets is included in sales and marketing expenses in our consolidated statements of operations. In determining the estimated life of our customer relationships, we consider quantitative and qualitative data, including, but not limited to, historical customer data, recent changes or expected changes in product or service offerings, and changes in how we monetize our products and services. The amortization period for capitalized contract costs related to our Premier Agent and Premier Broker programs ranges from two to three years.
We monitor our contract cost assets for impairment and recognize an impairment loss in the consolidated statements of operations to the extent the carrying amount of the asset recognized exceeds the amount of consideration that we expect to
receive in the future and that we have received but have not recognized in revenue less the costs that relate directly to providing those goods or services that have not yet been recognized as expenses. Write-offs of contract cost assets were not material for the years ended December 31, 2019 and December 31, 2018. Refer to Note 7 for more information regarding contract cost assets.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. The useful lives are as follows:
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Computer equipment
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2 to 3 years
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Office equipment, furniture and fixtures
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5 to 7 years
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Leasehold improvements
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Shorter of expected useful life or lease term
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Maintenance and repair costs are charged to expense as incurred. Major improvements, which extend the useful life of the related asset, are capitalized. Upon disposal of a fixed asset, we record a gain or loss based on the difference between the proceeds received and the net book value of the disposed asset.
Website and Software Development Costs
The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized in property and equipment and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives. Amortization expense related to capitalized website and software development costs is included in technology and development expense.
Capitalized development activities placed in service are amortized over the expected useful lives of those releases, currently estimated at one to five years. The estimated useful lives of website and software development activities are reviewed frequently and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing functionality.
Construction-in-progress primarily consists of website development costs that are capitalizable, but for which the associated applications had not been placed in service.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition, and is not amortized. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired. In our evaluation of goodwill, we typically first perform a qualitative assessment to determine whether the carrying value of each reporting unit is greater than its fair value. If it is more likely than not that the carrying value of a reporting unit is greater than its fair value, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of carrying value of the reporting unit over its fair value.
During the years ended December 31, 2019, 2018, and 2017 we did not record any impairments related to goodwill. Refer to Note 10 for additional information related to goodwill.
Our trade names and trademarks indefinite-lived intangible asset is not amortized, and we assess the asset for impairment on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that the asset may be impaired. On an interim basis we consider if there are any events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset, including, but not limited to, costs that could have a negative effect on future expected earnings and cash flows, changes in certain key performance metrics, and changes in management, key personnel, strategy or customers. In our evaluation of our trade names and trademarks indefinite-lived intangible asset, we typically first perform a qualitative assessment to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired. If so, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of the carrying value of the indefinite-lived intangible asset over its fair value.
We did not record any non-cash impairments related to the indefinite-lived Trulia trade names and trademarks intangible asset during the year ended December 31, 2019. During the years ended December 31, 2018 and 2017, we recorded non-cash impairments for $69.0 million and $174.0 million, respectively, related to the indefinite-lived Trulia trade names and trademarks intangible asset. For additional information about the non-cash impairments, see Note 11 to our consolidated financial statements.
Intangible Assets
We purchase and license data content from multiple data providers. This data content consists of U.S. county data about home details (e.g., the number of bedrooms, bathrooms, square footage) and other information relating to the purchase price of homes, both current and historical, as well as imagery, mapping and parcel data that is displayed on our mobile applications and websites. Our home details data not only provides information about a home and its related transactions which is displayed on our mobile applications and websites, but is also used in our proprietary valuation algorithms to produce Zestimates, Rent Zestimates and Zillow Home Value Indexes. License agreement terms vary by vendor. In some instances, we retain perpetual rights to this information after the contract ends; in other instances, the information and data are licensed only during the fixed term of the agreement. Additionally, certain data license agreements provide for uneven payment amounts throughout the contract term.
We capitalize payments made to third parties for data licenses that we expect to recover through generation of revenue and margins. For data license contracts that include uneven payment amounts, we capitalize the payments as they are made as an intangible asset and the total contract value is typically amortized on a straight-line basis over the term of the contract, which is equivalent to the estimated useful life of the asset. We evaluate data content contracts for potential capitalization at the inception of the arrangement as well as each time periodic payments to third parties are made.
The amortization period for the capitalized purchased content is based on our best estimate of the useful life of the asset, which is approximately five years. The determination of the useful life includes consideration of a variety of factors including, but not limited to, our assessment of the expected use of the asset and contractual provisions that may limit the useful life, as well as an assessment of when the data is expected to become obsolete based on our estimates of the diminishing value of the data over time. We evaluate the useful life of the capitalized purchased data content each reporting period to determine whether events and circumstances warrant a revision to the remaining useful life. If we determine the estimate of the asset’s useful life requires modification, the carrying amount of the asset is amortized prospectively over the revised useful life. The capitalized purchased data content is amortized on a straight-line basis as the pattern of delivery of the economic benefits of the data cannot reliably be determined because we do not have the ability to reliably predict future traffic to our mobile applications and websites.
Under certain other data agreements, the underlying data is obtained on a subscription basis with consistent monthly or quarterly recurring payment terms over the contractual period. Upon the expiration of such arrangements, we no longer have the right to access the related data, and therefore, the costs incurred under such contracts are not capitalized and are expensed as payments are made. We would immediately lose rights to data under these arrangements if we were to cancel the subscription and/or cease making payments under the subscription arrangements.
We also capitalize costs related to the license of certain internal-use software from third parties, including certain licenses of software in cloud computing arrangements. Additionally, we capitalize costs incurred during the application development stage related to the development of internal-use software and enterprise cloud computing services. We expense costs as incurred related to the planning and post-implementation phases of development. Capitalized internal-use software costs are amortized on a straight-line basis over the estimated useful life of the asset, which is currently one to five years.
Intangibles-in-progress consist of purchased content and software that are capitalizable but have not been placed in service.
We also have intangible assets for developed technology, customer relationships, trade names and trademarks and advertising relationships which we recorded in connection with acquisitions. Purchased intangible assets with a determinable economic life are carried at cost, less accumulated amortization. These intangible assets are amortized over the estimated useful life of the asset on a straight-line basis.
Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets
We evaluate intangible assets and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. We group assets for purposes of such review at the lowest level for
which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. If this comparison indicates impairment, the amount of impairment to be recognized is calculated as the difference between the carrying value and the fair value of the asset group.
Deferred Revenue
Deferred revenue consists of prepaid advertising fees received or billed in advance of satisfying our performance obligations and prepaid but unrecognized subscription revenue. Deferred revenue is recognized when or as we satisfy our obligations under contracts with customers.
Business Combinations
We recognize identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that we identify adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. We recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
Revenue Recognition
We recognize revenue when or as we satisfy our performance obligations by transferring control of the promised products or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services.
As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component as the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service is one year or less.
We do not disclose the transaction price related to remaining performance obligations for (i) contracts with an original expected duration of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for performance completed to date. The remaining duration of our performance obligations is generally less than one year.
In our Homes segment, we generate revenue from the resale of homes on the open market through our Zillow Offers program.
In our IMT segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to businesses and professionals primarily associated with the residential real estate and rental industries. 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 Mortgages segment, we generate revenue from the sale of advertising services to mortgage lenders and other mortgage professionals, mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans, as well as Mortech mortgage software solutions.
Homes 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 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.
Premier Agent Revenue. Premier Agent revenue is derived from our Premier Agent and Premier Broker programs. Our Premier Agent and Premier Broker programs offer a suite of marketing and business technology products and services to help real estate agents and brokers achieve their advertising goals, while growing and managing their businesses and brands. All Premier Agents and Premier Brokers receive access to a dashboard portal on our mobile application and website that provides individualized program performance analytics, our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent or Premier Broker through our mobile and web platforms and our
account management tools. The marketing and business technology products and services promised to Premier Agents and Premier Brokers are delivered over time, as the customer simultaneously receives and consumes the benefit of the performance obligations.
Premier Agent and Premier Broker advertising products, which include the delivery of impressions and validated consumer connections, or leads, are primarily offered on a share of voice basis. Payment is received prior to the delivery of impressions and connections. Impressions are delivered when an advertisement appears on pages viewed by users of our mobile applications and websites and connections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. We do not promise any minimum or maximum number of impressions or connections to customers, but instead control when and how many impressions to deliver based on a customer’s share of voice. We determine the number of impressions and connections to deliver to Premier Agents and Premier Brokers in each zip code using a market-based pricing method in consideration of the total amount spent by Premier Agents and Premier Brokers to purchase impressions and connections in the zip code during the month. This results in the delivery of impressions and connections over time in proportion to each Premier Agent’s and Premier Broker’s share of voice. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly prepaid spend in that zip code as a percentage of the total monthly prepaid spend of all Premier Agents and Premier Brokers in that zip code, and includes both the share of impressions delivered as advertisements appearing on pages viewed by users of our mobile applications and websites, as well as the proportion of consumer connections a Premier Agent or Premier Broker receives. The number of impressions and connections delivered for a given spend level is dynamic - as demand for advertising in a zip code increases or decreases, the number of impressions and connections delivered to a Premier Agent or Premier Broker in that zip code decreases or increases accordingly.
We primarily recognize revenue related to the Premier Agent and Premier Broker products and services based on the monthly prepaid spend recognized on a straight-line basis during the monthly billing period over which the products and services are provided. This methodology best depicts how we satisfy our performance obligations to customers, as we continuously transfer control of the performance obligations to the customer over time. Given a Premier Agent or Premier Broker typically prepays their monthly spend and the monthly spend is refunded on a pro-rata basis upon cancellation of the contract by a customer at any point in time, we have determined that Premier Agent and Premier Broker contracts are effectively daily contracts, and each performance obligation is satisfied over time as each day lapses. We have not allocated the transaction price to each performance obligation within our Premier Agent and Premier Broker arrangements, as the amounts recognized would be the same irrespective of any allocation.
In October 2018, we began testing a new pricing model, Flex, for Premier Agent and Premier Broker advertising services in limited markets. With the Flex model, Premier Agents and Premier Brokers are provided with validated leads at no upfront cost, and 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 and the value of those transactions. During this testing phase, we recognize revenue when we receive payment for a real estate transaction closed with a Flex lead. We will continuously reevaluate this determination and the point at which we may begin to estimate variable consideration and record revenue as performance obligations are transferred.
Rentals Revenue. Rentals revenue includes the sale of advertising and a suite of tools to rental professionals, landlords and other market participants. Rentals revenue primarily includes revenue generated by advertising sold to property managers, landlords and other rental professionals on a cost per lead, cost per click, cost per lease, cost per listing or cost per impression basis. We recognize revenue as leads, clicks and impressions are provided to rental professionals, or as rental listings are published on our mobile applications and websites, which is the amount for which we have the right to invoice. The number of leases generated through our rentals pay per lease product during the period is accounted for as variable consideration, and we estimate the amount of variable consideration based on the expected number of qualified leases secured during the period. We do not believe that a significant reversal in the amount of cumulative revenue recognized will occur once the uncertainty related to the number of leases secured is subsequently resolved.
