Zillow Group, Inc. (Z)

FORM 8-K | Current report
Nov. 7, 2019 4:08 PM
|
About: Zillow Group, Inc. (Z)View as PDF
ZILLOW GROUP, INC. (Form: 8-K, Received: 11/07/2019 16:12:46)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): November 7, 2019
 
ZILLOW GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
001-36853
 
47-1645716
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
1301 Second Avenue, Floor 31, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
(206) 470-7000
(Registrant’s telephone number, including area code)
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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 is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.    ☐
 






Item 2.02
Results of Operations and Financial Condition.
Zillow Group, Inc. (“Zillow Group”) today issued a press release and a shareholder letter announcing its financial results for the fiscal quarter ended September 30, 2019. The full text of the press release issued in connection with the announcement is furnished as Exhibit 99.1, accompanying supporting tables as Exhibit 99.2 and the shareholder letter as Exhibit 99.3 to this Current Report on Form 8-K.
The information in this Item 2.02 and Exhibits 99.1, 99.2 and 99.3 of this Current Report on Form 8-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 9.01
Financial Statements and Exhibits.
(d) Exhibits.
 







SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
Dated: November 7, 2019
 
ZILLOW GROUP, INC.
 
 
 
 
 
By:
/s/ JENNIFER ROCK
 
 
Name:
Jennifer Rock
 
 
Title:
Chief Accounting Officer





Exhibit 99.1

ZGLOGOA03.JPGClick to enlarge  
Contacts:
Investor Relations
ir@zillowgroup.com
 
Emily Heffter
Public Relations
press@zillow.com


Zillow Group Reports Third Quarter 2019 Financial Results

Results reflect expanded margins in Zillow Group’s IMT segment and sharp focus on Zillow Offers execution

SEATTLE – Nov. 7, 2019 - Zillow Group, Inc. (NASDAQ:Z) (NASDAQ:ZG), which is transforming the way people buy, sell, rent, and finance homes, today announced its consolidated financial results for the three months ended Sept. 30, 2019. The company’s consolidated quarterly revenue more than doubled year over year, driven by strong results in Zillow Group’s Homes segment and solid performance in the Premier Agent business.

Complete financial results and fourth quarter and full year 2019 outlook can be found in our shareholder letter and in the investor relations section of Zillow Group’s website at https://investors.zillowgroup.com/financials/quarterly-results/default.aspx.

“Our third quarter results were strong, demonstrating that Zillow Group’s business model expansion to mechanize real estate transactions is gaining traction as consumer demand reveals people want a better, simpler way to buy, sell, rent and finance homes,” said Zillow co-founder and CEO Rich Barton. “Our core Premier Agent business is strong, with record revenue that exceeded our outlook. The profitability of our Premier Agent business is foundational to Zillow’s success and is the reason we are able to expand Zillow Offers with such confidence and speed. This quarter’s results illuminate how Zillow Group is in the most favorable position to lead Real Estate 2.0.”
Recent highlights include:
Total third quarter consolidated revenue grew 117% year over year to $745.2 million, driven primarily by significant growth in the Homes segment.
Our Premier Agent business drove third quarter IMT revenue to $335.3 million, a year-over-year increase of 7%. IMT margin improved year over year, reflecting focused cost control and continued operating leverage from our scale and leadership.
Consumer awareness and demand for Zillow Offers is growing rapidly. More than 80,000 homeowners requested an offer from Zillow in the third quarter.
Zillow Offers opened eight new markets in the third quarter: Portland, Ore.; Nashville, Tenn.; Miami; San Diego; San Antonio; Austin, Texas; and Fort Collins and Colorado Springs, Colo.
The company expects to be in 26 markets by mid-2020, including Los Angeles -- the second-largest housing market in the country -- by the end of 2019.
Traffic to Zillow Group’s mobile apps and websites reached an all-time high in the third quarter with average monthly unique users up 5% year over year to 195.6 million. Visits exceeded 2.1 billion, up 11% year over year.





Third Quarter 2019 Financial Highlights
The following table sets forth Zillow Group’s financial highlights for the periods presented (in thousands, unaudited):
 
Three Months Ended
September 30,
 
2018 to 2019
% Change
 
Nine Months Ended
September 30,
 
2018 to 2019
% Change
 
2019
 
2018
 
 
2019
 
2018
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Homes segment
$
384,626

 
$
11,018

 
3,391%
 
$
762,022

 
$
11,018

 
6,816%
IMT segment:
 
 
 
 
 
 
 
 
 
 
 
Premier Agent
240,698

 
232,703

 
3%
 
690,394

 
677,320

 
2%
Rentals
44,430

 
37,319

 
19%
 
124,938

 
99,670

 
25%
Other (1)
50,162

 
43,616

 
15%
 
141,899

 
123,445

 
15%
Total IMT segment revenue
335,290

 
313,638

 
7%
 
957,231

 
900,435

 
6%
Mortgages segment
25,292

 
18,438

 
37%
 
79,637

 
56,766

 
40%
Total revenue
$
745,208

 
$
343,094

 
117%
 
$
1,798,890

 
$
968,219

 
86%
Other Financial Data:
 
 
 
 
 
 
 
 
 
 
 
Segment income (loss) before income taxes:
 
 
 
 
 
 
 
 
 
 
 
Homes segment
$
(87,870
)
 
$
(16,428
)
 
 
 
$
(204,197
)
 
$
(30,879
)
 
 
IMT segment
$
42,053

 
$
6,322

 
 
 
$
43,839

 
$
(184
)
 
 
Mortgages segment
$
(12,254
)
 
$
(623
)
 
 
 
$
(32,308
)
 
$
(625
)
 
 
Net loss
$
(64,649
)
 
$
(492
)
 
 
 
$
(204,151
)
 
$
(22,176
)
 
 
Adjusted EBITDA (2):
 
 
 
 
 
 
 
 
 
 
 
Homes segment
$
(67,825
)
 
$
(13,409
)
 

 
$
(158,801
)
 
$
(25,274
)
 

IMT segment
91,102

 
75,363

 

 
216,204

 
181,764

 

Mortgages segment
(7,435
)
 
4,211

 

 
(15,342
)
 
11,985

 
 
Total Adjusted EBITDA
$
15,842

 
$
66,165

 
 
 
$
42,061

 
$
168,475

 
 
Percentage of Revenue:
 
 
 
 
 
 
 
 
 
 
 
Segment income (loss) before income taxes:
 
 
 
 
 
 
 
 
 
 
 
Homes segment
(23
)%
 
(149
)%
 
 
 
(27
)%
 
(280
)%
 
 
IMT segment
13
 %
 
2
 %
 
 
 
5
 %
 
 %
 
 
Mortgages segment
(48
)%
 
(3
)%
 
 
 
(41
)%
 
(1
)%
 
 
Net loss
(9
)%
 
 %
 
 
 
(11
)%
 
(2
)%
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
 
 
 
 
Homes segment
(18
)%
 
(122
)%
 
 
 
(21
)%
 
(229
)%
 
 
IMT segment
27
 %
 
24
 %
 
 
 
23
 %
 
20
 %
 
 
Mortgages segment
(29
)%
 
23
 %
 
 
 
(19
)%
 
21
 %
 
 
Total Adjusted EBITDA
2
 %
 
19
 %
 
 
 
2
 %
 
17
 %
 
 
(1) Other revenue primarily includes revenue generated by new construction and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals.
(2) Adjusted EBITDA is a non-GAAP financial measure; it is not calculated or presented in accordance with U.S. generally accepted accounting principles, or GAAP. See below for more information regarding our presentation of Adjusted EBITDA, including a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, which is net loss on a consolidated basis and income (loss) before income taxes for each segment, for each of the periods presented.





Conference Call and Webcast Information
Zillow Group Co-founder & CEO Rich Barton and CFO Allen Parker will host a live conference call and webcast to discuss the results today at 2 p.m. Pacific Time (5 p.m. Eastern Time). A Shareholder Letter is available on the Quarterly Results section of Zillow Group’s investor relations website at https://investors.zillowgroup.com/financials/quarterly-results/default.aspx prior to the live conference call and webcast.
A link to the live webcast and recorded replay of the conference call will be available on the investor relations section of Zillow Group’s website. The live call may also be accessed via phone (866) 270-1533 toll-free domestically and at (412) 317-0797 internationally.

