UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x ☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2018~~2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36853

ZILLOW GROUP, INC.

(Exact name of registrant as specified in its charter)



Washington		47-1645716
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1301 Second Avenue, Floor 31,

Seattle, Washington98101

(Address of principal executive offices) (Zip Code)

(206) 470-7000

@ZillowGroup

(Registrant’s telephone number, including area code)

_____________________________________________________

Securities registered pursuant to Section 12(b) of the Act:



~~1301 Second Avenue, Floor 31, Seattle, Washington~~Title of each class	Trading Symbol(s)	~~98101~~Name of each exchange on which registered
~~(Address of principal executive offices)~~Class A Common Stock, par value $0.0001 per share	ZG	~~(Zip Code)~~The Nasdaq Global Select Market
Class C Capital Stock, par value $0.0001 per share	Z	The Nasdaq Global Select Market

~~(206) 470-7000~~

~~@ZillowGroup~~

~~(Registrant’s telephone number, including area code)~~

~~_____________________________________________________~~

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 x☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes x☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x☒	Accelerated filer	☐

Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~	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 x☒

As of July 31, ~~2018, 57,853,035~~2019, 58,486,480 shares of Class A common stock, 6,217,447 shares of Class B common stock, and ~~138,159,516~~141,903,904 shares of Class C capital stock were outstanding.

ZILLOW GROUP, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended June 30, ~~2018~~2019

TABLE OF CONTENTS

Table of Contents

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 ~~II,~~I, Item 1A (Risk Factors) in our ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarterly period~~year ended ~~March~~December 31, 2018. 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.

WHERE YOU CAN FIND MORE INFORMATION

Our filings with the Securities and Exchange Commission, or 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 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 (http://investors.zillowgroup.com)

Zillow Group Investor Relations Blog (http://www.zillowgroup.com/ir-blog)

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. 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.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data, unaudited)


	June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	431,045		$	352,095		$	766,698		$	651,058
Short-term investments	468,541			410,444			673,029			903,867
Accounts receivable, net of allowance for doubtful accounts of $4,241 and $5,341 at June 30, 2018 and December 31, 2017, respectively	64,083			54,396
Accounts receivable, net of allowance for doubtful accounts of $4,809 and $4,838 at June 30, 2019 and December 31, 2018, respectively							82,261			66,083
Mortgage loans held for sale							38,653			35,409
Inventory	5,666			—			552,823			162,829
Prepaid expenses and other current assets	38,169			24,590			62,062			61,067
Restricted cash							43,882			12,385
Total current assets	1,007,504			841,525			2,219,408			1,892,698
Contract cost assets	43,384			—			46,271			45,819
Property and equipment, net	118,242			112,271			145,932			135,172
Right of use assets							210,080			—
Goodwill	1,931,076			1,931,076			1,984,907			1,984,907
Intangible assets, net	299,228			319,711			202,824			215,904
Other assets	26,739			25,934			16,498			16,616
Total assets	$	3,426,173		$	3,230,517		$	4,825,920		$	4,291,116
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	5,928		$	3,587		$	8,028		$	7,471
Accrued expenses and other current liabilities	55,360			61,373			68,520			63,101
Accrued compensation and benefits	23,418			19,109			32,001			31,388
Revolving credit facilities							409,799			116,700
Warehouse lines of credit							30,057			33,018
Deferred revenue	35,920			31,918			37,080			34,080
Deferred rent, current portion	2,622			2,400			—			1,740
Lease liabilities, current portion							18,794			—
Total current liabilities	123,248			118,387			604,279			287,498
Deferred rent, net of current portion	18,263			21,330			—			19,945
Lease liabilities, net of current portion							211,593			—
Long-term debt	394,420			385,416			716,819			699,020
Deferred tax liabilities and other long-term liabilities	36,561			44,561			15,123			17,474
Total liabilities	572,492			569,694			1,547,814			1,023,937
Commitments and contingencies (Note 17)
Shareholders’ equity:
Preferred stock, $0.0001 par value; 30,000,000 shares authorized; no shares issued and outstanding	—			—			—			—
Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized; 57,821,610 and 56,629,103 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively	6			6
Class B common stock, $0.0001 par value; 15,000,000 shares authorized; 6,217,447 shares issued and outstanding as of June 30, 2018 and December 31, 2017	1			1
Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 131,410,047 and 127,268,598 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively	13			13
Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized; 58,474,815 and 58,051,448 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively							6			6
Class B common stock, $0.0001 par value; 15,000,000 shares authorized; 6,217,447 shares issued and outstanding as of June 30, 2019 and December 31, 2018							1			1
Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 141,821,374 and 139,635,370 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively							14			14
Additional paid-in capital	3,428,541			3,254,146			4,088,470			3,939,842
Accumulated other comprehensive loss	(1,275		)	(1,100		)
Accumulated other comprehensive income (loss)							896			(905		)
Accumulated deficit	(573,605		)	(592,243		)	(811,281		)	(671,779		)
Total shareholders’ equity	2,853,681			2,660,823			3,278,106			3,267,179
Total liabilities and shareholders’ equity	$	3,426,173		$	3,230,517		$	4,825,920		$	4,291,116

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenue:
IMT	$	325,246		$	266,850		$	625,125		$	512,625		$	323,669		$	305,941		$	621,941		$	586,797
Homes	—			—			—			—			248,924			—			377,396			—
Mortgages													26,985			19,305			54,345			38,328
Total revenue	325,246			266,850			625,125			512,625			599,578			325,246			1,053,682			625,125
Cost of revenue (exclusive of amortization) (1):
IMT	25,527			20,260			49,446			40,492			26,059			24,290			50,310			46,884
Homes	—			—			—			—			240,732			—			363,151			86
Mortgages													4,430			1,237			9,108			2,476
Total cost of revenue	25,527			20,260			49,446			40,492			271,221			25,527			422,569			49,446
Sales and marketing	147,727			131,218			285,018			237,158			187,433			147,727			349,020			285,018
Technology and development	100,376			78,541			194,309			151,409			120,330			100,376			228,100			194,309
General and administrative	60,579			53,346			116,652			98,812			82,839			60,579			178,613			116,652
Acquisition-related costs	632			43			659			148			—			632			—			659
Integration costs													293			—			645			—
Total costs and expenses	334,841			283,408			646,084			528,019			662,116			334,841			1,178,947			646,084
Loss from operations	(9,595		)	(16,558		)	(20,959		)	(15,394		)	(62,538		)	(9,595		)	(125,265		)	(20,959		)
Other income	3,089			1,610			5,535			2,563			9,458			3,089			18,626			5,535
Interest expense	(7,187		)	(6,897		)	(14,260		)	(13,620		)	(18,897		)	(7,187		)	(35,363		)	(14,260		)
Loss before income taxes	(13,693		)	(21,845		)	(29,684		)	(26,451		)	(71,977		)	(13,693		)	(142,002		)	(29,684		)
Income tax benefit	10,600			—			8,000			—			—			10,600			2,500			8,000
Net loss	$	(3,093	)	$	(21,845	)	$	(21,684	)	$	(26,451	)	$	(71,977	)	$	(3,093	)	$	(139,502	)	$	(21,684	)
Net loss per share — basic and diluted	$	(0.02	)	$	(0.12	)	$	(0.11	)	$	(0.14	)	$	(0.35	)	$	(0.02	)	$	(0.68	)	$	(0.11	)
Weighted-average shares outstanding — basic and diluted	194,155			185,439			192,807			184,305			205,754			194,155			205,137			192,807
____________________ (1) Amortization of website development costs and intangible assets included in technology and development	$	21,020		$	23,159		$	43,569		$	46,420		$	14,656		$	21,020		$	29,056		$	43,569

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Net loss	$	(3,093	)	$	(21,845	)	$	(21,684	)	$	(26,451	)	$	(71,977	)	$	(3,093	)	$	(139,502	)	$	(21,684	)
Other comprehensive income (loss):
Unrealized gains (losses) on investments	223			(177		)	(109		)	(202		)	751			223			1,895			(109		)
Currency translation adjustments	(44		)	—			(66		)	—			(52		)	(44		)	(94		)	(66		)
Total other comprehensive income (loss)	179			(177		)	(175		)	(202		)	699			179			1,801			(175		)
Comprehensive loss	$	(2,914	)	$	(22,022	)	$	(21,859	)	$	(26,653	)	$	(71,278	)	$	(2,914	)	$	(137,701	)	$	(21,859	)

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~SHAREHOLDERS’ EQUITY

(in thousands, except share data, unaudited)

Six Months Ended
June 30,
2018 2017
Operating activities
Net loss $ (21,684 ) $ (26,451 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 52,926
54,157
Share-based compensation expense 69,684
55,588
Amortization of contract cost assets 18,309
—
Amortization of discount and issuance costs on 2021 Notes 9,504
8,855
Deferred income taxes (8,000 ) —
Loss on disposal of property and equipment 2,106
2,024
Bad debt expense (352 ) 3,960
Deferred rent (2,845 ) 1,750
Amortization (accretion) of bond premium (discount) (504 ) 376
Changes in operating assets and liabilities:
Accounts receivable (9,335 ) (11,149 )
Inventory (5,666 ) —
Prepaid expenses and other assets (14,697 ) (5,845 )
Contract cost assets (21,371 ) —
Accounts payable 1,855
(1,714 )
Accrued expenses and other current liabilities (5,189 ) 1,203
Accrued compensation and benefits 4,309
503
Deferred revenue 4,002
1,635
Net cash provided by operating activities 73,052
84,892
Investing activities
Proceeds from maturities of investments 172,573
133,432
Purchases of investments (230,276 ) (193,604 )
Purchases of property and equipment (31,212 ) (31,608 )
Purchases of intangible assets (4,777 ) (6,784 )
Purchase of equity method investment —
(10,000 )
Proceeds from divestiture of a business —
579
Cash paid for acquisition, net —
(6,002 )
Net cash used in investing activities (93,692 ) (113,987 )
Financing activities
Proceeds from exercise of stock options 99,656
62,263
Value of equity awards withheld for tax liability (66 ) (295 )
Net cash provided by financing activities 99,590
61,968
Net increase in cash and cash equivalents during period 78,950
32,873
Cash and cash equivalents at beginning of period 352,095
243,592
Cash and cash equivalents at end of period $ 431,045
$ 276,465
Supplemental disclosures of cash flow information
Cash paid for interest $ 4,733
$ 4,458
Noncash transactions:
Capitalized share-based compensation $ 4,623
$ 5,289
Write-off of fully depreciated property and equipment $ 13,293
$ 7,552
Write-off of fully amortized intangible assets $ 10,797
$ 5,302



	Class A Common Stock, Class B Common Stock and Class C Capital Stock				Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Total Shareholders’ Equity

	Shares		Amount
Balance at April 1, 2019	205,130,332		$	21	$	4,022,218		$	(739,304	)	$	197	$	3,283,132
Issuance of common and capital stock upon exercise of stock options	814,062		—		19,433			—			—		19,433
Vesting of restricted stock units	569,260		—		—			—			—		—
Shares and value of restricted stock units withheld for tax liability	(18	)	—		(1		)	—			—		(1		)
Share-based compensation expense	—		—		46,820			—			—		46,820
Net loss	—		—		—			(71,977		)	—		(71,977		)
Other comprehensive income	—		—		—			—			699		699
Balance at June 30, 2019	206,513,636		$	21	$	4,088,470		$	(811,281	)	$	896	$	3,278,106



	Class A Common Stock, Class B Common Stock and Class C Capital Stock				Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity

	Shares		Amount
Balance at April 1, 2018	192,944,326		$	20	$	3,340,387		$	(570,512	)	$	(1,454	)	$	2,768,441
Issuance of common and capital stock upon exercise of stock options	2,065,545		—		46,747			—			—			46,747
Vesting of restricted stock units	439,944		—		—			—			—			—
Shares and value of restricted stock units withheld for tax liability	(711	)	—		(37		)	—			—			(37		)
Share-based compensation expense	—		—		41,444			—			—			41,444
Net loss	—		—		—			(3,093		)	—			(3,093		)
Other comprehensive income	—		—		—			—			179			179
Balance at June 30, 2018	195,449,104		$	20	$	3,428,541		$	(573,605	)	$	(1,275	)	$	2,853,681



	Class A Common Stock, Class B Common Stock and Class C Capital Stock				Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

	Shares		Amount
Balance at January 1, 2019	203,904,265		$	21	$	3,939,842		$	(671,779	)	$	(905	)	$	3,267,179
Issuance of common and capital stock upon exercise of stock options	1,543,850		—		32,997			—			—			32,997
Vesting of restricted stock units	1,065,607		—		—			—			—			—
Shares and value of restricted stock units withheld for tax liability	(86	)	—		(3		)	—			—			(3		)
Share-based compensation expense	—		—		115,634			—			—			115,634
Net loss	—		—		—			(139,502		)	—			(139,502		)
Other comprehensive income	—		—		—			—			1,801			1,801
Balance at June 30, 2019	206,513,636		$	21	$	4,088,470		$	(811,281	)	$	896		$	3,278,106



	Class A Common Stock, Class B Common Stock and Class C Capital Stock				Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity

	Shares		Amount
Balance at January 1, 2018	190,115,148		$	20	$	3,254,146		$	(592,243	)	$	(1,100	)	$	2,660,823
Cumulative-effect adjustment from adoption of guidance on revenue from contracts with customers	—		—		—			40,322			—			40,322
Issuance of common and capital stock upon exercise of stock options	4,479,759		—		99,653			—			—			99,653
Vesting of restricted stock units	834,788		—		—			—			—			—
Shares and value of restricted stock units withheld for tax liability	(1,318	)	—		(65		)	—			—			(65		)
Share-based compensation expense	—		—		74,307			—			—			74,307
Portion of conversion recorded in additional paid-in-capital in connection with partial conversion of convertible notes maturing in 2020	20,727		—		500			—			—			500
Net loss	—		—		—			(21,684		)	—			(21,684		)
Other comprehensive loss	—		—		—			—			(175		)	(175		)
Balance at June 30, 2018	195,449,104		$	20	$	3,428,541		$	(573,605	)	$	(1,275	)	$	2,853,681

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)



	Six Months Ended June 30,
	2019			2018
Operating activities
Net loss	$	(139,502	)	$	(21,684	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	41,728			52,926
Share-based compensation expense	109,756			69,684
Amortization of right of use assets	10,572			—
Amortization of contract cost assets	17,880			18,309
Amortization of discount and issuance costs on convertible notes maturing in 2023 and 2021	17,799			9,504
Deferred income taxes	(2,500		)	(8,000		)
Loss on disposal of property and equipment	3,878			2,106
Bad debt expense	706			(352		)
Deferred rent	—			(2,845		)
Accretion of bond discount	(3,695		)	(504		)
Changes in operating assets and liabilities:
Accounts receivable	(16,884		)	(9,335		)
Mortgage loans held for sale	(3,244		)	—
Inventory	(389,994		)	(5,666		)
Prepaid expenses and other assets	(2,015		)	(14,697		)
Lease liabilities	(11,946		)	—
Contract cost assets	(18,332		)	(21,371		)
Accounts payable	1,256			1,855
Accrued expenses and other current liabilities	6,952			(5,189		)
Accrued compensation and benefits	613			4,309
Deferred revenue	3,000			4,002
Other long-term liabilities	149			—
Net cash provided by (used in) operating activities	(373,823		)	73,052
Investing activities
Proceeds from maturities of investments	539,312			172,573
Purchases of investments	(302,891		)	(230,276		)
Purchases of property and equipment	(29,672		)	(31,212		)
Purchases of intangible assets	(8,927		)	(4,777		)
Net cash provided by (used in) investing activities	197,822			(93,692		)
Financing activities
Proceeds from borrowing on revolving credit facilities	293,099			—
Net repayments on warehouse lines of credit	(2,961		)	—
Proceeds from exercise of stock options	32,997			99,656
Value of equity awards withheld for tax liability	3			(66		)
Net cash provided by financing activities	323,138			99,590
Net increase in cash, cash equivalents and restricted cash during period	147,137			78,950
Cash, cash equivalents and restricted cash at beginning of period	663,443			352,095
Cash, cash equivalents and restricted cash at end of period	$	810,580		$	431,045
Supplemental disclosures of cash flow information
Cash paid for interest	$	16,616		$	4,733
Noncash transactions:
Capitalized share-based compensation	$	5,878		$	4,623
Write-off of fully depreciated property and equipment	$	9,867		$	13,293
Write-off of fully amortized intangible assets	$	3,311		$	10,797

See accompanying notes to condensed consolidated financial statements.

ZILLOW GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization and Description of Business

Zillow Group, Inc. ~~operates~~houses one of the largest ~~portfolio~~portfolios of real estate ~~and home-related~~ brands on mobile and the ~~web which focus on all stages of the home lifecycle: renting, buying, selling and financing.~~web. Zillow Group is committed to ~~empowering consumers with unparalleled~~leveraging its proprietary data, ~~inspiration~~technology and ~~knowledge around~~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 new, hassle-free way to buy and sell homes directly through Zillow, and ~~connecting them with great real estate professionals. The~~ Zillow ~~Group portfolio of~~Home Loans, Zillow’s affiliated lender that provides an easy way to receive mortgage pre-approvals and financing. Other consumer brands ~~includes real estate and rental marketplaces Zillow,~~include Trulia, StreetEasy, HotPads, Naked Apartments, RealEstate.com 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. ~~Beginning in April of 2018,~~ Zillow Offers provides homeowners in certain metropolitan areas with the opportunity to receive offers from Zillow to purchase their home. When Zillow buys a home, it makes necessary updates and lists the home for resale on the open market. WeGroup also ~~own and operate~~operates a number of business brands for real estate, rental and mortgage professionals, including Mortech, dotloop, Bridge Interactive and New Home Feed. Zillow, Inc. was incorporated as a Washington corporation in December 2004, and we launched the initial version of our website, Zillow.com, in February 2006. Zillow Group, Inc. was incorporated as a Washington corporation in July 2014 in connection with our acquisition of Trulia, Inc. (“Trulia”). Upon the closing of the Trulia acquisition in February 2015, each of Zillow, Inc. and Trulia became wholly owned subsidiaries of Zillow Group.

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: rates of revenue growth; our ability to manage advertising inventory or pricing; engagement and usage of our products; our investment of resources to pursue strategies that may not prove effective; competition in our market; the stability of the residential real estate ~~market;~~market and the impact of interest rate changes; changes in government regulation affecting our business; outcomes of legal proceedings; natural disasters and catastrophic events; scaling and adaptation of existing technology and network infrastructure; management of our growth; our ability to attract and retain qualified employees and key personnel; our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments; 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 year ended December 31, ~~2017,~~2018, which was filed with the SEC on February ~~15, 2018.~~21, 2019. The condensed consolidated balance sheet as of December 31, ~~2017,~~2018, included herein, was derived from the audited financial statements of Zillow Group, Inc. as of that date.

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 June 30, ~~2018,~~2019, our results of operations, ~~and~~ comprehensive loss and shareholders’ equity for the three and six month periods ended June 30, ~~2018~~2019 and ~~2017,~~2018, and our cash flows for the six month periods ended June 30, ~~2018~~2019 and ~~2017.~~2018. The results of the three and six month periods ended June 30, ~~2018~~2019 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2018~~2019 or for any interim period or for any other future year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to the net realizable value of inventory, amortization period and recoverability of contract cost assets, website and software development costs, recoverability of long-lived assets and intangible assets with definite lives, share-based compensation, income taxes, business combinations, and the recoverability of goodwill and indefinite-lived intangible assets, among others. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected.

~~Concentrations of Credit Risk~~

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents, investments and accounts receivable. We place cash and cash equivalents and investments with major financial institutions, which management assesses to be of high credit quality, in order to limit exposure of our investments.

Credit risk with respect to accounts receivable is dispersed due to the large number of customers. Further, our credit risk on accounts receivable is mitigated by the relatively short payment terms that we offer. Collateral is not required for accounts receivable. We maintain an allowance for doubtful accounts such that receivables are stated at net realizable value.

~~Cash and Cash Equivalents~~

Cash includes demand deposits with banks or financial institutions. Cash equivalents include short-term, highly liquid investments that are both readily convertible to known amounts of cash, and so near their maturity that they present minimal risk of changes in value because of changes in interest rates. Our cash equivalents include only investments with original maturities of three months or less. We regularly maintain cash in excess of federally insured limits at financial institutions.

~~Short-term Investments~~

Our investments consist of fixed income securities, which include U.S. and foreign government agency securities, corporate notes and bonds, commercial paper, municipal securities and certificates of deposit, and are classified as available-for-sale securities. As the investments are available to support current operations, our available-for-sale securities are classified as short-term investments. Available-for-sale securities are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive loss in shareholders’ equity, while realized gains and losses and other-than-temporary impairments are reported as a component of net loss based on specific identification. An impairment charge is recorded in the consolidated statements of operations for declines in fair value below the cost of an individual investment that are deemed to be other than temporary. We assess whether a decline in value is temporary based on the length of time that the fair market value has been below cost, the severity of the decline and the intent and ability to hold or sell the investment. We did not identify any investments as other-than-temporarily impaired as of June 30, 2018 or December 31, 2017.

~~Accounts Receivable and Allowance for Doubtful Accounts~~

Accounts receivable represent our unconditional right to consideration. Accounts receivable are generally due within 30 days and are recorded net of the allowance for doubtful accounts. We consider accounts outstanding longer than the contractual terms past due. We review accounts receivable on a regular basis and estimate an amount of losses for uncollectible accounts based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. We record changes in our estimate to the allowance for doubtful accounts through bad debt expense and relieve the allowance when accounts are ultimately determined to be uncollectible. Bad debt expense is included in general and administrative expenses.

~~Inventory~~

Inventory is comprised of homes acquired through our Zillow Offers program and is stated at the lower of cost or net realizable value. Homes are removed from inventory on a specific identification basis when they are resold. Stated cost includes consideration paid to acquire and update each home including associated allocated overhead costs. Work-in-progress inventory includes homes undergoing updates and finished goods inventory includes homes ready for resale. Unallocated overhead costs are expensed as incurred and included in cost of revenue. Selling costs, including commissions, escrow and title fees, staging, and holding costs, including utilities, taxes and maintenance, are expensed as incurred and included in sales and marketing expenses. For the three months ended June 30, 2018, there was an immaterial amount of holding costs included in sales and marketing expenses.

Each quarter we review the value of homes held in inventory for indicators that net realizable value is lower than cost. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized in cost of revenue.

~~Contract Cost Assets~~

We capitalize certain incremental costs of obtaining contracts with customers which we expect to recover. These costs relate to commissions paid to sales personnel, primarily for our Premier Agent and Premier Broker programs. As a practical expedient, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. Capitalized commission costs are recorded as contract cost assets in our condensed consolidated balance sheets. Contract cost assets are amortized to expense on a straight-line basis over a period that is consistent with the transfer to the customer of the products or services to which the asset relates, generally the estimated life of the customer relationship. Amortization expense related to contract cost assets is included in sales and marketing expenses in our condensed consolidated statements of operations. In determining the estimated life of our customer relationships, we consider quantitative and qualitative data, including, but not limited to, historical customer data, recent changes or expected changes in product or service offerings, and changes in how we monetize our products and services. The amortization period for capitalized contract costs related to our Premier Agent and Premier Broker programs ranges from two to three years.

~~Property and Equipment~~

~~Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. The useful lives are as follows:~~



~~Computer equipment~~	~~2 to 3 years~~
~~Office equipment, furniture and fixtures~~	~~5 to 7 years~~
~~Leasehold improvements~~	~~Shorter of expected useful life or lease term~~

Maintenance and repair costs are charged to expense as incurred. Major improvements, which extend the useful life of the related asset, are capitalized. Upon disposal of a fixed asset, we record a gain or loss based on the difference between the proceeds received and the net book value of the disposed asset.

~~Website and Software Development Costs~~

The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized in property and equipment and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives. Amortization expense related to capitalized website and software development costs is included in technology and development expense.

Capitalized development activities placed in service are amortized over the expected useful lives of those releases, currently estimated at one to three years. The estimated useful lives of website and software development activities are reviewed frequently and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing functionality.

~~Construction-in-progress primarily consists of website development costs that are capitalizable, but for which the associated applications had not been placed in service.~~

~~Recoverability of Goodwill and Indefinite-Lived Intangible Assets~~

Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition, and is not amortized. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired. Typically, we choose to forgo the initial qualitative assessment and perform a quantitative analysis to assist in our annual evaluation. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in our statements of operations.