Rentals revenue also includes revenue generated from our rental applications product through which potential renters can submit applications to multiple rental properties over a 30-day period for a flat service fee. We recognize revenue for the rental applications product on a straight-line basis during the contractual period over which the customer has the right to access and submit the rental application.
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. New construction revenue also includes revenue generated on a cost per impression basis whereby we recognize revenue as impressions are delivered to users interacting with our mobile applications and websites, which is the amount for which we have the right to invoice. Consideration for new construction products is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.
Mortgages Revenue. Mortgages revenue includes marketing products sold to mortgage professionals on a cost per lead basis, including our Custom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service, and beginning in the fourth quarter of 2018, also includes revenue generated by Zillow Home Loans, our affiliated mortgage lender, and revenue generated by Mortech.
Zillow Group operates Custom Quote and Connect through its wholly owned subsidiary, Zillow Group Marketplace, Inc., a licensed mortgage broker. For our Connect and Custom Quote cost per lead marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through our mortgages platform, which is the amount for which we have the right to invoice. For our subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, we contact a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend recognized on a straight-line basis during the contractual period over which the service is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.
Mortgage origination revenue reflects both origination fees and the corresponding sale, or expected future sale, of a loan. When an interest rate lock commitment is made to a customer, we record the expected gain on sale of the mortgage, plus the estimated earnings from the expected sale of the associated servicing rights, adjusted for a pull-through percentage (which is defined as the likelihood that an interest rate lock commitment will be originated), as revenue. Revenue from loan origination fees is recognized at the time the related real estate transactions are completed, usually upon the close of escrow and when we fund mortgage loans. Once funded, mortgage loans held for sale are recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loan is sold. Net origination costs associated with mortgage loans are recognized as incurred. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers.
Mortgage loans are sold with limited recourse provisions, which can result in repurchases of loans previously sold to investors or payments to reimburse investors for loan losses. Based on historical experience, discussions with our mortgage purchasers, analysis of the volume of mortgages we originated and the current housing and credit conditions, we estimate and record a loss reserve for mortgage loans held in our portfolio and mortgage loans held for sale, as well as known and projected mortgage loan repurchase requests on loans previously sold. These have historically not been significant to our financial statements.
Mortgage 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.
There were no customers that generated 10% or more of our total revenue in the years ended December 31, 2019, 2018 or 2017.
Cost of Revenue
Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries, benefits, bonuses and share-based compensation expense, as well as revenue-sharing costs related to our commercial business relationships, depreciation expense and costs associated with hosting our mobile applications and websites. For our Homes segment, our cost of revenue also consists of the consideration paid to acquire and make certain repairs and updates to each home, including associated overhead costs, as well as inventory valuation adjustments. For our IMT and Mortgages segments, cost of revenue also includes credit card fees and ad serving costs paid to third parties. For our Mortgages segment, our cost of revenue consists of lead acquisition costs and direct costs to originate loans, including underwriting and processing costs.
Technology and Development
Technology and development expenses consist of headcount expenses, including salaries, benefits, bonuses and share-based compensation expense for individuals engaged in the design, development and testing of our products, mobile applications and websites and the tools and applications that support our products. Technology and development expenses also include equipment and maintenance costs and depreciation expense. Finally, technology and development expenses 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.
Research and development costs are expensed as incurred and are recorded in technology and development expenses. For the years ended December 31, 2019, 2018 and 2017, expenses attributable to research and development for our business totaled $343.7 million, $298.1 million and $193.0 million, respectively.
Share-Based Compensation
We measure compensation expense for all share-based awards at fair value on the date of grant and recognize compensation expense over the service period on a straight-line basis for awards expected to vest.
We use the Black-Scholes-Merton option-pricing model to determine the fair value for option awards. In valuing our option awards, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives. We account for forfeitures as they occur. Risk-free interest rates are derived from U.S. Treasury securities as of the option award grant date. Expected dividend yield is based on our historical cash dividend payments, which have been zero to date. The expected volatility for our Class A common stock and Class C capital stock is estimated using our historical volatility. The weighted-average expected life of the option awards is estimated based on our historical exercise data.
For issuances of restricted stock units and restricted units, we determine the fair value of the award based on the market value of our Class A common stock or Class C capital stock, as applicable, at the date of grant.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended December 31, 2019, 2018 and 2017, expenses attributable to advertising totaled $185.2 million, $193.5 million and $166.5 million, respectively. Advertising costs are recorded in sales and marketing expenses.
Income Taxes
We use the asset and liability approach for accounting and reporting income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance against deferred tax assets would be established if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets are not expected to be realized.
We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate. To the extent that the final tax outcome of these matters is different than the
amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. Interest and penalties related to unrecognized tax benefits are recorded as income tax expense.
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 on our consolidated statements of operations and cash flows.
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 conforms the requirements for capitalizing implementation costs incurred in cloud computing arrangements that are service contracts with the accounting guidance that provides for the capitalization of costs incurred to develop or obtain internal-use software. Under the guidance, implementation costs that are capitalized should be characterized in financial statements in the same manner as other service costs and assets related to service costs and amortized over the term of the hosting arrangement. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. Entities are permitted to apply either a retrospective or prospective transition approach to adopt this guidance. We adopted this guidance on January 1, 2020 using the prospective transition approach under which we apply the guidance to all eligible costs incurred subsequent to adoption. Under this new guidance, we record the implementation costs incurred in cloud computing arrangements that are service contracts within prepaid expenses and other current assets or other long-term assets in our consolidated balance sheets, depending on the length of the underlying cloud computing contract. We amortize these costs on a straight-line basis over the term of the hosting arrangement unless another systematic and rational basis is more representative of the pattern in which we expect to benefit from access to the hosted software. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. This guidance removes, modifies and adds disclosures related to certain assets and liabilities measured at fair value. 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. This guidance is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. We adopted this guidance on January 1, 2020. We have not historically recorded material amounts of Level 3 assets and liabilities or material transfers of assets or liabilities between levels within the fair value hierarchy and therefore do not anticipate the adoption of this guidance to have any impact on our financial statement disclosures.
In June 2016, and subsequently amended in April 2019, May 2019 and November 2019, the FASB issued guidance on the measurement of credit losses on financial assets. This guidance will require an entity to measure and recognize expected credit losses for certain financial instruments and financial assets, including trade receivables. This guidance requires an entity to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument on initial recognition and at each reporting period, whereas current guidance employs an incurred loss methodology. This guidance is effective for interim and annual 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 adopted. We adopted this guidance on January 1, 2020. We have substantially completed our evaluation of the necessary changes to our accounting policies, processes and systems as a result of the adoption of the guidance and determined that the standard will primarily impact our trade accounts receivable and certain available-for-sale investments. Upon adoption, we expect to record a cumulative-effect adjustment to accumulated deficit as of January 1, 2020 to reflect estimated credit losses for trade receivables that are not currently aged. We do not expect the adoption of this guidance to have a material impact 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, treasury bills 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 may be used to repay amounts borrowed on our credit facilities (see Note 15) 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 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 economic hedging instruments are calculated by reference to quoted prices for similar assets.
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash equivalents:
|
|
|
|
|
|
Money market funds
|
$
|
872,431
|
|
|
$
|
872,431
|
|
|
$
|
—
|
|
U.S. government agency securities
|
35,009
|
|
|
—
|
|
|
35,009
|
|
Commercial paper
|
31,113
|
|
|
—
|
|
|
31,113
|
|
Treasury bills
|
6,441
|
|
|
—
|
|
|
6,441
|
|
Corporate notes and bonds
|
1,065
|
|
|
—
|
|
|
1,065
|
|
Certificates of deposit
|
249
|
|
|
—
|
|
|
249
|
|
Short-term investments:
|
|
|
|
|
|
U.S. government agency securities
|
862,154
|
|
|
—
|
|
|
862,154
|
|
Corporate notes and bonds
|
159,431
|
|
|
—
|
|
|
159,431
|
|
Commercial paper
|
150,267
|
|
|
—
|
|
|
150,267
|
|
Treasury bills
|
80,003
|
|
|
—
|
|
|
80,003
|
|
Municipal securities
|
27,889
|
|
|
—
|
|
|
27,889
|
|
Certificates of deposit
|
1,245
|
|
|
—
|
|
|
1,245
|
|
Mortgage origination-related:
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
36,507
|
|
|
—
|
|
|
36,507
|
|
IRLCs
|
937
|
|
|
—
|
|
|
937
|
|
Forward contracts - other current assets
|
7
|
|
|
—
|
|
|
7
|
|
Forward contracts - other current liabilities
|
(60)
|
|
|
—
|
|
|
(60)
|
|
Total
|
$
|
2,264,688
|
|
|
$
|
872,431
|
|
|
$
|
1,392,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2019, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $34.3 million and $64.7 million for our IRLCs and forward contracts, respectively. 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 15 for the carrying amount and estimated fair value of the Company’s convertible senior notes.