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, including, without limitation, statements regarding the future of Zillow Offers, Premier Agent, Zillow Home Loans and other parts of our business. Statements containing words such as “may,” “believe,” “anticipate.” “expect,” “intend,” “plan,” “project,” “will,” “projections,” “continue,” “estimate,” “outlook,” “guidance,” or similar expressions constitute forward-looking statements. Forward-looking statements are made based on assumptions as of November 7, 2019, and although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee these results. Differences in Zillow Group’s actual results from those described in these forward-looking statements may result from actions taken by Zillow Group as well as from risks and uncertainties beyond Zillow Group’s control. Factors that may contribute to such differences include, but are not limited to, Zillow Group’s ability to execute on strategy; Zillow Group’s ability to maintain and effectively manage an adequate rate of growth; Zillow Group’s ability to innovate and provide products and services that are attractive to its users and advertisers; Zillow Group’s investment of resources to pursue strategies that may not prove effective; Zillow Group’s ability to compete successfully against existing or future competitors; the impact of the real estate industry on Zillow Group’s business; the impact of pending legal proceedings described in Zillow Group’s filings with the Securities and Exchange Commission, or SEC; Zillow Group’s ability to successfully integrate and realize the benefits of its past or future strategic acquisitions or investments; Zillow Group’s ability to maintain or establish relationships with listings and data providers; the reliable performance of Zillow Group’s network infrastructure and content delivery processes; and Zillow Group’s ability to protect its intellectual property. The foregoing list of risks and uncertainties is illustrative but not exhaustive. For more information about potential factors that could affect Zillow Group’s business and financial results, please review the “Risk Factors” described in Zillow Group’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC and in Zillow Group’s other filings with the SEC. Except as may be required by law, Zillow Group does not intend, and undertakes no duty to update this information to reflect future events or circumstances.
Use of Non-GAAP Financial Measure
To provide investors with additional information regarding our financial results, this press release includes references to Adjusted EBITDA, which is a non-GAAP financial measure. We have provided a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, which is net loss on a consolidated basis and income (loss) before income taxes for each segment, within this earnings release.
Adjusted EBITDA is a key metric used by our management and board of directors to measure operating performance and trends, and to prepare and approve our annual budget. The exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not reflect impairment costs;
Adjusted EBITDA does not reflect acquisition-related costs;





Adjusted EBITDA does not reflect interest expense or other income;
Adjusted EBITDA does not reflect income taxes; and
Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and income (loss) before income taxes and our other GAAP results. You should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP.
About Zillow Group, Inc.
Zillow Group, Inc. (NASDAQ:Z) (NASDAQ:ZG) houses one of the largest portfolios of real estate brands on mobile and the web that attracted nearly 196 million average monthly unique users during the third quarter of 2019. Zillow Group is committed to leveraging its proprietary data, technology and innovations to make home buying, selling, financing and renting a seamless, on-demand experience for consumers. As its flagship brand, Zillow® now offers a fully integrated home shopping experience that includes access to for sale and rental listings, Zillow Offers™, which provides a hassle-free way to buy and sell homes directly through Zillow; and Zillow Home Loans, Zillow’s affiliated lender that provides an easy way to receive mortgage pre-approvals and financing. Other consumer brands include Trulia®, StreetEasy®, HotPads®, Naked Apartments® and Out East®. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions to help real estate professionals maximize business opportunities and connect with millions of consumers. Zillow Group business brands for real estate, rental and mortgage professionals, include Mortech®, dotloop®, Bridge Interactive® and New Home Feed®. The company is headquartered in Seattle, Washington.
Please visit http://investors.zillowgroup.com,www.zillowgroup.com/ir-blog, and www.twitter.com/zillowgroup, where Zillow Group discloses information about the company, its financial information, and its business which may be deemed material.
The Zillow Group logo is available at http://zillowgroup.mediaroom.com/logos-photos.
Zillow, Premier Agent, Mortech, Bridge Interactive, StreetEasy, HotPads, Out East and New Home Feed are registered trademarks of Zillow, Inc. Zillow Offers is a trademark of Zillow, Inc. Trulia is a registered trademark of Trulia, LLC. dotloop is a registered trademark of DotLoop, LLC. Naked Apartments is a registered trademark of Naked Apartments, LLC. Zillow Home Loans, LLC is an Equal Housing Lender; NMLS #10287.
(ZFIN)

Adjusted EBITDA
The following tables set forth a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, which is net loss on a consolidated basis and income (loss) before income taxes for each segment, for each of the periods presented (in thousands, unaudited):
 
Three Months Ended September 30, 2019
 
Homes
 
IMT
 
Mortgages
 
Corporate Items (2)
 
Consolidated
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) Before Income Taxes:
 
 
 
 
 
 
 
 
 
Net loss (1)
N/A

 
N/A

 
N/A

 
N/A

 
$
(64,649
)
Income tax benefit
N/A

 
N/A

 
N/A

 
N/A

 
(1,300
)
Income (loss) before income taxes
$
(87,870
)
 
$
42,053

 
$
(12,254
)
 
$
(7,878
)
 
$
(65,949
)
Other income

 

 
(344
)
 
(8,655
)
 
(8,999
)
Depreciation and amortization expense
2,331

 
18,362

 
1,467

 

 
22,160

Share-based compensation expense
8,025

 
30,687

 
3,416

 

 
42,128

Interest expense
9,689

 

 
280

 
16,533

 
26,502

Adjusted EBITDA
$
(67,825
)
 
$
91,102

 
$
(7,435
)
 
$

 
$
15,842






 
Three Months Ended September 30, 2018
 
Homes
 
IMT
 
Mortgages
 
Corporate Items (2)
 
Consolidated
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) Before Income Taxes:
 
 
 
 
 
 
 
 
 
Net loss (1)
N/A

 
N/A

 
N/A

 
N/A

 
$
(492
)
Income tax benefit
N/A

 
N/A

 
N/A

 
N/A

 
(14,700
)
Income (loss) before income taxes
$
(16,428
)
 
$
6,322

 
$
(623
)
 
$
(4,463
)
 
$
(15,192
)
Other income

 

 

 
(7,773
)
 
(7,773
)
Depreciation and amortization expense
368

 
22,053

 
954

 

 
23,375

Share-based compensation expense
2,219

 
36,988

 
2,475

 

 
41,682

Impairment costs

 
10,000

 

 

 
10,000

Acquisition-related costs

 

 
1,405

 

 
1,405

Interest expense
432

 

 

 
12,236

 
12,668

Adjusted EBITDA
$
(13,409
)
 
$
75,363

 
$
4,211

 
$

 
$
66,165

 
Nine Months Ended September 30, 2019
 
Homes
 
IMT
 
Mortgages
 
Corporate Items (2)
 
Consolidated
Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) Before Income Taxes:
 
 
 
 
 
 
 
 
 
Net loss (1)
N/A

 
N/A

 
N/A

 
N/A

 
$
(204,151
)
Income tax benefit
N/A

 
N/A

 
N/A

 
N/A

 
(3,800
)
Income (loss) before income taxes
$
(204,197
)
 
$
43,839

 
$
(32,308
)
 
$
(15,285
)
 
$
(207,951
)
Other income

 

 
(1,059
)
 
(26,566
)
 
(27,625
)
Depreciation and amortization expense
5,384

 
54,264

 
4,240

 

 
63,888

Share-based compensation expense
20,666

 
118,101

 
13,117

 

 
151,884

Interest expense
19,346

 

 
668

 
41,851

 
61,865

Adjusted EBITDA
$
(158,801
)
 
$
216,204

 
$
(15,342
)
 
$

 
$
42,061

 
Nine Months Ended September 30, 2018
 
Homes
 
IMT
 
Mortgages
 
Corporate Items (2)
 
Consolidated
Reconciliation of Adjusted EBITDA to Net Loss and Loss Before Income Taxes:
 
 
 
 
 
 
 
 
 
Net loss (1)
N/A

 
N/A

 
N/A

 
N/A

 
$
(22,176
)
Income tax benefit
N/A

 
N/A

 
N/A

 
N/A

 
(22,700
)
Loss before income taxes
$
(30,879
)
 
$
(184
)
 
$
(625
)
 
$
(13,188
)
 
$
(44,876
)
Other income

 

 

 
(13,308
)
 
(13,308
)
Depreciation and amortization expense
608

 
72,168

 
3,525

 

 
76,301

Share-based compensation expense
4,565

 
99,753

 
7,048

 

 
111,366

Impairment costs

 
10,000

 

 

 
10,000

Acquisition-related costs

 
27

 
2,037

 

 
2,064

Interest expense
432

 

 

 
26,496

 
26,928

Adjusted EBITDA
$
(25,274
)
 
$
181,764

 
$
11,985

 
$

 
$
168,475

(1) We use income (loss) before income taxes as our profitability measure in making operating decisions and assessing the performance of our segments, therefore, net loss and income tax benefit 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 interest income earned on our short-term investments included in Other income and interest costs on our convertible senior notes included in Interest expense.





