UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2024
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission File Number: 001-36853
_____________________________________________________
(Exact name of registrant as specified in its charter)
_____________________________________________________
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(206 ) 470-7000
(Registrant’s telephone number, including area code)
_____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 30, 2024, 54,324,808 shares of Class A common stock, 6,217,447 shares of Class B common stock and 173,016,890 shares of Class C capital stock were outstanding.
ZILLOW GROUP, INC.
Quarterly Report on Form 10-Q
For the Three Months Ended September 30, 2024
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
Item 5. | ||||||||
| Item 6. | ||||||||
i
GLOSSARY OF TERMS
As used in this Quarterly Report on Form 10-Q, the terms identified below have the meanings specified below unless otherwise noted or the context indicates otherwise:
Abbreviation or Acronym | Definition | |||||||
Zillow Group, “the Company,” “we,” “us” and “our” | Refers to Zillow Group, Inc., unless the context indicates otherwise as used in this Quarterly Report on Form 10-Q | |||||||
| 2020 Plan | Zillow Group, Inc. 2020 Incentive Plan | |||||||
| 2024 Notes | 0.75% Convertible Senior Notes due September 1, 2024 | |||||||
| 2025 Notes | 2.75% Convertible Senior Notes due May 15, 2025 | |||||||
| 2026 Notes | 1.375% Convertible Senior Notes due September 1, 2026 | |||||||
| Aryeo | Aryeo, Inc., a wholly owned subsidiary acquired on July 31, 2023 | |||||||
| Board | Board of Directors of Zillow Group, Inc. | |||||||
| FASB | Financial Accounting Standards Board | |||||||
| Follow Up Boss | Enchant, LLC, d/b/a Follow Up Boss, a wholly owned subsidiary acquired on December 8, 2023 | |||||||
| GAAP | Generally accepted accounting principles in the United States | |||||||
| IRLC | Interest rate lock commitment | |||||||
Lenders | UBS AG, JPMorgan Chase Bank, N.A., and prior to the master repurchase agreement expiration in March 2024, Atlas Securitized Products, L.P. | |||||||
| MBS | Mortgage-backed security | |||||||
NAR | National Association of REALTORS® | |||||||
| Notes | Aggregate of outstanding convertible senior notes, inclusive of the 2025 Notes, the 2026 Notes, and prior to their maturity in September 2024, the 2024 Notes | |||||||
OECD | Organization for Economic Co-operation and Development | |||||||
Pillar Two | Pillar Two Global Anti-Base Erosion | |||||||
| Repurchase Authorizations | A series of authorizations from the Board to repurchase Class A common stock, Class C capital stock, Notes, or a combination thereof | |||||||
| SEC | United States Securities and Exchange Commission | |||||||
| SOFR | Secured Overnight Financing Rate | |||||||
| Spruce | Refers to substantially all assets and liabilities of Spruce Holdings, Inc. and certain affiliated entities, which assets and liabilities were acquired on September 11, 2023 | |||||||
1
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” “potential,” “might” or the negative or plural of these words or similar expressions.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those risks, uncertainties and assumptions described in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, including, but not limited to risks related to:
•the current and future health and stability of the economy and United States residential real estate industry, including changes in inflationary conditions, interest rates, housing availability and affordability, homeowners insurance rates, labor shortages and supply chain issues;
•our ability to manage advertising and product inventory and pricing and maintain relationships with our real estate partners;
•our ability to establish or maintain relationships with listing and data providers, which affects traffic to our mobile applications and websites;
•our ability to comply with current and future rules and requirements promulgated by NAR, multiple listing services, or other real estate industry groups or governing bodies, or decisions to repeal, amend, or not enforce such rules and requirements;
•our ability to navigate industry changes, including as a result of past, pending or future class action lawsuits, settlements or government investigations, which may include lawsuits, settlements or investigations in which we are not a named party, such as the NAR settlement agreement entered into on March 15, 2024;
•uncertainties related to the November 2024 elections in the United States;
•our ability to continue to innovate and compete to attract customers and real estate partners;
•our ability to effectively invest resources to pursue new strategies, develop new products and services and expand existing products and services into new markets;
•our ability to operate and grow Zillow Home Loans, our mortgage origination business, including the ability to obtain or maintain sufficient financing to fund its origination of mortgages, meet customers’ financing needs with its product offerings, continue to grow the origination business and resell originated mortgages on the secondary market;
•the duration and impact of natural disasters, geopolitical events, and other catastrophic events (including public health crises) on our ability to operate, demand for our products or services, or general economic conditions;
•our ability to maintain adequate security measures or technology systems, or those of third parties on which we rely, to protect data integrity and the information and privacy of our customers and other third parties;
•the impact of past, pending or future litigation and other disputes or enforcement actions, which may include lawsuits or investigations to which we are not a party;
•our ability to attract, engage, and retain a highly skilled workforce;
•acquisitions, investments, strategic partnerships, capital-raising activities, or other corporate transactions or commitments by us or our competitors;
•our ability to continue relying on third-party services to support critical functions of our business;
•our ability to protect and continue using our intellectual property and prevent others from copying, infringing upon, or developing similar intellectual property, including as a result of generative artificial intelligence;
•our ability to comply with domestic and international laws, regulations, rules, contractual obligations, policies and other obligations, or to obtain or maintain required licenses to support our business and operations;
•our ability to pay our debt, settle conversions of our Notes, or repurchase our Notes upon a fundamental change;
•our ability to raise additional capital or refinance our indebtedness on acceptable terms, or at all;
•actual or anticipated fluctuations in quarterly and annual results of operations and financial position;
•actual or perceived inaccuracies in the assumptions, estimates and internal or third-party data that we use to calculate business, performance and operating metrics; and
•volatility of our Class A common stock and Class C capital stock prices.
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
2
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
In addition, statements such as “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
NOTE REGARDING INDUSTRY AND MARKET DATA
This Quarterly Report on Form 10-Q contains market and industry data that are based on our own internal estimates and research, as well as independent industry publications, trade or business organizations and other statistical information from third parties. Third-party information generally states that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified any of the data from third-party sources nor have we validated the underlying economic assumptions relied on therein. The content of, or accessibility through, these market and industry data sources, except to the extent specifically set forth in this Quarterly Report on Form 10-Q, does not constitute a portion of this report and are not incorporated herein, and any sources are an inactive textual reference only.
WHERE YOU CAN FIND MORE INFORMATION
Our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, are available on the “Investors” section of our website at www.zillowgroup.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this Quarterly Report on Form 10-Q or any other document we file with the SEC.
Investors and others should note that Zillow Group announces material financial information to its investors using its press releases, SEC filings and public conference calls and webcasts. Zillow Group intends to also use the following channels as a means of disclosing information about Zillow Group, its services and other matters, and for complying with its disclosure obligations under Regulation FD:
•Zillow Group Investor Relations Site (https://investors.zillowgroup.com)
•Zillow Group Blog (https://www.zillowgroup.com/news/)
•Zillow Group X Account (https://X.com/zillowgroup)
The information Zillow Group posts through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following Zillow Group’s press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time and reflects current updated channels as of the date of this Quarterly Report on Form 10-Q. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q or any other document we file with the SEC, and the inclusion of our website addresses and X Account are as inactive textual references only.
3
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data, unaudited)
| September 30, 2024 | December 31, 2023 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Short-term investments | |||||||||||
Accounts receivable, net | |||||||||||
| Mortgage loans held for sale | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Restricted cash | |||||||||||
| Total current assets | |||||||||||
| Contract cost assets | |||||||||||
| Property and equipment, net | |||||||||||
| Right of use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Accrued compensation and benefits | |||||||||||
| Borrowings under credit facilities | |||||||||||
| Deferred revenue | |||||||||||
| Lease liabilities, current portion | |||||||||||
Convertible senior notes, current portion | |||||||||||
| Total current liabilities | |||||||||||
| Lease liabilities, net of current portion | |||||||||||
Convertible senior notes, net of current portion | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 12) | |||||||||||
| Shareholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Class A common stock, $ | |||||||||||
Class B common stock, $ | |||||||||||
Class C capital stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Accumulated other comprehensive income (loss) | ( | ||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
4
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share data, which are presented in thousands, and per share data, unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Technology and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
Impairment and restructuring costs | |||||||||||||||||||||||
| Acquisition-related costs | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
Loss on extinguishment of debt | ( | ||||||||||||||||||||||
Other income, net | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense | ( | ( | |||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Net loss per share - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Weighted-average shares outstanding - basic and diluted | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
5
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions, unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Net unrealized gains (losses) on investments | ( | ( | |||||||||||||||||||||
Total other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
6
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except share data, which are presented in thousands, unaudited)
| Class A Common Stock, Class B Common Stock and Class C Capital Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at July 1, 2024 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of Class C capital stock upon exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Settlement of capped call transactions | ( | — | — | — | — | — | |||||||||||||||||||||||||||||
| Settlement of convertible senior notes | — | — | — | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
Balance at September 30, 2024 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Class A Common Stock, Class B Common Stock and Class C Capital Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at July 1, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of Class C capital stock upon exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchases of Class A common stock and Class C capital stock | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Issuance of Class C capital stock in connection with an acquisition | — | — | — | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
7
| Class A Common Stock, Class B Common Stock and Class C Capital Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance at January 1, 2024 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of Class C capital stock upon exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Settlement of capped call transactions | ( | — | — | — | — | — | |||||||||||||||||||||||||||||
| Settlement of convertible senior notes | — | — | — | ||||||||||||||||||||||||||||||||
| Repurchases of Class A common stock and Class C capital stock | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
Balance at September 30, 2024 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Class A Common Stock, Class B Common Stock and Class C Capital Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of Class C capital stock upon exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchases of Class A common stock and Class C capital stock | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Issuance of Class C capital stock in connection with an acquisition | — | — | — | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
8
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Amortization of right of use assets | |||||||||||
| Amortization of contract cost assets | |||||||||||
Amortization of debt issuance costs | |||||||||||
Impairment costs | |||||||||||
| Accretion of bond discount | ( | ( | |||||||||
Other adjustments to reconcile net loss to net cash provided by operating activities | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Mortgage loans held for sale | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Contract cost assets | ( | ( | |||||||||
| Lease liabilities | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other current liabilities | ( | ||||||||||
| Accrued compensation and benefits | |||||||||||
| Deferred revenue | |||||||||||
| Other long-term liabilities | ( | ||||||||||
Net cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Proceeds from maturities of investments | |||||||||||
| Proceeds from sales of investments | |||||||||||
| Purchases of investments | ( | ( | |||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Purchases of intangible assets | ( | ( | |||||||||
| Cash paid for acquisitions, net | ( | ||||||||||
Net cash provided by investing activities | |||||||||||
| Financing activities | |||||||||||
Net borrowings on warehouse line of credit and repurchase agreements | |||||||||||
| Repurchases of Class A common stock and Class C capital stock | ( | ( | |||||||||
Settlement of long-term debt | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
Net cash used in financing activities | ( | ( | |||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash during period | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Noncash transactions: | |||||||||||
| Capitalized share-based compensation | $ | $ | |||||||||
| Write-off of fully depreciated property and equipment | |||||||||||
| Write-off of fully amortized intangible assets | |||||||||||
| Value of Class C capital stock issued in connection with an acquisition | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
9
ZILLOW GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Index to Notes to Condensed Consolidated Financial Statements
| Page | ||||||||
| Note 1. | ||||||||
| Note 2. | ||||||||
Note 3. | ||||||||
Note 4. | ||||||||
| Note 5. | ||||||||
| Note 6. | ||||||||
| Note 7. | ||||||||
| Note 8. | ||||||||
| Note 9. | ||||||||
| Note 10. | ||||||||
| Note 11. | ||||||||
| Note 12. | ||||||||
| Note 13. | ||||||||
Note 1. Organization and Description of Business
Zillow Group is reimagining real estate to make home a reality for more and more people. As the most visited real estate website in the United States, Zillow and its affiliates help people find and get the home they want by connecting them with digital solutions, dedicated partners and agents, and easier buying, selling, financing and renting experiences.
Our portfolio of affiliates, subsidiaries and brands includes Zillow Premier Agent, Zillow Home Loans, our mortgage origination business and affiliate lender, Zillow Rentals, Trulia, StreetEasy, HotPads and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions for the real estate industry, including ShowingTime+, Spruce and Follow Up Boss.
