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
II, Item 1A (Risk Factors) of this report, as well as in Part I, Item 1A (Risk
Factors) of our Annual Report on Form 10-K for the year ended December 31, 2019.
Overview of our Business
Zillow Group, Inc., the largest portfolio of real estate brands on mobile and
the web, is building an on-demand real estate experience. Whether selling,
buying, renting or financing, customers can turn to the businesses of its
flagship brand, Zillow, to find and get into their next home with speed,
certainty and ease.
In addition to Zillow's for-sale and rental listings, Zillow Offers buys and
sells homes directly in dozens of markets across the country, allowing sellers
control over their timeline. Zillow Closing Services now offers title and escrow
services as another important step to unify the real estate transaction. Zillow
Home Loans, our affiliate lender, provides our customers with an easy option to
get pre-approved and secure financing for their next home purchase.
Other consumer brands include Trulia, StreetEasy, HotPads, Naked Apartments and
Out East. In addition, Zillow Group provides a comprehensive suite of marketing
software and technology solutions which include Mortech, dotloop, Bridge
Interactive and New Home Feed.
Reportable Segments and Revenue Overview
Zillow Group has three reportable segments: the Homes segment, the Internet,
Media & Technology ("IMT") segment and the Mortgages segment. The Homes segment
includes the financial results from Zillow Group's purchase and sale of homes
directly through the Zillow Offers service and the financial results from the
title and escrow services provided through Zillow Closing Services. The IMT
segment includes the financial results for the Premier Agent, Rentals and new
construction marketplaces, as well as dotloop, display and other advertising and
business software solutions. The Mortgages segment includes the financial
results for advertising sold to mortgage lenders and other mortgage
professionals, mortgage originations through Zillow Home Loans and our Mortech
mortgage software solutions.
The Homes segment primarily generates revenue through our Zillow Offers service
from the resale of homes on the open market. We began buying homes through
Zillow Offers in April 2018, and we began selling homes in July 2018. Other
Homes revenue relates to revenue associated with title and escrow services
provided through Zillow Closing Services which launched in the second half of
2019.
Premier Agent revenue is generated by the sale of advertising services, as well
as marketing and technology products and services, to help real estate agents
and brokers grow and manage their businesses. We offer these products and
services through our Premier Agent and Premier Broker programs. Premier Agent
and Premier Broker advertising products, which include the delivery of
impressions and validated consumer connections, or leads, are primarily sold on
a share of voice basis. Impressions and leads are distributed to Premier Agents
and Premier Brokers in proportion to their share of voice, or an agent
advertiser's share of total advertising purchased in a particular zip code.
Impressions are delivered when an advertisement of a Premier Agent or Premier
Broker appears on pages viewed by users of our mobile applications and websites
and connections are delivered when consumer contact information is provided to
Premier Agents and Premier Brokers. Connections and impressions are each
provided as part of our advertising services for Premier Agent and Premier
Brokers; we do not charge a separate fee for these consumer leads.
In October 2018, we began testing a new Flex pricing model for Premier Agent and
Premier Broker advertising services in limited markets. We plan to continue
testing this pricing model in select markets with high-performing partners in
the future. With the Flex model, Premier Agents and Premier Brokers are provided
with impressions and connections at no upfront cost, and they pay a performance
advertising fee only when a real estate transaction is closed with one of those
leads.
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Other IMT revenue includes revenue generated by rentals, new construction and
display advertising, as well as revenue from the sale of various other
advertising and business technology solutions for real estate professionals,
including dotloop. Rentals revenue includes advertising sold to property
managers, landlords and other rental professionals on a cost per lead, cost per
click, cost per lease or cost per listing basis. Rentals revenue also includes
revenue generated through our rental applications product, whereby potential
renters can submit applications to multiple properties for a flat service fee.
New construction revenue primarily includes advertising services sold to home
builders on a cost per residential community or cost per impression basis.
Display revenue consists of graphical mobile and web advertising sold to
advertisers promoting their brands on our mobile applications and websites.
