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, 2020 . 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 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. InSeptember 2020 , Zillow 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 primarily includes financial results for mortgage originations throughZillow Home Loans and advertising sold to mortgage lenders and other mortgage professionals. The Homes segment primarily generates 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. 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 validated consumer connections, or leads, are primarily offered on a share of voice basis. Connections 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. Connections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. Connections are provided as part of our suite of advertising services for Premier Agent and Premier Brokers; we do not charge a separate fee for these consumer leads. We also offer a pay for performance pricing model called "Flex" for Premier Agent and Premier Broker advertising services in limited markets. We offer this pricing model to select 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. 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, cost per listing or cost per impression basis. 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. 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. 33 -------------------------------------------------------------------------------- Table of Contents 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 ofJune 30, 2021 , we had 6,420 full-time employees compared to 5,504 full-time employees as ofDecember 31, 2020 . Financial Highlights During the three months endedJune 30, 2021 and 2020, we generated total revenue of$1.3 billion and$0.8 billion , respectively, representing year-over-year growth of 70%. The increase in total revenue was primarily attributable to the following: •Zillow Offers revenue increased by$318.2 million to$772.0 million for the three months endedJune 30, 2021 due to the sale of 2,086 homes at an average selling price of$370.1 thousand per home. For the three months endedJune 30, 2020 , Zillow Offers revenue was$453.8 million due to the sale of 1,437 homes at an average selling price of$315.8 thousand per home. •Premier Agent revenue increased by$156.8 million to$348.8 million for the three months endedJune 30, 2021 compared to$192.0 million for the three months endedJune 30, 2020 . •Other IMT revenue increased by$39.0 million to$127.3 million for the year endedJune 30, 2021 compared to$88.4 million for the three months endedJune 30, 2020 , primarily due to a 42% increase in rentals revenue. •Mortgages segment revenue increased by$23.0 million to$56.7 million for the three months endedJune 30, 2021 compared to$33.8 million for the three months endedJune 30, 2020 , driven by increases in revenue generated byZillow Home Loans and Custom Quote and Connect advertising services. •Visits for the three months endedJune 30, 2021 and 2020 were 2,750.2 million and 2,491.1 million, respectively, representing year-over-year growth of 10%. The increase in visits increased the number of events we monetized across our revenue categories. •Average monthly unique users of our mobile applications and websites for the three months endedJune 30, 2021 and 2020 were 228.8 million and 218.1 million, respectively, representing year-over-year growth of 5%. During the three months endedJune 30, 2021 and 2020, we generated total gross profit of$538.4 million and$280.9 million , respectively, representing year-over-year growth of 92%. 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 throughout the pandemic. In 2020, we implemented a variety of relief initiatives to help them navigate their financial challenges. This included discounts provided to our Premier Agent advertisers and on certain of our other IMT and Mortgage marketplace products. In addition, we temporarily paused home buying in early 2020 in all markets in response to local public health orders and to help protect the safety and health of our employees, customers and partners. 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 more details on these initiatives, see Part II Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 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 and announced that most employees will have flexibility to work from home indefinitely. We have started re-opening our offices to employees on an as-needed basis and will begin welcoming employees to use certain office locations more widely inSeptember 2021 . We believe our offices will continue to provide our distributed workforce with a place to work, learn and collaborate in the future. 34 -------------------------------------------------------------------------------- Table of Contents 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 first half of 2020. As our financial position has strengthened, we have gradually increased our hiring and marketing and advertising activities, and onMarch 11, 2021 , we announced our plan to hire more than 2,000 employees nationwide in 2021. Our liquidity has also been 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 are able to defer certain 2020 employer payroll tax payments until the fourth quarter of 2021 and 2022. 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 2021. 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. Key Metrics Management has identified visits, unique users, the number of homes sold through Zillow Offers and the volume of loans originated throughZillow Home Loans as relevant to investors' and others' assessment of our financial condition and results of 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 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 withZillow Home Loans , and our Premier Agent revenue and display revenue depend on advertisements being served to users of our mobile applications and websites. 35 -------------------------------------------------------------------------------- Table of Contents 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 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 June 30, 2020 to 2021 2021 2020 % Change Average monthly unique users 228.8 218.1 5 % 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 June 30, 2020 to 2021 2021 2020 % Change Number of homes sold 2,086 1,437 45 % 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 forZillow Home Loans for the periods presented (in thousands): Three Months Ended June 30, 2020 to 2021 2021 2020 % Change Purchase loan origination volume$ 230,012 $ 120,831 90 % Refinance loan origination volume 657,928 147,475 346 % Total loan origination volume$ 887,940 $ 268,306 231 % 36
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Table of Contents
Results of Operations
Given the remaining uncertainty surrounding the COVID-19 pandemic, financial
performance for prior and current periods may not be indicative of future
performance.