Our indefinite-lived intangible asset is not amortized, and we assess the asset for impairment on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that the asset may be impaired. On an interim basis, we consider if there are any events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset, including, but not limited to, costs that could have a negative effect on future expected earnings and cash flows, changes in certain key performance metrics, and changes in management, key personnel, strategy or customers. In our evaluation of our trade names and trademarks indefinite-lived intangible asset, we typically first perform a qualitative assessment to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired. If so, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of the carrying value of the indefinite-lived intangible asset over its fair value.

~~Intangible Assets~~

We purchase and license data content from multiple data providers. This data content consists of U.S. county data about home details (e.g., the number of bedrooms, bathrooms, square footage) and other information relating to the purchase price of homes, both current and historical, as well as imagery, mapping and parcel data that is displayed on our mobile applications and websites. Our home details data not only provides information about a home and its related transactions which is displayed on our mobile applications and websites, but is also used in our proprietary valuation algorithms to produce Zestimates, Rent Zestimates and Zillow Home Value Indexes. License agreement terms vary by vendor. In some instances, we retain perpetual rights to this information after the contract ends; in other instances, the information and data are licensed only during the fixed term of the agreement. Additionally, certain data license agreements provide for uneven payment amounts throughout the contract term.

We capitalize payments made to third parties for data licenses that we expect to provide future economic benefit through the recovery of the costs of these arrangements via the generation of our revenue and margins. For data license contracts that include uneven payment amounts, we capitalize the payments as they are made as an intangible asset and the total contract value is typically amortized on a straight-line basis over the term of the contract, which is equivalent to the estimated useful life of the asset. We evaluate data content contracts for potential capitalization at the inception of the arrangement as well as each time periodic payments to third parties are made.

The amortization period for the capitalized purchased content is based on our best estimate of the useful life of the asset, which is approximately five years. The determination of the useful life includes consideration of a variety of factors including, but not limited to, our assessment of the expected use of the asset and contractual provisions that may limit the useful life, as well as an assessment of when the data is expected to become obsolete based on our estimates of the diminishing value of the data over time. We evaluate the useful life of the capitalized purchased data content each reporting period to determine whether events and circumstances warrant a revision to the remaining useful life. If we determine the estimate of the asset’s useful life requires modification, the carrying amount of the asset is amortized prospectively over the revised useful life. The capitalized purchased data content is amortized on a straight-line basis as the pattern of delivery of the economic benefits of the data cannot reliably be determined because we do not have the ability to reliably predict future traffic to our mobile applications and websites.

Under certain other data agreements, the underlying data is obtained on a subscription basis with consistent monthly or quarterly recurring payment terms over the contractual period. Upon the expiration of such arrangements, we no longer have the right to access the related data, and therefore, the costs incurred under such contracts are not capitalized and are expensed as payments are made. We would immediately lose rights to data under these arrangements if we were to cancel the subscription and/or cease making payments under the subscription arrangements.

We also capitalize costs related to the license of certain internal-use software from third parties, including certain licenses of software in cloud computing arrangements. Additionally, we capitalize costs incurred during the application development stage related to the development of internal-use software and enterprise cloud computing services. We expense costs as incurred related to the planning and post-implementation phases of development. Capitalized internal-use software costs are amortized over the estimated useful life of the asset, which is currently one to three years, on a straight-line basis.

~~Intangibles-in-progress consist of purchased content and software that are capitalizable but have not been placed in service.~~

We also have intangible assets for developed technology, customer relationships, trade names and trademarks and advertising relationships which we recorded in connection with acquisitions. Purchased intangible assets with a determinable economic life are carried at cost, less accumulated amortization. These intangible assets are amortized over the estimated useful life of the asset on a straight-line basis.

~~Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets~~

We evaluate intangible assets and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. We group assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. If this comparison indicates impairment, the amount of impairment to be recognized is calculated as the difference between the carrying value and the fair value of the asset group.

~~Deferred Revenue~~

Deferred revenue consists of prepaid advertising fees received or billed in advance of satisfying our performance obligations and prepaid but unrecognized subscription revenue. Deferred revenue is recognized when or as we satisfy our obligations under contracts with customers.

~~Deferred Rent~~

For our operating leases, we recognize rent expense on a straight-line basis over the terms of the leases and, accordingly, we record the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. For office space under an operating lease that is subleased to a third party for which we intend to reoccupy the space at a future date, rent expense is recognized net of sublease income. Landlord-funded leasehold improvements are also recorded as deferred rent liabilities and are amortized as a reduction of rent expense over the non-cancelable term of the related operating lease.

~~Business Combinations~~

We recognize identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that we identify adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of operations. We recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.

~~Revenue Recognition~~

We recognize revenue when (or as) we satisfy our performance obligations by transferring control of the promised products or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services.

As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component as the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service is one year or less.

We do not disclose the transaction price related to remaining performance obligations for (i) contracts with an original expected duration of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for performance completed to date. The remaining duration of our performance obligations is generally less than one year.Recently Issued Accounting Standards Not Yet Adopted

In our Internet, Media & Technology (“IMT”) segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to businesses and professionals primarily associated with the residential real estate, rental and mortgage industries. These professionals include real estate, rental and mortgage professionals and brand advertisers. Our four primary revenue categories within our IMT segment are Premier Agent, Rentals, Mortgages and Other.

~~In our Homes segment, we generate revenue from the resale of homes on the open market through our Zillow Offers program.~~

real estate agents and brokers achieve their advertising goals, while growing and managing their businesses and brands. All Premier Agents and Premier Brokers receive access to a dashboard portal on our mobile application or website that provides individualized program performance analytics, our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent or Premier Broker through our mobile and web platforms and our account management tools. We have concluded that the marketing and business technology products and services promised to Premier Agents and Premier Brokers represent distinct performance obligations.

We offer our Premier Agent and Premier Broker advertising products on a cost per impression basis. Payment is received prior to the delivery of impressions. Impressions are delivered when a sold advertisement appears on pages viewed by users of our mobile applications and websites. We determine the cost per impression delivered in each zip code using an auction-based pricing method in consideration of the total amount spent by Premier Agents and Premier Brokers to purchase impressions in the zip code during the month. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly budgeted spend in that zip code as a percentage of the total monthly budgeted spend of all Premier Agents and Premier Brokers in that zip code. The cost per impression that we charge is dynamic - as demand for impressions in a zip code increases or decreases, the cost per impression in that zip code may be increased or decreased accordingly. The price paid for each impression is representative of the price at which we would sell an impression separately to a customer, or the stand-alone selling price.

We have not allocated the transaction price to each performance obligation as the amounts recognized would be the same irrespective of any allocation. As such, we recognize revenue related to the Premier Agent and Premier Broker products and services based on the contractual spend recognized on a straight-line basis during the contractual period over which the products and services are provided. This methodology best depicts how we satisfy our performance obligations to customers, as we continuously transfer control of the performance obligations to the customer throughout the contractual period.

~~Rentals Revenue.~~ Rentals revenue includes our rentals marketplace and suite of tools for rental professionals. Rentals revenue primarily includes revenue generated by advertising sold to property managers and other rental professionals on a cost per lead, cost per click or cost per lease generated basis. We recognize revenue as leads or clicks are provided to rental professionals, which is the amount for which we have the right to invoice. The number of leases generated through our rentals marketplace during the period is accounted for as variable consideration, and we estimate these amounts based on the expected number of qualified leases secured during the period. We do not believe that a significant reversal in the amount of cumulative revenue recognized will occur once the uncertainty related to the number of leases secured is subsequently resolved.

~~Mortgages Revenue.~~Mortgages revenue primarily includes marketing products sold to mortgage professionals on a cost per lead basis, including our Custom Quote and a portion of our Connect (formerly known as Long Form) services, and on a subscription basis, including a portion of our Connect service. For our Connect and Custom Quote cost per lead mortgage marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.

For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through Zillow Group’s mortgages platform, which is the amount for which we have the right to invoice. For our Connect subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, Zillow Group contacts a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend recognized on a straight-line basis during the contractual period over which the service is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.

Mortgages revenue also includes revenue generated by Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform, for which we recognize revenue on a straight-line basis during the contractual period over which the services are provided.

marketing solutions allow home builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis, and revenue is recognized on a straight-line basis during the contractual period over which the communities are advertised on our mobile applications and websites. Consideration is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.

~~Homes Revenue.~~ Homes revenue is derived from the resale of homes on the open market through our Zillow Offers program. Homes revenue is recognized at the time of the closing of the home sale when title to and possession of the property are transferred to the buyer.

~~Cost of Revenue~~

For our IMT segment, our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries and benefits and share-based compensation expense and bonuses, as well as credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships, depreciation expense and costs associated with the operation of our data center and mobile applications and websites. For our Homes segment, our cost of revenue also consists of the consideration paid to acquire and make necessary updates to each home including associated overhead costs.

~~Technology and Development~~

Technology and development expenses consist of headcount expenses, including salaries, benefits, share-based compensation expense and bonuses for salaried employees and contractors engaged in the design, development and testing of our mobile applications and websites, and equipment and maintenance costs. Technology and development expenses also include amortization costs related to capitalized website and development activities, amortization of software, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our mobile applications and websites, amortization of intangible assets recorded in connection with acquisitions, including developed technology and customer relationships, amongst others, and depreciation expense.

~~Share-Based Compensation~~

We measure compensation expense for all share-based awards at fair value on the date of grant and recognize compensation expense over the service period on a straight-line basis for awards expected to vest.

We use the Black-Scholes-Merton option-pricing model to determine the fair value for option awards. In valuing our option awards, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives. We account for forfeitures as they occur. Risk-free interest rates are derived from U.S. Treasury securities as of the option award grant date. Expected dividend yield is based on our historical cash dividend payments, which have been zero to date. The expected volatility for our Class A common stock and Class C capital stock is estimated using our historical volatility. The weighted-average expected life of the option awards is estimated based on our historical exercise data.

For issuances of restricted stock units and restricted units, we determine the fair value of the award based on the market value of our Class A common stock or Class C capital stock, as applicable, at the date of grant.

~~Advertising Costs~~

~~Advertising costs are expensed as incurred. Advertising costs are recorded in sales and marketing expenses.~~

~~Income Taxes~~

We use the asset and liability approach for accounting and reporting income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance against deferred tax assets would be established if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets are not expected to be realized.

We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts

recorded, such differences will affect the provision for income taxes in the period in which such determination is made. Interest and penalties related to unrecognized tax benefits are recorded as income tax expense.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and how AMT credits are utilized; (5) the additional limitations on deducting executive compensation under IRC Section 162(m); and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Shortly after enactment, implementation guidance was released by the Securities and Exchange Commission that requires a company to reflect the income tax effects of those aspects of the Tax Act for which the accounting under the accounting rules is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, it should record a provisional estimate in the financial statements. Further, the implementation guidance also provides for a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting pursuant to the accounting rules.

~~Recently Adopted Accounting Standards~~

~~In May 2014,~~August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance ~~on revenue from contracts with customers.~~related to a customer’s accounting for implementation costs incurred in hosting arrangements. The guidance ~~states that an entity should recognize revenue to depict~~aligns the ~~transfer of promised goods or services to customers~~requirements for capitalizing implementation costs incurred in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those products or services. It also states that an entity should recognize as an asset the incremental costs of obtaining a contract that the entity expects to recover and amortize the costs consistentcloud computing arrangements with the ~~transfer~~requirements for capitalizing costs to ~~the customer of the products~~develop or services to which the asset relates. The guidance requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this guidance effective January 1, 2018 using the modified retrospective transition approach applied to all contracts at the date of initial application. We recorded an adjustment of $40.3 million to decrease accumulated deficit as of January 1, 2018 related to the accounting for the cost of sales commissions, primarily related to sales commissions for our Premier Agent and Premier Broker advertising products. Historically, we expensed these sales commission costs as incurred, but under the new guidance, the cost of certain sales commissions is recorded as a contract cost asset and recognized as an operating expense over the period that we expect to recover the costs.

~~The amount by which each financial statement line item is affected by the application of this guidance for the three months ended June 30, 2018 is as follows (in thousands, except per share data):~~

New Guidance Prior Guidance Change
Condensed Consolidated Statement of Operations:
Sales and marketing $ 147,727
$ 148,646
$ (919 )
Total costs and expenses 334,841
335,760
(919 )
Loss from operations (9,595 ) (10,514 ) 919
Loss before income taxes (13,693 ) (14,612 ) 919
Income tax benefit 10,600
12,190
(1,590 )
Net loss (3,093 ) (2,422 ) (671 )
Net loss per share — basic and diluted (0.02 ) (0.01 ) (0.01 )

The amount by which each financial statement line item is affected by the application of this guidance as of and for the six months ended June 30, 2018 is as follows (in thousands, except per share data):

New Guidance Prior Guidance Change
Condensed Consolidated Statement of Operations:
Sales and marketing $ 285,018
$ 288,080
$ (3,062 )
Total costs and expenses 646,084
649,146
(3,062 )
Loss from operations (20,959 ) (24,021 ) 3,062
Loss before income taxes (29,684 ) (32,746 ) 3,062
Income tax benefit 8,000
8,900
(900 )
Net loss (21,684 ) (23,846 ) 2,162
Net loss per share — basic and diluted (0.11 ) (0.12 ) 0.01
Condensed Consolidated Balance Sheet:
Contract cost assets 43,384
—
43,384
Total assets 3,426,173
3,382,789
43,384
Deferred tax liabilities and other long-term liabilities 36,561
35,661
900
Total liabilities 572,492
571,592
900
Accumulated deficit (573,605 ) (616,089 ) 42,484
Total shareholders’ equity 2,853,681
2,811,197
42,484
Total liabilities and shareholders’ equity 3,426,173
3,382,789
43,384

~~Recently Issued Accounting Standards Not Yet Adopted~~

In June 2018, the FASB issued guidance related to contributions received and made. This guidance assists entities with evaluating whether a transfer of assets is considered a contribution or an exchange transaction. This guidance is effective for interim and annual reporting periods beginning after June 15, 2018 for contributions received and after December 15, 2018 for contributions made, and early adoption is permitted. The guidance should be applied on a modified prospective basis, though retrospective application is permitted. We expect to adopt this guidance on January 1, 2019. The adoption of this guidance is not expected to have a material impact on our financial position, results of operations or cash flows.

In February 2018, the FASB issued guidance on income tax accounting related to the Tax Act. This guidance permits a reclassification from accumulated other comprehensive income (loss) to accumulated deficit for the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate under the Tax Act. It also requires certain disclosures regarding these reclassifications. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. This guidance must be applied either on a prospective basis in the period of adoption or retrospectively to each period in which the effect of the change in the corporate income tax rate is recognized. We expect to adopt this guidance on January 1, 2019. The adoption of this guidance is not expected to have a material impact on our financial position, results of operations or cash flows.

In March 2017, the FASB issued guidance related to the premium amortization on purchased callable debt securities. This guidance shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date.obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, ~~2018,~~2019, and early adoption is permitted. This guidance ~~must~~may be applied ~~on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.~~either retrospectively or prospectively. We expect to adopt this guidance on January 1, ~~2019.~~2020. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.

In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. This guidance removes, modifies and adds disclosures related to fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim and annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial statement disclosures.

In June 2016, and subsequently amended in April 2019 and May 2019, the FASB issued guidance on the measurement of credit losses on financial instruments. This guidance ~~requires the use of an expected loss impairment model for instruments measured at amortized cost. For available-for-sale debt securities,~~will require an entity ~~is required~~to measure credit losses for certain financial instruments and financial assets, including trade receivables. This guidance requires an entity to recognize an allowance that reflects the entity’s current estimate of credit losses ~~through an allowance for credit losses rather than as a write-down.~~expected to be incurred over the life of the financial instrument on initial recognition and at each reporting period. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. The adoption of this guidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.

In February 2016, the FASB issued guidance on leases. This guidance requires the recognition of a right-of-use asset and lease liability on the balance sheet for all leases. This guidance also requires more detailed disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and early adoption is permitted. We expect to adopt this guidance on January 1, 2019. We anticipate this guidance will have a material impact on our financial position, primarily due to our office space operating leases, as we will be required to recognize lease assets and lease liabilities on our condensed consolidated balance sheet. We continue to assess the potential impacts of this guidance, including the impact the adoption of this guidance will have on our results of operations and cash flows.

Note 3. Fair Value Measurements

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

We applied 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. The fair value measurement of ~~corporate notes and bonds,~~ commercial paper ~~U.S. government agency securities and certificates of deposit~~ 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.

Short-term ~~Investments~~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.

Restricted cash — Restricted cash consists of cash received from the resale of homes through Zillow Offers which may be used to repay amounts borrowed on our revolving credit facilities (see Note 13) and amounts held in escrow related to funding home purchases in our mortgage origination business. The carrying value of restricted cash approximates fair value due to the short period of time amounts borrowed on the revolving credit facilities are outstanding.

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.

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. We generally only issue IRLCs for products that meet specific purchaser guidelines. Since not all IRLCs will become closed loans, we adjust our fair value measurements for the estimated amount of IRLCs that will not close.

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 hedging instruments are calculated by reference to quoted prices for similar assets.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):


	June 30, 2018						June 30, 2019
	Total		Level 1		Level 2		Total			Level 1		Level 2
Cash equivalents:
Money market funds	$	261,103	$	261,103	$	—	$	641,436		$	641,436	$	—
Commercial paper	8,481		—		8,481
Certificates of deposit	498		—		498
Short-term investments:
U.S. government agency securities	348,817		—		348,817		446,736			—		446,736
Corporate notes and bonds	55,431		—		55,431		94,922			—		94,922
Commercial paper	43,727		—		43,727		87,062			—		87,062
Municipal securities	11,306		—		11,306		33,352			—		33,352
Foreign government securities							5,997			—		5,997
Certificates of deposit	6,222		—		6,222		1,481			—		1,481
Foreign government securities	3,038		—		3,038
Treasury bills							3,479			—		3,479
Mortgage origination-related:
Mortgage loans held for sale							38,653			—		38,653
IRLCs							1,186			—		1,186
Forward contracts - other current assets							32			—		32
Forward contracts - other current liabilities							(225		)	—		(225		)
Total	$	738,623	$	261,103	$	477,520	$	1,354,111		$	641,436	$	712,675



	December 31, 2018
	Total			Level 1		Level 2
Cash equivalents:
Money market funds	$	541,575		$	541,575	$	—
Commercial paper	3,999			—		3,999
Short-term investments:
U.S. government agency securities	646,496			—		646,496
Corporate notes and bonds	112,933			—		112,933
Commercial paper	85,506			—		85,506
Municipal securities	39,306			—		39,306
Foreign government securities	14,915			—		14,915
Certificates of deposit	4,711			—		4,711
Mortgage origination-related:
Mortgage loans held for sale	35,409			—		35,409
IRLCs	847			—		847
Forward contracts - other current liabilities	(125		)	—		(125		)
Total	$	1,485,572		$	541,575	$	943,997

December 31, 2017
Total Level 1 Level 2
Cash equivalents:
Money market funds $ 233,508
$ 233,508
$ —
Corporate notes and bonds 6,199
—
6,199
Commercial paper 3,987
—
3,987
U.S. government agency securities 1,748
—
1,748
Certificates of deposit 249
—
249
Short-term investments:
U.S. government agency securities 298,758
—
298,758
Corporate notes and bonds 44,607
—
44,607
Commercial paper 39,325
—
39,325
Municipal securities 11,459
—
11,459
Certificates of deposit 10,297
—
10,297
Foreign government securities 5,998
—
5,998
Total $ 656,135
$ 233,508
$ 422,627
At June 30, 2019, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $45.7 million and $80.6 million for our IRLCs and forward contracts, respectively. At December 31, 2018, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $26.7 million and $28.8 million for our IRLCs and forward contracts, respectively. We do not have the right to offset our forward contract derivative positions.

See Note 1213 for the carrying amount and estimated fair value of the Company’s ~~Convertible Senior Notes due in 2021 and Trulia’s Convertible Senior Notes due in 2020.~~convertible senior notes.

We did not have ~~any~~material Level 3 assets or liabilities as of June 30, ~~2018~~2019 or December 31, ~~2017. There were no liabilities measured at fair value on a recurring basis as of June 30, 2018 or December 31, 2017.~~2018.

Note 4. Cash and Cash Equivalents, ~~and~~ Short-term 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, ~~and~~ available-for-sale investments and restricted cash as of the dates presented (in thousands):


	June 30, 2018									June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Market Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Market Value
Cash	$	160,963	$	—	$	—		$	160,963	$	125,262	$	—	$	—		$	125,262
Cash equivalents:
Money market funds	261,103		—		—			261,103		641,436		—		—			641,436
Commercial paper	8,481		—		—			8,481
Certificates of deposit	498		—		—			498
Short-term investments:
U.S. government agency securities	349,954		13		(1,150		)	348,817		446,098		668		(30		)	446,736
Corporate notes and bonds	55,504		1		(74		)	55,431		94,739		184		(1		)	94,922
Commercial paper	43,727		—		—			43,727		87,062		—		—			87,062
Municipal securities	11,351		—		(45		)	11,306		33,253		99		—			33,352
Foreign government securities										5,996		1		—			5,997
Certificates of deposit	6,224		—		(2		)	6,222		1,481		—		—			1,481
Foreign government securities	3,038		—		—			3,038
Treasury bills										3,475		4		—			3,479
Restricted cash										43,882		—		—			43,882
Total	$	900,843	$	14	$	(1,271	)	$	899,586	$	1,482,684	$	956	$	(31	)	$	1,483,609



	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Market Value
Cash	$	105,484	$	—	$	—		$	105,484
Cash equivalents:
Money market funds	541,575		—		—			541,575
Commercial paper	3,999		—		—			3,999
Short-term investments:
U.S. government agency securities	647,266		51		(821		)	646,496
Corporate notes and bonds	113,109		1		(177		)	112,933
Commercial paper	85,506		—		—			85,506
Municipal securities	39,316		23		(33		)	39,306
Foreign government securities	14,929		—		(14		)	14,915
Certificates of deposit	4,711		1		(1		)	4,711
Restricted cash	12,385		—		—			12,385
Total	$	1,568,280	$	76	$	(1,046	)	$	1,567,310

December 31, 2017

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Market
Value
Cash $ 106,404
$ —
$ —
$ 106,404
Cash equivalents:
Money market funds 233,508
—
—
233,508
Corporate notes and bonds 6,200
—
(1 ) 6,199
Commercial paper 3,987
—
—
3,987
U.S. government agency securities 1,748
—
—
1,748
Certificates of deposit 249
—
—
249
Short-term investments:
U.S. government agency securities 299,814
—
(1,056 ) 298,758
Corporate notes and bonds 44,661
1
(55 ) 44,607
Commercial paper 39,325
—
—
39,325
Municipal securities 11,494
—
(35 ) 11,459
Certificates of deposit 10,296
2
(1 ) 10,297
Foreign government securities 6,000
—
(2 ) 5,998
Total $ 763,686
$ 3
$ (1,150 ) $ 762,539

The following table presents available-for-sale investments by contractual maturity date as of June 30, ~~2018~~2019 (in thousands):



	Amortized Cost		Estimated Fair Market Value
Due in one year or less	$	651,437	$	652,206
Due after one year through two years	20,667		20,823
Total	$	672,104	$	673,029

Amortized
Cost

Estimated Fair
Market Value
Due in one year or less $ 384,920
$ 384,070
Due after one year through two years 84,878
84,471
Total $ 469,798
$ 468,541

Note 5. Accounts Receivable, net

The opening balance of accounts receivable, net was ~~$54.4~~$66.1 million as of January 1, ~~2018.~~2019.

The following table presents the changes in the allowance for doubtful accounts (in thousands):



Balance as of January 1, 2019	$	4,838
Bad debt expense	706
Less: write-offs, net of recoveries and other adjustments	(735		)
Balance as of June 30, 2019	$	4,809

Balance as of January 1, 2018 $ 5,341
Bad debt expense (352 )
Less: write-offs, net of recoveries and other adjustments (748 )
Balance as of June 30, 2018 $ 4,241

Note 6. Inventory

The following table presents the components of inventory, net of applicable lower of cost or net realizable value ~~write-downs, were~~adjustments, as ~~follows~~of the dates presented (in thousands):



	June 30, 2019		December 31, 2018
Work-in-progress	$	174,272	$	45,943
Finished goods	378,551		116,886
Inventory	$	552,823	$	162,829

June 30,
2018 December 31,
2017
Work-in-progress $ 2,636
$ —
Finished goods 3,030
—
Inventory $ 5,666
$ —

Note 7. Contract Cost Assets

As of June 30, 2019 and December 31, 2018,, we had ~~$43.4~~$46.3 million and $45.8 million, respectively, of contract cost assets. During the three and six month periods ended June 30, 2019 and 2018,, we recorded no impairment losses. ~~During the three and six month periods ended~~ ~~June 30, 2018, we~~We recorded ~~$9.0 million and $18.3 million, respectively, of~~ amortization expense related to contract cost ~~assets.~~assets of $9.2 million and $9.0 million during the three months ended June 30, 2019 and 2018, respectively, and $17.9 million and $18.3 million during the six months ended June 30, 2019 and 2018, respectively.