Certain Significant Risks and Uncertainties
We operate in a dynamic industry and, accordingly, can be affected by a variety of factors, which are uncertain and difficult to predict. For example, we believe that potential changes in any of the following areas may have a significant impact on us in terms of our future financial position, results of operations or cash flows: the current and future health and stability of the economy and United States residential real estate industry, including changes in inflationary conditions, interest rates, housing availability and affordability, homeowners insurance rates, labor shortages and supply chain issues; our ability to navigate industry changes, including as a result of certain or future class action lawsuits, settlements or government investigations; our ability to manage advertising and product inventory and pricing and maintain relationships with our real estate partners; our ability to comply with current and future rules and requirements promulgated by NAR, multiple listing services, or other real estate industry groups or governing bodies, and to maintain or establish relationships with listing and data providers; our investment of resources to pursue strategies and develop new products and services that may not prove effective or that are not attractive for customers and real estate partners or that do not allow us to compete successfully; our ability to operate and grow Zillow Home Loans, our mortgage origination business and affiliate lender, including the ability to obtain or maintain sufficient financing and resell originated mortgages on the secondary market; the duration and impact of natural disasters, geopolitical events, and other catastrophic events (including public health crises) on our ability to operate, demand for our products or services or general economic conditions; outcomes of legal proceedings; our ability to attract, engage, and retain a highly skilled workforce; protection of Zillow Group’s information and systems against security breaches or disruptions in operations; reliance on third-party services to support critical functions of our business; protection of our brand and intellectual property; and changes in laws or government regulation affecting our business, among other things.
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Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include Zillow Group, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared in conformity with GAAP and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes included in Zillow Group, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The condensed consolidated balance sheet as of December 31, 2023, included herein, was derived from the audited financial statements of Zillow Group, Inc. as of that date. Certain reclassifications of prior period amounts have been made to conform to the current period presentation.
The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2024 and our results of operations, comprehensive loss, and shareholders’ equity for the three and nine month periods ended September 30, 2024 and 2023, and cash flows for the nine month periods ended September 30, 2024 and 2023. The results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024, for any interim period, or for any other future year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to the accounting for certain revenue offerings, amortization period and recoverability of contract cost assets, website and software development costs, recoverability of long-lived assets and intangible assets, share-based compensation, income taxes, business combinations, including the initial and subsequent fair value measurements of assets (primarily intangible assets), liabilities and contingent consideration, and the recoverability of goodwill, among others. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The health of the housing market and broader economy have introduced significant additional uncertainty with respect to estimates, judgments and assumptions, which may materially impact the estimates previously listed, among others.
Recently Issued Accounting Standards Not Yet Adopted
In November 2023, the FASB issued guidance to improve existing disclosure requirements for segment reporting, primarily through enhanced disclosures about significant segment expenses and new disclosure requirements applicable to entities with a single reportable segment. This guidance is effective for annual periods beginning after December 15, 2023 and interim periods beginning after December 15, 2024, on a retrospective basis. We expect to adopt this guidance for the annual period ending December 31, 2024. We expect this guidance to result in additional disclosures primarily related to significant segment expenses that are regularly provided to our chief operating decision maker.
In December 2023, the FASB issued guidance to enhance the income tax rate reconciliation disclosure requirements and to provide clarity on disclosure requirements for income taxes. This guidance is effective for annual periods beginning after December 15, 2024, and can be applied on a prospective or retrospective basis, with early adoption permitted. We expect to adopt this guidance for the annual period ending December 31, 2025. While we anticipate this guidance will result in additional disclosures related to income taxes, we do not expect this new guidance to have a significant impact on our consolidated financial statements.
In November 2024, the FASB issued guidance that will require disclosure of specified information about certain costs and expenses included within an entity’s consolidated financial statements. This guidance is effective for annual periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027, and can be applied on a prospective or retrospective basis, with early adoption permitted. We have not yet determined the impact the adoption of this guidance will have on our consolidated financial statements.
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Note 3. Financial Instruments
We apply the following methods and assumptions in estimating our fair value measurements:
Cash equivalents — The fair value measurement of money market funds is based on quoted market prices in active markets (Level 1). The fair value measurement of other cash equivalents is based on observable market-based inputs principally derived from or corroborated by observable market data (Level 2).
Short-term investments — The fair value measurement of our short-term investments is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means (Level 2).
Restricted cash — The carrying value of restricted cash approximates fair value due to the short period of time that amounts are held in escrow (Level 1).
Mortgage loans held for sale — The fair value of mortgage loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics (Level 2).
Forward contracts — The fair value of mandatory loan sales commitments and derivative instruments such as forward sales of MBSs that are utilized as economic hedging instruments is calculated by reference to quoted prices for similar assets (Level 2).
Contingent consideration — In December 2023, Zillow Group acquired Follow Up Boss for $399 million in cash, net of cash acquired, and contingent consideration of up to $100 million, payable over a three-year period upon achievement of certain performance metrics. The fair value of the contingent consideration is estimated using a Monte Carlo simulation which considers the probabilities of the achievement of certain performance metrics (Level 3).
The discount rates used in our valuation of contingent consideration are based on our estimated cost of debt and are directly related to the fair value of contingent consideration. An increase in the discount rate, in isolation, would result in a decrease in the fair value measurement. Conversely, a decrease in the discount rate, in isolation, would result in an increase in the fair value measurement. The probabilities of achieving the relevant performance metrics used in our valuation of contingent consideration are directly related to the fair value of contingent consideration, as an increase in the probability, in isolation, would result in an increase in the fair value measurement. Conversely, a decrease in the probability, in isolation, would result in a decrease in the fair value measurement.
During the three and nine month periods ended September 30, 2024, there were no material changes in the unobservable inputs used in determining the fair value of contingent consideration included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
IRLCs — The fair value of IRLCs is calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics. Expired commitments are excluded from the fair value measurement. Since not all IRLCs will become closed loans, we adjust our fair value measurements for the estimated amount of IRLCs that will not close. This adjustment is effected through the pull-through rate, which represents the probability that an IRLC will ultimately result in a closed loan. For IRLCs that are canceled or expired, any recorded gain or loss is reversed at the end of the commitment period (Level 3).
The pull-through rate is based on estimated changes in market conditions, loan stage and historical borrower behavior. Pull-through rates are directly related to the fair value of IRLCs as an increase in the pull-through rate, in isolation, would result in an increase in the fair value measurement. Conversely, a decrease in the pull-through rate, in isolation, would result in a decrease in the fair value measurement. Changes in the fair value of IRLCs are included within revenue in our condensed
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| September 30, 2024 | December 31, 2023 | ||||||||||
| Range | |||||||||||
| Weighted-average | |||||||||||
We manage our interest rate risk related to IRLCs and mortgage loans held for sale through the use of derivative instruments, generally forward contracts on MBSs, which are commitments to either purchase or sell a financial instrument at a future date for a specified price, and mandatory loan commitments, which are an obligation by an investor to buy loans at a specified price within a specified time period. We do not enter into or hold derivatives for trading or speculative purposes, and our derivatives are not designated as hedging instruments. Changes in the fair value of our derivative financial instruments are recognized in revenue in our condensed consolidated statements of operations.
The following table presents the notional amounts of the economic hedging instruments related to our mortgage loans held for sale as of the dates presented (in millions):
| September 30, 2024 | December 31, 2023 | ||||||||||
IRLCs | $ | $ | |||||||||
Forward contracts(1) | $ | $ | |||||||||
(1) Represents net notional amounts. We do not have the right to offset our forward contract derivative positions. | |||||||||||
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The following table presents the amortized cost, as applicable, and estimated fair market value of assets and liabilities measured at fair value on a recurring basis by category as of the dates presented (in millions):
| September 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Amortized Cost | Estimated Fair Market Value | Amortized Cost | Estimated Fair Market Value | ||||||||||||||||||||
Assets | |||||||||||||||||||||||
| Cash | $ | $ | $ | $ | |||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||
| U.S. government treasury securities | |||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
U.S. government treasury securities(1) | |||||||||||||||||||||||
Corporate bonds(2) | |||||||||||||||||||||||
| U.S. government agency securities | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Mortgage origination-related: | |||||||||||||||||||||||
| Mortgage loans held for sale | — | — | |||||||||||||||||||||
| IRLCs - other current assets | — | — | |||||||||||||||||||||
| Forward contracts - other current assets | — | — | |||||||||||||||||||||
| Restricted cash | |||||||||||||||||||||||
Total assets measured at fair value on a recurring basis | $ | $ | $ | $ | |||||||||||||||||||
Liabilities | |||||||||||||||||||||||
| Mortgage origination-related: | |||||||||||||||||||||||
| Forward contracts - accrued expenses and other current liabilities | $ | — | $ | $ | — | $ | |||||||||||||||||
| Contingent consideration: | |||||||||||||||||||||||
| Contingent consideration - accrued expenses and other current liabilities | — | — | |||||||||||||||||||||
| Contingent consideration - other long-term liabilities | — | — | |||||||||||||||||||||
Total liabilities measured at fair value on a recurring basis | $ | — | $ | $ | — | $ | |||||||||||||||||
(1) The estimated fair market value includes $ | |||||||||||||||||||||||
(2) The estimated fair market value includes $ | |||||||||||||||||||||||
The following table presents available-for-sale investments by contractual maturity date as of September 30, 2024 (in millions):
| Amortized Cost | Estimated Fair Market Value | ||||||||||
| Due in one year or less | $ | $ | |||||||||
| Due after one year | |||||||||||
| Total | $ | $ | |||||||||
See Note 7 for the carrying amounts and estimated fair values of our Notes.
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Note 4. Property and Equipment, net
The following table presents the detail of property and equipment as of the dates presented (in millions):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Website development costs | $ | $ | |||||||||
| Leasehold improvements | |||||||||||
| Computer equipment | |||||||||||
| Office equipment, furniture and fixtures | |||||||||||
| Construction-in-progress | |||||||||||
| Property and equipment | |||||||||||
| Less: accumulated amortization and depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
We recorded depreciation expense related to property and equipment (other than website development costs) of $3 million and $6 million for the three months ended September 30, 2024 and 2023, respectively, and $11 million and $18 million for the nine months ended September 30, 2024 and 2023, respectively.
We capitalized website development costs of $46 million and $49 million for the three months ended September 30, 2024 and 2023, respectively, and $152 million and $144 million for the nine months ended September 30, 2024 and 2023, respectively. Amortization expense for website development costs included in cost of revenue was $40 million and $30 million for the three months ended September 30, 2024 and 2023, respectively, and $109 million and $79 million for the nine months ended September 30, 2024 and 2023, respectively.
Note 5. Acquisitions
Acquisition of Follow Up Boss
On December 8, 2023, Zillow Group acquired Follow Up Boss, a customer relationship management system for real estate professionals, for $399 million in cash, net of cash acquired, and contingent consideration of up to $100 million in cash, payable over a three-year period upon achievement of certain performance metrics. See Note 3 for additional information regarding the preliminary fair value of contingent consideration. The acquisition is consistent with our strategy to invest in a more integrated software experience for our agent customers. The acquisition of Follow Up Boss has been accounted for as a business combination, and assets acquired and liabilities assumed were generally recorded at their preliminary estimated fair values, in accordance with the applicable accounting guidance. Goodwill represents the expected synergies from combining the acquired assets and the operations of the acquirer as well as intangible assets that do not qualify for separate recognition. Goodwill recorded in connection with the acquisition is deductible for tax purposes.
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The total preliminary purchase price has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their preliminarily estimated fair values at the acquisition date, as follows (in millions):
| Preliminary purchase price: | |||||
Cash | $ | ||||
Contingent consideration | |||||
| Total preliminary purchase price | $ | ||||
| Identifiable assets acquired and liabilities assumed: | |||||
| Cash and cash equivalents | $ | ||||
Goodwill | |||||
Intangible assets | |||||
Deferred revenue | ( | ||||
Other liabilities | ( | ||||
| Total preliminary purchase price | $ | ||||
The preliminary estimated fair value of the identifiable intangible assets acquired and associated useful lives consisted of the following (in millions):
Preliminary Estimated Fair Value | Estimated Weighted-Average Useful Life (in years) | ||||||||||
Developed technology | $ | ||||||||||
Customer relationships | |||||||||||
Trade names and trademarks | |||||||||||
| Total | $ | ||||||||||
Estimated fair values of the identifiable intangible assets acquired were determined by management, based in part on a preliminary valuation performed by an independent third-party valuation specialist. We used an income approach to measure the fair value of the customer relationships intangible asset acquired based on the excess earnings method, whereby the fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. We used an income approach to measure the fair value of the developed technology and trade names and trademarks based on the relief-from-royalty method. These fair value measurements were based on Level 3 inputs under the fair value hierarchy.
