ZILLOW GROUP, INC. 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, 2019 as well as in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q. 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 in theU.S. , Zillow and its affiliates offer customers an on-demand experience for selling, buying, renting or financing with transparency and nearly seamless end-to-end service. Zillow Offers buys and sells homes directly in dozens of markets across the country, allowing sellers control over their timeline. 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. Zillow recently launchedZillow Homes, Inc. , a licensed brokerage entity, to streamline Zillow Offers transactions. Other consumer brands include Trulia, StreetEasy, HotPads 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 OverviewZillow 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 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 financial results for mortgage originations through Zillow Home Loans, advertising sold to mortgage lenders and other mortgage professionals as well as our Mortech mortgage software solutions. The Homes segment primarily generates revenue through our Zillow Offers service from the resale of homes. We began buying homes through Zillow Offers inApril 2018 , and we began selling homes inJuly 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. InOctober 2018 , we began testing a new Flex pricing model for Premier Agent and Premier Broker advertising services in limited markets. We now offer this pricing model to certain high-performing partners, and provide it alongside our legacy market-based pricing model. 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 validated leads. 33 -------------------------------------------------------------------------------- Table of Contents 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 on a cost per impression or cost per click basis to advertisers promoting their brands on our mobile applications and websites. In our Mortgages segment, we generate revenue through mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans, and from advertising sold to mortgage lenders and other mortgage professionals on a cost per lead basis, including our Connect and Custom Quote services. We also generate revenue from Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform. During the three months endedSeptember 30, 2020 , we generated total revenue of$656.7 million , as compared to$745.2 million during the three months endedSeptember 30, 2019 , a decrease of$88.5 million , or 12%. As further described below, our total revenue was negatively impacted by the effects of COVID-19 during the three months endedSeptember 30, 2020 , largely due to the pause in home buying activities in our Zillow Offers business in the first half of 2020 which resulted in lower inventory available for resale. The number of homes sold through Zillow Offers decreased 52% to 583 homes for the three months endedSeptember 30, 2020 from 1,211 homes for the three months endedSeptember 30, 2019 , resulting in a$197.5 million , or 51%, decrease in Homes segment revenue. This decrease was partially offset by an$80.1 million , or 24%, increase in IMT segment revenue driven by a$58.0 million , or 24%, increase in Premier Agent revenue, a$22.1 million , or 23%, increase in Other IMT revenue primarily due to increases in rentals revenue, and a$28.9 million , or 114%, increase in Mortgages segment revenue primarily due to an increase in revenue generated by Zillow Home Loans. Visits increased 32% to 2,786.2 million for the three months endedSeptember 30, 2020 from 2,104.9 million for the three months endedSeptember 30, 2019 . There were approximately 236.2 million average monthly unique users of our mobile applications and websites for the three months endedSeptember 30, 2020 , representing year-over-year growth of 21%. As ofSeptember 30, 2020 , we had 5,409 full-time employees compared to 5,249 full-time employees as ofDecember 31, 2019 . COVID-19 Impact InDecember 2019 , COVID-19 was reported and subsequently spread worldwide. OnMarch 11, 2020 , theWorld 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. In response to the COVID-19 pandemic, 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. We have taken meaningful actions to support our customers and partners, including implementing a variety of relief initiatives to help them navigate their financial challenges. EffectiveMarch 23, 2020 , we began offering Premier Agent advertiserswho participate in our market-based pricing program a 50% discount on their subsequent monthly bill. This discount also applied to any new bookings throughApril 22, 2020 . Additionally, we provided other targeted market-based discounts and offered temporary discounts on certain of our other IMT and Mortgage marketplace products throughout the second quarter, and in limited cases during the third quarter. We experienced year-over-year growth in IMT segment revenue for the three months endedSeptember 30, 2020 , including Premier Agent revenue and Other IMT segment revenue, driven primarily by faster-than-expected residential real estate industry recovery leading to increased consumer engagement across our mobile applications and websites as visits increased 32% to 2,786.2 million for the three months endedSeptember 30, 2020 . In addition, we experienced year-over-year growth in Mortgages segment revenue for the three months endedSeptember 30, 2020 , primarily as a result of relatively low interest rates and a strong refinance market. 