Note 8. Property and Equipment, net

The following table presents the detail of property and equipment as of the dates presented (in thousands):



	June 30, 2019			December 31, 2018
Website development costs	$	153,905		$	149,891
Leasehold improvements	77,737			65,012
Office equipment, furniture and fixtures	43,484			39,510
Construction-in-progress	27,293			29,037
Computer equipment	23,024			22,477
Property and equipment	325,443			305,927
Less: accumulated amortization and depreciation	(179,511		)	(170,755		)
Property and equipment, net	$	145,932		$	135,172

June 30,
2018 December 31,
2017
Website development costs $ 143,014
$ 130,072
Leasehold improvements 57,776
47,321
Computer equipment 29,416
30,071
Construction-in-progress 21,211
28,150
Office equipment, furniture and fixtures 25,749
22,887
Property and equipment 277,166
258,501
Less: accumulated amortization and depreciation (158,924 ) (146,230 )
Property and equipment, net $ 118,242
$ 112,271

We recorded depreciation expense related to property and equipment (other than website development costs) of ~~$4.9~~$6.4 million and ~~$3.9~~$4.9 million ~~respectively,~~ during the three months ended June 30, 2019 and 2018, respectively, and ~~2017,~~$12.4 million and $9.1 million ~~and $7.7 million, respectively,~~ during the six months ended June 30, 2019 and 2018, ~~and 2017.~~respectively.

We capitalized ~~$10.0~~$10.3 million and ~~$12.0~~$10.0 million ~~respectively,~~ in website development costs during the three months ended June 30, 2019 and 2018, respectively, and ~~2017,~~$20.3 million and $18.6 million ~~and $26.4 million, respectively,~~ during the six months ended June 30, 2019 and 2018, ~~and 2017.~~respectively. Amortization expense for website development costs included in technology and development expenses was ~~$8.4~~$3.6 million and ~~$9.8~~$8.4 million ~~respectively,~~ during the three months ended June 30, 2019 and 2018, respectively, and ~~2017,~~$7.0 million and $18.0 million ~~and $19.9 million, respectively,~~ during the six months ended June 30, 2019 and 2018, ~~and 2017.~~respectively.

Note 9. Equity ~~Investments~~

~~In June 2017, we purchased an equity interest in a privately held corporation for approximately $10.0 million.~~Investment

In October 2016, we purchased a 10% equity interest in a privately held variable interest entity within the real estate industry for $10.0 million. The entity is financed through its business operations. We are not the primary beneficiary of the entity, as we do not direct the activities that most significantly impact the entity’s economic performance. Therefore, we do not consolidate the entity. Our maximum exposure to loss is $10.0 million, the carrying amount of the investment as of June 30, ~~2018.~~2019.

~~These investments are~~This investment is an equity ~~securities~~security without a readily determinable fair ~~values~~value which we account for at cost minus any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. There ~~have~~has been no ~~impairments~~impairment or upward or downward adjustments to our equity investment as of June 30, ~~2018~~2019 that would impact the carrying amount of ~~either~~the investment. ~~These investments are~~The equity investment is classified within other assets in the condensed consolidated balance sheet.

Note 10. Intangible Assets, net

The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):


	June 30, 2018							June 30, 2019
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Purchased content	$	37,855	$	(25,479	)	$	12,376	$	43,886	$	(35,555	)	$	8,331
Software	21,188		(11,218		)	9,970		28,807		(16,850		)	11,957
Customer relationships	103,900		(53,712		)	50,188		103,600		(67,257		)	36,343
Developed technology	111,980		(64,756		)	47,224		109,080		(76,869		)	32,211
Trade names and trademarks	4,900		(4,473		)	427		4,400		(4,400		)	—
Lender licenses								400		(117		)	283
Intangibles-in-progress	2,043		—			2,043		5,699		—			5,699
Total	$	281,866	$	(159,638	)	$	122,228	$	295,872	$	(201,048	)	$	94,824



	December 31, 2018
	Cost		Accumulated Amortization			Net
Purchased content	$	42,110	$	(30,477	)	$	11,633
Software	24,296		(13,925		)	10,371
Customer relationships	103,900		(60,733		)	43,167
Developed technology	111,980		(72,788		)	39,192
Trade names and trademarks	4,900		(4,683		)	217
Lender licenses	400		(17		)	383
Intangibles-in-progress	2,941		—			2,941
Total	$	290,527	$	(182,623	)	$	107,904

December 31, 2017
Cost
Accumulated
Amortization
Net
Purchased content $ 35,260
$ (20,480 ) $ 14,780
Software 18,957
(8,899 ) 10,058
Customer relationships 103,900
(46,365 ) 57,535
Developed technology 113,380
(56,664 ) 56,716
Trade names and trademarks 4,900
(3,943 ) 957
Advertising relationships 9,000
(8,525 ) 475
Intangibles-in-progress 2,190
—
2,190
Total $ 287,587
$ (144,876 ) $ 142,711

Amortization expense recorded for intangible assets for the three months ended June 30, 2019 and 2018 ~~and 2017~~ was ~~$12.6~~$11.0 million and ~~$13.3~~$12.6 million, respectively. Amortization expense recorded for intangible assets for the six months ended June 30, 2019 and 2018 ~~and 2017~~ was ~~$25.6~~$22.0 million and ~~$26.5~~$25.6 million, respectively. These amounts are included in technology and development expenses.

We have an indefinite-lived intangible asset that we recorded in connection with our February 2015 acquisition of Trulia for Trulia’s trade names and trademarks that is not subject to amortization. The carrying value of the Trulia trade names and trademarks intangible asset was ~~$177.0~~$108.0 million as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Intangibles-in-progress consists of software that is capitalizable but has not been placed in service.

Note 11. Deferred Revenue

The following tables present the changes in deferred revenue for the periods presented (in thousands):



	Three Months Ended June 30, 2019
Balance as of April 1, 2019	$	36,105
Deferral of revenue	259,132
Less: Revenue recognized	(258,157		)
Balance as of June 30, 2019	$	37,080



	Six Months Ended June 30, 2019
Balance as of January 1, 2019	$	34,080
Deferral of revenue	501,984
Less: Revenue recognized	(498,984		)
Balance as of June 30, 2019	$	37,080

Three Months Ended
June 30, 2018
Balance as of April 1, 2018 $ 35,297
Deferral of revenue 250,735
Less: Revenue recognized (250,112 )
Balance as of June 30, 2018 $ 35,920

Six Months Ended
June 30, 2018
Balance as of January 1, 2018 $ 31,918
Deferral of revenue 488,856
Less: Revenue recognized (484,854 )
Balance as of June 30, 2018 $ 35,920

During the three months ended June 30, ~~2018,~~2019 we recognized as revenue a total of ~~$32.6~~$33.0 million pertaining to amounts that were recorded in deferred revenue as of ~~March 31, 2018.~~April 1, 2019. During the six months ended June 30, ~~2018,~~2019, we recognized as revenue a total of ~~$29.3~~$30.9 million pertaining to amounts that were recorded in deferred revenue as of ~~December 31, 2017.~~January 1, 2019.

Note 12. ~~Convertible Senior Notes~~Leases

~~Convertible Senior Notes due in 2021~~

~~On December 12, 2016, Zillow Group issued $460.0 million aggregate principal amount~~Our lease portfolio is primarily composed of ~~2.00% Convertible Senior Notes due 2021 (the “2021 Notes”)~~operating leases for our office space. We have lease agreements that include lease components (e.g., fixed rent) and non-lease components (e.g., common area maintenance), which ~~amount includes~~are accounted for as a single component, as we have elected the practical expedient to group lease and non-lease components. We also elected the practical expedient to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the condensed consolidated statements of operations on a straight-line basis over the lease term.

Our leases have remaining lease terms ranging from less than one year to twelve years, some of which include options to extend the lease term for up to an additional ten years. For example, our largest leases, which include our corporate headquarters in Seattle, Washington and office space in New York, New York and San Francisco, California, include options to renew the existing leases for either one or two periods of five years. When determining if a renewal option is reasonably certain of being exercised at lease commencement, we consider several factors, including but not limited to, contract-based, asset-based and entity-based factors. We reassess the term of existing leases if there is a significant event or change in circumstances within our control that affects whether we are reasonably certain to exercise ~~in full of the $60.0 million over-allotment~~an option to ~~Citigroup Global Markets Inc. as the initial purchaser~~extend a lease. Examples of ~~the 2021 Notes in a private offering~~such events or changes include construction of significant leasehold improvements or other modifications or customizations to the ~~initial purchaser in reliance on the exemption from the registration requirements provided by Section 4(a)(2)~~underlying asset, relevant business decisions or subleases. In most cases, we have concluded that renewal options are not reasonably certain of the Securities Act of 1933, as amended (the “Securities Act”) for resale to qualified institutional buyers as defined in, and pursuant to, Rule 144A under the Securities Act. The 2021 Notes bear interest at a fixed rate of 2.00% per year, payable semiannually in arrears on June 1 and December 1 of each year. The 2021 Notesbeing exercised, therefore, such renewals are convertible into cash, shares of our Class C capital stock or a combination thereof, at the Company’s election. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased, redeemed, or converted in accordance with their terms.

The net proceeds from the issuance of the 2021 Notes were approximately $447.8 million, after deducting fees and expenses. The Company used approximately $370.2 million of the net proceeds from the issuance of the 2021 Notes to repurchase a portion of the outstanding 2020 Notes (see additional information below under “Trulia’s Convertible Senior Notes due 2020”) in privately negotiated transactions. In addition, the Company used approximately $36.6 million of the net proceeds from the issuance of the 2021 Notes to pay the cost of the capped call transactions with the initial purchaser of the 2021 Notes and two additional financial institutions (“Capped Call Confirmations”) as discussed further below. The Company used the remainder of the net proceeds for general corporate purposes.

Prior to the close of business on the business day immediately preceding September 1, 2021, the 2021 Notes are convertible at the option of the holders of the 2021 Notes only under certain conditions, none of which conditions have been satisfied as of June 30, 2018. On or after September 1, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2021 Notes may convert their 2021 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2021 Notes by paying or delivering, as the case may be, cash, shares of Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The conversion rate will initially be 19.0985 shares of Class C capital stock per $1,000 principal amount of 2021 Notes (equivalent to an initial conversion price of approximately $52.36 per share of Class C capital stock). The conversion rate is subject to customary adjustments upon the occurrence of certain events. The Company may redeem for cash all or part of the 2021 Notes, at its option, on or after December 6, 2019, under certain circumstances at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as definednot included in the ~~indenture governing the 2021 Notes). The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.~~right of use asset and lease liability.

If the Company undergoes a fundamental change (as defined in the indenture governing the 2021 Notes), holders of the 2021 Notes may require the Company to repurchase for cash all or part of their 2021 Notes at a repurchase price equal to 100% of the principal amount of the 2021 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date (as defined in the indenture governing the 2021 Notes). In addition, if certain fundamental changes occur, the Company may be required in certain circumstances to increase the conversion rate for any 2021 Notes converted in connection with such fundamental changes by a specified number of shares of its Class C capital stock. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the 2021 Notes, as described in the indenture governing the notes. There are no financial covenants associated with the 2021 Notes.

We may not redeem the 2021 Notes prior to December 6, 2019. We may redeem the 2021 Notes for cash, at our option, in whole or in part on or after December 6, 2019, if the last reported sale price per share of our Class C capital stock has been at

~~least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.~~

~~Interest expense related to the 2021 Notes for~~During the three months ended June 30, ~~2018 was $7.1 million, which is comprised~~2019, it became reasonably certain that in a future period we would exercise the first of ~~approximately $4.8 million~~two five years renewal options related to the ~~amortization~~office space lease for our corporate headquarters in Seattle, Washington, due to the construction of ~~debt discount~~significant leasehold improvements. Therefore, the payments associated with the renewal are now included in the measurement of the lease liability and ~~debt issuance costs~~right of use asset.

As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. For those leases that existed as of January 1, 2019, we used our incremental borrowing rate based on information available at that date. We apply a portfolio approach for determining the incremental borrowing rate based on the applicable lease terms and ~~$2.3 million~~the current economic environment, and we utilize the assistance of third-party specialists to assist us in determining our yield curve.

The components of our operating lease expense were as follows for the ~~contractual coupon interest. Interest expense related to~~periods presented (in thousands):



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease cost	$	9,004	$	15,527
Variable lease cost	4,965		9,746
Total lease cost	$	13,969	$	25,273

Cash paid for amounts included in the ~~2021 Notes~~measurement of lease liabilities for the three and six ~~months~~month periods ended June 30, 2019 was $7.2 million and $16.3 million, respectively. Right of use assets obtained in exchange for new operating lease obligations for the three and six month periods ended June 30, 2019 were $113.7 million. The weighted average remaining term for our leases as of June 30, 2019 was 9 years. The weighted average discount rate for our leases as of June 30, 2019 was 6.5%.

Maturities of our operating lease liabilities by fiscal year were as follows as of June 30, 2019 (in thousands):



Remainder of 2019	$	15,106
2020	37,558
2021	41,089
2022	37,173
2023	34,990
All future years	164,992
Total lease payments	330,908
Less: Imputed interest	(100,521		)
Present value of lease liabilities	$	230,387

Operating lease expense for the three and six month periods ended June 30, 2018, was ~~$14.1~~$5.6 million ~~which is comprised~~and $11.4 million, respectively. The following table presents our future minimum payments for all operating leases as of ~~approximately $9.5~~December 31, 2018, including future minimum payments for operating leases that had not yet commenced as of December 31, 2018 totaling $112.9 million ~~related to the amortization of debt discount and debt issuance costs and $4.6 million~~(in thousands):



2019	$	29,085
2020	38,060
2021	40,099
2022	37,721
2023	36,458
All future years	85,462
Total future minimum lease payments	$	266,885

Note 13. Debt

Revolving Credit Facilities

To provide capital for ~~the contractual coupon interest.~~Zillow Offers, we utilize revolving credit facilities that are classified as current liabilities in our condensed consolidated balance sheets. The ~~effective interest rate on the liability component~~following table summarizes our revolving credit facilities as of the ~~2021 Notes~~periods presented (in thousands, except interest rates):



Effective Date	Maximum Borrowing Capacity		Outstanding Borrowings at June 30, 2019		Outstanding Borrowings at December 31, 2018		Weighted Average Interest Rate
July 31, 2018	$	500,000	$	265,097	$	116,700	5.97	%
January 31, 2019	500,000		144,702		—		5.95	%
Total	$	1,000,000	$	409,799	$	116,700

On January 31, 2019, certain wholly owned subsidiaries of Zillow Group entered into a revolving credit agreement with Citibank, N.A., as the directing lender, and certain other parties thereto. The credit agreement provides for ~~the three and six months ended June 30, 2018 is 7.44%. Accrued interest related to the 2021 Notes~~a maximum borrowing capacity of $500.0 million (the “Maximum Amount”) with a current borrowing capacity of $145.0 million as of June 30, 2019, which amount may be increased up to the Maximum Amount subject to the satisfaction of certain conditions, through a non-recourse credit facility secured by a pledge of the equity of certain Zillow Group subsidiaries that purchase and sell select residential properties through Zillow Offers. The credit agreement has an initial term of two years and may be extended for up to two additional periods of six months each, subject to agreement by the directing lender. Zillow Group formed certain special purpose entities to effectuate the transactions contemplated by the January 31, 2019 revolving credit facility. Each special purpose entity is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such entity are available to satisfy the debts and other obligations of any affiliate or other entity.

The July 31, 2018 revolving credit facility has an initial term of one year and automatically renews on a monthly basis as of July 31, 2019 for up to 24 additional months, subject to agreement by the directing lender. The revolving credit facility has a current borrowing capacity of $275.1 million as of June 30, 2019. Zillow Group formed certain special purpose entities to effectuate the transactions contemplated by the July 31, 2018 revolving credit facility. Each special purpose entity is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such entity are available to satisfy the debts and other obligations of any affiliate or other entity.

The stated interest rate on our revolving credit facilities is one-month LIBOR plus an applicable margin as defined in the respective credit agreements. Our revolving credit facilities include customary representations and warranties, covenants (including financial covenants applicable to Zillow Group) and provisions regarding events of default. As of June 30, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred. In certain circumstances Zillow Group may be obligated to fund some or all of the payment obligations under the credit agreement. Further, borrowings against any eligible property are due upon its sale or at maturity of the applicable facility, or if the property’s ownership period exceeds the agreed aging criteria. Each of the credit facilities permits only a portion of the financed properties to be owned longer than 180 days, and no financed properties may be owned for longer than one year. Any financed property excluded by such aging criteria will drop out of the borrowing base, and the applicable borrower will be required to repay any resulting overadvance. Our revolving credit facilities also require that we establish, maintain and in certain circumstances fund, certain specified reserve accounts. These reserve accounts include, but are not limited to, interest reserves, insurance, tax reserves, renovation cost reserves and special reserves. Amounts funded to these reserve accounts and the collection accounts have been classified within our consolidated balance sheets as restricted cash.

For additional details related to our revolving credit facilities, see Note 14 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017 was $0.8 million, and is recorded in accrued expenses and other~~2018.

Warehouse Lines of Credit

To provide capital for Zillow Home Loans, we utilize warehouse lines of credit that are classified as current liabilities in ~~the~~our condensed consolidated balance ~~sheet.~~sheets. The following table summarizes our warehouse lines of credit as of the periods presented (in thousands, except interest rates):



Maturity Date	Maximum Borrowing Capacity		Outstanding Borrowings at June 30, 2019		Outstanding Borrowings at December 31, 2018		Weighted Average Interest Rate
July 15, 2019	$	50,000	$	15,722	$	14,125	4.95	%
June 27, 2020	50,000		14,335		18,892		4.95	%
Total	$	100,000	$	30,057	$	33,017

On June 28, 2019, Zillow Home Loans amended and restated its warehouse line of credit previously maturing on June 29, 2019. The amended and restated credit agreement extends the term of the original agreement for one year, through June 27, 2020, and continues to provide for a maximum borrowing capacity of $50.0 million with availability under the warehouse line of credit limited depending on the types of loans originated.

Borrowings on the warehouse lines of credit bear interest at the one-month LIBOR plus an applicable margin, as defined in the credit agreements governing the warehouse lines of credit. The warehouse lines of credit include customary representations and warranties, covenants and provisions regarding events of default. As of June 30, 2019, Zillow Group was in compliance with all financial covenants and no event of default had occurred.

Convertible Senior Notes

The following table ~~presents the~~summarizes our outstanding ~~principal amount and carrying value of the 2021 Notes~~convertible senior notes as of the ~~dates~~periods presented (in ~~thousands)~~thousands, except interest rates):



Maturity Date	Aggregate Principal Amount		Fair Value at June 30, 2019		Fair Value at December 31, 2018		Stated Interest Rate		Effective Interest Rate
July 1, 2023	$	373,750	$	370,095	$	321,855	1.50	%	6.99	%
December 1, 2021	460,000		521,318		446,200		2.00	%	7.44	%
December 15, 2020	9,637		16,842		16,744		2.75	%	N/A
Total	$	843,387	$	908,255	$	784,799

Outstanding
Principal
Amount

Unamortized
Debt Discount
and Debt
Issuance Costs

Carrying
Value
June 30, 2018 $ 460,000
$ (75,217 ) $ 384,783
December 31, 2017 $ 460,000
$ (84,721 ) $ 375,279

The convertible notes are senior unsecured obligations and are classified as long-term debt in our condensed consolidated balance sheets. Interest on the convertible notes is paid semi-annually. As of June 30, 2019 and December 31, 2018, respectively, the total unamortized debt discount and debt issuance costs for ~~the 2021 Notes will be amortized to interest expense over a remaining period of approximately 41 months.~~

~~The estimated fair value of the 2021 Notes was $581.2~~our outstanding senior convertible notes were $126.6 million and ~~$509.0 million, respectively,~~$144.4 million. The convertible senior notes maturing in 2023 and 2021 are not redeemable or convertible as of June 30, ~~2018 and December 31, 2017.~~2019. The ~~estimated fair value of the 2021 Notes was determined through consideration of quoted market prices. The fair value is classified as Level 3 due to the limited trading activity for the 2021 Notes.~~

The Capped Call Confirmations are expected generally to reduce the potential dilution of our Class C capital stock upon any conversion of 2021 Notes and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2021 Notes in the event that the market price of the Class C capital stock is greater than the strike price of the Capped Call Confirmations (which initially corresponds to the initial conversion price of the 2021 Notes and is subject to certain adjustments under the terms of the Capped Call Confirmations), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Confirmations. The Capped Call Confirmations have an initial cap price of $69.19 per share, which represents a premium of approximately 85% over the closing price of the Company’s Class C capital stock on The Nasdaq Global Select Market on December 6, 2016, and is subject to certain adjustments under the terms of the Capped Call Confirmations. The Capped Call Confirmations will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2021 Notes, the number of shares of Class C capital stock that will underlie the 2021 Notes. In addition, the Capped Call Confirmations provide for the Company to elect, subject to certain conditions, for the Capped Call Confirmations to remain outstanding (with certain modifications) following its election to redeem the 2021 Notes, notwithstanding any conversions of 2021 Notes in connection with such redemption. The Capped Call Confirmations do not meet the criteria for separate accounting as a derivative as they are indexed to our own stock. The premiums paid for the Capped Call Confirmations have been included as a net reduction to additional paid-in capital within shareholders’ equity.

~~Trulia’s Convertible Senior Notes due in 2020~~

~~In connection with the February 2015 acquisition of Trulia, a portion of the total purchase price was allocated to Trulia’s Convertible Senior Notes due~~convertible senior notes maturing in 2020 ~~(the “2020 Notes”), which~~ are unsecured senior obligations. Pursuant to and in accordance with the Merger Agreement, Zillow Group entered into a supplemental indenture in respect of the 2020 Notes in the aggregate principal amount of $230.0 million, which supplemental indenture provides, among other things, that,convertible, at the effective time of the Trulia Merger, (i) each outstanding 2020 Note is no longer convertible into shares of Trulia common stock and is convertible solely into shares of Zillow Group Class A common stock, pursuant to, and in accordance with, the terms of the indenture governing the 2020 Notes, and (ii) Zillow Group guaranteed all of the obligations of Trulia under the 2020 Notes and related indenture. In December 2016, the Company used approximately $370.2 million of the net proceeds from the issuance of the 2021 Notes discussed above to repurchase $219.9 million aggregate principal of the 2020 Notes in privately negotiated transactions. The aggregate principal amount of the 2020 Notes is due on December 15, 2020 if not earlier converted or redeemed. Interest is payable on the 2020 Notes at the rate of 2.75% semi-annually on June 15 and December 15 of each year.

Holders of the 2020 Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding the maturity date. Regarding the supplemental indenture in respect of the 2020 Notes, the conversion ratio immediately prior to the effective time of the Trulia Merger of 27.8303 shares of Trulia common stock per $1,000 principal amount of notes was adjusted to 12.3567 shares of our Class A common stock per $1,000 principal amount of notes based on the exchange ratio of 0.444 per the Merger Agreement. This was equivalent to an initial conversion price of approximately $80.93 per share of our Class A common stock. Regarding the August 2015 distribution of shares of our Class C capital stock as a dividend to our Class A and Class B common shareholders, the conversion ratio has been further adjusted to 41.4550 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $24.12 per share of our Class A common stock. The conversion ratio will be adjusted for certain dilutive events and will be increased in the case of corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the indenture governing the notes). The conversion option of the ~~2020 Notes has no cash settlement provisions. The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.~~

The holders of the 2020 Notes will have the ability to require us to repurchase the notes in whole or in part upon the occurrence of an event that constitutes a “Fundamental Change” (as defined in the indenture governing the notes, including such events as a “change in control” or “termination of trading”, subject to certain exceptions). In such case, the repurchase price would be 100% of the principal amount of the 2020 Notes plus accruedholder, and unpaid interest, if any, to, but excluding, the Fundamental Change repurchase date. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the notes. There are no financial covenants associated with the 2020 Notes.

~~The 2020 Notes are~~ redeemable, at our option, in whole or in part on or after December 20, 2018, if the last reported sale price per share of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.

~~The carrying value of the 2020 Notes was $9.6 million and $10.1 million, respectively,~~ as of June 30, ~~2018 and~~2019.

For additional details related to our convertible senior notes, see Note 14 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The estimated fair value of the 2020 Notes was $16.7 million and $17.6 million, respectively, as of June 30, 2018 and December 31, 2017. The estimated fair value of the 2020 Notes was determined through consideration of quoted market prices. The fair value is classified as Level 3 due to the limited trading activity for the 2020 Notes.2018.