The purchase price allocation for the Follow Up Boss acquisition is preliminary and subject to change during the measurement period up to one year from the acquisition date. We made an initial allocation of the purchase price at the date of the acquisition based upon information available and our understanding of the estimates used to determine the preliminary fair value of acquired assets, assumed liabilities and contingent consideration. We are in the process of specifically identifying the amounts assigned to certain tangible assets acquired and liabilities assumed and contingent consideration. As of September 30, 2024, the measurement period (not to extend beyond one year) is open for the Follow Up Boss acquisition; therefore, assets acquired, liabilities assumed, and contingent consideration are subject to adjustment until the end of the measurement period.
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Acquisitions of Aryeo and Spruce
On July 31, 2023, Zillow Group acquired Aryeo, a software company that serves real estate photographers, in exchange for approximately $15 million in cash, net of cash acquired, and 380,259 shares of our Class C capital stock with a value of $20 million, for total consideration of $35 million, net of cash acquired. On September 11, 2023, Zillow Group acquired substantially all of the assets and liabilities of Spruce, a tech-enabled title and escrow platform, in exchange for approximately $19 million in cash, net of cash acquired.
The acquisitions of Aryeo and Spruce have been accounted for as business combinations, and assets acquired and liabilities assumed were recorded at their estimated fair values. Goodwill represents the expected synergies from combining the acquired assets and the operations of the acquirer as well as intangible assets that do not qualify for separate recognition. Goodwill recorded in connection with the acquisition of Aryeo is not deductible for tax purposes, and goodwill recorded in connection with the acquisition of Spruce is deductible for tax purposes.
The total purchase prices have been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date, as follows (in millions):
Aryeo | Spruce | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Goodwill | |||||||||||
Intangible assets | |||||||||||
Other assets | |||||||||||
Liabilities | ( | ( | |||||||||
Total purchase price | $ | $ | |||||||||
The estimated fair value of the identifiable intangible assets acquired and associated useful lives consisted of the following (in millions):
Aryeo | Spruce | ||||||||||||||||||||||
Estimated Fair Value | Estimated Useful Life (in years) | Estimated Fair Value | Estimated Useful Life (in years) | ||||||||||||||||||||
| Customer relationships | $ | $ | — | — | |||||||||||||||||||
Purchased content | — | — | |||||||||||||||||||||
| Developed technology | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
We used an income approach to measure the fair value of the customer relationships intangible asset acquired from Aryeo based on the excess earnings method, whereby the fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. We used a cost approach to measure the fair value of purchased content acquired from Aryeo. We used an income approach to measure the fair value of the developed technology acquired from Aryeo and Spruce based on the relief-from-royalty method. These fair value measurements were based on Level 3 inputs under the fair value hierarchy.
Acquisition-related costs incurred, which primarily included legal, accounting and other external costs directly related to the acquisitions, are included within acquisition-related costs in our condensed consolidated statements of operations and were expensed as incurred. Aggregate acquisition-related costs for the acquisitions of Follow Up Boss, Aryeo, and Spruce were not material to our financial statements.
Unaudited pro forma revenue and earnings information related to the acquisitions has not been presented as the aggregate effects of the acquisitions of Follow Up Boss, Aryeo and Spruce were not material to our condensed consolidated financial statements.
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Note 6. Intangible Assets, net
The following tables present the detail of intangible assets as of the dates presented (in millions):
| September 30, 2024 | |||||||||||||||||
| Cost | Accumulated Amortization | Net | |||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||
| Software | ( | ||||||||||||||||
Developed technology | ( | ||||||||||||||||
| Trade names and trademarks | ( | ||||||||||||||||
| Purchased content | ( | ||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||
| December 31, 2023 | |||||||||||||||||
| Cost | Accumulated Amortization | Net | |||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||
Developed technology | ( | ||||||||||||||||
Software | ( | ||||||||||||||||
| Trade names and trademarks | ( | ||||||||||||||||
| Purchased content | ( | ||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||
Note 7. Debt
The following table presents the carrying values of Zillow Group’s debt as of the dates presented (in millions):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Master repurchase agreements: | |||||||||||
JPMorgan Chase Bank, N.A.(1) | $ | $ | |||||||||
UBS AG(2) | |||||||||||
Atlas Securitized Products, L.P.(3) | |||||||||||
Total master repurchase agreements | |||||||||||
| Convertible senior notes | |||||||||||
2026 Notes | |||||||||||
2025 Notes | |||||||||||
2024 Notes(4) | |||||||||||
| Total convertible senior notes | |||||||||||
| Total debt | $ | $ | |||||||||
(1)Agreement was amended and renewed on May 2, 2024, increasing the total maximum borrowing capacity from $ | |||||||||||
(2)Agreement was amended and renewed on September 6, 2024, increasing the total maximum borrowing capacity from $ | |||||||||||
(3)Agreement expired on March 11, 2024 and was not renewed. | |||||||||||
(4) The 2024 Notes matured on September 1, 2024 and are no longer outstanding. | |||||||||||
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Credit Facilities
We utilize master repurchase agreements to provide capital for Zillow Home Loans. The following table summarizes certain details related to our outstanding master repurchase agreements as of September 30, 2024 (in millions, except interest rates):
| Lender | Maturity Date | Maximum Borrowing Capacity | Borrowings Outstanding | Available Borrowing Capacity | Weighted-Average Interest Rate | |||||||||||||||||||||||||||
JPMorgan Chase Bank, N.A. | May 1, 2025 | $ | $ | $ | % | |||||||||||||||||||||||||||
UBS AG | September 5, 2025 | % | ||||||||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||||||||
In accordance with the master repurchase agreements, the Lenders agreed to pay Zillow Home Loans a negotiated purchase price for eligible loans, and Zillow Home Loans simultaneously agreed to repurchase such loans from the Lenders under a specified timeframe at an agreed upon price that includes interest. The master repurchase agreements contain margin call provisions that provide the Lenders with certain rights in the event of a decline in the market value of the assets purchased under the master repurchase agreements. As of September 30, 2024 and December 31, 2023, $155 million and $99 million, respectively, in mortgage loans held for sale were pledged as collateral under the master repurchase agreements.
Borrowings on the master repurchase agreements bear interest at a floating rate based on SOFR plus an applicable margin, as defined by the governing agreements. The master repurchase agreements include customary representations and warranties, covenants and provisions regarding events of default. As of September 30, 2024, Zillow Home Loans was in compliance with all financial covenants and no event of default had occurred. The master repurchase agreements are recourse to Zillow Home Loans, and have no recourse to Zillow Group or any of its other subsidiaries.
For additional details related to our repurchase agreements, see Note 11 in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Convertible Senior Notes
The following tables summarize certain details related to our Notes as of the dates presented or for the periods ended (in millions, except interest rates):
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Maturity Date | Aggregate Principal Amount | Stated Interest Rate | Effective Interest Rate | Semi-Annual Interest Payment Dates | Unamortized Debt Issuance Costs | Fair Value | Unamortized Debt Issuance Costs | Fair Value | ||||||||||||||||||||||||||||||||||||||||||
| September 1, 2026 | $ | % | % | March 1; September 1 | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| May 15, 2025 | % | % | May 15; November 15 | |||||||||||||||||||||||||||||||||||||||||||||||
| September 1, 2024 | % | % | March 1; September 1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||
| Contractual Coupon Interest | Amortization of Debt Issuance Costs | Interest Expense | Contractual Coupon Interest | Amortization of Debt Issuance Costs | Interest Expense | |||||||||||||||||||||||||||||||||
2026 Notes | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
2025 Notes | ||||||||||||||||||||||||||||||||||||||
2024 Notes | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
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| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||
| Contractual Coupon Interest | Amortization of Debt Issuance Costs | Interest Expense | Contractual Coupon Interest | Amortization of Debt Issuance Costs | Interest Expense | |||||||||||||||||||||||||||||||||
2026 Notes | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
2025 Notes | ||||||||||||||||||||||||||||||||||||||
2024 Notes | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
The Notes are senior unsecured obligations. The 2026 Notes are classified as long-term debt and the 2025 Notes are classified as current liabilities in our condensed consolidated balance sheets based on their contractual maturity dates. Interest on the Notes is paid semi-annually in arrears. The estimated fair value of the Notes is classified as Level 2 and was determined through consideration of quoted market prices in markets that are not active.
The Notes are convertible into cash, shares of Class C capital stock or a combination thereof, at our election, and may be settled as described below. They will mature on their respective maturity dates, unless earlier repurchased, redeemed or converted in accordance with their terms. The following table summarizes the conversion and redemption options with respect to the Notes:
| Early Conversion Date | Conversion Rate | Conversion Price | Optional Redemption Date | |||||||||||||||||||||||
| 2026 Notes | March 1, 2026 | 22.9830 | $ | September 5, 2023 | ||||||||||||||||||||||
| 2025 Notes | November 15, 2024 | 14.8810 | $ | May 22, 2023 | ||||||||||||||||||||||
The 2024 Notes matured on September 1, 2024. During the period from March 1, 2024 through the close of business on August 29, 2024, holders of the 2024 Notes elected to convert all outstanding 2024 Notes in accordance with the terms of the indenture. We settled these conversions with aggregate cash payments totaling $610 million, which included $608 million in principal repayments, $2 million for accrued interest and a nominal cash payment in lieu of fractional shares, and the issuance of 1.9 million shares of Class C capital stock.
In September 2024, we received 2.1 million shares of Class C capital stock from the settlement of the capped call transactions we entered into in connection with the issuance of the 2024 Notes. Under applicable Washington State law, the acquisition of a corporation’s own shares is not disclosed separately as treasury stock in the financial statements and such shares are treated as authorized but unissued shares. We record acquisitions of our shares of capital stock as a reduction to capital stock at the par value of the shares reacquired, then to additional paid-in capital until it is depleted to a nominal amount, with any further excess recorded to retained earnings. We recorded an offsetting increase to additional paid-in capital for the unwind of the capped call transactions.
There were no repurchases of Notes during the three months ended September 30, 2024. During the nine months ended September 30, 2024 and in accordance with our Repurchase Authorizations, we repurchased $88 million aggregate principal amount of the 2025 Notes through open market transactions for $89 million in cash, including accrued interest, resulting in a loss on extinguishment of debt of $1 million, recognized in our condensed consolidated statements of operations. On or after November 15, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date for the 2025 Notes, holders may convert the 2025 Notes at their option at the applicable Conversion Rate then in effect. Any conversions of the 2025 Notes will be settled on the maturity date.
On October 8, 2024, we submitted notice to the trustee to exercise our right to redeem the remaining $499 million in aggregate principal amount of the 2026 Notes on December 18, 2024 (the “Redemption Date”). We have elected to settle any conversions through a combination of cash and shares of Class C capital stock. The 2026 Notes may be converted by the holders at any time prior to 5:00 p.m. (New York City time) on December 17, 2024. The conversion rate for the 2026 Notes is 22.9830 shares of Class C capital stock per $1,000 principal amount of 2026 Notes converted (subject to adjustment under certain circumstances as set forth in the indenture governing the 2026 Notes). For any holder of the 2026 Notes that does not elect to convert their 2026 Notes, we will be required to redeem the 2026 Notes in cash at a redemption price equal to 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the Redemption Date. These settlements will reduce our outstanding convertible senior notes, net of current portion in our condensed consolidated balance sheet.
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The following table summarizes certain details related to the capped call confirmations with respect to the 2026 Notes:
| Maturity Date | Initial Cap Price | Cap Price Premium | ||||||||||||
| September 1, 2026 | $ | % | ||||||||||||
For additional details related to our Notes, see Note 11 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Note 8. Income Taxes
We are subject to income taxes in the United States (federal and state) and certain foreign jurisdictions. As of September 30, 2024 and December 31, 2023, 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. We have accumulated federal tax losses of approximately $1.4 billion as of December 31, 2023, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $56 million (tax effected) as of December 31, 2023.
Our income tax expense or benefit for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account for the relevant period. We update our estimate of the annual effective tax rate on a quarterly basis and make year-to-date adjustments to the tax provision or benefit, as applicable. Income tax expense was not material for the three or nine month periods ended September 30, 2024 and 2023.