34 -------------------------------------------------------------------------------- Table of Contents OnMarch 23, 2020 , we announced that Zillow Offers would temporarily pause home buying in all markets in response to local public health orders and to help protect the safety and health of our employees, customers and partners. Where able, we continued to make updates to, list and sell homes in inventory. By earlyAugust 2020 , we had resumed home buying in all paused Zillow Offers markets with enhanced health and safety protocols and increased usage of virtual technology. For example, buyers can use virtual tools on the Zillow mobile application or website to view a home if they do not want to visit in person, and all Zillow-owned homes have 3D home tours and floor plans, including room dimensions, on the listing. Zillow Offers is available in 25 markets as ofSeptember 30, 2020 . Revenue generated by the Homes segment for the three months endedSeptember 30, 2020 was negatively impacted by our previous pause in home buying activities for Zillow Offers, which led to lower than anticipated inventory levels entering the three months endedSeptember 30, 2020 resulting in less homes available for resale during the period. To preserve our liquidity in response to the COVID-19 pandemic, we temporarily paused hiring for non-critical roles, paused the majority of our advertising spending and reduced other discretionary spending. During the three months endedSeptember 30, 2020 , we began to increase our hiring and marketing and advertising activities and expect to continue to increase these activities throughout the remainder of 2020. In May of 2020, we strengthened our financial position through our issuance of$565.0 million aggregate principal amount of convertible senior notes due in 2025 ("2025 Notes") for net proceeds of$553.3 million , of which we used$194.7 million to repurchase certain of our 2021 Notes, and we issued 8,800,000 shares of Class C capital stock for net proceeds of$411.5 million . We also expect our liquidity to be positively impacted by certain provisions included in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") that was signed into law onMarch 27, 2020 and provides tax provisions and other stimulus measures to affected companies. Under the CARES Act, we expect to defer certain employer payroll tax payments until 2021 and 2022. We deferred a total of$18.1 million of such payments as ofSeptember 30, 2020 . The impact of the CARES Act was otherwise immaterial to our results of operations for the three and nine month periods endedSeptember 30, 2020 . We have also taken action to promote the health and safety of our employees during the COVID-19 pandemic, and we quickly transitioned the majority of our employees to work remotely inMarch 2020 . We subsequently announced that most employees will have flexibility to work from home indefinitely. Beginning inSeptember 2020 , we started re-opening our offices to employees on an as-needed basis. We expect office re-openings to be a gradual process over many months beginning in 2020 and gradually increasing over time and believe our offices will continue to provide our distributed workforce with a place to work, learn and collaborate. 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 and nine month periods endedSeptember 30, 2020 . The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods as the extent of the impact of COVID-19 on our business continues to be uncertain and difficult to predict. While we have begun to see our business and the business of our customers and real estate partners recover from the initial economic effects of the pandemic, we expect the impact of the COVID-19 pandemic to continue to affect our financial results for the foreseeable future. The extent to which COVID-19 continues to impact our results and financial position will depend on future developments, which are uncertain and cannot be predicted, including new information that may emerge concerning the severity of the COVID-19 pandemic and the actions taken to contain it or address its impact. 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 endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 , both metrics were adversely impacted by the COVID-19 pandemic in the first half of 2020. While visits and unique users stabilized during the three months endedSeptember 30, 2020 , COVID-19 may adversely impact the number of visits and unique users to our mobile applications and websites in future periods. As discussed above, onMarch 23, 2020 , we announced that Zillow Offers would temporarily pause home buying in all markets in response to local public health orders and to help protect the safety and health of our employees, customers and partners. Where able, we continued to make updates to, list and sell homes in inventory. By earlyAugust 2020 , we had resumed home buying in all 24 Zillow Offers markets and Zillow Offers is now available in 25 markets. While we have resumed home buying in all Zillow Offers markets, a decline in home buying and other potential effects of COVID-19 on residential real estate transactions may adversely impact the number of homes sold in future periods, which could result in a decline in revenue in future periods. 35 -------------------------------------------------------------------------------- Table of Contents 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, 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. Zillow and StreetEasy measure visits withNaked Apartments measure unique users withwho 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 September 30, 2019 to 2020 2020 2019 % Change Average Monthly Unique Users 236.2 195.6 21 % 36
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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 Homes segment revenue.