We did not have any Level 3 assets as of December 31, 2019 or 2018. There were no material liabilities measured at fair value as of December 31, 2019 or 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Market
Value
|
Cash
|
$
|
194,955
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
194,955
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
872,431
|
|
|
—
|
|
|
—
|
|
|
872,431
|
|
U.S. government agency securities
|
35,011
|
|
|
—
|
|
|
(2)
|
|
|
35,009
|
|
Commercial paper
|
31,113
|
|
|
—
|
|
|
—
|
|
|
31,113
|
|
Treasury bills
|
6,441
|
|
|
—
|
|
|
—
|
|
|
6,441
|
|
Corporate notes and bonds
|
1,065
|
|
|
—
|
|
|
—
|
|
|
1,065
|
|
Certificates of deposit
|
249
|
|
|
—
|
|
|
—
|
|
|
249
|
|
Short-term investments:
|
|
|
|
|
|
|
|
U.S. government agency securities
|
861,862
|
|
|
365
|
|
|
(73)
|
|
|
862,154
|
|
Corporate notes and bonds
|
159,382
|
|
|
91
|
|
|
(42)
|
|
|
159,431
|
|
Commercial paper
|
150,267
|
|
|
—
|
|
|
—
|
|
|
150,267
|
|
Treasury bills
|
79,989
|
|
|
14
|
|
|
—
|
|
|
80,003
|
|
Municipal securities
|
27,836
|
|
|
56
|
|
|
(3)
|
|
|
27,889
|
|
Certificates of deposit
|
1,245
|
|
|
—
|
|
|
—
|
|
|
1,245
|
|
Restricted cash
|
89,646
|
|
|
—
|
|
|
—
|
|
|
89,646
|
|
Total
|
$
|
2,511,492
|
|
|
$
|
526
|
|
|
$
|
(120)
|
|
|
$
|
2,511,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Estimated Fair Market Value
|
Due in one year or less
|
$
|
1,254,763
|
|
|
$
|
1,255,186
|
|
Due after one year through two years
|
25,818
|
|
|
25,803
|
|
Total
|
$
|
1,280,581
|
|
|
$
|
1,280,989
|
|
Note 5. Accounts Receivable, net
The following table presents the detail of accounts receivable as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Accounts receivable
|
$
|
60,579
|
|
|
$
|
61,134
|
|
Unbilled accounts receivable
|
10,948
|
|
|
9,787
|
|
Less: allowance for doubtful accounts
|
(4,522)
|
|
|
(4,838)
|
|
Accounts receivable, net
|
$
|
67,005
|
|
|
$
|
66,083
|
|
The following table presents the changes in the allowance for doubtful accounts for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Allowance for doubtful accounts:
|
|
|
|
|
|
Balance, beginning of period
|
$
|
4,838
|
|
|
$
|
5,341
|
|
|
$
|
1,337
|
|
Additions charged to expense
|
2,772
|
|
|
869
|
|
|
7,349
|
|
Less: write-offs, net of recoveries and other adjustments
|
(3,088)
|
|
|
(1,372)
|
|
|
(3,345)
|
|
Balance, end of period
|
$
|
4,522
|
|
|
$
|
4,838
|
|
|
$
|
5,341
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Work-in-process
|
$
|
152,171
|
|
|
$
|
45,943
|
|
Finished goods
|
684,456
|
|
|
116,886
|
|
Inventory
|
$
|
836,627
|
|
|
$
|
162,829
|
|
Note 7. Contract Cost Assets
As of December 31, 2019 and December 31, 2018, we had $45.2 million and $45.8 million, respectively, of contract cost assets. Write-offs of contract cost assets that we determined were not recoverable during the years ended December 31, 2019 and 2018 were not material. We recorded amortization expense related to contract cost assets of $35.3 million and $36.0 million during the years ended December 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Website development costs
|
$
|
149,648
|
|
|
$
|
149,891
|
|
Leasehold improvements
|
81,981
|
|
|
65,012
|
|
Construction-in-progress
|
45,337
|
|
|
29,037
|
|
Office equipment, furniture and fixtures
|
36,582
|
|
|
39,510
|
|
Computer equipment
|
31,942
|
|
|
22,477
|
|
Property and equipment
|
345,490
|
|
|
305,927
|
|
Less: accumulated amortization and depreciation
|
(175,001)
|
|
|
(170,755)
|
|
Property and equipment, net
|
$
|
170,489
|
|
|
$
|
135,172
|
|
We recorded depreciation expense related to property and equipment (other than website development costs) of $24.9 million, $19.5 million and $15.6 million, respectively, during the years ended December 31, 2019, 2018 and 2017.
We capitalized $42.3 million, $34.1 million and $49.9 million, respectively, in website development costs during the years ended December 31, 2019, 2018 and 2017. Amortization expense for website development costs included in technology and development expenses was $17.0 million, $28.6 million and $40.0 million, respectively, for the years ended December 31, 2019, 2018 and 2017.
Note 9. Acquisitions and Equity Investments
Acquisition of Mortgage Lenders of America
On October 31, 2018, Zillow Group’s wholly owned subsidiary, ZGM Holdco, Inc., acquired the outstanding equity of Mortgage Lenders of America, L.L.C. (“MLOA”), a national mortgage lender headquartered in Overland Park, Kansas for approximately $66.7 million in cash.
Our acquisition of MLOA was accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values as of October 31, 2018. Goodwill, which represents the expected synergies from combining the acquired assets and the operations of the acquirer, as well as intangible assets that do not qualify for separate recognition, is measured as of the acquisition date as the excess of consideration transferred, which is also measured at fair value, and the net of the fair values of the assets acquired and the liabilities assumed as of the acquisition date. The goodwill recognized in conjunction with this business combination was initially allocated to our Internet, Media & Technology (“IMT”) segment. However, 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. In conjunction with this segment change, we reallocated goodwill to each segment based on the relative fair value of the segments impacted by the change. Refer to Note 10 for the allocation of goodwill to each of our reportable segments.
The total consideration paid upon acquisition was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. Based upon the fair values determined by us, in which we considered or relied in part upon a valuation report of a third-party expert, the total purchase price was allocated as follows (in thousands):
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
10,796
|
|
Restricted cash
|
753
|
|
Mortgage loans available for sale
|
34,248
|
|
Property, plant and equipment
|
1,315
|
|
Intangible assets
|
2,600
|
|
Goodwill
|
53,831
|
|
Other acquired assets
|
3,079
|
|
Accounts payable
|
(1,953)
|
|
Accrued expenses
|
(2,591)
|
|
Warehouse lines of credit
|
(32,536)
|
|
Other assumed liabilities
|
(2,855)
|
|
Total purchase price
|
$
|
66,687
|
|
Acquisition-related costs incurred, which primarily included legal, accounting, regulatory and other external costs directly related to the acquisition, are included within Acquisition-related costs within our consolidated statements of operations and were expensed as incurred and were not material.
The results of operations related to the acquisition of MLOA have been included in our consolidated financial statements since the date of acquisition. On an unaudited pro forma basis, revenue would have been approximately 3.0% higher for the year ended December 31, 2018 and 5.0% higher for the year-ended December 31, 2017 if the acquisition would have been consummated as of January 1, 2017. Unaudited pro forma earnings information has not been presented as the effects were not material to our consolidated financial statements.
Equity Investments
In June 2017, we purchased an equity interest in a privately held corporation for approximately $10.0 million.
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 December 31, 2019.
These investments are equity securities without readily determinable fair values 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. During the year ended December 31, 2018, we recognized a non-cash impairment charge of $10.0 million related to our June 2017 investment. The impairment charge is included in Impairment costs within our consolidated statements of operations. During the third quarter of 2018, in connection with our quarterly qualitative assessment of this investment for impairment indicators, we identified factors that led us to conclude that the investment was impaired and the fair value of the investment was less than the carrying value. The most significant of such factors was related to the business prospects of the investee. Accordingly, we performed an analysis to determine the fair value of the investment and concluded that our best estimate of its fair value was $0.0 million. This is considered a Level 3 measurement under the fair value hierarchy.
There has been no impairment or upward or downward adjustments to our October 2016 equity investment as of December 31, 2019 that would impact the carrying amount of the investment. The equity investment is classified within other assets in the consolidated balance sheets.
Note 10. Goodwill
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. In conjunction with this segment change, we reallocated goodwill to each reporting unit based on the relative fair value of the reporting units impacted by the segment change. The following table presents goodwill by reportable segment as of the period presented (in thousands):
|
|
|
|
|
|
|
December 31, 2019
|
Homes
|
$
|
—
|
|
IMT
|
1,786,416
|
|
Mortgages
|
198,491
|
|
Total
|
$
|
1,984,907
|
|
There was no change in the total balance of goodwill during 2019.
The goodwill balance as of December 31, 2018 was fully attributable to our IMT segment.
Note 11. Intangible Assets, net
The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Customer relationships
|
$
|
102,600
|
|
|
$
|
(73,770)
|
|
|
$
|
28,830
|
|
Developed technology
|
107,200
|
|
|
(81,383)
|
|
|
25,817
|
|
Purchased content
|
47,298
|
|
|
(40,636)
|
|
|
6,662
|
|
Intangibles-in-progress
|
6,391
|
|
|
—
|
|
|
6,391
|
|
Software
|
35,527
|
|
|
(20,843)
|
|
|
14,684
|
|
Lender licenses
|
400
|
|
|
(217)
|
|
|
183
|
|
Total
|
$
|
299,416
|
|
|
$
|
(216,849)
|
|
|
$
|
82,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Customer relationships
|
$
|
103,900
|
|
|
$
|
(60,733)
|
|
|
$
|
43,167
|
|
Developed technology
|
111,980
|
|
|
(72,788)
|
|
|
39,192
|
|
Purchased content
|
42,110
|
|
|
(30,477)
|
|
|
11,633
|
|
Software
|
24,296
|
|
|
(13,925)
|
|
|
10,371
|
|
Intangibles-in-progress
|
2,941
|
|
|
—
|
|
|
2,941
|
|
Lender licenses
|
400
|
|
|
(17)
|
|
|
383
|
|
Trade names and trademarks
|
4,900
|
|
|
(4,683)
|
|
|
217
|
|
Total
|
$
|
290,527
|
|
|
$
|
(182,623)
|
|
|
$
|
107,904
|
|
Amortization expense recorded for intangible assets for the years ended December 31, 2019, 2018 and 2017 was $44.9 million, $50.8 million and $54.3 million, respectively, and these amounts are included in technology and development expenses.
Intangibles-in-progress consists of software that is capitalizable but has not been placed in service.
Estimated future amortization expense for intangible assets, including amortization related to future commitments (see Note 20), as of December 31, 2019 is as follows (in thousands):
|
|
|
|
|
|
2020
|
$
|
43,986
|
|
2021
|
36,867
|
|
2022
|
7,231
|
|
2023
|
587
|
|
Total future amortization expense
|
$
|
88,671
|
|
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 December 31, 2019 and 2018.
During the year ended December 31, 2018, we recognized a non-cash impairment charge of $69.0 million related to our indefinite-lived Trulia trade names and trademarks intangible asset. The impairment charge is included in Impairment costs within our IMT and Mortgages segments for $65.0 million and $4.0 million, respectively. In connection with our annual budgeting process that was substantially completed during the three months ended December 31, 2018, we identified factors that led us to conclude it was more likely than not that the $177.0 million carrying value of the asset exceeded its fair value. The most significant of such factors was a shortfall in projected revenue related to the Trulia brand compared to projections at the time the intangible asset was remeasured as of October 1, 2017. Accordingly, with the assistance of a third-party valuation specialist, we performed a quantitative analysis to determine the fair value of the intangible asset and concluded that our best estimate of its fair value was $108.0 million. The valuation was prepared using an income approach based on the relief-from-royalty method and relied on inputs with unobservable market prices including the assumed revenue growth rates, royalty rate, discount rate, and estimated tax rate, and therefore is considered a Level 3 measurement under the fair value hierarchy.
During the year ended December 31, 2017, we recognized a non-cash impairment charge of $174.0 million related to our indefinite-lived Trulia trade names and trademarks intangible asset. The impairment charge is included in Impairment costs within our IMT and Mortgages segments for $161.9 million and $12.1 million, respectively. In connection with our qualitative assessment of the recoverability of this asset during our annual impairment test as of October 1, 2017, we identified factors that led us to conclude it was more likely than not that the $351.0 million carrying value of the asset exceeded its fair value. The most significant of such factors was a shortfall in projected revenue related to the Trulia brand compared to projections at the time the intangible asset was initially recorded in February 2015. Accordingly, with the assistance of a third-party valuation specialist, we performed a quantitative analysis to determine the fair value of the intangible asset and concluded that our best estimate of its fair value was $177.0 million. The valuation was prepared using an income approach based on the relief-from-royalty method and relied on inputs with unobservable market prices including the assumed revenue growth rates, royalty rate, discount rate, and estimated tax rate, and therefore is considered a Level 3 measurement under the fair value hierarchy.