Note 9. Share Repurchase Authorizations
The Board has authorized the repurchase of up to $2.5 billion of our Class A common stock, Class C capital stock, outstanding Notes or a combination thereof. For additional information on these authorizations, see Note 13 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Repurchases of stock under the Repurchase Authorizations may be made in open-market transactions or privately negotiated transactions, or in such other manner as deemed appropriate by management, and may be made from time to time as determined by management depending on market conditions, share price, trading volume, cash needs and other business factors, in each case as permitted by securities laws and other legal requirements. As of September 30, 2024, $381 million remained available for future repurchases pursuant to the Repurchase Authorizations.
There were no share repurchases during the three months ended September 30, 2024. The following tables summarize our Class A common stock and Class C capital stock repurchase activity under the Repurchase Authorizations for the periods presented (in millions, except share data, which are presented in thousands, and per share amounts):
| Three Months Ended September 30, 2023 | ||||||||||||||
| Class A common stock | Class C capital stock | |||||||||||||
| Shares repurchased | ||||||||||||||
| Weighted-average price per share | $ | $ | ||||||||||||
| Total purchase price | $ | $ | ||||||||||||
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | ||||||||||||||||||||||
| Class A common stock | Class C capital stock | Class A common stock | Class C capital stock | ||||||||||||||||||||
| Shares repurchased | |||||||||||||||||||||||
| Weighted-average price per share | $ | $ | $ | $ | |||||||||||||||||||
| Total purchase price | $ | $ | $ | $ | |||||||||||||||||||
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Note 10. Share-Based Awards
In addition to the option awards and restricted stock units typically granted under the 2020 Plan which vest quarterly over four years , during the first quarter of 2023, the Compensation Committee of the Board approved option and restricted stock unit awards granted under the 2020 Plan in connection with the 2022 annual review cycle that vest quarterly over three years . The exercisability terms of these equity awards are otherwise consistent with the terms of the option awards and restricted stock units typically granted under the 2020 Plan. For additional information regarding our share-based awards, see Note 14 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Option Awards
The following table summarizes option award activity for the nine months ended September 30, 2024:
| Number of Shares Subject to Existing Options (in thousands) | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in millions) | ||||||||||||||||||||
| Outstanding at January 1, 2024 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
Forfeited or canceled | ( | ||||||||||||||||||||||
| Outstanding at September 30, 2024 | |||||||||||||||||||||||
| Vested and exercisable at September 30, 2024 | |||||||||||||||||||||||
The following assumptions were used to determine the fair value of option awards granted for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Expected volatility | |||||||||||||||||||||||
| Risk-free interest rate | |||||||||||||||||||||||
| Weighted-average expected life | |||||||||||||||||||||||
| Weighted-average fair value of options granted | $ | $ | $ | $ | |||||||||||||||||||
As of September 30, 2024, there was a total of $270 million in unrecognized compensation cost related to unvested option awards.
Restricted Stock Units
The following table summarizes activity for restricted stock units for the nine months ended September 30, 2024:
| Restricted Stock Units (in thousands) | Weighted-Average Grant Date Fair Value | ||||||||||
| Unvested outstanding at January 1, 2024 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Unvested outstanding at September 30, 2024 | |||||||||||
As of September 30, 2024, there was a total of $603 million in unrecognized compensation cost related to unvested restricted stock units.
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Share-Based Compensation Expense
The following table presents the effects of share-based compensation expense in our condensed consolidated statements of operations during the periods presented (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Technology and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total share-based compensation | $ | $ | $ | $ | |||||||||||||||||||
Note 11. Net Loss Per Share
For the periods presented, the following Class C capital stock equivalents were excluded from the calculations of diluted net loss per share because their effect would have been antidilutive (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Weighted-average Class C capital stock option awards outstanding | |||||||||||||||||||||||
| Weighted-average Class C capital stock restricted stock units outstanding | |||||||||||||||||||||||
| Class C capital stock issuable upon conversion of the Notes | |||||||||||||||||||||||
| Total Class C capital stock equivalents | |||||||||||||||||||||||
Note 12. Commitments and Contingencies
Commitments
During the three and nine months ended September 30, 2024, there were no material changes to the commitments disclosed in Note 16 in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Legal Proceedings
We are involved in a number of legal proceedings concerning matters arising in connection with the conduct of our business activities, some of which are at preliminary stages and some of which seek an indeterminate amount of damages. We regularly evaluate the status of legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made if accruals are not appropriate. For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in preliminary stages; (ii) specific damages have not been sought; (iii) damages sought are, in our view, unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories presented. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial position, results of operations or cash flow. For the matters discussed below, we have not recorded any material accruals as of September 30, 2024 or December 31, 2023.
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On September 17, 2019, International Business Machines Corporation (“IBM”) filed a complaint against us in the U.S. District Court for the Central District of California, alleging, among other things, that the Company has infringed and continues to willfully infringe seven patents held by IBM and seeks unspecified damages, including a request that the amount of compensatory damages be trebled, injunctive relief and costs and reasonable attorneys’ fees. On November 8, 2019, we filed a motion to transfer venue and/or to dismiss the complaint. On December 2, 2019, IBM filed an amended complaint, and on December 16, 2019 we filed a renewed motion to transfer venue and/or to dismiss the complaint. The Company’s motion to transfer venue to the U.S. District Court for the Western District of Washington (the “Court”) was granted on May 28, 2020. On September 18, 2020, we filed four Inter Partes Review (“IPR”) petitions before the U.S. Patent and Trial Appeal Board (“PTAB”) seeking the PTAB’s review of the patentability with respect to three of the patents asserted by IBM in the lawsuit. On March 15, 2021, the PTAB instituted IPR proceedings with respect to two of the three patents for which we filed petitions. On March 22, 2021, the PTAB denied institution with respect to the last of the three patents. On January 22, 2021, the Court partially stayed the action with respect to all patents for which we filed an IPR and set forth a motion schedule. On March 8, 2021, IBM filed its second amended complaint. On March 25, 2021, we filed an amended motion for judgment on the pleadings. On July 15, 2021, the Court rendered an order in connection with the motion for judgment on the pleadings finding in our favor on two of the four patents on which we filed our motion. On August 31, 2021, the Court ruled that the parties will proceed with respect to the two patents for which it previously denied judgment, and vacated the stay with respect to one of the three patents for which Zillow filed an IPR, which stay was later reinstated by stipulation of the parties on May 18, 2022. On September 23, 2021, IBM filed a notice of appeal with the United States Court of Appeals for the Federal Circuit with respect to the August 31, 2021 judgment entered, which judgment was affirmed by the Federal Circuit on October 17, 2022. On March 3, 2022, the PTAB ruled on Zillow’s two remaining IPRs finding that Zillow was able to prove certain claims unpatentable, and others it was not. On October 28, 2022, the Court found one of the two patents upon which the parties were proceeding in this action as invalid, and dismissed IBM’s claim relating to that patent. Following the Court’s ruling, on October 28, 2022, the parties filed a joint stipulation with the Court seeking a stay of this action, which was granted by the Court on November 1, 2022. On November 25, 2022, Zillow filed a motion to join an IPR petition within Ebates Performance Mktg., Inc. d/b/a Rakuten Rewards v. Int’l Bus. Machs. Corp. (“Rakuten IPR”), IPR2022-00646 concerning the final remaining patent in this action, which the Court granted on April 20, 2023. On October 11, 2023, the PTAB ruled on the Rakuten IPR finding the claims of the patent asserted against Zillow unpatentable. IBM appealed the PTAB’s decision on November 21, 2023 (the “PTAB Appeal”), and cross appeals were filed by Ebates Performance Marketing Inc. on November 21, 2023 and by us on December 15, 2023. On March 20, 2024, IBM voluntarily dismissed all claims filed in this action against Zillow with prejudice, with the exception of those pertaining to the patent asserted within the pending PTAB Appeal. On June 21, 2024 we filed our response to the PTAB Appeal. On July 30, 2024, IBM filed its reply in further support of the PTAB Appeal. On September 3, 2024, we filed our reply in further support of our cross-appeal. There is a reasonable possibility that a loss may be incurred related to this matter; however, the possible loss or range of loss is not estimable. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit.
On July 21, 2020, IBM filed a second action against us in Court, alleging, among other things, that the Company has infringed and continues to willfully infringe five patents held by IBM and seeks unspecified damages. On September 14, 2020, we filed a motion to dismiss the complaint filed in the action, to which IBM responded by the filing of an amended complaint on November 5, 2020. On December 18, 2020, we filed a motion to dismiss IBM’s first amended complaint. On December 23, 2020, the Court issued a written order staying this case in full. On July 23, 2021, we filed an IPR with the PTAB with respect to one patent included in the second lawsuit. On October 6, 2021, the stay of this action was lifted, except for proceedings relating to the one patent for which we filed an IPR. On December 1, 2021, the Court dismissed the fourth claim asserted by IBM in its amended complaint. On December 16, 2021 Zillow filed a motion to dismiss the remaining claims alleged in IBM’s amended complaint. On March 9, 2022, the Court granted Zillow’s motion to dismiss in full, dismissing IBM’s claims related to all the patents asserted by IBM in this action, except for the one patent for which an IPR was still pending. On March 10, 2022, the PTAB rendered its decision denying Zillow’s IPR. On August 1, 2022, IBM filed an appeal of the Court’s ruling with respect to two of the dismissed patents, which ruling was affirmed by the appeals court on January 9, 2024. On March 20, 2024, IBM voluntarily dismissed all claims filed in this action against Zillow with prejudice and the Clerk of Court was directed to close the case.
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On November 16, 2021, November 19, 2021 and January 6, 2022, three purported class action lawsuits were filed against us and certain of our executive officers, alleging, among other things, violations of federal securities laws on behalf of a class of those who purchased our stock between August 7, 2020 and November 2, 2021. The three purported class action lawsuits, captioned Barua v. Zillow Group, Inc. et al., Silverberg v. Zillow Group, et al. and Hillier v. Zillow Group, Inc. et al. were brought in Court and were consolidated on February 16, 2022 (the “Federal Securities Suit”). On May 12, 2022, the plaintiffs filed their amended consolidated complaint which alleges, among other things, that we issued materially false and misleading statements regarding our Zillow Offers business. The complaints seek to recover, among other things, alleged damages sustained by the purported class members as a result of the alleged misconduct. We moved to dismiss the amended consolidated complaint on July 11, 2022, plaintiffs filed their opposition to the motion to dismiss on September 2, 2022, and we filed a reply in support of the motion to dismiss on October 11, 2022. On December 7, 2022, the Court rendered its decision granting defendants’ motion to dismiss, in part, and denying the motion, in part. On January 23, 2023, the defendants filed their answer to the consolidated complaint. On March 14, 2024, plaintiffs filed a motion for class certification, we filed our opposition on April 26, 2024 and plaintiffs filed their reply on June 7, 2024. On August 16, 2024, plaintiffs filed an amended complaint, and on September 13, 2024, we filed our answer to the amended complaint. On August 23, 2024, the Court issued an order granting class certification. On September 6, 2024, we filed a petition for permission to appeal the class certification order, on September 16, 2024 plaintiffs filed their opposition to our petition, and on September 23, 2024, we filed our reply in further support of the petition. On October 24, 2024, the Ninth Circuit issued an order granting Zillow permission to appeal. On November 1, 2024, the Court issued an order staying the Federal Securities Suit pending the outcome of the appeal. There is a reasonable possibility that a loss may be incurred related to this matter; however, the possible loss or range of loss is not estimable. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in this consolidated lawsuit.
On March 10, 2022, May 5, 2022 and July 20, 2022, shareholder derivative suits were filed in Court and on July 25, 2022, a shareholder derivative suit was filed in the Superior Court of the State of Washington, King County (the “2022 State Suit”), against us and certain of our executive officers and directors seeking unspecified damages on behalf of the Company and certain other relief, such as reform to corporate governance practices. The plaintiffs (including the Company as a nominal defendant) allege, among other things, that the defendants breached their fiduciary duties by failing to maintain an effective system of internal controls, which purportedly caused the losses the Company incurred when it decided to wind down Zillow Offers operations. Plaintiffs also allege, among other things, violations of Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934, insider trading and waste of corporate assets. On June 1, 2022 and September 14, 2022, the Court issued orders consolidating the three federal derivative suits and staying the consolidated action until further order of the Court, which stay was further continued by the Court on September 6, 2023. On September 15, 2022, the Superior Court of the State of Washington entered a temporary stay in the 2022 State Suit. Upon the filing of the defendants’ answer in the related securities class action lawsuit on January 23, 2023, the stay in the 2022 State Suit was lifted. A partial stay was then reentered in the 2022 State Suit, which expired on February 1, 2024. On May 17, 2024, the Superior Court issued an order staying the 2022 State Suit. On August 23, 2023, a second shareholder derivative suit was filed in the Superior Court of the State of Washington, King County (the “2023 State Suit”). On May 24, 2024, we filed a motion to dismiss and/or a motion to stay the 2023 State Suit. On September 13, 2024, the Superior Court issued an order staying the 2023 State Suit. On October 31, 2024, a shareholder derivative suit was filed in the U.S. District Court for the Western District of Washington, which is substantially similar to the other shareholder derivative suits. There is a reasonable possibility that a loss may be incurred related to this matter; however, the possible loss or range of loss is not estimable. The defendants deny the allegations of any wrongdoing and vigorously defend the claims in these lawsuits.