The following table presents the number of homes sold through Zillow Offers for
the periods presented:
Three Months Ended
September 30, 2019 to 2020
2020 2019 % Change
Number of Homes Sold 583 1,211 (52) %
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 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 mortgage originations and the
related sale of mortgages on the secondary market through Zillow Home Loans, the
sale of advertising services to mortgage lenders and other mortgage
professionals, as well as Mortech mortgage software solutions.
Homes Segment
Zillow Offers Revenue. Zillow Offers revenue is derived from the resale of
homes. 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 sales 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 insurance, which is recorded net of amounts remitted to
third-party underwriters, and title and escrow closing fees, are recognized as
revenue upon closing of the underlying real estate transaction.
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.
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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. We now offer this
pricing model to certain high-performing partners and provide it alongside our
legacy market-based pricing model. 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. Beginning in the three months
ended September 30, 2020 , we believe we have sufficient historical data
available and therefore estimate variable consideration and record revenue as
performance obligations, or validated leads, are transferred. 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 transactions closed is
subsequently resolved. Prior to the three months ended September 30, 2020 , we
recognized revenue for validated leads when we received payment for a real
estate transaction closed with a Flex lead.
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 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.
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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 whereby we recognize revenue 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 revenue generated by Zillow Home
Loans, our affiliated mortgage lender, marketing products sold to mortgage
professionals on a cost per lead basis, including our Custom Quote and Connect
services, 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. 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.
Mortgage origination revenue recorded within our Mortgages segment reflects
origination fees on purchase or refinanced mortgages 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 purchase or refinance transactions are completed, usually upon the close
of escrow and when we fund the purchase or refinance 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. Origination costs associated with
originating 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.
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.
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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,
including the customer connections team, 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 nine months ended September 30, 2020 , Homes segment
sales and marketing 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 trade names and trademarks, 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 nine months ended September 30, 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 and nine month periods ended September 30, 2019 ,
integration costs primarily include consulting-related expenses incurred in
connection with the integration of Zillow Home Loans.
Gain on Partial Extinguishment of 2021 Notes
The gain on the partial extinguishment of the 2021 Notes recorded for the nine
months ended September 30, 2020 relates to the partial repurchase of the 2021
Notes in May 2020 in connection with the issuance of the 2025 Notes. For
additional information on the repurchase, see Note 11 to our condensed
consolidated financial statements.
Other Income
Other income consists primarily of interest income earned on our cash, cash
equivalents and short-term investments. For the nine months ended September 30,
2020 , Other income for our IMT segment included a $5.3 million gain on the sale
of our October 2016 equity investment. For additional information on the sale,
see Note 9 to our condensed consolidated financial statements. 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 the convertible senior
notes due in 2021, 2023, 2024, 2025 and 2026 and interest on Trulia's
convertible senior notes due in 2020 that we guaranteed in connection with our
February 2015 acquisition of Trulia. 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, 2025 and 2026. Refer to
Note 11 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.
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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, and in certain cases are subject to a LIBOR floor, 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, and in certain cases
are subject to a LIBOR floor, 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 September 30, 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 income tax expense of $0.4 million for the three months ended
September 30, 2020 and an income tax benefit of $8.1 million for the nine months
ended September 30, 2020 . The income tax benefit for the nine months ended
September 30, 2020 was primarily a result of a $9.7 million income tax benefit
related to the $71.5 million non-cash impairment we recorded during the nine
months ended September 30, 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 nine months ended September 30, 2020 .
Results of Operations
Given the 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.
