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ZILLOW C

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Zillow C : GROUP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/07/2019 | 04:45pm EDT
The following discussion of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial
statements and the related notes included elsewhere in this Quarterly Report on
Form 10-Q. In addition to historical financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results may differ materially from those described in or
implied by any forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this Quarterly Report on Form 10-Q, including in the section titled "Note
Regarding Forward-Looking Statements," and also those factors discussed in Part
I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended
December 31, 2018.
Overview of our Business
Zillow Group, Inc. houses one of the largest portfolios of real estate brands on
mobile and the web. Zillow Group is committed to leveraging its proprietary
data, technology and innovations to make home buying, selling, financing and
renting a seamless, on-demand experience for consumers. As its flagship brand,
Zillow now offers a fully integrated home shopping experience that includes
access to for sale and rental listings, Zillow Offers, which provides a new,
hassle-free way to buy and sell homes directly through Zillow, and Zillow Home
Loans, Zillow's affiliated lender that provides an easy way to receive mortgage
pre-approvals and financing. Other consumer brands include Trulia, StreetEasy,
HotPads, Naked Apartments, RealEstate.com and Out East. In addition, Zillow
Group provides a comprehensive suite of marketing software and technology
solutions to help real estate professionals maximize business opportunities and
connect with millions of consumers. Zillow Group also operates a number of
business brands for real estate, rental and mortgage professionals, including
Mortech, dotloop, Bridge Interactive and New Home Feed.
Reportable Segments and Revenue Overview
As of January 1, 2019, Zillow Group has three reportable segments: the Internet,
Media & Technology ("IMT") segment, the Homes segment and the Mortgages segment.
The IMT segment includes the financial results for the Premier Agent, Rentals
and new construction marketplaces, as well as dotloop, display and other
advertising and business software solutions. The Homes segment includes the
financial results from Zillow Group's purchase and sale of homes directly
through the Zillow Offers service. The Mortgages segment includes the financial
results for advertising sold to mortgage lenders and other mortgage
professionals, mortgage originations through Zillow Home Loans and our Mortech
mortgage software solutions.
Premier Agent revenue is generated by the sale of advertising services, as well
as marketing and technology products and services, to help real estate agents
and brokers grow and manage their businesses. We offer these products and
services through our Premier Agent and Premier Broker programs. Premier Agent
and Premier Broker advertising products, which include the delivery of
impressions and validated consumer connections, or leads, are sold on a share of
voice basis. Impressions and leads are distributed to Premier Agents and Premier
Brokers in proportion to their share of voice, or an agent advertiser's share of
total advertising purchased in a particular zip code. Impressions are delivered
when an advertisement of a Premier Agent or Premier Broker appears on pages
viewed by users of our mobile applications and websites and connections are
delivered when consumer contact information is provided to Premier Agents and
Premier Brokers. Connections and impressions are each provided as part of our
advertising services for Premier Agent and Premier Brokers; we do not charge a
separate fee for these consumer leads.
Rentals revenue primarily includes advertising sold to property managers,
landlords and other rental professionals on a cost per lead, cost per click,
cost per lease or cost per listing basis. Rentals revenue also includes revenue
generated through our rental applications product, whereby potential renters can
submit applications to multiple properties over a 30-day period for a flat
service fee.
Other revenue primarily includes revenue generated by new construction and
display advertising, as well as revenue from the sale of various other
advertising and business technology solutions for real estate professionals,
including dotloop. New construction revenue primarily includes advertising
services sold to home builders on a cost per residential community basis.
Display revenue primarily consists of graphical mobile and web advertising sold
to advertisers promoting their brands on our mobile applications and websites.
In our Homes segment, we generate revenue from the resale of homes on the open
market through our Zillow Offers service. We began buying homes through the
Zillow Offers service in April 2018, and we began selling homes in July 2018.
In our Mortgages segment, we generate revenue from advertising sold to mortgage
lenders and other mortgage professionals on a cost per lead or subscription
basis, including our Connect and Custom Quote services, through mortgage
originations and the related sale of mortgages on the secondary market through
Zillow Home Loans and from Mortech, which

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provides subscription-based mortgage software solutions, including a product and
pricing engine and lead management platform.
During the three months ended June 30, 2019, we generated total revenue of
$599.6 million, as compared to $325.2 million in the three months ended June 30,
2018, an increase of 84%. This increase was primarily the result of the addition
of $248.9 million in Homes revenue, a $9.4 million, or 28% increase in Rentals
revenue, a $7.7 million, or 40% increase in Mortgages revenue, and a $7.3
million, or 17% increase in Other revenue. There were approximately 194.3
million average monthly unique users of our mobile applications and websites for
the three months ended June 30, 2019, representing year-over-year growth of 4%.
Visits increased 14% to 2,181.4 million for the three months ended June 30, 2019
from 1,920.6 million for the three months ended June 30, 2018.
As of June 30, 2019, we had 4,880 full-time employees compared to 4,336
full-time employees as of December 31, 2018.
Key Metrics
Management has identified unique users and visits as relevant to investors' and
others' assessment of our financial condition and results of operations.
Unique Users
Measuring unique users is important to us because much of our revenue depends in
part on our ability to enable real estate, rental and mortgage professionals to
connect with our consumer users - home buyers and sellers, renters, and
individuals with or looking for a mortgage. Growth in consumer traffic to our
mobile applications and websites increases the number of impressions, clicks,
connections, leads and other events we can monetize to generate revenue. For
example, Premier Agent revenue and display revenue depend on advertisements
being served to users of our mobile applications and websites, and our Homes
segment revenue depends in part on users accessing our mobile applications and
websites to engage in the sale and purchase of homes with Zillow Group.
We count a unique user the first time an individual accesses one of our mobile
applications using a mobile device during a calendar month and the first time an
individual accesses one of our websites using a web browser during a calendar
month. If an individual accesses our mobile applications using different mobile
devices within a given month, the first instance of access by each such mobile
device is counted as a separate unique user. If an individual accesses more than
one of our mobile applications within a given month, the first access to each
mobile application is counted as a separate unique user. If an individual
accesses our websites using different web browsers within a given month, the
first access by each such web browser is counted as a separate unique user. If
an individual accesses more than one of our websites in a single month, the
first access to each website is counted as a separate unique user since unique
users are tracked separately for each domain. Zillow, StreetEasy, HotPads, Naked
Apartments and RealEstate.com measure unique users with Google Analytics, and
Trulia measures unique users with Adobe Analytics.
                                 Three Months Ended
                                      June 30,            2018 to 2019
                                   2019           2018      % Change
                                   (in millions)
Average Monthly Unique Users     194.3           186.1         4 %


Visits
The number of visits is an important metric because it is an indicator of
consumers' level of engagement with our mobile applications, websites and other
services. We believe highly engaged consumers are more likely to be
transaction-ready real estate market participants and therefore more
sought-after by our real estate advertisers or more likely to participate in our
Zillow Offers program or use Zillow Homes Loans.
We define a visit as a group of interactions by users with the Zillow, Trulia,
StreetEasy and RealEstate.com mobile applications and websites, as we monetize
our Premier Agent and Premier Broker products on these mobile applications and
websites. A single visit can contain multiple page views and actions, and a
single user can open multiple visits across domains, web browsers, desktop or
mobile devices. Visits can occur on the same day, or over several days, weeks or
months.
Zillow, StreetEasy and RealEstate.com measure visits with Google Analytics, and
Trulia measures visits with Adobe Analytics. Visits to Trulia end after thirty
minutes of user inactivity. Visits to Zillow, StreetEasy and RealEstate.com end
either:

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(i) after thirty minutes of user inactivity or at midnight; or (ii) through a
campaign change. A visit ends through a campaign change if a visitor arrives via
one campaign or source (for example, via a search engine or referring link on a
third-party website), leaves the mobile application or website, and then returns
via another campaign or source.
          Three Months Ended
               June 30,           2018 to 2019
           2019          2018       % Change
            (in millions)
Visits   2,181.4       1,920.6          14 %