In connection with our impairment analyses in 2019, we evaluated our planned future use of the Trulia trade names and trademarks intangible asset and concluded that it remains appropriate to consider this asset to have an indefinite life.
Note 12. Accrued Expenses and Other Current Liabilities
The following table presents the detail of accrued expenses and other current liabilities as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Accrued marketing and advertising
|
$
|
18,343
|
|
|
$
|
18,559
|
|
Taxes payable
|
6,287
|
|
|
1,381
|
|
Merger consideration payable to former stockholders of certain acquired entities
|
6,117
|
|
|
5,904
|
|
Accrued interest expense
|
4,501
|
|
|
794
|
|
Accrued estimated legal liabilities and legal fees
|
3,882
|
|
|
7,305
|
|
Accrued purchased content
|
156
|
|
|
4,256
|
|
Other accrued expenses and other current liabilities
|
46,156
|
|
|
24,902
|
|
Total accrued expenses and other current liabilities
|
$
|
85,442
|
|
|
$
|
63,101
|
|
Note 13. Deferred Revenue
The following table presents the change in deferred revenue for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
2018
|
Balance as of the beginning of the period
|
$
|
34,080
|
|
|
$
|
31,918
|
|
Deferral of revenue during the period
|
1,049,634
|
|
|
982,647
|
|
Less: Revenue recognized during the period
|
(1,043,967)
|
|
|
(980,485)
|
|
Balance as of the end of the period
|
$
|
39,747
|
|
|
$
|
34,080
|
|
During the year ended December 31, 2019 we recognized as revenue a total of $32.7 million pertaining to amounts that were recorded in deferred revenue as of December 31, 2018. During the year ended December 31, 2018, we recognized as revenue a total of $28.8 million pertaining to amounts that were recorded in deferred revenue as of December 31, 2017.
Note 14. 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 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 eleven 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 year ended December 31, 2019, it became reasonably certain that in a future period we would exercise the first of two five year 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 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 year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
Operating lease cost
|
$
|
35,837
|
|
Variable lease cost
|
11,231
|
|
Total lease cost
|
$
|
47,068
|
|
Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2019 was $31.8 million. Right of use assets obtained in exchange for new operating lease obligations for the year ended December 31, 2019 were $128.4 million. The weighted average remaining term for our leases as of December 31, 2019 was 8.50 years. The weighted average discount rate for our leases as of December 31, 2019 was 6.5%.
The following table presents the scheduled maturities of our operating lease liabilities by fiscal year as of December 31, 2019 (in thousands):
|
|
|
|
|
|
2020
|
$
|
38,914
|
|
2021
|
43,073
|
|
2022
|
40,760
|
|
2023
|
40,991
|
|
2024
|
36,040
|
|
All future years
|
143,140
|
|
Total lease payments
|
342,918
|
|
Less: Imputed interest
|
(104,881)
|
|
Present value of lease liabilities
|
$
|
238,037
|
|
Operating lease expense for the years ended December 31, 2018 and 2017 was $23.7 million and $21.4 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 15. Debt
The following table presents the carrying values of Zillow Group’s debt as of the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
Homes Segment
|
|
|
|
|
Credit facilities:
|
|
|
|
|
Goldman Sachs Bank USA
|
|
$
|
39,244
|
|
|
$
|
—
|
|
Citibank, N.A.
|
|
296,369
|
|
|
—
|
|
Credit Suisse AG, Cayman Islands
|
|
355,911
|
|
|
116,700
|
|
Total Homes Segment debt
|
|
691,524
|
|
|
116,700
|
|
Mortgages Segment
|
|
|
|
|
Repurchase agreement:
|
|
|
|
|
|
|
|
Citibank, N.A.
|
|
394
|
|
|
—
|
|
Warehouse lines of credit:
|
|
|
|
|
Comerica Bank
|
|
30,033
|
|
|
18,892
|
|
People’s United Bank, N.A.
|
|
—
|
|
|
14,125
|
|
Total Mortgages Segment debt
|
|
30,427
|
|
|
33,017
|
|
Convertible Senior Notes
|
|
|
|
|
1.375% convertible senior notes due 2026
|
|
327,187
|
|
|
—
|
|
0.75% convertible senior notes due 2024
|
|
490,538
|
|
|
—
|
|
1.50% convertible senior notes due 2023
|
|
310,175
|
|
|
294,738
|
|
2.0% convertible senior notes due 2021
|
|
415,502
|
|
|
394,645
|
|
2.75% convertible senior notes due 2020
|
|
9,637
|
|
|
9,637
|
|
Total convertible senior notes
|
|
1,553,039
|
|
|
699,020
|
|
Total
|
|
$
|
2,274,990
|
|
|
$
|
848,737
|
|
Homes Segment
To provide capital for Zillow Offers, we utilize credit facilities that are classified as current liabilities in our consolidated balance sheets. We classify these credit facilities as current liabilities as amounts drawn to purchase homes are typically repaid as homes are sold, which we expect to be within one year. The following table summarizes certain details related to our credit facilities (in thousands, except interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
|
|
Final Maturity Date
|
|
Maximum Borrowing Capacity
|
|
Weighted Average Interest Rate
|
Goldman Sachs Bank USA
|
|
April 20, 2022
|
|
$
|
500,000
|
|
|
4.41
|
%
|
Citibank, N.A.
|
|
January 31, 2022
|
|
500,000
|
|
|
5.54
|
%
|
Credit Suisse AG, Cayman Islands
|
|
July 31, 2021
|
|
500,000
|
|
|
5.63
|
%
|
|
|
Total
|
|
$
|
1,500,000
|
|
|
|
Undrawn amounts available under the credit facilities included in the table above are not committed, meaning the applicable lender is not committed to, but may in its discretion, advance loan funds in excess of the outstanding borrowings. The final maturity dates are inclusive of extensions which are subject to agreement by the respective lender. The Goldman Sachs Bank USA credit facility has an initial term of two years which may be extended for one additional period of six months, subject to certain conditions. The Citibank, N.A. credit facility has an initial term of two years and may be extended for up to two additional periods of six months each. The Credit Suisse AG, Cayman Islands Branch credit facility has an initial term of one year and then automatically renews on a monthly basis for up to 24 additional months.
Zillow Group formed certain special purpose entities (each, an “SPE”) to purchase and sell residential properties through Zillow Offers. Each SPE is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such SPE are available to satisfy the debts and other obligations of any affiliate or other entity. The credit facilities are secured by the assets and equity of one or more SPEs. These SPEs are variable interest entities and Zillow Group is the primary beneficiary as it has the power to control the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses of the SPEs or the right to receive benefits from the SPEs that could potentially be significant to the SPEs. The SPEs are consolidated within Zillow Group’s consolidated financial statements and primarily increased inventory and borrowings under credit facilities by $836.6 million and $691.5 million, respectively, as of December 31, 2019 and $162.8 million and $116.7 million, respectively, as of December 31, 2018.
Outstanding amounts drawn under each credit facility are required to be repaid on the facility maturity date or earlier if accelerated due to an event of default. Further, each SPE is required to repay any resulting shortfall if the value of the eligible properties owned by such SPE falls below a certain percentage of the principal amount outstanding under the applicable credit facility. Continued inclusion of properties in each credit facility is subject to various eligibility criteria. For example, aging criteria limit the inclusion in the borrowing base of properties owned longer than a specified number of days, and properties owned for longer than one year are ineligible.
The stated interest rate on our credit facilities is one-month LIBOR plus an applicable margin as defined in the respective credit agreements. Our credit facilities include customary representations and warranties, provisions regarding events of default and covenants. The terms of these credit facilities and related financing documents require Zillow Group and certain of its subsidiaries, as applicable, to comply with a number of customary financial and other covenants, such as maintaining certain levels of liquidity, tangible net worth, leverage ratios, adequate insurance coverage and market capitalization. As of December 31, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred. Except for certain limited circumstances, the credit facilities are non-recourse to Zillow Group. Our credit facilities require that we establish, maintain and in certain circumstances that Zillow Group fund specified reserve accounts. These reserve accounts include, but are not limited to, interest reserves, insurance reserves, tax reserves, renovation cost reserves and reserves for specially permitted liens. Amounts funded to these reserve accounts and the collection accounts have been classified within our consolidated balance sheets as restricted cash.
Mortgages Segment
To provide capital for Zillow Home Loans, we utilize warehouse lines of credit and a master repurchase agreement which are classified as current liabilities in our consolidated balance sheets. The facilities provide short-term financing between the issuance of a mortgage loan and when Zillow Home Loans sell the loan to an investor. The following table summarizes certain details related to our warehouse lines of credit and repurchase agreement (in thousands, except interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
|
|
Maturity Date
|
|
Maximum Borrowing Capacity
|
|
Weighted Average Interest Rate
|
Citibank, N.A.
|
|
October 27, 2020
|
|
$
|
75,000
|
|
|
3.29
|
%
|
Comerica Bank
|
|
June 27, 2020
|
|
50,000
|
|
|
4.22
|
%
|
People’s United Bank, N.A.
|
|
October 15, 2019
|
|
50,000
|
|
|
4.89
|
%
|
On October 29, 2019, Zillow Home Loans entered into a master repurchase agreement (the “Repurchase Agreement”) with Citibank, N.A. (“Citibank”) to provide short-term funding for mortgage loans and replaced the borrowing capacity of the warehouse line previously provided by People’s United Bank, N.A. On June 28, 2019, Zillow Home Loans amended and restated its warehouse line of credit with Comerica Bank previously maturing on June 29, 2019. The amended and restated credit agreement extended the term of the original agreement for one year and continues to provide for a committed maximum borrowing capacity of $50.0 million.
In accordance with the Repurchase Agreement, Citibank agrees to pay Zillow Home Loans a negotiated purchase price for eligible loans and Zillow Home Loans simultaneously agrees to repurchase such loans from Citibank under a specified timeframe at an agreed upon price that includes interest. The Repurchase Agreement includes a committed amount of $25.0 million, and includes customary representations and warranties, covenants and provisions regarding events of default. As of December 31, 2019, $0.4 million in mortgage loans held for sale were pledged as collateral under the facility, and Zillow Home Loans was in compliance with all financial covenants and no event of default had occurred.
Transactions under the Repurchase Agreement bear interest at the one-month LIBOR plus an applicable margin, as defined in the Repurchase Agreement, and are secured by residential mortgage loans available for sale. The Repurchase Agreement contains margin call provisions that provide Citibank with certain rights in the event of a decline in the market value of the assets purchased under the Repurchase Agreement. The Repurchase Agreement is recourse to Zillow Home Loans, but non-recourse to Zillow Group or any of its other subsidiaries.
Borrowings on the warehouse lines of credit bear interest at the one-month LIBOR plus an applicable margin, as defined in the governing credit agreements. The warehouse lines of credit include customary representations and warranties, covenants and provisions regarding events of default. As of December 31, 2019, Zillow Home Loans was in compliance with all financial covenants and no event of default had occurred. The warehouse lines of credit are recourse to Zillow Home Loans, but non-recourse to Zillow Group or any of its other subsidiaries.