In our Mortgages segment, we generate revenue from advertising sold to mortgage
lenders and other mortgage professionals on a cost per lead or subscription
basis, including our Connect and Custom Quote services, and from Mortech, which
provides subscription-based mortgage software solutions, including a product and
pricing engine and lead management platform. We also generate revenue through
mortgage originations and the related sale of mortgages on the secondary market
through Zillow Home Loans.
During the three months ended March 31, 2020, we generated total revenue of
$1,125.8 million, as compared to $454.1 million in the three months ended March
31, 2019, an increase of $671.7 million, or 148%. This increase was primarily
the result of a $641.4 million, or 499% increase in Homes segment revenue, a
$32.4 million or 11% increase in IMT segment revenue driven by a $24.4 million,
or 11%, increase in Premier Agent revenue and an $8.0 million, or 10%, increase
in Other IMT revenue. These increases were partially offset by a $2.1 million,
or 8%, decrease in Mortgages segment revenue. Visits increased 5% to 2,117.6
million for the three months ended March 31, 2020 from 2,019.8 million for the
three months ended March 31, 2019. There were approximately 192.5 million
average monthly unique users of our mobile applications and websites for the
three months ended March 31, 2020, representing year-over-year growth of 6%. The
number of homes sold through Zillow Offers increased 478% to 2,394 for the three
months ended March 31, 2020 from 414 for the three months ended March 31, 2019.
As of March 31, 2020, we had 5,338 full-time employees compared to 5,249
full-time employees as of December 31, 2019.
COVID-19 Impact
In December 2019, a novel strain of coronavirus, COVID-19, was reported and has
subsequently spread worldwide. On March 11, 2020, the World Health Organization
declared COVID-19 a pandemic. The COVID-19 pandemic and resulting global and
economic disruptions have affected our business, as well as those of our
customers and real estate partners, and there are no reliable estimates of how
long the pandemic will last or the magnitude of its long-term impact. In light
of the uncertain and rapidly evolving situation relating to the spread of
COVID-19, we have taken certain measures intended to serve the needs of our
customers and real estate partners, while also protecting our business and the
safety of our employees, our customers and the communities in which we operate.
These measures include pausing home buying through Zillow Offers, offering
certain product discounts, temporarily closing offices, pausing hiring except
for critical roles, pausing the majority of our advertising spending and
reducing other discretionary spending. At the same time, we are striving to
continue our business operations to the extent possible during these
unprecedented times, including through the implementation of proactive work from
home policies and acceleration of development and implementation of various
technology initiatives to better enable virtual shopping and real estate
transactions. As reflected in the discussion below, the impact of the pandemic
and actions taken in response to it had varying effects on our key metrics and
results of operations for the three months ended March 31, 2020, primarily in
the last month of the period. The effect of the COVID-19 pandemic will not be
fully reflected in our results of operations and overall financial performance
until future periods and is expected to be significant. The extent of the impact
of COVID-19 on our business is highly uncertain and difficult to predict, as
information is rapidly evolving with respect to the duration and severity of the
pandemic.
Key Metrics
Management has identified visits, unique users and the number of homes sold
through Zillow Offers as relevant to investors' and others' assessment of our
financial condition and results of operations. Although there was an increase in
both visits and unique users for the three months ended March 31, 2020 as
compared to the three months ended March 31, 2019, both metrics were adversely
impacted by the COVID-19 pandemic beginning in March 2020, although they have
subsequently improved during April 2020. COVID-19 may continue to adversely
impact the number of visits and unique users to our mobile applications and
websites in future periods, which we would expect to result in a decline in
revenue in future periods.
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In addition, on March 23, 2020, we announced that Zillow Offers would
temporarily pause home buying in all markets in response to local public health
orders related to COVID-19 and to help protect the safety and health of our
employees, customers and partners. To the extent possible, we continue to
update, list and sell homes in inventory through Zillow Offers. Although the
duration and impact of COVID-19 is uncertain, we expect that this temporary
pause in home buying and other potential effects of COVID-19 on residential real
estate transactions will adversely impact the number of homes sold in future
periods, which we expect will result in a decline in revenue in future periods.