Exhibit 99.2


Reported Consolidated Results

ZILLOW GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
September 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,791,918

 
$
651,058

Short-term investments
531,679

 
903,867

Accounts receivable, net
77,674

 
66,083

Mortgage loans held for sale
36,762

 
35,409

Inventory
879,353

 
162,829

Prepaid expenses and other current assets
66,413

 
61,067

Restricted cash
75,004

 
12,385

Total current assets
3,458,803

 
1,892,698

Contract cost assets
46,047

 
45,819

Property and equipment, net
154,251

 
135,172

Right of use assets
218,564

 

Goodwill
1,984,907

 
1,984,907

Intangible assets, net
197,527

 
215,904

Other assets
15,889

 
16,616

Total assets
$
6,075,988

 
$
4,291,116

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,717

 
$
7,471

Accrued expenses and other current liabilities
76,061

 
63,101

Accrued compensation and benefits
33,540

 
31,388

Revolving credit facilities
698,280

 
116,700

Warehouse lines of credit
30,116

 
33,018

Deferred revenue
41,955

 
34,080

Deferred rent, current portion

 
1,740

Lease liabilities, current portion
17,937

 

Total current liabilities
907,606

 
287,498

Deferred rent, net of current portion

 
19,945

Lease liabilities, net of current portion
223,989

 

Long-term debt
1,478,719

 
699,020

Deferred tax liabilities and other long-term liabilities
13,796

 
17,474

Total liabilities
2,624,110

 
1,023,937

Shareholders’ equity:
 
 
 
Class A common stock
6

 
6

Class B common stock
1

 
1

Class C capital stock
14

 
14

Additional paid-in capital
4,327,003

 
3,939,842

Accumulated other comprehensive income (loss)
784

 
(905
)
Accumulated deficit
(875,930
)
 
(671,779
)
Total shareholders’ equity
3,451,878

 
3,267,179

Total liabilities and shareholders’ equity
$
6,075,988

 
$
4,291,116







ZILLOW GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Homes
$
384,626

 
$
11,018

 
$
762,022

 
$
11,018

IMT
335,290

 
313,638

 
957,231

 
900,435

Mortgages
25,292

 
18,438

 
79,637

 
56,766

Total revenue
745,208

 
343,094

 
1,798,890

 
968,219

Cost of revenue (exclusive of amortization) (1)(2):
 
 
 
 
 
 
 
Homes
370,796

 
10,226

 
733,947

 
10,312

IMT
24,318

 
25,186

 
74,628

 
72,070

Mortgages
4,721

 
1,260

 
13,829

 
3,736

Total cost of revenue
399,835

 
36,672

 
822,404

 
86,118

Sales and marketing (2)
181,347

 
128,734

 
530,367

 
413,752

Technology and development (2)
123,974

 
105,314

 
352,074

 
299,623

General and administrative (2)
88,493

 
70,743

 
267,106

 
187,395

Impairment costs

 
10,000

 

 
10,000

Acquisition-related costs

 
1,405

 

 
2,064

Integration costs
5

 
523

 
650

 
523

Total costs and expenses
793,654

 
353,391

 
1,972,601

 
999,475

Loss from operations
(48,446
)
 
(10,297
)
 
(173,711
)
 
(31,256
)
Other income
8,999

 
7,773

 
27,625

 
13,308

Interest expense
(26,502
)
 
(12,668
)
 
(61,865
)
 
(26,928
)
Loss before income taxes
(65,949
)
 
(15,192
)
 
(207,951
)
 
(44,876
)
Income tax benefit
1,300

 
14,700

 
3,800

 
22,700

Net loss
$
(64,649
)
 
$
(492
)
 
$
(204,151
)
 
$
(22,176
)
Net loss per share — basic and diluted
$
(0.31
)
 
$

 
$
(0.99
)
 
$
(0.11
)
Weighted-average shares outstanding — basic and diluted
207,002

 
202,416

 
205,766

 
195,208

_________________
(1) Amortization of website development costs and intangible assets included in technology and development
$
15,835

 
$
18,165

 
$
44,891

 
$
61,735

(2) Includes share-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of revenue
$
1,062

 
$
969

 
$
2,878

 
$
3,180

Sales and marketing
6,588

 
5,911

 
19,039

 
17,413

Technology and development
18,034

 
15,031

 
51,942

 
40,920

General and administrative
16,444

 
19,771

 
78,025

 
49,853

Total
$
42,128

 
$
41,682

 
$
151,884

 
$
111,366

Other Financial Data:
 
 
 
 
 
 
 
Segment income (loss) before income taxes
 
 
 
 
 
 
 
Homes segment
$
(87,870
)
 
$
(16,428
)
 
$
(204,197
)
 
$
(30,879
)
IMT segment
$
42,053

 
$
6,322

 
$
43,839

 
$
(184
)
Mortgages segment
$
(12,254
)
 
$
(623
)
 
$
(32,308
)
 
$
(625
)
Adjusted EBITDA (3)
 
 
 
 
 
 
 
Homes segment
$
(67,825
)
 
$
(13,409
)
 
$
(158,801
)
 
$
(25,274
)
IMT segment
91,102

 
75,363

 
216,204

 
181,764

Mortgages segment
(7,435
)
 
4,211

 
(15,342
)
 
11,985

Total Adjusted EBITDA
$
15,842

 
$
66,165

 
$
42,061

 
$
168,475

(3) Adjusted EBITDA is a non-GAAP financial measure; it is not calculated or presented in accordance with U.S. generally accepted accounting principles, or GAAP. See Exhibit 99.1 for more information regarding our presentation of Adjusted EBITDA and for a reconciliation of Adjusted EBITDA to net loss on a consolidated basis and income (loss) before income taxes for each segment, the most directly comparable GAAP financial measure, for each of the periods presented.





ZILLOW GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
September 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(204,151
)
 
$
(22,176
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
63,888

 
76,301

Share-based compensation expense
151,884

 
111,366

Amortization of right of use assets
16,710

 

Amortization of contract cost assets
26,722

 
27,227

Amortization of discount and issuance costs on convertible senior notes maturing in 2021, 2023, 2024 and 2026
29,868

 
17,990

Impairment costs

 
10,000

Deferred income taxes
(3,800
)
 
(22,700
)
Loss on disposal of property and equipment
5,744

 
3,129

Bad debt expense
1,894

 
1,053

Deferred rent

 
(3,116
)
Accretion of bond discount
(5,241
)
 
(2,172
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(13,485
)
 
(12,994
)
Mortgage loans held for sale
(1,353
)
 

Inventory
(716,524
)
 
(43,257
)
Prepaid expenses and other assets
(5,848
)
 
(15,012
)
Lease liabilities
(15,029
)
 

Contract cost assets
(26,950
)
 
(32,143
)
Accounts payable
2,999

 
2,254

Accrued expenses and other current liabilities
12,241

 
(3,751
)
Accrued compensation and benefits
2,152

 
6,503

Deferred revenue
7,875

 
4,041

Other long-term liabilities
122

 

Net cash provided by (used in) operating activities
(670,282
)
 
102,543

Investing activities
 
 
 
Proceeds from maturities of investments
859,142

 
261,675

Purchases of investments
(479,963
)
 
(848,838
)
Purchases of property and equipment
(45,140
)
 
(44,482
)
Purchases of intangible assets
(15,123
)
 
(8,179
)
Cash paid for acquisition, net

 
(2,000
)
Net cash provided by (used in) investing activities
318,916

 
(641,824
)
Financing activities
 
 
 
Proceeds from issuance of convertible notes, net of issuance costs
1,085,686

 
364,020

Premiums paid for capped call confirmations
(150,530
)
 
(29,414
)
Proceeds from issuance of Class C capital stock, net of issuance costs

 
360,345

Proceeds from borrowing on revolving credit facilities
581,580

 
24,674

Net repayments on warehouse lines of credit
(2,902
)
 

Proceeds from exercise of stock options
41,014

 
114,623

Value of equity awards withheld for tax liability
(3
)
 
(67
)
Net cash provided by financing activities
1,554,845

 
834,181

Net increase in cash, cash equivalents and restricted cash during period
1,203,479

 
294,900

Cash, cash equivalents and restricted cash at beginning of period
663,443

 
352,095

Cash, cash equivalents and restricted cash at end of period
$
1,866,922

 
$
646,995

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
25,837

 
$
4,800

Noncash transactions:
 
 
 
Capitalized share-based compensation
$
8,942

 
$
6,674

Write-off of fully depreciated property and equipment
$
28,951

 
$
18,687

Write-off of fully amortized intangible assets
$
9,959

 
$
10,797






Non-GAAP Net Income (Loss) per Share
Our presentation of non-GAAP net income (loss) per share excludes the impact of share-based compensation expense, impairment costs, acquisition-related costs and income taxes. This measure is not a key metric used by our management and board of directors to measure operating performance or otherwise manage the business. However, we provide non-GAAP net income (loss) per share as supplemental information to investors, as we believe the exclusion of share-based compensation expense, impairment costs, acquisition-related costs and income taxes facilitates investors’ operating performance comparisons on a period-to-period basis. You should not consider non-GAAP net income (loss) per share in isolation or as a substitute for analysis of our results as reported under GAAP.

