Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share
ZG
The Nasdaq Global Select Market
Class C Capital Stock, par value $0.0001 per share
Z
The Nasdaq Global Select Market
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.
Large accelerated filer
☒
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 26, 2022, 58,197,059 shares of Class A common stock, 6,217,447 shares of Class B common stock and 173,312,042 shares of Class C capital stock were outstanding.
As used in this Quarterly Report on Form 10-Q, the terms “Zillow Group,” “the Company,” “we,” “us” and “our” refer to Zillow Group, Inc., unless the context indicates otherwise.
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” 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, 2021, including, but not limited to risks related to:
•the current and future health and stability of the economy, financial conditions and residential housing market, including any extended downturn or slowdown;
•changes in general economic and financial conditions (including federal monetary policy, interest rates, inflation, home price fluctuations, and housing inventory) that may reduce demand for our products and services, lower our profitability or reduce our access to financing;
•actual or anticipated changes in our rates of growth and innovation relative to those of our competitors;
•actual or anticipated fluctuations in our financial condition and results of operations;
•changes in projected operational and financial results;
•investment of resources to pursue strategies and develop new products and services that may not prove effective or that are not attractive to customers and real estate partners;
•the duration and impact of the COVID-19 pandemic (including variants) or other public health crises on our ability to operate, demand for our products or services, or general economic conditions;
•addition or loss of a significant number of customers;
•acquisitions, strategic partnerships, joint ventures, capital-raising activities or other corporate transactions or commitments by us or our competitors;
•actual or anticipated changes in technology, products, markets or services by us or our competitors;
•ability to protect the information and privacy of our customers and other third parties;
•ability to protect our brand and intellectual property;
•ability to obtain or maintain licenses and permits to support our current and future businesses;
•ability to comply with multiple listing service rules and requirements to access and use listing data, and to maintain or establish relationships with listings and data providers;
•ability to operate and grow our mortgage origination business, including the ability to obtain sufficient financing and resell originated mortgages on the secondary market;
•the impact of natural disasters and other catastrophic events;
•changes in laws or government regulation affecting our business; and
•the impact of pending or future litigation or regulatory actions.
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.
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.
Our filings with the Securities and Exchange Commission (“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 Webpage (https://investors.zillowgroup.com)
•Zillow Group Blog (https://www.zillowgroup.com/news/)
•Zillow Group Twitter Account (https://twitter.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 Twitter account are as inactive textual references only.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Description of Business
Zillow Group is reimagining real estate to make it easier to unlock life’s next chapter. As the most visited real estate website in the United States, Zillow and its affiliates offer customers an on-demand experience for selling, buying, renting or financing with transparency and ease.
Our portfolio of consumer brands includes Zillow Premier Agent, Zillow Home Loans, our affiliate lender, Zillow Closing Services, 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 which include Mortech, New Home Feed and ShowingTime+, which houses ShowingTime, Bridge Interactive, dotloop and interactive floor plans.
In the fourth quarter of 2021, we began to wind down the operations of Zillow Offers, our iBuying business which purchased and sold homes directly in markets across the country. The wind down was complete as of September 30, 2022, and we have presented the financial results of Zillow Offers as discontinued operations in our condensed consolidated financial statements for all periods presented. See Note 3 for additional information.
Certain Significant Risks and Uncertainties
We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: current and future health and stability of the economy, financial conditions, and housing market, and changes in general economic and financial conditions (including federal monetary policy, interest rates, inflation, home price fluctuations and housing inventory); 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; the duration and impact of public health crises, like the COVID-19 pandemic (including variants) on our ability to operate, demand for our products or services or general economic conditions; addition or loss of a significant number of customers; our ability to successfully integrate and realize the benefits of our past or future strategic partnerships, acquisitions, business combinations or investments; our ability to manage advertising inventory or pricing; engagement and usage of our products; competition and innovation in our markets; actual or anticipated changes in technology, products, markets or services by us or our competitors; our ability to maintain or establish relationships with listings and data providers; our ability to obtain or maintain licenses and permits to support our current and future businesses; our ability to operate and grow our mortgage origination business, including the ability to obtain sufficient financing and resell originated mortgages on the secondary market; changes in laws or government regulation affecting our business; outcomes of legal proceedings; natural disasters and other catastrophic events; our ability to attract and retain qualified employees and key personnel; protection of customers’ information and other privacy concerns; protection of our brand and intellectual property; and intellectual property infringement and other claims, among other things.
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 U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“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, 2021, which was filed with the SEC on February 10, 2022. The condensed consolidated balance sheet as of December 31, 2021, included herein, was derived from the audited financial statements of Zillow Group, Inc. as of that date, adjusted for the reclassification of discontinued operations discussed in Note 3.
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, 2022 and our results of operations, comprehensive loss, and shareholders’ equity for the three and nine month periods ended September 30, 2022 and 2021, and our cash flows for the nine month periods ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any interim period, or for any other future year. Unless indicated otherwise, the information in the Notes to Condensed Consolidated Financial Statements relates to the Company’s continuing operations and does not include the results of discontinued operations.
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, restructuring costs, 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, the presentation of discontinued and continuing operations, business combinations 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 residential housing market, interest rate environment and the COVID-19 pandemic 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 June 2022, the Financial Accounting Standards Board issued guidance to improve existing measurement and disclosure requirements for equity securities that are subject to a contractual sale restriction. This guidance is effective for interim and annual periods beginning after December 15, 2023 on a prospective basis, with early adoption permitted. We expect to adopt this guidance on January 1, 2024. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations and cash flows.
Note 3. Discontinued Operations
Zillow Offers Wind Down
In November 2021, the Board of Directors of Zillow Group made the determination to wind down Zillow Offers operations, and the financial results of Zillow Offers have historically been reported within our Homes segment. This decision was made in light of home pricing unpredictability, capacity constraints and other operational challenges faced by Zillow Offers that were exacerbated by an unprecedented housing market, a global pandemic and a difficult labor and supply chain environment, all of which led us to conclude that, despite its initial promise in earlier quarters, Zillow Offers was unlikely to be a sufficiently stable line of business to meet our goals going forward.
The wind down of Zillow Offers was complete as of September 30, 2022, at which time Zillow Offers met the criteria for discontinued operations. We have presented the assets and liabilities and results of operations, excluding allocation of any general corporate expenses, of Zillow Offers for all periods presented as discontinued operations in our condensed consolidated financial statements. No assets or liabilities were classified as discontinued operations as of September 30, 2022.
The following table presents the major classes of line items of the discontinued operations included in the condensed consolidated statements of operations for the periods presented (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Revenue
$
23
$
1,187
$
4,249
$
2,668
Cost of revenue
24
1,414
4,023
2,751
Gross profit (loss)
(1)
(227)
226
(83)
Operating expenses:
Sales and marketing
1
90
153
189
Technology and development
—
10
6
41
General and administrative
—
10
10
26
Restructuring costs
—
—
25
—
Total operating expenses
1
110
194
256
Income (loss) from discontinued operations
(2)
(337)
32
(339)
Loss on extinguishment of debt
—
—
(21)
—
Other income
—
—
13
—
Interest expense
—
(16)
(36)
(25)
Loss from discontinued operations before income taxes
(2)
(353)
(12)
(364)
Income tax benefit (expense)
—
6
(1)
1
Net loss from discontinued operations
$
(2)
$
(347)
$
(13)
$
(363)
Net loss from discontinued operations per share:
Basic
$
(0.01)
$
(1.37)
$
(0.05)
$
(1.46)
Diluted
$
(0.01)
$
(1.31)
$
(0.05)
$
(1.38)
The following table presents significant non-cash items and capital expenditures of the discontinued operations for the periods presented (in millions):
Nine Months Ended September 30,
2022
2021
Amortization of debt discount and debt issuance costs
$
21
$
1
Loss on debt extinguishment
21
—
Share-based compensation
16
27
Inventory valuation adjustment
9
304
Depreciation and amortization
7
7
Capital expenditures
1
6
Issuance (settlement) of beneficial interests in securitizations
There were no restructuring charges attributable to discontinued operations for the three months ended September 30, 2022. The following table presents a summary of restructuring charges attributable to discontinued operations for the periods presented (in millions):
Line Item of Discontinued Operations
Nine Months Ended September 30, 2022
Cumulative Amount Recognized
Inventory write-down
Cost of revenue
$
9
N/A
Other charges:
Employee termination costs
Restructuring costs
$
20
$
72
Financing-related charges
Interest expense and Loss on debt extinguishment
37
43
Contract termination costs
Restructuring costs
4
14
Accelerated depreciation and amortization
Cost of revenue
14
19
Asset write-offs
Restructuring costs
—
1
Other charges
Restructuring costs
1
1
Total other charges
76
150
Total
$
85
$
150
Restructuring charges attributable to continued operations relate to employee termination costs within our IMT and Mortgages segments and certain indirect costs of the Homes segment that do not qualify as discontinued operations. These costs were not material for the three months ended September 30, 2022 and totaled $6 million, $2 million and $6 million, respectively, for the nine months ended September 30, 2022. Cumulative restructuring charges attributable to continued operations as of September 30, 2022 totaled $23 million. The remaining liability balance associated with such restructuring charges as of September 30, 2022 is not material.
Note 4. Fair Value Measurements
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 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 mortgage-backed securities that are utilized as economic hedging instruments is calculated by reference to quoted prices for similar assets (Level 2).
Interest rate lock commitments — The fair value of interest rate lock commitments (“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 cancelled or expire, any recorded gain or loss is reversed at the end of the commitment period (Level 3).
The following table presents the range and weighted-average pull-through rates used in determining the fair value of IRLCs as of the dates presented:
September 30, 2022
December 31, 2021
Range
46% - 100%
42% - 100%
Weighted-average
87%
85%
Warrant —In July 2022, we entered into a warrant agreement in conjunction with a commercial agreement with a publicly traded company that vests, subject to meeting certain conditions, over a period of five years. The warrant is accounted for as a derivative instrument recorded at fair value with gains and losses recognized in other income, net in our condensed consolidated statements of operations. The warrant is recorded within other assets in our condensed consolidated balance sheet as of September 30, 2022. The fair value measurement is adjusted for the estimated amount of tranches that will not vest. For the three and nine months ended September 30, 2022, we recorded a loss of $4 million in our condensed consolidated statements of operations related to the change in fair value of the warrant (Level 3).
The following tables present the balances of assets (liabilities) measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in millions):
The following table presents the changes in our IRLCs for the periods presented (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Balance, beginning of the period
$
2
$
6
$
5
$
12
Issuances
2
23
12
58
Transfers
(4)
(23)
(15)
(64)
Fair value changes recognized in earnings
(1)
1
(3)
1
Balance, end of period
$
(1)
$
7
$
(1)
$
7
At September 30, 2022, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $79 million and $131 million for our IRLCs and forward contracts, respectively. At December 31, 2021, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $305 million and $388 million for our IRLCs and forward contracts, respectively. We do not have the right to offset our derivative positions.
See Note 11 for the carrying amounts and estimated fair values of our convertible senior notes.