Basis of Presentation
Revenue
We recognize revenue when (or as) we satisfy our performance obligations by
transferring control of promised products or services to our customers in an
amount that reflects the consideration to which we expect to be entitled in
exchange for those products or services.
In our IMT segment, we generate revenue from the sale of advertising services
and our suite of marketing software and technology solutions to residential real
estate businesses and professionals. These professionals include real estate,
rental and new construction professionals and brand advertisers. Our three
primary revenue categories within our IMT segment are Premier Agent, Rentals and
Other.
In our Homes segment, we generate revenue from the resale of homes on the open
market through our Zillow Offers program.
In our Mortgages segment, we generate revenue from the sale of advertising
services to mortgage lenders and other mortgage professionals, mortgage
originations and the related sale of mortgages on the secondary market through
Zillow Home Loans, as well as Mortech mortgage software solutions.
Premier Agent Revenue. Premier Agent revenue is derived from our Premier Agent
and Premier Broker programs. Our Premier Agent and Premier Broker programs offer
a suite of marketing and business technology products and services to help real
estate agents and brokers achieve their advertising goals, while growing and
managing their businesses and brands. All Premier Agents and Premier Brokers
receive access to a dashboard portal on our mobile application or website that
provides individualized program performance analytics, our customer relationship
management, or CRM, tool that captures detailed information about each contact
made with a Premier Agent or Premier Broker through our mobile and web platforms
and our account management tools. 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
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 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 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

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control of the performance obligations to the customer over time. We have not
allocated the transaction price to each individual 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 the leads. With this pricing model, the
transaction price represents variable consideration, as the amount to which we
expect to be entitled varies based on the number of validated leads that convert
into real estate transactions and the value of those transactions. As our
experience with this pricing model is limited, we fully constrain the estimated
variable consideration. When a real estate transaction is closed with a Flex
lead and payment is made, the uncertainty is resolved, and revenue is recognized
in the period for the satisfied performance obligations. We will continuously
reevaluate this determination and will begin estimating variable consideration
and recording revenue as performance obligations are transferred when we have
concluded we are able to make a reliable estimate.
Rentals Revenue. Rentals revenue includes the sale of advertising 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 or cost per listing basis. We recognize revenue as leads
or clicks are provided to rental professionals, or as listings from rental
professionals are published on our mobile applications and websites, which is
the amount for which we have the right to invoice. The number of leases
generated through our rentals marketplace during the period is accounted for as
variable consideration, and we estimate these amounts based on the expected
number of qualified leases secured during the period. We do not believe that a
significant reversal in the amount of cumulative revenue recognized will occur
once the uncertainty related to the number of leases secured is subsequently
resolved.
Beginning in 2018, Rentals revenue also includes revenue generated from our
rental applications product through which potential renters can submit
applications to multiple rental properties over a 30-day period for a flat
service fee. We recognize revenue for the rental applications product on a
straight-line basis during the contractual period over which the customer has
the right to access and submit the rental application.
Other Revenue. Other revenue primarily includes revenue generated by new
construction and display, as well as revenue from the sale of various other
marketing and business products and services to real estate professionals. Our
new construction marketing solutions allow home builders to showcase their
available inventory to home shoppers. New construction revenue primarily
includes revenue generated by advertising sold to builders on a cost per
residential community basis, and revenue is recognized on a straight-line basis
during the contractual period over which the communities are advertised on our
mobile applications and websites. New construction revenue also includes revenue
generated on a cost per impression basis whereby revenue is recognized on a
straight-line basis during the contractual period over which the advertising
impressions are delivered. 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.
Homes Revenue. Homes revenue is derived from the resale of homes on the open
market through our Zillow Offers program. Homes revenue is recognized at the
time of the closing of the home sale when title to and possession of the
property are transferred to the buyer. The amount of revenue recognized for each
home sale is equal to the full sale price of the home net of resale concessions
and credits to the buyer and does not reflect real estate agent commissions,
closing or other costs associated with the transaction.
Mortgages Revenue. Mortgages revenue primarily includes marketing products sold
to mortgage professionals on a cost per lead basis, including our Custom Quote
and a portion of our Connect services, and on a subscription basis, including a
portion of our Connect service. Zillow Group operates Custom Quote and Connect
through its wholly owned subsidiary, Zillow 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.

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Consumers who request rates for mortgage loans in Custom Quotes are presented
with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user
contacts a mortgage professional through our mortgages platform, which is the
amount for which we have the right to invoice. For our subscription product, the
opportunity to receive a consumer contact is based on the mortgage
professional's relative share of voice in a geographic county. When a consumer
submits a contact, we contact a group of subscription mortgage professionals via
text message, and the first mortgage professional to respond receives the
consumer contact information. We recognize revenue based on the contractual
spend recognized on a straight-line basis during the contractual period over
which the service is provided. This methodology best depicts how we satisfy our
performance obligation to subscription customers, as we continuously transfer
control of the performance obligation to the customer throughout the contractual
period.
Beginning in the fourth quarter of 2018, mortgages revenue also includes revenue
generated by Zillow Home Loans, Zillow's affiliated mortgage lender. We elect
the fair value option for our mortgage loans held for sale, which are initially
recorded at fair value based on either sale commitments or current market quotes
and are adjusted for subsequent changes in fair value until the loans are
closed. Net origination costs and fees associated with mortgage loans are
recognized as incurred at the time of origination. We sell substantially all of
the mortgages we originate and the related servicing rights to third-party
purchasers in the secondary mortgage market within a short period of time after
origination.
Mortgages revenue also includes revenue generated by Mortech, which provides
subscription-based mortgage software solutions, including a product and pricing
engine and lead management platform, for which we recognize revenue on a
straight-line basis during the contractual period over which the services are
provided.
Costs and Expenses
Cost of Revenue. Our cost of revenue consists of expenses related to operating
our mobile applications and websites, including associated headcount expenses,
such as salaries, benefits, bonuses and share-based compensation expense, as
well as revenue-sharing costs related to our commercial business relationships,
depreciation expense and costs associated with the operation of our data center
and mobile applications and websites. For our IMT and Mortgages segment, cost of
revenue also includes credit card fees and ad serving costs paid to third
parties. For our Homes segment, our cost of revenue also consists of the
consideration paid to acquire, make certain repairs and updates to, and sell
each home, including associated overhead costs, as well as inventory valuation
adjustments. For our Mortgages segment, our cost of revenue consists of lead
acquisition costs and direct costs to originate loans, including underwriting
and processing costs.
Sales and Marketing. Sales and marketing expenses consist of advertising costs
and other sales expenses related to promotional and marketing activities,
headcount expenses, including salaries, commissions, benefits, bonuses and
share-based compensation expense for sales, sales support, customer support,
marketing and public relations employees and depreciation expense. For our Homes
segment, sales and marketing expenses also consist of selling costs, such as
real estate agent commissions, escrow and title fees, and staging costs, as well
as holding costs, including utilities, taxes and maintenance. For our Mortgages
segment, sales and marketing expenses also include headcount expenses for loan
officers and specialists supporting Zillow Home Loans.
Technology and Development. Technology and development expenses consist of
headcount expenses, including salaries, benefits, bonuses and share-based
compensation expense for individuals engaged in the design, development and
testing of our mobile applications and websites and the tools and applications
that support our products. Technology and development expenses also include
equipment and maintenance costs. Technology and development expenses also
include amortization costs related to capitalized website and development
activities, amortization of software, amortization of certain intangibles and
other data agreement costs related to the purchase of data used to populate our
mobile applications and websites, and amortization of intangible assets recorded
in connection with acquisitions, including developed technology and customer
relationships, amongst others. Technology and development expenses also include
depreciation expense.
General and Administrative. General and administrative expenses consist of
headcount expenses, including salaries, benefits, bonuses and share-based
compensation expense for executive, finance, accounting, legal, human resources,
recruiting, corporate information technology costs and other administrative
support. General and administrative expenses also include legal settlement costs
and estimated legal liabilities, legal, accounting and other third-party
professional service fees, rent expense, depreciation expense and bad debt
expense.
Acquisition-related Costs. Acquisition-related costs consist of investment
banking, legal, accounting, tax and regulatory filing fees associated with
effecting acquisitions.