The following table sets forth a reconciliation of non-GAAP net income (loss), adjusted, to net loss, as reported on a GAAP basis, and the calculation of non-GAAP net income (loss) per share - basic and diluted, for each of the periods presented (in thousands, except per share data, unaudited):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net loss, as reported
$
(64,649
)
 
$
(492
)
 
$
(204,151
)
 
$
(22,176
)
Share-based compensation expense
42,128

 
41,682

 
151,884

 
111,366

Impairment costs

 
10,000

 

 
10,000

Acquisition-related costs

 
1,405

 

 
2,064

Income tax benefit
(1,300
)
 
(14,700
)
 
(3,800
)
 
(22,700
)
Net income (loss), adjusted
$
(23,821
)
 
$
37,895

 
$
(56,067
)
 
$
78,554

Non-GAAP net income (loss) per share — basic
$
(0.12
)
 
$
0.19

 
$
(0.27
)
 
$
0.40

Non-GAAP net income (loss) per share — diluted
$
(0.12
)
 
$
0.18

 
$
(0.27
)
 
$
0.38

Weighted-average shares outstanding — basic
207,002

 
202,416

 
205,766

 
195,208

Weighted-average shares outstanding — diluted
207,002

 
211,746

 
205,766

 
204,926


Non-GAAP net income (loss) per share - diluted for the periods presented is calculated using weighted-average shares outstanding - diluted, which includes potential shares of Class A common stock and Class C capital stock for the periods in which their effect would have been dilutive. The potential shares of Class A common stock and Class C capital stock were excluded from the calculation of non-GAAP net loss per share for the periods presented because their effect would have been antidilutive as a result of the non-GAAP net loss incurred in such periods. The following table reconciles the denominators used in the basic and diluted non-GAAP net income (loss) per share calculations (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Denominator for basic calculation
207,002

 
202,416

 
205,766

 
195,208

Effect of dilutive securities:
 
 
 
 
 
 
 
     Option awards

 
7,678

 

 
8,333

     Unvested restricted stock units

 
1,242

 

 
1,385

Class A common stock issuable upon conversion of the 2020 Notes

 
410

 

 

          Denominator for dilutive calculation
207,002

 
211,746

 
205,766

 
204,926






Segment Results of Operations
The following table presents our segment results for the periods presented (in thousands, unaudited):
 
Three Months Ended
September 30, 2019
 
Three Months Ended
September 30, 2018
 
Homes
 
IMT
 
Mortgages
 
Homes
 
IMT
 
Mortgages
Revenue
$
384,626

 
$
335,290

 
$
25,292

 
$
11,018

 
$
313,638

 
$
18,438

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
370,796

 
24,318

 
4,721

 
10,226

 
25,186

 
1,260

Sales and marketing
49,186

 
118,514

 
13,647

 
4,650

 
117,522

 
6,562

Technology and development
20,651

 
94,656

 
8,667

 
6,128

 
93,930

 
5,256

General and administrative
22,174

 
55,749

 
10,570

 
6,010

 
60,678

 
4,055

Impairment costs

 

 

 

 
10,000

 

Acquisition-related costs

 

 

 

 

 
1,405

Integration costs

 

 
5

 

 

 
523

Total costs and expenses
462,807

 
293,237

 
37,610

 
27,014

 
307,316

 
19,061

Income (loss) from operations
(78,181
)
 
42,053

 
(12,318
)
 
(15,996
)
 
6,322

 
(623
)
Segment other income

 

 
344

 

 

 

Segment interest expense
(9,689
)
 

 
(280
)
 
(432
)
 

 

Income (loss) before income taxes (1)
$
(87,870
)
 
$
42,053

 
$
(12,254
)
 
$
(16,428
)
 
$
6,322

 
$
(623
)
 
Nine Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2018
 
Homes
 
IMT
 
Mortgages
 
Homes
 
IMT
 
Mortgages
Revenue
$
762,022

 
$
957,231

 
$
79,637

 
$
11,018

 
$
900,435

 
$
56,766

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
733,947

 
74,628

 
13,829

 
10,312

 
72,070

 
3,736

Sales and marketing
107,457

 
380,608

 
42,302

 
7,035

 
384,241

 
22,476

Technology and development
51,130

 
276,886

 
24,058

 
12,154

 
270,978

 
16,491

General and administrative
54,339

 
181,270

 
31,497

 
11,964

 
163,303

 
12,128

Impairment costs

 

 

 

 
10,000

 

Acquisition-related costs

 

 

 

 
27

 
2,037

Integration costs

 

 
650

 

 

 
523

Total costs and expenses
946,873

 
913,392

 
112,336

 
41,465

 
900,619

 
57,391

Income (loss) from operations
(184,851
)
 
43,839

 
(32,699
)
 
(30,447
)
 
(184
)
 
(625
)
Segment other income

 

 
1,059

 

 

 

Segment interest expense
(19,346
)
 

 
(668
)
 
(432
)
 

 

Income (loss) before income taxes (1)
$
(204,197
)
 
$
43,839

 
$
(32,308
)
 
$
(30,879
)
 
$
(184
)
 
$
(625
)





(1) The following table presents the reconciliation of total segment loss before income taxes to consolidated loss before income taxes for the periods presented (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Total segment loss before income taxes
$
(58,071
)
 
$
(10,729
)
 
$
(192,666
)
 
$
(31,688
)
Corporate interest expense
(16,533
)
 
(12,236
)
 
(41,851
)
 
(26,496
)
Corporate other income
8,655

 
7,773

 
26,566

 
13,308

Consolidated loss before income taxes
$
(65,949
)
 
$
(15,192
)
 
$
(207,951
)
 
$
(44,876
)

Key Metrics
The following table sets forth our key metrics for each of the periods presented:
 
Three Months Ended
September 30,
 
2018 to 2019
% Change
 
2019
 
2018
 
 
(in millions)
 
 
Average Monthly Unique Users (1)
195.6

 
186.6

 
5
%
Visits (2)
2,104.9

 
1,888.9

 
11
%
(1)
Zillow, StreetEasy, HotPads and Naked Apartments measure unique users with Google Analytics, and Trulia measures unique users with Adobe Analytics.
(2)
Visits includes visits to the Zillow, Trulia and StreetEasy mobile apps and websites. We measure Zillow and StreetEasy visits with Google Analytics and Trulia visits with Adobe Analytics.

Non-GAAP Average Return on Homes Sold After Interest Expense
To provide investors with additional information regarding our Homes segment financial results, this Exhibit includes a calculation of Average Return on Homes Sold After Interest Expense, which is a non-GAAP financial measure. We have provided a reconciliation of Average Return on Homes Sold After Interest Expense to the most directly comparable GAAP financial measure, which is average gross profit per home for the Homes segment.
We believe that Average Return on Homes Sold After Interest Expense is a useful financial measure to investors as it is one of the primary measures used by management in making investment decisions, measuring unit level economics and evaluating operating performance for the Zillow Offers business. The measure is intended to convey the unit level economics of homes sold during the period by presenting the average revenue and associated expenses directly attributed to the homes sold. We believe this average per unit measure facilitates meaningful period over period comparisons notwithstanding variability in the number of homes sold during a period and indicates ability to generate average returns on assets sold after considering home purchase costs, renovation costs, holding costs and selling costs.
We calculate the average return on homes sold after interest expense as revenue associated with homes sold during the period less direct costs attributable to those homes divided by the number of homes sold during the period. Specifically, direct costs include, with respect to each home sold during the period (1) home acquisition and renovation costs, which in turn include certain labor costs directly associated with these activities; (2) holding and selling costs; and (3) interest costs incurred.
Included in direct holding and interest expense amounts for the periods presented are holding and interest costs recorded as period expenses in prior periods associated with homes sold in the current period, which are not calculated in accordance with, or as an alternative for, GAAP and should not be considered in isolation or as a substitute for results reported under GAAP. Excluded from certain of these direct cost amounts are costs recorded in the current period related to homes that remain in inventory at the end of the period, as shown in the tables below. We make these period adjustments because we believe presenting Average Return on Homes Sold After Interest Expense in this manner provides a focused view on a subset of our assets - homes sold during the period - and reflecting costs associated with those homes sold from the time we acquire to the time we sell the home, which may be useful to investors.





Average Return on Homes Sold After Interest Expense is intended to illustrate the performance of homes sold during the period and is not intended to be a segment or company performance metric. Average Return on Homes Sold After Interest Expense is a supplemental measure of operating performance for a subset of assets and has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Average Return on Homes Sold After Interest Expense does not reflect capital expenditure requirements for such replacements or for new capital expenditure requirements;
Average Return on Homes Sold After Interest Expense does not consider the potentially dilutive impact of share-based compensation;
Average Return on Homes Sold After Interest Expense does not include period costs that were not eligible for inventory capitalization associated with homes held in inventory at the end of the period;
Average Return on Homes Sold After Interest Expense does not reflect indirect expenses included in cost of revenue, sales and marketing, technology and development, or general and administrative expenses, some of which are recurring cash expenditures necessary to operate the business; and
Average Return on Homes Sold After Interest Expense does not reflect income taxes.

On a GAAP basis, Homes segment average gross profit per home was $11,420 for the three months ended September 30, 2019.

The following table presents the total return on homes sold after interest expense and the Average Return on Homes Sold After Interest Expense for the period presented (in thousands, except average per home amounts, unaudited):
 
 
 
Three Months Ended
September 30, 2019
 
 
 
Total
 
Average
Per Home
Homes sold
 
 
1,211

 
 
Homes revenue
 
 
$
384,626

 
$
317,610

Operating costs:
 
 
 
 
 
Home acquisition costs (1)
 
 
347,844

 
287,237

Renovation costs (1)
 
 
15,449

 
12,757

Holding costs (1)(2)
 
 
4,634

 
3,827

Selling costs
 
 
16,835

 
13,902

Total operating costs
 
 
384,762

 
317,723

Interest expense (1)(2)
 
 
5,708

 
4,713

Return on homes sold after interest expense
 
 
$
(5,844
)
 
$
(4,826
)
(1) Amount excludes expenses incurred during the period that are not related to homes sold during the period.
(2) Holding costs and interest expense include $1.8 million and $2.9 million, respectively, of costs incurred in prior periods associated with homes sold during the current period.