Convertible Senior Notes
The following tables summarize certain details related to our outstanding convertible senior notes as of the periods presented (in thousands, except interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
Maturity Date
|
|
Aggregate Principal Amount
|
|
Stated Interest Rate
|
|
Effective Interest Rate
|
|
First Interest Payment Date
|
|
Semi-Annual Interest Payment Dates
|
|
Unamortized Debt Discount and Debt Issuance Costs
|
|
Fair Value
|
|
Unamortized Debt Discount and Debt Issuance Costs
|
|
Fair Value
|
September 1, 2026
|
|
$
|
500,000
|
|
|
1.375
|
%
|
|
8.10
|
%
|
|
March 1, 2020
|
|
|
March 1; September 1
|
|
$
|
172,813
|
|
|
$
|
597,380
|
|
|
$
|
—
|
|
|
$
|
—
|
|
September 1, 2024
|
|
673,000
|
|
|
0.75
|
%
|
|
7.68
|
%
|
|
March 1, 2020
|
|
|
March 1; September 1
|
|
182,462
|
|
|
730,500
|
|
|
—
|
|
|
—
|
|
July 1, 2023
|
|
373,750
|
|
|
1.50
|
%
|
|
6.99
|
%
|
|
January 1, 2019
|
|
|
January 1; July 1
|
|
63,575
|
|
|
356,464
|
|
|
79,012
|
|
|
321,855
|
|
December 1, 2021
|
|
460,000
|
|
|
2.00
|
%
|
|
7.44
|
%
|
|
June 1, 2017
|
|
|
June 1; December 1
|
|
44,498
|
|
|
514,312
|
|
|
65,355
|
|
|
446,200
|
|
December 15, 2020
|
|
9,637
|
|
|
2.75
|
%
|
|
N/A
|
|
|
N/A
|
|
|
June 15; December 15
|
|
—
|
|
|
16,842
|
|
|
—
|
|
|
16,744
|
|
Total
|
|
$
|
2,016,387
|
|
|
|
|
|
|
|
|
|
|
$
|
463,348
|
|
|
$
|
2,215,498
|
|
|
$
|
144,367
|
|
|
$
|
784,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
Maturity Date
|
|
Contractual Coupon Interest
|
|
Amortization of Debt Discount
|
|
Amortization of Debt Issuance Costs
|
|
Interest Expense
|
|
Contractual Coupon Interest
|
|
Amortization of Debt Discount
|
|
Amortization of Debt Issuance Costs
|
|
Interest Expense
|
September 1, 2026
|
|
$
|
2,139
|
|
|
$
|
5,869
|
|
|
$
|
144
|
|
|
$
|
8,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
September 1, 2024
|
|
1,539
|
|
|
9,482
|
|
|
325
|
|
|
11,346
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
July 1, 2023
|
|
5,606
|
|
|
14,047
|
|
|
1,374
|
|
|
21,027
|
|
|
2,788
|
|
|
6,655
|
|
|
650
|
|
|
10,093
|
|
December 1, 2021
|
|
9,200
|
|
|
18,899
|
|
|
1,957
|
|
|
30,056
|
|
|
9,200
|
|
|
17,571
|
|
|
1,817
|
|
|
28,588
|
|
December 15, 2020
|
|
265
|
|
|
—
|
|
|
—
|
|
|
265
|
|
|
265
|
|
|
—
|
|
|
—
|
|
|
265
|
|
Total
|
|
$
|
18,749
|
|
|
$
|
48,297
|
|
|
$
|
3,800
|
|
|
$
|
70,846
|
|
|
$
|
12,253
|
|
|
$
|
24,226
|
|
|
$
|
2,467
|
|
|
$
|
38,946
|
|
The convertible notes are senior unsecured obligations and are classified as long-term debt in our consolidated balance sheets with the exception of the convertible senior notes due December 15, 2020 which are classified within short-term liabilities. Interest on the convertible notes is paid semi-annually in arrears. The estimated fair value of the convertible senior notes was determined through consideration of quoted market prices. The fair value is classified as Level 3 due to the limited trading activity for each of the convertible senior notes. The convertible senior notes maturing in 2026, 2024, 2023 and 2021 are not redeemable or convertible as of December 31, 2019. The convertible senior notes maturing in 2020 are convertible, at the option of the holder, and redeemable, at our option, as of December 31, 2019.
On September 9, 2019, Zillow Group issued $600.0 million aggregate principal amount of Convertible Senior Notes due 2024 (the “Initial 2024 Notes”) and $500.0 million aggregate principal amount of Convertible Senior Notes due 2026 (the “2026 Notes”) in a private offering to qualified institutional buyers. The net proceeds from the issuance of the Initial 2024 Notes were approximately $592.2 million and the net proceeds from the issuance of the 2026 Notes were approximately $493.5 million, in each case after deducting fees and expenses payable by the Company. The Company used approximately $75.2 million of the net proceeds from the issuance of the Initial 2024 Notes and approximately $75.4 million of the net proceeds from the issuance of the 2026 Notes to pay the cost of the capped call transactions entered into in connection with the
issuances, described below. On October 9, 2019, the Company issued $73.0 million aggregate principal amount of 0.75% Convertible Senior Notes due 2024 (the “Additional Notes” and, together with the Initial 2024 Notes, the “2024 Notes”). The Additional Notes were sold pursuant to the initial purchasers’ partial exercise of their option to purchase such notes, granted in connection with the offering of the Initial 2024 Notes. The Additional Notes have the same terms, and were issued under the same indenture, as the Initial 2024 Notes. The net proceeds from the offering of the Additional Notes were approximately $72.0 million, after deducting fees and expenses payable by the Company. The Company used approximately $9.1 million of the net proceeds from the issuance of the Additional Notes to pay the cost of the capped call transactions entered into in connection with the issuance of the Additional Notes.
On July 3, 2018, Zillow Group issued $373.8 million aggregate principal amount of Convertible Senior Notes due 2023 (the “2023 Notes”), which includes $48.8 million principal amount of 2023 Notes sold pursuant to the underwriters’ option to purchase additional 2023 Notes. The net proceeds from the issuance of the 2023 Notes were approximately $364.0 million, after deducting fees and expenses payable by the Company. We used approximately $29.4 million of the net proceeds from the issuance of the 2023 Notes to pay the cost of capped call transactions entered into in connection with the issuances, described below.
On December 12, 2016, Zillow Group issued $460.0 million aggregate principal amount of 2.00% Convertible Senior Notes due 2021 (the “2021 Notes”), which includes the exercise of the $60.0 million over-allotment option, to the initial purchaser of the 2021 Notes in a private offering to qualified institutional buyers. The net proceeds from the issuance of the 2021 Notes were approximately $447.8 million, after deducting fees and expenses payable by the Company. In December 2016, the Company used approximately $370.2 million of the net proceeds from the issuance of the 2021 Notes to repurchase $219.9 million aggregate principal amount of Trulia’s convertible senior notes due in 2020 in privately negotiated transactions. In addition, the Company used approximately $36.6 million of the net proceeds from the issuance of the 2021 Notes to pay the cost of the capped call transactions with the initial purchaser of the 2021 Notes and two additional financial institutions, described below.
The Company has used or intends to use the remainder of the net proceeds of the 2026 Notes, 2024 Notes, 2023 Notes, and 2021 Notes (together the “Notes”) for general corporate purposes, which may include working capital, sales and marketing activities, general and administrative matters and capital expenditures.
The Notes are convertible into cash, shares of Class C capital stock or a combination thereof, at our election, and may be settled as described below. The Notes will mature on their respective Maturity Date, unless earlier repurchased, redeemed or converted in accordance with their terms.
The following table summarizes the conversion and redemption options with respect to the Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Early Conversion Date
|
|
Conversion Rate
|
|
Conversion Price
|
|
Optional Redemption Date
|
September 1, 2026
|
|
March 1, 2026
|
|
22.9830
|
|
$
|
43.51
|
|
|
September 5, 2023
|
September 1, 2024
|
|
March 1, 2024
|
|
22.9830
|
|
43.51
|
|
|
September 5, 2022
|
July 1, 2023
|
|
April 1, 2023
|
|
12.7592
|
|
78.37
|
|
|
July 6, 2021
|
December 1, 2021
|
|
September 1, 2021
|
|
19.0985
|
|
52.36
|
|
|
December 6, 2019
|
Prior to the close of business on the business day immediately preceding the applicable Early Conversion Date, the Notes will be convertible at the option of the holders only under certain conditions. On or after the applicable Early Conversion Date, until the close of business on the second scheduled trading day immediately preceding the applicable Maturity Date, holders may convert the Notes at their option at the applicable Conversion Rate then in effect, irrespective of these conditions. The Company will settle conversions of the Notes by paying or delivering, as the case may be, cash, shares of its Class C capital stock, or a combination of cash and shares of its Class C capital stock, at its election. The applicable Conversion Rate for each series of Notes will initially be the conversion rate of shares of Class C capital stock per $1,000 principal amount of the Notes (equivalent to an initial Conversion Price per share of Class C capital stock). The applicable Conversion Rate and the corresponding initial Conversion Price will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. The Company may redeem for cash all or part of the respective series of Notes, at its option, on or after the applicable Optional Redemption Date, under certain circumstances, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indentures governing the Notes). We may not redeem a series of Notes prior to the applicable Optional Redemption Date. We may redeem for cash all or any portion of a series of Notes, at our option, in whole or in part on or after the applicable Optional Redemption Date if the last reported sale price per share of our Class C capital stock has been at least 130% of the Conversion
Price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period. The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.
If the Company undergoes a fundamental change (as defined in the indentures governing the Notes), holders may require the Company to repurchase for cash all or part of a series of Notes, as applicable, at a repurchase price equal to 100% of the principal amount of the notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date (as defined in the indentures governing the Notes). In addition, if certain fundamental changes occur, the Company may be required, in certain circumstances, to increase the conversion rate for any of the Notes converted in connection with such fundamental changes by a specified number of shares of its Class C capital stock. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the Notes, as described in the indentures governing the Notes. There are no financial covenants associated with the Notes.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component for each of the Notes was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amounts of the Notes and their liability components represents their respective debt discounts, which are recorded as a direct deduction from the related debt liability in the consolidated balance sheets and amortized to interest expense using the effective interest method over the term of the Notes. The equity components of the Notes, net of issuance costs, are included in additional paid-in capital in the consolidated balance sheets and are not remeasured as long as they continue to meet the conditions for equity classification.
The equity components of the 2026 Notes, 2024 Notes, 2023 Notes and 2021 Notes of $172.3 million, $183.5 million, $76.6 million and $91.4 million, respectively, are net of issuance costs of $2.3 million, $2.4 million, $2.0 million and $2.5 million, respectively.