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Integration Costs. Integration costs consist of expenses incurred to incorporate
operations, systems, technology and rights and responsibilities of acquired
companies, during both pre-closing and post-closing periods, into Zillow Group's
business. For the three and six month periods ended June 30, 2019, integration
costs primarily include consulting-related expenses incurred in connection with
the integration of Zillow Home Loans.
Other Income
Other income consists primarily of interest income earned on our cash, cash
equivalents and short-term investments. For our Mortgages segment, other income
includes interest income earned on mortgage loans held for sale.
Interest Expense
Our corporate interest expense consists of interest on Trulia's Convertible
Senior Notes due in 2020 (the "2020 Notes") we guaranteed in connection with our
February 2015 acquisition of Trulia, interest on the Convertible Senior Notes
due in 2021 (the "2021 Notes") we issued in December 2016 and interest on the
Convertible Senior Notes due in 2023 (the "2023 Notes") we issued in July 2018.
Interest is payable on the 2020 Notes at the rate of 2.75% semi-annually on
June 15 and December 15 of each year. Interest is payable on the 2021 Notes at
the rate of 2.00% semi-annually on June 1 and December 1 of each year. Interest
is payable on the 2023 Notes at the rate of 1.50% semi-annually on January 1 and
July 1 of each year.
For our Homes segment, interest expense includes interest on borrowings, funding
fees and other fees, including the amortization of deferred issuance costs, on
our revolving credit facilities related to our Zillow Offers business.
Borrowings on our revolving credit facilities bear interest at a floating rate
based on the one-month LIBOR plus an applicable margin, as defined in the credit
agreements.
For our Mortgages segment, interest expense includes interest on the warehouse
lines of credit acquired as part of the acquisition of Zillow Home Loans. Each
warehouse line of credit provides for a current and maximum borrowing capacity
of $50.0 million, or $100.0 million in total. Borrowings on the warehouse lines
of credit bear interest at the one-month LIBOR rate plus an applicable margin,
as defined in the credit agreements governing the warehouse lines of credit.
Income Taxes
We are subject to federal and state income taxes in the United States and in
Canada. As of June 30, 2019 and December 31, 2018, we have provided a valuation
allowance against our net deferred tax assets that we believe, based on the
weight of available evidence, are not more likely than not to be realized.
Therefore, no material current tax liability or expense has been recorded in the
condensed consolidated financial statements. We have accumulated federal tax
losses of approximately $1,081.7 million as of December 31, 2018, which are
available to reduce future taxable income. We have accumulated state tax losses
of approximately $32.5 million (tax effected) as of December 31, 2018.

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Results of Operations
In 2018, our business model evolved significantly with the launch of Zillow
Offers in April and the acquisition of Zillow Home Loans in October. Zillow
Offers, for example, is a cash- and inventory-intensive business with a high
cost of revenue as compared with other parts of our operations; the cost of
revenue includes the amount we pay to purchase homes. Revenue for the Homes
segment includes the full sale prices of homes less resale concessions and
credits to the buyer, and does not reflect real estate agent commissions,
closing or other associated costs. As a result of this evolution of our business
model, financial performance for prior year periods may not be indicative of
future performance.
The following tables present our results of operations for the periods indicated
and as a percentage of total revenue:
                                              Three Months Ended                Six Months Ended
                                                   June 30,                         June 30,
                                            2019               2018            2019           2018
                                              (in thousands, except per share data, unaudited)
Statements of Operations Data:
Revenue:
IMT                                    $    323,669$    305,941$  621,941$  586,797
Homes                                       248,924                  -        377,396              -
Mortgages                                    26,985             19,305         54,345         38,328
Total revenue                               599,578            325,246      1,053,682        625,125
Cost of revenue (exclusive of
amortization) (1)(2):
IMT                                          26,059             24,290         50,310         46,884
Homes                                       240,732                  -        363,151             86
Mortgages                                     4,430              1,237          9,108          2,476
Total cost of revenue                       271,221             25,527        422,569         49,446
Sales and marketing (1)                     187,433            147,727        349,020        285,018
Technology and development (1)              120,330            100,376        228,100        194,309
General and administrative (1)               82,839             60,579        178,613        116,652
Acquisition-related costs                         -                632              -            659
Integration costs                               293                  -            645              -
Total costs and expenses                    662,116            334,841      1,178,947        646,084
Loss from operations                        (62,538 )           (9,595 )     (125,265 )      (20,959 )
Other income                                  9,458              3,089         18,626          5,535
Interest expense                            (18,897 )           (7,187 )      (35,363 )      (14,260 )
Loss before income taxes                    (71,977 )          (13,693 )     (142,002 )      (29,684 )
Income tax benefit                                -             10,600          2,500          8,000
Net loss                               $    (71,977 )$     (3,093 )$ (139,502 )$  (21,684 )
Net loss per share - basic and diluted $      (0.35 )$      (0.02 )$    (0.68 )$    (0.11 )
Weighted-average shares outstanding -
basic and diluted                           205,754            194,155        205,137        192,807
Other Financial Data:
Adjusted EBITDA (3)                    $      2,297$     56,000$   26,219$  102,310



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                                               Three Months Ended            Six Months Ended
                                                    June 30,                     June 30,
                                                2019           2018         2019          2018
                                                          (in thousands, unaudited)
(1) Includes share-based compensation as
follows:
Cost of revenue                            $        936$  1,256$   1,816$   2,211
Sales and marketing                               6,801        6,340        12,451        11,502
Technology and development                       18,399       14,347        33,908        25,889
General and administrative                       17,496       17,000        61,581        30,082
Total                                      $     43,632$ 38,943$ 109,756$  69,684
(2) Amortization of website development
costs and intangible assets included in
technology and development                 $     14,656$ 21,020$  29,056$  43,569
(3) See "Adjusted EBITDA" below for more information and for a reconciliation of Adjusted EBITDA
to net loss, the most directly comparable financial measure calculated and presented in accordance
with U.S. generally accepted accounting principles, or GAAP.



                                                  Three Months Ended             Six Months Ended
                                                       June 30,                      June 30,
                                                 2019            2018           2019           2018
                                                                    (unaudited)
Percentage of Revenue:
Revenue:
IMT                                                54  %            94  %         59  %           94  %
Homes                                              42                0            36               0
Mortgages                                           5                6             5               6
Total revenue                                     100              100           100             100
Cost of revenue (exclusive of amortization):
IMT                                                 4                8             5               8
Homes                                              40                0            34               -
Mortgages                                           1                -             1               -
Total cost of revenue                              45                8            40               8
Sales and marketing                                31               45            33              46
Technology and development                         20               31            22              31
General and administrative                         14               19            17              19
Acquisition-related costs                           0                -             0               -
Integration costs                                   -                0             -               0
Total costs and expenses                          110              103           112             103
Loss from operations                              (10 )             (3 )         (12 )            (3 )
Other income                                        2                1             2               1
Interest expense                                   (3 )             (2 )          (3 )            (2 )
Loss before income taxes                          (12 )             (4 )         (13 )            (5 )
Income tax benefit                                  0                3             -               1
Net loss                                          (12 )%            (1 )%        (13 )%           (3 )%


Adjusted EBITDA
To provide investors with additional information regarding our financial
results, we have disclosed Adjusted EBITDA, a non-GAAP financial measure, within
this Quarterly Report on Form 10-Q. We have provided a reconciliation below of
Adjusted EBITDA to net loss, the most directly comparable GAAP financial
measure.

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We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q as it is
a key metric used by our management and board of directors to measure operating
performance and trends and to prepare and approve our annual budget. In
particular, the exclusion of certain expenses in calculating Adjusted EBITDA
facilitates operating performance comparisons on a period-to-period basis.
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•        Adjusted EBITDA does not reflect our cash expenditures or future
         requirements for capital expenditures or contractual commitments;

• Adjusted EBITDA does not reflect changes in, or cash requirements for,

our working capital needs;

• Adjusted EBITDA does not consider the potentially dilutive impact of

         share-based compensation;


•        Although depreciation and amortization are non-cash charges, the assets
         being depreciated and amortized may have to be replaced in the future,
         and Adjusted EBITDA does not reflect cash capital expenditure
         requirements for such replacements or for new capital expenditure
         requirements;

• Adjusted EBITDA does not reflect acquisition-related costs;

• Adjusted EBITDA does not reflect interest expense or other income;

• Adjusted EBITDA does not reflect income taxes; and

• Other companies, including companies in our own industry, may calculate

         Adjusted EBITDA differently than we do, limiting its usefulness as a
         comparative measure.