Note ~~13.~~14. Income Taxes

We are subject to federal and state income taxes in the United States and in Canada. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, we have provided a valuation allowance against our net deferred tax assets that we believe, based on the weight of available evidence, are not more likely than not to be realized. Therefore, no material current tax liability or expense has been recorded in the condensed consolidated financial statements. We have accumulated federal tax losses of approximately ~~$1,014.0~~$1,081.7 million as of December 31, ~~2017,~~2018, which are available to reduce future taxable income. We have accumulated state tax losses of approximately ~~$21.4~~$32.5 million (tax effected) as of December 31, ~~2017.~~

~~We recorded an income tax benefit of $10.6~~ million for the three months ended June 30, 2018, which was calculated as the difference between the income tax benefit of $8.0 million recorded for the six months ended June 30, 2018 and the income tax expense of $2.6 million for the three months ended March 31, 2018. The $8.0 million tax benefit recorded for the six months ended June 30, 2018 is comprised of a $5.4 million income tax benefit, which was calculated using an estimate of our annual effective tax rate of 22.0% applied to our loss before income taxes of $29.7 million for the six months ended June 30, 2018, adjusted by a $1.1 million tax benefit limitation, and a $2.6 million discrete income tax benefit as a result of our estimated impact from the Tax Act. Our estimated annual effective tax rate for the six months ended June 30, 2018 is primarily impacted by the release in valuation allowance resulting from indefinite-lived deferred tax assets and their ability to offset indefinite-lived intangible deferred tax liabilities.

As of June 30, 2018, we have not completed our accounting for the income tax effects related to the deduction limitations on compensation under the Tax Act, and we have recorded provisional adjustments where we were able to make reasonable estimates of the effects for which our analysis is not yet complete. The provisional adjustments relate to the grandfathering of our executive compensation under Section 162(m) of the Internal Revenue Code. We expect the Internal Revenue Service to provide further guidance in applying the written binding contracts requirement under the Tax Act. We believe the clarifications of this rule could impact our financial position and results of operations by an estimated $2.0 million to $5.0 million.

~~Note 14. 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 June 30, 2018 or December 31, 2017.

~~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. During the six months ended June 30, 2018 and the year ended December 31, 2017, no shares of Class B common stock were converted into Class A common stock at the option of the holders. 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.~~

Note 15. Share-Based Awards

In connection with our February 2015 acquisition of Trulia, we assumed the obligations of Zillow and Trulia outstanding under pre-existing stock plans. We intend that future equity grants will be made under Zillow Group’s 2011 Amended and Restated Incentive Plan (as amended and/or restated from time to time, the “2011 Plan”) only (or a successor thereto).

~~Zillow Group, Inc. Amended and Restated 2011 Incentive Plan~~

On July 19, 2011, the 2011 Plan became effective. In addition to the share reserve of 18,400,000 shares, the number of shares available for issuance under the 2011 Plan automatically increases on the first day of each of our fiscal years by a number of shares equal to the least of (a) 3.5% of our outstanding Class A common stock, Class B common stock, and Class C capital stock on a fully diluted basis as of the end of our immediately preceding fiscal year, (b) 10,500,000 shares, and (c) a lesser amount determined by our board of directors; provided, however, that any shares from any increases in previous years that are not actually issued will continue to be available for issuance under the 2011 Plan. In addition, shares previously available for grant under Zillow, Inc.’s 2005 Equity Incentive Plan (the “2005 Plan”), but not issued or subject to outstanding awards under the 2005 Plan as of July 19, 2011, and shares subject to outstanding awards under the 2005 Plan that subsequently cease to be subject to such awards (other than by reason of exercise of the awards) are available for grant under the 2011 Plan. The 2011 Plan is administered by the compensation committee of the board of directors. Under the terms of the 2011 Plan, the compensation committee may grant equity awards, including incentive stock options, nonqualified stock options, restricted stock, restricted stock units or restricted units to employees, officers, directors, consultants, agents, advisers and independent contractors. The board of directors has also authorized certain senior executive officers to grant equity awards under the 2011 Plan, within limits prescribed by our board of directors. The 2011 Plan provides that in the event of a stock dividend, stock split or similar event, the maximum number and kind of securities available for issuance under the plan will be proportionally adjusted.

Options under the 2011 Plan are granted with an exercise price per share not less than 100% of the fair market value of our stock on the date of grant, with the exception of substituted option awards granted in connection with acquisitions, and are exercisable at such times and under such conditions as determined by the compensation committee. Any portion of an option that is not vested and exercisable on the date of a participant’s termination of service expires on such date. Employees generally forfeit their rights to exercise vested options 3 months following their termination of employment or 12 months following termination by reason of death, disability or retirement. Options granted under the 2011 Plan typically expire seven or ten years from the grant date and typically vest either 25% after 12 months and ratably thereafter over the next 36 months or quarterly over a period of four years, though certain options have been granted with alternative vesting schedules.

Restricted stock units granted under the 2011 Plan typically vest either 25% after 12 months and quarterly thereafter over the next three years, quarterly over a period of four years, or 12.5% after 6 months and quarterly thereafter for the next 3.5 years. Any portion of a restricted stock unit that is not vested on the date of a participant’s termination of service expires on such date.

Option Awards

The following table summarizes option award activity for the six months ended June 30, ~~2018:~~2019:



	Number of Shares Subject to Existing Options		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2019	27,310,110		$	34.04	6.23	$	97,941
Granted	6,721,428		40.05
Exercised	(1,543,850	)	21.37
Forfeited or cancelled	(1,419,750	)	41.10
Outstanding at June 30, 2019	31,067,938		35.65		6.62	367,905
Vested and exercisable at June 30, 2019	17,363,786		31.63		4.87	266,575

Number
of Shares
Subject to
Existing
Options

Weighted-
Average
Exercise
Price Per
Share

Weighted-
Average
Remaining
Contractual
Life (Years)

Aggregate
Intrinsic
Value
(in thousands)
Outstanding at January 1, 2018 26,645,206
$ 27.70
5.72 $ 355,739
Granted 4,902,258
54.09

Exercised (4,479,759 ) 22.25

Forfeited or cancelled (444,412 ) 33.47

Outstanding at June 30, 2018 26,623,293
33.38
6.35 687,615
Vested and exercisable at June 30, 2018 13,324,092
28.13
4.76 414,037

The fair value of options 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 June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Expected volatility	45%	43%	45%-47%	43%-45%
Expected dividend yield	—	—	—	—
Risk-free interest rate	2.00%	2.70%	2.00%-2.53%	2.52%-2.70%
Weighted-average expected life	5.00 years	4.50 years	4.75-5.25 years	4.50-5.00 years
Weighted-average fair value of options granted	$16.96	$23.30	$16.79	$21.07

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Expected volatility 43%
47% 43%-45%
47%-49%
Expected dividend yield — — — —
Risk-free interest rate 2.70%
1.67% 2.52%-2.70%
1.67%-1.84%
Weighted-average expected life 4.50 years
4.25 years 4.50-5.00 years
4.25-4.75 years
Weighted-average fair value of options granted $23.30
$17.56 $21.07
$14.30

As of June 30, ~~2018,~~2019, there was a total of ~~$197.7~~$210.7 million in unrecognized compensation cost related to unvested stock options.

Restricted Stock Units

The following table summarizes activity for restricted stock units for the six months ended June 30, ~~2018:~~2019:



	Restricted Stock Units		Weighted- Average Grant- Date Fair Value
Unvested outstanding at January 1, 2019	5,266,324		$	42.19
Granted	3,638,550		39.32
Vested	(1,065,607	)	39.46
Forfeited or cancelled	(601,829	)	41.23
Unvested outstanding at June 30, 2019	7,237,438		41.23

Restricted
Stock Units

Weighted-
Average Grant-
Date Fair
Value
Unvested outstanding at January 1, 2018 4,016,405
$ 33.22
Granted 2,369,968
53.57
Vested (834,788 ) 34.01
Forfeited or cancelled (371,500 ) 37.69
Unvested outstanding at June 30, 2018 5,180,085
42.10

~~The fair value of outstanding restricted stock units will be recorded as share-based compensation expense over the vesting period.~~ As of June 30, ~~2018,~~2019, there was ~~$204.4~~a total of $277.0 million ~~of total~~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 thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of revenue	$	936	$	1,256	$	1,816	$	2,211
Sales and marketing	6,801		6,340		12,451		11,502
Technology and development	18,399		14,347		33,908		25,889
General and administrative	17,496		17,000		61,581		30,082
Total	$	43,632	$	38,943	$	109,756	$	69,684

On February 21, 2019, Zillow Group announced the appointment of Richard N. Barton as Zillow Group’s Chief Executive Officer, effective February 21, 2019. Mr. Barton succeeds Spencer Rascoff, who served as Zillow Group’s Chief Executive Officer since 2010 and who remains a member of Zillow Group’s board of directors. In connection with Mr. Rascoff’s resignation as Chief Executive Officer, Zillow Group entered into an Executive Departure Agreement and Release (the “Agreement”) with Mr. Rascoff. Pursuant to the Agreement, Mr. Rascoff remained a full-time employee of Zillow Group until March 22, 2019 (the “Departure Date”) in order to provide transition services until such date. Pursuant to the Agreement, Mr. Rascoff received, among other things, accelerated vesting of outstanding stock options held by Mr. Rascoff as of the Departure Date by an additional eighteen months from the Departure Date. Options not vested as of the Departure Date, taking into account the foregoing vesting acceleration, were terminated. Each of Mr. Rascoff’s vested stock options outstanding as of the Departure Date will remain exercisable until, except for any later date contemplated by the following proviso, the earlier of (x) the third anniversary of the Departure Date and (y) the latest day upon which the option would have expired by its original

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Cost of revenue $ 1,256
$ 1,025
$ 2,211
$ 1,928
Sales and marketing 6,340
6,250
11,502
11,780
Technology and development 14,347
10,400
25,889
18,891
General and administrative 17,000
11,518
30,082
22,989
Total $ 38,943
$ 29,193
$ 69,684
$ 55,588
terms under any circumstances (the “Option Expiration Outside Date”); provided, however, that the options will remain exercisable for so long as Mr. Rascoff serves on Zillow Group’s board of directors (but not later than any applicable Option Expiration Outside Date), and if Mr. Rascoff ceases to serve on Zillow Group’s board of directors on or after the third anniversary of the Departure Date, each option will remain exercisable until the earlier of (i) ninety days from the final date of Mr. Rascoff’s service on Zillow Group’s board of directors and (ii) the applicable Option Expiration Outside Date. The change in the exercise period of the options as well as the vesting acceleration pursuant to the Agreement have been accounted for as equity modifications, and we recorded $26.4 million of share-based compensation expense associated with the modifications in the six months ended June 30, 2019. We measured the modification charge by calculating the incremental fair value of the modified award compared to the fair value of the original award immediately prior to the modification. The value of the modified awards as of the modification date was estimated using the Black-Scholes-Merton option-pricing model, assuming no dividends, expected volatility of 46%-47%, a risk-free interest rate of 2.47%-2.49% and a weighted-average expected life of 3.84-5.25 years.

Note 16. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of shares (including Class A common stock, Class B common stock and Class C capital stock) outstanding during the period. In the calculation of basic net loss per share, undistributed earnings are allocated assuming all earnings during the period were distributed.

Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares (including Class A common stock, Class B common stock and Class C capital stock) outstanding during the period and potentially dilutive Class A common stock and Class C capital stock equivalents, except in cases where the effect of the Class A common stock or Class C capital stock equivalent would be antidilutive. Potential Class A common stock and Class C capital stock equivalents consist of Class A common stock and Class C capital stock issuable upon exercise of stock options and Class A common stock and Class C capital stock underlying unvested restricted stock units using the treasury stock method. Potential Class A common stock equivalents also include Class A common stock issuable upon conversion of the 2020 Notes using the if-converted method.

Since the Company expects to settle the principal amount of the outstanding 2021 Notes in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread of approximately 8.8 million shares has a dilutive impact on diluted net income per share when the market price of the Company’s Class C capital stock at the end of a period exceeds the conversion price of $52.36 per share for the 2021 Notes.

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 per share because their effect would have been antidilutive (in thousands):



	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Weighted-average Class A common stock and Class C capital stock option awards outstanding	19,502	27,428	19,656	24,393
Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding	7,230	5,246	6,548	4,799
Class A common stock issuable upon conversion of the convertible notes maturing in 2020	411	402	411	402
Class C capital stock issuable related to conversion spread on the convertible notes maturing in 2021	—	997	—	997
Total Class A common stock and Class C capital stock equivalents	27,143	34,073	26,615	30,591

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Weighted-average Class A common stock and Class C capital stock option awards outstanding 27,428
29,921
24,393
29,214
Weighted-average Class A common stock and Class C capital stock restricted stock units outstanding 5,246
4,654
4,799
4,320
Class A common stock issuable upon conversion of the 2020 Notes 402
427
402
427
Class C capital stock issuable related to conversion spread on the 2021 Notes 997
—
997
—
Total Class A common stock and Class C capital stock equivalents 34,073
35,002
30,591
33,961

In the event of liquidation, dissolution, distribution of assets or winding-up of the Company, the holders of all classes of common and capital stock have equal rights to receive all the assets of the Company after the rights of the holders of preferred stock have been satisfied. We have not presented net loss per share under the two-class method for our Class A common stock, Class B common stock and Class C capital stock because it would be the same for each class due to equal dividend and liquidation rights for each class.

Note 17. Commitments and Contingencies

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 ~~2018~~2019 and ~~2024. We are committed to pay a portion of the related operating expenses under certain of these~~2030. For additional information regarding our lease agreements. Certain of these arrangements have free rent periods or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis. Operating lease expense for the three months ended June 30, 2018 and 2017 was $5.6 million and $5.2 million, respectively. Operating lease expense for the six months ended June 30, 2018 and 2017 was $11.4 million and $10.1 million, respectively.agreements, see Note 12.

Purchase Commitments

~~We have entered into~~Purchase commitments primarily include various non-cancelable agreements to purchase ~~commitments for~~ content related to our mobile applications and ~~websites. See Note 2~~websites as well as homes we are under ~~“Intangible Assets” for additional information regarding~~contract to purchase through Zillow Offers but that have not closed as of the respective date. As of June 30, 2019, the value of homes under contract that have not closed was $266.2 million.

Letters of Credit

As of June 30, 2019, we have outstanding letters of credit of approximately $16.9 million, which secure our ~~purchase commitments.~~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 ~~$3.7~~$9.7 million and $8.9 million, respectively, as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

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.

In July 2015, VHT, Inc. (“VHT”) filed a complaint against us in the U.S. District Court for the Western District of Washington alleging copyright infringement of VHT’s images on the Zillow Digs site. In January 2016, VHT filed an amended complaint alleging copyright infringement of VHT’s images on the Zillow Digs site as well as the Zillow listing site. In December 2016, the court granted a motion for partial summary judgment that dismissed VHT’s claims with respect to the Zillow listing site. A federal jury trial began on January 23, 2017, and on February 9, 2017, the jury returned a verdict finding that the Company had infringed VHT’s copyrights in images displayed or saved to the Digs site. The jury awarded VHT $79,875 in actual damages and approximately $8.2 million in statutory damages. In March 2017, the Company filed motions in the district court seeking judgment for the Company on certain claims that are the subject of the verdict, and for a new trial on others. On June 20, 2017, the judge ruled and granted in part our motions, finding that VHT failed to present sufficient evidence to prove direct copyright infringement for a portion of the images, reducing the total damages to approximately $4.1 million. On ~~October 26, 2017,~~March 15, 2019, after the Company had filed an appeal with the Ninth Circuit Court of Appeals seeking review of the final judgment and certain prior rulings entered by the district ~~court.~~court, the Ninth Circuit Court of Appeals issued an opinion that, among other things, (i) affirmed the district court’s grant of summary judgment in favor of Zillow on direct infringement of images on Zillow’s listing site, (ii) affirmed the district court’s grant in favor of Zillow of judgment notwithstanding the verdict on certain images that were displayed on the Zillow Digs site, (iii) remanded consideration of the issue whether VHT’s images on the Zillow Digs site were part of a compilation or individual photos, and (iv) vacated the jury’s finding of willful infringement. On June 13, 2019, VHT filed a petition for writ of certiorari with the United States Supreme Court seeking review of certain rulings by the Ninth Circuit Court of Appeals. We have recorded an estimated liability for ~~approximately $4.1 million~~immaterial amounts related to this matter as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. We do not believe there is a reasonable possibility that a material loss in excess of amounts accrued may be incurred.

In April 2017, we received a Civil Investigative Demand from the Consumer Financial Protection Bureau (“CFPB”) requesting information related to our March 2017 response to the CFPB’s February 2017 Notice and Opportunity to Respond and Advise (“NORA”) letter. The NORA letter notified us that the CFPB’s Office of Enforcement was considering whether to recommend that the CFPB take legal action against us, alleging that we violated Section 8 of the Real Estate Settlement

Procedures Act (“RESPA”) and Section 1036 of the Consumer Financial Protection Act (“CFPA”). This notice stemmed from an inquiry that commenced in 2015 when we received and responded to an initial Civil Investigative Demand from the CFPB. On June 22, 2018, we received a letter from the CFPB stating that it had completed its investigation, that it did not intend to take enforcement action, and that we were relieved from the document-retention obligations required by the CFPB’s investigation. As of June 30, 2018, we did not record an accrual in connection with this matter given the investigation has been completed. As of December 31, 2017, we recorded an accrual for an immaterial amount in connection with this matter.

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 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 ~~May~~October 2018, our motion to dismiss was granted without prejudice, and the plaintiffs were given 45 days file a second consolidated amended complaint and attempt to cure the defects in their consolidated amended complaint. In November 2018, the plaintiffs filed ~~their opposition~~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. In June 2018,~~complaint was denied, and we filed our ~~reply in support of our motion~~answer to ~~dismiss~~ the ~~consolidated~~second amended ~~complaint.~~complaint on May 3, 2019. We have denied the allegations of wrongdoing and intend to vigorously defend the claims in this lawsuit. We have not recorded an accrual related to this lawsuit as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, as we do not believe a loss is probable.

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 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 ~~have been~~were stayed until ~~after the court has ruled on~~ our ~~pending~~ motion to dismiss the second consolidated amended complaint in the securities class action lawsuit discussed ~~above.~~above was denied in April 2019. On July 8, 2019, the plaintiffs in the consolidated federal derivative lawsuit filed a consolidated shareholder derivative complaint, to which the defendants have 45 days to respond. The defendants intend to deny the allegations of wrongdoing and vigorously defend the claims in these lawsuits. We have not recorded an accrual related to these lawsuits as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, as we do not believe a loss 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, including, but not limited to, losses arising out of the breach of such agreements and out of intellectual property infringement claims made by third parties. In addition, we have agreements that indemnify certain issuers of surety bonds against losses that they may incur as a result of executing surety bonds on our behalf. For our indemnification arrangements, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments. In addition, we have indemnification agreements with certain of our directors and executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations may vary.

Note 18. Related Party Transactions

On April 3, 2019, we entered into a Charter Service Agreement with Executive Jet Management, Inc. for the occasional use by us of an aircraft owned by an entity that is owned by Mr. Lloyd Frink, our Executive Chairman and President, for business travel. We recognized approximately $0.2 million in expenses pursuant to the Charter Service Agreement for the three and six month periods ended June 30, 2019.

Note 19. Self-Insurance

We are self-insured for medical benefits and ~~beginning on January 1, 2018 for~~ dental benefits for all qualifying Zillow Group employees. The medical plan carries a stop-loss policy which ~~will protect~~provides protection when cumulative medical claims exceed 125% of expected claims for the plan year with a limit of $1.0 million and from individual claims during the plan year exceeding ~~$150,000.~~$500,000. We record estimates of the total costs of claims incurred based on an analysis of historical data and independent estimates. Our liability for self-insured claims is included within accrued compensation and benefits in our condensed consolidated balance sheets and was ~~$2.8~~$3.6 million and ~~$2.0~~$3.9 million, respectively, as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Note ~~19.~~20. Employee Benefit Plan

We have a defined contribution 401(k) retirement plan covering Zillow Group employees who have met certain eligibility requirements ~~(“the Zillow~~(the “Zillow Group 401(k) Plan”). Eligible employees may contribute pretax compensation up to a maximum amount allowable under the Internal Revenue Service limitations. Employee contributions and earnings thereon vest immediately. We currently match up to 4% of employee contributions under the Zillow Group 401(k) Plan. The total expense related to the Zillow Group 401(k) Plan was $5.2 million and $4.0 million, respectively, for the three months ended June 30, 2019 and 2018, and ~~2017 was $4.0~~$10.1 million and ~~$3.0~~$7.8 million, ~~respectively. The total expense related to the Zillow Group 401(k) Plan~~respectively, for the six months ended June 30, ~~2018~~2019 and ~~2017 was $7.8 million and $5.9 million, respectively.~~2018.

Note ~~20.~~21. Segment Information and Revenue

Beginning ~~in the second quarter of 2018,~~January 1, 2019, we have ~~two~~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 offor the ~~IMT~~Internet, Media & Technology (“IMT”), Homes and ~~Homes~~Mortgages segments.

The IMT segment includes the financial results for the Premier Agent, Rentals ~~Mortgages~~ and new construction marketplaces, dotloop, and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals. The Homes segment includes the financial results from Zillow Group’s ~~buying~~purchase and ~~selling~~sale of homes directly. The Mortgages segment includes financial results for advertising sold to mortgage lenders and other mortgage professionals, mortgage originations through Zillow Home Loans and the sale of mortgages on the secondary market, as well as Mortech mortgage software solutions.

Revenue and costs are ~~generally~~ directly attributed to our ~~segments.~~segments when possible. However, due to the integrated structure of our business, certain costs incurred by one segment may benefit the other ~~segment.~~segments. These costs ~~are generally~~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 and marketing and advertising costs. These costs are allocated to each segment based on the estimated ~~effort attributable to~~benefit each ~~segment.~~segment receives from such expenditures.

The chief executive officer reviews information about our revenue categories as well as statement of operations data inclusive of loss before income taxes by segment. This information is included in the following ~~table~~tables for the periods presented (in thousands):



	Three Months Ended June 30, 2019								Three Months Ended June 30, 2018
	IMT		Homes			Mortgages			IMT		Homes			Mortgages
Revenue:
Premier Agent	$	231,961	$	—		$	—		$	230,885	$	—		$	—
Rentals	42,670		—			—			33,288		—			—
Other	49,038		—			—			41,768		—			—
Homes	—		248,924			—			—		—			—
Mortgages	—		—			26,985			—		—			19,305
Total revenue	323,669		248,924			26,985			305,941		—			19,305
Costs and expenses:
Cost of revenue	26,059		240,732			4,430			24,290		—			1,237
Sales and marketing	135,440		37,409			14,584			137,972		2,095			7,660
Technology and development	94,261		18,198			7,871			91,131		3,790			5,455
General and administrative	54,671		17,808			10,360			52,438		4,176			3,965
Acquisition-related costs	—		—			—			—		—			632
Integration costs	—		—			293			—		—			—
Total costs and expenses	310,431		314,147			37,538			305,831		10,061			18,949
Income (loss) from operations	13,238		(65,223		)	(10,553		)	110		(10,061		)	356
Segment other income	—		—			402			—		—			—
Segment interest expense	—		(5,899		)	(287		)	—		—			—
Income (loss) before income taxes (1)	$	13,238	$	(71,122	)	$	(10,438	)	$	110	$	(10,061	)	$	356


	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018									Six Months Ended June 30, 2019								Six Months Ended June 30, 2018
	IMT			Homes			Consolidated			IMT			Homes			Consolidated			IMT		Homes			Mortgages			IMT			Homes			Mortgages
Revenue:
Premier Agent	$	230,885		$	—		$	230,885		$	444,617		$	—		$	444,617		$	449,696	$	—		$	—		$	444,617		$	—		$	—
Rentals	33,288			—			33,288			62,351			—			62,351			80,508		—			—			62,351			—			—
Mortgages	19,305			—			19,305			38,328			—			38,328
Other	41,768			—			41,768			79,829			—			79,829			91,737		—			—			79,829			—			—
Homes	—			—			—			—			—			—			—		377,396			—			—			—			—
Mortgages																			—		—			54,345			—			—			38,328
Total revenue	325,246			—			325,246			625,125			—			625,125			621,941		377,396			54,345			586,797			—			38,328
Costs and expenses:
Cost of revenue	25,527			—			25,527			49,446			—			49,446			50,310		363,151			9,108			46,884			86			2,476
Sales and marketing	145,177			2,550			147,727			281,770			3,248			285,018			262,094		58,271			28,655			266,719			2,385			15,914
Technology and development	95,967			4,409			100,376			187,412			6,897			194,309			182,230		30,479			15,391			177,048			6,026			11,235
General and administrative	55,384			5,195			60,579			107,601			9,051			116,652			125,521		32,165			20,927			102,625			5,954			8,073
Acquisition-related costs	632			—			632			659			—			659			—		—			—			27			—			632
Integration costs																			—		—			645			—			—			—
Total costs and expenses	322,687			12,154			334,841			626,888			19,196			646,084			620,155		484,066			74,726			593,303			14,451			38,330
Income (loss) from operations	2,559			(12,154		)	(9,595		)	(1,763		)	(19,196		)	(20,959		)	1,786		(106,670		)	(20,381		)	(6,506		)	(14,451		)	(2		)
Other income	3,089			—			3,089			5,535			—			5,535
Interest expense	(7,187		)	—			(7,187		)	(14,260		)	—			(14,260		)
Loss before income taxes	$	(1,539	)	$	(12,154	)	$	(13,693	)	$	(10,488	)	$	(19,196	)	$	(29,684	)
Segment other income																			—		—			715			—			—			—
Segment interest expense																			—		(9,657		)	(388		)	—			—			—
Income (loss) before income taxes (1)																			$	1,786	$	(116,327	)	$	(20,054	)	$	(6,506	)	$	(14,451	)	$	(2	)

~~We have~~(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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Total segment loss before income taxes	$	(68,322	)	$	(9,595	)	$	(134,595	)	$	(20,959	)
Corporate interest expense	(12,711		)	(7,187		)	(25,318		)	(14,260		)
Corporate other income	9,056			3,089			17,911			5,535
Consolidated loss before income taxes	$	(71,977	)	$	(13,693	)	$	(142,002	)	$	(29,684	)

Certain corporate items are not ~~presented the comparable 2017 periods~~directly attributable to any of our segments, including interest income earned on our short-term investments included in ~~the table above because we had one operating~~Other income and ~~reportable segment prior to 2018.~~interest costs on our convertible senior notes included in Interest expense.