Note 5. Cash and Cash Equivalents, Investments and Restricted Cash
The following tables present the amortized cost, gross unrealized gains and losses and estimated fair market value of our cash and cash equivalents, investments, and restricted cash as of the dates presented (in millions):
The following table presents available-for-sale investments by contractual maturity date as of September 30, 2022 (in millions):
Amortized Cost
Estimated Fair Market Value
Due in one year or less
$
1,096
$
1,083
Due after one year
439
433
Total
$
1,535
$
1,516
Note 6. Contract Balances
Contract assets were $80 million and $78 million as of September 30, 2022 and December 31, 2021, respectively. Contract assets represent amounts for which we have recognized revenue for contracts that have not yet been invoiced to our customers. Contract assets are primarily related to our Premier Agent Flex, Zillow Lease Connect and StreetEasy Experts offerings, whereby we estimate variable consideration based on the expected number of real estate transactions to be closed for Premier Agent Flex and StreetEasy Experts, and qualified leases to be secured for Zillow Lease Connect. We recognize revenue when we satisfy our performance obligations under the corresponding contracts. StreetEasy Experts is our pay for performance pricing model available in the New York City market for which agents and brokers are provided with leads at no initial cost and pay a performance referral fee only when a real estate purchase transaction is closed with one of the leads. Under the StreetEasy Experts pricing model, the transaction price represents variable consideration, as the amount to which we expect to be entitled varies based on the number of leads that convert into real estate transactions and the value of those transactions. We record a corresponding contract asset for the estimate of variable consideration for StreetEasy Experts when the right to the consideration is conditional. When the right to consideration becomes unconditional, we reclassify amounts to accounts receivable. Contract assets are recorded within prepaid expenses and other current assets in our condensed consolidated balance sheets.
For the three months ended September 30, 2022 and 2021, we recognized revenue of $50 million and $51 million, respectively, that was included in the deferred revenue balance at the beginning of the related period. For the nine months ended September 30, 2022 and 2021, we recognized revenue of $51 million and $48 million, respectively, that was included in the deferred revenue balance at the beginning of the related period.
Note 7. Contract Cost Assets
As of September 30, 2022 and December 31, 2021, we had $25 million and $35 million, respectively, of contract cost assets. For the three and nine months ended September 30, 2022 and 2021, we did not incur any material impairment losses to our contract cost assets.
We recorded amortization expense related to contract cost assets of $7 million and $12 million for the three months ended September 30, 2022 and 2021, respectively, and $23 million and $32 million for the nine months ended September 30, 2022 and 2021, respectively.
The following table presents the detail of property and equipment as of the dates presented (in millions):
September 30, 2022
December 31, 2021
Website development costs
$
256
$
175
Leasehold improvements
90
107
Office equipment, furniture and fixtures
26
26
Computer equipment
19
19
Construction-in-progress
8
7
Property and equipment
399
334
Less: accumulated amortization and depreciation
(138)
(119)
Property and equipment, net
$
261
$
215
We recorded depreciation expense related to property and equipment (other than website development costs) of $6 million and $8 million for the three months ended September 30, 2022 and 2021, respectively, and $19 million and $20 million for the nine months ended September 30, 2022 and 2021, respectively.
We capitalized $37 million and $27 million in website development costs for the three months ended September 30, 2022 and 2021, respectively, and $104 million and $51 million for the nine months ended September 30, 2022 and 2021, respectively. Amortization expense for website development costs included in cost of revenue was $17 million and $8 million for the three months ended September 30, 2022 and 2021, respectively, and $48 million and $24 million for the nine months ended September 30, 2022 and 2021, respectively.
On September 30, 2021, Zillow Group acquired ShowingTime.com, Inc. (“ShowingTime”) in exchange for approximately $512 million in cash, subject to certain adjustments. Our acquisition of ShowingTime has been accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values as of September 30, 2021. Goodwill, which 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, is measured as of the acquisition date as the excess of consideration transferred, which is also measured at fair value, and the net of the fair values of the assets acquired and the liabilities assumed as of the acquisition date.
The total purchase price has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. The total purchase price was allocated as follows (in millions):
Cash and cash equivalents
$
15
Identifiable intangible assets
111
Goodwill
389
Other acquired assets
6
Deferred tax liability
(4)
Other assumed liabilities
(5)
Total purchase price
$
512
The estimated fair value of identifiable intangible assets acquired and associated useful lives consisted of the following (in millions):
Estimated Fair Value
Estimated Weighted-Average Useful Life (in years)
Customer relationships
$
55
8
Developed technology
47
4
Trade names and trademarks
9
10
Total
$
111
We used an income approach to measure the fair value of the customer relationships 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 the 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.
Acquisition-related costs incurred, which primarily included legal, accounting and other external costs directly related to the acquisition, are included within acquisition-related costs in our condensed consolidated statements of operations and were expensed as incurred.
Unaudited pro forma earnings information has not been presented as the effects were not material to our condensed consolidated financial statements.
The following tables present the detail of intangible assets as of the dates presented (in millions):
September 30, 2022
Cost
Accumulated Amortization
Net
Customer relationships
$
55
$
(8)
$
47
Developed technology
50
(14)
36
Software
46
(13)
33
Trade names and trademarks
45
(13)
32
Purchased content
7
(6)
1
Total
$
203
$
(54)
$
149
December 31, 2021
Cost
Accumulated Amortization
Net
Customer relationships
$
139
$
(84)
$
55
Developed technology
133
(86)
47
Trade names and trademarks
45
(9)
36
Software
53
(18)
35
Intangibles-in-progress
2
—
2
Purchased content
4
(3)
1
Total
$
376
$
(200)
$
176
Amortization expense recorded for intangible assets for the three months ended September 30, 2022 and 2021 was $11 million and $12 million, respectively, and $47 million and $37 million for the nine months ended September 30, 2022 and 2021, respectively. Amortization expense for trade names and trademarks and customer relationships intangible assets is included in sales and marketing expenses. Amortization expense for all other intangible assets is included in cost of revenue.
We did not record any impairment costs related to our intangible assets for the three or nine months ended September 30, 2022 and 2021.
Note 11. Debt
The following table presents the carrying values of Zillow Group’s debt as of the dates presented (in millions):
To provide capital for Zillow Home Loans, we utilize master repurchase agreements and a warehouse line of credit. The following table summarizes certain details related to our repurchase agreements and warehouse line of credit (in millions, except interest rates):
Lender
Maturity Date
Maximum Borrowing Capacity
Weighted-Average Interest Rate
Credit Suisse AG, Cayman Islands
March 17, 2023
$
100
4.73
%
Citibank, N.A.
June 9, 2023
100
4.89
%
Comerica Bank
June 24, 2023
50
4.95
%
Total
$
250
In accordance with the master repurchase agreements, Credit Suisse and Citibank (together the “Lenders”) have agreed to pay Zillow Home Loans a negotiated purchase price for eligible loans, and Zillow Home Loans has 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, 2022 and December 31, 2021, $26 million and $87 million, respectively, in mortgage loans held for sale were pledged as collateral under the master repurchase agreements.
Borrowings on the repurchase agreements and warehouse line of credit bear interest either at a floating rate based on Secured Overnight Financing Rate (“SOFR”) plus an applicable margin, as defined by the governing agreements, or Bloomberg Short-Term Bank Yield Index Rate (“BSBY”) plus an applicable margin, as defined by the governing agreements. The repurchase agreements and warehouse line of credit include customary representations and warranties, covenants and provisions regarding events of default. As of September 30, 2022, Zillow Home Loans was in compliance with all financial covenants and no event of default had occurred. The repurchase agreements and warehouse line of credit 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 warehouse line of credit and repurchase agreements, see Note 13 in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Convertible Senior Notes
Effective January 1, 2022, we adopted guidance which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Refer to Note 2in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for additional information regarding the adoption of this guidance.
The following tables summarize certain details related to our outstanding convertible senior notes as of the dates presented or for the periods ended (in millions, except interest rates):
The convertible notes are senior unsecured obligations. The convertible senior notes maturing in 2026 (“2026 Notes”), 2025 (“2025 Notes”) and 2024 (“2024 Notes”) (together, the “Notes”) are classified as long-term debt in our condensed consolidated balance sheets based on their contractual maturity dates. Interest on the convertible notes is paid semi-annually in arrears. The estimated fair value of the convertible senior 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 date, 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:
Maturity Date
Early Conversion Date
Conversion Rate
Conversion Price
Optional Redemption Date
September 1, 2026
March 1, 2026
22.9830
$
43.51
September 5, 2023
May 15, 2025
November 15, 2024
14.8810
67.20
May 22, 2023
September 1, 2024
March 1, 2024
22.9830
43.51
September 5, 2022
The following table summarizes certain details related to the capped call confirmations with respect to the convertible senior notes:
There were no conversions of convertible senior notes during the three and nine months ended September 30, 2022. The following table summarizes the activity for our convertible senior notes maturing in 2023 (“2023 Notes”) for the three months ended September 30, 2021 (in millions, except share data which are presented in thousands):
Aggregate principal amount settled
$
368
Cash paid
$
1
Shares of Class C capital stock issued
4,675
Total fair value of consideration transferred (1)
$
562
Loss on extinguishment of debt:
Consideration allocated to the liability component (2)
$
343
Carrying value of the liability component, net of unamortized debt discount and debt issuance costs
328
Loss on extinguishment of debt
$
15
Consideration allocated to the equity component
$
219
The following table summarizes the activity for our 2023 Notes, 2024 Notes and 2026 Notes for the nine months ended September 30, 2021 (in millions, except share data which are presented in thousands):
2023 Notes
2024 Notes
2026 Notes
Total
Aggregate principal amount settled
$
374
$
65
$
1
$
440
Cash paid
$
1
$
—
$
—
$
1
Shares of Class C capital stock issued
4,752
1,485
28
6,265
Total fair value of consideration transferred (1)
$
572
$
200
$
4
$
776
Loss on extinguishment of debt:
Consideration allocated to the liability component (2)
$
349
$
53
$
1
$
403
Carrying value of the liability component, net of unamortized debt discount and debt issuance costs
334
51
1
386
Loss on extinguishment of debt
$
15
$
2
$
—
$
17
Consideration allocated to the equity component
$
223
$
147
$
3
$
373
(1) For convertible senior notes converted by note holders, the total fair value of consideration transferred includes the value of shares transferred to note holders using the daily volume weighted-average price of our Class C capital stock on the conversion date and an immaterial amount of cash paid in lieu of fractional shares. For convertible senior notes redeemed, the total fair value of consideration transferred comprises cash transferred to note holders to settle the related notes.
(2) Consideration allocated to the liability component is based on the fair value of the liability component immediately prior to settlement, which was calculated using a discounted cash flow analysis with a market interest rate of a similar liability that does not have an associated convertible feature.
The last reported sale price of our Class C capital stock did not exceed 130% of the conversion price of each series of the Notes for more than 20 trading days during the 30 consecutive trading days ended September 30, 2022. Accordingly, each series of the Notes is not redeemable or convertible at the option of the holders from October 1 through December 31, 2022.
For additional details related to our convertible senior notes, 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, 2021.