Because of these limitations, you should consider Adjusted EBITDA alongside
other financial performance measures, including various cash flow metrics, net
loss and our other GAAP results.
The following table presents a reconciliation of Adjusted EBITDA to net loss for
each of the periods presented:
                                           Three Months Ended             Six Months Ended
                                                June 30,                      June 30,
                                           2019           2018           2019           2018
                                                       (in thousands, unaudited)
Reconciliation of Adjusted EBITDA to
Net Loss:
Net loss                               $  (71,977 )$   (3,093 )$ (139,502 )$  (21,684 )
Other income                               (9,458 )       (3,089 )      (18,626 )       (5,535 )
Depreciation and amortization expense      21,203         26,020         41,728         52,926
Share-based compensation expense           43,632         38,943        109,756         69,684
Acquisition-related costs                       -            632              -            659
Interest expense                           18,897          7,187         35,363         14,260
Income tax benefit                              -        (10,600 )       (2,500 )       (8,000 )
Adjusted EBITDA                        $    2,297$   56,000$   26,219$  102,310



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Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Revenue
The following table presents Zillow Group's revenue by category and by segment
for the periods presented (in thousands, unaudited):
                          Three Months Ended
                               June 30,           2018 to 2019
                          2019          2018        % Change
Percentage of Revenue:
IMT Revenue:
Premier Agent          $  231,961$ 230,885            - %
Rentals                    42,670       33,288           28 %
Other                      49,038       41,768           17 %
Total IMT revenue         323,669      305,941            6 %
Homes                     248,924            -          N/A
Mortgages                  26,985       19,305           40 %
Total revenue          $  599,578$ 325,246           84 %

The following table presents Zillow Group's revenue categories as percentages of total revenue for the periods presented (unaudited):

                               Three Months Ended
                                    June 30,
                               2019         2018
Percentage of Total Revenue:
IMT Revenue:
Premier Agent                    39 %         71 %
Rentals                           7           10
Other                             8           13
Total IMT revenue                54           94
Homes                            42            0
Mortgages                         5            6
Total revenue                   100 %        100 %


Total revenue increased by $274.3 million, or 84%, for the three months ended
June 30, 2019 compared to the three months ended June 30, 2018. The increase in
total revenue was primarily attributable to our Zillow Offers business, which
began selling homes in July of 2018. Homes revenue was $248.9 million for the
three months ended June 30, 2019. There were approximately 194.3 million average
monthly unique users of our mobile applications and websites for the three
months ended June 30, 2019 compared to 186.1 million average monthly unique
users for the three months ended June 30, 2018, representing year-over-year
growth of 4%. Visits increased 14% to 2,181.4 million for the three months ended
June 30, 2019 from 1,920.6 million for the three months ended June 30, 2018. The
increases in unique users and visits increased the number of impressions, leads,
clicks and other events we monetized across our revenue categories.

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IMT Segment
Premier Agent Revenue. Premier Agent revenue grew to $232.0 million for the
three months ended June 30, 2019 from $230.9 million for the three months ended
June 30, 2018, an increase of $1.1 million. Premier Agent revenue was positively
impacted by an increase in visits. As discussed above, visits increased 14% to
2,181.4 million for the three months ended June 30, 2019 from 1,920.6 million
for the three months ended June 30, 2018. The increase in visits increased the
number of impressions and leads we could monetize in our Premier Agent
marketplace. Year-over-year Premier Agent revenue growth slowed, which we
believe was due to changes made to our Premier Agent and Premier Broker
advertising programs in 2018 to improve lead quality and consumer connections.
We believe these changes contributed to an increase in advertiser churn, or exit
from our advertising platform. Advertiser churn has normalized throughout the
first half of 2019.
Premier Agent revenue per visit decreased by 12% to $0.106 for the three months
ended June 30, 2019 from $0.120 for the three months ended June 30, 2018. We
calculate Premier Agent revenue per visit by dividing the revenue generated by
our Premier Agent and Premier Broker programs in the period by the number of
visits in the period. We believe the decrease in Premier Agent revenue per visit
was primarily a result of changes we made to our Premier Agent and Premier
Broker programs in 2018. For example, in April 2018, we began testing a new
method of consumer lead validation and distribution to our Premier Agent and
Premier Broker advertisers. A validated consumer connection is made when a
consumer who is interested in connecting with a real estate professional does
not select a specific Premier Agent or Premier Broker with whom they want to
connect through one of our mobile applications or websites; applying the new
model, these validated consumer leads are distributed to Premier Agents and
Premier Brokers in proportion to their share of voice, or an agent advertiser's
share of total advertising purchased in a particular zip code. This transition
to the new lead validation and distribution process resulted in a decrease in
the total number of leads received by some advertisers and increased advertiser
churn in the third and fourth quarters of 2018 as current and prospective
Premier Agents and Premier Brokers evaluated the value of these higher-quality
leads and market-based pricing continued to take effect. We believe we made
appropriate adjustments to the Premier Agent and Premier Broker programs to help
address this advertiser churn, by, for example, decreasing the number of
screening questions posed to consumers during the consumer lead validation
process, in an effort to return to prior lead volumes, and setting price caps on
the cost per impression and cost per lead paid by Premier Agents and Premier
Brokers to help stabilize auction-based pricing dynamics in certain markets, as
advertiser churn has normalized throughout the first half of 2019.
In the second quarter of 2019, Premier Agent revenue also included an immaterial
amount of revenue generated from our initial testing of a new pricing model for
Premier Agent and Premier Broker advertisers, Flex, in limited markets. With the
Flex model, Premier Agents and Premiers 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 the leads. We expect to continue
testing this pricing model in additional regions and may implement it more
broadly in the future.
Rentals Revenue. Rentals revenue was $42.7 million for the three months ended
June 30, 2019 compared to $33.3 million for the three months ended June 30,
2018, an increase of $9.4 million, or 28%. The increase in Rentals revenue was
primarily attributable to an increase in the number of average monthly rental
listings on our mobile applications and websites, which increased 6% to 40,336
average monthly rental listings for the three months ended June 30, 2019 from
38,141 average monthly rental listings for the three months ended June 30, 2018.
Average monthly rental listings include the average monthly monetized,
deduplicated rental listings for the period, which are displayed across all of
our mobile applications and websites. An increase in rental listings on our
mobile applications and websites increases the likelihood that a consumer will
contact a rental professional, which in turn increases the likelihood of a lead,
click, lease or listing that we monetize. The quarterly revenue per average
monthly rental listing increased 21% to approximately $1,058 for the three
months ended June 30, 2019 from approximately $873 for the three months ended
June 30, 2018. We calculate quarterly revenue per average monthly rental listing
by dividing total Rentals revenue for the period by the average monthly
deduplicated rental listings for the period and then dividing by the number of
quarters in the period. The increase in quarterly revenue per average monthly
rental listing is primarily due to an increase in the adoption of our rental
applications product. The increase in Rentals revenue was also driven in part by
the 14% increase in visits to 2,181.4 million for the three months ended
June 30, 2019, which increases the likelihood a consumer will contact a rental
professional and, in turn, increases the likelihood of a lead, click, lease or
listing that we monetize.

