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 endedDecember 31, 2021 . Overview of our BusinessZillow Group, Inc. is reimagining real estate to make it easier to unlock life's next chapter. As the most visited real estate website inthe United States , Zillow and its affiliates help high-intent movers find and win their home through digital solutions, first class partners and easier buying, selling, financing and renting experiences. We help customers find and win their home with referrals to trusted Zillow Premier Agent and Premier Broker partners and our portfolio of Zillow-branded and affiliated transaction-oriented services. Zillow Offers has purchased and sold homes directly in markets across the country. In the fourth quarter of 2021, we began to wind down Zillow Offers operations with expected completion in the second half of 2022.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 Zillow Rentals, Trulia, StreetEasy, Zillow Closing Services, HotPads and Out East. In addition,Zillow Group provides a comprehensive suite of marketing software and technology solutions for the real estate industry which include Mortech, dotloop, Bridge Interactive, New Home Feed and ShowingTime.
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 fromZillow Group's purchase and sale of homes directly through the Zillow Offers service and the financial results from the title and escrow services performed by Zillow Closing Services, primarily in connection with the purchase and sale of Zillow Offers homes. 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. In the fourth quarter of 2021, we began to include the financial results of ShowingTime in the IMT segment. For additional information regarding theSeptember 2021 acquisition of ShowingTime, see Note 9 in our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The Mortgages segment primarily includes financial results for mortgage originations throughZillow Home Loans and advertising sold to mortgage lenders and other mortgage professionals.
The Homes segment has primarily generated revenue through our Zillow Offers service from the resale of homes. Other Homes revenue relates to revenue associated with title and escrow services provided through Zillow Closing Services. As a result of the decision to wind down Zillow Offers operations, we plan to report Zillow Offers as a discontinued operation beginning with the period during which disposition of the business is complete. We expect the disposition to be complete in the second half of 2022.
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 products, which include the delivery of validated customer connections, or leads, are primarily offered on a share of voice basis. Connections are distributed to Premier Agent and Premier Broker partners in proportion to their share of voice, or an agent advertiser's share of total advertising purchased in a particular zip code. Connections are delivered when customer contact information is provided to Premier Agent and Premier Broker partners. Connections are provided as part of our suite of advertising services for Premier Agent and Premier Broker partners; we do not charge a separate fee for these customer leads. We also offer a pay for performance pricing model called "Flex" for Premier Agent and Premier Broker services in certain markets to select partners. With the Flex model, Premier Agent and Premier Broker partners are provided with validated leads at no initial cost and pay a performance fee only when a real estate transaction is closed with one of the leads. 35
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Rentals revenue includes advertising sold to property managers, landlords and other rental professionals on a cost per lead, click, lease, listing or impression basis or for a fixed fee for certain advertising packages. Rentals revenue also includes revenue generated from our rental applications product, through which potential renters can submit applications to multiple properties for a flat service fee. Other IMT revenue 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 and ShowingTime. 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 on a cost per impression or cost per click basis to advertisers promoting their brands on our mobile applications and websites. ShowingTime revenue is primarily generated by Appointment Center, a software-as-a-service and call center solution allowing real estate agents, brokerages and multiple listing services to efficiently schedule real estate viewing appointments on behalf of their customers. Appointment Center services also include call center specialists who provide scheduling support to customers. Appointment Center revenue is primarily billed in advance on a monthly basis. In our Mortgages segment, we primarily generate revenue through mortgage originations and the related sale of mortgages on the secondary market throughZillow Home Loans and from advertising sold to mortgage lenders and other mortgage professionals on a cost per lead basis, including our Custom Quote and Connect services.
As of
Financial Highlights
For the three months endedMarch 31, 2022 and 2021, we generated total revenue of$4.3 billion and$1.2 billion , respectively, representing year-over-year growth of 250%. The increase in total revenue was primarily attributable to the following: •Zillow Offers revenue increased by$3.0 billion to$3.7 billion for the three months endedMarch 31, 2022 due to the sale of 8,981 homes at an average selling price of$414.0 thousand per home. For the three months endedMarch 31, 2021 , Zillow Offers revenue was$701 million due to the sale of 1,965 homes at an average selling price of$356.7 thousand per home. We expect Zillow Offers revenue to decrease in subsequent quarters as we complete our wind down of Zillow Offers. •Premier Agent revenue increased by$29 million to$363 million for the three months endedMarch 31, 2022 compared to$334 million for the three months endedMarch 31, 2021 . The increase in Premier Agent revenue was primarily due to a 4% increase in Premier Agent revenue per visit, driven primarily by continued strong demand across the residential real estate industry and growth in monetization of our impressions and leads. •Other IMT revenue increased by$18 million to$66 million for the three months endedMarch 31, 2022 compared to$48 million for the three months endedMarch 31, 2021 . The increase in Other IMT revenue was primarily a result of the addition of ShowingTime revenue beginning in the fourth quarter of 2021. •Mortgages segment revenue decreased by$22 million to$46 million for the three months endedMarch 31, 2022 compared to$68 million for the three months endedMarch 31, 2021 , driven by a decrease in revenue generated byZillow Home Loans , as total loan origination volume decreased 40%. The decrease in loan origination volume was driven primarily by higher interest rates that decreased demand for refinance mortgages.