Convertible Senior Notes Repurchase Authorization
On December 2, 2021, Zillow Group’s Board of Directors authorized the repurchase of up to $750 million of our Class A common stock, Class C capital stock or a combination thereof. On May 4, 2022, the Board of Directors authorized the repurchase of up to an additional $1.0 billion (together the “Repurchase Authorizations”) of our Class A common stock, Class C capital stock or a combination thereof. On November 1, 2022, Zillow Group’s Board of Directors further expanded the Repurchase Authorizations to allow for the repurchase of a portion of our outstanding Notes. Repurchases of outstanding Notes 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, market price of the Notes, trading volume, cash needs and other business factors, in each case as permitted by securities laws and other
legal requirements. As of September 30, 2022, $674 million remained available for future repurchases pursuant to the Repurchase Authorizations. For additional details related to the Repurchase Authorizations, see Note 13 under the subsection titled “Stock Repurchase Authorizations”.
Note 12. Income Taxes
We are subject to income taxes in the United States (federal and state), Canada and Serbia. As of September 30, 2022 and December 31, 2021, 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 $2.1 billion as of December 31, 2021, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $73 million (tax effected) as of December 31, 2021.
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. We recorded income tax expense of $3 million for the three months ended September 30, 2022 primarily driven by state taxes, and an income tax benefit of $5 million for the three months ended September 30, 2021 primarily driven by state taxes and the decrease in the valuation allowance associated with our September 2021 acquisition of ShowingTime.
Note 13. Shareholders’ Equity
Preferred Stock
Our board of directors has the authority to fix and determine and to amend the number of shares of any series of preferred stock that is wholly unissued or to be established and to fix and determine and to amend the designation, preferences, voting powers and limitations and the relative, participating, optional or other rights, of any series of shares of preferred stock that is wholly unissued or to be established, subject in each case to certain approval rights of holders of our outstanding Class B common stock. There was no preferred stock issued and outstanding as of September 30, 2022 or December 31, 2021.
Common and Capital Stock
Our Class A common stock has no preferences or privileges and is not redeemable. Holders of Class A common stock are entitled to one vote for each share.
Our Class B common stock has no preferences or privileges and is not redeemable. At any time after the date of issuance, each share of Class B common stock, at the option of the holder, may be converted into one share of Class A common stock, or automatically converted into Class A common stock upon the affirmative vote by or written consent of holders of a majority of the shares of the Class B common stock. Holders of Class B common stock are entitled to 10 votes for each share.
Our Class C capital stock has no preferences or privileges, is not redeemable and, except in limited circumstances, is non-voting.
Equity Distribution Agreement
On February 17, 2021, we entered into an equity distribution agreement with certain sales agents and/or principals (the “Managers”), pursuant to which we may offer and sell from time to time, through the Managers, shares of our Class C capital stock, having an aggregate gross sales price of up to $1.0 billion, in such share amounts as we may specify by notice to the Managers, in accordance with the terms and conditions set forth in the equity distribution agreement.
There were no shares issued under the equity distribution agreement during the three and nine months ended September 30, 2022.
The following table summarizes the activity pursuant to the equity distribution agreement for the nine months ended September 30, 2021 (in millions, except share data which are presented in thousands, and per share amounts):
Shares of Class C capital stock issued
3,164
Weighted-average issuance price per share
$
174.05
Gross proceeds (1)
$
551
(1) Net proceeds were $545 million after deducting $6 million of commissions and other offering expenses incurred.
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, 2022, $674 million remained available for future repurchases pursuant to the Repurchase Authorizations.
The following table summarizes, on a settlement date basis, 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):
During the first quarter of 2022, in connection with the 2021 annual review cycle, the Compensation Committee of the Board of Directors (the “Compensation Committee”) approved option and restricted stock unit awards under the Zillow Group, Inc. 2020 Incentive Plan (the “2020 Plan”), a portion of which vest quarterly over four years, and a portion of which vest quarterly over a one year period beginning in May 2022. On August 3, 2022, upon recommendation of the Compensation Committee, the Board of Directors approved a supplemental grant of restricted stock units to eligible employees. The supplemental restricted stock units were granted on August 8, 2022 and vest quarterly over a two-year period beginning in August 2022. The exercisability and settlement 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.
When determining the grant date fair value of share-based awards, management considers whether an adjustment is required to the observable market price or volatility of the Company’s Class A common stock or Class C capital stock used in the valuation as a result of material non-public information. For additional information regarding our share-based awards, 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, 2021.
Option Award Repricing
On August 3, 2022, upon recommendation of the Compensation Committee, the Board of Directors approved adjustments to the exercise price of certain outstanding vested and unvested option awards for eligible employees. The exercise price of eligible option awards was reduced to $38.78, which was the closing market price of our Class C capital stock on August 8, 2022. No other changes were made to the terms and conditions of the eligible option awards.
We have accounted for the reprice of the eligible option awards as an equity modification whereby the incremental fair value attributable to the repriced option awards, as measured on the date of reprice, will be recognized as additional share-based compensation expense. The reprice impacted 7 million stock option awards, affected 3,348 employees and is expected to result in incremental share-based compensation expense of $66 million in total, of which $29 million was recognized during the three months ended September 30, 2022, including amounts associated with vested awards. The remaining expense will be recognized over the remaining requisite service period of the original awards.
Option Awards
The following table summarizes all option award activity for the nine months ended September 30, 2022:
Number of Shares Subject to Existing Options (in thousands)
Weighted- Average Exercise Price Per Share
Weighted- Average Remaining Contractual Life (Years)
The fair value of all option awards granted is estimated at the date of grant using the Black-Scholes-Merton option-pricing model, assuming no dividends and with the following assumptions for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Expected volatility
61%
55%
55% - 61%
52% - 56%
Risk-free interest rate
3.38%
0.76%
1.94% - 3.38%
0.57% - 0.90%
Weighted-average expected life
5.00 years
4.75 years
4.50 - 6.00 years
4.50 - 5.75 years
Weighted-average fair value of options granted
$18.06
$45.40
$23.75
$58.96
The weighted-average total fair value of options repriced was $67.58. As of September 30, 2022, there was a total of $463 million in unrecognized compensation cost related to unvested option awards.
Restricted Stock Units
The following table summarizes activity for all restricted stock units for the nine months ended September 30, 2022:
Restricted Stock Units (in thousands)
Weighted- Average Grant- Date Fair Value
Unvested outstanding at January 1, 2022
6,074
$
66.51
Granted
10,664
42.71
Vested
(3,278)
53.87
Forfeited
(2,193)
60.45
Unvested outstanding at September 30, 2022
11,267
48.85
As of September 30, 2022, there was a total of $510 million in unrecognized compensation cost related to unvested restricted stock units.
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):
For the periods presented, the following table reconciles the denominators used in the basic and diluted net loss and net income (loss) from continuing operations per share calculations (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Denominator for basic calculation
240,080
254,074
244,157
248,564
Effect of dilutive securities:
Option awards
—
8,874
—
10,581
Unvested restricted stock units
—
2,164
—
2,898
Denominator for dilutive calculation
240,080
265,112
244,157
262,043
For the periods presented, the following Class A common stock and Class C capital stock equivalents were excluded from the calculations of diluted net loss and net income (loss) from continuing operations per share because their effect would have been antidilutive (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Weighted-average Class A common stock and Class C capital stock option awards outstanding
2,417
209
15,942
992
Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding
9,670
1,253
8,326
850
Class C capital stock issuable upon conversion of the convertible notes maturing in 2023, 2024, 2025 and 2026
33,855
33,927
33,855
38,316
Total Class A common stock and Class C capital stock equivalents
45,942
35,389
58,123
40,158
Note 16. Commitments and Contingencies
Interest Rate Lock Commitments
We have entered into IRLCs with prospective borrowers under our mortgage origination business whereby we commit to lend a certain loan amount under specific terms and at a specific interest rate to the borrower. These commitments are treated as derivatives and are carried at fair value. For additional information regarding our IRLCs, see Note 4 to our condensed consolidated financial statements.
Lease Commitments
We have entered into various non-cancelable operating lease agreements for certain of our office space and equipment with original lease periods expiring between 2022 and 2032. For additional information regarding our lease agreements, see Note 12 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Purchase Commitments
Purchase commitments primarily include various non-cancelable agreements to purchase content related to our mobile applications and websites and certain cloud computing services. For additional information regarding our purchase obligations, see Note 18 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Escrow Balances
In conducting our title and escrow operations through Zillow Closing Services, we routinely hold customers’ assets in escrow, pending completion of real estate transactions, and are responsible for the proper disposition of these balances for our
customers. Certain of these amounts are maintained in segregated bank accounts and have not been included in the accompanying condensed consolidated balance sheets. These balances were not material as of September 30, 2022 and $55 million as of December 31, 2021, and pertain to discontinued operations.
Letters of Credit
As of September 30, 2022, we have outstanding letters of credit of approximately $16 million which secure our lease obligations in connection with certain of our office space operating leases.
Surety Bonds
In the course of business, we are required to provide financial commitments in the form of surety bonds to third parties as a guarantee of our performance on and our compliance with certain obligations. If we were to fail to perform or comply with these obligations, any draws upon surety bonds issued on our behalf would then trigger our payment obligation to the surety bond issuer. We have outstanding surety bonds issued for our benefit of approximately $13 million and $12 million, respectively, as of September 30, 2022 and December 31, 2021.
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, 2022 or December 31, 2021.
In August and September 2017, two 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 common stock between February 12, 2016 and August 8, 2017. One of those purported class actions, captioned Vargosko v. Zillow Group, Inc. et al, was brought in the U.S. District Court for the Central District of California. The other purported class action lawsuit, captioned Shotwell v. Zillow Group, Inc. et al, was brought in the U.S. District Court for the Western District of Washington. The complaints allege, among other things, that during the period between February 12, 2016 and August 8, 2017, we issued materially false and misleading statements regarding our business practices. The complaints seek to recover, among other things, alleged damages sustained by the purported class members as a result of the alleged misconduct. In November 2017, an amended complaint was filed against us and certain of our executive officers in the Shotwell v. Zillow Group purported class action lawsuit, extending the beginning of the class period to November 17, 2014. In January 2018, the Vargosko v. Zillow Group purported class action lawsuit was transferred to the U.S. District Court for the Western District of Washington and consolidated with the Shotwell v. Zillow Group purported class action lawsuit. In February 2018, the plaintiffs filed a consolidated amended complaint, and in April 2018, we filed our motion to dismiss the consolidated amended complaint. In October 2018, our motion to dismiss was granted without prejudice, and in November 2018, the plaintiffs filed a second consolidated amended complaint, which we moved to dismiss in December 2018. On April 19, 2019, our motion to dismiss the second consolidated amended complaint was denied. On October 11, 2019, plaintiffs filed a motion for class certification which was granted by the court on October 28, 2020. On February 17, 2021, the Ninth Circuit Court of Appeals denied our petition for review of that decision. On October 21, 2022, the parties jointly filed a notice of settlement with the U.S. District Court for the Western District of Washington to inform the court that the parties have reached an agreement in principle to settle this action. The proposed settlement is subject to the negotiation and execution of a settlement agreement and court approval thereof. The full amount of the settlement payment is expected to be paid by the Company’s insurance carriers under its insurance policy.