Revenue
% of Total Revenue
Three Months Ended Three Months Ended
September 30, 2019 to 2020 September 30,
2020 2019 $ Change % Change 2020 2019
(in thousands, unaudited)
Revenue:
Homes segment:
Zillow Offers $ 185,904 $ 384,626 $ (198,722) (52) % 28 % 52 %
Other 1,201 - 1,201 N/A - 0
Total Homes segment revenue 187,105 384,626 (197,521) (51) 28 52
IMT segment:
Premier Agent 298,673 240,698 57,975 24 45 32
Other 116,716 94,592 22,124 23 18 13
Total IMT segment revenue 415,389 335,290 80,099 24 63 45
Mortgages segment 54,198 25,292 28,906 114 8 3
Total revenue $ 656,692 $ 745,208 $
(88,516) (12) % 100 % 100 %
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% of Total Revenue
Nine Months Ended Nine Months Ended
September 30, 2019 to 2020 September 30,
2020 2019 $ Change % Change 2020 2019
(in thousands, unaudited)
Revenue:
Homes segment:
Zillow Offers $ 1,408,832 $ 762,022 $ 646,810 85 % 55 % 42 %
Other 2,398 - 2,398 N/A - 0
Total Homes segment revenue 1,411,230 762,022 649,208 85 55 42
IMT segment:
Premier Agent 732,741 690,394 42,347 6 29 38
Other 293,653 266,837 26,816 10 12 15
Total IMT segment revenue 1,026,394 957,231 69,163 7 40 53
Mortgages segment 113,241 79,637 33,604 42 4 4
Total revenue $ 2,550,865 $ 1,798,890 $ 751,975 42 % 100 % 100 %
Three months ended September 30, 2020 compared to the three months ended
September 30, 2019
Total revenue decreased $88.5 million , or 12%, to $656.7 million:
•Homes segment revenue decreased 51% to $187.1 million , primarily due to a
decrease of $198.7 million , or 52%, in Zillow Offers revenue. Zillow Offers
revenue declined to $185.9 million due to the sale of 583 homes at an average
selling price of $318.8 thousand per home, as compared to the sale of 1,211
homes at an average selling price of $317.6 thousand per home in the comparable
prior year period. Although we resumed home buying in all Zillow Offers markets
by early August 2020 , the pause in home buying activities in our Zillow Offers
business in the first half of 2020 resulted in lower inventory available for
resale during the three months ended September 30, 2020 . We expect Zillow Offers
revenue to increase in future periods as we expect to continue to increase our
home buying and home selling activities across all markets. However, given the
unknown duration and severity of the COVID-19 pandemic and related economic
disruption, we do not know whether we will have to make further adjustments to
our operations or how quickly the business will re-accelerate now that we have
resumed home buying activities.
•IMT segment revenue increased 24% to $415.4 million due to a $58.0 million , or
24%, increase in Premier Agent revenue and a $22.1 million , or 23%, increase in
Other IMT revenue. Premier Agent revenue was positively impacted by an increase
in visits, which increased 32% to 2,786.2 million. Premier Agent revenue per
visit decreased by 6% to $0.107 for the three months ended September 30, 2020
from $0.114 for the three months ended September 30, 2019 . 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 decrease
in Premier Agent revenue per visit was driven by the increase in visits
outpacing the increase in Premier Agent revenue for the three months ended
September 30, 2020 as strong residential real estate industry recovery in the
third quarter lead to increased consumer engagement across our mobile
applications and websites. Other IMT revenue increased primarily due to 50%
growth in rentals revenue driven by increased rental advertising revenue and
increased adoption of our rentals applications product, partially offset by a
36% decrease in display revenue as many display advertisers decreased
discretionary marketing spend during the COVID-19 pandemic.
•Mortgages segment revenue increased 114% to $54.2 million primarily due to an
increase in revenue generated by Zillow Home Loans due to higher sales volume
reflective of market demand as low interest rates have supported strong
refinance activity and expanded industry margins on selling mortgages into the
secondary market.