The following table summarizes certain details related to the capped call confirmations with respect to the Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Initial Cap Price
|
|
Cap Price Premium
|
September 1, 2026
|
|
$
|
80.5750
|
|
|
150
|
%
|
September 1, 2024
|
|
72.5175
|
|
|
125
|
%
|
July 1, 2023
|
|
105.45
|
|
|
85
|
%
|
December 1, 2021
|
|
69.19
|
|
|
85
|
%
|
The capped call confirmations are expected generally to reduce the potential dilution of our Class C capital stock upon any conversion of the Notes and/or offset the cash payments the Company is required to make in excess of the principal amount of such notes in the event that the market price of the Class C capital stock is greater than the strike price of the capped call confirmations (which initially corresponds to the initial Conversion Price of such notes and is subject to certain adjustments under the terms of the capped call confirmations), with such reduction and/or offset subject to a cap based on the cap price of the capped call confirmations. The capped call confirmations with respect to the Notes have an Initial Cap Price per share, which represents a premium (“Cap Price Premium”) over the relevant historical closing price of the Company’s Class C capital stock on the Nasdaq Global Select Market, and is subject to certain adjustments under the terms of the capped call confirmations. The capped call confirmations will cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of Class C capital stock that will underlie such notes. The capped call confirmations do not meet the criteria for separate accounting as a derivative as they are indexed to our own stock. The capped call premiums paid have been included as a net reduction to additional paid-in capital within shareholders’ equity.
Note 16. Income Taxes
We are subject to federal and state income taxes in the United States and federal and provincial income taxes in Canada.
We recorded an income tax benefit of $4.3 million for the year ended December 31, 2019. The majority of the income tax benefit is a result of federal and state interest expense limitation carryforwards that are indefinite-lived deferred tax assets that can be offset against our indefinite-lived deferred tax liabilities. In addition, net operating losses generated after December 31, 2017 also can be offset against the indefinite-lived deferred tax liabilities. These items contributed to a release of the valuation allowance and the recognition of an income tax benefit for the year ended December 31, 2019.
We recorded an income tax benefit of $31.1 million for the year ended December 31, 2018. Approximately $15.4 million of the income tax benefit resulted from the $69.0 million non-cash impairment we recorded during the year ended December 31, 2018 related to the indefinite-lived Trulia trade names and trademarks intangible asset. For additional information about the non-cash impairment, see Note 11 to our consolidated financial statements. The remaining portion of our income tax benefit was primarily the result of net operating losses generated after December 31, 2017 with an indefinite carryforward period due to the Tax Act. Thus, net operating losses for the year ended December 31, 2018 could be offset against our indefinite-lived deferred tax liabilities, which resulted in the release of our valuation allowance and the recognition of an income tax benefit for the year ended December 31, 2018.
During the year ended December 31, 2018, we completed our accounting for the income tax effects of deduction limitations on compensation under the Tax Act. The Internal Revenue Service provided further guidance regarding the written binding contracts requirement under the Tax Act, and we determined that certain of our executives’ compensation previously eligible to be deducted for tax purposes under Section 162(m) of the Internal Revenue Code were considered grandfathered. Therefore, we continued to deduct this compensation during the year ended December 31, 2018. Based on the clarification of these rules, we recorded a $5.9 million income tax benefit for the year ended December 31, 2018.
We recorded an income tax benefit of $89.6 million for the year ended December 31, 2017. Approximately $66.0 million of the income tax benefit related to a $174.0 million non-cash impairment we recorded during the year ended December 31, 2017 related to the indefinite-lived Trulia trade names and trademarks intangible asset. For additional information about the non-cash impairment, see Note 11 to our consolidated financial statements. The remaining $23.6 million of the income tax benefit primarily relates to our initial analysis of the impact of the rate decrease included in the Tax Act for the impact of the reduction in our net deferred tax liability related to our indefinite-lived intangible asset.
The following table summarizes the components of our income tax benefit for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current income tax expense:
|
|
|
|
|
|
State
|
$
|
304
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign
|
99
|
|
|
161
|
|
|
—
|
|
Total current income tax expense
|
403
|
|
|
161
|
|
|
—
|
|
Deferred income tax benefit:
|
|
|
|
|
|
Federal
|
(1,631)
|
|
|
(28,502)
|
|
|
(84,238)
|
|
State
|
(2,856)
|
|
|
(2,441)
|
|
|
(5,348)
|
|
Foreign
|
(174)
|
|
|
(320)
|
|
|
—
|
|
Total deferred income tax benefit
|
(4,661)
|
|
|
(31,263)
|
|
|
(89,586)
|
|
Total income tax benefit
|
$
|
(4,258)
|
|
|
$
|
(31,102)
|
|
|
$
|
(89,586)
|
|
The following table presents a reconciliation of the federal statutory rate and our effective tax rate for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Tax expense at federal statutory rate
|
(21.0)
|
%
|
|
(21.0)
|
%
|
|
(35.0)
|
%
|
State income taxes, net of federal tax benefit
|
(3.0)
|
|
|
(5.9)
|
|
|
(4.4)
|
|
Nondeductible expenses
|
—
|
|
|
—
|
|
|
0.8
|
|
Share-based compensation
|
(0.9)
|
|
|
(16.5)
|
|
|
(20.6)
|
|
Section 162(m) of Internal Revenue Code
|
1.1
|
|
|
1.0
|
|
|
—
|
|
Research and development credits
|
(7.2)
|
|
|
(8.4)
|
|
|
(6.3)
|
|
Meals and entertainment
|
1.1
|
|
|
1.8
|
|
|
—
|
|
Return to provision adjustments
|
0.5
|
|
|
(4.2)
|
|
|
—
|
|
Enactment of Tax Act
|
—
|
|
|
(1.9)
|
|
|
(13.1)
|
|
Other
|
(0.6)
|
|
|
0.4
|
|
|
2.2
|
|
Valuation allowance
|
28.6
|
|
|
34.0
|
|
|
27.7
|
|
Effective tax rate
|
(1.4)
|
%
|
|
(20.7)
|
%
|
|
(48.7)
|
%
|
Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Federal and state net operating loss carryforwards
|
$
|
273,171
|
|
|
$
|
259,629
|
|
Share-based compensation
|
75,704
|
|
|
55,280
|
|
Research and development credits
|
70,970
|
|
|
48,805
|
|
Lease liabilities
|
58,899
|
|
|
—
|
|
Other tax credits
|
910
|
|
|
910
|
|
Accruals and reserves
|
3,891
|
|
|
3,000
|
|
Inventory
|
17,819
|
|
|
3,574
|
|
Depreciation and amortization
|
2,032
|
|
|
—
|
|
Deferred rent
|
—
|
|
|
4,842
|
|
Other deferred tax assets
|
55,851
|
|
|
10,792
|
|
Total deferred tax assets
|
559,247
|
|
|
386,832
|
|
Deferred tax liabilities:
|
|
|
|
Website and software development costs
|
(20,681)
|
|
|
(14,685)
|
|
Goodwill
|
(1,951)
|
|
|
(598)
|
|
Intangible assets
|
(38,032)
|
|
|
(45,035)
|
|
Right of use assets
|
(52,486)
|
|
|
—
|
|
Discount on 2021 Notes, 2023 Notes, 2024 Notes and 2026 Notes not deductible for tax
|
(108,114)
|
|
|
(31,450)
|
|
Depreciation and amortization
|
—
|
|
|
(888)
|
|
Total deferred tax liabilities
|
(221,264)
|
|
|
(92,656)
|
|
Net deferred tax assets before valuation allowance
|
337,983
|
|
|
294,176
|
|
Less: valuation allowance
|
(346,877)
|
|
|
(307,599)
|
|
Net deferred tax liabilities
|
$
|
(8,894)
|
|
|
$
|
(13,423)
|
|
Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31, 2019 and 2018 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance increased by $39.3 million and $32.8 million, respectively, during the years ended December 31, 2019 and 2018.
We have accumulated federal tax losses of approximately $1,137.6 million and $1,081.7 million, respectively, as of December 31, 2019 and 2018, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $34.3 million and $32.5 million (tax effected), respectively, as of December 31, 2019 and 2018. Additionally, we have net research and development credit carryforwards of $71.0 million and $48.8 million, respectively, as of December 31, 2019 and 2018, which are available to reduce future tax liabilities. The tax loss and research and development credit carryforwards begin to expire in 2025. Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. In connection with our August 2013 public offering of our Class A Common stock, we experienced an ownership change that triggered Sections 382 and 383, which may limit our ability to utilize net operating loss and tax credit carryforwards. In connection with our February 2015 acquisition of Trulia, Trulia experienced an ownership change that triggered Section 382 and 383, which may limit Zillow Group’s ability to utilize Trulia’s net operating loss and tax credit carryforwards.
We are currently not under audit in any tax jurisdiction. Tax years from 2016 through 2019 are currently open for audit by federal and state taxing authorities.
Changes for unrecognized tax benefits for the periods presented are as follows (in thousands):
|
|
|
|
|
|
Balance at January 1, 2017
|
$
|
15,395
|
|
Gross increases—prior and current period tax positions
|
5,216
|
|
Gross increases—prior period tax positions
|
1,002
|
|
Balance at December 31, 2017
|
$
|
21,613
|
|
Gross increases—current period tax positions
|
6,421
|
|
Gross increases—prior period tax positions
|
591
|
|
Balance at December 31, 2018
|
$
|
28,625
|
|
Gross increases—current period tax positions
|
9,021
|
|
Gross increases—prior period tax positions
|
1,786
|
|
Balance at December 31, 2019
|
$
|
39,432
|
|
At December 31, 2019, the total amount of unrecognized tax benefits of $39.4 million is recorded as a reduction to our deferred tax asset. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as income tax expense and are zero.
Note 17. Shareholders’ Equity
Preferred Stock
Our board of directors has the authority to fix and determine and to amend the number of shares of any series of preferred stock that is wholly unissued or to be established and to fix and determine and to amend the designation, preferences, voting powers and limitations, and the relative, participating, optional or other rights, of any series of shares of preferred stock that is wholly unissued or to be established, subject in each case to certain approval rights of holders of our outstanding Class B common stock. There was no preferred stock issued and outstanding as of December 31, 2019 or December 31, 2018.
Common and Capital Stock
Our Class A common stock has no preferences or privileges and is not redeemable. Holders of Class A common stock are entitled to one vote for each share.
Our Class B common stock has no preferences or privileges and is not redeemable. At any time after the date of issuance, each share of Class B common stock, at the option of the holder, may be converted into one share of Class A common stock, or automatically converted into Class A common stock upon the affirmative vote by or written consent of holders of a majority of the shares of the Class B common stock. During the years ended December 31, 2019, 2018 and 2017, no shares of Class B common stock were converted into Class A common stock at the option of the holders. Holders of Class B common stock are entitled to 10 votes for each share.
Our Class C capital stock has no preferences or privileges, is not redeemable and, except in limited circumstances, is non-voting. On July 3, 2018, Zillow Group issued and sold 6,557,017 shares (of which 855,263 shares were related to the exercise
of the underwriters’ option to purchase additional shares) of our Class C capital stock at a public offering price of $57.00 per share. We received net proceeds of $360.3 million after deducting underwriting discounts and commissions and offering expenses payable by us.