In October and November 2017 and January and February 2018, four shareholder derivative lawsuits were filed in the U.S. District Court for the Western District of Washington and the Superior Court of the State of Washington, King County, against 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 in the derivative suits (in which the Company is a nominal defendant) allege, among other things, that the defendants breached their fiduciary duties in connection with oversight of the Company’s public statements and legal compliance, and as a result of the breach of such fiduciary duties, the Company was damaged, and defendants were unjustly enriched. Certain of the plaintiffs also allege, among other things, violations of Section 14(a) of the Securities Exchange Act of 1934 and waste of corporate assets. On February 5, 2018, the U.S. District Court for the Western District of Washington consolidated the two federal shareholder derivative lawsuits pending in that court. On February 16, 2018, the Superior Court of the State of Washington, King County, consolidated the two shareholder derivative lawsuits pending in that court. All four of the shareholder derivative lawsuits were stayed until our motion to dismiss the second consolidated amended complaint in the securities class action lawsuit discussed above was denied in April 2019. On July 8, 2019, the plaintiffs in the consolidated federal derivative lawsuit filed a consolidated shareholder derivative complaint, which we moved to dismiss on August 22, 2019. On February 28, 2020, our motion to dismiss the consolidated federal shareholder derivative complaint was denied. On February 16, 2021, the court in the consolidated state derivative matter stayed the action. On March 5, 2021, a new shareholder derivative lawsuit was filed in the U.S. District Court for the Western District of Washington against 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, alleging, among other things, violations of federal securities laws. The U.S. District Court for the Western District of Washington formally consolidated the new lawsuit with the other consolidated federal shareholder derivative lawsuit pending in that court on June 15, 2021. The defendants intend to deny the allegations of wrongdoing and vigorously defend the claims in this consolidated lawsuit. We do not believe that there is a reasonable possibility that a material loss will be incurred related to these derivative matters.
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 was granted on May 28, 2020. On August 12, 2020, IBM filed its answer to our counterclaims. On September 18, 2020, we filed four Inter Partes Review (“IPR”) petitions before the U.S. Patent and Trial Appeal Board (“PTAB”) seeking the Board’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. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit. 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.
On July 21, 2020, IBM filed a second action against us in the U.S. District Court for the Western District of Washington, 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 the one remaining patent, for which this case continues to remain stayed. On August 1, 2022, IBM filed an appeal of the Court’s ruling with respect to two of the dismissed patents. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit. 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.
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 the U.S. District Court for the Western District of Washington and were consolidated on February 16, 2022. 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. We intend to deny the allegations of wrongdoing and intend to vigorously defend the claims in this consolidated lawsuit. We do not believe that a loss related to this consolidated lawsuit is probable.
On March 10, 2022, May 5, 2022 and July 20, 2022 shareholder derivative suits were filed in the U.S. District Court for the Western District of Washington and on July 25, 2022, a shareholder derivative suit was filed in the Superior Court of the State of Washington, King County, 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 U.S. District Court for the Western District of Washington issued orders consolidating the three federal derivative suits and staying the consolidated action until further order of the court. On September 15, 2022, the Superior Court of the State of Washington entered a temporary stay in the state derivative suit. The defendants intend to deny the allegations of wrongdoing and vigorously defend the claims in these lawsuits. We do not believe that a loss related to these lawsuits is probable.
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 18 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
We have three operating and reportable segments, which have been identified based on the way in which our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. The chief executive officer acts as the chief operating decision-maker and reviews financial and operational information for the Internet, Media & Technology (“IMT”), Mortgages and Homes segments.
The IMT segment includes the financial results for the Premier Agent, rentals and new construction marketplaces, as well as display, StreetEasy, ShowingTime+, which houses ShowingTime, Bridge Interactive, dotloop and interactive floor plans, and other advertising and business software solutions. In the first quarter of 2022, we began reporting rentals revenue as a separate revenue category within the IMT segment and prior period amounts have been recast to conform to this presentation. In the fourth quarter of 2021, we began to include the financial results of ShowingTime in the IMT segment. The Mortgages segment primarily includes the financial results for mortgage originations and the sale of mortgages on the secondary market through Zillow Home Loans and advertising sold to mortgage lenders and other mortgage professionals. The Homes segment includes the financial results from title and escrow services performed by Zillow Closing Services and certain indirect costs of the Homes segment which do not qualify as discontinued operations. As discussed in Note 3, as of September 30, 2022, the wind down of Zillow Offers was complete and we have presented the financial results of Zillow Offers as discontinued operations in our condensed consolidated financial statements, and prior period amounts have been recast to conform to this presentation.
Revenue and costs are directly attributed to our segments when possible. However, due to the integrated structure of our business, certain costs incurred by one segment may benefit the other segments. These costs primarily include headcount-related expenses, general and administrative expenses including executive, finance, accounting, legal, human resources, recruiting and facilities costs, product development and data acquisition costs, costs related to operating our mobile applications and websites and marketing and advertising costs. These costs are allocated to each segment based on the estimated benefit each segment receives from such expenditures.
The chief executive officer reviews information about our revenue categories as well as statement of operations data inclusive of income (loss) from continuing operations before income taxes by segment.This information is included in the following tables for the periods presented (in millions):
Three Months Ended September 30, 2022
Three Months Ended September 30, 2021
IMT
Mortgages
Homes
IMT
Mortgages
Homes
Revenue:
Premier Agent
$
312
$
—
$
—
$
359
$
—
$
—
Rentals
74
—
—
67
—
—
Other
71
—
—
54
—
—
Mortgages
—
26
—
—
70
—
Total revenue
457
26
—
480
70
—
Cost of revenue (1)
67
17
5
51
22
9
Gross profit
390
9
(5)
429
48
(9)
Operating expenses (1):
Sales and marketing
145
20
—
159
29
17
Technology and development
126
16
—
75
7
19
General and administrative
110
25
3
62
18
24
Acquisition-related costs
—
—
—
3
—
—
Total operating expenses
381
61
3
299
54
60
Income (loss) from continuing operations
9
(52)
(8)
130
(6)
(69)
Segment other income (expense)
(4)
1
—
—
1
—
Segment interest expense
—
—
—
—
(1)
—
Income (loss) from continuing operations before income taxes (2)
Income (loss) from continuing operations before income taxes (2)
$
182
$
(116)
$
(80)
$
407
$
(26)
$
(175)
(1) The following tables present depreciation and amortization expense and share-based compensation expense for each of our segments for the periods presented (in millions):
(2) The following table presents the reconciliation of total segment income (loss) from continuing operations before income taxes to consolidated income (loss) from continuing operations before income taxes for the periods presented (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Total segment income (loss) from continuing operations before income taxes
$
(54)
$
55
$
(14)
$
206
Corporate interest expense
(9)
(28)
(24)
(95)
Corporate other income
15
1
21
2
Loss on extinguishment of debt
—
(15)
—
(17)
Consolidated income (loss) from continuing operations before income taxes
$
(48)
$
13
$
(17)
$
96
Certain corporate items are not directly attributable to any of our segments, including loss on extinguishment of debt, interest income earned on our short-term investments included in other income and interest costs on our convertible senior notes included in interest expense.
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 also those factors discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2021.
Overview of our Business
Zillow Group is reimagining real estate to make it easier to unlock life’s next chapter. As the most visited real estate website in the United States, Zillow and its affiliates offer customers an on-demand experience for selling, buying, renting or financing with transparency and ease.
Our portfolio of consumer brands includes Zillow Premier Agent, Zillow Home Loans, our affiliate lender, Zillow Closing Services, 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 which include Mortech, New Home Feed and ShowingTime+, which houses ShowingTime, Bridge Interactive, dotloop and interactive floor plans.
Discontinued Operations
In the fourth quarter of 2021, the Board of Directors (the “Board”) of Zillow Group made the determination to wind down Zillow Offers, our iBuying business which purchased and sold homes directly in markets across the United States. The wind down was complete as of September 30, 2022 and has resulted in approximately a 25% reduction of Zillow Group’s workforce. The financial results of Zillow Offers have been presented in the accompanying condensed consolidated financial statements as discontinued operations and, therefore, are excluded from the following discussion of the results of our continuing operations. Given the wind down of Zillow Offers and corresponding shift in our strategic plans, financial performance for prior and current periods may not be indicative of future performance. For additional information, see Note 3 in our Notes to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
August 2022 Equity Award Actions
On August 3, 2022, upon the recommendation of the Compensation Committee of the Board, the full Board approved adjustments to the exercise price of certain outstanding vested and unvested option awards for eligible employees. The exercise price of eligible option awards was reduced to $38.78, which was the closing market price of our Class C capital stock on August 8, 2022. No other changes were made to the terms and conditions of the eligible option awards. In addition, the Board approved a supplemental grant of restricted stock units to eligible employees that was granted on August 8, 2022 and vests quarterly over a two-year period beginning in August 2022. The repricing of eligible option awards and the issuance of supplemental restricted stock units (collectively the “August 2022 Equity Award Actions”) is expected to result in total incremental share-based compensation expense of approximately $189 million, $56 million of which was recognized during the three months ended September 30, 2022. The remaining expense will be recognized over the remaining requisite service period, which is largely over the next two years. For additional information, see Note 14 in our Notes to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Reportable Segments and Revenue Overview
Zillow Group has three reportable segments: the Internet, Media & Technology (“IMT”) segment, the Mortgages segment and the Homes segment. The IMT segment includes the financial results for the Premier Agent, rentals and new construction marketplaces, as well as display, StreetEasy, ShowingTime+, which houses ShowingTime, Bridge Interactive, dotloop and interactive floor plans, and other advertising and business software solutions. In the fourth quarter of 2021, we began to include the financial results of ShowingTime in the IMT segment. For additional information regarding the September 2021 acquisition of ShowingTime, see Note 9 in our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The Mortgages segment primarily includes financial results for mortgage originations through Zillow Home Loans and advertising sold to mortgage lenders and other mortgage professionals. The Homes segment includes the financial results from title and escrow services performed by Zillow Closing Services and certain indirect costs of the Homes segment which do not qualify as discontinued operations.
Premier Agent revenue is generated by the sale of advertising services, as well as marketing and technology products and services, to help real estate agents and brokers grow and manage their businesses. We offer these products and services through our Premier Agent and Premier Broker programs. Premier Agent and Premier Broker products, which include the delivery of validated customer connections, or leads, are primarily offered on a share of voice basis. Connections are distributed to Premier Agent and Premier Broker partners in proportion to their share of voice, or an agent advertiser’s share of total advertising purchased in a particular zip code. Connections are delivered when customer contact information is provided to Premier Agent and Premier Broker partners. Connections are provided as part of our suite of advertising services for Premier Agent and Premier Broker partners; we do not charge a separate fee for these customer leads.
We also offer a pay for performance pricing model called “Flex” for Premier Agent and Premier Broker services in certain markets to select partners. With the Flex model, Premier Agent and Premier Broker partners are provided with validated leads at no initial cost and pay a performance fee only when a real estate transaction is closed with one of the leads.
Rentals revenue includes advertising sold to property managers, landlords and other rental professionals on a cost per lead, click, lease, listing or impression basis or for a fixed fee for certain advertising packages. Rentals revenue also includes revenue generated from our rental applications product, through which potential renters can submit applications to multiple properties for a flat service fee.