Visits
The number of visits is an important metric because it is an indicator of
consumers' level of engagement with our mobile applications, websites and other
services. We believe highly engaged consumers are more likely to participate in
our Zillow Offers program or use Zillow Homes Loans or more likely to be
transaction-ready real estate market participants and therefore more
sought-after by our real estate partners.
We define a visit as a group of interactions by users with the Zillow, Trulia
and StreetEasy 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 and StreetEasy measure visits with Google Analytics, and Trulia measures
visits with Adobe Analytics. Visits to Trulia end after thirty minutes of user
inactivity. Visits to Zillow and StreetEasy end either: (i) after thirty minutes
of user inactivity or at midnight; or (ii) through a campaign change. A visit
ends through a campaign change if a visitor arrives via one campaign or source
(for example, via a search engine or referring link on a third-party website),
leaves the mobile application or website, and then returns via another campaign
or source.
The following table presents the number of visits to our mobile applications and
websites for the periods presented (in millions):
                 Three Months Ended
                     March 31,                           2019 to 2020
                2020               2019                 % Change
Visits            2,117.6        2,019.8        5  %



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 customers - 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, 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, and Premier Agent revenue and display revenue depend on
advertisements being served to users of our mobile applications and websites.
We count a unique user the first time an individual accesses one of our mobile
applications using a mobile device during a calendar month and the first time an
individual accesses one of our websites using a web browser during a calendar
month. If an individual accesses our mobile applications using different mobile
devices within a given month, the first instance of access by each such mobile
device is counted as a separate unique user. If an individual accesses more than
one of our mobile applications within a given month, the first access to each
mobile application is counted as a separate unique user. If an individual
accesses our websites using different web browsers within a given month, the
first access by each such web browser is counted as a separate unique user. If
an individual accesses more than one of our websites in a single month, the
first access to each website is counted as a separate unique user since unique
users are tracked separately for each domain. Zillow, StreetEasy, HotPads and
Naked Apartments measure unique users with Google Analytics, and Trulia measures
unique users with Adobe Analytics.
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Due to third-party technological limitations, user software settings, or user
behavior, Google Analytics may assign a unique cookie to different instances of
access by the same individual to our mobile applications and websites. In such
instances, Google Analytics would count different instances of access by the
same individual as separate unique users. Accordingly, reliance on the number of
unique users counted by Google Analytics may overstate the actual number of
unique users who access our mobile applications and websites during the period.
The following table presents our average monthly unique users for the periods
presented (in millions):
                                      Three Months Ended
                                          March 31,                          2019 to 2020
                                      2020              2019                % Change
Average Monthly Unique Users              192.5        181.1        6  %


Homes Sold
The number of homes sold through Zillow Offers is an important metric as it is
an indicator of customers' adoption of the Zillow Offers service as well as our
ability to generate revenue through the service. Growth in the number of homes
sold through Zillow Offers suggests increased adoption of the service by home
buyers and generally results in growth in the amount of our Homes segment
revenue.
The following table presents the number of homes sold through Zillow Offers for
the periods presented:
                              Three Months Ended
                                  March 31,                           2019 to 2020
                               2020             2019                 % Change
Number of Homes Sold               2,394        414        478  %



Basis of Presentation
Revenue
We recognize revenue when or as we satisfy our performance obligations by
transferring control of promised products or services to our customers in an
amount that reflects the consideration to which we expect to be entitled in
exchange for those products or services.
In our Homes segment, we generate revenue from the resale of homes on the open
market and through our title and escrow services. Our two revenue categories
within our Homes segment are Zillow Offers and Other.
In our IMT segment, we generate revenue from the sale of advertising services
and our suite of marketing software and technology solutions to residential real
estate businesses, professionals and consumers. These professionals include real
estate, rental and new construction brand advertisers, professionals and
consumers. Our two revenue categories within our IMT segment are Premier Agent
and Other.
In our Mortgages segment, we generate revenue from the sale of advertising
services to mortgage lenders and other mortgage professionals, mortgage
originations and the related sale of mortgages on the secondary market through
Zillow Home Loans, as well as Mortech mortgage software solutions.