Revenue
% of Total Revenue
Three Months Ended Three Months Ended
June 30, 2020 to 2021 June 30,
2021 2020 $ Change % Change 2021 2020
(in thousands, unaudited)
Revenue:
Homes segment:
Zillow Offers $ 772,030 $ 453,816 $ 318,214 70 % 59 % 59 %
Other 5,115 436 4,679 1,073 - -
Total Homes segment revenue 777,145 454,252 322,893 71 59 59
IMT segment:
Premier Agent 348,754 191,962 156,792 82 27 25
Other 127,336 88,377 38,959 44 10 12
Total IMT segment revenue 476,090 280,339 195,751 70 36 36
Mortgages segment 56,745 33,761 22,984 68 4 4
Total revenue $ 1,309,980 $ 768,352 $ 541,628 70 % 100 % 100 %
% of Total Revenue
Six Months Ended Six Months Ended
June 30, 2020 to 2021 June 30,
2021 2020 $ Change % Change 2021 2020
(in thousands, unaudited)
Revenue:
Homes segment:
Zillow Offers $ 1,473,004 $ 1,222,928 $ 250,076 20 % 58 % 65 %
Other 8,293 1,197 7,096 593 - -
Total Homes segment revenue 1,481,297 1,224,125 257,172 21 59 65
IMT segment:
Premier Agent 683,072 434,068 249,004 57 27 23
Other 239,346 176,937 62,409 35 9 9
Total IMT segment revenue 922,418 611,005 311,413 51 36 32
Mortgages segment 124,705 59,043 65,662 111 5 3
Total revenue $ 2,528,420 $ 1,894,173 $ 634,247 33 % 100 % 100 %
37-------------------------------------------------------------------------------- Table of Contents Three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 Total revenue increased$541.6 million , or 70%, to$1.3 billion: •Homes segment revenue increased 71% to$777.1 million , primarily due to an increase of$318.2 million , or 70%, in Zillow Offers revenue. Zillow Offers revenue increased to$772.0 million due to the sale of 2,086 homes at an average selling price of$370.1 thousand per home, as compared to the sale of 1,437 homes at an average selling price of$315.8 thousand per home in the comparable prior year period. Homes segment revenue for the three months endedJune 30, 2020 was negatively impacted by the temporary pause in home buying activities in Zillow Offers markets in response to the COVID-19 pandemic. We resumed home buying activities in all markets in the third quarter of 2020 and have since significantly grown our acquisition and resale volumes, driving a year-over-year increase in revenue. We expect Zillow Offers revenue to increase in future periods as we continue to increase our home buying and home selling activities. •IMT segment revenue increased 70% to$476.1 million due to a$156.8 million , or 82%, increase in Premier Agent revenue and a$39.0 million , or 44%, increase in Other IMT revenue. Premier Agent revenue was positively impacted by an increase in visits, which increased 10% to 2.8 billion. Premier Agent revenue per visit increased by 65% to$0.127 for the three months endedJune 30, 2021 from$0.077 for the three months endedJune 30, 2020 . 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 and increased consumer engagement across our mobile applications and websites. Additionally, Premier Agent revenue was negatively impacted in the three months endedJune 30, 2020 due to temporary discounts offered to our Premier Agent partners in response to the COVID-19 pandemic. Other IMT revenue increased primarily due to a 42% increase in revenue generated by our rentals marketplace. This was attributable to increased revenue from our pay per listing, pay per contact and rental applications products. We expect IMT segment revenue to increase in absolute dollars in future periods as a result of the expected continued expansion of our Flex pricing model. •Mortgages segment revenue increased 68% to$56.7 million due to growth in mortgage originations revenue which drove 52% of the increase in Mortgages segment revenue, and growth in our Custom Quote and Connect advertising services revenue accounted for 46% of the increase in Mortgages segment revenue. The increase in mortgage originations revenue was primarily driven by an increase in loan origination volume from$268.3 million to$887.9 million , or 231%. We believe low interest rates have supported strong refinance activity during the three months endedJune 30, 2021 . This increase was partially offset by a 44% decrease in gain on sale margin driven by industry margin compression. In the event interest rates increase in future periods, refinance activity may decrease as a percentage of total loan origination volume which may result in a decrease in absolute dollars in mortgage segment revenue in future periods. 