During the three months ended
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Wind Down of Zillow Offers Operations
InNovember 2021 , the Board of Directors ofZillow Group made the determination to wind down Zillow Offers operations. The wind down is expected to be completed in the second half of 2022 and result in approximately a 25% reduction ofZillow Group's workforce of which approximately 21% has been completed. During the wind down period, we continue to sell properties in inventory. As of earlyMay 2022 , we have sold, are under contract to sell or have reached agreement on disposition terms for all except approximately 100 homes. We expect the sale of our remaining inventory to be substantially complete during the three months endingJune 30, 2022 , with operations and a small amount of inventory extending into the three months endingSeptember 30, 2022 . As ofJanuary 31, 2022 , we are no longer acquiring homes. For the three months endedMarch 31, 2022 , we recorded a write-down to inventory totaling$5 million with a corresponding increase to cost of revenue as a result of purchasing homes at higher prices than our current estimates of the future selling prices after selling costs. For the three months endedMarch 31, 2022 , we have also incurred$30 million in restructuring costs within our Homes segment associated with our wind down of Zillow Offers operations, primarily associated with one-time termination benefit costs, other severance and employee costs and contract termination costs. Additionally, for the three months endedMarch 31, 2022 , we incurred$30 million of charges associated with winding down Zillow Offers financing facilities, which have been recorded within interest expense and loss on extinguishment of debt, and$6 million of accelerated depreciation and amortization recorded to cost of revenue. For additional information regarding the impairment and restructuring costs, including total expected costs to be incurred and cumulative costs incurred as ofMarch 31, 2022 , see Note 18 in our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q and the subsection below titled "Impairment and Restructuring" under the caption "Results of Operations." Given the wind down of Zillow Offers and corresponding shift in our strategic plans, financial performance for prior and current periods may not be indicative of future performance.
COVID-19 Impact
The effect and extent of the impact of the COVID-19 pandemic on our business continues to be uncertain and difficult to predict. While we have seen recovery in our business and the businesses of our customers and real estate partners from the initial economic effects of the pandemic, the impact of the COVID-19 pandemic (including variants) may continue to affect our financial results in 2022. The extent to which COVID-19 (including any variants) continues to impact our results and financial position will depend on future developments, which are uncertain and difficult to predict.
Health of Residential Housing Market
Our financial performance is impacted by changes in the health of the residential housing market, which is impacted, in turn, by general economic conditions. Current market factors, including low housing inventory, decreases in new for-sale listings, increases in mortgage interest rates, inflationary conditions and high rental occupancy rates may have a negative impact on the number of transactions that consumers complete using our products and services and on demand for our advertising services. The extent to which these factors impact our results and financial position will depend on future developments, which are uncertain and difficult to predict.
Key Metrics
Management has identified visits, unique users, and the volume of loans originated throughZillow Home Loans as relevant to investors' and others' assessment of our financial condition and results of operations. We no longer consider the number of homes sold as a key metric given the wind down of Zillow Offers operations. 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 have participated in our Zillow Offers program, use Zillow Homes Loans or be transaction-ready real estate market participants and therefore are more sought-after by our Premier Agent and Premier Broker real estate partners.
We define a visit as a group of interactions by users with the Zillow, Trulia and StreetEasy 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. 37
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Zillow and StreetEasy measure visits with
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, 2021 to 2022 2022 2021 % Change Visits 2,627 2,511 5 % Unique Users Measuring unique users is important to us because much of our revenue depends in part on our ability to connect home buyers and sellers, renters and individuals with or looking for a mortgage to real estate, rental and mortgage professionals, products and services. 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 depended in part, and our Mortgages segment revenue depends in part, on users accessing our mobile applications and websites to engage in the sale, purchase and financing of homes with Zillow Offers andZillow Home Loans , and our Premier Agent revenue, rentals 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 and HotPads measure unique users withMarch 31, 2022 , unique users decreased 5% compared to the three months endedMarch 31, 2021 , driven primarily by strong residential real estate industry recovery in the comparable prior year period coupled with more normalized seasonality impacts during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . 38
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Loan Origination Volume
Loan origination volume is an important metric as it is a measure of how successful we are at growing originations and subsequent sales of mortgage loan products through our mortgage origination business,Zillow Home Loans , which directly impacts our Mortgages segment revenue. Loan origination volume represents the total value of mortgage loan originations closed throughZillow Home Loans during the period.