Other IMT revenue includes revenue generated by new construction and display advertising, as well as revenue from the sale of various other advertising and business technology solutions for real estate professionals, including StreetEasy and ShowingTime+, which houses ShowingTime, Bridge Interactive, dotloop and interactive floor plans. New construction revenue primarily includes advertising services sold to home builders on a cost per residential community or cost per impression basis. Display revenue consists of graphical mobile and web advertising sold on a cost per impression or cost per click basis to advertisers promoting their brands on our mobile applications and websites. StreetEasy revenue includes advertising services sold to real estate professionals serving the New York City market primarily on a cost per listing or performance fee basis. ShowingTime revenue is primarily generated by Appointment Center, a software-as-a-service and call center solution allowing real estate agents, brokerages and multiple listing services to efficiently schedule real estate viewing appointments on behalf of their customers. Appointment Center services also include call center specialists who provide scheduling support to customers. Appointment Center revenue is primarily billed in advance on a monthly basis.
In our Mortgages segment, we primarily generate revenue through mortgage originations and the related sale of mortgages on the secondary market 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.
Homes segment revenue relates to revenue associated with title and escrow services provided through Zillow Closing Services and was not material for the periods presented.
As of September 30, 2022, we had 5,830 full-time employees compared to 8,005 full-time employees as of December 31, 2021. The reduction in the number of employees was primarily related to the wind down of Zillow Offers operations.
Financial Overview
For the three months ended September 30, 2022 and 2021, we generated total revenue of $483 million and $550 million, respectively, representing a year-over-year decrease of 12%. The decrease in total revenue was primarily attributable to the following:
•Premier Agent revenue decreased by $47 million to $312 million for the three months ended September 30, 2022 compared to $359 million for the three months ended September 30, 2021. The decrease in Premier Agent revenue was primarily due to macro housing market factors including interest rate and home price increases and volatility, as well as tight inventory levels. These factors resulted in a 16% decrease in Premier Agent revenue per visit.
•Mortgages segment revenue decreased by $44 million to $26 million for the three months ended September 30, 2022 compared to $70 million for the three months ended September 30, 2021, driven by a decrease in revenue generated by Zillow Home Loans, as total loan origination volume decreased 76% primarily resulting from a decrease in demand for mortgages attributable to the rising and volatile interest rate environment. The decrease in Mortgages segment revenue was also impacted by a decrease in revenue from Custom Quote and Connect advertising services.
•The decreases noted above were partially offset by a $17 million increase in Other IMT revenue to $71 million for the three months ended September 30, 2022 compared to $54 million for the three months ended September 30, 2021. The increase in Other IMT revenue was primarily a result of the addition of ShowingTime revenue beginning in the fourth quarter of 2021.
During the three months ended September 30, 2022 and 2021, we generated total gross profit of $394 million and $468 million, respectively, representing a year-over-year decrease of 16%, due to the combined factors discussed below.
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, including low housing inventory, fewer new for-sale listings, increases and volatility in mortgage interest rates as well as home price fluctuations, inflationary conditions and high rental occupancy rates may have a negative impact on the number of transactions that consumers complete using our products and services and on demand for our advertising services. The extent to which these factors impact our results and financial position will depend on future developments, which are uncertain and difficult to predict.
COVID-19 Impact
The effect and extent of the impact of the COVID-19 pandemic on our business continues to be uncertain and difficult to predict. While we have seen recovery in our business and the businesses of our customers and real estate partners from the initial economic effects of the pandemic, the duration and impact of the COVID-19 pandemic (including variants) may continue to affect our financial results. The extent to which COVID-19 (including any variants) continues to impact our results and financial position will depend on future developments, which are uncertain and difficult to predict.
Key Metrics
Management has identified visits, unique users 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. We no longer consider the number of homes sold as a key metric given the wind down of Zillow Offers operations.
Visits
The number of visits is an important metric because it is an indicator of consumers’ level of engagement with our mobile applications, websites and other services. We believe highly engaged consumers are more likely to use our products and services, including Zillow Homes Loans, or be transaction-ready real estate market participants and therefore are more sought-after by our Premier Agent and Premier Broker partners.
We define a visit as a group of interactions by users with the Zillow, Trulia and StreetEasy mobile applications and websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. Visits can occur on the same day, or over several days, weeks or months.
Zillow and StreetEasy measure visits with Google Analytics, and Trulia measures visits with Adobe Analytics. Visits to Trulia end after thirty minutes of user inactivity. Visits to Zillow and StreetEasy end either: (i) after thirty minutes of user inactivity or at midnight; or (ii) through a campaign change. A visit ends through a campaign change if a visitor arrives via one campaign or source (for example, via a search engine or referring link on a third-party website), leaves the mobile application or website, and then returns via another campaign or source.
The following table presents the number of visits to our mobile applications and websites for the periods presented (in millions):
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 and financing of homes, including with Zillow Home Loans, and our Premier Agent revenue, rentals revenue and display revenue depend on advertisements being served to users of our mobile applications and websites.
We count a unique user the first time an individual accesses one of our mobile applications using a mobile device during a calendar month and the first time an individual accesses one of our websites using a web browser during a calendar month. If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. If an individual accesses more than one of our mobile applications within a given month, the first access to each mobile application is counted as a separate unique user. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain. Zillow, StreetEasy and HotPads measure unique users with Google Analytics, and Trulia measures unique users with Adobe Analytics.
Due to third-party technological limitations, user software settings or user behavior, Google Analytics may assign a unique cookie to different instances of access by the same individual to our mobile applications and websites. In such instances, Google Analytics would count different instances of access by the same individual as separate unique users. Accordingly, reliance on the number of unique users counted by Google Analytics may overstate the actual number of unique users who access our mobile applications and websites during the period.
The following table presents our average monthly unique users for the periods presented (in millions):
Three Months Ended September 30,
2021 to 2022 % Change
2022
2021
Average monthly unique users
236
227
4
%
Loan Origination Volume
Loan origination volume is an important metric as it is a measure of how successful we are at the origination and subsequent sale of mortgage loan products through our mortgage origination business, Zillow Home Loans, which directly impacts our Mortgages segment revenue. Loan origination volume represents the total value of mortgage loan originations closed 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):
Three Months Ended September 30,
2021 to 2022 % Change
2022
2021
Purchase loan origination volume
$
240
$
359
(33)
%
Refinance loan origination volume
31
754
(96)
%
Total loan origination volume
$
271
$
1,113
(76)
%
During the three months ended September 30, 2022, total loan origination volume decreased 76% compared to the three months ended September 30, 2021, driven primarily by higher interest rates which decreased demand for mortgages.
Results of Operations
Given continued uncertainty surrounding the health of the housing market, interest rate environment and the COVID-19 pandemic, financial performance for current and prior periods may not be indicative of future performance.
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Total revenue decreased $67 million, or 12%, to $483 million:
•IMT segment revenue decreased to $457 million, primarily due to a $47 million, or 13%, decrease in Premier Agent revenue, partially offset by a $17 million, or 31%, increase in Other IMT revenue. The decrease in Premier Agent revenue was driven by macro housing market factors including interest rate and home price increases and volatility, as well as tight inventory levels. These factors resulted in a decrease in Premier Agent revenue per visit, which decreased by 16% to $0.113 for the three months ended September 30, 2022 from $0.135 for the three months ended September 30, 2021. We calculate Premier Agent revenue per visit by dividing the revenue generated by our Premier Agent and Premier Broker programs by the number of visits in the period. Other IMT revenue increased primarily as a result of the addition of ShowingTime revenue beginning in the fourth quarter of 2021. We expect IMT segment revenue to decrease in absolute dollars during the three months ending December 31, 2022 primarily due to continued macroeconomic pressure on demand driven by home price affordability, which has been impacted by higher home prices and interest rate increases.
•Mortgages segment revenue decreased 63% to $26 million due to a decline in mortgage originations revenue which drove 73% of the decrease in Mortgages segment revenue, and a decline in our Custom Quote and Connect advertising services revenue which drove 27% of the decrease in Mortgages segment revenue. The decrease in mortgage originations revenue was primarily due to a 76% decrease in total loan origination volume from $1.1 billion to $271 million, primarily resulting from a decrease in demand for mortgages attributable to the rising and volatile interest rate environment. The decrease in mortgage originations revenue was also attributable to a 38% decrease in gain on sale margin driven by industry margin compression. Gain on sale margin represents the net gain on sale of mortgage loans divided by total loan origination volume for the period. Net gain on sale of mortgage loans includes all components related to the origination and sale of mortgage loans, including the net gain on sale of loans into the secondary market, loan origination fees, unrealized gains and losses associated with changes in fair value of interest rate lock commitments and mortgage loans held for sale, realized and unrealized gains or losses from derivative financial instruments and the provision for losses relating to representations and warranties. The decrease in our Custom Quote and Connect advertising revenue was primarily due to a 44% decrease in leads generated from marketing products sold to mortgage professionals driven by a decrease in demand for mortgages attributable to the rising and volatile interest rate environment. We expect Mortgage segment revenue to decrease for the three months ending December 31, 2022, driven primarily by adverse macro housing market factors.
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
Total revenue decreased $74.0 million, or 5%, to $1.5 billion:
•Mortgages segment revenue decreased 48% to $101 million due to a decline in mortgage originations revenue which drove 77% of the decrease in Mortgages segment revenue, and a decline in our Custom Quote and Connect advertising services revenue which drove 23% of the decrease in Mortgages segment revenue. The decrease in mortgage originations revenue was primarily due to a 59% decrease in total loan origination volume from $3.2 billion to $1.3 billion, primarily resulting from a decrease in demand for mortgages attributable to the rising interest rate environment. The decrease in mortgage originations revenue was also attributable to a 27% decrease in gain on sale margin driven by industry margin compression. The decrease in our Custom Quote and Connect advertising revenue was primarily due to a 33% decrease in leads generated from marketing products sold to mortgage professionals driven by a decrease in demand for mortgages attributable to the rising interest rate environment.
•IMT segment revenue increased to $1.4 billion, primarily due to a $52 million, or 33%, increase in Other IMT revenue, partially offset by a $34 million, or 3%, decrease in Premier Agent revenue. Other IMT revenue increased primarily as a result of the addition of ShowingTime revenue beginning in the fourth quarter of 2021. The decrease in Premier Agent revenue was driven by macro housing market factors including interest rate and home price increases and volatility, as well as tight inventory levels. These factors resulted in a decrease in Premier Agent revenue per visit, which decreased by 8% to $0.122 for the nine months ended September 30, 2022 from $0.132 for the nine months ended September 30, 2021.
Income (Loss) from Continuing Operations Before Income Taxes
% of Revenue
Three Months Ended September 30,
2021 to 2022
Three Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
(in millions, unaudited)
Income (loss) from continuing operations before income taxes:
IMT segment
$
5
$
130
$
(125)
(96)
%
1
%
27
%
Mortgages segment
(51)
(6)
(45)
(750)
(196)
(9)
Homes segment
(8)
(69)
61
88
N/A
N/A
Corporate items (1)
6
(42)
48
114
N/A
N/A
Total income (loss) from continuing operations before income taxes
$
(48)
$
13
$
(61)
(469)
%
(10)
%
2
%
% of Revenue
Nine Months Ended September 30,
2021 to 2022
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
(in millions, unaudited)
Income (loss) from continuing operations before income taxes:
IMT segment
$
182
$
407
$
(225)
(55)
%
13
%
29
%
Mortgages segment
(116)
(26)
(90)
(346)
(115)
(13)
Homes segment
(80)
(175)
95
54
N/A
N/A
Corporate items (1)
(3)
(110)
107
97
N/A
N/A
Total income (loss) from continuing operations before income taxes
$
(17)
$
96
$
(113)
(118)
%
(1)
%
6
%
(1) Certain corporate items are not directly attributable to any of our segments, including loss on extinguishment of debt, interest income earned on our short-term investments included in other income and interest costs on our convertible senior notes included in interest expense.