The calculation of Average Return on Homes Sold After Interest Expense includes only those expenses directly attributed to the homes sold during the period. To arrive at return on homes sold after interest expense, the Company deducts from Homes segment gross profit (1) holding costs incurred in the current period and prior periods for homes sold during the period that are included in sales and marketing expense, (2) selling costs incurred in the current period for homes sold during the period that are included in sales and marketing expense and (3) interest expense incurred in the current and prior periods for homes sold during the period. The Company adds to Homes segment gross profit (1) inventory valuation adjustments recorded during the period associated with homes that remain in inventory at period end, net of inventory valuation adjustments recorded in prior periods related to homes sold in the current period, and indirect expenses included in cost of revenue and (2) share-based compensation expense and depreciation and amortization expense included in cost of revenue. The following table presents the calculation of Homes segment average gross profit per home and Average Return on Homes Sold After Interest Expense and a reconciliation of return on homes sold after interest expense to Homes segment gross profit (in thousands, except average per home amounts, unaudited):
Calculation of Average Gross Profit per Home
Three Months Ended
September 30, 2019
Homes segment revenue
$
384,626

Homes segment cost of revenue
370,796

Homes segment gross profit
$
13,830

Homes sold
1,211

Average gross profit per home
$
11,420

Reconciliation of Non-GAAP Measure to Nearest GAAP Measure
 
Homes segment gross profit
$
13,830

Holding costs included in sales and marketing (1)
(4,634
)
Selling costs included in sales and marketing (2)
(16,835
)
Interest expense (3)
(5,708
)
Inventory valuation adjustments and indirect expenses included in cost of revenue (4)
7,153

Share-based compensation expense and depreciation and amortization expense included in cost of revenue
350

Return on homes sold after interest expense
$
(5,844
)
Homes sold
1,211

Average return on homes sold after interest expense
$
(4,826
)
(1) Amount represents holding costs incurred related to homes sold in the current period that were not eligible for inventory capitalization and were therefore expensed as period costs in the current period and prior periods. These costs primarily include homeowners association dues, property taxes, insurance, utilities, and cleaning and maintenance costs incurred during the time a home is held for sale after the renovation period is complete. On a GAAP basis, the Company incurred a total of $7.7 million of holding costs included in sales and marketing expense for the period presented.
(2) Amount represents selling costs incurred related to homes sold in the current period that were not eligible for inventory capitalization and were therefore expensed as period costs in the current period. These costs primarily include agent commissions paid upon the sale of a home.
(3) Amount represents interest expense incurred related to homes sold in the current period that was not eligible for inventory capitalization and was therefore expensed as a period cost in the current period and prior periods.
(4) Amount includes inventory valuation adjustments recorded during the period associated with homes that remain in inventory at period end, net of inventory valuation adjustments recorded in prior periods related to homes sold in the current period, as well as corporate costs allocated to the Homes segment such as headcount expenses and hosting-related costs related to the operation of our website.






On a GAAP basis, Homes segment average gross profit per home was $11,645 for the nine months ended September 30, 2019.

The following table presents the total return on homes sold after interest expense and the Average Return on Homes Sold After Interest Expense for the period presented (in thousands, except average per home amounts, unaudited):
 
 
 
Nine Months Ended
September 30, 2019
 
 
 
Total
 
Average
Per Home
Homes sold
 
 
2,411

 
 
Homes revenue
 
 
$
762,022

 
$
316,061

Operating costs:
 
 
 
 
 
Home acquisition costs (1)
 
 
689,508

 
285,984

Renovation costs (1)
 
 
29,614

 
12,283

Holding costs (1)(2)
 
 
8,441

 
3,501

Selling costs
 
 
33,053

 
13,709

Total operating costs
 
 
760,616

 
315,477

Interest expense (1)(2)
 
 
10,895

 
4,519

Return on homes sold after interest expense
 
 
$
(9,489
)
 
$
(3,935
)
(1) Amount excludes expenses incurred during the period that are not related to homes sold during the period.
(2) Holding costs and interest expense include $0.9 million and $1.0 million, respectively, of costs incurred in prior periods associated with homes sold during the current period.






The following table presents the calculation of Homes segment average gross profit per home and Average Return on Homes Sold After Interest Expense and a reconciliation of return on homes sold after interest expense to Homes segment gross profit (in thousands, except average per home amounts, unaudited):
Calculation of Average Gross Profit per Home
Nine Months Ended
September 30, 2019
Homes segment revenue
$
762,022

Homes segment cost of revenue
733,947

Homes segment gross profit
$
28,075

Homes sold
2,411

Average gross profit per home
$
11,645

Reconciliation of Non-GAAP Measure to Nearest GAAP Measure
 
Homes segment gross profit
$
28,075

Holding costs included in sales and marketing (1)
(8,441
)
Selling costs included in sales and marketing (2)
(33,053
)
Interest expense (3)
(10,895
)
Inventory valuation adjustments and indirect expenses included in cost of revenue (4)
14,376

Share-based compensation expense and depreciation and amortization expense included in cost of revenue
449

Return on homes sold after interest expense
$
(9,489
)
Homes sold
2,411

Average return on homes sold after interest expense
$
(3,935
)
(1) Amount represents holding costs incurred related to homes sold in the current period that were not eligible for inventory capitalization and were therefore expensed as period costs in the current period and prior periods. These costs primarily include homeowners association dues, property taxes, insurance, utilities, and cleaning and maintenance costs incurred during the time a home is held for sale after the renovation period is complete. On a GAAP basis, the Company incurred a total of $14.3 million of holding costs included in sales and marketing expense for the period presented.
(2) Amount represents selling costs incurred related to homes sold in the current period that were not eligible for inventory capitalization and were therefore expensed as period costs in the current period. These costs primarily include agent commissions paid upon the sale of a home.
(3) Amount represents interest expense incurred related to homes sold in the current period that was not eligible for inventory capitalization and was therefore expensed as a period cost in the current period and prior periods.
(4) Amount includes inventory valuation adjustments recorded during the period associated with homes that remain in inventory at period end, net of inventory valuation adjustments recorded in prior periods related to homes sold in the current period, as well as corporate costs allocated to the Homes segment such as headcount expenses and hosting-related costs related to the operation of our website.




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    Dear Fellow Shareholders:  We’re pleased to report our third quarter results that reflect our focus on  execution as we work to transform the real estate transaction to deliver a  seamless, integrated experience for our customers.     We are making traction in evolving Zillow from the 1.0 category leader, where  people turn to “search and find” real estate data and connect with trusted  professionals, to Zillow 2.0, where we leverage our core business to help people  buy, sell, rent and borrow through advanced technology and streamlined  processes and services.      Our results demonstrate improved performance in our Premier Agent business,  great progress in our Homes segment, and effective cost discipline across  segments as we continue to lay the foundation for achieving our long-term  targets.    Q3 & Recent Highlights:    ● Total Q3 consolidated revenue more than doubled year over year to a  record $745.2 million, exceeding the high end of our outlook.  ● Traffic to Zillow Group mobile apps and websites reached an all-time high  with average monthly unique users up 5% to 195.6 million. Visits  exceeded 2.1 billion, up 11% year over year.  ● IMT segment revenue and Adjusted EBITDA both exceeded the high end  of our outlook, and IMT segment margin improved over Q3 2018,  reflecting focused cost control and continued operating leverage from  our scale and leadership.    ● Premier Agent revenue grew year over year and exceeded the high end  of outlook.   ● Homes segment revenue and Adjusted EBITDA both exceeded our  outlook.    ● Zillow Offers is now available in 21 markets, adding a record eight  markets in Q3. During the quarter, we sold 1,211 homes and purchased  2,291 homes, ending the quarter with 2,822 homes on our balance sheet.   ● We ended the quarter with a strong cash position following our  convertible debt offering in September, and we bolstered our operational  liquidity by closing an additional non-recourse credit facility in October.        2 | Q3.2019    ​ ​ ​ ​ ​