In addition to the matters discussed above, from time to time, we are involved in litigation and claims that arise in the ordinary course of business. Although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters. For additional information regarding our indemnifications, see Note 16 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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Note 13. Revenue and Contract Balances
We recognize revenue when or as we satisfy our performance obligations by transferring control of the 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. See Note 2 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for additional information on our revenue from contracts with customers and contract balances.
Disaggregation of Revenue
The following table presents our revenue disaggregated by category for the periods presented (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Residential | $ | $ | $ | $ | |||||||||||||||||||
| Rentals | |||||||||||||||||||||||
| Mortgages | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
Contract assets totaled $148 million and $90 million as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, the average remaining recognition period for our contract asset related to our Premier Agent Flex offering is five months .
For the three months ended September 30, 2024, the opening balance of deferred revenue was $59 million, of which $51 million was recognized as revenue during the period. For the three months ended September 30, 2023, the opening balance of deferred revenue was $49 million, of which $46 million was recognized as revenue during the period.
For the nine months ended September 30, 2024, the opening balance of deferred revenue was $52 million, of which $50 million was recognized as revenue during the period. For the nine months ended September 30, 2023, the opening balance of deferred revenue was $44 million, of which $43 million was recognized as revenue during the period.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 those factors discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2023.
Overview of our Business
Zillow Group is reimagining real estate to make home a reality for more and more people. As the most visited real estate website in the United States, Zillow and its affiliates help people find and get the home they want by connecting them with digital solutions, dedicated partners and agents, and easier buying, selling, financing and renting experiences.
Our portfolio of affiliates, subsidiaries and brands includes Zillow Premier Agent, Zillow Home Loans, our mortgage origination business and affiliate lender, Zillow Rentals, Trulia, StreetEasy, HotPads and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions for the real estate industry, including ShowingTime+, Spruce and Follow Up Boss.
As of September 30, 2024, we had 6,835 employees, compared to 6,263 employees as of December 31, 2023.
Health of Housing Market
Our financial performance is impacted by changes in the health of the housing market, which is impacted, in turn, by general economic conditions. Current market factors have been driven by low housing inventory, volatility in mortgage interest rates, volatility in rental occupancy rates, as well as home price fluctuations and inflationary conditions. These factors may impact the number of transactions consumers complete using our products and services and demand for our advertising services. According to industry data from NAR, total transaction value increased 2% during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 and 3% during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. Despite the current market factors mentioned above, we continue to invest in the growth of our business. We believe this continued investment has resulted in year over year total revenue results, described below, for the three and nine months ended September 30, 2024 as compared to the same periods in the prior year, that exceeded industry performance for the same periods. The extent to which market factors impact our results and financial position will depend on future developments, which are uncertain and difficult to predict.
Revenue Overview
Our revenue is classified into four categories: Residential, Rentals, Mortgages and Other.
Residential. Residential revenue includes revenue generated by our Premier Agent and new construction marketplaces, as well as revenue from the sale of advertising and business technology solutions for real estate professionals through StreetEasy for-sale product offerings, ShowingTime+, including Listing Showcase, and upon acquisition on December 8, 2023, Follow Up Boss.
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 and brands. We offer these products and services through our Premier Agent program. Premier Agent products, which include the delivery of validated customer connections, or leads, are offered on a share of voice (“market-based pricing”) and pay for performance (“Flex”) basis. For our market-based pricing offering, connections are distributed to Premier Agent partners in proportion to their share of voice, or a Premier Agent partner’s share of total advertising purchased in a particular zip code. With the Flex model, Premier Agent partners are provided with validated leads at no initial cost and pay a performance advertising fee only when a real estate transaction is closed with one of the leads, generally within two years.
New construction revenue primarily includes advertising services sold to home builders on a cost per residential community or cost per impression basis.
Revenue generated through ShowingTime+ includes ShowingTime revenue, which is primarily generated by Appointment Center, a software-as-a-service and call center solution allowing real estate agents, brokerages and multiple listing
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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. ShowingTime+ revenue also includes our dotloop real estate transaction management software-as-a-service solution, as well as Zillow Showcase, a listing marketing package.
Rentals. Rentals revenue includes advertising and a suite of tools sold to property managers on a cost per lead, lease, listing or impression basis or for a fixed fee for certain advertising packages through both the Zillow and StreetEasy brands. 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.
Mortgages. Mortgages revenue primarily includes revenue generated 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 Custom Quote and Connect services.
Other. Other revenue includes revenue generated primarily by display advertising.
For additional information on our revenue categories, see Note 2 in our Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Financial Overview
For the three months ended September 30, 2024 and 2023, we generated total revenue of $581 million and $496 million, respectively, an increase of 17%. The increase in total revenue was primarily attributable to the following:
•Residential revenue increased by $43 million, or 12%, to $405 million, due to increases in residential revenue per visit and the number of visits.
•Rentals revenue increased by $24 million, or 24%, to $123 million, due to increases in average monthly rentals unique visitors and quarterly revenue per average monthly rentals unique visitor.
•Mortgages revenue increased by $15 million, or 63%, to $39 million, driven by an increase in mortgage originations revenue.
During the three months ended September 30, 2024 and 2023, we generated gross profit of $441 million and $386 million, respectively, an increase of 14%.
Key Metrics
Management has identified visits, unique users and the volume of loans originated through Zillow 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 use our products and services, including Zillow Homes Loans, or be transaction-ready real estate market participants and therefore more sought-after by our Premier Agent partners.
We define a visit as a group of interactions by users with our 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.
Prior to January 1, 2024, we measured visits to Zillow and StreetEasy using the Universal Analytics version of Google Analytics’ traffic measurement platform. Through Universal Analytics, visits to Zillow and StreetEasy ended either: (i) after thirty minutes of user inactivity or at midnight; or (ii) through a campaign change. A visit ends through a campaign change if a visitor arrived via one campaign or source (for example, via a search engine or referring link on a third-party website), left the mobile application or website, and then returned via another campaign or source.
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Universal Analytics is no longer offered by Google as of July 1, 2024 and has been replaced by Google Analytics 4. As a result of this change, from January 1, 2024 through June 30, 2024, we measured visits to Zillow using an internal measurement tool, but continued to use Universal Analytics to measure visits to StreetEasy. As of July 1, 2024, we measure visits to both Zillow and StreetEasy using an internal measurement tool, and visits to Zillow and StreetEasy end after thirty minutes of user inactivity or at midnight. Trulia continues to measure visits with Adobe Analytics, and visits to Trulia end after thirty minutes of user inactivity.
We believe the use of an internal measurement tool to measure visits to Zillow and StreetEasy allows us to maintain control over and provide greater insight into our end-to-end data as we enhance our broader long-term analytics strategy, while also becoming less reliant on third-party providers. We have recast prior period visits to Zillow to conform with the current period measurement methodology. The change in our measurement platform for visits resulted in an approximately 10% decrease in reported visits for both the three and nine month periods ended September 30, 2023, primarily driven by the methodology for campaign changes.
The following table presents the number of visits to our mobile applications and websites for the periods presented (in millions, except percentages), recast for prior periods, as described above:
| Three Months Ended September 30, | 2023 to 2024 % Change | Nine Months Ended September 30, | 2023 to 2024 % Change | ||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
| Visits | 2,440 | 2,366 | 3 | % | 7,251 | 6,995 | 4 | % | |||||||||||||||||||||||||||
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 revenue depends in part, on users accessing our mobile applications and websites to engage in the sale, purchase, renting and financing of homes, including with Zillow Home Loans, and a significant portion of our Residential revenue, Rentals revenue and Other 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.
Prior to January 1, 2024, we measured unique users for Zillow, StreetEasy and HotPads using Universal Analytics. As discussed above, Universal Analytics is no longer offered as of July 1, 2024 and has been replaced by Google Analytics 4. As a result of this change, from January 1, 2024 through June 30, 2024, we measured unique users for Zillow using an internal measurement tool, but continued to use Universal Analytics to measure unique users for StreetEasy and HotPads. As of July 1, 2024, we measure visits to Zillow, StreetEasy and HotPads using an internal measurement tool. Trulia continues to measure unique users with Adobe Analytics.
Due to technological limitations, user software settings, or user behavior, our internal measurement tool and Universal Analytics may assign a unique cookie to different instances of access by the same individual to our mobile applications and websites. In such instances, although these tools capture the number of unique users in accordance with the defined methodology, there are inherent limitations in measuring the number of unique individuals accessing our mobile applications and websites.
We believe the use of an internal measurement tool to measure unique users for Zillow, StreetEasy and HotPads allows us to maintain control over and provide greater insight into our end-to-end data as we enhance our broader long-term analytics strategy, while also becoming less reliant on third-party providers. We have recast prior period unique users for Zillow to conform to the current period measurement methodology. The change in our measurement platform for unique users resulted in an approximately 2% increase in reported unique users for both the three and nine month periods ended September 30, 2023.
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The following table presents our average monthly unique users for the periods presented (in millions, except percentages), recast for prior periods, as described above:
| Three Months Ended September 30, | 2023 to 2024 % Change | Nine Months Ended September 30, | 2023 to 2024 % Change | ||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
| Average monthly unique users | 233 | 230 | 1 | % | 227 | 226 | — | % | |||||||||||||||||||||||||||
Loan Origination Volume
Loan origination volume is an important metric as it is a measure of how successful we are at the origination of mortgage loan products through our mortgage origination business, Zillow Home Loans, which directly impacts our Mortgages revenue. Loan origination volume represents the total value of mortgage loan originations closed through Zillow Home Loans during the period.
The following table presents loan origination volume by purpose and in total for Zillow Home Loans for the periods presented (in millions, except percentages):
| Three Months Ended September 30, | 2023 to 2024 % Change | Nine Months Ended September 30, | 2023 to 2024 % Change | ||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
| Purchase loan origination volume | $ | 812 | $ | 452 | 80 | % | $ | 2,169 | $ | 1,047 | 107 | % | |||||||||||||||||||||||
| Refinance loan origination volume | 7 | 5 | 40 | % | 14 | 12 | 17 | % | |||||||||||||||||||||||||||
| Total loan origination volume | $ | 819 | $ | 457 | 79 | % | $ | 2,183 | $ | 1,059 | 106 | % | |||||||||||||||||||||||
During the three and nine month periods ended September 30, 2024, total loan origination volume increased 79% and 106%, respectively, compared to the three and nine month periods ended September 30, 2023. These increases were primarily driven by the continued growth in Zillow Home Loans purchase loan originations as we prioritize growth in Zillow Home Loans purchase originations.
Results of Operations
Given continued uncertainty surrounding the health of the housing market, interest rate environment and inflationary conditions, financial performance for current and prior periods may not be indicative of future performance.