Homes Segment
Zillow Offers Revenue. Zillow Offers revenue is derived from the resale of homes
on the open market. We recognize revenue at the time of the closing of the home
sale when title to and possession of the property are transferred to the buyer.
The amount of revenue recognized for each home sale is equal to the full sale
price of the home net of resale concessions and credits to the buyer and does
not reflect real estate agent commissions, closing or other costs associated
with the transaction.
Other Revenue. Other Homes revenue is primarily generated through Zillow Closing
Services, which offers title and escrow services to home buyers and sellers,
including title search procedures for title insurance policies, escrow and other
closing services. Title search, which is recorded net of amounts remitted to
third-party insurance underwriters, and title and escrow closing fees, are
recognized as revenue upon closing of the underlying real estate transaction.
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IMT Segment
Premier Agent Revenue. Premier Agent revenue is derived from our Premier Agent
and Premier Broker programs. Our Premier Agent and Premier Broker programs offer
a suite of marketing and business technology products and services to help real
estate agents and brokers achieve their advertising goals, while growing and
managing their businesses and brands. All Premier Agents and Premier Brokers
receive access to a dashboard portal on our mobile application and website that
provides individualized program performance analytics, our customer relationship
management, or CRM, tool that captures detailed information about each contact
made with a Premier Agent or Premier Broker through our mobile and web platforms
and our account management tools. The marketing and business technology products
and services promised to Premier Agents and Premier Brokers are delivered over
time, as the customer simultaneously receives and consumes the benefit of the
performance obligations.
Premier Agent and Premier Broker advertising products, which include the
delivery of impressions and validated consumer connections, or leads, are
primarily offered on a share of voice basis. Payment is received prior to the
delivery of impressions and connections. Impressions are delivered when an
advertisement appears on pages viewed by users of our mobile applications and
websites and connections are delivered when consumer contact information is
provided to Premier Agents and Premier Brokers. We do not promise any minimum or
maximum number of impressions or connections to customers, but instead control
when and how many impressions and connections to deliver based on a customer's
share of voice. We determine the number of impressions and connections to
deliver to Premier Agents and Premier Brokers in each zip code using a
market-based pricing method in consideration of the total amount spent by
Premier Agents and Premier Brokers to purchase impressions and connections in
the zip code during the month. This results in the delivery of impressions and
connections over time in proportion to each Premier Agent's and Premier Broker's
share of voice. A Premier Agent's or Premier Broker's share of voice in a zip
code is determined by their proportional monthly prepaid spend in that zip code
as a percentage of the total monthly prepaid spend of all Premier Agents and
Premier Brokers in that zip code, and includes both the share of impressions
delivered as advertisements appearing on pages viewed by users of our mobile
applications and websites, as well as the proportion of consumer connections a
Premier Agent or Premier Broker receives. The number of impressions and
connections delivered for a given spend level is dynamic - as demand for
advertising in a zip code increases or decreases, the number of impressions and
connections delivered to a Premier Agent or Premier Broker in that zip code
decreases or increases accordingly.
We primarily recognize revenue related to the Premier Agent and Premier Broker
products and services based on the monthly prepaid spend recognized on a
straight-line basis during the monthly billing period over which the products
and services are provided. This methodology best depicts how we satisfy our
performance obligations to customers, as we continuously transfer control of the
performance obligations to the customer over time. Given a Premier Agent or
Premier Broker typically prepays their monthly spend and the monthly spend is
refunded on a pro-rata basis upon cancellation of the contract by a customer at
any point in time, we have determined that Premier Agent and Premier Broker
contracts are effectively daily contracts, and each performance obligation is
satisfied over time as each day lapses. We have not allocated the transaction
price to each performance obligation within our Premier Agent and Premier Broker
arrangements, as the amounts recognized would be the same irrespective of any
allocation.
In October 2018, we began testing a new pricing model, Flex, for Premier Agent
and Premier Broker advertising services in limited markets. With the Flex model,
Premier Agents and Premier Brokers are provided with validated leads at no
upfront cost and pay a performance advertising fee only when a real estate
transaction is closed with one of the leads. With this pricing model, the
transaction price represents variable consideration, as the amount to which we
expect to be entitled varies based on the number of validated leads that convert
into real estate transactions and the value of those transactions. During this
testing phase, we recognize revenue when we receive payment for a real estate
transaction closed with a Flex lead. We will continuously reevaluate this
determination and the point at which we may begin to estimate variable
consideration and record revenue as performance obligations are transferred.