 
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Third Quarter 2019 Results      Consolidated Q3 revenue was $745.2 million, driven by continued growth in our  Homes segment and improved performance in our Premier Agent business.  GAAP net loss for the quarter was $64.6 million, or 9% of revenue, which was a  sequential improvement over Q2. Consolidated Q3 Adjusted EBITDA exceeded  the high end of our outlook at $15.8 million, or 2% of revenue1, driven by  increased operating leverage.  INTERNET, MEDIA & TECHNOLOGY SEGMENT RESULTS    Internet, Media & Technology (“IMT”) segment revenue increased 7% year over  year to $335.3 million in Q3, exceeding the high end of our outlook. The growth  was fueled by Premier Agent retention trends that have normalized over the  course of this year. IMT segment GAAP income before income taxes was $42.1  million, or 13% of segment revenue for Q3 2019, and IMT segment GAAP income  before income taxes was $6.3 million, or 2% of segment revenue for Q3 2018,  representing more than one thousand basis points of margin expansion.    IMT segment Adjusted EBITDA was $91.1 million, or 27% of segment revenue,  marking nearly 320 basis points of margin improvement over Q3 2018. Focused  cost management and increased operating leverage combined with solid  Premier Agent revenue performance resulted in IMT segment Adjusted EBITDA  approximately $10 million above the high end of our outlook range.     IMT segment GAAP income before income taxes was $43.8 million, or 5% of  segment revenue for the nine months ended September 30, 2019, and IMT  segment GAAP loss before income taxes was $0.2 million for the nine months  ended September 30, 2018, or less than 1% of segment revenue, representing  margin expansion of 460 basis points. The increase in IMT segment GAAP  income before income taxes is not meaningful on a year over year percentage  basis.     For the nine months ended September 30, 2019, we expanded IMT segment  Adjusted EBITDA margin by 240 basis points and grew IMT segment Adjusted  EBITDA by 19% year over year.   1 Adjusted EBITDA and segment-level Adjusted EBITDA are non-GAAP financial measures; they are not calculated or  pr​ esented in accordance with U.S. generally accepted accounting principles, or GAAP. Please see the below sections  “Use of Non-GAAP Financial Measures” and “Adjusted EBITDA” for more information about our presentation of  Adjusted EBITDA and segment-level Adjusted EBITDA, including a reconciliation to the most directly comparable GAAP  financial measure, which is net loss on a consolidated basis and income or loss before income taxes for each  segment, for the relevant period.   3 | Q3.2019    ​ ​ ​ ​ ​


 
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    1 ​ IMT segment Adjusted EBITDA is a non-GAAP financial measure; it is not calculated or presented in accordance with  GAAP. Please see the below sections “Use of Non-GAAP Financial Measures” and “Adjusted EBITDA” for more  information about our presentation of IMT segment Adjusted EBITDA, including a reconciliation to the most directly  comparable GAAP financial measure, which is loss before income taxes for the IMT segment, and a calculation of IMT  Segment Adjusted EBITDA Margin and year-over-year growth.  Premier Agent  Our Premier Agent business delivered solid results in Q3. Retention rose year  over year, and both customer and agent satisfaction has improved because of  the mechanisms we have put in place over the last year. Demand for leads  remained strong, contributing to $240.7 million in Premier Agent revenue, an  increase of 3% year over year. Excluding the impact of Flex test markets, Q3  Premier Agent revenue grew 5% year over year. This is reflected in the chart on  the next page, which presents a "same-store sales" view of Premier Agent  market-based pricing (“MBP”) monthly recurring revenue (“MRR”) year-over-year  growth as of the end of each quarter. This view adjusts for the markets that  have already transitioned or will transition to the Flex pricing model by the end  of 2019 and demonstrates the reacceleration of core “same-store” MBP MRR in  Q3. We expect that this favorable trend will continue in Q4.    4 | Q3.2019    ​ ​ ​ ​ ​


 
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    As a reminder, in Flex, an agent pays Zillow a “success fee” only after they close a  deal with a Zillow lead. With the transition of Phoenix and Atlanta in Q4,  combined with the four markets in Connecticut and Colorado that converted  earlier this year, we estimate these Flex tests represent approximately 5% of  total Premier Agent MRR as we exit 2019.    At this time, we do not have any additional markets scheduled for conversion to  Flex. While we believe the Flex pricing model can ultimately deliver better  experiences and results than our MBP lead-generation model because our  incentives are aligned with our agent partners to best serve our shared  customers and close more deals, we require more time to validate our financial  assumptions. Should we decide to roll out Flex to additional markets, we will be  transparent with our shareholders about the geographies we’re targeting, the  timelines for each, and the revenue trends we expect compared to our MBP  model based on the performance of our tests. Regardless of the Premier Agent  model, our primary success measures remain the same. We are focused on  customer satisfaction, revenue and profit yield per lead.  The health and strength of our Premier Agent business is foundational to the  success of Zillow 2.0. As we expand our services down the funnel to the  transaction level, we expect a large portion of our customers will continue to  prefer the assistance of a Zillow Premier Agent. By partnering with the most  productive, customer-service-focused agents, we believe we will deliver high  value to our customers, and to our shareholders.    Rentals  Rentals revenue grew 19% year over year to $44.4 million. We continue to  innovate and build tools that move us closer to the rental transaction and are  pleased with our continued execution within this marketplace.   Other Revenue  Other revenue, which includes new construction, display and other advertising  and business technology solutions for real estate professionals, grew 15% year  over year to $50.2 million.     5 | Q3.2019    ​ ​ ​ ​ ​


 
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HOMES SEGMENT RESULTS    We continue to see strong demand in our Homes segment. Our Zillow Offers  business​ allows consumers to explore simpler and easier alternatives to buy and  sell homes. Homes segment revenue in Q3 was $384.6 million, a 55% sequential  increase from Q2, exceeding the high end of our outlook. As a reminder of how  fast our Zillow Offers business has grown, in Q3 of last year we reported just  $11.0 million in Homes segment revenue.      During Q3, we purchased 2,291 homes, sold 1,211 homes and ended the  quarter with 2,822 homes on our balance sheet. More than 80,000 homeowners  requested an offer from Zillow in Q3. We continue to attract the vast majority of  our customers through our Zillow-owned and -earned channels, including  through our mobile apps and website, news articles, social media and word of  mouth.     Zillow Offers now operates in 21 markets nationally. Q3 was our most aggressive  quarter for market expansion to date, in which we opened eight new markets, or  roughly one every two weeks. In Q4, we plan to launch Zillow Offers in the Los  Angeles market, which is the second largest housing market in the U.S. with  about 2.5 million housing units. The service is already available in Riverside and  San Diego counties, and adding Los Angeles makes this new way of selling  available across a large portion of Southern California.            6 | Q3.2019    ​ ​ ​ ​ ​


 
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During Q3, Homes segment gross profit was $13.8 million, and average per  home gross profit was $11.4 thousand2. Average return on homes sold before  interest expense was within our expected range of plus or minus 200 basis  points. We remain comfortable with this range for the time being, as our  business is in the early stages of development. Once we achieve scale, however,  we expect to deliver an average return on homes sold before interest expense of  400 to 500 basis points per home, and to achieve a Homes segment Adjusted  EBITDA margin of 200 to 300 basis points. As a reminder, these estimates  exclude expected additional earnings from adjacent business lines, such as  mortgage origination.       While still very early, we are encouraged by the positive feedback from our Zillow    Offers customers and the demand we’re seeing for a more efficient, integrated    transaction experience. Click the link to the right to see Tim’s story of his recent    move in which he took advantage of Zillow Offers, Zillow Home Loans and a    Zillow Premier Agent.      ​Click here to see Tim’s story3    Third Quarter 2019 Homes Unit Economics Exhibit  Total    Average Per Home       Homes sold  1,211      Homes revenue  $384,626,000    $317,610  Operating costs:        Home acquisition costs*  347,844,000    287,237  Renovation costs*  15,449,000    12,757  Holding costs*, **  4,634,000    3,827  Selling costs  16,835,000    13,902  Total operating costs  384,762,000    317,723  Return on Homes Sold Before Interest Expense***  (136,000)    (113)  Interest expense​*, **  5,708,000    4,713  Return on Homes Sold After Interest Expense***  ($5,844,000)    ($4,826)    * Amount excludes expenses incurred during the period that are not related to homes sold during the period.  ** Holding costs and interest expense include $1.8 million and $2.9 million, respectively, of costs incurred in prior  quarters associated with homes sold in the third quarter of 2019.  *** Average Return on Homes Sold After Interest Expense and Average Return on Homes Sold Before Interest  Expense are non-GAAP financial measures; they are not calculated or presented in accordance with U.S. generally  accepted accounting principles, or GAAP. Please see the below sections “Use of Non-GAAP Financial Measures” and  “Non-GAAP Average Return on Homes Sold Before Interest Expense” for more information about our presentation of  Average Return on Homes Sold After Interest Expense and Average Return on Homes Sold Before Interest Expense,  including reconciliation to the most directly comparable GAAP financial measure, which is gross profit for the Homes  segment and, on a per home basis, per home gross profit.    2 Gross profit for the Homes segment and, on a per home basis, per home gross profit, are the most directly  comparable GAAP financial measures to our presentation of return on homes sold after interest expense and Average  Return on Homes Sold After Interest Expense. Please see the below sections “Use of Non-GAAP Financial Measures”  and “Non-GAAP Average Return on Homes Sold Before Interest Expense” for more information.  3 h​ ttps://www.zillowgroup.com/news/zillow-offers-seller-stories-black/    7 | Q3.2019    ​ ​ ​ ​ ​