Revenue
| % of Total Revenue | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | 2023 to 2024 | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | ||||||||||||||||||||||||||||||
| (in millions, except percentages, unaudited) | |||||||||||||||||||||||||||||||||||
| Residential | $ | 405 | $ | 362 | $ | 43 | 12 | % | 70 | % | 73 | % | |||||||||||||||||||||||
| Rentals | 123 | 99 | 24 | 24 | 21 | 20 | |||||||||||||||||||||||||||||
| Mortgages | 39 | 24 | 15 | 63 | 7 | 5 | |||||||||||||||||||||||||||||
| Other | 14 | 11 | 3 | 27 | 2 | 2 | |||||||||||||||||||||||||||||
| Total revenue | $ | 581 | $ | 496 | $ | 85 | 17 | % | 100 | % | 100 | % | |||||||||||||||||||||||
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| % of Total Revenue | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | 2023 to 2024 | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | ||||||||||||||||||||||||||||||
| (in millions, except percentages, unaudited) | |||||||||||||||||||||||||||||||||||
| Residential | $ | 1,207 | $ | 1,103 | $ | 104 | 9 | % | 72 | % | 75 | % | |||||||||||||||||||||||
| Rentals | 337 | 264 | 73 | 28 | 20 | 18 | |||||||||||||||||||||||||||||
| Mortgages | 104 | 74 | 30 | 41 | 6 | 5 | |||||||||||||||||||||||||||||
| Other | 34 | 30 | 4 | 13 | 2 | 2 | |||||||||||||||||||||||||||||
| Total revenue | $ | 1,682 | $ | 1,471 | $ | 211 | 14 | % | 100 | % | 100 | % | |||||||||||||||||||||||
Three months ended September 30, 2024 compared to three months ended September 30, 2023
Total revenue increased $85 million, or 17%, to $581 million:
•Residential revenue increased $43 million, or 12%. The increase in Residential revenue was partially driven by an 8% increase in Residential revenue per visit to $0.166 for the three months ended September 30, 2024 from $0.153 for the three months ended September 30, 2023, primarily due to the inclusion of revenue from Follow Up Boss, which we acquired in December 2023, growth in our Premier Agent revenue primarily due to continued improvement in our ability to convert connections into transactions, an increase in ShowingTime+ revenue as we expanded software services available to sellers and listing agents, and growth in our new construction revenue. We calculate Residential revenue per visit by dividing the revenue generated by our Residential offerings by the number of visits in the period. Residential revenue was also positively impacted by a 3% increase in the number of visits for the three months ended September 30, 2024 from the three months ended September 30, 2023. We expect Residential revenue to decrease in absolute dollars during the three months ending December 31, 2024, primarily due to the impact of seasonality on the residential real estate market.
•Rentals revenue increased $24 million, or 24%. The increase in Rentals revenue was primarily due to growth in average monthly rentals unique visitors, which increased 20% to 36 million during the three months ended September 30, 2024, from 30 million during the three months ended September 30, 2023. We have estimated average monthly rentals unique visitors using Comscore data as of September 2024, which measures average monthly unique visitors on rental listings on Zillow, Trulia and HotPads mobile apps and websites. The increase in Rentals revenue was also driven by a 4% increase in quarterly revenue per average monthly rentals unique visitor to $3.42 for the three months ended September 30, 2024, from $3.30 for the three months ended September 30, 2023, primarily driven by growth in multifamily property listings, which drove a 38% increase in multifamily rentals revenue. We calculate quarterly revenue per average monthly rentals unique visitor by dividing total Rentals revenue for the period by the average monthly rentals unique visitors for the period and then dividing by the number of quarters in the period.
•Mortgages revenue increased $15 million, or 63%. This increase was primarily driven by a $16 million increase in mortgage originations revenue. The increase in mortgage originations revenue was primarily due to a 79% increase in total loan origination volume to $819 million for the three months ended September 30, 2024 from $457 million for the three months ended September 30, 2023, primarily driven by continued growth in Zillow Home Loans purchase loan origination volume. The increase in mortgage originations revenue was also attributable to a 21% increase in gain on sale margin. 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 IRLCs 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.
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Nine months ended September 30, 2024 compared to nine months ended September 30, 2023
Total revenue increased $211 million, or 14%, to $1.7 billion:
•Residential revenue increased $104 million, or 9%. The increase in Residential revenue was driven by a 6% increase in Residential revenue per visit to $0.166 for the nine months ended September 30, 2024 from $0.158 for the nine months ended September 30, 2023, primarily due to the inclusion of revenue from Follow Up Boss, which we acquired in December 2023, growth in our Premier Agent revenue primarily due to continued improvement in our ability to convert connections into transactions, an increase in ShowingTime+ revenue as we expanded software services available to sellers and listing agents, and accelerating growth in our new construction revenue. The increase in Residential revenue was also attributable to a 4% increase in the number of visits for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.
•Rentals revenue increased $73 million, or 28%. The increase in Rentals revenue was primarily due to a 24% increase in quarterly revenue per average monthly rentals unique visitor to $3.62 for the nine months ended September 30, 2024 as compared to $2.93 for the nine months ended September 30, 2023, primarily driven by growth in multifamily property listings, which drove a 42% increase in multifamily rentals revenue. The increase in rentals revenue was also due to growth in the number of average monthly rentals unique visitors, which increased 3% to 31 million during the nine months ended September 30, 2024, from 30 million during the nine months ended September 30, 2023.
•Mortgages revenue increased $30 million, or 41%. This increase was driven by a $45 million increase in mortgage originations revenue, partially offset by a $12 million decrease in Custom Quote and Connect advertising services revenue. The increase in mortgage originations revenue was primarily due to a 106% increase in total loan origination volume to $2.2 billion for the nine months ended September 30, 2024 from $1.1 billion for the nine months ended September 30, 2023, primarily driven by continued growth in Zillow Home Loans purchase loan origination volume. The increase in mortgage originations revenue was also attributable to a 20% increase in gain on sale margin. The increase in mortgage originations revenue was partially offset by a $12 million decrease in Custom Quote and Connect advertising services revenue, which was primarily due to a 20% decrease in leads generated from marketing products sold to mortgage professionals. This decrease in leads was primarily driven by our focus on organic growth of our mortgage origination business.
Adjusted EBITDA
The following table summarizes net loss and Adjusted EBITDA (in millions, except percentages):
| % of Revenue | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | 2023 to 2024 | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Net loss | $ | (20) | $ | (28) | $ | 8 | 29 | % | (3) | % | (6) | % | |||||||||||||||||||||||
| Adjusted EBITDA | $ | 127 | $ | 107 | $ | 20 | 19 | % | 22 | % | 22 | % | |||||||||||||||||||||||
| % of Revenue | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | 2023 to 2024 | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Net loss | $ | (60) | $ | (85) | $ | 25 | 29 | % | (4) | % | (6) | % | |||||||||||||||||||||||
| Adjusted EBITDA | $ | 386 | $ | 322 | $ | 64 | 20 | % | 23 | % | 22 | % | |||||||||||||||||||||||
To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA, a non-GAAP financial measure, in this Quarterly Report on Form 10-Q. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q as it is a key metric used by our management and Board 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.
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Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure 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 impairment and restructuring costs;
•Adjusted EBITDA does not reflect acquisition-related costs;
•Adjusted EBITDA does not reflect loss on extinguishment of debt;
•Adjusted EBITDA does not reflect interest expense or other income, net;
•Adjusted EBITDA does not reflect income taxes; and
•Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently from the way we do, limiting its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash-flow metrics, net loss and our other GAAP results.
The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods presented (in millions, unaudited):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Reconciliation of Adjusted EBITDA to Net Loss: | |||||||||||||||||||||||
Net loss | $ | (20) | $ | (28) | $ | (60) | $ | (85) | |||||||||||||||
Income taxes | — | — | 4 | 1 | |||||||||||||||||||
Other income, net | (34) | (34) | (101) | (108) | |||||||||||||||||||
| Depreciation and amortization | 63 | 49 | 178 | 134 | |||||||||||||||||||
| Share-based compensation | 108 | 109 | 329 | 342 | |||||||||||||||||||
Impairment and restructuring costs | — | 1 | 6 | 9 | |||||||||||||||||||
Acquisition-related costs | 1 | 1 | 1 | 2 | |||||||||||||||||||
Loss on extinguishment of debt | — | — | 1 | — | |||||||||||||||||||
| Interest expense | 9 | 9 | 28 | 27 | |||||||||||||||||||
| Adjusted EBITDA | $ | 127 | $ | 107 | $ | 386 | $ | 322 | |||||||||||||||
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Costs and Expenses, Gross Profit and Other Items
| % of Total Revenue | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | 2023 to 2024 | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | ||||||||||||||||||||||||||||||
| (in millions, except percentages, unaudited) | |||||||||||||||||||||||||||||||||||
| Cost of revenue | $ | 140 | $ | 110 | $ | 30 | 27 | % | 24 | % | 22 | % | |||||||||||||||||||||||
| Gross profit | 441 | 386 | 55 | 14 | 76 | 78 | |||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Sales and marketing | 217 | 164 | 53 | 32 | 37 | 33 | |||||||||||||||||||||||||||||
| Technology and development | 145 | 142 | 3 | 2 | 25 | 29 | |||||||||||||||||||||||||||||
| General and administrative | 123 | 131 | (8) | (6) | 21 | 26 | |||||||||||||||||||||||||||||
| Impairment and restructuring costs | — | 1 | (1) | (100) | — | — | |||||||||||||||||||||||||||||
| Acquisition-related costs | 1 | 1 | — | — | — | — | |||||||||||||||||||||||||||||
| Total operating expenses | 486 | 439 | 47 | 11 | 84 | 89 | |||||||||||||||||||||||||||||
| Other income, net | 34 | 34 | — | — | 6 | 7 | |||||||||||||||||||||||||||||
| Interest expense | 9 | 9 | — | — | 2 | 2 | |||||||||||||||||||||||||||||
| Income tax expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| % of Total Revenue | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | 2023 to 2024 | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | 2024 | 2023 | ||||||||||||||||||||||||||||||
| (in millions, except percentages, unaudited) | |||||||||||||||||||||||||||||||||||
| Cost of revenue | $ | 393 | $ | 306 | $ | 87 | 28 | % | 23 | % | 21 | % | |||||||||||||||||||||||
| Gross profit | 1,289 | 1,165 | 124 | 11 | 77 | 79 | |||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Sales and marketing | 588 | 493 | 95 | 19 | 35 | 34 | |||||||||||||||||||||||||||||
| Technology and development | 436 | 419 | 17 | 4 | 26 | 28 | |||||||||||||||||||||||||||||
| General and administrative | 386 | 407 | (21) | (5) | 23 | 28 | |||||||||||||||||||||||||||||
| Impairment and restructuring costs | 6 | 9 | (3) | (33) | — | 1 | |||||||||||||||||||||||||||||
| Acquisition-related costs | 1 | 2 | (1) | (50) | — | — | |||||||||||||||||||||||||||||
| Total operating expenses | 1,417 | 1,330 | 87 | 7 | 84 | 90 | |||||||||||||||||||||||||||||
Loss on extinguishment of debt | 1 | — | 1 | — | — | — | |||||||||||||||||||||||||||||
| Other income, net | 101 | 108 | (7) | (6) | 6 | 7 | |||||||||||||||||||||||||||||
| Interest expense | 28 | 27 | 1 | 4 | 2 | 2 | |||||||||||||||||||||||||||||
Income tax expense | 4 | 1 | 3 | 300 | — | — | |||||||||||||||||||||||||||||
Cost of Revenue
Cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount-related 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. Cost of revenue also includes amortization costs related to capitalized website and development activities, amortization of software, amortization of certain intangible assets and other costs to obtain data used to populate our mobile applications and websites, and amortization of certain intangible assets recorded in connection with acquisitions, including developed technology. Cost of revenue also includes credit card fees and ad serving costs paid to third parties, direct costs to provide our rental applications product, and direct costs to originate mortgage loans, including underwriting and processing costs.
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Three months ended September 30, 2024 compared to three months ended September 30, 2023
Cost of revenue increased $30 million, or 27%, primarily driven by increases of $14 million in depreciation and amortization expense primarily due to an increase in amortization of website development costs, $4 million in mortgage loan processing costs due to increased purchase loan origination volume, $3 million in lead acquisition costs related to partnerships, and $2 million in connectivity costs.
Nine months ended September 30, 2024 compared to nine months ended September 30, 2023
Cost of revenue increased $87 million, or 28%, primarily driven by increases of $47 million in depreciation and amortization expense primarily due to an increase in amortization of website development costs, $12 million in mortgage loan processing costs due to increased purchase loan origination volume, $7 million in lead acquisition costs related to partnerships, $5 million in connectivity costs, and $4 million in headcount-related expenses, including share-based compensation expense.
Gross Profit
Gross profit is calculated as revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross profit has and will continue to be affected by a number of factors, including the mix of revenue from our various product offerings.
Three months ended September 30, 2024 compared to three months ended September 30, 2023
Gross profit increased by $55 million, or 14%, primarily due to an increase in revenue, discussed above. Total gross margin decreased from 78% to 76%.
Nine months ended September 30, 2024 compared to nine months ended September 30, 2023
Gross profit increased by $124 million, or 11%, primarily due to an increase in revenue, discussed above. Total gross margin decreased from 79% to 77%.