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Other Revenue. Other revenue was $49.0 million for the three months ended
June 30, 2019 compared to $41.8 million for the three months ended June 30,
2018, an increase of $7.3 million, or 17%. The increase in Other revenue was
primarily a result of a 32% increase in revenue generated by our new
construction marketing solutions. Growth in new construction revenue was
primarily attributable to higher spend in our cost per impression product and
increases in adoption by and advertising sales to new home builders through our
new construction platform.
Homes Segment
Homes revenue was $248.9 million for the three months ended June 30, 2019 due to
the sale of 786 homes at an average selling price of $316.7 thousand per home.
For the three months ended March 31, 2019, Homes revenue was $128.5 million as a
result of the sale of 414 homes. The increase in Homes revenue as compared with
the prior quarterly period was primarily a result of an increase in the number
of homes sold in the period as consumer adoption of Zillow Offers increases in
geographic areas in which it is currently operating, and as Zillow Offers
expands into new geographic markets. We did not record any revenue within the
Homes Segment for the second quarter of 2018. As of June 30, 2019, Zillow Offers
was operating in 11 metropolitan areas.
Mortgages Segment
Mortgages revenue was $27.0 million for the three months ended June 30, 2019
compared to $19.3 million for the three months ended June 30, 2018, an increase
of $7.7 million, or 40%. The increase in mortgages revenue was primarily a
result of the addition of revenue generated by Zillow Home Loans, Zillow's
affiliated mortgage lender, which we acquired in the fourth quarter of 2018.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Revenue
The following table presents Zillow Group's revenue by category and by segment
for the periods presented (in thousands, unaudited):
                           Six Months Ended
                               June 30,            2018 to 2019
                           2019          2018        % Change
Percentage of Revenue:
IMT Revenue:
Premier Agent          $   449,696$ 444,617            1 %
Rentals                     80,508       62,351           29 %
Other                       91,737       79,829           15 %
Total IMT revenue          621,941      586,797            6 %
Homes                      377,396            -          N/A
Mortgages                   54,345       38,328           42 %
Total revenue          $ 1,053,682$ 625,125           69 %

The following table presents Zillow Group's revenue categories as percentages of total revenue for the periods presented (unaudited):

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                               Six Months Ended
                                   June 30,
                               2019         2018
Percentage of Total Revenue:
IMT Revenue:
Premier Agent                    43 %         71 %
Rentals                           8           10
Other                             9           13
Total IMT revenue                59           94
Homes                            36            0
Mortgages                         5            6
Total revenue                   100 %        100 %


Total revenue increased by $428.6 million, or 69%, for the six months ended
June 30, 2019 compared to the six months ended June 30, 2018. The increase in
total revenue was primarily attributable to our Zillow Offers business, which
began selling homes in July of 2018. Homes revenue was $377.4 million for the
six months ended June 30, 2019. There were approximately 194.3 million average
monthly unique users of our mobile applications and websites for the three
months ended June 30, 2019 compared to 186.1 million average monthly unique
users for the three months ended June 30, 2018, representing year-over-year
growth of 4%. The increase in unique users increased the number of impressions,
leads, clicks and other events we monetized across our revenue categories.
IMT Segment
Premier Agent Revenue. Premier Agent revenue grew to $449.7 million for the six
months ended June 30, 2019 from $444.6 million for the six months ended June 30,
2018, an increase of $5.1 million, or 1%. Premier Agent revenue was positively
impacted by an increase in visits. Visits increased 14% to 4,201.2 million for
the six months ended June 30, 2019 from 3,685.4 million for the six months ended
June 30, 2018. The increase in visits increased the number of impressions we
could monetize in our Premier Agent marketplace. Year-over-year Premier Agent
revenue growth slowed, which we believe was due to changes made to our Premier
Agent and Premier Broker advertising programs in 2018 to improve lead quality
and consumer connections, which led to an increase in advertiser churn, or exit
from our advertising platform. Advertiser churn has normalized throughout the
first half of 2019.
In the first half of 2019, Premier Agent revenue also included an immaterial
amount of revenue generated from our initial testing of a new pricing model for
Premier Agent and Premier Broker advertisers, Flex, in limited markets.
Rentals Revenue. Rentals revenue was $80.5 million for the six months ended
June 30, 2019 compared to $62.4 million for the six months ended June 30, 2018,
an increase of $18.2 million, or 29%. The increase in Rentals revenue was
primarily attributable to an increase in the number of average monthly rental
listings on our mobile applications and websites, which increased 8% to 39,732
average monthly rental listings for the six months ended June 30, 2019 from
36,706 average monthly rental listings for the six months ended June 30, 2018.
The quarterly revenue per average monthly rental listing increased 19% to
approximately $1,013 for the six months ended June 30, 2019 from approximately
$849 for the six months ended June 30, 2018. The increase in quarterly revenue
per average monthly rental listing is primarily due to an increase in the
adoption of our rental applications product. The increase in Rentals revenue was
also driven in part by the 14% increase in visits to 4,201.2 million for the six
months ended June 30, 2019.
Other Revenue. Other revenue was $91.7 million for the six months ended June 30,
2019 compared to $79.8 million for the six months ended June 30, 2018, an
increase of $11.9 million, or 15%. The increase in Other revenue was primarily a
result of a 32% increase in revenue generated by our new construction marketing
solutions. Growth in new construction revenue was primarily attributable to
increases in adoption by and advertising sales to new home builders through our
new construction platform.
Homes Segment
Homes revenue was $377.4 million for the six months ended June 30, 2019 due to
the sale of 1,200 homes at an average selling price of $314.5 thousand per home.

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Mortgages Segment
Mortgages revenue was $54.3 million for the six months ended June 30, 2019
compared to $38.3 million for the six months ended June 30, 2018, an increase of
$16.0 million, or 42%. The increase in mortgages revenue was primarily a result
of the addition of revenue generated by Zillow Home Loans, Zillow's affiliated
mortgage lender, which we acquired in the fourth quarter of 2018.
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Segment Results of Operations
The following table presents Zillow Group's segment results for the periods
presented (in thousands, unaudited):
                                       Three Months Ended                         Three Months Ended
                                          June 30, 2019                              June 30, 2018
                                 IMT          Homes       Mortgages        IMT          Homes        Mortgages
Revenue                      $ 323,669$ 248,924$  26,985$ 305,941     $       -     $    19,305
Costs and expenses:
Cost of revenue                 26,059       240,732         4,430        24,290             -           1,237
Sales and marketing            135,440        37,409        14,584       137,972         2,095           7,660
Technology and development      94,261        18,198         7,871        91,131         3,790           5,455
General and administrative      54,671        17,808        10,360        52,438         4,176           3,965
Acquisition-related costs            -             -             -             -             -             632
Integration costs                    -             -           293             -             -               -
Total costs and expenses       310,431       314,147        37,538       305,831        10,061          18,949
Income (loss) from
operations                      13,238       (65,223 )     (10,553 )         110       (10,061 )           356
Other income                         -             -           402             -             -               -
Interest expense                     -        (5,899 )        (287 )           -             -               -
Income (loss) before income
taxes (1)                    $  13,238$ (71,122 )$ (10,438 )$     110$ (10,061 )$       356


(1) The following table presents the reconciliation of total segment loss before
income taxes to consolidated loss before income taxes for the period presented
(in thousands):
                                          Three Months Ended
                                               June 30,
                                          2019          2018

Total segment loss before income taxes $ (68,322 )$ (9,595 ) Corporate interest expense

               (12,711 )      (7,187 )
Corporate other income                     9,056         3,089

Consolidated loss before income taxes $ (71,977 )$ (13,693 )



IMT Segment
Cost of Revenue. Cost of revenue was $26.1 million for the three months ended
June 30, 2019 compared to $24.3 million for the three months ended June 30,
2018, an increase of $1.8 million, or 7%. The increase in cost of revenue was
primarily attributable to a $2.1 million increase in data center and
connectivity costs.
Sales and Marketing. Sales and marketing expenses were $135.4 million for the
three months ended June 30, 2019 compared to $138.0 million for the three months
ended June 30, 2018, a decrease of $2.5 million, or 2%. The decrease in sales
and marketing expenses was primarily attributable to a $9.9 million decrease in
marketing and advertising expenses, partially offset by a $4.0 million increase
in professional services fees, a $2.1 million increase in headcount-related
expenses, including share-based compensation expense and a $1.3 million increase
in miscellaneous expenses.
Technology and Development. Technology and development expenses, which include
research and development costs, were $94.3 million for the three months ended
June 30, 2019 compared to $91.1 million for the three months ended June 30,
2018,