 
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MORTGAGES SEGMENT RESULTS    Mortgages revenue for the third quarter was $25.3 million, an increase of 37%  year over year, primarily driven by our October 2018 acquisition of Zillow Home  Loans (formerly Mortgage Lenders of America), exceeding our Q3 outlook.    During the quarter, we were pleased to welcome Rian Furey as President of  Zillow Home Loans and SVP of Mortgages, and Libby Cooper as Vice President of  Strategy and Operations. Rian brings 20 years of direct consumer lending  operations and capital markets experience to the role, and he and Libby have hit  the ground running as they establish Zillow Home Loans as the payments  platform for our customers.  Third Quarter 2019 Financial Details    OPERATING EXPENSE SUMMARY    Total operating expenses increased 125% year over year to $793.7 million. The  increase was primarily due to the rapid growth in activity associated with the  purchase and sale of homes in our Zillow Offers business. Cost trends in IMT  were favorable and reflected our focus on improving operating leverage and  streamlining operations. The increases in our Mortgages segment expenses year  over year were primarily driven by the inclusion of and continued build out of  our mortgage origination business that we acquired in October 2018.   The following table presents certain of our costs and expenses by segment for  the periods presented (in thousands, unaudited):  BALANCE SHEET & CASH FLOW SUMMARY    We ended the quarter with more than $2.3 billion in cash and short-term  investments, including the nearly $1.1 billion in net proceeds after deducting  fees and expenses payable by Zillow ($935.1 million after deducting the costs of  related capped call transactions) we raised through the successful completion of  our previously announced convertible debt offerings in September.  In October, we also secured an additional non-recourse revolving credit facility  with up to $500 million in borrowing capacity to support the expansion of our  Zillow Offers business, bringing our total asset-backed, non-recourse credit  facility capacity to $1.5 billion. These credit facilities provide us the ability to  finance up to 85% of the lesser of the aggregate acquisition cost or the  aggregate market value of a property, using each home as collateral. We now    8 | Q3.2019    ​ ​ ​ ​ ​


 
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have approximately $900 million in undrawn lines of credit, bringing our total  maximum corporate liquidity to $3.3 billion. This provides us with strength on  our balance sheet and strategic flexibility.    OUTLOOK    The following table presents our outlook for the periods presented (in millions,  unaudited):      Zillow Group Outlook as of November 7, 2019     Three Months Ending  Year Ending  (in millions)    December 31, 2019   December 31, 2019  Revenue:        IMT segment:        Premier Agent  $225 to $229    $915 to $919  Total IMT segment revenue  $308 to $315    $1,265 to $1,272  Homes segment  $465 to $490    $1,227 to $1,252  Mortgages segment  $17 to $20    $97 to $100  Total revenue  $790 to $825    $2,589 to $2,624  Adjusted EBITDA*:        IMT segment  $68 to $73    $284 to $289  Homes segment  ($95) to ($85)    ($254) to ($244)  Mortgages segment  ($16) to ($13)    ($31) to ($28)  Total Adjusted EBITDA  ($43) to ($25)    ($1) to $17          Weighted average shares outstanding — basic  207.0 to 209.0    205.5 to 207.5  Weighted average shares outstanding — diluted  212.0 to 214.0    210.0 to 212.0    * Zillow Group has not provided a quantitative reconciliation of forecasted GAAP net loss to forecasted total Adjusted  EBITDA or of forecasted GAAP income (loss) before income taxes to forecasted segment Adjusted EBITDA within this  communication because the company is unable, without making unreasonable efforts, to calculate certain reconciling  items with confidence. These items include, but are not limited to: income taxes which are directly impacted by  unpredictable fluctuations in the market price of the company’s capital stock; depreciation and amortization expense  from new acquisitions; impairments of assets; and acquisition-related costs. These items, which could materially  affect the computation of forward-looking GAAP net loss and income (loss) before income taxes, are inherently  uncertain and depend on various factors, many of which are outside of Zillow Group’s control. For more information  regarding the non-GAAP financial measure discussed in this communication, please see “Use of Non-GAAP Financial  Measures” below.    Internet, Media & Technology Segment  In Q4, we expect IMT revenue growth of 4% year over year at the midpoint of the  outlook range and an Adjusted EBITDA margin of 23% at the midpoint. We have  increased our outlook for full-year IMT revenue and Adjusted EBITDA by $8.5  million and $9.0 million, respectively, at the midpoint of the outlook range, due  to our outperformance in Q3 and the continued, favorable trends we are seeing  in agent retention and productivity thus far in Q4. In Q4, Premier Agent revenue  is expected to be between $225 and $229 million, which is an increase of 3%  year over year at the midpoint. And, full year Premier Agent revenue is raised    9 | Q3.2019    ​ ​ ​ ​ ​


 
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and tightened to between $915 and $919 million, representing a 2% increase  year over year at the midpoint.     Homes Segment  In Q4, we expect Homes revenue to be between $465 and $490 million. This  forecast reflects the sequential uplift from new market openings (i.e., full-quarter  impact of the 8 new markets launched in Q3, and the partial quarter impact of  the one additional market we expect to launch in Q4), partially offset by seasonal  slowing in our home acquisition rate, consistent with seasonal market trends.     Mortgages Segment  In Q4, we expect Mortgages revenue to decrease year over year, as we annualize  the acquisition of Mortgage Lenders of America that closed on October 31, 2018  and continue to invest in our mortgage technology platform. Due to Q3’s  stronger than anticipated results, however, we now expect full-year revenue to  be at the high end of our previous guidance range and Adjusted EBITDA to be  above the high end of our previous guidance ranges.  HOUSING MARKET UPDATE    The typical U.S. home is worth $231,000, up nearly 5% from a year ago,  according to Zillow’s September housing market report. After years of  unsustainable, double-digit growth, the market appears to be entering a period  of stabilization, rather than a true slowdown.     While the rate of annual home value growth has slowed over the last year, the  rate remains well above the historic average in most major metros, fueled by  strong buyer demand and low mortgage rates. Inventory remains constrained.  Even accounting for seasonality, there are 6.4% fewer homes for sale than there  were at this time last year.     Mortgage rates continue to hover near record lows at around 3.7% for a 30-year  fixed-rate mortgage, keeping pressure on the lower end of the market.  Meanwhile, rent growth continues to be stable across the U.S., up 2.2%  nationally to $1,597.  SUMMARY    Consumer demand for a seamless, tech-enabled real estate transaction is  growing steadily, and we believe Zillow Group has many competitive advantages  to lead the market to Real Estate 2.0. This starts with our large and stable  Premier Agent business that is the foundation of our emerging businesses  fueled by a large audience, high brand awareness and trust, best-in-class data  intelligence and technology systems, strong industry partnerships and critical  operational expertise.      By moving further down funnel, our total addressable market has expanded  from $18 billion in real estate advertising4 to $1.8 trillion in real estate  4 Borrell Associates 2019; Total spent on online and offline residential real estate advertising.    10 | Q3.2019    ​ ​ ​ ​ ​


 
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transactions5 - and this excludes the numerous adjacent market opportunities  that surround every home transaction.     We remain energized by the opportunity in front of us to transform not only our  company, but our industry as well. This expedition will take years, not months, to  realize our full potential. With every quarter, we gain valuable experience that  enables us to refine our model, which we believe will drive improved margins  and returns over time and ultimately deliver l​ ong-term value for our customers,  partners, employees and shareholders.     We remain committed to providing you with clarity and insights as we progress  along this journey. As always, we appreciate you joining us. We have every  confidence it will be worth it.    Sincerely,      Rich Barton, Co-founder & CEO   Allen Parker, CFO      Conference Call and Webcast   Zillow Group Co-founder & CEO Rich Barton and CFO Allen Parker will host a live  conference call and webcast to discuss the results today at 2 p.m. Pacific Time (5  p.m. Eastern Time).   A link to the live webcast and recorded replay of the conference call will be  available on the investor relations section of Zillow Group’s website:  https://investors.zillowgroup.com/financials/quarterly-results/default.aspx​. The  live call may also be accessed via phone (866) 270-1533 toll-free domestically  and at (412) 317-0797 internationally.   * * *    Zillow Group’s third quarter 2019 supplemental financial results tables are  available on the investor relations section of the Zillow Group website at  https://investors.zillowgroup.com/financials/quarterly-results/default.aspx​. They  are also included as Exhibit 99.2 to its Current Report on Form 8-K as furnished  to the SEC on November 7, 2019, which is available on the investor relations  section of the Zillow Group website at  https://investors.zillowgroup.com/financials/sec-filings/default.aspx​ and the  SEC’s website at www.sec.gov.    Forward-Looking Statements  This communication contains forward-looking statements within the meaning of Section 27A of the  Securities  Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which involve risks  and uncertainties, including, without limitation, statements regarding our long-term business and  financial  targets;  the  performance  of  the  Homes,  Mortgages,  and  IMT  segments  in  2019  and  5 Represents estimated aggregate transaction value of existing and new homes sold in 2019. US Census Bureau and  National Association of REALTORS ® 2019.    11 | Q3.2019    ​ ​ ​ ​ ​