The following shares of common and capital stock have been reserved for future issuance as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Option awards outstanding
|
29,634,296
|
|
|
27,310,110
|
|
Restricted stock units outstanding
|
7,052,767
|
|
|
5,266,324
|
|
Class A common stock and Class C capital stock available for grant under 2011 Plan
|
1,466,856
|
|
|
3,675,082
|
|
Class C capital stock available for grant under the 2019 Equity Inducement Plan
|
7,898,167
|
|
|
—
|
|
Shares issuable upon conversion of outstanding Class B common stock
|
6,217,447
|
|
|
6,217,447
|
|
Total
|
52,269,533
|
|
|
42,468,963
|
|
Note 18. Share-Based Awards
In connection with our February 2015 acquisition of Trulia, we assumed the obligations of Zillow and Trulia outstanding under pre-existing stock plans. We intend that future equity grants will be made under Zillow Group’s 2011 Amended and Restated Incentive Plan (as amended and/or restated from time to time, the “2011 Plan”) only (or a successor thereto).
Zillow Group, Inc. 2019 Equity Inducement Plan
On August 8, 2019, the 2019 Equity Inducement Plan (“Inducement Plan”) became effective. Subject to adjustment from time to time as provided in the Inducement Plan, 10,000,000 shares of Class C capital stock are available for issuance under the Inducement Plan. Shares issued under the Inducement Plan shall be drawn from authorized and unissued shares of Class C capital stock. The purpose of the Inducement Plan is to attract, retain and motivate certain new employees of the Company and its subsidiaries by providing them the opportunity to acquire a proprietary interest in the Company and to align their interests and efforts to the long-term interests of the Company’s shareholders. Each award under the Inducement Plan is intended to qualify as an employment inducement award pursuant to Listing Rule 5635(c) of the corporate governance rules of the NASDAQ Stock Market. The Inducement Plan is administered by the compensation committee of the board of directors. Under the terms of the Inducement Plan, the compensation committee may grant equity awards, including incentive stock options, nonqualified stock options, restricted stock, restricted stock units or restricted units to new employees of the Company and its subsidiaries. The Inducement Plan provides that in the event of a stock dividend, stock split or similar event, the maximum number and kind of securities available for issuance under the plan will be proportionally adjusted.
Options under the Inducement Plan are granted with an exercise price per share not less than 100% of the fair market value of our stock on the date of grant, with the exception of substituted option awards granted in connection with acquisitions, and are exercisable at such times and under such conditions as determined by the compensation committee. Any portion of an option that is not vested and exercisable on the date of a participant’s termination of service expires on such date. Employees generally forfeit their rights to exercise vested options 3 months following their termination of employment or 12 months following termination by reason of death, disability or retirement. Options granted under the Inducement Plan expire ten years from the grant date and vest 25% after 12 months and quarterly thereafter over the next three years.
Restricted stock units granted under the Inducement Plan vest 25% after 12 months and quarterly thereafter over the next three years. Any portion of a restricted stock unit that is not vested on the date of a participant’s termination of service expires on such date.
Zillow Group, Inc. Amended and Restated 2011 Incentive Plan
On July 19, 2011, the 2011 Plan became effective. In addition to the share reserve of 18,400,000 shares, the number of shares available for issuance under the 2011 Plan automatically increases on the first day of each of our fiscal years by a number of shares equal to the least of (a) 3.5% of our outstanding Class A common stock, Class B common stock, and Class C capital stock on a fully diluted basis as of the end of our immediately preceding fiscal year, (b) 10,500,000 shares, and (c) a lesser amount determined by our board of directors; provided, however, that any shares from any increases in previous years that are not actually issued will continue to be available for issuance under the 2011 Plan. In addition, shares previously available for grant under Zillow, Inc.’s 2005 Equity Incentive Plan (the “2005 Plan”), but not issued or subject to outstanding awards under the 2005 Plan as of July 19, 2011, and shares subject to outstanding awards under the 2005 Plan that subsequently cease to be subject to such awards (other than by reason of exercise of the awards) are available for grant under the 2011 Plan. The 2011 Plan is administered by the compensation committee of the board of directors. Under the terms of the 2011 Plan, the compensation committee may grant equity awards, including incentive stock options, nonqualified stock options, restricted stock, restricted stock units or restricted units to employees, officers, directors, consultants, agents, advisers and independent contractors. The board of directors has also authorized certain senior executive officers to grant equity awards under the 2011 Plan, within limits prescribed by our board of directors. The 2011 Plan provides that in the event of a stock dividend, stock split or similar event, the maximum number and kind of securities available for issuance under the plan will be proportionally adjusted.
Options under the 2011 Plan are granted with an exercise price per share not less than 100% of the fair market value of our stock on the date of grant, with the exception of substituted option awards granted in connection with acquisitions, and are exercisable at such times and under such conditions as determined by the compensation committee. Any portion of an option that is not vested and exercisable on the date of a participant’s termination of service expires on such date. Employees generally forfeit their rights to exercise vested options 3 months following their termination of employment or 12 months following termination by reason of death, disability or retirement. Options granted under the 2011 Plan typically expire seven or ten years from the grant date and typically vest either 25% after 12 months and ratably thereafter over the next 36 months or quarterly over a period of four years, though certain options have been granted with alternative vesting schedules.
Restricted stock units granted under the 2011 Plan typically vest either 25% after 12 months and quarterly thereafter over the next three years, quarterly over a period of four years, or 12.5% after 6 months and quarterly thereafter for the next 3.5 years. Any portion of a restricted stock unit that is not vested on the date of a participant’s termination of service expires on such date.
Trulia 2005 Stock Incentive Plan
Trulia granted options under its 2005 Stock Incentive Plan (as amended, “the 2005 Plan”) until September 2012 when the 2005 Plan was terminated. Stock options issued prior to the plan termination remained outstanding in accordance with their terms. Options granted under the 2005 Plan generally vest at a rate of 25% after 12 months and ratably thereafter over the next 36 months and expire 10 years from the grant date. Certain options vest monthly over two to four years.
Trulia 2012 Equity Incentive Plan, as Amended and Restated
On September 19, 2012, Trulia’s 2012 Equity Incentive Plan (the “2012 Plan”) became effective. The 2012 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to employees, directors and consultants. Under the 2012 Plan, stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying stock at the grant date. The plan administrator determines the vesting period for each option award on the grant date, and the options generally expire 10 years from the grant date or such shorter term as may be determined for the options. No new equity awards will be made under the 2012 Plan.
Option Awards
The following table summarizes option award activity for the year ended December 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
|
7,950,882
|
|
|
39.53
|
|
|
|
|
|
Exercised
|
(2,918,053)
|
|
|
22.43
|
|
|
|
|
|
Forfeited or cancelled
|
(2,708,643)
|
|
|
41.77
|
|
|
|
|
|
Outstanding at December 31, 2019
|
29,634,296
|
|
|
35.95
|
|
|
6.28
|
|
331,107
|
|
Vested and exercisable at December 31, 2019
|
18,587,087
|
|
|
33.01
|
|
|
4.86
|
|
257,029
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Expected volatility
|
45% – 47%
|
|
|
42% – 45%
|
|
45% – 49%
|
Expected dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
Risk-free interest rate
|
1.60% – 2.53%
|
|
|
2.52% – 2.84%
|
|
1.67% – 2.06%
|
Weighted-average expected life
|
4.75 – 5.25 years
|
|
4.50 – 5.00 years
|
|
4.25 – 4.75 years
|
Weighted-average fair value of options granted
|
$16.52
|
|
|
$19.11
|
|
|
$14.51
|
|
As of December 31, 2019, there was a total of $169.1 million in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.8 years.
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $51.1 million, $161.4 million and $156.1 million, respectively. The fair value of options vested for the years ended December 31, 2019, 2018 and 2017 was $100.1 million, $87.7 million and $84.8 million, respectively.
Restricted Stock Units
The following table summarizes activity for restricted stock units for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
|
Weighted-
Average Grant-
Date Fair
Value
|
Unvested outstanding at January 1, 2019
|
5,266,324
|
|
|
$
|
42.19
|
|
Granted
|
5,313,377
|
|
|
38.18
|
|
Vested
|
(2,244,631)
|
|
|
40.04
|
|
Forfeited or cancelled
|
(1,282,303)
|
|
|
41.35
|
|
Unvested outstanding at December 31, 2019
|
7,052,767
|
|
|
40.01
|
|
The total fair value of vested restricted stock units was $89.9 million, $62.0 million and $43.7 million, respectively, for the years ended December 31, 2019, 2018 and 2017.
The fair value of the outstanding restricted stock units is based on the market value of our Class A common stock or Class C capital stock, as applicable on the date of grant, and will be recorded as share-based compensation expense over the vesting period. As of December 31, 2019, there was $260.0 million of total unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted-average period of 3.0 years.
Share-Based Compensation Expense
The following table presents the effects of share-based compensation expense in our consolidated statements of operations during the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cost of revenue
|
$
|
3,978
|
|
|
|
$
|
4,127
|
|
|
|
$
|
3,884
|
|
Sales and marketing
|
25,126
|
|
|
|
22,942
|
|
|
|
22,735
|
|
Technology and development
|
69,921
|
|
|
|
56,673
|
|
|
|
39,938
|
|
General and administrative
|
99,877
|
|
|
|
65,342
|
|
|
|
47,014
|
|
Total
|
$
|
198,902
|
|
|
|
$
|
149,084
|
|
|
|
$
|
113,571
|
|
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 year ended December 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 19. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares (including Class A common stock, Class B common stock and Class C capital stock) outstanding during the period. In the calculation of basic net loss per share, undistributed earnings are allocated assuming all earnings during the period were distributed.
Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares (including Class A common stock, Class B common stock and Class C capital stock) outstanding during the period and potentially dilutive Class A common stock and Class C capital stock equivalents, except in cases where the effect of the Class A common stock or Class C capital stock equivalent would be antidilutive. Potential Class A common stock and Class C capital stock equivalents consist of Class A common stock and Class C capital stock issuable upon exercise of stock options and Class A common stock and Class C capital stock underlying unvested restricted stock awards and unvested restricted stock units using the treasury stock method. Potential Class A common stock equivalents also include Class A common stock issuable upon conversion of the convertible senior notes due in 2020 using the if-converted method.