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an increase of $3.1 million, or 3%. Approximately $5.6 million of the increase
related to growth in headcount-related expenses, including share-based
compensation expense, as we continue to grow our engineering teams to support
current and future product initiatives. In addition, there was a $1.1 million
increase in software and hardware costs and a $1.1 million increase in the gain
on disposal of assets. These increases were partially offset by a $6.2 million
decrease in depreciation and amortization expense. We expect our technology and
development expenses to increase in absolute dollars over time as we continue to
build new mobile and website functionality and develop new technologies.
General and Administrative. General and administrative expenses were $54.7
million for the three months ended June 30, 2019 compared to $52.4 million for
the three months ended June 30, 2018, an increase of $2.2 million, or 4%. The
increase in general and administrative expenses was primarily due to a $4.2
million increase in estimated legal liabilities, a $2.3 million increase in
building lease-related expenses including rent, utilities and insurance,
partially offset by a $1.8 million decrease in headcount-related expenses,
including share-based compensation expense, a $1.0 million decrease in business
and state taxes and a $0.7 million decrease in professional services fees.
Homes Segment
Cost of Revenue. Cost of revenue was $240.7 million for the three months ended
June 30, 2019. Cost of revenue was primarily attributable to home acquisition
and renovation costs related to the 786 homes that we sold during the period. We
expect cost of revenue to increase in absolute dollars in future years as we
continue to incur more expenses that are associated with growth in revenue and
expansion of Zillow Offers into new markets.
Sales and Marketing. Sales and marketing expenses were $37.4 million for the
three months ended June 30, 2019 compared to $2.1 million for the three months
ended June 30, 2018, an increase of $35.3 million. The increase in sales and
marketing expenses was primarily attributable to a $12.3 million increase in
headcount-related expenses, including share-based compensation expense, a $10.7
million increase in selling expenses directly attributable to the resale of
homes, a $5.1 million increase in holding costs, a $4.5 million increase in
marketing and advertising expenses and a $2.7 million increase in miscellaneous
expenses. We expect our sales and marketing expenses to increase in absolute
dollars in future periods as we continue to expand the Homes segment.
Technology and Development. Technology and development expenses, which include
research and development costs, were $18.2 million for the three months ended
June 30, 2019 compared to $3.8 million for the three months ended June 30, 2018,
an increase of $14.4 million. The increase in technology and development
expenses was primarily due to an $11.5 million increase in headcount-related
expenses, including share-based compensation expense, as we continue to grow our
teams to support the Homes segment, a $1.0 million increase in data acquisition
costs and a $1.9 million increase in miscellaneous expenses. We expect our
technology and development expenses to increase in absolute dollars in future
periods as we continue to build new website functionality and other technologies
that will facilitate the purchasing and sales processes related to our Homes
segment.
General and Administrative. General and administrative expenses were $17.8
million for the three months ended June 30, 2019 compared to $4.2 million for
the three months ended June 30, 2018, an increase of $13.6 million. The increase
in general and administrative expenses was primarily due to an $8.6 million
increase in headcount-related expenses, including share-based compensation
expense, as we continue to grow our teams to support the Homes segment. In
addition, there was a $2.5 million increase in building lease-related expenses
including rent, utilities and insurance, a $0.8 million increase software and
hardware costs and a $1.7 million increase in miscellaneous expenses. We expect
general and administrative expenses to increase in absolute dollars in future
periods as we continue to expand our Homes business.
Interest Expense. Interest expense was $5.9 million for the three months ended
June 30, 2019. Interest expense was primarily attributable to borrowings,
funding fees and other fees, including the amortization of deferred issuance
costs, on our revolving credit facilities. There was no interest expense
recorded for the three months ended June 30, 2018. We expect interest expense to
increase in absolute dollars in future periods as we continue to expand our
Homes business.
Mortgages Segment
Cost of Revenue. Cost of revenue was $4.4 million for the three months ended
June 30, 2019 compared to $1.2 million for the three months ended June 30, 2018,
an increase of $3.2 million. The increase in cost of revenue was primarily
attributable to our October 2018 acquisition of Zillow Home Loans, and includes
a $1.9 million increase in headcount-related expenses, including share-based
compensation expense and a $0.5 million increase in mortgage loan processing
costs. We expect cost of revenue to increase in absolute dollars in future years
as we continue to incur more expenses that are associated with growth in revenue
and expansion of Zillow Home Loans.

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Sales and Marketing. Sales and marketing expenses were $14.6 million for the
three months ended June 30, 2019 compared to $7.7 million for the three months
ended June 30, 2018, an increase of $6.9 million, or 90%. The increase in sales
and marketing expenses was primarily attributable to a $5.3 million increase in
headcount-related expenses, including share-based compensation expense,
primarily related to our October 2018 acquisition of Zillow Home Loans, and a
$0.9 million increase in marketing and advertising expenses. We expect our sales
and marketing expenses to increase in absolute dollars in future periods as we
continue to expand the Mortgages segment.
Technology and Development. Technology and development expenses, which include
research and development costs, were $7.9 million for the three months ended
June 30, 2019 compared to $5.5 million for the three months ended June 30, 2018,
an increase of $2.4 million, or 44%. The increase in technology and development
expenses was primarily a result of a $2.1 million increase in headcount-related
expenses, including share-based compensation expense, primarily related to our
October 2018 acquisition of Zillow Home Loans. We expect our technology and
development expenses to increase in absolute dollars in future periods as we
continue to build new website functionality and other technologies that will
facilitate the origination of mortgages in Zillow Home Loans.
General and Administrative. General and administrative expenses were $10.4
million for the three months ended June 30, 2019 compared to $4.0 million for
the three months ended June 30, 2018, an increase of $6.4 million. The increase
in general and administrative expenses was primarily due to a $4.3 million
increase in headcount-related expenses, including share-based compensation
expense, primarily related to our October 2018 acquisition of Zillow Home Loans.
In addition, there was a $0.6 million increase in building lease-related
expenses including rent, utilities and insurance and a $1.5 million increase in
miscellaneous expenses. We expect general and administrative expenses to
increase over time in absolute dollars as we continue to expand our mortgage
business.
Corporate Items
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.
Interest Expense. Interest expense on our convertible senior notes was $12.7
million for the three months ended June 30, 2019 compared to $7.2 million for
the three months ended June 30, 2018, an increase of $5.5 million, or 77%. This
increase was primarily due to the July 2018 issuance of our convertible senior
notes maturing in 2023. For additional information regarding the convertible
senior notes, see Note 13 to our condensed consolidated financial statements.
Other Income. Other income not directly attributable to any of our segments was
$9.1 million for the three months ended June 30, 2019 compared to $3.1 million
for the three months ended June 30, 2018, an increase of $6.0 million. This
increase was primarily due to an increase in the balance of our short-term
investment portfolio generating an increase in interest income.


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Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018 Segment Results of Operations The following table presents Zillow Group's segment results for the periods presented (in thousands, unaudited):

                                         Six Months Ended                          Six Months Ended
                                          June 30, 2019                              June 30, 2018
                                 IMT          Homes        Mortgages        IMT          Homes       Mortgages
Revenue                      $ 621,941$  377,396$  54,345$ 586,797     $       -     $  38,328
Costs and expenses:
Cost of revenue                 50,310        363,151         9,108        46,884            86         2,476
Sales and marketing            262,094         58,271        28,655       266,719         2,385        15,914
Technology and development     182,230         30,479        15,391       177,048         6,026        11,235
General and administrative     125,521         32,165        20,927       102,625         5,954         8,073
Acquisition-related costs            -              -             -            27             -           632
Integration costs                    -              -           645             -             -             -
Total costs and expenses       620,155        484,066        74,726       593,303        14,451        38,330
Income (loss) from
operations                       1,786       (106,670 )     (20,381 )      (6,506 )     (14,451 )          (2 )
Other income                         -              -           715             -             -             -
Interest expense                     -         (9,657 )        (388 )           -             -             -
Income (loss) before income
taxes (1)                    $   1,786$ (116,327 )$ (20,054 )$  (6,506 )$ (14,451 )$      (2 )


(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):
                                            Six Months Ended
                                                June 30,
                                           2019          2018

Total segment loss before income taxes $ (134,595 )$ (20,959 ) Corporate interest expense

                (25,318 )     (14,260 )
Corporate other income                     17,911         5,535

Consolidated loss before income taxes $ (142,002 )$ (29,684 )



IMT Segment
Cost of Revenue. Cost of revenue was $50.3 million for the six months ended
June 30, 2019 compared to $46.9 million for the six months ended June 30, 2018,
an increase of $3.4 million, or 7%. The increase in cost of revenue was
primarily attributable to a $4.4 million increase in data center and
connectivity costs.
Sales and Marketing. Sales and marketing expenses were $262.1 million for the
six months ended June 30, 2019 compared to $266.7 million for the six months
ended June 30, 2018, a decrease of $4.6 million, or 2%. The decrease in sales
and marketing expenses was primarily attributable to a $17.2 million decrease in
marketing and advertising expenses, partially offset by a $7.0 million increase
in professional services fees and a $5.0 million increase in headcount-related
expenses, including share-based compensation expense.
Technology and Development. Technology and development expenses, which include
research and development costs, were $182.2 million for the six months ended
June 30, 2019 compared to $177.0 million for the six months ended June 30, 2018,
an increase of $5.2 million, or 3%. Approximately $12.8 million of the increase
related to growth in headcount-related expenses, including share-based
compensation expense, as we continue to grow our engineering teams to support
current and future product initiatives. In addition, there was a $2.2 million
increase in software and hardware costs, a $1.6 million increase in other
non-capitalizable data content expense, a $1.6 million increase in professional
services fees and a $1.3 million increase in miscellaneous expenses. These
increases were partially offset by a $14.3 million decrease in depreciation and
amortization expense.