Sales and Marketing
Sales and marketing expenses consist of advertising costs and other sales expenses related to promotional and marketing activities, headcount-related expenses, including salaries, commissions, benefits, bonuses and share-based compensation expense for sales, sales support, customer support, including the customer connections team and mortgage loan officers and specialists, marketing and public relations employees, depreciation expense and amortization of certain intangible assets recorded in connection with acquisitions, including trade names and trademarks and customer relationships.
Three months ended September 30, 2024 compared to three months ended September 30, 2023
Sales and marketing expenses increased $53 million, or 32%, due to increases of $25 million in marketing and advertising costs as we continue to invest in the growth of our rentals marketplace and $23 million in headcount-related expenses, including share-based compensation expense. We expect sales and marketing expenses to decrease in absolute dollars during the three months ending December 31, 2024 as marketing and advertising costs decrease in line with typical seasonal media spend.
Nine months ended September 30, 2024 compared to nine months ended September 30, 2023
Sales and marketing expenses increased $95 million, or 19%, due to increases of $52 million in headcount-related expenses, including share-based compensation expense, $33 million in marketing and advertising costs as we continue to invest in the growth of our rentals marketplace, and $4 million in travel expenses.
Technology and Development
Technology and development expenses consist of headcount-related 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 equipment and maintenance costs and depreciation expense.
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Three months ended September 30, 2024 compared to three months ended September 30, 2023
Technology and development expenses increased $3 million, or 2%, due primarily to an increase of $3 million in headcount-related expenses, including share-based compensation expense.
Nine months ended September 30, 2024 compared to nine months ended September 30, 2023
Technology and development expenses increased $17 million, or 4%, due to increases of $19 million in headcount-related expenses, including share-based compensation expense, as we continue to invest in human capital to grow our businesses, $7 million in software and hardware costs, and $3 million in travel expenses. These increases were partially offset by a $10 million decrease in third-party professional service fees driven by active cost management.
General and Administrative
General and administrative expenses consist of headcount-related 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.
Three months ended September 30, 2024 compared to three months ended September 30, 2023
General and administrative expenses decreased $8 million, or 6%, primarily due to a $6 million decrease in third party professional service fees driven by active cost management and a $5 million decrease in rent expense primarily driven by cost savings associated with changes in the use of certain office space in our lease portfolio. These decreases were partially offset by an increase of $4 million due to the change in fair value of contingent consideration associated with our acquisition of Follow Up Boss.
Nine months ended September 30, 2024 compared to nine months ended September 30, 2023
General and administrative expenses decreased $21 million, or 5%, primarily due to a decrease of $18 million in headcount-related expenses, including share-based compensation expense. The decrease in headcount-related expenses was primarily driven by $18 million in share-based compensation expense associated with the departures of certain executive personnel incurred during the nine months ended September 30, 2023. The decrease in general and administrative expenses was also due to a $12 million decrease in rent expense primarily driven by cost savings associated with changes in the use of certain office space in our lease portfolio. These decreases were partially offset by increases of $8 million due to the change in fair value of contingent consideration associated with our acquisition of Follow Up Boss and $3 million in travel expenses.
Impairment and Restructuring Costs
Impairment and restructuring costs were not material for the three months ended September 30, 2024 and 2023. Impairment and restructuring costs were $6 million and $9 million for the nine months ended September 30, 2024 and 2023, respectively, and were primarily associated with changes in the use of certain office space in our lease portfolio. Impairment and restructuring costs incurred during the nine months ended September 30, 2023 also included $3 million that pertained to employee termination costs.
Other Income, net
Other income, net consists primarily of interest income earned on our cash, cash equivalents and investments and fair value adjustments on an outstanding warrant.
Other income, net decreased $7 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, and was primarily driven by fair value adjustments on an outstanding warrant, partially offset by increases in returns on investments due to the higher interest rate environment as compared to the prior year period.
Income Taxes
We are subject to income taxes in the United States (federal and state) and certain foreign jurisdictions. As of September 30, 2024 and December 31, 2023, 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. There is a reasonable possibility that within the next several years, sufficient positive evidence will become available to demonstrate that a significant
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portion of the valuation allowance against our U.S. net deferred tax assets will no longer be required. We have accumulated federal tax losses of approximately $1.4 billion as of December 31, 2023, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $56 million (tax effected) as of December 31, 2023.
Income tax expense was not material for the three and nine month periods ended September 30, 2024 and 2023.
In 2021, the OECD, a global policy forum, released Pillar Two, designed to ensure that multinational groups with consolidated financial statement revenue in excess of €750 million annually pay a minimum 15% tax in each jurisdiction in which they operate. The OECD continues to release guidance and countries are implementing legislation to adopt these rules, which are expected to be effective for accounting periods beginning on or after December 31, 2023. The United States has not yet enacted legislation implementing Pillar Two. We have evaluated the impact of these rules and currently believe they will not have a material impact on our financial position, results of operations or cash flows due to certain transitional safe harbors. We will continue to monitor and refine our assessment as further guidance is made available.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flows from operations, debt financing and equity offerings. Our cash requirements consist principally of working capital, general corporate needs and mortgage loan originations. We continue to invest in the development and expansion of our operations using available cash flows from operations. Ongoing investments include, but are not limited to, improvements in our technology platforms, investments in new products and services, and continued investments in sales and marketing. We also use cash flows from operations to service our debt obligations and to repurchase Class A common stock, Class C capital stock, outstanding Notes or a combination thereof through our Repurchase Authorizations or otherwise.
Sources of Liquidity
As of September 30, 2024 and December 31, 2023, we had cash and cash equivalents, investments and restricted cash of $2.2 billion and $2.8 billion, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions and money market funds. Investments consist of fixed income securities, which include U.S. government treasury securities, investment grade corporate securities, U.S. government agency securities, and commercial paper. Restricted cash primarily consists of amounts used to fund customer home purchases in our mortgage origination business. Amounts on deposit with third-party financial institutions exceed the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable. As of September 30, 2024, Zillow Group and its subsidiaries were in compliance with all debt covenants specified in the facilities described below.
We believe that cash from operations and cash and cash equivalents and investment balances will be sufficient to meet our ongoing operating activities, working capital, capital expenditures, strategic acquisitions and investments and other capital requirements for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operations, debt financing and equity offerings, as applicable.
Summarized Cash Flow Information
The following table presents selected cash flow data for the periods presented (in millions, unaudited):
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash Flow Data: | |||||||||||
| Net cash provided by operating activities | $ | 306 | $ | 268 | |||||||
| Net cash provided by investing activities | 121 | 339 | |||||||||
| Net cash used in financing activities | (847) | (226) | |||||||||
Cash Flows Provided By Operating Activities
Our operating cash flows result primarily from cash received from real estate professionals, rental professionals, mortgage professionals, builders and brand advertisers, as well as cash received from sales of mortgages originated by Zillow Home Loans. Our primary uses of cash from operating activities include marketing and advertising activities, mortgages funded through Zillow Home Loans and employee compensation and benefits. Additionally, uses of cash from operating activities include costs associated with operating our mobile applications and websites and other general corporate expenditures.
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For the nine months ended September 30, 2024, net cash provided by operating activities was $306 million. This was driven by a net loss of $60 million, adjusted by share-based compensation of $329 million, depreciation and amortization of $178 million, accretion of bond discount of $23 million, amortization of contract cost assets of $14 million, amortization of right of use assets of $8 million, impairment costs of $6 million, amortization of debt issuance costs of $4 million, and $14 million in other adjustments to reconcile net loss to cash provided by operating activities. Changes in operating assets and liabilities decreased cash provided by operating activities by $164 million. The changes in operating assets and liabilities are primarily related to a $73 million increase in prepaid expenses and other current assets primarily due to an increase in revenue from products and services billed in arrears, a $64 million increase in mortgage loans held for sale due to an increase in purchase loan origination volume, a $31 million decrease in lease liabilities due to contractual lease payments, a $21 million increase in accounts receivable primarily due to an increase in revenue from products and services billed in arrears, and a $15 million increase in contract cost assets primarily due to capitalized sales commissions. These changes were partially offset by a $25 million increase in accounts payable driven by the timing of payments, an $8 million increase in accrued expenses and other current liabilities primarily driven by the timing of billings, and a $5 million increase in deferred revenue consistent with an increase in revenue.
For the nine months ended September 30, 2023, net cash provided by operating activities was $268 million. This was driven by a net loss of $85 million, adjusted by share-based compensation of $342 million, depreciation and amortization of $134 million, accretion of bond discount of $29 million, amortization of right of use assets of $18 million, amortization of contract cost assets of $16 million, impairment costs of $6 million, and amortization of debt issuance costs of $4 million. Changes in operating assets and liabilities decreased cash provided by operating activities by $135 million. The changes in operating assets and liabilities are primarily related to a $55 million increase in mortgage loans held for sale due to an increase in purchase loan origination volume, a $26 million increase in accounts receivable primarily due to an increase in revenue from products and services billed in arrears, a $24 million decrease in lease liabilities due to contractual lease payments, a $22 million increase in prepaid expenses and other current assets primarily due to an increase in revenue from products and services billed in arrears, a $16 million increase in contract cost assets primarily due to capitalized sales commissions, a $4 million decrease in other long term liabilities, and a $3 million decrease in accrued expenses and other current liabilities. These changes were partially offset by a $7 million increase in accounts payable and a $4 million increase in accrued compensation and benefits both driven by the timing of payments, and a $4 million increase in deferred revenue.
Cash Flows Provided By Investing Activities
Our primary investing activities include the purchase and sale or maturity of investments, the purchase of property and equipment and intangible assets, and cash paid in connection with acquisitions.
For the nine months ended September 30, 2024, net cash provided by investing activities was $121 million. This was the result of $251 million of net proceeds from maturities and sales of investments and $130 million of purchases of property and equipment and intangible assets.
For the nine months ended September 30, 2023, net cash provided by investing activities was $339 million. This was the result of $498 million of net proceeds from the maturity of investments, $125 million of purchases of property and equipment and intangible assets, and $34 million of cash paid for acquisitions, net of cash acquired.
Cash Flows Used In Financing Activities
Our primary financing activities include repurchases of Class A common stock and Class C capital stock, the exercise of employee option awards, repayments of borrowings on the warehouse line of credit and master repurchase agreements related to Zillow Home Loans and settlement of long-term debt including a portion of the Notes.
For the nine months ended September 30, 2024, net cash used in financing activities was $847 million, which primarily related to $697 million of cash paid for the settlement of the 2024 Notes and partial repurchase of the 2025 Notes, and $301 million of cash paid for share repurchases. The cash outflows were partially offset by $96 million of proceeds from the exercise of option awards and $55 million of net borrowings on our master repurchase agreements related to Zillow Home Loans.
For the nine months ended September 30, 2023, net cash used in financing activities was $226 million, which primarily related to $336 million of cash paid for share repurchases, partially offset by $56 million of proceeds from the exercise of option awards and $54 million of net borrowings on our warehouse line of credit and master repurchase agreements related to Zillow Home Loans.
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Capital Resources
Notes
As of September 30, 2024, we have a total of $918 million aggregate principal amount of Notes outstanding. The Notes are senior unsecured obligations, and interest on the Notes is paid semi-annually. The following table summarizes our Notes as of the periods presented (in millions, except interest rates):
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||||||||
| Maturity Date | Aggregate Principal Amount | Stated Interest Rate | Carrying Value | Carrying Value | ||||||||||||||||||||||
| September 1, 2026 | $ | 499 | 1.375 | % | $ | 497 | $ | 496 | ||||||||||||||||||
| May 15, 2025 | 419 | 2.75 | % | 418 | 504 | |||||||||||||||||||||
| September 1, 2024 | — | 0.75 | % | — | 607 | |||||||||||||||||||||
| Total | $ | 918 | $ | 915 | $ | 1,607 | ||||||||||||||||||||
Settlement of 2024 Notes. The 2024 Notes matured on September 1, 2024. During the period from March 1, 2024 through the close of business on August 29, 2024, holders of the 2024 Notes elected to convert all outstanding 2024 Notes in accordance with the terms of the indenture. We settled these conversions with aggregate cash payments totaling $610 million, which included $608 million in principal repayments, $2 million for accrued interest and a nominal cash payment in lieu of fractional shares, and the issuance of 1.9 million shares of Class C capital stock. In September 2024, we received 2.1 million shares of Class C capital stock from the settlement of the capped call transactions we entered into in connection with the issuance of the 2024 Notes.