The following table presents loan origination volume by purpose and in total for
Three Months Ended March 31, 2021 to 2022 2022 2021 % Change Purchase loan origination volume$ 123 $ 115 7 % Refinance loan origination volume 578 1,052 (45) % Total loan origination volume$ 701 $ 1,167
(40) %
During the three months ended
Results of Operations
Given the uncertainty surrounding the COVID-19 pandemic, the health of the residential housing market and strategic shifts in our business, financial performance for prior and current periods may not be indicative of future performance. Revenue % of Total Revenue Three Months Ended Three Months Ended March 31, 2021 to 2022 March 31, 2022 2021 $ Change % Change 2022 2021 (in millions, unaudited) Revenue: Homes segment: Zillow Offers$ 3,718 $ 701 $ 3,017 430 % 87 % 58 % Other 3 3 - - - -Total Homes segment revenue 3,721 704 3,017 429 87 58 IMT segment: Premier Agent 363 334 29 9 9 27 Rentals 61 64 (3) (5) 1 5 Other 66 48 18 38 2 4 Total IMT segment revenue 490 446 44 10 12 37 Mortgages segment 46 68 (22) (32) 1 6 Total revenue$ 4,257 $ 1,218 $ 3,039 250 % 100 % 100 %
Total revenue increased
•Homes segment revenue increased 429% to$3.7 billion , primarily due to an increase of$3.0 billion , or 430%, in Zillow Offers revenue. Zillow Offers revenue increased to$3.7 billion due to the sale of 8,981 homes at an average selling price of$414.0 thousand per home, as compared to the sale of 1,965 homes at an average selling price of$356.7 thousand per home in the comparable prior year period. The increase in revenue is due to increased acquisition volumes in 2021 subsequent to the three months endedMarch 31, 2021 , which resulted in higher resale volumes, including accelerated resales, as we wind down Zillow Offers operations. We expect Zillow Offers revenue to decrease in subsequent quarters as we complete our wind down of Zillow Offers. 39 -------------------------------------------------------------------------------- T a ble of Contents •IMT segment revenue increased 10% to$490 million , primarily due to a$29 million , or 9%, increase in Premier Agent revenue. The increase in Premier Agent revenue was driven by an increase in Premier Agent revenue per visit, which increased by 4% to$0.138 for the three months endedMarch 31, 2022 from$0.133 for the three months endedMarch 31, 2021 . We calculate Premier Agent revenue per visit by dividing the revenue generated by our Premier Agent and Premier Broker programs by the number of visits in the period. The increase in Premier Agent revenue per visit was driven primarily by continued strong demand across the residential real estate industry which increased home sales prices and resulted in higher monetization of leads. Other IMT revenue increased primarily as a result of the addition of ShowingTime revenue beginning in the fourth quarter of 2021. •Mortgages segment revenue decreased 32% to$46 million primarily due to a decline in mortgage originations revenue. The decrease in mortgage originations revenue was primarily due to a 40% decrease in total loan origination volume from$1.2 billion to$701 million , primarily resulting from a decrease in refinance activity. The decrease in mortgage originations revenue was also attributable to a 27% decrease in gain on sale margin driven by industry margin compression. Gain on sale margin represents the net gain on sale of mortgage loans divided by total loan origination volume for the period. Net gain on sale of mortgage loans includes all components related to the origination and sale of mortgage loans, including the net gain on sale of loans into the secondary market, loan origination fees, unrealized gains and losses associated with changes in fair value of interest rate lock commitments and mortgage loans held for sale, realized and unrealized gains or losses from derivative financial instruments and the provision for losses relating to representations and warranties.
Income (Loss) Before Income Taxes
% of Revenue Three Months Ended Three Months Ended March 31, 2021 to 2022 March 31, 2022 2021 $ Change % Change 2022 2021 (in millions, unaudited) Income (loss) before income taxes: Homes segment$ (68) $ (58) $ (10) (17) % (2) % (8) % IMT segment 108 143 (35) (24) 22 32 Mortgages segment (27) (2) (25) (1250) (59) (3) Corporate items (1) (6) (34) 28 82 N/A N/A Total income before income taxes$ 7 $ 49 $ (42) (86) % - % 4 % (1) Certain corporate items are not directly attributable to any of our segments, including the loss on extinguishment of debt, interest income earned on our short-term investments included in other income and interest costs on our convertible senior notes included in interest expense. Adjusted EBITDA % of Revenue Three Months Ended Three Months Ended March 31, 2021 to 2022 March 31, 2022 2021 $ Change % Change 2022 2021 (in millions, unaudited) Net income$ 16 $ 52 $ (36) (69) % - % 4 % Adjusted EBITDA: Homes segment$ 23 $ (33) $ 56 170 % 1 % (5) % IMT segment 209 209 - - 43 47 Mortgages segment (12) 6 (18) (300) (26) 9
Total Adjusted EBITDA
21 % 5 % 15 % 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 income and Adjusted EBITDA by segment to income (loss) before income taxes for each segment, the most directly comparableU.S. generally accepted accounting principles ("GAAP") financial measures. 40
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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 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 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 expenditures or contractual commitments;
•Adjusted EBITDA does not reflect restructuring costs;
•Adjusted EBITDA does not reflect acquisition-related costs;
•Adjusted EBITDA does not reflect the loss on extinguishment of debt;
•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 income, income (loss) before income taxes for each segment, and our other GAAP results. 41
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The following tables present a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, which is net income on a consolidated basis and income (loss) before income taxes for each segment, for each of the periods presented (in millions, unaudited):
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