Note ~~21.~~22. Subsequent Events

~~Underwritten Public Offering of 1.50% Convertible Senior Notes due in 2023~~

On July ~~3, 2018,~~11, 2019, Zillow ~~Group issued $373.8~~Home Loans extended the term of its $50.0 million ~~aggregate principle amount~~warehouse line of Convertible Senior Notes due 2023 (the “2023 Notes”), which includes $48.8 million principal amount of 2023 Notes sold pursuant to the underwriters’ option to purchase additional 2023 Notes. The 2023 Notes bear interest at a fixed rate of 1.50% per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2019. The 2023 Notes are convertible into cash, shares of Class C capital stock or a combination thereof, at our election. The 2023 Notes will maturecredit previously maturing on July ~~1, 2023, unless earlier repurchased, redeemed, or converted in accordance with their terms.~~

The net proceeds from the issuance of the 2023 Notes were approximately $364.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. We used approximately $29.4 million of the net proceeds from the issuance of the 2023 Notes to pay the cost of the Capped Call Confirmations described below.

~~Prior to the close of business~~15, 2019 such that it now matures on the business day immediately preceding April 1, 2023, the 2023 Notes are convertible at the option of the holders only under certain conditions. On or after April 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2023 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2023 Notes by paying or delivering, as the case may be, cash, shares of the Company’s Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The conversion rate will initially be 12.7592 shares of Class C capital stock per $1,000 principal amount of 2023 Notes (equivalent to an initial conversion price of approximately $78.37 per share of Class C capital stock). The conversion rate is subject to customary adjustments upon the occurrence of certain events. The Company may redeem for cash all or part of the 2023 Notes, at its option, on or after July 6, 2021, under certain circumstances at a redemption price equal to 100% of the principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indenture governing the 2023 Notes).October 15, 2019.

If the Company undergoes a fundamental change (as defined in the indenture governing the 2023 Notes), holders may require the Company to repurchase for cash all or part of their 2023 Notes at a repurchase price equal to 100% of the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date (as defined in the indenture governing the 2023 Notes). In addition, if certain fundamental changes occur, the Company may be required in certain circumstances to increase the conversion rate for any Notes converted in connection with such fundamental changes by a specified number of shares of its Class C capital stock. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the 2023 Notes, as described in the indenture governing the 2023 Notes. There are no financial covenants associated with the 2023 Notes.

We may not redeem the notes prior to July 6, 2021. We may redeem for cash all or any portion of the 2023 Notes, at our option, on or after July 6, 2021 if the last reported sale price of our Class C capital stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.

The Capped Call Confirmations are expected generally to reduce the potential dilution of our Class C capital stock upon any conversion of 2023 Notes and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2023 Notes in the event that the market price of the Class C capital stock is greater than the strike price of the Capped Call Confirmations (which initially corresponds to the initial conversion price of the 2023 Notes and is subject to certain adjustments under the terms of the Capped Call Confirmations), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Confirmations. The Capped Call Confirmations have an initial cap price of $78.37 per share, which represents a premium of approximately 37.5% over the public offering price of the Company’s Class C capital stock in the concurrent share offering of $57.00 (described below), and is subject to certain adjustments under the terms of the Capped Call Confirmations. The Capped Call Confirmations will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2023 Notes, the number of shares of Class C capital stock that will underlie the 2023 Notes.

~~Underwritten Public Offering of Class C Capital Stock~~

On July 3, 2018, Zillow Group issued and sold 6,557,017 shares (of which 855,263 shares were related to the exercise of the underwriters’ option to purchase additional shares) of our Class C capital stock at a public offering price of $57.00 per share. The net proceeds for all shares sold by us in the public offering were approximately $360.3 million after deducting underwriting discounts and commissions and estimated offering expenses.

~~Entry into Revolving Credit Agreement~~

On August 3, 2018, Zillow Group announced that certain of its wholly owned subsidiaries entered into a revolving credit agreement with Credit Suisse AG, Cayman Islands Branch, as the directing lender, and certain other parties thereto, dated as of July 31, 2018 (the “Credit Agreement”). The Credit Agreement provides for a maximum borrowing capacity of $250.0 million (the “Maximum Amount”) with an initial borrowing capacity of $20.0 million, which amount may be increased up to the Maximum Amount subject to the satisfaction of certain conditions, through a non-recourse credit facility secured by a pledge of the equity of certain Company subsidiaries that purchase and sell select residential properties through Zillow Offers. The Credit Agreement has an initial term of one year which may be extended for up to three years, subject to agreement by the directing lender. The Credit Agreement includes customary representations and warranties, covenants (including financial covenants applicable to the Company), and provisions regarding events of default.

In connection with the Credit Agreement entered into by certain of Zillow Group’s wholly owned subsidiaries in July 2018, Zillow Group formed certain special purpose entities to effectuate the transactions contemplated by the Credit Agreement. Each special purpose entity is a separate legal entity, and neither the assets nor credit of any such entity are available to satisfy the debts and other obligations of any affiliate or other entity.

~~Acquisition of Mortgage Lenders of America~~

On August 6, 2018, Zillow Group announced that its wholly owned subsidiary, ZGM Holdco, Inc., has entered into a definitive agreement to acquire Mortgage Lenders of America, L.L.C. (“MLOA”), a national mortgage lender headquartered in Overland Park, Kansas. The purchase agreement contains customary representations, warranties and covenants of the parties as well as conditions to closing, including, among other things, the receipt of certain third-party consents and governmental approvals and the absence of a material adverse effect on MLOA. Zillow Group currently expects the transaction to close in the fourth quarter of 2018.

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 ~~contained~~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 ~~II,~~I, Item 1A (Risk Factors) of our ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarterly period~~year ended ~~March~~December 31, 2018.

Overview of our Business

~~Our living database of approximately 110 million U.S. homes, including homes for sale, homes for rent~~Reportable Segments and homes not currently on the market, attracts an active and vibrant community of users. Individuals and businesses that use Zillow’s mobile applications and websites have updated information on more than 80 millionhomes, creating exclusive home profiles not available anywhere else. These profiles include detailed information about homes, including property facts, listing information and purchase and sale data. We provide this information to our users where, when and how they want it, through our industry-leading mobile applications and websites. Using complex, proprietary automated valuation models, we provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on approximately 100 million~~U.S. homes.~~Revenue Overview

As of ~~the second quarter of 2018,~~January 1, 2019, Zillow Group has ~~two~~three reportable segments: the Internet, Media & Technology (“IMT”) segment, ~~our historical operating and reportable~~the Homes segment and the ~~new Homes~~Mortgages segment. ~~In connection with our~~The IMT segment ~~we generate revenue from~~includes the ~~sale of advertising services and our suite of marketing software and technology solutions to businesses and professionals primarily associated with~~financial results for the residential real estate, rental and mortgage industries. These professionals include real estate, rental and mortgage professionals and brand advertisers. Our four primary revenue categories within our IMT segment are Premier Agent, Rentals and new construction marketplaces, as well as dotloop, display and other advertising and business software solutions. The Homes segment includes the financial results from Zillow Group’s purchase and sale of homes directly through the Zillow Offers service. The Mortgages segment includes the financial results for advertising sold to mortgage lenders and ~~Other.~~other mortgage professionals, mortgage originations through Zillow Home Loans and our Mortech mortgage software solutions.

Premier Agent revenue is generated by the sale of advertising ~~under our Premier Agent and Premier Broker programs, which offer a suite of~~services, as well as marketing and ~~business~~ technology products and services, to help real estate agents and brokers ~~achieve~~grow and manage their ~~advertising goals, while growing and managing their businesses and brands.~~businesses. We offer these products and services through our Premier Agent and Premier Broker programs. Premier Agent and Premier Broker advertising products, which include the delivery of impressions and validated consumer connections, or leads, are sold on a ~~cost per impression~~share of voice basis. Impressions and leads are distributed to Premier Agents and Premier Brokers in proportion to their share of voice, or an agent advertiser’s share of total advertising purchased in a particular zip code. Impressions are delivered when an advertisement of a ~~sold advertisement~~Premier Agent or Premier Broker appears on pages viewed by users of our mobile applications and ~~websites.~~ websites and connections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. Connections and impressions are each provided as part of our advertising services for Premier Agent and Premier Brokers; we do not charge a separate fee for these consumer leads.

Rentals revenue primarily includes advertising sold to property managers, landlords and other rental professionals on a cost per lead, cost per click, cost per lease or cost per ~~lease generated~~listing basis. ~~Mortgages~~Rentals revenue ~~primarily~~also includes ~~advertising sold to mortgage lenders and other mortgage professionals on a cost per lead basis, including our Connect (formerly known as Long Form) and Custom Quote services, as well as~~ revenue generated ~~by Mortech, which provides subscription-based mortgage software solutions, including~~through our rental applications product, whereby potential renters can submit applications to multiple properties over a ~~product and pricing engine and lead management platform.~~ 30-day period for a flat service fee.

Other revenue primarily includes revenue generated by new construction and display advertising, as well as revenue from the sale of various other advertising and business ~~software solutions and services and~~ technology solutions for real estate professionals, including dotloop. New construction revenue primarily includes advertising services sold to home builders on a cost per residential community basis. Display revenue primarily consists of graphical mobile and web advertising sold to advertisers promoting their brands on our mobile applications and websites.

In our Homes segment, we generate revenue from the resale of homes on the open market through our Zillow Offers ~~program. In April 2018, we announced Zillow Group’s direct purchase of~~service. We began buying homes through the Zillow Offers ~~program. We~~service in April 2018, and we began ~~buying~~selling homes in ~~May~~July 2018.

In our Mortgages segment, we generate revenue from advertising sold to mortgage lenders and other mortgage professionals on a cost per lead or subscription basis, including our Connect and Custom Quote services, through mortgage originations and the related sale of ~~2018.~~mortgages on the secondary market through Zillow Home Loans and from Mortech, which

provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.

During the three months ended June 30, ~~2018,~~2019, we generated total revenue of ~~$325.2~~$599.6 million, as compared to ~~$266.9~~$325.2 million in the three months ended June 30, ~~2017,~~2018, an increase of ~~22%~~84%. This increase was primarily the result of the addition of $248.9 million in Homes revenue, a ~~$41.2~~$9.4 million, or ~~22%, increase in Premier Agent revenue, a $9.6 million, or 40%,~~28% increase in Rentals revenue, a $7.7 million, or 40% increase in Mortgages revenue, and a ~~$9.3~~$7.3 million, or ~~29%,~~17% increase in Other revenue. ~~This increase was partially offset by a decrease in Mortgages revenue of $1.6 million, or 8%, as compared with the three months ended June 30, 2017.~~ There were approximately ~~186.1~~194.3 million average monthly unique users of our mobile applications and websites for the three months ended June 30, ~~2018,~~2019, representing year-over-year growth of 4%. Visits increased 14% to 2,181.4 million for the three months ended June 30, 2019 from 1,920.6 million for the three months ended June 30, 2018 from 1,678.7 million for the three months ended June 30, 2017. Net loss for the three months ended June 30, 2018 was $3.1 million, as compared to net loss for the three months ended June 30, 2017 of $21.8 million.2018.

As of June 30, ~~2018,~~2019, we had ~~3,541~~4,880 full-time employees compared to ~~3,181~~4,336 full-time employees as of December 31, ~~2017.~~2018.

Key Metrics

Management has identified unique users and visits as relevant to investors’ and others’ assessment of our financial condition and results of operations.

Unique Users

Measuring unique users is important to us because much of our ~~Premier Agent, Rentals, Mortgages, and other advertising~~ revenue depends in part on our ability to enable real estate, rental and mortgage professionals to connect with our consumer users - home buyers and sellers, renters, and individuals with or looking for a mortgage. Growth in consumer traffic to our ~~display revenue depends in part on~~mobile applications and websites increases the number of impressions, ~~delivered~~clicks, connections, leads and other events we can monetize to generate revenue. For example, Premier Agent revenue and display revenue depend on advertisements being served to users of our ~~users,~~mobile applications and websites, and our Homes segment revenue depends in part on users accessing our mobile applications and websites to engage in the sale and purchase of homes with Zillow Group on the open market. Growth in consumer traffic to our mobile applications and websites increases the number of impressions, clicks, leads, and other events we can monetize to generate revenue. In addition, our community of users improves the quality of our living database of homes with their contributions, which in turn attracts more users.Group.

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, HotPads, Naked Apartments and RealEstate.com ~~(as of June 2017)~~ measure unique users with Google Analytics, and Trulia measures unique users with Adobe ~~Analytics (formerly called Omniture analytical tools).~~Analytics.

Three Months Ended
June 30,
2017 to 2018
% Change
2018 2017
(in millions)
Average Monthly Unique Users 186.1
178.1
4 %



	Three Months Ended June 30,		2018 to 2019 % Change
	2019	2018	2018 to 2019 % Change
	(in millions)
Average Monthly Unique Users	194.3	186.1	4	%

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 be transaction-ready real estate market participants and therefore more sought-after by our ~~agent and other~~ real estate ~~professional~~ advertisers or more likely to participate in our Zillow Offers ~~program.~~program or use Zillow Homes Loans.

We define a visit as a group of interactions by users with the Zillow, Trulia, StreetEasy and RealEstate.com ~~(as of June 2017)~~ mobile applications and websites, as we monetize our Premier Agent and Premier Broker products on these 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, StreetEasy and RealEstate.com 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, StreetEasy and RealEstate.com 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.

Three Months Ended
June 30,
2017 to 2018
% Change
2018 2017
(in millions)
Visits 1,920.6
1,678.7
14 %



	Three Months Ended June 30,		2018 to 2019 % Change
	2019	2018	2018 to 2019 % Change
	(in millions)
Visits	2,181.4	1,920.6	14	%

Basis of Presentation

Revenue

We recognize revenue when (or as) we satisfy our performance obligations by transferring control of ~~the~~ promised products or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services.

In our ~~Internet, Media & Technology (“IMT”)~~IMT segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to ~~businesses and professionals primarily associated with the~~ residential real estate ~~rental~~businesses and ~~mortgage industries.~~professionals. These professionals include real estate, rental and ~~mortgage~~new construction professionals and brand advertisers. Our ~~four~~three primary revenue categories within our IMT segment are Premier Agent, Rentals ~~Mortgages~~ and Other.

In our Homes segment, we generate revenue from the resale of homes on the open market through our Zillow Offers program.

In our Mortgages segment, we generate revenue from the sale of advertising services to mortgage lenders and other mortgage professionals, mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans, as well as Mortech mortgage software solutions.

Premier Agent Revenue. Premier Agent revenue is derived from our Premier Agent and Premier Broker programs. Our Premier Agent and Premier Broker programs offer a suite of marketing and business technology products and services to help real estate agents and brokers achieve their advertising goals, while growing and managing their businesses and brands. All Premier Agents and Premier Brokers receive access to a dashboard portal on our mobile application or website that provides individualized program performance analytics, our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent or Premier Broker through our mobile and web platforms and our account management tools. ~~We have concluded that the~~The marketing and business technology products and services promised to Premier Agents and Premier Brokers ~~represent distinct~~are delivered over time, as the customer simultaneously receives and consumes the benefit of the performance obligations.

~~We offer our~~ Premier Agent and Premier Broker advertising products, which include the delivery of impressions and validated consumer connections, or leads, are offered on a ~~cost per impression~~share of voice basis. Payment is received prior to the delivery of ~~impressions.~~impressions and connections. Impressions are delivered when ~~a sold~~an advertisement appears on pages viewed by users of our mobile applications and ~~websites.~~websites and connections are delivered when consumer contact information is provided to Premier Agents and Premier Brokers. We determine the ~~cost per impression delivered~~number of impressions and connections to deliver to Premier Agents and Premier Brokers in each zip code using ~~an auction-based~~a market-based pricing method in consideration of the total amount spent by Premier Agents and Premier Brokers to purchase impressions and connections in the zip code during the month. This results in the delivery of impressions and connections over time in proportion to each Premier Agent’s and Premier Broker’s share of voice. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly ~~budgeted~~prepaid spend in that zip code as a percentage of the total monthly ~~budgeted~~prepaid spend of all Premier Agents and Premier Brokers in that zip ~~code. The cost per impression that we charge is dynamic - as demand for impressions in a zip~~ code, increases or decreases, the cost per impression in that zip code may be increased or decreased accordingly. The price paid for each impression is representative of the price at which we would sell an impression separately to a customer, or the stand-alone selling price.

In April 2018, we began testing a new form of lead validation and distribution related to our auction-based pricing model whereby the share of voice purchased by Premier Agents and Premier Brokers will representincludes both the share of impressions delivered as advertisements appearing on pages viewed by users of our mobile applications and websites, as well as the proportion of ~~validated~~ consumer connections a Premier Agent or Premier Broker receives. ~~When consumers who are interested~~The number of impressions and connections delivered for a given spend level is dynamic - as demand for advertising in ~~connecting with~~ a ~~real estate professional do not select~~zip code increases or decreases, the number of impressions and connections delivered to a ~~specific~~ Premier Agent or Premier Broker ~~advertisement~~in that zip code decreases or increases accordingly.

We recognize revenue related to the Premier Agent and Premier Broker products and services based on ~~one~~the monthly prepaid spend recognized on a straight-line basis during the monthly billing period over which the products and services are provided. This methodology best depicts how we satisfy our performance obligations to customers, as we continuously transfer

control of ~~Zillow Group’s mobile applications or websites,~~ the ~~validated consumer leads will~~performance obligations to the customer over time. We have not allocated the transaction price to each individual performance obligation within our Premier Agent and Premier Broker arrangements, as the amounts recognized would be ~~distributed to~~the same irrespective of any allocation.

In October 2018, we began testing a new pricing model, Flex, for Premier Agent and Premier Broker advertising services in limited markets. With the Flex model, Premier Agents and Premier Brokers ~~in proportion~~are provided with validated leads at no upfront cost, and they pay a performance advertising fee only when a real estate transaction is closed with one of the leads. With this pricing model, the transaction price represents variable consideration, as the amount to ~~their share of voice. We believe distributing validated consumer connection leads~~which we expect to be entitled varies based on the ~~basis~~number of ~~share of voice creates better experiences for consumers and further strengthens our partnerships with~~validated leads that convert into real estate ~~professionals. We expect~~transactions and the value of those transactions. As our experience with this pricing model is limited, we fully constrain the estimated variable consideration. When a real estate transaction is closed with a Flex lead and payment is made, the uncertainty is resolved, and revenue is recognized in the ~~future~~period for the satisfied performance obligations. We will continuously reevaluate this determination and will begin estimating variable consideration and recording revenue as performance obligations are transferred when we have concluded we are able to ~~apply this new form of lead distribution more broadly with nationwide adoption by the end of 2018. We are unable to predict whether this change will have~~make a ~~material impact on revenue or other results of operations.~~reliable estimate.

Rentals Revenue. Rentals revenue includes ~~our rentals marketplace~~the sale of advertising and a suite of tools ~~for~~to rental ~~professionals.~~professionals, landlords and other market participants. Rentals revenue primarily includes revenue generated by advertising sold to property managers, landlords and other rental professionals on a cost per lead, cost per click, cost per lease or cost per ~~lease generated~~listing basis. We recognize revenue as leads or clicks are provided to rental professionals, or as listings from rental professionals are published on our mobile applications and websites, which is the amount for which we have the right to invoice. The number of leases generated through our rentals marketplace during the period is accounted for as variable consideration, and we estimate these amounts based on the expected number of qualified leases secured during the period. We do not believe that a significant reversal in the amount of cumulative revenue recognized will occur once the uncertainty related to the number of leases secured is subsequently resolved.

Beginning in 2018, Rentals revenue also includes revenue generated from our rental applications product through which potential renters can submit applications to multiple rental properties over a 30-day period for a flat service fee. We recognize revenue for the rental applications product on a straight-line basis during the contractual period over which the customer has the right to access and submit the rental application.

Other Revenue. 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. Our new construction marketing solutions allow home builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis, and revenue is recognized on a straight-line basis during the contractual period over which the communities are advertised on our mobile applications and websites. New construction revenue also includes revenue generated on a cost per impression basis whereby revenue is recognized on a straight-line basis during the contractual period over which the advertising impressions are delivered. Consideration for new construction products is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.

Homes Revenue. Homes revenue is derived from the resale of homes on the open market through our Zillow Offers program. Homes revenue is recognized at the time of the closing of the home sale when title to and possession of the property are transferred to the buyer. The amount of revenue recognized for each home sale is equal to the full sale price of the home net of resale concessions and credits to the buyer and does not reflect real estate agent commissions, closing or other costs associated with the transaction.

Mortgages Revenue.Mortgages revenue primarily includes marketing products sold to mortgage professionals on a cost per lead basis, including our Custom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service. Zillow Group operates Custom Quote and Connect through its wholly owned subsidiary, Zillow Group Marketplace, Inc., a licensed mortgage broker. For our Connect and Custom Quote cost per lead ~~mortgage~~ marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender.

Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.

For our cost per lead mortgages products, we recognize revenue when a user contacts a mortgage professional through ~~Zillow Group’s~~our mortgages platform, which is the amount for which we have the right to invoice. For our subscription product, the opportunity to receive a consumer contact is based on the mortgage professional’s relative share of voice in a geographic county. When a consumer submits a contact, ~~Zillow Group contacts~~we contact a group of subscription mortgage professionals via text message, and the first mortgage professional to respond receives the consumer contact information. We recognize revenue based on the contractual spend recognized on a straight-line basis during the contractual period over which the service is provided. This methodology best depicts how we satisfy our performance obligation to subscription customers, as we continuously transfer control of the performance obligation to the customer throughout the contractual period.

Beginning in the fourth quarter of 2018, mortgages revenue also includes revenue generated by Zillow Home Loans, Zillow’s affiliated mortgage lender. We elect the fair value option for our mortgage loans held for sale, which are initially recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loans are closed. Net origination costs and fees associated with mortgage loans are recognized as incurred at the time of origination. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers in the secondary mortgage market within a short period of time after origination.

~~Other Revenue.~~ 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. Our new construction marketing solutions allow home builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis, and revenue is recognized on a straight-line basis during the contractual period over which the communities are advertised on our mobile applications and websites. Consideration is billed in arrears. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.

Costs and Expenses

Cost of Revenue. ~~For our IMT segment, our~~ Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries, benefits, bonuses and share-based compensation expense, as well as ~~credit card fees, ad serving costs paid to third parties,~~ revenue-sharing costs related to our commercial business relationships, depreciation expense and costs associated with the operation of our data center and mobile applications and websites. For our IMT and Mortgages segment, cost of revenue also includes credit card fees and ad serving costs paid to third parties. For our Homes segment, our cost of revenue also consists of the consideration paid to acquire, ~~and~~ make ~~necessary~~certain repairs and updates to, and sell each home, including associated overhead costs, as well as inventory valuation adjustments. For our Mortgages segment, our cost of revenue consists of lead acquisition costs and direct costs to originate loans, including underwriting and processing costs.