Other Revenue. Other IMT revenue primarily includes revenue generated by
rentals, new construction and display, as well as revenue from the sale of
various other marketing and business products and services to real estate
professionals. Rentals revenue includes the sale of advertising and a suite of
tools to rental professionals, landlords and other market participants. Rentals
revenue primarily includes revenue generated by advertising sold to property
managers, landlords and other rental professionals on a cost per lead, cost per
click, cost per lease, cost per listing or cost per impression basis. We
recognize revenue as leads, clicks and impressions are provided to rental
professionals, or as rental listings are published on our mobile applications
and websites, which is the amount for which we have the right to invoice. The
number of leases generated through our rentals pay per lease product during the
period is accounted for as variable consideration, and we estimate the amount of
variable consideration based on the expected number of qualified leases secured
during the period. We do not believe that a
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significant reversal in the amount of cumulative revenue recognized will occur
once the uncertainty related to the number of leases secured is subsequently
resolved.
Rentals revenue also includes revenue generated from our rental applications
product through which potential renters can submit applications to multiple
rental properties over a 30-day period for a flat service fee. We recognize
revenue for the rental applications product on a straight-line basis during the
contractual period over which the customer has the right to access and submit
the rental application.
Our new construction marketing solutions allow home builders to showcase their
available inventory to home shoppers. New construction revenue primarily
includes revenue generated by advertising sold to builders on a cost per
residential community basis, and revenue is recognized on a straight-line basis
during the contractual period over which the communities are advertised on our
mobile applications and websites. New construction revenue also includes revenue
generated on a cost per impression basis whereby we recognize revenue as
impressions are delivered to users interacting with our mobile applications and
websites, which is the amount for which we have the right to invoice.
Consideration for new construction products is billed in arrears. Display
revenue primarily consists of graphical mobile and web advertising sold on a
cost per thousand impressions or cost per click basis to advertisers promoting
their brands on our mobile applications and websites. We recognize display
revenue as clicks occur or as impressions are delivered to users interacting
with our mobile applications or websites, which is the amount for which we have
the right to invoice.
Mortgages Segment
Mortgages Revenue. Mortgages revenue includes marketing products sold to
mortgage professionals on a cost per lead basis, including our Custom Quote and
a portion of our Connect services, and on a subscription basis, including a
portion of our Connect service, revenue generated by Zillow Home Loans, our
affiliated mortgage lender, and revenue generated by Mortech. Zillow Group
operates Custom Quote and Connect through its wholly owned subsidiary, Zillow
Group Marketplace, Inc., a licensed mortgage broker. For our Connect and Custom
Quote cost per lead marketing products, participating qualified mortgage
professionals typically make a prepayment to gain access to consumers interested
in connecting with mortgage professionals. Mortgage professionals who exhaust
their initial prepayment prepay additional funds to continue to participate in
the marketplace. For our Connect subscription mortgage marketing product,
participating qualified mortgage professionals generally prepay a monthly
subscription fee, which they then allocate to desired geographic counties. In
Zillow Group's Connect platform, consumers answer a series of questions to find
a local lender, and mortgage professionals receive consumer contact information,
or leads, when the consumer chooses to share their information with a lender.
Consumers who request rates for mortgage loans in Custom Quotes are presented
with customized quotes from participating mortgage professionals.
For our cost per lead mortgages products, we recognize revenue when a user
contacts a mortgage professional through our mortgages platform, which is the
amount for which we have the right to invoice. For our subscription product, the
opportunity to receive a consumer contact is based on the mortgage
professional's relative share of voice in a geographic county. When a consumer
submits a contact, we contact a group of subscription mortgage professionals via
text message, and the first mortgage professional to respond receives the
consumer contact information. We recognize revenue based on the contractual
spend recognized on a straight-line basis during the contractual period over
which the service is provided. This methodology best depicts how we satisfy our
performance obligation to subscription customers, as we continuously transfer
control of the performance obligation to the customer throughout the contractual
period.