The following tables summarize net loss, which includes the impact of discontinued operations, and Adjusted EBITDA in total and for each segment, both of which exclude the impact of discontinued operations:
% of Revenue
Three Months Ended September 30,
2021 to 2022
Three Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
(in millions, unaudited)
Net loss
$
(53)
$
(329)
$
276
84
%
(11)
%
(60)
%
Adjusted EBITDA:
IMT segment
164
206
(42)
(20)
36
43
Mortgages segment
(27)
5
(32)
(640)
(104)
7
Homes segment
(7)
(55)
48
87
N/A
N/A
Total Adjusted EBITDA
$
130
$
156
$
(26)
(17)
%
27
%
28
%
% of Revenue
Nine Months Ended September 30,
2021 to 2022
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
(in millions, unaudited)
Net loss
$
(29)
$
(267)
$
238
89
%
(2)
%
(17)
%
Adjusted EBITDA:
IMT segment
559
633
(74)
(12)
39
45
Mortgages segment
(60)
5
(65)
(1300)
(59)
3
Homes segment
(58)
(138)
80
58
N/A
N/A
Total Adjusted EBITDA
$
441
$
500
$
(59)
(12)
%
29
%
31
%
To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA in total and for each segment, each a non-GAAP financial measure, within this Quarterly Report on Form 10-Q. We have provided a reconciliation below of Adjusted EBITDA in total to net loss and Adjusted EBITDA by segment to income (loss) from continuing operations before income taxes for each segment, the most directly comparable U.S. generally accepted accounting principles (“GAAP”) financial measures.
We have included Adjusted EBITDA in total and for each segment in this Quarterly Report on Form 10-Q as they are key metrics used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.
Our use of Adjusted EBITDA in total and for each segment has limitations as an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not reflect the results of discontinued operations;
•Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or contractual commitments;
•Adjusted EBITDA does not reflect restructuring costs;
•Adjusted EBITDA does not reflect acquisition-related costs;
•Adjusted EBITDA does not reflect loss on extinguishment of debt;
•Adjusted EBITDA does not reflect interest expense or other income;
•Adjusted EBITDA does not reflect income taxes; and
•Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently from the way we do, limiting its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA in total and for each segment alongside other financial performance measures, including various cash-flow metrics, net loss, income (loss) from continuing operations before income taxes for each segment, and our other GAAP results.
The following tables present a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, which is net loss on a consolidated basis and income (loss) from continuing operations before income taxes for each segment, for each of the periods presented (in millions, unaudited):
Three Months Ended September 30, 2022
IMT
Mortgages
Homes
Corporate Items (2)
Consolidated
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) From Continuing Operations Before Income Taxes:
Net loss (1)
N/A
N/A
N/A
N/A
$
(53)
Loss from discontinued operations, net of income taxes
N/A
N/A
N/A
N/A
2
Income taxes
N/A
N/A
N/A
N/A
3
Income (loss) from continuing operations before income taxes
$
5
$
(51)
$
(8)
$
6
$
(48)
Other expense (income), net
4
(1)
—
(15)
(12)
Depreciation and amortization
32
2
—
—
34
Share-based compensation
123
23
1
—
147
Interest expense
—
—
—
9
9
Adjusted EBITDA
$
164
$
(27)
$
(7)
$
—
$
130
Three Months Ended September 30, 2021
IMT
Mortgages
Homes
Corporate Items (2)
Consolidated
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) From Continuing Operations Before Income Taxes:
Net loss (1)
N/A
N/A
N/A
N/A
$
(329)
Loss from discontinued operations, net of income taxes
N/A
N/A
N/A
N/A
347
Income taxes
N/A
N/A
N/A
N/A
(5)
Income (loss) from continuing operations before income taxes
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) From Continuing Operations Before Income Taxes:
Net loss (1)
N/A
N/A
N/A
N/A
$
(29)
Loss from discontinued operations, net of income taxes
N/A
N/A
N/A
N/A
13
Income taxes
N/A
N/A
N/A
N/A
(1)
Income (loss) from continuing operations before income taxes
$
182
$
(116)
$
(80)
$
(3)
$
(17)
Other expense (income), net
4
(2)
—
(21)
(19)
Depreciation and amortization
104
8
2
—
114
Share-based compensation
263
46
14
—
323
Restructuring costs
6
2
6
—
14
Interest expense
—
2
—
24
26
Adjusted EBITDA
$
559
$
(60)
$
(58)
$
—
$
441
Nine Months Ended September 30, 2021
IMT
Mortgages
Homes
Corporate Items (2)
Consolidated
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) From Continuing Operations Before Income Taxes:
Net loss (1)
N/A
N/A
N/A
N/A
$
(267)
Loss from discontinued operations, net of income taxes
N/A
N/A
N/A
N/A
363
Income taxes
N/A
N/A
N/A
N/A
—
Income (loss) from continuing operations before income taxes
$
407
$
(26)
$
(175)
$
(110)
$
96
Other income, net
—
(3)
—
(2)
(5)
Depreciation and amortization
68
5
8
—
81
Share-based compensation
150
25
29
—
204
Acquisition-related costs
8
—
—
—
8
Loss on extinguishment of debt
—
—
—
17
17
Interest expense
—
4
—
95
99
Adjusted EBITDA
$
633
$
5
$
(138)
$
—
$
500
(1) We use income (loss) from continuing operations before income taxes as our profitability measure in making operating decisions and assessing the performance of our segments; therefore, net loss and income taxes are calculated and presented only on a consolidated basis within our financial statements.
(2) Certain corporate items are not directly attributable to any of our segments, including the loss on extinguishment of debt, interest income earned on our short-term investments included in other income and interest costs on our convertible senior notes included in interest expense.
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. For our IMT and Mortgages segments, cost of revenue also includes credit card fees and ad serving costs paid to third parties. For our Mortgages segment, cost of revenue also consists of direct costs to originate loans, including underwriting and processing costs.
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Cost of revenue increased by $7 million, or 9%, primarily due to an increase of $16 million in our IMT segment, partially offset by decreases of $5 million in our Mortgages segment and $4 million in our Homes segment.
•The increase in cost of revenue in our IMT segment was primarily attributable to a $10 million increase in depreciation and amortization expense driven by an increase in capitalized website and development activities and a $6 million increase in headcount-related expenses, including share-based compensation expense, which was impacted by the August 2022 Equity Award Actions during the three months ended September 30, 2022.
•The decrease in cost of revenue in our Mortgages segment was primarily attributable to a $5 million decrease in lead acquisition costs due to a decrease in volume associated with the macro housing market environment.
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
Cost of revenue increased by $50 million, or 22%, primarily due to an increase of $62 million in our IMT segment, partially offset by decreases of $8 million in our Mortgages segment and $4 million in our Homes segment.
•The increase in cost of revenue in our IMT segment was primarily attributable to a $40 million increase in depreciation and amortization expense driven by an increase in capitalized website and development activities and capitalized software costs, a $13 million increase in headcount-related expenses and an $8 million increase in data acquisition costs. Headcount-related expenses include share-based compensation expense, which was impacted by the August 2022 Equity Award Actions during the nine months ended September 30, 2022.
•The decrease in cost of revenue in our Mortgages segment was primarily attributable to a decrease in lead acquisition costs of $9 million due to a decrease in volume associated with the macro housing market environment.
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 segments.
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Gross profit decreased by $74 million, or 16%, due to decreases in gross profit of $39 million in both our IMT segment and our Mortgages segment, partially offset by an increase of $4 million in our Homes segment. Total gross margin decreased from 85% to 82%.
•The decrease in IMT segment gross profit was primarily driven by a decrease in revenue due to macro housing market factors, including rising interest rates and rising housing prices and volatility, which have reduced our Premier Agent revenue per visit compared to the three months ended September 30, 2021. Gross margin decreased from 89% for the three months ended September 30, 2021 to 85% for the three months ended September 30, 2022.
•The decrease in Mortgages segment gross profit was primarily driven by decreases in mortgage originations and Custom Quote and Connect advertising services revenue, discussed above. Gross margin decreased from 69% for the three months ended September 30, 2021 to 35% for the three months ended September 30, 2022.
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
Gross profit decreased by $124 million, or 9%, primarily due to decreases in gross profit of $86 million in our Mortgages segment and $42 million in our IMT segment, partially offset by an increase of $4 million in our Homes segment. Total gross margin decreased from 86% to 82%.
•The decrease in Mortgages segment gross profit was driven by a decrease in mortgage originations and Custom Quote and Connect advertising services revenue, discussed above. Gross margin decreased from 68% for the nine months ended September 30, 2021 to 47% for the nine months ended September 30, 2022.
•The decrease in IMT segment gross profit was driven by a decrease in revenue due to macro housing market factors, including rising interest rates and housing prices and volatility, which have reduced our Premier Agent revenue per visit compared to the nine months ended September 30, 2021. Gross margin decreased from 90% for the nine months ended September 30, 2021 to 86% or the nine months ended September 30, 2022.
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, 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. For our Mortgages segment, sales and marketing expenses include headcount-related expenses for loan officers and specialists supporting Zillow Home Loans.
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Sales and marketing expenses decreased $40 million, or 20%, due to decreases of $17 million in our Homes segment, $14 million in our IMT segment and $9 million in our Mortgages segment.
•The decrease in sales and marketing expenses in the Homes segment was primarily attributable to an $8 million decrease in headcount-related expenses, including share-based compensation expense, and a $7 million decrease in marketing and advertising costs. The decreases resulted from the wind down of Zillow Offers and the reduction in indirect costs related to the Homes segment.
•The decrease in sales and marketing expenses in the IMT segment was primarily attributable to a $28 million decrease in marketing and advertising costs driven by active cost management, partially offset by a $16 million increase in headcount-related costs, including share-based compensation expense, primarily due to the impact of the August 2022 Equity Award Actions.
•The decrease in sales and marketing expenses in the Mortgages segment was primarily attributable to a $5 million decrease in headcount-related expenses and a $4 million decrease in marketing and advertising costs driven by active cost management.
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
Sales and marketing expenses decreased $30 million, or 6%, due to decreases of $27 million in our Homes segment and $20 million in our Mortgages segment, partially offset by an increase of $17 million in our IMT segment.
•The decrease in sales and marketing expenses in the Homes segment was primarily attributable to a $15 million decrease in marketing and advertising costs and a $9 million decrease in headcount-related expenses, including share-based compensation expense. The decreases resulted from the wind down of Zillow Offers and the reduction in indirect costs related to the Homes segment.
•The decrease in sales and marketing expenses in the Mortgages segment was primarily attributable to a $14 million decrease in headcount-related expenses, including share-based compensation expense, and a $7 million decrease in marketing and advertising costs driven by active cost management.