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Nine months ended September 30, 2020 compared to the nine months ended September
30, 2019
Total revenue increased $752.0 million , or 42%, to $2,550.9 million:
•Homes segment revenue increased 85% to $1,411.2 million , primarily due to an
increase in Zillow Offers revenue of $646.8 million , or 85%. Zillow Offers
revenue increased to $1,408.8 million due to the sale of 4,414 homes at an
average selling price of $319.1 thousand per home as compared to the sale of
2,411 homes at an average selling price of $316.0 thousand per home in the
comparable prior year period. Although Zillow Offers revenue increased for the
nine months ended September 30, 2020 as compared to the comparable prior year
period, revenue for the nine months ended September 30, 2020 was negatively
impacted by the COVID-19 pandemic due to the pause in home buying activities by
our Zillow Offers business beginning in March of 2020, as discussed above.
Although we resumed home buying in all Zillow Offers markets by early August
2020 , the pause in home buying activities in our Zillow Offers business in the
first half of 2020 resulted in lower inventory available for resale during the
third quarter.
•IMT segment revenue increased 7% to $1,026.4 million , primarily due to an
increase of $42.3 million , or 6%, in Premier Agent revenue. Premier Agent
revenue was positively impacted by an increase in visits, which increased 17% to
7,353.6 million for the nine months ended September 30, 2020 from 6,306.0
million in the comparable prior year period. Temporary discounts offered to our
Premier Agent partners in response to the COVID-19 pandemic partially offset the
growth in Premier Agent revenue, resulting in lower revenue per visit when
compared to the prior year. Other IMT revenue increased $26.8 million , or 10%,
primarily due to a 30% increase in revenue generated by our rentals marketplace
attributable to increased advertising revenue and increased adoption of our
rentals application product, partially offset by the impact of COVID-19 related
discounts offered during the first half of 2020, as well as a 45% decrease in
display revenue, as many display advertisers decreased discretionary marketing
spend during the COVID-19 pandemic.
•Mortgages segment revenue increased 42% to $113.2 million . The increase in
mortgages revenue is primarily due to an increase in revenue generated by Zillow
Home Loans due to increased sales volume reflective of market demand as low
interest rates have supported strong refinance activity.
Income (Loss) Before Income Taxes
% of Revenue
Three Months Ended Three Months Ended
September 30, 2019 to 2020 September 30,
2020 2019 $ Change % Change 2020 2019
(in thousands, unaudited)
Income (loss) before income
taxes:
Homes segment $ (75,617) $ (87,870) $ 12,253 14 % (40) % (23) %
IMT segment 139,956 42,053 97,903 233 34 13
Mortgages segment 10,594 (12,254) 22,848 186 20 (48)
Corporate items (1) (34,938) (7,878) (27,060) (343) N/A N/A
Total income (loss) before income taxes$ 39,995 $ (65,949) $ 105,944 161 % 6 % (9) % 43
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% of Revenue
Nine Months Ended Nine Months Ended
September 30, 2019 to 2020 September 30,
2020 2019 $ Change % Change 2020 2019
(in thousands, unaudited)
Income (loss) before income
taxes:
Homes segment $ (253,633) $ (204,197) $ (49,436) (24) % (18) % (27) %
IMT segment 117,615 43,839 73,776 168 11 5
Mortgages segment (2,791) (32,308) 29,517 91 (2) (41)
Corporate items (1) (77,466) (15,285) (62,181) (407) N/A N/A
Total loss before income taxes
(8,324) (4) % (8) % (12) % (1) Certain corporate items are not directly attributable to any of our segments, including the gain on the partial extinguishment of the 2021 Notes, interest income earned on our short-term investments included in Other income and interest costs on our convertible senior notes included in Interest expense. Three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 Income (loss) before income taxes increased$105.9 million , or 161%, to$40.0 million , driven by: •An increase in IMT segment income before income taxes of$97.9 million , or 233%. This was the result of an increase in IMT segment revenue of$80.1 million and a decrease in costs and expenses of$17.8 million . The increase in IMT segment revenue was primarily the result of increases in Premier Agent and rentals revenue, as discussed above. Decreases in marketing and advertising expenses drove the majority of the decline in total costs and expenses. •An increase in Mortgages segment income before income taxes of$22.8 million , or 186%, primarily due to an increase in Mortgages