Since the Company expects to settle the principal amount of the outstanding convertible notes maturing in 2021, 2023, 2024 and 2026 in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread for each of the notes has a dilutive impact on diluted net income per share when the market price of the Company’s Class C capital stock at the end of the period exceeds the conversion price per share. The following table presents the conversion spread and conversion price per share of Class C capital stock for each of the convertible senior notes (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Conversion Spread
|
|
Conversion Price per Share
|
September 1, 2026
|
|
11,492
|
|
|
$
|
43.51
|
|
September 1, 2024
|
|
15,468
|
|
|
43.51
|
|
July 1, 2023
|
|
4,769
|
|
|
78.37
|
|
December 1, 2021
|
|
8,785
|
|
|
52.36
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Weighted-average Class A common stock and Class C capital stock option awards outstanding
|
19,183
|
|
|
|
22,736
|
|
|
|
27,998
|
|
Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding
|
6,765
|
|
|
|
4,949
|
|
|
|
4,262
|
|
Class A common stock issuable upon conversion of the convertible senior notes due in 2020
|
404
|
|
|
|
400
|
|
|
|
435
|
|
Class C capital stock issuable related to conversion spread on the 2024 and 2026 Notes
|
439
|
|
|
|
—
|
|
|
|
—
|
|
Total Class A common stock and Class C capital stock equivalents
|
26,791
|
|
|
|
28,085
|
|
|
|
32,695
|
|
In the event of liquidation, dissolution, distribution of assets or winding-up of the Company, the holders of all classes of common and capital stock have equal rights to receive all the assets of the Company after the rights of the holders of preferred stock have been satisfied. We have not presented net loss per share under the two-class method for our Class A common stock, Class B common stock and Class C capital stock because it would be the same for each class due to equal dividend and liquidation rights for each class.
Note 20. Commitments and Contingencies
Lease Commitments
We have entered into various non-cancelable operating lease agreements for certain of our office space and equipment with original lease periods expiring between 2020 and 2030. For additional information regarding our lease agreements, see Note 14.
Purchase Commitments
Purchase commitments primarily include various non-cancelable agreements to purchase content related to our mobile applications and websites and certain cloud computing services as well as homes we are under contract to purchase through Zillow Offers but that have not closed as of the respective date. The amounts due for non-cancelable purchase commitments excluding homes under contract as of December 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
Purchase Obligations
|
2020
|
$
|
65,375
|
|
2021
|
32,507
|
|
2022
|
507
|
|
2023
|
507
|
|
Total future purchase commitments
|
$
|
98,896
|
|
As of December 31, 2019, the value of homes under contract that have not closed was $163.4 million.
Letters of Credit
As of December 31, 2019 and 2018, 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 $10.2 million and $8.9 million, respectively, as of December 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. For the matters discussed below, we have not recorded any material accruals as of December 31, 2019 or 2018.
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 district court 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 October 7, 2019, the United States Supreme Court denied VHT’s petition for writ of certiorari seeking review of certain rulings by the Ninth Circuit Court of Appeals. On December 9, 2019, the Company filed a motion for summary judgment with the district court seeking a ruling that VHT’s images are a compilation, or in the alternative, seeking a dismissal of the case based on a recent United States Supreme Court ruling. We do not believe there is a reasonable possibility that a material loss may be incurred related to this complaint.
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 in November 2018, the plaintiffs filed a second consolidated amended complaint, which we moved to dismiss in December 2018. On April 19, 2019, our motion to dismiss the second consolidated amended complaint was denied, and we filed our answer to the second amended complaint on May 3, 2019. On October 11, 2019, plaintiffs filed a motion for class certification. We have denied the allegations of wrongdoing and intend to vigorously defend the claims in this lawsuit. We do not believe a loss related to this complaint is probable.
In October and November 2017 and January and February 2018, four shareholder derivative lawsuits were filed in the U.S. District Court for the Western District of Washington and the Superior Court of the State of Washington, King County, against certain of our executive officers and directors seeking unspecified damages on behalf of the Company and certain other relief, such as reform to corporate governance practices. The plaintiffs in the derivative suits (in which the Company is a nominal defendant) allege, among other things, that the defendants breached their fiduciary duties in connection with oversight of the Company’s public statements and legal compliance, and as a result of the breach of such fiduciary duties, the Company was damaged, and defendants were unjustly enriched. Certain of the plaintiffs also allege, among other things, violations of Section 14(a) of the Securities Exchange Act of 1934 and waste of corporate assets. On February 5, 2018, the U.S. District Court for the Western District of Washington consolidated the two shareholder derivative lawsuits pending in that court. On February 16, 2018, the Superior Court of the State of Washington, King County, consolidated the two shareholder derivative lawsuits pending in that court. All four of the shareholder derivative lawsuits were stayed until our motion to dismiss the second consolidated amended complaint in the securities class action lawsuit discussed above was denied in April 2019. On July 8, 2019, the plaintiffs in the consolidated federal derivative lawsuit filed a consolidated shareholder derivative complaint, which we moved to dismiss on August 22, 2019. We do not believe a loss is probable related to these lawsuits.
On September 17, 2019, International Business Machines Corporation (“IBM”) filed a complaint against us in the United States District Court for the Central District of California, alleging, among other things, that the Company has infringed and continues to willfully infringe seven patents held by IBM and seeks unspecified damages, including a request that the amount of compensatory damages be trebled, injunctive relief and costs and reasonable attorneys’ fees. On December 2, 2019, IBM filed an amended complaint. On December 16, 2019, the Company filed a motion to transfer venue and a motion to dismiss the complaint. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit. There is a reasonable possibility that a loss may be incurred related to this complaint; however, the possible loss or range of loss is not estimable.
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 21. 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 $0.3 million in expenses pursuant to the Charter Service Agreement for the year ended December 31, 2019.
Note 22. 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 consolidated balance sheets and was $3.6 million and $3.9 million, respectively, as of December 31, 2019 and December 31, 2018.
Note 23. 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 $20.8 million, $16.0 million and $12.3 million, respectively, for the years ended December 31, 2019, 2018 and 2017.
Note 24. 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 Homes, Internet, Media & Technology (“IMT”) and Mortgages segments.
The Homes segment includes the financial results from Zillow Group’s purchase and sale of homes directly. The IMT segment includes the financial results for the Premier Agent, Rentals and new construction marketplaces, dotloop, and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals. The Mortgages segment includes financial results for advertising sold to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and the sale of mortgages on the secondary market, as well as Mortech mortgage software solutions.
Revenue and costs are directly attributed to our segments when possible. However, due to the integrated structure of our business, certain costs incurred by one segment may benefit the other segments. These costs primarily include headcount-related expenses, general and administrative expenses including executive, finance, accounting, legal, human resources, recruiting, and facilities costs, product development and data acquisition costs and marketing and advertising costs. These costs are allocated to each segment based on the estimated benefit each segment receives from such expenditures.
The chief executive officer reviews information about our revenue categories as well as statement of operations data inclusive of loss before income taxes by segment. This information is included in the following tables for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Homes
|
|
IMT
|
|
Mortgages
|
|
Homes
|
|
IMT
|
|
Mortgages
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes
|
$
|
1,365,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52,365
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Premier Agent
|
—
|
|
|
923,876
|
|
|
—
|
|
|
—
|
|
|
898,332
|
|
|
—
|
|
|
—
|
|
|
761,594
|
|
|
—
|
|
Rentals
|
—
|
|
|
164,173
|
|
|
—
|
|
|
—
|
|
|
134,587
|
|
|
—
|
|
|
—
|
|
|
102,544
|
|
|
—
|
|
Other
|
—
|
|
|
188,847
|
|
|
—
|
|
|
—
|
|
|
168,224
|
|
|
—
|
|
|
—
|
|
|
132,065
|
|
|
—
|
|
Mortgages
|
—
|
|
|
—
|
|
|
100,691
|
|
|
—
|
|
|
—
|
|
|
80,046
|
|
|
—
|
|
|
—
|
|
|
80,591
|
|
Total revenue
|
1,365,250
|
|
|
1,276,896
|
|
|
100,691
|
|
|
52,365
|
|
|
1,201,143
|
|
|
80,046
|
|
|
—
|
|
|
|
996,203
|
|
|
|
80,591
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
1,315,345
|
|
|
98,522
|
|
|
18,154
|
|
|
49,392
|
|
|
96,693
|
|
|
7,505
|
|
|
—
|
|
|
80,310
|
|
|
4,893
|
|
Sales and marketing
|
171,634
|
|
|
488,909
|
|
|
53,585
|
|
|
17,134
|
|
|
502,785
|
|
|
32,702
|
|
|
—
|
|
|
415,739
|
|
|
32,462
|
|
Technology and development
|
78,994
|
|
|
365,769
|
|
|
32,584
|
|
|
21,351
|
|
|
363,712
|
|
|
25,755
|
|
|
—
|
|
|
297,007
|
|
|
22,978
|
|
General and administrative
|
81,407
|
|
|
243,636
|
|
|
41,133
|
|
|
22,002
|
|
|
220,564
|
|
|
19,587
|
|
|
—
|
|
|
192,581
|
|
|
18,235
|
|
Impairment costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
75,000
|
|
|
4,000
|
|
|
—
|
|
|
161,850
|
|
|
12,150
|
|
Acquisition-related costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
2,305
|
|
|
—
|
|
|
463
|
|
|
—
|
|
Integration costs
|
—
|
|
|
—
|
|
|
650
|
|
|
—
|
|
|
—
|
|
|
2,015
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total costs and expenses
|
1,647,380
|
|
|
1,196,836
|
|
|
146,106
|
|
|
109,879
|
|
|
1,258,781
|
|
|
93,869
|
|
|
—
|
|
|
1,147,950
|
|
|
90,718
|
|
Income (loss) from operations
|
(282,130)
|
|
|
80,060
|
|
|
(45,415)
|
|
|
(57,514)
|
|
|
(57,638)
|
|
|
(13,823)
|
|
|
—
|
|
|
(151,747)
|
|
|
(10,127)
|
|
Segment other income
|
—
|
|
|
—
|
|
|
1,409
|
|
|
—
|
|
|
—
|
|
|
244
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Segment interest expense
|
(29,990)
|
|
|
—
|
|
|
(956)
|
|
|
(2,177)
|
|
|
—
|
|
|
(132)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income (loss) before income taxes (1)
|
$
|
(312,120)
|
|
|
$
|
80,060
|
|
|
$
|
(44,962)
|
|
|
$
|
(59,691)
|
|
|
$
|
(57,638)
|
|
|
$
|
(13,711)
|
|
|
$
|
—
|
|
|
$
|
(151,747)
|
|
|
$
|
(10,127)
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Total segment loss before income taxes
|
$
|
(277,022)
|
|
|
$
|
(131,040)
|
|
|
$
|
(161,874)
|
|
Corporate interest expense
|
(70,846)
|
|
|
(38,946)
|
|
|
(27,517)
|
|
Corporate other income
|
38,249
|
|
|
19,026
|
|
|
5,385
|
|
Consolidated loss before income taxes
|
$
|
(309,619)
|
|
|
$
|
(150,960)
|
|
|
$
|
(184,006)
|
|
Certain corporate items are not directly attributable to any of our segments, including interest income earned on our short-term investments included in Other income and interest costs on our convertible senior notes included in Interest expense.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, with the participation of our management, and under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.
We intend to regularly review and evaluate the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and to improve these controls and procedures over time and to correct any deficiencies that we may discover in the future. While we believe the present design of our disclosure controls and procedures and internal control over financial reporting are effective, future events affecting our business may cause us to modify our controls and procedures.
The Company’s independent registered public accounting firm has issued an attestation report regarding its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.