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. The increase in our Custom Quote and Connect advertising revenue was primarily due to a 26% increase in leads generated from marketing products sold to mortgage professionals. Six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 Total revenue increased$634.2 million , or 33%, to$2.5 billion: •IMT segment revenue increased 51% to$922.4 million due to a$249.0 million , or 57%, increase in Premier Agent revenue and a$62.4 million , or 35%, increase in Other IMT revenue. Premier Agent revenue was positively impacted by an increase in visits, which increased 15% to 5.3 billion for the six months endedJune 30, 2021 from 4.6 billion for the six months endedJune 30, 2020 . The increase in visits increased the number of impressions and leads we could monetize in our Premier Agent marketplace. Additionally, Premier Agent revenue for the six months endedJune 30, 2020 was negatively impacted by discounts offered to our Premier Agent partners in response to the COVID-19 pandemic, as discussed above. Other IMT revenue increased primarily due to a 44% increase in revenue generated by our rentals marketplace. This was attributable to increased revenue from our pay per listing, pay per contact and rental applications products. 38 -------------------------------------------------------------------------------- Table of Contents •Homes segment revenue increased 21% to$1.5 billion , primarily due to an increase of$250.1 million , or 20%, in Zillow Offers revenue. Zillow Offers revenue increased to$1.5 billion due to the sale of 4,051 homes at an average selling price of$363.6 thousand per home, as compared to the sale of 3,831 homes at an average selling price of$319.2 thousand per home in the comparable prior year period. Homes segment revenue for the six months endedJune 30, 2020 was negatively impacted by the temporary pause in home buying activities in response to the COVID-19 pandemic, as discussed above, driving a year-over-year increase in revenue. •Mortgages segment revenue increased 111% to$124.7 million primarily due to growth in mortgage originations revenue which drove 71% of the increase in Mortgages segment revenue, while growth in our Custom Quote and Connect advertising services revenue accounted for 28% of the increase in Mortgages segment revenue. The increase in mortgage originations revenue was primarily driven by an increase in loan origination volume from$405.3 million to$2.1 billion , or 407%. We believe low interest rates have supported strong refinance activity during the six months endedJune 30, 2021 . This was partially offset by a 30% decrease in gain on sale margin driven by industry margin compression. The increase in our Custom Quote and Connect advertising revenue was primarily due to a 36% increase in leads generated from marketing products sold to mortgage professionals. Income (Loss) Before Income Taxes % of Revenue Three Months Ended Three Months Ended June 30, 2020 to 2021 June 30, 2021 2020 $ Change % Change 2021 2020 (in thousands, unaudited) Income (loss) before income taxes: Homes segment$ (59,346) $ (80,058) $ 20,712 26 % (8) % (18) % IMT segment 133,573 19,166 114,407 597 28 7 Mortgages segment (17,685) (240) (17,445) (7,269) (31) (1) Corporate items (1) (33,591) (22,637) (10,954) (48) N/A N/A Total income (loss) before income taxes$ 22,951 $ (83,769) $ 106,720 127 % 2 % (11) % % of Revenue Six Months Ended Six Months Ended June 30, 2020 to 2021 June 30, 2021 2020 $ Change % Change 2021 2020 (in thousands, unaudited) Income (loss) before income taxes: Homes segment$ (117,820) $ (178,016) $ 60,196 34 % (8) % (15) % IMT segment 277,148 (22,341) 299,489 1,341 30 (4) Mortgages segment (19,505) (13,385) (6,120) (46) (16) (23) Corporate items (1) (67,798) (42,528) (25,270) (59) N/A N/A Total income (loss) before income taxes$ 72,025 $ (256,270) $ 328,295 128 % 3 % (14) % (1) Certain corporate items are not directly attributable to any of our segments, including the gain (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. 39 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA % of Revenue Three Months Ended Three Months Ended June 30, 2020 to 2021 June 30, 2021 2020 $ Change % Change 2021 2020 (in thousands, unaudited) Net income (loss)$ 9,641 $ (84,448) $ 94,089 111 % 1 % (11) % Adjusted EBITDA: Homes segment$ (29,092) $ (60,908) $ 31,816 52 % (4) % (13) % IMT segment 217,763 71,862 145,901 203 46 26 Mortgages segment (5,897) 4,885 (10,782) (221) (10) 14 Total Adjusted EBITDA$ 182,774 $ 15,839 $ 166,935 1,054 % 14 % 2 % % of Revenue Six Months Ended Six Months Ended June 30, 2020 to 2021 June 30, 2021 2020 $ Change % Change 2021 2020 (in thousands, unaudited) Net income (loss)$ 61,605 $ (247,721) $ 309,326 125 % 2 % (13) % Adjusted EBITDA: Homes segment$ (63,040) $ (135,903) $ 72,863 54 % (4) % (11) % IMT segment 426,346 157,579 268,767 171 46 26 Mortgages segment 450 (718) 1,168 163 - (1) Total Adjusted EBITDA$ 363,756 $ 20,958 $ 342,798 1,636 % 14 % 1 % 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; •Adjusted EBITDA does not reflect acquisition-related costs; •Adjusted EBITDA does not reflect the gain (loss) on extinguishment of debt; •Adjusted EBITDA does not reflect interest expense or other income; •Adjusted EBITDA does not reflect income taxes; and 40
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Table of Contents •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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