Mortgage origination revenue recorded within our Mortgages segment reflects both
origination fees and the corresponding sale, or expected future sale, of a loan.
When an interest rate lock commitment is made to a customer, we record the
expected gain on sale of the mortgage, plus the estimated earnings from the
expected sale of the associated servicing rights, adjusted for a pull-through
percentage (which is defined as the likelihood that an interest rate lock
commitment will be originated), as revenue. Revenue from loan origination fees
is recognized at the time the related real estate transactions are completed,
usually upon the close of escrow and when we fund mortgage loans. Once funded,
mortgage loans held for sale are recorded at fair value based on either sale
commitments or current market quotes and are adjusted for subsequent changes in
fair value until the loan is sold. Net origination costs and fees associated
with mortgage loans are recognized as incurred. We sell substantially all of the
mortgages we originate and the related servicing rights to third-party
purchasers.
Mortgages revenue also includes revenue generated by Mortech, which provides
subscription-based mortgage software solutions, including a product and pricing
engine and lead management platform, for which we recognize revenue on a
straight-line basis during the contractual period over which the services are
provided.
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Costs and Expenses
Cost of Revenue. Our cost of revenue consists of expenses related to operating
our mobile applications and websites, including associated headcount expenses,
such as salaries, benefits, bonuses and share-based compensation expense, as
well as revenue-sharing costs related to our commercial business relationships,
depreciation expense and costs associated with hosting our mobile applications
and websites. For our Homes segment, our cost of revenue also consists of the
consideration paid to acquire and make certain repairs and updates to each home,
including associated overhead costs, as well as inventory valuation adjustments.
For our IMT and Mortgages segments, cost of revenue also includes credit card
fees and ad serving costs paid to third parties. For our Mortgages segment, our
cost of revenue also consists of direct costs to originate loans, including
underwriting and processing costs.
Sales and Marketing. Sales and marketing expenses consist of advertising costs
and other sales expenses related to promotional and marketing activities,
headcount expenses, including salaries, commissions, benefits, bonuses and
share-based compensation expense for sales, sales support, customer support,
marketing and public relations employees and depreciation expense. For our Homes
segment, sales and marketing expenses also consist of selling costs, such as
real estate agent commissions, escrow and title fees, and staging costs, as well
as holding costs incurred during the period that homes are listed for sale,
including utilities, taxes and maintenance. During the three months ended March
31, 2020, Homes segment expenses also include certain expenses attributable to
our efforts to pause home buying in response to the COVID-19 pandemic. For our
Mortgages segment, sales and marketing expenses include headcount expenses for
loan officers and specialists supporting Zillow Home Loans.
Technology and Development. Technology and development expenses consist of
headcount expenses, including salaries, benefits, bonuses and share-based
compensation expense for individuals engaged in the design, development and
testing of our products, mobile applications and websites and the tools and
applications that support our products. Technology and development expenses also
include amortization costs related to capitalized website and development
activities, amortization of software, amortization of certain intangibles and
other data agreement costs related to the purchase of data used to populate our
mobile applications and websites, amortization of intangible assets recorded in
connection with acquisitions, including developed technology and customer
relationships, amongst others, equipment and maintenance costs and depreciation
expense.
General and Administrative. General and administrative expenses consist of
headcount expenses, including salaries, benefits, bonuses and share-based
compensation expense for executive, finance, accounting, legal, human resources,
recruiting, corporate information technology costs and other administrative
support. General and administrative expenses also include legal settlement costs
and estimated legal liabilities, legal, accounting and other third-party
professional service fees, rent expense, depreciation expense and bad debt
expense.
Impairment Costs. Impairment costs for the three months ended March 31, 2020
consist of a $71.5 million non-cash impairment related to the Trulia trade names
and trademarks intangible asset and a $5.3 million non-cash impairment related
to our October 2016 equity investment. For additional information about the
impairments, see Note 9 and Note 10 to our condensed consolidated financial
statements.