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General and Administrative. General and administrative expenses were $125.5
million for the six months ended June 30, 2019 compared to $102.6 million for
the six months ended June 30, 2018, an increase of $22.9 million, or 22%. The
increase in general and administrative expenses was primarily due to a $23.5
million increase in headcount-related expenses driven primarily by the
recognition of a total of $23.3 million of share-based compensation expense in
the IMT segment during the six months ended June 30, 2019 in connection with the
modification of certain outstanding equity awards related to the departure of
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. For additional
information regarding the equity modification, see Note 15 to our condensed
consolidated financial statements.
Homes Segment
Cost of Revenue. Cost of revenue was $363.2 million for the six months ended
June 30, 2019 compared to $0.1 million for the six months ended June 30, 2018.
Cost of revenue for the six months ended June 30, 2019 was primarily
attributable to home acquisition and renovation costs related to the 1,200 homes
that we sold during the period.
Sales and Marketing. Sales and marketing expenses were $58.3 million for the six
months ended June 30, 2019 compared to $2.4 million for the six months ended
June 30, 2018, an increase of $55.9 million. The increase in sales and marketing
expenses was primarily attributable to a $19.8 million increase in
headcount-related expenses, including share-based compensation expense, as we
continue to grow our teams to support the Homes segment, a $16.2 million
increase in selling expenses directly attributable to the resale of homes, a
$7.9 million increase in holding costs, a $7.5 million increase in marketing and
advertising expenses and a $4.5 million increase in miscellaneous expenses.
Technology and Development. Technology and development expenses, which include
research and development costs, were $30.5 million for the six months ended
June 30, 2019 compared to $6.0 million for the six months ended June 30, 2018,
an increase of $24.5 million. The increase in technology and development
expenses was primarily due to a $19.7 million increase in headcount-related
expenses, including share-based compensation expense, as we continue to grow our
teams to support the Homes segment, a $1.5 million increase in data acquisition
costs, a $1.4 million increase in depreciation and amortization expense and a
$1.9 million increase in miscellaneous expenses.
General and Administrative. General and administrative expenses were $32.2
million for the six months ended June 30, 2019 compared to $6.0 million for the
six months ended June 30, 2018, an increase of $26.2 million. The increase in
general and administrative expenses was primarily due to a $15.9 million
increase in headcount-related expenses, including share-based compensation
expense, as we continue to grow our teams to support the Homes segment. In
addition, there was a $4.7 million increase in building lease-related expenses
including rent, utilities and insurance, a $1.7 million increase in professional
services fees, a $1.5 million increase in software and hardware costs and a $2.4
million increase in miscellaneous expenses.
Interest Expense. Interest expense was $9.7 million for the six months ended
June 30, 2019 and was primarily attributable to borrowings, funding fees and
other fees, including the amortization of deferred issuance costs, on our
revolving credit facilities. There was no interest expense recorded for the six
months ended June 30, 2018.
Mortgages Segment
Cost of Revenue. Cost of revenue was $9.1 million for the six months ended
June 30, 2019 compared to $2.5 million for the six months ended June 30, 2018,
an increase of $6.6 million. The increase in cost of revenue was primarily
attributable to our October 2018 acquisition of Zillow Home Loans, and includes
a $3.4 million increase in headcount-related expenses, including share-based
compensation expense, a $1.1 million increase in mortgage loan processing costs,
a $0.9 million increase in lead acquisition costs and a $1.2 million increase in
miscellaneous expenses.
Sales and Marketing. Sales and marketing expenses were $28.7 million for the six
months ended June 30, 2019 compared to $15.9 million for the six months ended
June 30, 2018, an increase of $12.7 million, or 80%. The increase in sales and
marketing expenses was primarily attributable to a $10.1 million increase in
headcount-related expenses, including share-based compensation expense,
primarily related to our October 2018 acquisition of Zillow Home Loans, a $1.2
million increase in marketing and advertising expenses and a $1.4 million
increase in miscellaneous expenses.
Technology and Development. Technology and development expenses, which include
research and development costs, were $15.4 million for the six months ended
June 30, 2019 compared to $11.2 million for the six months ended June 30, 2018,
an increase of $4.2 million, or 37%. The increase in technology and development
expenses was primarily a result of a $3.5 million increase in headcount-related
expenses, including share-based compensation expense, related to our October
2018 acquisition of Zillow Home Loans.

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General and Administrative. General and administrative expenses were $20.9
million for the six months ended June 30, 2019 compared to $8.1 million for the
six months ended June 30, 2018, an increase of $12.9 million. The increase in
general and administrative expenses was primarily due to a $9.4 million increase
in headcount-related expenses, including share-based compensation expense,
primarily related to our October 2018 acquisition of Zillow Home Loans. In
addition, there was a $1.1 million increase in building lease-related expenses
including rent, utilities and insurance, a $0.7 million increase in professional
services fees, a $0.7 million increase in software and hardware costs and a $1.0
million increase in miscellaneous expenses.
Corporate Items
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.
Interest Expense. Interest expense on our convertible senior notes was $25.3
million for the six months ended June 30, 2019 compared to $14.3 million for the
six months ended June 30, 2018, an increase of $11.1 million, or 78%. This
increase was primarily due to the July 2018 issuance of our convertible senior
notes maturing in 2023. For additional information regarding the convertible
senior notes, see Note 13 to our condensed consolidated financial statements.
Other Income. Other income not directly attributable to any of our segments was
$17.9 million for the six months ended June 30, 2019 compared to $5.5 million
for the six months ended June 30, 2018, an increase of $12.4 million. This
increase is primarily due to an increase in the balance of our short-term
investment portfolio generating an increase in interest income.
Liquidity and Capital Resources
As of June 30, 2019 and December 31, 2018, we had cash and cash equivalents,
investments and restricted cash of $1,483.6 million and $1,567.3 million,
respectively. Cash and cash equivalents balances consist of operating cash on
deposit with financial institutions, money market funds and commercial paper.
Investments consist of fixed income securities, which include U.S. government
agency securities, corporate notes and bonds, commercial paper, municipal
securities, foreign government securities, certificates of deposit and treasury
bills. Restricted cash consists of amounts funded to the reserve and collection
accounts related to our revolving credit facilities and amounts held in escrow
related to funding home purchases in our mortgage origination business. Amounts
on deposit with third-party financial institutions exceed the Federal Deposit
Insurance Corporation and the Securities Investor Protection Corporation
insurance limits, as applicable. We believe that cash from operations and cash
and cash equivalents and investment balances will be sufficient to meet our
ongoing operating activities, working capital, capital expenditures and other
capital requirements for at least the next 12 months.
The expansion of Zillow Group's purchase of homes in the Zillow Offers program
and sale of homes on the open market continues to have a significant impact on
our liquidity and capital resources as a cash and inventory intensive
initiative. We primarily use debt financing to fund a portion of the purchase
price of homes and certain related costs. As of June 30, 2019, we have $409.8
million of total outstanding borrowings on revolving credit facilities to
provide capital for Zillow Offers with a total maximum borrowing capacity of
$1,000.0 million. For additional information regarding the revolving credit
facilities, see Note 13 to our condensed consolidated financial statements.
The October 31, 2018 acquisition of Zillow Home Loans also continues to have a
significant impact on our liquidity and capital resources as a cash intensive
business that funds mortgage loans originated for resale in the secondary
market. We primarily use debt financing to fund the mortgage loan originations.
On June 28, 2019, Zillow Home Loans amended and restated the warehouse line of
credit previously maturing on June 29, 2019. The amended and restated credit
agreement extends the term of the original agreement for one year through June
27, 2020, and continues to provide for a maximum borrowing capacity of $50.0
million with availability under the warehouse line of credit limited depending
on the types of loans originated. As of June 30, 2019, we have $30.1 million of
total outstanding borrowings on warehouse lines of credit to provide capital for
Zillow Home Loans with a total maximum borrowing capacity of $100.0 million. For
additional information regarding our warehouse lines of credit, see Note 13 to
our condensed consolidated financial statements.
As of June 30, 2019, we have outstanding a total of $843.4 million aggregate
principal of senior convertible notes. The convertible notes are senior
unsecured obligations, and interest on the convertible notes is paid
semi-annually. For additional information regarding the senior convertible
notes, see Note 13 to our condensed consolidated financial statements.