•The increase in sales and marketing expenses in the IMT segment was primarily attributable to a $39 million increase in headcount-related expenses, including share-based compensation expense, primarily driven by the impact of the August 2022 Equity Award Actions, a $5 million increase in travel expenses, a $4 million increase in trade shows and events, and a $3 million increase in software and hardware costs. These increases were partially offset by a $26 million decrease in marketing and advertising costs and a $6 million decrease in professional services, both driven by active cost management.
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.
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Technology and development expenses increased $41 million, or 41%, primarily due to increases of $51 million in our IMT segment and $9 million in our Mortgages segment, partially offset by a decrease of $19 million in our Homes segment.
•The increase in technology and development expenses in the IMT segment was primarily attributable to a $44 million increase in headcount related costs, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions, and a $4 million increase in professional services.
•The increase in technology and development expenses in the Mortgages segment was primarily attributable to a $5 million increase in headcount-related costs, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions.
•The decrease in technology and development expenses in the Homes segment was primarily attributable to a $16 million decrease in headcount-related costs, including share-based compensation expense, which was primarily driven by the wind down of Zillow Offers and the reduction in indirect costs related to the Homes segment.
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
Technology and development expenses increased $50 million, or 16%, primarily due to increases of $79 million in our IMT segment and $13 million in our Mortgages segment, partially offset by a decrease of $42 million in our Homes segment.
•The increase in technology and development expenses in the IMT segment was primarily attributable to a $60 million increase in headcount related costs, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions, and a $12 million increase in professional services.
•The increase in technology and development expenses in the Mortgages segment was primarily attributable to a $9 million increase in headcount-related costs, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions, and a $3 million increase in professional services.
•The decrease in technology and development expenses in the Homes segment was primarily attributable to a $39 million decrease in headcount-related costs, including share-based compensation expense, which was primarily driven by the wind down of Zillow Offers and the reduction in indirect costs related to the Homes segment.
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, 2022 compared to three months ended September 30, 2021
General and administrative expenses increased $34 million, or 33%, due to increases of $48 million in our IMT segment and $7 million in our Mortgages segment, partially offset by a decrease of $21 million in our Homes segment.
•The increase in general and administrative expenses for our IMT and Mortgages segments was primarily attributable to increases in headcount-related expenses, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions, of $39 million and $7 million, respectively.
•The decrease in general and administrative expenses for our Homes segment was primarily attributable to a $14 million decrease in headcount-related expenses and a $3 million decrease in software and hardware costs as we wound down Zillow Offers operations.
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
General and administrative expenses increased $67 million, or 22%, primarily due to increases of $85 million in our IMT segment and $10 million in our Mortgages, partially offset by a decrease of $28 million in our Homes segments.
•The increase in general and administrative expenses for our IMT and Mortgages segments was primarily attributable to increases in headcount-related expenses, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions, of $70 million and $8 million, respectively.
•The decrease in general and administrative expenses for our Homes segment was primarily attributable to a $16 million decrease in headcount-related expenses, including share-based compensation expense, a $5 million decrease in facilities costs and a $3 million decrease in software and hardware costs as we wound down Zillow Offers operations.
Restructuring Costs
Restructuring costs of $14 million for the nine months ended September 30, 2022 were primarily attributable to the wind down of Zillow Offers operations. Restructuring costs within our IMT and Mortgages segments and certain indirect costs of the Homes segment which do not qualify as discontinued operations related to employee termination costs and totaled $6 million, $2 million, and $6 million, respectively, for the nine months ended September 30, 2022. For additional information regarding the restructuring, see Note 3 of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. We expect restructuring costs to increase for the three months ending December 31, 2022 as compared to the three months ended September 30, 2022, driven by cost actions to streamline our operations and prioritize investments.
Loss on Extinguishment of Debt
We recorded a $15 million loss on extinguishment of debt during the three months ended September 30, 2021 associated with the conversion of $366 million of aggregate principal of the convertible senior notes maturing in 2023 (“2023 Notes”) and the redemption of the remaining $1 million of aggregate principal of the 2023 Notes.
We recorded a $17 million loss on extinguishment of debt during the nine months ended September 30, 2021 associated with conversions of the 2023 Notes, convertible notes maturing in 2024 (“2024 Notes”) and 2026 (“2026 Notes”).
For additional information on the loss on extinguishment, see Note 11 of our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Other Income, net
Other income, net consists primarily of interest income earned on our cash, cash equivalents and investments and fair value adjustments on our outstanding warrant.
Other income, net increased $10 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 and increased $14 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. These increases were primarily driven by increases in returns on investments due to rising interest rates, partially offset by a $4 million fair value adjustment on an outstanding warrant recorded within our IMT segment.
Interest Expense
Our corporate interest expense consists of interest and deferred issuance costs associated with our convertible senior notes. On January 1, 2022, we adopted guidance which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Upon adoption, we de-recognized the remaining debt discounts on the convertible senior notes and no longer recognize amortization of debt discounts to interest expense. Refer to Note 11 of our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for stated interest rates and interest payment dates for each of our convertible senior notes.
For our Mortgages segment, interest expense includes interest on the warehouse line of credit and interest on the master repurchase agreements related to our Zillow Home Loans business. Borrowings on the repurchase agreements bear interest at Secured Overnight Financing Rate (“SOFR”) plus an applicable margin, as defined in the governing agreements. Borrowings on the warehouse line of credit bear interest at Bloomberg Short-Term Bank Yield Index Rate (“BSBY”) plus an applicable margin, as defined in the governing agreements.
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Interest expense decreased $20 million, or 69%, primarily due to a $19 million decrease in corporate interest expense not attributable to any of our segments. The decrease in corporate interest expense not attributable to any of our segments was primarily due to the adoption of guidance which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, which, as discussed above, eliminated the debt discounts on the convertible senior notes that were previously amortized to interest expense prior to adoption. Additionally, the settlement of conversions and redemptions of the 2023 Notes, 2024 Notes and 2026 Notes during the year ended December 31, 2021 decreased the outstanding principal balances of our convertible senior notes upon which interest was incurred.
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
Interest expense decreased $73 million, or 74%, primarily due to a $71 million decrease in corporate interest expense not attributable to any of our segments. The decrease in corporate interest expense not attributable to any of our segments was due to the same drivers as for the three months ended September 30, 2022, discussed above.
Income Taxes
We are subject to income taxes in the United States (federal and state), Canada and Serbia. As of September 30, 2022 and December 31, 2021, 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 quarters, sufficient positive evidence will become available to demonstrate that a significant 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 $2.1 billion as of December 31, 2021, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $73 million (tax effected) as of December 31, 2021.
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. We recorded income tax expense of $3 million for the three months ended September 30, 2022 primarily driven by state taxes, and an income tax benefit of $5 million for the three months ended September 30, 2021 primarily driven by state taxes and the decrease in the valuation allowance associated with our September 2021 acquisition of ShowingTime.
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 generally reinvest available cash flows from operations into our business and to service our debt obligations.
Sources of Liquidity
As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents, investments and restricted cash of $3.5 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 agency securities, investment grade corporate securities, treasury bills and commercial paper. Restricted cash consists of amounts held in escrow related to funding 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, 2022, 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 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.
The cash flows related to discontinued operations have not been separated. Accordingly, the condensed consolidated statements of cash flows and the following discussions include the results of continuing and discontinued operations. See Note 3 in our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information on discontinued operations, including supplemental cash flow information. The following table presents selected cash flow data for the periods presented (in millions, unaudited):
Nine Months Ended September 30,
2022
2021
Cash Flow Data:
Net cash provided by (used in) operating activities
$
4,420
$
(2,962)
Net cash provided by (used in) investing activities
(1,123)
621
Net cash provided by (used in) financing activities
(4,160)
3,088
Cash Flows Provided By (Used In) 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 and, prior to September 30, 2022, from customers for sales of homes through Zillow Offers. 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. Prior to the wind down of Zillow Offers operations, our primary uses of cash from operating activities also included payments for homes purchased through Zillow Offers.
For the nine months ended September 30, 2022, net cash provided by operating activities was $4.4 billion. This was driven by a net loss of $29 million, adjusted by share-based compensation of $341 million, depreciation and amortization of $121 million, amortization of debt discount and debt issuance costs of $24 million, amortization of contract cost assets of $23 million, a loss on extinguishment of debt of $21 million, amortization of right of use assets of $17 million and an inventory valuation adjustment of $9 million. This was partially offset by $9 million in other adjustments to reconcile net loss to net cash provided by operating activities. Changes in operating assets and liabilities increased cash provided by operating activities by $3.9 billion. The changes in operating assets and liabilities are primarily related to a $3.9 billion decrease in inventory and a $76 million decrease in accounts receivable as we wound down Zillow Offers operations, a $58 million decrease in mortgage loans held for sale driven by increased interest rates which decreased demand for mortgages, and a $6 million increase in other long-term liabilities primarily due to our outstanding warrant agreement. These changes were partially offset by a $52 million decrease in accrued compensation and benefits and a $49 million decrease in accrued expenses and other current liabilities driven primarily by the wind down of Zillow Offers operations, a $15 million decrease in lease liabilities primarily due to lease payments, a $13 million increase in prepaid expenses and other current assets and a $13 million increase in contract cost assets.
For the nine months ended September 30, 2021, net cash used in operating activities was $3.0 billion. This was primarily driven by net loss of $267 million, adjusted by an inventory valuation adjustment of $304 million, share-based compensation of $231 million, depreciation and amortization of $88 million, amortization of debt discount and debt issuance costs of $72 million, amortization of contract cost assets of $32 million, amortization of right of use assets of $18 million, a loss on extinguishment of debt of $17 million, and $10 million in other adjustments to reconcile net loss to net cash used in operating activities. Changes in operating assets and liabilities offset these adjustments by $3.5 billion. The changes in operating assets and liabilities are primarily related to a $3.6 billion increase in inventory due to home purchases outpacing the sale of homes through Zillow Offers for the nine months ended September 30, 2021, an $89 million increase in accounts receivable due primarily to an increase in revenue from products and services billed in arrears, a $70 million increase in prepaid expenses and other current assets due to an increase in contract assets driven by increased revenue from the Premier Agent Flex pricing model and the timing of payments, a $22 million increase in contract cost assets primarily due to capitalized sales commissions, and a $21 million decrease in lease liabilities. These changes were partially offset by a $163 million increase in accrued expenses and other liabilities driven by the timing of payments, a $110 million decrease in mortgage loans held for sale, a $17 million increase in accounts payable driven by the timing of payments, an $11 million increase in accrued compensation and benefits, and a $4 million increase in deferred revenue.
Cash Flows Provided By (Used In) 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, 2022, net cash used in investing activities was $1.1 billion. This was the result of $1.0 billion of net purchases of investments and $104 million of purchases of property and equipment and intangible assets.
For the nine months ended September 30, 2021, net cash provided by investing activities was $621 million. This was the result of $1.2 billion of net proceeds from the maturity of investments, partially offset by $497 million of net cash paid for our September 2021 acquisition of ShowingTime, and $69 million of purchases of property and equipment and intangible assets.
Cash Flows Provided By (Used in) Financing Activities
Net cash provided by (used in) financing activities has primarily resulted from repurchases of Class A common stock and Class C capital stock, settlement of long term debt including our securitization term loans, net proceeds from equity offerings, the exercise of employee option awards, proceeds from our securitization transaction, proceeds from and repayments of borrowings on our credit facilities related to Zillow Offers and repayments of borrowings on the warehouse lines of credit and master repurchase agreements related to Zillow Home Loans.