Integration Costs. Integration costs consist of expenses incurred to incorporate
operations, systems, technology and rights and responsibilities of acquired
companies, during both pre-closing and post-closing periods, into Zillow Group's
business. For the three months ended March 31, 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.
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Interest Expense
Our corporate interest expense consists of interest on Trulia's convertible
senior notes due in 2020 that we guaranteed in connection with our February 2015
acquisition of Trulia, and interest on the convertible senior notes due in 2021,
2023, 2024 and 2026. Our corporate interest expense also includes the
amortization of the debt discount and deferred issuance costs for the
convertible senior notes due in 2021, 2023, 2024 and 2026. Refer to Note 12 of
our Notes to Condensed Consolidated Financial Statements in Part I of this
Quarterly Report on Form 10-Q for stated interest rates and interest payment
dates for each of our convertible senior notes.
For our Homes segment, interest expense includes interest on borrowings, funding
fees and other fees, including the amortization of deferred issuance costs, on
the credit facilities related to our Zillow Offers business. Borrowings on these
credit facilities bear interest at the one-month LIBOR plus an applicable margin
as defined in the credit agreements.
For our Mortgages segment, interest expense includes interest on the warehouse
lines of credit and beginning in the fourth quarter of 2019, interest on the
master repurchase agreement, related to our Zillow Home Loans business.
Borrowings on the warehouse lines of credit and master repurchase agreement bear
interest at the one-month LIBOR plus an applicable margin as defined in the
agreements.
Income Taxes
We are subject to federal and state income taxes in the United States and
federal and provincial income taxes in Canada. As of March 31, 2020 and December
31, 2019, we have provided a valuation allowance against our net deferred tax
assets that we believe, based on the weight of available evidence, are not more
likely than not to be realized. Therefore, no material current tax liability or
expense has been recorded in the condensed consolidated financial statements. We
have accumulated federal tax losses of approximately $1,137.6 million as of
December 31, 2019, which are available to reduce future taxable income. We have
accumulated state tax losses of approximately $34.3 million (tax effected) as of
December 31, 2019.
We recorded an income tax benefit of $9.2 million for the three months ended
March 31, 2020. The income tax benefit was a result of a $9.7 million income tax
benefit related to the $71.5 million non-cash impairment we recorded during the
three months ended March 31, 2020 related to the Trulia trade names and
trademarks intangible asset. For additional information about the non-cash
impairment, see Note 10 to our condensed consolidated financial statements. This
income tax benefit was partially offset by an immaterial amount of state income
tax expense recorded for the three months ended March 31, 2020.
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Results of Operations
Given the unprecedented uncertainty surrounding COVID-19, including the unknown
duration and severity of the pandemic and related economic disruption and the
unknown overall impact on customer demand, we are unable to forecast the full
impact on our business. As a result, financial performance for prior and current
periods may not be indicative of future performance.
The following tables present our results of operations for the periods indicated
and as a percentage of total revenue (in thousands, except per share and
percentage data, unaudited):
                                                               Three Months Ended
                                                                    March 31,
                                                              2020             2019
Statements of Operations Data:
Revenue:
Homes                                                     $  769,873       $ 128,472
IMT                                                          330,666         298,272
Mortgages                                                     25,282          27,360
Total revenue                                              1,125,821         454,104
Cost of revenue (exclusive of amortization) (1)(2):
Homes                                                        732,199         122,419
IMT                                                           24,318          24,251
Mortgages                                                      5,155           4,678
Total cost of revenue                                        761,672         151,348
Sales and marketing (1)                                      204,648         161,587
Technology and development (1)                               134,918

107,770


General and administrative (1)                                92,285          95,774
Impairment costs                                              76,800               -
Integration costs                                                  -             352
Total costs and expenses                                   1,270,323         516,831
Loss from operations                                        (144,502)        (62,727)
Other income                                                   9,593           9,168
Interest expense                                             (37,592)        (16,466)
Loss before income taxes                                    (172,501)        (70,025)
Income tax benefit                                             9,228           2,500
Net loss                                                  $ (163,273)      $ (67,525)
Net loss per share - basic and diluted                    $    (0.78)      $   (0.33)
Weighted-average shares outstanding - basic and diluted      210,674

204,514


Other Financial Data:
Segment loss before income taxes:
Homes segment                                             $  (97,958)      $ (45,205)
IMT segment                                                  (41,507)        (11,452)