Sales and Marketing.Sales and marketing expenses consist of advertising costs and other sales expenses related to promotional and marketing activities, as well as selling costs, such as commissions, escrow and title fees, staging, and holding costs, such as utilities, taxes and maintenance, related to our Zillow Offers program. Sales and marketing expenses also include headcount expenses, including salaries, commissions, benefits, bonuses and share-based compensation expense ~~and bonuses~~ for sales, sales support, customer support, marketing and public relations employees and depreciation expense. For our Homes segment, sales and marketing expenses also consist of selling costs, such as real estate agent commissions, escrow and title fees, and staging costs, as well as holding costs, including utilities, taxes and maintenance. For our Mortgages segment, sales and marketing expenses also include headcount expenses for loan officers and specialists supporting Zillow Home Loans.

Technology and Development.Technology and development expenses consist of headcount expenses, including salaries, benefits, bonuses and share-based compensation expense ~~and bonuses~~ for ~~salaried employees and contractors~~individuals engaged in the design, development and testing of our mobile applications and websites and the tools and applications that support our products. Technology and development expenses also include equipment and maintenance costs. Technology and development expenses also include amortization costs related to capitalized website and development activities, amortization of software, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our

mobile applications and websites, and amortization of intangible assets recorded in connection with acquisitions, including developed technology and customer relationships, amongst others. Technology and development expenses also include depreciation expense.

General and Administrative.General and administrative expenses consist of headcount expenses, including salaries, benefits, bonuses and share-based compensation expense ~~and bonuses~~ 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.

Acquisition-related Costs. Acquisition-related costs consist of investment banking, legal, accounting, tax and regulatory filing fees associated with effecting acquisitions.

Integration Costs. Integration costs consist of expenses incurred to incorporate operations, systems, technology and rights and responsibilities of acquired companies, during both pre-closing and post-closing periods, into Zillow Group’s business. For the three and six month periods ended June 30, 2019, integration costs primarily include consulting-related expenses incurred in connection with the integration of Zillow Home Loans.

Other Income

Other income consists primarily of interest income earned on our cash, cash equivalents and short-term investments. For our Mortgages segment, other income includes interest income earned on mortgage loans held for sale.

Interest Expense

~~Interest~~Our corporate interest expense consists of interest on ~~the~~Trulia’s Convertible Senior Notes due in 2020 ~~Notes~~(the “2020 Notes”) we guaranteed in connection with our February 2015 acquisition of Trulia, interest on the Convertible Senior Notes due in 2021 (the “2021 Notes”) we issued in December 2016 and interest on the ~~2021~~Convertible Senior Notes due in 2023 (the “2023 Notes”) we issued in ~~December 2016.~~July 2018. Interest is payable on the 2020 Notes at the rate of 2.75% semi-annually on June 15 and December 15 of each year. Interest is payable on the 2021 Notes at the rate of 2.00% semi-annually on June 1 and December 1 of each year. ~~Beginning in July 2018, interest expense will include interest on the Convertible Senior Notes due 2023 (the “2023 Notes”) we issued in July 2018.~~ Interest ~~will be~~is payable on the 2023 Notes at the rate of 1.50% semi-annually ~~in arrears~~ on January 1 and July 1 of each year.

For our Homes segment, interest expense includes interest on borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our revolving credit facilities related to our Zillow Offers business. Borrowings on our revolving credit facilities bear interest at a floating rate based on the one-month LIBOR plus an applicable margin, as defined in the credit agreements.

For our Mortgages segment, interest expense includes interest on the warehouse lines of credit acquired as part of the acquisition of Zillow Home Loans. Each warehouse line of credit provides for a current and maximum borrowing capacity of $50.0 million, or $100.0 million in total. Borrowings on the warehouse lines of credit bear interest at the one-month LIBOR rate plus an applicable margin, as defined in the credit agreements governing the warehouse lines of credit.

Income Taxes

~~On December 22, 2017,~~

Results of Operations

In 2018, our business model evolved significantly with the ~~U.S. government enacted comprehensive tax legislation under~~launch of Zillow Offers in April and the ~~Tax Cuts~~acquisition of Zillow Home Loans in October. Zillow Offers, for example, is a cash- and ~~Jobs Act (the “Tax Act”). The Tax Act makes broad~~inventory-intensive business with a high cost of revenue as compared with other parts of our operations; the cost of revenue includes the amount we pay to purchase homes. Revenue for the Homes segment includes the full sale prices of homes less resale concessions and ~~complex changes~~credits to the ~~U.S. tax code, including but~~buyer, and does not limited to: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain untaxed earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and how AMT credits are utilized; (5) the additional limitations on deducting executive compensation under IRC Section 162(m); and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Shortly after enactment, implementation guidance was released by the Securities and Exchange Commission that requires a company to reflect the income tax effects of those aspects of the Tax Act for which the accounting under the accounting rules is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, it should record a provisional estimate in the financial statements. Further, the implementation guidance also provides for a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting pursuant to the accounting rules.

~~We recorded an income tax benefit of $10.6~~ million for the three months ended June 30, 2018, which was calculated as the difference between the income tax benefit of $8.0 million recorded for the six months ended June 30, 2018 and the income tax expense of $2.6 million recorded for the three months ended March 31, 2018. The $8.0 million tax benefit recorded for the six months ended June 30, 2018 is comprised of a $5.4 million income tax benefit, which was calculated using an estimate of our annual effective tax rate of 22.0% applied to our loss before income taxes of $29.7 million for the six months ended June 30, 2018 adjusted by a $1.1 million tax benefit limitation, and a $2.6 million discrete income tax benefit asreal estate agent commissions, closing or other associated costs. As a result of our estimated impact from the Tax Act. Our estimated annual effective tax rate for the six months ended June 30, 2018 is primarily impacted by the release in valuation allowance resulting from indefinite-lived deferred tax assets and their ability to offset indefinite-lived intangible deferred tax liabilities.

As of June 30, 2018, we have not completed our accounting for the income tax effects related to the deduction limitations on compensation under the Tax Act, and we have recorded provisional adjustments where we were able to make reasonable estimates of the effects for which our analysis is not yet complete. The provisional adjustments relate to the grandfatheringthis evolution of our ~~executive compensation under Section 162(m)~~business model, financial performance for prior year periods may not be indicative of the Internal Revenue Code. We expect the Internal Revenue Service to provide further guidance in applying the written binding contracts requirement under the Tax Act. We believe the clarifications of this rule could impact our financial position and results of operations by an estimated $2.0 million to $5.0 million.

~~Results of Operations~~future performance.

The following tables present our results of operations for the periods indicated and as a percentage of total revenue:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(in thousands, except per share data, unaudited)												(in thousands, except per share data, unaudited)
Statements of Operations Data:
Revenue:
IMT	$	325,246		$	266,850		$	625,125		$	512,625		$	323,669		$	305,941		$	621,941		$	586,797
Homes	—			—			—			—			248,924			—			377,396			—
Mortgages													26,985			19,305			54,345			38,328
Total revenue	325,246			266,850			625,125			512,625			599,578			325,246			1,053,682			625,125
Cost of revenue (exclusive of amortization) (1)(2):
IMT	25,527			20,260			49,446			40,492			26,059			24,290			50,310			46,884
Homes	—			—			—			—			240,732			—			363,151			86
Mortgages													4,430			1,237			9,108			2,476
Total cost of revenue	25,527			20,260			49,446			40,492			271,221			25,527			422,569			49,446
Sales and marketing (1)	147,727			131,218			285,018			237,158			187,433			147,727			349,020			285,018
Technology and development (1)	100,376			78,541			194,309			151,409			120,330			100,376			228,100			194,309
General and administrative (1)	60,579			53,346			116,652			98,812			82,839			60,579			178,613			116,652
Acquisition-related costs	632			43			659			148			—			632			—			659
Integration costs													293			—			645			—
Total costs and expenses	334,841			283,408			646,084			528,019			662,116			334,841			1,178,947			646,084
Loss from operations	(9,595		)	(16,558		)	(20,959		)	(15,394		)	(62,538		)	(9,595		)	(125,265		)	(20,959		)
Other income	3,089			1,610			5,535			2,563			9,458			3,089			18,626			5,535
Interest expense	(7,187		)	(6,897		)	(14,260		)	(13,620		)	(18,897		)	(7,187		)	(35,363		)	(14,260		)
Loss before income taxes	(13,693		)	(21,845		)	(29,684		)	(26,451		)	(71,977		)	(13,693		)	(142,002		)	(29,684		)
Income tax benefit	10,600			—			8,000			—			—			10,600			2,500			8,000
Net loss	$	(3,093	)	$	(21,845	)	$	(21,684	)	$	(26,451	)	$	(71,977	)	$	(3,093	)	$	(139,502	)	$	(21,684	)
Net loss per share — basic and diluted	$	(0.02	)	$	(0.12	)	$	(0.11	)	$	(0.14	)	$	(0.35	)	$	(0.02	)	$	(0.68	)	$	(0.11	)
Weighted-average shares outstanding — basic and diluted	194,155			185,439			192,807			184,305			205,754			194,155			205,137			192,807
Other Financial Data:
Adjusted EBITDA (3)	$	56,000		$	39,700		$	102,310		$	94,499		$	2,297		$	56,000		$	26,219		$	102,310


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
	(in thousands, unaudited)								(in thousands, unaudited)
(1) Includes share-based compensation as follows:
Cost of revenue	$	1,256	$	1,025	$	2,211	$	1,928	$	936	$	1,256	$	1,816	$	2,211
Sales and marketing	6,340		6,250		11,502		11,780		6,801		6,340		12,451		11,502
Technology and development	14,347		10,400		25,889		18,891		18,399		14,347		33,908		25,889
General and administrative	17,000		11,518		30,082		22,989		17,496		17,000		61,581		30,082
Total	$	38,943	$	29,193	$	69,684	$	55,588	$	43,632	$	38,943	$	109,756	$	69,684
(2) Amortization of website development costs and intangible assets included in technology and development	$	21,020	$	23,159	$	43,569	$	46,420	$	14,656	$	21,020	$	29,056	$	43,569
(3) See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
	(unaudited)								(unaudited)
Percentage of Revenue:
Revenue:
IMT	100	%	100	%	100	%	100	%	54	%	94	%	59	%	94	%
Homes	0		0		0		0		42		0		36		0
Mortgages									5		6		5		6
Total revenue	100		100		100		100		100		100		100		100
Cost of revenue (exclusive of amortization):
IMT	8		8		8		8		4		8		5		8
Homes	0		0		0		0		40		0		34		—
Mortgages									1		—		1		—
Total cost of revenue	8		8		8		8		45		8		40		8
Sales and marketing	45		49		46		46		31		45		33		46
Technology and development	31		29		31		30		20		31		22		31
General and administrative	19		20		19		19		14		19		17		19
Acquisition-related costs	—		—		—		—		0		—		0		—
Integration costs									—		0		—		0
Total costs and expenses	103		106		103		103		110		103		112		103
Loss from operations	(3	)	(6	)	(3	)	(3	)	(10	)	(3	)	(12	)	(3	)
Other income	1		1		1		—		2		1		2		1
Interest benefit	(2	)	(3	)	(2	)	(3	)
Interest expense									(3	)	(2	)	(3	)	(2	)
Loss before income taxes	(4	)	(8	)	(5	)	(5	)	(12	)	(4	)	(13	)	(5	)
Income tax benefit	3		0		1		0		0		3		—		1
Net loss	(1	)%	(8	)%	(3	)%	(5	)%	(12	)%	(1	)%	(13	)%	(3	)%

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA, a non-GAAP financial measure, within this Quarterly Report on Form ~~10-Q, a non-GAAP financial measure.~~10-Q. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q as it is a key metric used by our management and board 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 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 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 our other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods presented:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(in thousands, unaudited)												(in thousands, unaudited)
Reconciliation of Adjusted EBITDA to Net Loss:
Net loss	$	(3,093	)	$	(21,845	)	$	(21,684	)	$	(26,451	)	$	(71,977	)	$	(3,093	)	$	(139,502	)	$	(21,684	)
Other income	(3,089		)	(1,610		)	(5,535		)	(2,563		)	(9,458		)	(3,089		)	(18,626		)	(5,535		)
Depreciation and amortization expense	26,020			27,022			52,926			54,157			21,203			26,020			41,728			52,926
Share-based compensation expense	38,943			29,193			69,684			55,588			43,632			38,943			109,756			69,684
Acquisition-related costs	632			43			659			148			—			632			—			659
Interest expense	7,187			6,897			14,260			13,620			18,897			7,187			35,363			14,260
Income tax benefit	(10,600		)	—			(8,000		)	—			—			(10,600		)	(2,500		)	(8,000		)
Adjusted EBITDA	$	56,000		$	39,700		$	102,310		$	94,499		$	2,297		$	56,000		$	26,219		$	102,310

Three Months Ended June 30, ~~2018~~2019 Compared to Three Months Ended June 30, ~~2017~~2018

Revenue

The following table presents Zillow Group’s revenue by category and by segment for the periods presented (in thousands, unaudited):


	Three Months Ended June 30,				2017 to 2018 % Change		Three Months Ended June 30,				2018 to 2019 % Change
	2018		2017		2017 to 2018 % Change		2019		2018		2018 to 2019 % Change
Percentage of Revenue:
IMT Revenue:
Premier Agent	$	230,885	$	189,725	22	%	$	231,961	$	230,885	—	%
Rentals	33,288		23,710		40	%	42,670		33,288		28	%
Other							49,038		41,768		17	%
Total IMT revenue							323,669		305,941		6	%
Homes							248,924		—		N/A
Mortgages	19,305		20,936		(8	)%	26,985		19,305		40	%
Other	41,768		32,479		29	%
Homes	—		—		N/A
Total revenue	$	325,246	$	266,850	22	%	$	599,578	$	325,246	84	%

The following table presents Zillow Group’s revenue categories as percentages of total revenue for the periods presented (unaudited):


	Three Months Ended June 30,				Three Months Ended June 30,
	2018		2017		2019		2018
Percentage of Total Revenue:
IMT Revenue:
Premier Agent	71	%	71	%	39	%	71	%
Rentals	10		9		7		10
Other					8		13
Total IMT revenue					54		94
Homes					42		0
Mortgages	6		8		5		6
Other	13		12
Homes	—		—
Total revenue	100	%	100	%	100	%	100	%

Total revenue increased by ~~$58.4~~$274.3 million, or ~~22%~~84%, for the three months ended June 30, ~~2018~~2019 compared to the three months ended June 30, ~~2017.~~2018. The increase in total revenue was primarily attributable to our Zillow Offers business, which began selling homes in July of 2018. Homes revenue was $248.9 million for the three months ended June 30, 2019. There were approximately ~~186.1~~194.3 million average monthly unique users of our mobile applications and websites for the three months ended June 30, ~~2018~~2019 compared to ~~178.1~~186.1 million average monthly unique users for the three months ended June 30, ~~2017,~~2018, representing year-over-year growth of 4%. Visits increased 14% to 2,181.4 million for the three months ended June 30, 2019 from 1,920.6 million for the three months ended June 30, ~~2018 from 1,678.7 million for the three months ended June 30, 2017.~~2018. The increases in unique users and visits increased the number of impressions, leads, clicks and other events we monetized across our revenue categories.

IMT Segment

Premier Agent Revenue. Premier Agent revenue grew to $232.0 million for the three months ended June 30, 2019 from $230.9 million for the three months ended June 30, 2018, ~~from $189.7 million for the three months ended June 30, 2017,~~ an increase of ~~$41.2 million, or 22%. Premier Agent revenue represented 71% of total revenue for the three months ended June 30, 2018 and 2017.~~$1.1 million. Premier Agent revenue was positively impacted by an increase in visits. As discussed above, visits increased 14% to 2,181.4 million for the three months ended June 30, 2019 from 1,920.6 million for the three months ended June 30, ~~2018 from 1,678.7 million for the three months ended June 30, 2017. This~~2018. The increase in visits increased the number of impressions and leads we could monetize in our Premier Agent marketplace. Year-over-year Premier Agent revenue growth slowed, which we believe was due to changes made to our Premier Agent and Premier Broker advertising programs in 2018 to improve lead quality and consumer connections. We believe these changes contributed to an increase in advertiser churn, or exit from our advertising platform. Advertiser churn has normalized throughout the first half of 2019.

Premier Agent revenue per visit ~~increased~~decreased by 6%12% to $0.106 for the three months ended June 30, 2019 from $0.120 for the three months ended June 30, ~~2018 from $0.113 for the three months ended June 30, 2017.~~2018. We calculate Premier Agent revenue per visit by dividing the revenue generated by our Premier Agent and Premier Broker programs in the period by the number of visits in the period. We believe the decrease in Premier Agent revenue per visit was ~~also positively impacted by market forces continuing~~primarily a result of changes we made to ~~take effect within the auction-based pricing method we deployed for~~ our Premier Agent and Premier Broker ~~products~~programs in ~~2016 and 2017, which may have increased demand for our advertising platform.~~

In2018. For example, in April 2018, we began testing a new method of consumer lead validation and distribution to our Premier Agent and Premier Broker advertisers related to our auction-based pricing model. With this new method of consumer lead distribution, the share of voice, or an agent advertiser’s share of total advertising purchased in a particular zip code, purchased by Premier Agents and Premier Brokers will represent both the share of impressions delivered as advertisements appearing on pages viewed by users of our mobile applications and websites, as well as the proportion of validated consumer connections a Premier Agent or Premier Broker receives.advertisers. A validated consumer connection is made when a consumer who is interested in connecting with a real estate professional does not select a specific Premier Agent or Premier Broker with whom they want to connect through one of our mobile applications or ~~websites. Applying~~websites; applying the new model, these validated consumer leads ~~will be~~are distributed to Premier Agents and Premier Brokers in proportion to their share of ~~voice. We believe distributing validated consumer connection leads on the basis of~~voice, or an agent advertiser’s share of ~~voice creates better experiences for consumers and further strengthens our partnerships with real estate professionals. We expect~~total advertising purchased in a particular zip code. This transition to ~~apply this~~the new ~~form of~~ lead validation and distribution process resulted in a decrease in the total number of leads received by some advertisers and increased advertiser churn in the third and fourth quarters of 2018 as current and prospective Premier Agents and Premier Brokers evaluated the value of these higher-quality leads and market-based pricing continued to take effect. We believe we made appropriate adjustments to the Premier Agent and Premier Broker programs to help address this advertiser churn, by, for example, decreasing the number of screening questions posed to consumers during the consumer lead validation process, in an effort to return to prior lead volumes, and setting price caps on the cost per impression and cost per lead paid by Premier Agents and Premier Brokers to help stabilize auction-based pricing dynamics in certain markets, as advertiser churn has normalized throughout the first half of 2019.

In the second quarter of 2019, Premier Agent revenue also included an immaterial amount of revenue generated from our initial testing of a new pricing model for Premier Agent and Premier Broker advertisers, Flex, in limited markets. With the Flex model, Premier Agents and Premiers Brokers are provided with validated leads at no upfront cost, and they pay a performance advertising fee only when a real estate transaction is closed with one of the leads. We expect to continue testing this pricing model in additional regions and may implement it more broadly ~~with nationwide adoption by~~in the ~~end of 2018. We are unable to predict whether this change will have a material impact on revenue or other results of operations.~~future.

Rentals Revenue. Rentals revenue was $42.7 million for the three months ended June 30, 2019 compared to $33.3 million for the three months ended June 30, 2018, ~~compared to $23.7 million for the three months ended June 30, 2017,~~ an increase of ~~$9.6~~$9.4 million, or ~~40%~~28%. The increase in ~~rentals~~Rentals revenue was ~~partially~~primarily attributable to an increase in the number of average monthly rental listings on our mobile applications and websites, which increased ~~93%~~6% to 40,336 average monthly rental listings for the three months ended June 30, 2019 from 38,141 average monthly rental listings for the three months ended June 30, ~~2018 from 19,720 average monthly rental listings for the three months ended June 30, 2017.~~2018. Average monthly rental listings include the average monthly monetized, deduplicated rental listings for the period, which are displayed across all of our mobile applications and websites. An increase in rental listings on our mobile applications and websites increases the likelihood that a consumer will contact a rental professional, which in turn increases the likelihood of a lead, click, lease or ~~lease~~listing that we monetize. The increase in average monthly rental listings was primarily a result of our monetization of rental listings on our StreetEasy brand mobile application and website beginning in the third quarter of 2017. The quarterly revenue per average monthly rental listing ~~decreased 26%~~increased 21% to approximately $1,058 for the three months ended June 30, 2019 from approximately $873 for the three months ended June 30, 2018 from approximately $1,202 for the three months ended June 30, 2017, due primarily to the monetization of rental listings on StreetEasy beginning in the third quarter of 2017, which typically generate less revenue per

~~listing than larger rental properties.~~2018. We calculate quarterly revenue per average monthly rental listing by dividing total ~~rentals~~Rentals revenue for the period by the average monthly deduplicated rental listings for the period and then dividing by the number of quarters in the period. The increase in ~~rentals~~quarterly revenue per average monthly rental listing is primarily due to an increase in the adoption of our rental applications product. The increase in Rentals revenue was also driven in part by the 14% increase in visits to ~~1,920.6~~2,181.4 million for the three months ended June 30, ~~2018,~~2019, which ~~similarly~~ increases the likelihood a consumer will contact a rental professional ~~which~~and, in turn, increases the likelihood of a lead, click, lease or ~~lease~~listing that we monetize.

Other Revenue. Other revenue was $49.0 million for the three months ended June 30, 2019 compared to $41.8 million for the three months ended June 30, 2018, an increase of $7.3 million, or 17%. The increase in Other revenue was primarily a result of a 32% increase in revenue generated by our new construction marketing solutions. Growth in new construction revenue was primarily attributable to higher spend in our cost per impression product and increases in adoption by and advertising sales to new home builders through our new construction platform.

Homes Segment

Homes revenue was $248.9 million for the three months ended June 30, 2019 due to the sale of 786 homes at an average selling price of $316.7 thousand per home. For the three months ended March 31, 2019, Homes revenue was $128.5 million as a result of the sale of 414 homes. The increase in Homes revenue as compared with the prior quarterly period was primarily a result of an increase in the number of homes sold in the period as consumer adoption of Zillow Offers increases in geographic areas in which it is currently operating, and as Zillow Offers expands into new geographic markets. We did not record any revenue within the Homes Segment for the second quarter of 2018. As of June 30, 2019, Zillow Offers was operating in 11 metropolitan areas.

Mortgages Segment

Mortgages revenue was $27.0 million for the three months ended June 30, 2019 compared to $19.3 million for the three months ended June 30, 2018, ~~compared to $20.9 million for the three months ended June 30, 2017, a decrease~~an increase of ~~$1.6~~$7.7 million, or 8%40%. The ~~decrease~~increase in mortgages revenue was primarily a result of ~~decreased~~the addition of revenue generated by ~~our Connect~~Zillow Home Loans, Zillow’s affiliated mortgage lender, which we acquired in the fourth quarter of 2018.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

Revenue

The following table presents Zillow Group’s revenue by category and ~~Custom Quote services. In~~by segment for the ~~first half~~periods presented (in thousands, unaudited):



	Six Months Ended June 30,				2018 to 2019 % Change
	2019		2018		2018 to 2019 % Change
Percentage of Revenue:
IMT Revenue:
Premier Agent	$	449,696	$	444,617	1	%
Rentals	80,508		62,351		29	%
Other	91,737		79,829		15	%
Total IMT revenue	621,941		586,797		6	%
Homes	377,396		—		N/A
Mortgages	54,345		38,328		42	%
Total revenue	$	1,053,682	$	625,125	69	%

The following table presents Zillow Group’s revenue categories as percentages of ~~2018, we began testing and implementation of a new consumer lead distribution model~~total revenue for the periods presented (unaudited):



	Six Months Ended June 30,
	2019		2018
Percentage of Total Revenue:
IMT Revenue:
Premier Agent	43	%	71	%
Rentals	8		10
Other	9		13
Total IMT revenue	59		94
Homes	36		0
Mortgages	5		6
Total revenue	100	%	100	%

Total revenue increased by $428.6 million, or 69%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increase in ~~select markets. Following full implementation of the new lead distribution model later in 2018, we expect to deliver fewer, more transaction-ready consumer connections~~total revenue was primarily attributable to our ~~advertising lenders,~~Zillow Offers business, which ~~we believe will result~~began selling homes in ~~a more efficient experience~~July of 2018. Homes revenue was $377.4 million for ~~all participants. We believe~~ the ~~decrease in revenue generated by Connect was primarily a result~~six months ended June 30, 2019. There were approximately 194.3 million average monthly unique users of our mobile applications and websites for the fewer, higher quality consumer leads delivered in connection with our testing and initial implementation of the new consumer lead distribution model in select markets, and other product iterations across our sites which also ledthree months ended June 30, 2019 compared to ~~a decrease in leads.~~

In addition, we believe rising mortgage interest rates in the United States have contributed to a decrease in monetization events, primarily for our Custom Quote service, where we experienced lower refinance volumes than expected. We are uncertain how interest rates will impact mortgages revenue in future periods. The number of mortgage loan information requests submitted by consumers increased 22% to 6.4186.1 million average monthly unique users for the three months ended June 30, 2018, ~~from 5.3~~representing year-over-year growth of 4%. The increase in unique users increased the number of impressions, leads, clicks and other events we monetized across our revenue categories.