For the nine months ended September 30, 2022, net cash used in financing activities was $4.2 billion, which was primarily related to $2.2 billion of repayments on borrowings of our credit facilities and $1.2 billion for the repayment of the term loans associated with the wind down of Zillow Offers operations, $773 million of cash paid for share repurchases and $68 million of net repayments on our warehouse line of credit and master repurchase agreements related to Zillow Home Loans. The cash outflows were partially offset by $44 million of proceeds from the exercise of option awards.
For the nine months ended September 30, 2021, cash provided by financing activities was $3.1 billion, which was primarily related to $2.1 billion of net borrowings on our credit facilities related to Zillow Offers, $545 million in proceeds from the sale of 3 million shares of Class C capital stock under our equity distribution agreement, $443 million in proceeds from the issuance of the 2021-1 term loan, net of issuance costs, and $98 million of proceeds from the exercise of option awards. These cash inflows were partially offset by $101 million of net repayments on our warehouse line of credit and master repurchase agreements related to Zillow Home Loans.
Capital Resources
We continue to invest in the development and expansion of our continuing operations. Ongoing investments include, but are not limited to, improvements in our technology platforms, infrastructure and continued investments in sales and marketing. To finance these investments and ongoing operations, and in the event that we require additional funding to support strategic business opportunities, we have issued convertible senior notes. As of September 30, 2022, we have outstanding a total of $1.7 billion aggregate principal of convertible senior notes. The convertible notes are senior unsecured obligations, and interest on the convertible notes is paid semi-annually. The following table summarizes our convertible senior notes as of the periods presented (in millions, except interest rates):
September 30, 2022
December 31, 2021
Maturity Date
Aggregate Principal Amount
Stated Interest Rate
Carrying Value
Carrying Value
September 1, 2026
$
499
1.375
%
$
495
$
369
May 15, 2025
565
2.75
%
559
443
September 1, 2024
608
0.75
%
605
507
Total
$
1,672
$
1,659
$
1,319
Refer to Note 11 of our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information regarding our convertible senior notes, including conversion rates, conversion and redemption dates and the related capped call transactions.
On February 17, 2021, we entered into an equity distribution agreement with certain sales agents and/or principals (the “Managers”), pursuant to which we may offer and sell from time to time, through the Managers, shares of our Class C capital stock, having an aggregate gross sales price of up to $1.0 billion, in such share amounts as we may specify by notice to the Managers, in accordance with the terms and conditions set forth in the equity distribution agreement. During the nine months ended September 30, 2022, we did not sell any shares under the equity distribution agreement. During the nine months ended September 30, 2021, we issued and sold 3 million shares of our Class C capital stock under the equity distribution agreement for total proceeds of $551 million and net proceeds of $545 million, after deducting $6 million of commissions and other offering expenses incurred. For additional information regarding the equity distribution agreement, see Note 13 in our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
On December 2, 2021, Zillow Group’s Board of Directors authorized the repurchase of up to $750 million of our Class A common stock, Class C capital stock or a combination thereof. On May 4, 2022, the Board of Directors authorized the repurchase of up to an additional $1 billion (together the “Repurchase Authorizations”) of our Class A common stock, Class C capital stock or a combination thereof. During the nine months ended September 30, 2022, we repurchased 3 million shares of Class A common stock and 14 million shares of Class C capital stock at an average price of $46.13 and $44.40 per share, respectively, for an aggregate purchase price of $154 million and $619 million, respectively. As of September 30, 2022, $674 million remained available for future repurchases pursuant to the Repurchase Authorizations, which repurchases decrease our liquidity and capital resources when effected. On November 1, 2022, the Board of Directors further expanded the Repurchase Authorizations to allow for the repurchase of a portion of our outstanding convertible senior notes. For additional information on our Repurchase Authorizations, see Note 11 and Note 13 in our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
IMT
Our principal sources of liquidity for the IMT segment are cash flows from operations within the segment.
Mortgages
Zillow Home Loans impacts 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 warehouse line of credit and master repurchase agreements as of the periods presented (in millions, except interest rates):
Lender
Maturity Date
Maximum Borrowing Capacity
Outstanding Borrowings at
September 30, 2022
Outstanding Borrowings at
December 31, 2021
Weighted Average Interest Rate
Credit Suisse AG, Cayman Islands
March 17, 2023
$
100
$
22
$
77
4.73
%
Citibank, N.A.
June 9, 2023
100
2
17
4.89
%
Comerica Bank
June 24, 2023
50
21
19
4.95
%
Total
$
250
$
45
$
113
Refer to Note 11 of our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information on Zillow Group’s warehouse line of credit and master repurchase agreements.
Homes
Prior to its wind down, Zillow Group’s purchase of homes through the Zillow Offers program had a significant impact on our liquidity and capital resources as a cash and inventory intensive business. We previously used credit facilities, and beginning in the third quarter of 2021, asset-backed securitizations, to fund a portion of the purchase price of homes and certain related costs. On November 2, 2021, the Board of Directors of Zillow Group made the determination to wind down Zillow Offers operations and as of September 30, 2022, the wind down was complete. As a result of the wind down, during the first half of 2022, certain wholly owned subsidiaries of Zillow Group repaid all amounts drawn on the Zillow Offers credit facilities and all principal on the securitization term loans. We incurred prepayment penalties of $6 million associated with the pay-down of our credit facilities and $8 million in connection with the pay-down of the securitizations. Refer to Note 3 of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information on the Zillow Offers wind down.
Contractual Obligations and Other Commitments
Convertible Senior Notes - Includes the aggregate principal amounts of the 2024 Notes, 2025 Notes and 2026 Notes due on their contractual maturity dates, as well as the associated coupon interest. As of September 30, 2022, we have an outstanding aggregate principal amount of convertible senior notes of $1.7 billion, none of which is payable within 12 months. Future interest payments associated with the convertible senior notes total $83 million, with $27 million payable within 12 months. Refer to Note 11 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 convertible senior notes.
Mortgages Segment Credit Facilities - Includes principal amounts due for amounts borrowed under the warehouse line of credit and master repurchase agreements to finance mortgages originated through Zillow Home Loans. As of September 30,
2022, we have outstanding principal amounts of $45 million. Amounts exclude an immaterial amount of estimated interest payments.
Operating Lease Obligations - Our lease portfolio primarily comprises operating leases for our office space. For additional information regarding our operating leases, see Note 12 to 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, 2021. Additionally, as of September 30, 2022, we had outstanding letters of credit of approximately $16 million, which secure our lease obligations in connection with certain of the operating leases of our office spaces.
Purchase Obligations - We have non-cancellable purchase obligations for content related to our mobile applications and websites and certain cloud computing costs. Refer to Note 16 of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information on our purchase obligations.
Other Commitments -We deferred a total of $24 million of certain employer payroll tax payments under the Coronavirus Aid, Relief, and Economic Security Act that was signed into law on March 27, 2020 and provides tax provisions and other stimulus measures to affected companies. We expect to make a payment of $13 million for the remaining deferred payroll taxes in the fourth quarter of 2022.
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 real estate market, the broader economy and the COVID-19 pandemic 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, 2021. 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, 2021.
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 agency securities, treasury bills, investment grade corporate securities and commercial paper. Our current investment policy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting our principal at risk.
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.
The fair values of the convertible senior notes change primarily when the market price of our stock fluctuates or interest rates change. The following table summarizes our outstanding convertible senior notes as of September 30, 2022 (in millions, except interest rates):
Maturity Date
Aggregate Principal Amount
Stated Interest Rate
September 1, 2026
$
499
1.375
%
May 15, 2025
565
2.75
%
September 1, 2024
608
0.75
%
$
1,672
For additional details related to our credit facilities, see Note 11 to our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
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 warehouse line of credit and 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 warehouse line of credit and master repurchase agreements, which can negatively impact our net income. This risk is primarily mitigated through expedited sale of our loans. As of September 30, 2022 and December 31, 2021, we had outstanding $45 million and $113 million, respectively, of borrowings on our warehouse line of credit and master repurchase agreements which bear interest either at a floating rate based on Secured Overnight Financing Rate (“SOFR”) plus an applicable margin, as defined by the governing agreements, or Bloomberg Short-Term Bank Yield Index Rate (“BSBY”) 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 mortgage-backed securities. Assuming no change in the outstanding borrowings on the warehouse line of credit and master repurchase agreements, we estimate that a one percentage point increase in SOFR or BSBY, as applicable, would increase our annual interest expense associated with the warehouse line of credit and master repurchase agreements by an immaterial amount as of September 30, 2022 and December 31, 2021.
Inflation Risk
We do not believe that inflation has a material effect on our business, results of operations or financial condition, particularly given we are winding down Zillow Offers operations. However, the United States is experiencing the highest levels of inflation in nearly four decades. If the inflation rate continues to increase, our costs, in particular labor, marketing and hosting costs, may become subject to significant inflationary pressures 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 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 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.
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, 2022. 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, 2022.
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 Exchange Act that occurred during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
For information regarding legal proceedings in which we are involved, see Note 16 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.
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, 2021. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the three months ended September 30, 2022.
Purchase of Equity Securities by the Issuer
The following table summarizes our stock repurchases during the three months ended September 30, 2022 (in millions, except share data which are presented in thousands, and per share amounts):
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1)
Period
Class A common stock
Class C capital stock
Class A common stock
Class C capital stock
July 1 - July 31, 2022
—
—
$
—
$
—
—
$
850
August 1 -August 31, 2022
508
2,964
36.04
35.51
3,472
727
September 1 - September 30, 2022
264
1,261
34.51
34.42
1,525
674
Total
772
4,225
4,997
(1) On December 2, 2021, the Board of Directors authorized a stock repurchase program granting the authority to repurchase up to $750 million of its Class A common stock, Class C capital stock or a combination of both. On May 4, 2022, the Board of Directors authorized the repurchase of up to an additional $1 billion (together the “Repurchase Authorizations”) of its Class A common stock, Class C capital stock or a combination thereof. On November 1, 2022, the Board of Directors further expanded the Repurchase Authorizations to allow for the repurchase of a portion of our outstanding convertible senior notes. The Repurchase Authorizations do not have an expiration date.
Our proxy statement for the 2022 Annual Meeting of Shareholders, which was filed with the Securities and Exchange Commission on April 28, 2022, contained a typographical error in the section entitled “Submission of Shareholder Proposals for Inclusion in Next Year’s Proxy Statement or Presentation at Next Year’s Annual Meeting” solely related to the date by which a shareholder proposal satisfying the conditions of Rule 14a-8 must be received at our principal executive offices in order to be considered for inclusion in next year’s proxy statement. The corrected information is set forth below:
Submission of Shareholder Proposals for Inclusion in Next Year’s Proxy Statement or Presentation at Next Year’s Annual Meeting
To be considered for inclusion in next year’s proxy statement and form of proxy pursuant to Rule 14a-8 under the Exchange Act, shareholder proposals for the 2023 Annual Meeting of Shareholders satisfying the conditions of Rule 14a-8 must be received at our principal executive offices no later than the close of business on December 29, 2022.
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).
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.