Mortgages segment                                            (13,145)         (9,616)
Total segment loss before income taxes                    $ (152,610)      $ (66,273)
Adjusted EBITDA (3):
Homes segment                                             $  (74,995)      $ (34,524)
IMT segment                                                   85,717          61,047
Mortgages segment                                             (5,603)         (2,601)
Total Adjusted EBITDA                                     $    5,119       $  23,922



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                                                                              Three Months Ended
                                                                                   March 31,
                                                                           2020                 2019
(1) Includes share-based compensation as follows:
Cost of revenue                                                       $     1,173          $       881
Sales and marketing                                                         6,993                5,650
Technology and development                                                 18,917               15,508
General and administrative                                                 16,712               44,085
Total                                                                 $

43,795 $ 66,124 (2) Amortization of website development costs and intangible assets included in technology and development

$    17,184          $    14,400
(3) See "Adjusted EBITDA" below for more information and for a reconciliation of Adjusted EBITDA to the
most directly comparable financial measure calculated and presented in accordance with U.S. generally
accepted accounting principles, or GAAP, which is net loss on a consolidated basis and loss before income
taxes for each segment.



                                                     Three Months Ended
                                                         March 31,
                                                      2020             2019
Percentage of Revenue:
Revenue:
Homes                                                        68  %      28  %
IMT                                                          29         66
Mortgages                                                     2          6
Total revenue                                               100        100
Cost of revenue (exclusive of amortization):
Homes                                                        65         27
IMT                                                           2          5
Mortgages                                                     -          1
Total cost of revenue                                        68         33
Sales and marketing                                          18         36
Technology and development                                   12         24
General and administrative                                    8         21
Impairment costs                                              7          0
Integration costs                                             0          -
Total costs and expenses                                    113        114
Loss from operations                                        (13)       (14)
Other income                                                  1          2
Interest expense                                             (3)        (4)
Loss before income taxes                                    (15)       (15)
Income tax benefit                                            1          1
Net loss                                                    (15) %     (15) %


Adjusted EBITDA
To provide investors with additional information regarding our financial
results, we have disclosed Adjusted EBITDA in total and for each segment, each a
non-GAAP financial measure, within this Quarterly Report on Form 10-Q. We have
provided a reconciliation below of Adjusted EBITDA in total to net loss and
Adjusted EBITDA by segment to loss before income taxes for each segment, the
most directly comparable GAAP financial measures.
We have included Adjusted EBITDA in total and for each segment in this Quarterly
Report on Form 10-Q as they are key metrics used by our management and board of
directors to measure operating performance and trends and to prepare and
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approve our annual budget. In particular, the exclusion of certain expenses in
calculating Adjusted EBITDA facilitates operating performance comparisons on a
period-to-period basis.
Our use of Adjusted EBITDA in total and for each segment has limitations as an
analytical tool, and you should not consider these measures in isolation or as a
substitute for analysis of our results as reported under GAAP. Some of these
limitations are:
•Adjusted EBITDA does not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
•Adjusted EBITDA does not consider the potentially dilutive impact of
share-based compensation;
•Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future, and Adjusted
EBITDA does not reflect cash capital expenditure requirements for such
replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not reflect impairment costs;
•Adjusted EBITDA does not reflect interest expense or other income;
•Adjusted EBITDA does not reflect income taxes; and
•Other companies, including companies in our own industry, may calculate
Adjusted EBITDA differently than we do, limiting its usefulness as a comparative
measure.
Because of these limitations, you should consider Adjusted EBITDA in total and
for each segment alongside other financial performance measures, including
various cash flow metrics, net loss, loss before income taxes for each segment
and our other GAAP results.
The following tables present a reconciliation of Adjusted EBITDA to the most
directly comparable GAAP financial measure, which is net loss on a consolidated
basis and loss before income taxes for each segment, for each of the periods
presented (in thousands, unaudited):

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