IMT Segment

Premier Agent Revenue. Premier Agent revenue grew to $449.7 million~~mortgage loan information requests submitted by consumers~~ for the ~~three~~six months ended June 30, ~~2017. This resulted in a 24%decrease in our average revenue per loan information request~~2019 from $444.6 million for the ~~three~~six months ended June 30, 2018, ~~compared~~an increase of $5.1 million, or 1%. Premier Agent revenue was positively impacted by an increase in visits. Visits increased 14% to 4,201.2 million for the ~~three~~six months ended June 30, ~~2017.~~2019 from 3,685.4 million for the six months ended June 30, 2018. The ~~growth~~increase in ~~loan information requests submitted by consumers increases the likelihood of a monetization event, but there is not a direct correlation between~~visits increased the number of ~~loan requests~~impressions we could monetize in our Premier Agent marketplace. Year-over-year Premier Agent revenue growth slowed, which we believe was due to changes made to our Premier Agent and ~~mortgage~~Premier Broker advertising programs in 2018 to improve lead quality and consumer connections, which led to an increase in advertiser churn, or exit from our advertising platform. Advertiser churn has normalized throughout the first half of 2019.

In the first half of 2019, Premier Agent revenue ~~because loan information requests do not always result~~also included an immaterial amount of revenue generated from our initial testing of a new pricing model for Premier Agent and Premier Broker advertisers, Flex, in ~~revenue recognition.~~limited markets.

~~Other~~Rentals Revenue. Rentals revenue was ~~$41.8~~$80.5 million for the ~~three~~six months ended June 30, 2019 compared to $62.4 million for the six months ended June 30, 2018, ~~compared to $32.5 million for the three months ended June 30, 2017,~~ an increase of ~~$9.3~~$18.2 million, or 29%. The increase in ~~other~~Rentals revenue was primarily attributable to an increase in the number of average monthly rental listings on our mobile applications and websites, which increased 8% to 39,732 average monthly rental listings for the six months ended June 30, 2019 from 36,706 average monthly rental listings for the six months ended June 30, 2018. The quarterly revenue per average monthly rental listing increased 19% to approximately $1,013 for the six months ended June 30, 2019 from approximately $849 for the six months ended June 30, 2018. The increase in quarterly revenue per average monthly rental listing is primarily due to an increase in the adoption of our rental applications product. The increase in Rentals revenue was also driven in part by the 14% increase in visits to 4,201.2 million for the six months ended June 30, 2019.

Other Revenue. Other revenue was $91.7 million for the six months ended June 30, 2019 compared to $79.8 million for the six months ended June 30, 2018, an increase of $11.9 million, or 15%. The increase in Other revenue was primarily a result of a ~~61%~~32% increase in revenue generated by our new construction marketing solutions. Growth in new construction revenue was primarily attributable to increases in adoption by and advertising sales to new home builders through our new construction platform.

~~Consistent with our expectations, we did not record any~~ Homes Segment

Homes revenue for the three months ended June 30, 2018. We expect to record Homes revenue in future quarters as we close on the resale of homes we purchase through our Zillow Offers program. We continue to expect the Homes segment to have a material impact on our consolidated balance sheets, statements of operations and cash flows during the remainder of 2018, including with respect to cost of revenue, sales and marketing expense, and other costs and expenses. Due to the differences between the operational requirements and accounting treatment, among other factors, of the Homes segment as compared with the IMT segment, historical financial results may not be indicative of future financial performance on a consolidated basis.

~~Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017~~

~~Revenue~~

~~The following table presents Zillow Group’s revenue by category for the periods presented (in thousands, unaudited):~~

Six Months Ended
June 30,
2017 to 2018
% Change
2018 2017
Premier Agent $ 444,617
$ 365,026
22 %
Rentals 62,351
45,255
38 %
Mortgages 38,328
41,206
(7 )%
Other 79,829
61,138
31 %
Homes —
—
N/A
Total revenue $ 625,125
$ 512,625
22 %

~~The following table presents Zillow Group’s revenue categories as percentages of total revenue for the periods presented (unaudited):~~

Six Months Ended
June 30,
2018 2017
Percentage of Total Revenue:
Premier Agent 71 % 71 %
Rentals 10
9
Mortgages 6
8
Other 13
12
Homes —
—
Total revenue 100 % 100 %

Total revenue increased by $112.5 million, or 22%, for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. There were approximately 186.1 million average monthly unique users of our mobile applications and websites for the three months ended June 30, 2018 compared to 178.1 million average monthly unique users for the three months ended June 30, 2017, representing year-over-year growth of 4%. This increase in unique users increased the number of impressions, leads, clicks and other events we monetized across our revenue categories.

~~Premier Agent revenue grew to $444.6~~was $377.4 million for the six months ended June 30, ~~2018 from $365.0~~2019 due to the sale of 1,200 homes at an average selling price of $314.5 thousand per home.

Mortgages Segment

Mortgages revenue was $54.3 million for the six months ended June 30, 2017, an increase of $79.6 million, or 22%. Premier Agent revenue represented 71% of total revenue for the six months ended June 30, 2018 and 2017. Premier Agent revenue was positively impacted by an increase in visits. Visits increased 15% to 3,685.4 million for the six months ended June 30, 2018 from 3,211.7 million for the six months ended June 30, 2017. This increase in visits increased the number of impressions we could monetize in our Premier Agent marketplace. Premier Agent revenue per visit increased by 6% to $0.121 for the six months ended June 30, 2018 from $0.114 for the six months ended June 30, 2017. We believe Premier Agent revenue was also positively impacted by market forces continuing to take effect within the auction-based pricing method we deployed for our Premier Agent and Premier Broker products in 2016 and 2017, which may have increased demand for our advertising platform.

~~Rentals revenue was $62.4 million for the six months ended June 30, 2018~~2019 compared to $45.3 million for the six months ended June 30, 2017, an increase of $17.1 million, or 38%. The increase in rentals revenue was partially attributable to an increase in the number of average monthly rental listings on our mobile applications and websites, which increased 90% to 36,706 average monthly rental listings for the six months ended June 30, 2018 from 19,323 average monthly rental listings for the six months ended June 30, 2017. The increase in average monthly rental listings was primarily a result of our monetization of rental listings on our StreetEasy brand mobile application and website beginning in the third quarter of 2017. The quarterly revenue per average monthly rental listing decreased 27% to approximately $849 for the six months ended June 30, 2018 from approximately $1,171 for the six months ended June 30, 2017, due primarily to the monetization of rental listings on StreetEasy beginning in the third quarter of 2017, which typically generate less revenue per listing than larger rental properties. The increase in rentals revenue was also driven in part by the 15% increase in visits to 3,685.4 million for the six months ended June 30, 2018, which similarly increases the likelihood a consumer will contact a rental professional, which in turn increases the likelihood of a lead, click, or lease that we monetize.

~~Mortgages revenue was~~ $38.3 million for the six months ended June 30, 2018, ~~compared to $41.2 million for the six months ended June 30, 2017, a decrease~~an increase of ~~$2.9~~$16.0 million, or 7%42%. The ~~decrease~~increase in mortgages revenue was primarily a result of ~~decreased~~the addition of revenue generated by our Connect and Custom Quote services. In the first half of 2018, we began testing and implementation of a new consumer lead distribution model in select markets. Following full implementation of the new lead distribution model later in 2018, we expect to deliver fewer, more transaction-ready consumer connections to our advertising lenders,Zillow Home Loans, Zillow’s affiliated mortgage lender, which we believe will result in a more efficient experience for all participants. We believe the decrease in revenue generated by Connect was primarily a result of the fewer, higher quality consumer leads delivered in connection with our testing and initial implementation of Connect in select markets, and other product iterations across our sites which also led to a decrease in leads.

~~In addition, we believe rising mortgage interest rates~~acquired in the United States have contributed to a decrease in monetization events, primarily for our Custom Quote service, where we experienced lower refinance volumes than expected. We are uncertain how interest rates will impact mortgages revenue in future periods. The numberfourth quarter of ~~mortgage loan information~~2018.

~~requests submitted by consumers increased 15% to 13.6 millionfor the six months ended June 30, 2018 from 11.8 millionmortgage loan information requests submitted by consumers for the six months ended June 30, 2017. This resulted in a 19%~~decrease in our average revenue per loan information request for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The growth in loan information requests submitted by consumers increases the likelihood of a monetization event, but there is not a direct correlation between the number of loan requests and mortgage revenue because loan information requests do not always result in revenue recognition.

Other revenue was $79.8 million for the six months ended June 30, 2018 compared to $61.1 million for the six months ended June 30, 2017, an increase of $18.7 million, or 31%. The increase in other revenue was primarily a result of a 64% increase in revenue generated by our new construction marketing solutions. Growth in new construction revenue was primarily attributable to increases in adoption by and advertising sales to new home builders through our new construction platform.

Consistent with our expectations, we did not record any Homes revenue for the six months ended June 30, 2018. We expect to record Homes revenue in future quarters as we close on the resale of homes we purchase through our Zillow Offers program.

Three Months Ended June 30, ~~2018~~2019 Compared to Three Months Ended June 30, ~~2017~~2018

Segment Results of Operations

The following table presents Zillow Group’s segment results for the periods presented (in thousands, unaudited):


	Three Months Ended June 30, 2018									Three Months Ended June 30, 2017								Three Months Ended June 30, 2019								Three Months Ended June 30, 2018
	IMT			Homes			Consolidated			IMT			Homes		Consolidated			IMT		Homes			Mortgages			IMT		Homes			Mortgages
Revenue	$	325,246		$	—		$	325,246		$	266,850		$	—	$	266,850		$	323,669	$	248,924		$	26,985		$	305,941	$	—		$	19,305
Costs and expenses:
Cost of revenue	25,527			—			25,527			20,260			—		20,260			26,059		240,732			4,430			24,290		—			1,237
Sales and marketing	145,177			2,550			147,727			131,218			—		131,218			135,440		37,409			14,584			137,972		2,095			7,660
Technology and development	95,967			4,409			100,376			78,541			—		78,541			94,261		18,198			7,871			91,131		3,790			5,455
General and administrative	55,384			5,195			60,579			53,346			—		53,346			54,671		17,808			10,360			52,438		4,176			3,965
Acquisition-related costs	632			—			632			43			—		43			—		—			—			—		—			632
Integration costs																		—		—			293			—		—			—
Total costs and expenses	322,687			12,154			334,841			283,408			—		283,408			310,431		314,147			37,538			305,831		10,061			18,949
Income (loss) from operations	2,559			(12,154		)	(9,595		)	(16,558		)	—		(16,558		)	13,238		(65,223		)	(10,553		)	110		(10,061		)	356
Other income	3,089			—			3,089			1,610			—		1,610			—		—			402			—		—			—
Interest expense	(7,187		)	—			(7,187		)	(6,897		)	—		(6,897		)	—		(5,899		)	(287		)	—		—			—
Loss before income taxes	$	(1,539	)	$	(12,154	)	$	(13,693	)	$	(21,845	)	$	—	$	(21,845	)
Income (loss) before income taxes (1)																		$	13,238	$	(71,122	)	$	(10,438	)	$	110	$	(10,061	)	$	356

(1) The following table presents the reconciliation of total segment loss before income taxes to consolidated loss before income taxes for the period presented (in thousands):



	Three Months Ended June 30,
	2019			2018
Total segment loss before income taxes	$	(68,322	)	$	(9,595	)
Corporate interest expense	(12,711		)	(7,187		)
Corporate other income	9,056			3,089
Consolidated loss before income taxes	$	(71,977	)	$	(13,693	)

IMT Segment

Cost of ~~Revenue~~

Revenue. Cost of revenue was ~~$25.5~~$26.1 million for the three months ended June 30, 2019 compared to $24.3 million for the three months ended June 30, 2018, ~~compared to $20.3 million for the three months ended June 30, 2017,~~ an increase of ~~$5.3~~$1.8 million, or ~~26%~~7%. The increase in cost of revenue was primarily attributable to a ~~$2.8~~$2.1 million increase in data center and connectivity costs, a $1.8 million increase in credit card and ad serving fees and a $1.0 million increase in headcount-related expenses, including share-based compensation expense. We expect our cost of revenue to increase in absolute dollars in future years as we continue to incur more expenses that are associated with growth in revenue.costs.

Sales and ~~Marketing~~

Marketing. Sales and marketing expenses were ~~$145.2~~$135.4 million for the three months ended June 30, 2019 compared to $138.0 million for the three months ended June 30, 2018, ~~compared to $131.2 million for the three months ended June 30, 2017, an increase~~a decrease of ~~$14.0~~$2.5 million, or ~~11%~~2%. The ~~increase~~decrease in sales and marketing expenses was primarily attributable to ~~an $8.9~~a $9.9 million decrease in marketing and advertising expenses, partially offset by a $4.0 million increase in professional services fees, a $2.1 million increase in headcount-related expenses, including share-based compensation expense ~~due primarily to significant growth in the size of our sales team. The increase in sales and marketing expenses was~~

~~also attributable to a $2.3 millionincrease in tradeshows and conferences expense and related travel costs, a $1.1 million increase in marketing and advertising expenses, a $0.7 millionincrease in consulting costs to support our advertising initiatives,~~ and a ~~$1.0~~$1.3 million increase in miscellaneous expenses. We expect our sales and marketing expenses to increase in absolute dollars in future years as we continue to expand our sales team and invest more resources in extending our audience through marketing and advertising initiatives.

Technology and ~~Development~~

Development. Technology and development expenses, which include research and development costs, were ~~$96.0~~$94.3 million for the three months ended June 30, ~~2018~~2019 compared to ~~$78.5~~$91.1 million for the three months ended June 30, ~~2017,~~ 2018,

an increase of ~~$17.4~~$3.1 million, or ~~22%~~3%. Approximately ~~$16.5~~$5.6 millionof the increase related to growth in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering teams to support current and future product initiatives. In addition, there was a ~~$1.8 millionincrease in other non-capitalizable data content expense and a $1.3~~$1.1 million increase in ~~professional services fees,~~software and hardware costs and a $1.1 million increase in the gain on disposal of assets. These increases were partially offset by a ~~$2.2~~$6.2 million decrease in ~~miscellaneous expenses.~~

~~Other data content expense was $11.1 million~~depreciation and $9.3 million, respectively, for the three months ended June 30, 2018 and 2017. Amortization expense included in technology and development for capitalized website development costs and software was $9.7 million and $10.8 million, respectively, for the three months ended June 30, 2018 and 2017. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $8.7 million and $9.9 million, respectively, for the three months ended June 30, 2018 and 2017. Amortization expense included in technology and development for purchased data content intangible assets was $2.5 million for the three months ended June 30, 2018 and 2017.amortization expense. We expect our technology and development expenses to increase in absolute dollars over time as we continue to build new mobile and website functionality and develop new technologies.

General and ~~Administrative~~

Administrative. General and administrative expenses were ~~$55.4~~$54.7 million for the three months ended June 30, 2019 compared to $52.4 million for the three months ended June 30, 2018, ~~compared to $53.3 million for the three months ended June 30, 2017,~~ an increase of ~~$2.0~~$2.2 million, or 4%. The increase in general and administrative expenses was primarily due to a ~~$7.6~~$4.2 million increase in ~~headcount-related expenses, including share-based compensation expense, driven primarily by growth in headcount in shared corporate services to support our engineering and other teams,~~estimated legal liabilities, a $2.3 million ~~increase in software and hardware costs, a $0.8 million~~increase in building lease-related expenses including rent, utilities and insurance, ~~and a $1.8 million increase in miscellaneous expenses,~~ partially offset by a ~~$7.2~~$1.8 million decrease in ~~estimated legal liabilities and~~headcount-related expenses, including share-based compensation expense, a ~~$3.3~~$1.0 million decrease in ~~bad debt expense. We expect general~~business and ~~administrative expenses to increase over time~~state taxes and a $0.7 million decrease in ~~absolute dollars as we continue to expand our business.~~professional services fees.

Homes Segment

Cost of ~~Revenue~~

~~We did not record any cost~~Revenue. Cost of revenue for the three months ended June 30, 2018. Consistent with our expectations, no homes were sold by the Company through Zillow Offers during the period. We expect to record cost of revenue beginning in the third quarter of 2018 as we close on the resale of homes we purchase through our Zillow Offers program.

~~Sales and Marketing~~

~~Sales and marketing expenses were $2.6~~was $240.7 million for the three months ended June 30, ~~2018.~~ 2019. Cost of revenue was primarily attributable to home acquisition and renovation costs related to the 786 homes that we sold during the period. We expect cost of revenue to increase in absolute dollars in future years as we continue to incur more expenses that are associated with growth in revenue and expansion of Zillow Offers into new markets.

Sales and Marketing. Sales and marketing expenses were $37.4 million for the three months ended June 30, 2019 compared to $2.1 million for the three months ended June 30, 2018, an increase of $35.3 million. The increase in sales and marketing expenses was primarily attributable to ~~$1.9~~a $12.3 million increase in headcount-related expenses, including share-based compensation expense, ~~as we continue~~a $10.7 million increase in selling expenses directly attributable to ~~grow our teams to support~~ the ~~Homes segment.~~resale of homes, a $5.1 million increase in holding costs, a $4.5 million increase in marketing and advertising expenses and a $2.7 million increase in miscellaneous expenses. We expect our sales and marketing expenses to increase in absolute dollars in future periods as we continue to expand the Homes segment.

Technology and ~~Development~~

Development. Technology and development expenses, which include research and development costs, were ~~$4.4~~$18.2 million for the three months ended June 30, ~~2018. Technology~~2019 compared to $3.8 million for the three months ended June 30, 2018, an increase of $14.4 million. The increase in technology and development expenses ~~were~~was primarily due to ~~$4.1~~an $11.5 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes ~~segment.~~segment, a $1.0 million increase in data acquisition costs and a $1.9 million increase in miscellaneous expenses. We expect our technology and development expenses to increase in absolute dollars in future periods as we continue to build new website functionality and other technologies that will facilitate the purchasing and sales processes ~~relat~~

edrelated to our Homes segment.

General and ~~Administrative~~

Administrative. General and administrative expenses were ~~$5.2~~$17.8 million for the three months ended June 30, ~~2018.~~2019 compared to $4.2 million for the three months ended June 30, 2018, an increase of $13.6 million. The increase in general and administrative expenses ~~were~~was primarily due to ~~$4.1~~an $8.6 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment. In addition, ~~we incurred $0.6~~there was a $2.5 million increase in building lease-related expenses including rent, utilities and ~~insurance.~~insurance, a $0.8 million increase software and hardware costs and a $1.7 million increase in miscellaneous expenses. We expect general and administrative expenses to increase in absolute dollars in future periods as we continue to expand our Homes business.

Interest Expense. Interest expense was $5.9 million for the three months ended June 30, 2019. Interest expense was primarily attributable to borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our revolving credit facilities. There was no interest expense recorded for the three months ended June 30, 2018. We expect interest expense to increase in absolute dollars in future periods as we continue to expand our Homes business.

Mortgages Segment

Cost of Revenue. Cost of revenue was $4.4 million for the three months ended June 30, 2019 compared to $1.2 million for the three months ended June 30, 2018, an increase of $3.2 million. The increase in cost of revenue was primarily attributable to our October 2018 acquisition of Zillow Home Loans, and includes a $1.9 million increase in headcount-related expenses, including share-based compensation expense and a $0.5 million increase in mortgage loan processing costs. We expect cost of revenue to increase in absolute dollars in future years as we continue to incur more expenses that are associated with growth in revenue and expansion of Zillow Home Loans.

Sales and Marketing. Sales and marketing expenses were $14.6 million for the three months ended June 30, 2019 compared to $7.7 million for the three months ended June 30, 2018, an increase of $6.9 million, or 90%. The increase in sales and marketing expenses was primarily attributable to a $5.3 million increase in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans, and a $0.9 million increase in marketing and advertising expenses. We expect our sales and marketing expenses to increase in absolute dollars in future periods as we continue to expand the Mortgages segment.

Technology and Development. Technology and development expenses, which include research and development costs, were $7.9 million for the three months ended June 30, 2019 compared to $5.5 million for the three months ended June 30, 2018, an increase of $2.4 million, or 44%. The increase in technology and development expenses was primarily a result of a $2.1 millionincrease in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans. We expect our technology and development expenses to increase in absolute dollars in future periods as we continue to build new website functionality and other technologies that will facilitate the origination of mortgages in Zillow Home Loans.

General and Administrative. General and administrative expenses were $10.4 million for the three months ended June 30, 2019 compared to $4.0 million for the three months ended June 30, 2018, an increase of $6.4 million. The increase in general and administrative expenses was primarily due to a $4.3 million increase in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans. In addition, there was a $0.6 million increase in building lease-related expenses including rent, utilities and insurance and a $1.5 million increase in miscellaneous expenses. We expect general and administrative expenses to increase over time in absolute dollars as we continue to expand our mortgage business.

Corporate Items

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.

Interest Expense. Interest expense on our convertible senior notes was $12.7 million for the three months ended June 30, 2019 compared to $7.2 million for the three months ended June 30, 2018, an increase of $5.5 million, or 77%. This increase was primarily due to the July 2018 issuance of our convertible senior notes maturing in 2023. For additional information regarding the convertible senior notes, see Note 13 to our condensed consolidated financial statements.

Other Income. Other income not directly attributable to any of our segments was $9.1 million for the three months ended June 30, 2019 compared to $3.1 million for the three months ended June 30, 2018, an increase of $6.0 million. This increase was primarily due to an increase in the balance of our short-term investment portfolio generating an increase in interest income.

Six Months Ended June 30, ~~2018~~2019 Compared to Six Months Ended June 30, ~~2017~~2018

Segment Results of Operations

The following table presents Zillow Group’s segment results for the periods presented (in thousands, unaudited):


	Six Months Ended June 30, 2018									Six Months Ended June 30, 2017								Six Months Ended June 30, 2019								Six Months Ended June 30, 2018
	IMT			Homes			Consolidated			IMT			Homes		Consolidated			IMT		Homes			Mortgages			IMT			Homes			Mortgages
Revenue	$	625,125		$	—		$	625,125		$	512,625		$	—	$	512,625		$	621,941	$	377,396		$	54,345		$	586,797		$	—		$	38,328
Costs and expenses:
Cost of revenue	49,446			—			49,446			40,492			—		40,492			50,310		363,151			9,108			46,884			86			2,476
Sales and marketing	281,770			3,248			285,018			237,158			—		237,158			262,094		58,271			28,655			266,719			2,385			15,914
Technology and development	187,412			6,897			194,309			151,409			—		151,409			182,230		30,479			15,391			177,048			6,026			11,235
General and administrative	107,601			9,051			116,652			98,812			—		98,812			125,521		32,165			20,927			102,625			5,954			8,073
Acquisition-related costs	659			—			659			148			—		148			—		—			—			27			—			632
Integration costs																		—		—			645			—			—			—
Total costs and expenses	626,888			19,196			646,084			528,019			—		528,019			620,155		484,066			74,726			593,303			14,451			38,330
Loss from operations	(1,763		)	(19,196		)	(20,959		)	(15,394		)	—		(15,394		)
Income (loss) from operations																		1,786		(106,670		)	(20,381		)	(6,506		)	(14,451		)	(2		)
Other income	5,535			—			5,535			2,563			—		2,563			—		—			715			—			—			—
Interest expense	(14,260		)	—			(14,260		)	(13,620		)	—		(13,620		)	—		(9,657		)	(388		)	—			—			—
Loss before income taxes	$	(10,488	)	$	(19,196	)	$	(29,684	)	$	(26,451	)	$	—	$	(26,451	)
Income (loss) before income taxes (1)																		$	1,786	$	(116,327	)	$	(20,054	)	$	(6,506	)	$	(14,451	)	$	(2	)

(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):



	Six Months Ended June 30,
	2019			2018
Total segment loss before income taxes	$	(134,595	)	$	(20,959	)
Corporate interest expense	(25,318		)	(14,260		)
Corporate other income	17,911			5,535
Consolidated loss before income taxes	$	(142,002	)	$	(29,684	)

IMT Segment

Cost of ~~Revenue~~

Revenue. Cost of revenue was ~~$49.4~~$50.3 million for the six months ended June 30, 2019 compared to $46.9 million for the six months ended June 30, 2018, ~~compared to $40.5 million for the six months ended June 30, 2017,~~ an increase of ~~$9.0~~$3.4 million, or ~~22%~~7%. The increase in cost of revenue was primarily attributable to a ~~$4.1~~$4.4 million increase in data center and connectivity ~~costs,~~costs.