2025 Notes. We may from time to time seek to redeem, retire or purchase outstanding debt through cash purchases and/or exchanges for cash, shares of stock or a combination of cash and stock, pursuant to the redemption terms of such debt securities, in open market purchases, privately negotiated transactions or otherwise. Such redemptions, repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.
There were no repurchases of Notes during the three months ended September 30, 2024. During the nine months ended September 30, 2024, we repurchased $88 million aggregate principal amount of the 2025 Notes through open market transactions for $89 million in cash, including accrued interest.
On or after November 15, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date for the 2025 Notes, holders may convert the 2025 Notes at their option at the applicable Conversion Rate then in effect. Any conversions of the 2025 Notes will be settled on the maturity date. We expect to settle the principal amount of the 2025 Notes in cash and any conversion premium in shares of Class C capital stock. In addition, we may redeem the 2025 Notes if the last reported sale price of our Class C capital stock equals or exceeds $87.36 per share (130% of the conversion price) for a specified period of trading days. If we elect to redeem the 2025 Notes, we would expect to settle any conversions in cash up to the principal amount and shares of Class C capital stock for any conversion obligation in excess of the principal amount.
Redemption of 2026 Notes. On October 8, 2024, we submitted notice to the trustee to exercise our right to redeem the remaining $499 million in aggregate principal amount of the 2026 Notes on December 18, 2024 (the “Redemption Date”). The 2026 Notes may be converted by the holders at any time prior to 5:00 p.m. (New York City time) on December 17, 2024. The conversion rate for the 2026 Notes is 22.9830 shares of Class C capital stock per $1,000 principal amount of 2026 Notes converted (subject to adjustment under certain circumstances as set forth in the indenture governing the 2026 Notes). We expect to settle the principal amount of the 2026 Notes in cash and any conversion premium in shares of Class C capital stock. For any holder of the 2026 Notes that does not elect to convert their 2026 Notes, we will be required to redeem the 2026 Notes in cash at a redemption price equal to 100% of the principal amount of 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the Redemption Date.
Refer to Note 7 of our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information regarding our Notes, including conversion rates, conversion and redemption dates and the related capped call transactions.
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Share Repurchases
The Board has authorized the repurchase of up to $2.5 billion of our Class A common stock, Class C capital stock, outstanding Notes or a combination thereof. During the nine months ended September 30, 2024, we repurchased 1.1 million shares of Class A common stock and 6 million shares of Class C capital stock at an average price of $42.26 and $42.45 per share, respectively, for an aggregate purchase price of $46 million and $255 million, respectively. As of September 30, 2024, $381 million remained available for future repurchases pursuant to the Repurchase Authorizations, which repurchases decrease our liquidity and capital resources when effected. For additional information on these authorizations, see Notes 11 and 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Credit Facilities
Zillow Home Loans operations impact our liquidity and capital resources as a cash intensive business that funds mortgage loans originated for resale in the secondary market. We primarily use debt financing to fund mortgage loan originations. The following table summarizes our master repurchase agreements as of the periods presented (in millions, except interest rates):
| Lender | Maturity Date | Maximum Borrowing Capacity | Outstanding Borrowings at September 30, 2024 | Outstanding Borrowings at December 31, 2023 | Weighted Average Interest Rate at September 30, 2024 | |||||||||||||||||||||||||||
JPMorgan Chase Bank, N.A.(1) | May 1, 2025 | $ | 150 | $ | 78 | $ | 40 | 6.56 | % | |||||||||||||||||||||||
UBS AG(2) | September 5, 2025 | 150 | 70 | 45 | 6.58 | % | ||||||||||||||||||||||||||
Atlas Securitized Products, L.P.(3) | March 11, 2024 | — | — | 8 | — | % | ||||||||||||||||||||||||||
| Total | $ | 300 | $ | 148 | $ | 93 | ||||||||||||||||||||||||||
(1) Agreement was amended and renewed on May 2, 2024, increasing the total maximum borrowing capacity from $100 million to $150 million.
(2) Agreement was amended and renewed on September 6, 2024, increasing the total maximum borrowing capacity from $100 million to $150 million.
(3) Agreement expired on March 11, 2024 and was not renewed.
Refer to Note 7 of our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information on Zillow Group’s master repurchase agreements.
Contractual Obligations and Other Commitments
Notes - Includes the aggregate principal amounts of the Notes due on their contractual maturity dates, as well as the associated coupon interest. As of September 30, 2024, we have an outstanding aggregate principal amount of $918 million, $419 million of which is payable within 12 months. Future interest payments associated with the Notes total $25 million, with $18 million payable within 12 months. Subsequent to September 30, 2024, we provided notice to the trustee that we will redeem the remaining $499 million in aggregate principal amount of the 2026 Notes on December 18, 2024. Refer to Note 7 of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for maturity dates, stated interest rates and additional information on our Notes.
Credit Facilities - Includes principal amounts due for amounts borrowed under the master repurchase agreements to finance mortgages originated through Zillow Home Loans. Principal amounts under the master repurchase agreements are due when the related mortgage loan is sold to an investor or directly to an agency. As of September 30, 2024, we have outstanding principal amounts of $148 million. Amounts exclude an immaterial amount of estimated interest payments.
Operating Lease Obligations - Our lease portfolio primarily comprises operating leases for our office space. During the nine months ended September 30, 2024, there were no material changes to our operating lease obligations disclosed in Note 10 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Additionally, as of September 30, 2024, we had outstanding letters of credit of approximately $11 million, which secure our lease obligations in connection with certain of the operating leases of our office spaces.
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Contingent Consideration - In connection with the acquisition of Follow Up Boss, we are obligated to pay contingent consideration upon the achievement of certain performance metrics over a three-year period. For additional information regarding this contingent consideration, see Note 3 and Note 5 of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Purchase Obligations - We have non-cancelable purchase obligations for content related to our mobile applications and websites and certain cloud computing costs. During the nine months ended September 30, 2024, there were no material changes to the purchase commitments disclosed in Note 16 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We evaluate our estimates, judgments and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates, and the health of the housing market and the broader economy have introduced significant additional uncertainty with respect to estimates, judgments and assumptions, which may materially impact our estimates. For information on our critical accounting policies and estimates, see Part II Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.
Interest Rate Risk
Under our current investment policy, we invest our excess cash in money market funds, U.S. government treasury securities, U.S. government agency securities, investment grade corporate securities and commercial paper. Our current investment policy seeks first to preserve capital, second to provide sufficient liquidity for our operating and capital needs and third to maximize yield.
Our short-term investments are exposed to market risk due to the fluctuation of prevailing interest rates that may reduce the yield on our investments or their fair value. For our investment portfolio, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio.
As of September 30, 2024, we had approximately $918 million aggregate principal amount of Notes. All outstanding Notes bear fixed rates of interest and, therefore, do not expose us to financial statement risk associated with changes in interest rates. The fair values of the Notes change primarily when the market price of our stock fluctuates or interest rates change.
We are also subject to market risk which may impact our mortgage loan origination volume and associated revenue and the net interest margin derived from borrowings under our master repurchase agreements that provide capital for Zillow Home Loans. Market risk occurs in periods where changes in short-term interest rates result in mortgage loans being originated with terms that provide a smaller interest rate spread above the financing terms of our master repurchase agreements, which can negatively impact our results of operations. This risk is primarily mitigated through the expedited sale of our loans. As of September 30, 2024 and December 31, 2023, we had $148 million and $93 million, respectively, of outstanding borrowings on our master repurchase agreements which bear interest at a floating rate based on SOFR plus an applicable margin, as defined by the governing agreements. We manage the interest rate risk associated with our mortgage loan origination services through the use of forward sales of MBSs. Assuming no change in the outstanding borrowings on the master repurchase agreements, we estimate that a one percentage point increase in SOFR would not have a material effect on our annual interest expense associated with the master repurchase agreements as of September 30, 2024 and December 31, 2023.
For additional details related to our credit facilities and Notes, see Note 7 to our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Inflation Risk
The macroeconomic environment in the United States has experienced, and continues to experience, inflationary pressures. While it is difficult to accurately measure the impact of these inflationary pressures on our business, we believe these effects have been pervasive throughout our business during the past several quarters. In response to ongoing inflationary pressures in the United States, the Federal Reserve implemented a number of increases to the federal funds rate during 2022 and 2023. Despite inflation stabilizing beginning in the second half of 2023 and the federal funds rate decreasing in the second half of 2024, prior federal funds rate increases have impacted other market rates derived from this benchmark rate, including mortgage interest rates. The persistently high mortgage interest rates across the industry relative to recent years has impacted the number of transactions consumers complete using our products and services and the demand for our advertising services and mortgage origination offerings and, in turn, had an adverse impact on our revenue.
If inflationary pressures persist, our costs, in particular labor, marketing and hosting costs, may increase and we may not be able to fully offset such higher costs through price increases. In addition, uncertain or changing economic and market conditions, including inflation or deflation, may continue to affect demand for our products and services and the housing markets in which we operate. Our inability or failure to quickly respond to inflation could harm our business, results of operations and financial condition. We cannot predict the duration or magnitude of these inflationary pressures, or how they may change over time, but we expect to see continued impacts on the residential real estate industry, our customers and our company. Despite these near-term effects, we do not expect these inflationary pressures to have a material impact on our ability to execute our long-term business strategy.
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Foreign Currency Exchange Risk
We do not believe that foreign currency exchange risk has had a material effect on our business, results of operations or financial condition. As we do not maintain a significant balance of foreign currency, we do not believe an immediate 10% increase or decrease in foreign currency exchange rates relative to the U.S. dollar would have a material effect on our business, results of operations or financial condition.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of September 30, 2024. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective as of September 30, 2024.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Securities Exchange Act of 1934, as amended, that occurred during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding legal proceedings in which we are involved, see Note 12 under the subsection titled “Legal Proceedings” in our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Item 1A. Risk Factors
There have not been any material changes to the risk factors affecting our business, financial condition or future results from those set forth in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. However, you should carefully consider the factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Except as previously reported in the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2024, there were no unregistered sales of equity securities during the three months ended September 30, 2024.
Purchase of Equity Securities by the Issuer
None.
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Item 5. Other Information
On August 30, 2024 , Dan Spaulding , Chief People Officer of the Company, entered into a 10b5-1 sales plan intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended. This 10b5-1 sales plan provides for (1) the sale of up to 244,997 shares of Class C capital stock related to the exercise of option awards granted to Mr. Spaulding and (2) the sale of an indeterminate number of shares of Class C capital stock related to the vesting of restricted stock units granted to Mr. Spaulding. The number of shares of Class C capital stock that will be sold under this 10b5-1 sales plan related to vesting of restricted stock unit awards is not yet determinable because (i) certain future awards granted during the life of the plan that follow the same vesting schedule as existing awards under the plan may be covered by the terms of the plan and (ii) for each vested restricted stock unit award that is covered by the terms of the plan, an unknown number of shares will be sold to satisfy tax withholding prior to any sale occurring under the terms of the plan. This 10b5-1 sales plan will become effective on November 29, 2024 and will terminate on May 21, 2026 , subject to earlier termination as provided in the plan.
On September 4, 2024 , Jeremy Hofmann , Chief Financial Officer of the Company, entered into a 10b5-1 sales plan intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended. This 10b5-1 sales plan provides for (1) the sale of up to 100,000 shares of Class C capital stock related to the exercise of option awards granted to Mr. Hofmann and (2) the sale of an indeterminate number of shares of Class C capital stock related to the vesting of restricted stock units granted to Mr. Hofmann. The number of shares of Class C capital stock that will be sold under this 10b5-1 sales plan related to vesting of restricted stock unit awards is not yet determinable because (i) certain future awards granted during the life of the plan that follow the same vesting schedule as existing awards under the plan may be covered by the terms of the plan and (ii) for each vested restricted stock unit award that is covered by the terms of the plan, an unknown number of shares will be sold to satisfy tax withholding prior to any sale occurring under the terms of the plan. This 10b5-1 sales plan will become effective on December 4, 2024 and will terminate on December 31, 2025 , subject to earlier termination as provided in the plan.
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Item 6. Exhibits
The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1^ | ||||||||
| 32.2^ | ||||||||
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document). | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (embedded within the inline XBRL document). | |||||||
| ^ | The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the SEC and are not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: November 6, 2024 | ZILLOW GROUP, INC. | ||||||||||
| By: | /s/ JENNIFER ROCK | ||||||||||
| Name: | Jennifer Rock | ||||||||||
| Title: | Chief Accounting Officer | ||||||||||
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