 
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beyond;  the  current  and  future  health  and stability of the residential housing market, as well as  statements regarding our business outlook for 2019, strategic priorities, and operational plans for  2019  and  2020​.  Statements  containing  words  such  as  “may,”  “believe,”  “anticipate,”  “expect,”  “intend,”  “plan,”  “project,”  “will,”  “projections,”  “continue,”  “estimate,”  “outlook,”  “guidance,”  or  similar expressions constitute forward-looking statements. Forward-looking statements are made  based  on  assumptions  as  of  November  7,  2019,  and  although  we  believe  the  expectations  reflected  in  the  forward-looking  statements  are  reasonable,  we  cannot  guarantee these results.  Differences  in  Zillow  Group’s  actual  results  from  those  described  in  these  forward-looking  statements may result from actions taken by Zillow Group, as well as from risks and uncertainties  beyond Zillow Group’s control. Factors that may contribute to such differences include, but are not  limited  to,  Zillow  Group’s  ability  to  execute  on  strategy;  Zillow  Group’s  ability  to  maintain  and  effectively  manage  an  adequate  rate  of  growth;  Zillow  Group’s  ability  to  innovate  and  provide  products and services that are attractive to its users and advertisers; Zillow Group’s investment of  resources  to  pursue  strategies  that  may  not  prove  effective;  Zillow  Group’s  ability  to  compete  successfully against existing or future competitors; the impact of the real estate industry on Zillow  Group’s business; the impact of pending legal proceedings described in Zillow Group’s filings with  the  Securities  and  Exchange  Commission,  or  SEC;  Zillow  Group’s  ability to successfully integrate  and  realize  the  benefits of its past or future strategic acquisitions or investments; Zillow Group’s  ability  to  maintain  or  establish  relationships  with  listings  and  data  providers;  the  reliable  performance  of  Zillow Group’s network infrastructure and content delivery processes; and Zillow  Group’s  ability  to  protect  its  intellectual  property.  The  foregoing list of risks and uncertainties is  illustrative  but  not  exhaustive.  For  more  information  about  potential  factors  that  could  affect  Zillow  Group’s  business  and financial results, please review the “Risk Factors” described in Zillow  Group’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC and  in Zillow Group’s other filings with the SEC. Except as may be required by law, Zillow Group does  not  intend,  and  undertakes  no  duty,  to  update  this  information  to  reflect  future  events  or  circumstances.    Use of Non-GAAP Financial Measures  This communication includes references to Adjusted EBITDA (on both a consolidated basis and for  each segment, and including forecasted Adjusted EBITDA and EBITDA margin), average return on  homes  sold  before  interest  expense  and  Average Return on Homes Sold After Interest Expense,  which  are  non-GAAP  financial  measures  not  prepared  in  conformity  with  accounting  principles  generally  accepted  in  the  United  States  (“GAAP”).  These  non-GAAP  financial  measures  are  not  prepared under a comprehensive set of accounting rules and, therefore, should only be reviewed  alongside results reported under GAAP.      Adjusted EBITDA   To  provide  investors  with additional information regarding our financial results, this shareholder  letter includes references to Adjusted EBITDA (on both a consolidated basis and for each segment,  and  including  forecasted  Adjusted  EBITDA  and  EBITDA  margin),  which  is  a  non-GAAP  financial  measure.  We have provided a reconciliation of Adjusted EBITDA to the most directly comparable  GAAP financial measure, which is net loss on a consolidated basis and income (loss) before income  taxes for each segment, within this shareholder letter.    Adjusted  EBITDA  is  a  key  metric  used  by  our  management  and  board  of  directors  to  measure  operating performance and trends, and to prepare and approve our annual budget. The exclusion  of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons  on a period-to-period basis.     Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in  isolation  or  as  a  substitute  for  analysis  of  our  results  as  reported  under  GAAP.  Some  of  these  limitations are:   ● Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital  expenditures or contractual commitments;   ● Adjusted  EBITDA  does  not  reflect  changes  in,  or  cash  requirements  for,  our  working  capital needs;   ● Adjusted  EBITDA  does  not  consider  the  potentially  dilutive  impact  of  share-based  compensation;     12 | Q3.2019    ​ ​ ​ ​ ​


 
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● Although  depreciation  and  amortization  are  non-cash  charges,  the  assets  being  depreciated  and  amortized may have to be replaced in the future, and Adjusted EBITDA  does not reflect cash capital expenditure requirements for such replacements or for new  capital expenditure requirements;   ● Adjusted EBITDA does not reflect acquisition-related costs;   ● Adjusted EBITDA does not reflect interest expense or other income;   ● Adjusted EBITDA does not reflect income taxes; and   ● Other  companies,  including  companies  in  our  own  industry,  may  calculate  Adjusted  EBITDA differently than we do, limiting its usefulness as a comparative measure.     Because  of  these  limitations,  you  should  consider  Adjusted  EBITDA  alongside  other  financial  performance  measures,  including  various  cash  flow  metrics,  net  loss  and  income  (loss)  before  income taxes and our other GAAP results. You should not consider Adjusted EBITDA in isolation or  as a substitute for analysis of our results as reported under GAAP.          13 | Q3.2019    ​ ​ ​ ​ ​


 
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The  following  table  presents  Adjusted  EBITDA  along  with  the  most  directly  comparable  GAAP  financial measure, which is net loss on a consolidated basis and income (loss) before income taxes  for each segment along with the calculation of Adjusted EBITDA margin and associated year over  year growth rates and the most directly comparable GAAP financial measure and related year over  growth  rates,  which  is  net  loss  margin on a consolidated basis and income (loss) before income  taxes margin for each segment, for the periods presented (in thousands, unaudited):      1 ​ Other revenue primarily includes revenue generated by new construction and display, as well as revenue from the  sale of various other marketing and business products and services to real estate professionals.  2 ​ IMT segment income before income taxes margin for the three months ended September 30, 2019 of 12.5% less the  comparable 2018 period margin of 2.0%, results in a 1,050 basis point IMT segment income before income taxes  margin expansion for the three months ended September 30, 2019. IMT segment Adjusted EBITDA margin for the  three months ended September 30, 2019 of 27.2% less the comparable 2018 period margin of 24.0%, results in a 320  basis point IMT segment Adjusted EBITDA margin expansion for the three months ended September 30, 2019. IMT  segment income before income taxes margin for the nine months ended September 30, 2019 of 4.6% less the  comparable 2018 period margin of 0.0%, results in a 460 basis point IMT segment income before income taxes  margin expansion for the nine months ended September 30, 2019. IMT segment Adjusted EBITDA margin for the nine  months ended September 30, 2019 of 22.6% less the comparable 2018 period margin of 20.2%, results in a 240 basis  point IMT segment Adjusted EBITDA margin expansion for the nine months ended September 30, 2019.            14 | Q3.2019    ​ ​ ​ ​ ​


 
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The following tables set forth a reconciliation of Adjusted EBITDA to the most directly comparable  GAAP financial measure, which is net loss on a consolidated basis and income (loss) before income  taxes for each segment, for each of the periods presented (in thousands, unaudited):                   15 | Q3.2019    ​ ​ ​ ​ ​


 
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  1 We use income (loss) before income taxes as our profitability measure in making operating decisions and assessing  the performance of our segments, therefore, net loss and income tax benefit 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 interest income earned on  our short-term investments included in Other income and interest costs on our   convertible senior notes included in Interest expense.    Non-GAAP Average Return on Homes Sold After Interest Expense  To  provide  investors  with additional information regarding our Homes segment financial results,  this Exhibit includes a calculation of Average Return on Homes Sold After Interest Expense, which  is a non-GAAP financial measure. We have provided a reconciliation of Average Return on Homes  Sold  After  Interest  Expense  to  the  most  directly  comparable  GAAP  financial  measure,  which  is  average gross profit per home for the Homes segment.    We  believe  that  Average  Return  on  Homes  Sold  After  Interest  Expense  is  a  useful  financial  measure  to  investors  as  it  is  one  of  the  primary  measures  used  by  management  in  making  investment  decisions,  measuring  unit  level economics and evaluating operating performance for  the Zillow Offers business. The measure is intended to convey the unit level economics of homes  sold  during  the  period  by  presenting  the  average  revenue  and  associated  expenses  directly  attributed  to  the  homes  sold.  We  believe  this  average  per  unit  measure  facilitates  meaningful  period over period comparisons notwithstanding variability in the number of homes sold during a  period  and  indicates  ability  to  generate  average  returns  on  assets  sold  after  considering  home  purchase costs, renovation costs, holding costs and selling costs.     We calculate the average return on homes sold after interest expense as revenue associated with  homes sold during the period less direct costs attributable to those homes divided by the number  of homes sold during the period. Specifically, direct costs include, with respect to each home sold  during  the  period  (1)  home  acquisition  and renovation costs, which in turn include certain labor  costs  directly  associated  with  these  activities;  (2)  holding and selling costs; and (3) interest costs  incurred.     Included  in  direct  holding  and  interest  expense  amounts  for  the  periods presented are holding  and interest costs recorded as period expenses in prior periods associated with homes sold in the  current  period,  which  are  not  calculated  in  accordance  with,  or  as  an alternative for, GAAP and  should not be considered in isolation or as a substitute for results reported under GAAP. Excluded  from  certain  of  these  direct  cost  amounts  are  costs  recorded  in  the  current  period  related  to  homes that remain in inventory at the end of the period, as shown in the tables below. We make  these  period  adjustments  because  we  believe  presenting  Average  Return  on  Homes  Sold  After  Interest  Expense  in  this manner provides a focused view on a subset of our assets - homes sold  during  the  period  -  and  reflecting  costs  associated  with  those  homes  sold  from  the  time  we  acquire