segment revenue of$28.9 million driven primarily by higher sales volume within our Zillow Home Loans business, as discussed above. This was partially offset by an increase in Mortgages segment costs and expenses of$6.1 million , driven primarily by increased headcount-related costs to support the growth in our Zillow Home Loans business. •A decrease in Homes segment loss before income taxes of$12.3 million , or 14%. This was the result of a$197.5 million decrease in Homes segment revenue, a$201.7 million decrease in total operating costs and expenses and an$8.1 million decrease in interest expense. These declines were primarily the result of the pause in home buying activities in the first half of 2020 in response to the COVID-19 pandemic, which led to less homes held and sold in the three months endedSeptember 30, 2020 when compared to the comparable prior year period. •An increase in loss before income taxes for corporate items by$27.1 million to$34.9 million , driven primarily by an increase in interest expense associated with ourMay 2020 issuance of the convertible senior notes due in 2025. Nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 Loss before income taxes increased$8.3 million , or 4%, to a loss before income taxes of$216.3 million , driven by: •An increase in loss before income taxes for corporate items of$62.2 million , primarily driven by a$58.2 million increase in interest expense associated with ourMay 2020 issuance of the convertible senior notes due in 2025. •An increase in Homes segment loss before income taxes of$49.4 million , or 24%, resulting from an increase in Homes segment costs and expenses of$704.5 million , an increase of$5.8 million in interest expense, partially offset by an increase of$649.2 million in Homes segment revenue. The increase in these items was primarily driven by the sale of 2,003 additional homes and an increased investment in headcount during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 as we continued to expand our Zillow Offers business. •An increase in IMT segment income before income taxes of$73.8 million , or 168%, primarily due to an increase in IMT segment revenue of$69.2 million , as discussed above, and a$62.3 million decrease in marketing and advertising expenses, partially offset by$73.9 million in impairment costs, as discussed further below. 44 -------------------------------------------------------------------------------- Table of Contents •A decrease in Mortgages segment loss before income taxes of$29.5 million , or 91%, to a loss before income taxes of$2.8 million , primarily due to an increase in Mortgages segment revenue of$33.6 million , partially offset by an increase in Mortgages segment costs and expenses of$3.8 million . Increased Mortgages segment revenue was primarily a result of higher sales volume within our Zillow Home Loans business. The increased total costs and expenses were primarily the result of increased headcount-related costs to support the growth in our Zillow Home Loans business. Adjusted EBITDA % of Revenue Three Months Ended Three Months Ended September 30, 2019 to 2020 September 30, 2020 2019 $ Change % Change 2020 2019 (in thousands, unaudited) Net income (loss)$ 39,570 $ (64,649) $ 104,219 161 % 6 % (9) % Adjusted EBITDA: Homes segment$ (59,176) $ (67,825) $ 8,649 13 % (32) % (18) % IMT segment 195,465 91,102 104,363 115 47 27 Mortgages segment 15,895 (7,435) 23,330 314 29 (29) Total Adjusted EBITDA$ 152,184 $ 15,842 $ 136,342 861 % 23 % 2 % % of Revenue Nine Months Ended Nine Months Ended September 30, 2019 to 2020 September 30, 2020 2019 $ Change % Change 2020 2019 (in thousands, unaudited) Net loss$ (208,151) $ (204,151) $ (4,000) (2) % (8) % (11) % Adjusted EBITDA: Homes segment$ (195,079) $ (158,801) $ (36,278) (23) % (14) % (21) % IMT segment 353,044 216,204 136,840 63 34 23 Mortgages segment 15,177 (15,342) 30,519 199 13 (19) Total Adjusted EBITDA$ 173,142 $ 42,061 $ 131,081 312 % 7 % 2 % 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 (loss) and Adjusted EBITDA by segment to income (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 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; 45
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Table of Contents •Adjusted EBITDA does not reflect the gain on the partial extinguishment of the 2021 Notes; •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 (loss), income (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 income (loss) on a consolidated basis and income (loss) before income taxes for each segment, for each of the periods presented (in thousands, unaudited):
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