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The following table presents selected cash flow data for the periods presented:
                                                           Six Months Ended
                                                               June 30,
                                                          2019              2018
                                                       (in thousands, unaudited)
Cash Flow Data:
Net cash provided by (used in) operating activities $     (373,823 )$ 73,052
Net cash provided by (used in) investing activities        197,822        (93,692 )
Net cash provided by financing activities                  323,138         

99,590



Cash Flows Provided By (Used In) Operating Activities
Our operating cash flows result primarily from cash received from real estate
professionals, rental professionals, mortgage professionals and brand
advertisers, as well as cash received from consumers for sales of homes through
Zillow Offers and sales of mortgages originated by Zillow to third parties. Our
primary uses of cash from operating activities include payments for homes
purchased through Zillow Offers, marketing and advertising activities, mortgages
funded through Zillow Home Loans and employee compensation and benefits.
Additionally, uses of cash from operating activities include costs associated
with operating our mobile applications and websites and other general corporate
expenditures.
For the six months ended June 30, 2019, net cash used in operating activities
was $373.8 million. This was primarily driven by a net loss of $139.5 million,
adjusted by share-based compensation expense of $109.8 million, depreciation and
amortization expense of $41.7 million, amortization of contract cost assets of
$17.9 million, amortization of the discount and issuance costs on the
convertible notes maturing in 2023 and 2021 of $17.8 million, amortization of
right of use assets of $10.6 million, a loss on disposal of property and
equipment of $3.9 million, accretion of bond discount of $3.7 million and a $2.5
million change in deferred income taxes. Changes in operating assets and
liabilities increased cash used in operating activities by $430.4 million. The
changes in operating assets and liabilities are primarily due to a $390.0
million increase in inventory due to the purchase of homes through Zillow
Offers, an $18.3 million increase in contract cost assets due primarily to the
capitalization of sales commissions, a $16.9 million increase in accounts
receivable due primarily to an increase in revenue, an $11.9 million decrease in
lease liabilities, a $3.2 million increase in mortgage loans held for sale and a
$2.0 million increase in prepaid expenses and other assets driven primarily by
the timing of payments, partially offset by a $7.0 million increase in accrued
expenses and other current liabilities driven primarily by the timing of
payments, and a $3.0 million increase in deferred revenue.
For the six months ended June 30, 2018, net cash provided by operating
activities was $73.1 million. This was primarily driven by a net loss of $21.7
million, adjusted by share-based compensation expense of $69.7 million,
depreciation and amortization expense of $52.9 million, amortization of contract
cost assets of $18.3 million, amortization of the discount and issuance costs on
the 2021 Notes of $9.5 million, a non-cash change in our deferred income taxes
of $8.0 million, a change in deferred rent of $2.8 million, and a loss on
disposal of property and equipment of $2.1 million. Changes in operating assets
and liabilities decreased cash provided by operating activities by $46.1
million. The changes in operating assets and liabilities are primarily due to a
$21.4 million increase in contract cost assets due primarily to the
capitalization of sales commissions, a $14.7 million increase in prepaid
expenses and other assets driven primarily by the timing of payments, a $9.3
million increase in accounts receivable due primarily to an increase in revenue,
a $5.7 million increase in inventory due to the purchase of homes through Zillow
Offers, and a $5.2 million decrease in accrued expenses and other current
liabilities driven primarily by the timing of payments.
Cash Flows Provided By (Used In) Investing Activities
Our primary investing activities include the purchase and sale or maturity of
investments, the purchase of property and equipment and intangible assets and
cash paid in connection with acquisitions.
For the six months ended June 30, 2019, net cash provided by investing
activities was $197.8 million. This was primarily the result of $236.4 million
of net proceeds from maturities of investments and $38.6 million of purchases
for property and equipment and intangible assets.
For the six months ended June 30, 2018, net cash used in investing activities
was $93.7 million. This was primarily the result of $57.7 million of net
purchases of investments and $36.0 million of purchases for property and
equipment and intangible assets.

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Cash Flows Provided By Financing Activities
For the six months ended June 30, 2019, cash provided by financing activities
was $323.1 million, including $293.1 million of proceeds from borrowings on our
revolving credit facilities related to Zillow Offers and $33.0 million of
proceeds from the exercise of option awards, partially offset by $3.0 million of
net repayments of borrowings on our warehouse lines of credit related to Zillow
Home Loans.
For the six months ended June 30, 2018, our financing activities included $99.7
million of proceeds from the exercise of option awards.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements other than outstanding surety
bonds issued for our benefit of approximately $9.7 million as of June 30, 2019.
We do not believe that the surety bonds will have a material effect on our
liquidity, capital resources, market risk support or credit risk support. For
additional information regarding the surety bonds, see Note 17 to our condensed
consolidated financial statements under the subsection titled "Surety Bonds".
Contractual Obligations and Other Commitments
There have been no material changes outside the ordinary course of business in
our commitments under contractual obligations as previously disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2018, except for the
categories of contractual obligations listed below, which have been updated to
reflect our obligations as of June 30, 2019.
                                                                   Payments Due By Period
                                                         Less Than 1                                    More Than 5
                                             Total           Year         1-3 Years       3-5 Years        Years
                                                                  (in thousands, unaudited)
Homes under contract (1)                 $   266,210$  266,210     $         -     $         -     $        -
Revolving credit facilities (2)              409,799        409,799               -               -              -
Warehouse lines of credit (3)                 30,057         30,057               -               -              -
Operating lease obligations (4)              120,592          4,439          27,026          26,768         62,359
Total contractual obligations            $   826,658$  710,505     $   

27,026 $ 26,768$ 62,359

____________________

(1) We have obligations to purchase homes under contract through our Zillow Offers business.
(2) Includes principal amounts due for amounts borrowed under the revolving credit facilities used to provide
capital for our Zillow Offers business. Amounts exclude an immaterial amount of estimated interest payments.
(3) Includes principal amounts due for amounts borrowed under the warehouse lines of credit used to finance Zillow
Home Loans. Amounts exclude an immaterial amount of estimated interest payments.
(4) Our operating lease obligations consist of new office space in New York, New York, Seattle, Washington, Atlanta,
Georgia, Dallas, Texas, and Scottsdale, Arizona. For additional information regarding our operating leases, see Note
12 to our condensed consolidated financial statements.


As of June 30, 2019, we have outstanding letters of credit of approximately
$16.9 million, which secure our lease obligations in connection with certain of
the operating leases of our office spaces.
In the course of business, we are required to provide financial commitments in
the form of surety bonds to third parties as a guarantee of our performance on
and our compliance with certain obligations. If we were to fail to perform or
comply with these obligations, any draws upon surety bonds issued on our behalf
would then trigger our payment obligation to the surety bond issuer. We have
outstanding surety bonds issued for our benefit of approximately $9.7 million as
of June 30, 2019.

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Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
U.S. generally accepted accounting principles, or GAAP. The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses and related
disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our
estimates are based on historical experience and various other assumptions that
we believe to be reasonable under the circumstances. Our actual results could
differ from these estimates. For information on our critical accounting policies
and estimates, see Part II, Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) of our Annual Report on
Form 10-K for the year ended December 31, 2018. There have been no material
changes to our critical accounting policies and estimates as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2018.

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