Sales and Marketing. Sales and marketing expenses were $262.1 million for the six months ended June 30, 2019 compared to $266.7 million for the six months ended June 30, 2018, a ~~$3.7~~decrease of $4.6 million, or 2%. The decrease in sales and marketing expenses was primarily attributable to a $17.2 million decrease in marketing and advertising expenses, partially offset by a $7.0 million increase in ~~credit card and ad serving~~professional services fees and a ~~$1.4~~$5.0 million increase in headcount-related expenses, including share-based compensation expense.

~~Sales and Marketing~~

Sales and marketing expenses were $281.8 million for the six months ended June 30, 2018 compared to $237.2 million for the six months ended June 30, 2017, an increase of $44.6 million, or 19%. The increase in sales and marketing expenses was primarily attributable to increased marketing and advertising expenses of $21.5 million, primarily related to advertising spend to attract consumers across online and offline channels, which supports our growth initiatives.

In addition to the increases in marketing and advertising expenses, headcount-related expenses increased $16.3 million, including share-based compensation expense, due primarily to significant growth in the size of our sales team. The increase in sales and marketing expenses was also attributable to a $2.8 million~~increase in tradeshows and conferences expense and related travel costs, a $1.5 million~~increase in consulting costs to support our advertising initiatives, a $0.6 million increase in depreciation expense, a $0.5 million increase in software and hardware costs, and a $1.4 million increase in miscellaneous expenses.

Technology and ~~Development~~

Development. Technology and development expenses, which include research and development costs, were ~~$187.4~~$182.2 million for the six months ended June 30, 2019 compared to $177.0 million for the six months ended June 30, 2018, ~~compared to $151.4 million for the six months ended June 30, 2017,~~ an increase of ~~$36.0~~$5.2 million, or ~~24%~~3%. Approximately ~~$30.3~~$12.8 millionof the increase related to growth in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering teams to support current and future product initiatives. In addition, there was a ~~$5.9~~$2.2 million increase in software and hardware costs, a $1.6 millionincrease in other non-capitalizable data content expense, a $1.6 million increase in professional services fees and a $1.3 million increase in miscellaneous expenses. These increases were partially offset by a $14.3 million decrease in depreciation and amortization expense.

~~Other data content expense was $21.6~~

General and Administrative. General and administrative expenses were $125.5 million ~~and $15.8 million, respectively,~~ for the six months ended June 30, 2018 and 2017. Amortization expense included in technology and development for capitalized website development costs and software was $20.6 million and $21.8 million, respectively, for the six months ended June 30, 2018 and 2017. Amortization expense included in technology and development related2019 compared to intangible assets recorded in connection with acquisitions was $17.8 million and $19.7 million, respectively, for the six months ended June 30, 2018 and 2017. Amortization expense included in technology and development for purchased data content intangible assets was $5.0$102.6 million for the six months ended June 30, 2018, ~~and 2017.~~

~~General and Administrative~~

~~General and administrative expenses were $107.6 million for the six months ended June 30, 2018 compared to $98.8 million for the six months ended June 30, 2017,~~ an increase of ~~$8.8~~$22.9 million, or 9%22%. The increase in general and administrative expenses was primarily due to a ~~$10.2~~$23.5 millionincrease in headcount-related expenses ~~including~~driven primarily by the recognition of a total of $23.3 million of share-based compensation expense ~~driven primarily by growth~~ in ~~headcount~~the IMT segment during the six months ended June 30, 2019 in ~~shared corporate services~~connection with the modification of certain outstanding equity awards related to ~~support~~the departure of Spencer Rascoff, who served as Zillow Group’s Chief Executive Officer since 2010 and who remains a member of Zillow Group’s board of directors. For additional information regarding the equity modification, see Note 15 to our engineering and other teams, a $4.8 million increase in software and hardware costs, a $2.8 million increase in travel and meals expense, a $1.2 million increase in city and state taxes, a $1.2 million increase in building lease-related expenses including rent, utilities and insurance, and a $1.0 million~~increase in professional services fees, partially offset by a $7.2 milliondecrease in estimated legal liabilities, a $4.3 milliondecrease in bad debt expense, and a $0.9 milliondecrease in miscellaneous expenses.~~condensed consolidated financial statements.

Homes Segment

Cost of ~~Revenue~~

~~Consistent with our expectations, no cost~~Revenue. Cost of revenue was ~~incurred~~$363.2 million for the six months ended June 30, ~~2018 as no homes were sold by the Company through Zillow Offers during the period.~~

~~Sales and Marketing~~

~~Sales and marketing expenses were $3.2~~2019 compared to $0.1 million for the six months ended June 30, 2018. Cost of revenue for the six months ended June 30, 2019 was primarily attributable to home acquisition and renovation costs related to the 1,200 homes that we sold during the period.

Sales and Marketing. Sales and marketing expenses were $58.3 million for the six months ended June 30, 2019 compared to $2.4 million for the six months ended June 30, 2018, an increase of $55.9 million. The increase in sales and marketing expenses was primarily attributable to ~~$2.5~~a $19.8 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes ~~segment.~~segment, a $16.2 million increase in selling expenses directly attributable to the resale of homes, a $7.9 million increase in holding costs, a $7.5 million increase in marketing and advertising expenses and a $4.5 million increase in miscellaneous expenses.

Technology and ~~Development~~

Development. Technology and development expenses, which include research and development costs, were ~~$6.9~~$30.5 million for the six months ended June 30, ~~2018. Technology~~2019 compared to $6.0 million for the six months ended June 30, 2018, an increase of $24.5 million. The increase in technology and development expenses ~~were~~was primarily due to ~~$6.4~~a $19.7 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes ~~segment.~~segment, a $1.5 million increase in data acquisition costs, a $1.4 million increase in depreciation and amortization expense and a $1.9 million increase in miscellaneous expenses.

General and ~~Administrative~~

Administrative. General and administrative expenses were ~~$9.1~~$32.2 million for the six months ended June 30, ~~2018. General~~2019 compared to $6.0 million for the six months ended June 30, 2018, an increase of $26.2 million. The increase in general and administrative expenses ~~were~~was primarily due to ~~$7.3~~a $15.9 million increase in headcount-related expenses, including share-based compensation expense, as we continue to grow our teams to support the Homes segment. In addition, ~~we incurred $0.9~~there was a $4.7 million increase in building lease-related expenses including rent, utilities and ~~insurance.~~insurance, a $1.7 million increase in professional services fees, a $1.5 million increase in software and hardware costs and a $2.4 million increase in miscellaneous expenses.

Interest Expense. Interest expense was $9.7 million for the six months ended June 30, 2019 and was primarily attributable to borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on our revolving credit facilities. There was no interest expense recorded for the six months ended June 30, 2018.

Mortgages Segment

Cost of Revenue. Cost of revenue was $9.1 million for the six months ended June 30, 2019 compared to $2.5 million for the six months ended June 30, 2018, an increase of $6.6 million. The increase in cost of revenue was primarily attributable to our October 2018 acquisition of Zillow Home Loans, and includes a $3.4 million increase in headcount-related expenses, including share-based compensation expense, a $1.1 million increase in mortgage loan processing costs, a $0.9 million increase in lead acquisition costs and a $1.2 million increase in miscellaneous expenses.

Sales and Marketing. Sales and marketing expenses were $28.7 million for the six months ended June 30, 2019 compared to $15.9 million for the six months ended June 30, 2018, an increase of $12.7 million, or 80%. The increase in sales and marketing expenses was primarily attributable to a $10.1 million increase in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans, a $1.2 million increase in marketing and advertising expenses and a $1.4 million increase in miscellaneous expenses.

Technology and Development. Technology and development expenses, which include research and development costs, were $15.4 million for the six months ended June 30, 2019 compared to $11.2 million for the six months ended June 30, 2018, an increase of $4.2 million, or 37%. The increase in technology and development expenses was primarily a result of a $3.5 millionincrease in headcount-related expenses, including share-based compensation expense, related to our October 2018 acquisition of Zillow Home Loans.

General and Administrative. General and administrative expenses were $20.9 million for the six months ended June 30, 2019 compared to $8.1 million for the six months ended June 30, 2018, an increase of $12.9 million. The increase in general and administrative expenses was primarily due to a $9.4 million increase in headcount-related expenses, including share-based compensation expense, primarily related to our October 2018 acquisition of Zillow Home Loans. In addition, there was a $1.1 million increase in building lease-related expenses including rent, utilities and insurance, a $0.7 million increase in professional services fees, a $0.7 million increase in software and hardware costs and a $1.0 million increase in miscellaneous expenses.

Corporate Items

Interest Expense. Interest expense on our convertible senior notes was $25.3 million for the six months ended June 30, 2019 compared to $14.3 million for the six months ended June 30, 2018, an increase of $11.1 million, or 78%. This increase was primarily due to the July 2018 issuance of our convertible senior notes maturing in 2023. For additional information regarding the convertible senior notes, see Note 13 to our condensed consolidated financial statements.

Other Income. Other income not directly attributable to any of our segments was $17.9 million for the six months ended June 30, 2019 compared to $5.5 million for the six months ended June 30, 2018, an increase of $12.4 million. This increase is primarily due to an increase in the balance of our short-term investment portfolio generating an increase in interest income.

Liquidity and Capital Resources

As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, we had cash and cash equivalents, investments and ~~investments~~restricted cash of ~~$899.6~~$1,483.6 million and ~~$762.5~~$1,567.3 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions, money market funds ~~corporate notes~~ and ~~bonds,~~ commercial ~~paper, U.S. government agency securities and certificates of~~

~~deposit with original maturities of three months or less.~~paper. Investments ~~as of June 30, 2018 and December 31, 2017~~ consist of fixed income securities, which include U.S. government agency securities, corporate notes and bonds, commercial paper, municipal securities, foreign government securities, certificates of deposit and ~~foreign government securities.~~treasury bills. Restricted cash consists of amounts funded to the reserve and collection accounts related to our revolving credit facilities and 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. 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.

The ~~implementation and~~ expansion of Zillow Group’s purchase of homes in the Zillow Offers program and sale of homes on the open market ~~will likely~~continues to have a significant impact on our liquidity and capital resources as a cash and inventory intensive initiative. ~~During the three months ended June 30, 2018, we used cash from our balance sheet to fund the purchases of homes and related costs. Beginning in the third quarter of 2018, we expect to~~We primarily use debt financing to fund a portion of the purchase price of homes and certain related costs. ~~On August 3, 2018, Zillow Group announced that certain~~As of ~~its wholly owned subsidiaries entered into a~~June 30, 2019, we have $409.8 million of total outstanding borrowings on revolving credit ~~agreement~~facilities to provide capital for Zillow Offers with ~~Credit Suisse AG, Cayman Islands Branch, as~~a total maximum borrowing capacity of $1,000.0 million. For additional information regarding the ~~directing lender, and certain other parties thereto, dated as of July~~revolving credit facilities, see Note 13 to our condensed consolidated financial statements.

The October 31, 2018 ~~(the “Credit Agreement”).~~acquisition of Zillow Home Loans also continues to have a significant impact on 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 the mortgage loan originations. On June 28, 2019, Zillow Home Loans amended and restated the warehouse line of credit previously maturing on June 29, 2019. The ~~Credit Agreement provides~~amended and restated credit agreement extends the term of the original agreement for one year through June 27, 2020, and continues to provide for a maximum borrowing capacity of ~~$250.0~~$50.0 million ~~(the “Maximum Amount”)~~ with ~~an initial~~availability under the warehouse line of credit limited depending on the types of loans originated. As of June 30, 2019, we have $30.1 million of total outstanding borrowings on warehouse lines of credit to provide capital for Zillow Home Loans with a total maximum borrowing capacity of $20.0 million, which amount may be increased up to the Maximum Amount subject to the satisfaction of certain conditions, through a non-recourse credit facility secured by a pledge of the equity of certain Company subsidiaries that purchase and sell select residential properties through Zillow Offers. The Credit Agreement has an initial term of one year which may be extended for up to three years, subject to agreement by the directing lender. The Credit Agreement includes customary representations and warranties, covenants (including financial covenants applicable to the Company), and provisions regarding events of default.

We have outstanding $9.6 million aggregate principal of 2020 Notes as of June 30, 2018. The 2020 Notes were guaranteed by Zillow Group in connection with our February 2015 acquisition of Trulia, Inc. The aggregate principal amount of the 2020 Notes is due on December 15, 2020 if not earlier converted or redeemed. The 2020 Notes are convertible into shares of Zillow Group Class A common stock. Interest is payable on the 2020 Notes at the rate of 2.75%semi-annually on June 15 and December 15 of each year. Holders of the 2020 Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding the maturity date. The 2020 Notes are redeemable, at our option, in whole or in part on or after December 20, 2018, under certain circumstances.$100.0 million. For additional information regarding ~~the 2020 Notes,~~our warehouse lines of credit, see Note ~~12 to our condensed consolidated financial statements.~~

In December 2016, Zillow Group issued $460.0 million aggregate principal amount of 2021 Notes. The 2021 Notes bear interest at a fixed rate of 2.00% per year, payable semiannually in arrears on June 1 and December 1 of each year. The 2021 Notes are convertible into cash, shares of our Class C capital stock or a combination thereof, at the Company’s election. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased, redeemed, or converted in accordance with their terms. Prior to the close of business on the business day immediately preceding September 1, 2021, the 2021 Notes are convertible at the option of the holders of the 2021 Notes only under certain conditions, none of which conditions have been satisfied as of June 30, 2018. On or after September 1, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2021 Notes may convert their 2021 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2021 Notes by paying or delivering, as the case may be, cash, shares of Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The Company may redeem for cash all or part of the 2021 Notes, at its option, on or after December 6, 2019, under certain circumstances at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indenture governing the 2021 Notes). For additional information regarding the 2021 Notes, see Note 1213 to our condensed consolidated financial statements.

~~On July 3, 2018,~~As of June 30, 2019, we ~~closed underwritten public offerings~~have outstanding a total of ~~(1) 6,557,017 shares of Class C capital stock of Zillow Group, which includes 855,263 shares sold pursuant to the underwriters’ option to purchase additional shares; and (2) $373.8~~$843.4 million aggregate principal ~~amount~~ of ~~Convertible Senior Notes due 2023 (the “2023 Notes”), which includes $48.8 million principal amount of 2023 Notes sold pursuant to the underwriters’ option to purchase additional 2023 Notes.~~senior convertible notes. The ~~net proceeds from the offering of Class C capital stock~~convertible notes are senior unsecured obligations, and the issuance of the 2023 Notes were approximately $360.3 million and $364.0 million, respectively, after deducting underwriting discounts and commissions and estimated offering expenses payable by Zillow Group. We used $29.4 million of the net proceeds from the issuance of the 2023 Notes to pay the cost of capped call confirmations. We intend to use the remainder of the net proceeds for general corporate purposes, which may include general and administrative matters and capital expenditures. Additionally, we may choose to use a portion of the net proceeds to expand our current business through acquisitions of, or investments in, other businesses, products or technologies.

The 2023 Notes bear interest at a fixed rate of 1.50% per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2019. Beginning in July 2018, interest expense will include interest on the ~~2023 Notes, and as a result, we expect~~convertible notes is paid semi-annually. For additional information regarding the senior convertible notes, see Note 13 to our interest expense to increase in future periods. The 2023 Notes are convertible into cash, shares of Class C capital stock or a combination thereof, at the Company’s election. The 2023 Notes will mature on July 1, 2023, unless earlier repurchased, redeemed, or converted in accordance with their terms. Prior to the close of business on the business day immediately preceding April 1, 2023, the 2023 Notes are convertible at the option of the holders only under certain conditions. On or after April 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2023 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2023 Notes by paying or delivering, as the case may be, cash, shares of the Company’s Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The conversion rate will initially be 12.7592 shares of Class C capital stock per $1,000 principal amount of 2023 Notes (equivalent to an initial conversion price of approximately $78.37 per share of Class C capital stock). The conversion rate is subject to customary adjustments upon the occurrence of certain events. The Company may redeem for cash all or part of the 2023 Notes, at its option, on or after July 6, 2021, under certain circumstances at a redemption price equal to 100% of the principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indenture governing the 2023 Notes).condensed consolidated financial statements.

The following table presents selected cash flow data for the periods presented:


	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2019			2018
	(in thousands, unaudited)						(in thousands, unaudited)
Cash Flow Data:
Net cash provided by operating activities	$	73,052		$	84,892
Net cash used in investing activities	(93,692		)	(113,987		)
Net cash provided by (used in) operating activities							$	(373,823	)	$	73,052
Net cash provided by (used in) investing activities							197,822			(93,692		)
Net cash provided by financing activities	99,590			61,968			323,138			99,590

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 and brand ~~advertisers.~~advertisers, as well as cash received from consumers for sales of homes through Zillow Offers and sales of mortgages originated by Zillow to third parties. Our primary uses of cash from operating activities include payments for homes purchased through Zillow Offers, 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.

For the six months ended June 30, 2019, net cash used in operating activities was $373.8 million. This was primarily driven by a net loss of $139.5 million, adjusted by share-based compensation expense of $109.8 million, depreciation and amortization expense of $41.7 million, amortization of contract cost assets of $17.9 million, amortization of the discount and issuance costs on the convertible notes maturing in 2023 and 2021 of $17.8 million, amortization of right of use assets of $10.6 million, a loss on disposal of property and equipment of $3.9 million, accretion of bond discount of $3.7 million and a $2.5 million change in deferred income taxes. Changes in operating assets and liabilities increased cash used in operating activities by $430.4 million. The changes in operating assets and liabilities are primarily due to a $390.0 million increasein inventory due to the purchase of homes through Zillow Offers, an $18.3 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $16.9 million increase in accounts receivable due primarily to an increase in revenue, an $11.9 million decrease in lease liabilities, a $3.2 million increase in mortgage loans held for sale and a $2.0 million increase in prepaid expenses and other assets driven primarily by the timing of payments, partially offset by a $7.0 million increase in accrued expenses and other current liabilities driven primarily by the timing of payments, and a $3.0 million increase in deferred revenue.

For the six months ended June 30, 2018, net cash provided by operating activities was $73.1 million. This was primarily driven by a net loss of $21.7 million, adjusted by share-based compensation expense of $69.7 million, depreciation and amortization expense of $52.9 million, amortization of contract cost assets of $18.3 million, amortization of the discount and issuance costs on the 2021 Notes of $9.5 million, a non-cash change in our deferred income taxes of $8.0 million, a change in deferred rent of $2.8 million, and a loss on disposal of property and equipment of $2.1 million. Changes in operating assets and liabilities decreased cash provided by operating activities by $46.1 million. The changes in operating assets and liabilities are primarily due to a $21.4 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $14.7 million increase in prepaid expenses and other assets driven primarily by the timing of payments, a $9.3 million increase in accounts receivable due primarily to an increase in revenue, a $5.7 million increasein inventory due to the purchase of homes through Zillow Offers, and a $5.2 million decrease in accrued expenses and other current liabilities driven primarily by the timing of payments.

For the six months ended June 30, 2017, net cash provided by operating activities was $84.9 million. This was primarily driven by a net loss of $26.5 million, adjusted by depreciation and amortization expense of $54.2 million, share-based compensation expense of $55.6 million, amortization of the discount and issuance costs on the 2021 Notes of $8.9 million, an increase in bad debt expense of $4.0 million, a loss on disposal of property and equipment of $2.0 million, and a change in deferred rent of $1.8 million. Changes in operating assets and liabilities increased cash provided by operating activities by $15.4 million. The increase in operating assets and liabilities is primarily due to an $11.1 million decrease in accounts receivable driven by the timing of payments received, and a $5.8 million decrease in prepaid expenses and other assets driven primarily by the timing of payments.

Cash Flows ~~Used In~~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 six months ended June 30, 2019, net cash provided by investing activities was $197.8 million. This was primarily the result of $236.4 million of net proceeds from maturities of investments and $38.6 million of purchases for property and equipment and intangible assets.

For the six months ended June 30, 2018, net cash used in investing activities was $93.7 million. This was primarily the result of $57.7 million of net purchases of investments and $36.0 million of purchases for property and equipment and intangible assets.

For the six months ended June 30, 2017, net cash used in investing activities was $114.0 million. This was primarily the result of $60.2 million of net purchases of investments, $38.4 million of purchases for property and equipment and intangible assets, approximately $10.0 million related to the purchase of a cost method investment, and $6.0 million paid in connection with an acquisition, partially offset by $0.6 million in proceeds from our August 2016 sale of our Diverse Solutions business.

Cash Flows Provided By Financing Activities

For the six months ended June 30, ~~2018 and 2017, our~~2019, cash provided by financing activities ~~primarily~~was $323.1 million, including $293.1 million of proceeds from borrowings on our revolving credit facilities related to ~~the exercise~~Zillow Offers and $33.0 million of ~~employee option awards. The~~ proceeds from the exercise of option awards, ~~for~~partially offset by $3.0 million of net repayments of borrowings on our warehouse lines of credit related to Zillow Home Loans.

For the six months ended June 30, 2018, ~~and 2017 were~~our financing activities included $99.7 million ~~and $62.3 million, respectively.~~of proceeds from the exercise of option awards.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements other than outstanding surety bonds issued for our benefit of approximately ~~$3.7~~$9.7 million as of June 30, ~~2018.~~2019. We do not believe that the surety bonds will have a material effect on our liquidity, capital resources, market risk support or credit risk support. For additional information regarding the surety bonds, see Note 17 to our condensed consolidated financial statements under the subsection titled “Surety Bonds”.

Contractual Obligations and Other Commitments

There have been no material changes outside the ordinary course of business in our commitments under contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, except for ~~a lease agreement we entered into in April 2018 for additional office space for our corporate headquarters in Seattle, Washington. Pursuant to~~ the ~~terms~~categories of the lease, we will lease an additional 79,038 square feet, and we are obligated to make escalating monthly lease payments that begin in September 2019 and continue through December 2024. The following table provides a summary of our contractual obligations ~~under this lease~~listed below, which have been updated to reflect our obligations as of June 30, ~~2018:~~2019.

Payments Due By Period
Total Less Than 1 year 1-3 Years 3-5 Years More Than 5 Years
(in thousands, unaudited)
Operating lease obligation $ 13,146
$ —
$ 4,268
$ 4,953
$ 3,925



	Payments Due By Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
	(in thousands, unaudited)
Homes under contract (1)	$	266,210	$	266,210	$	—	$	—	$	—
Revolving credit facilities (2)	409,799		409,799		—		—		—
Warehouse lines of credit (3)	30,057		30,057		—		—		—
Operating lease obligations (4)	120,592		4,439		27,026		26,768		62,359
Total contractual obligations	$	826,658	$	710,505	$	27,026	$	26,768	$	62,359
____________________ (1) We have obligations to purchase homes under contract through our Zillow Offers business. (2) Includes principal amounts due for amounts borrowed under the revolving credit facilities used to provide capital for our Zillow Offers business. Amounts exclude an immaterial amount of estimated interest payments. (3) Includes principal amounts due for amounts borrowed under the warehouse lines of credit used to finance Zillow Home Loans. Amounts exclude an immaterial amount of estimated interest payments. (4) Our operating lease obligations consist of new office space in New York, New York, Seattle, Washington, Atlanta, Georgia, Dallas, Texas, and Scottsdale, Arizona. For additional information regarding our operating leases, see Note 12 to our condensed consolidated financial statements.

As of June 30, 2019, we have outstanding letters of credit of approximately $16.9 million, which secure our lease obligations in connection with certain of the operating leases of our office spaces.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these ~~consolidated~~ financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates 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.

We believe that the assumptions and estimates associated with revenue recognition, the net realizable value of inventory, amortization period and recoverability of contract cost assets, website and software development costs, recoverability of long-lived assets and intangible assets with definite lives, share-based compensation, income taxes, business combinations, and the recoverability of goodwill and indefinite-lived intangible assets, have the greatest potential impact For information on ~~our condensed consolidated financial statements. Therefore, we consider these to be~~ our critical accounting policies and ~~estimates.~~

~~Revenue Recognition~~

~~We recognize revenue when (or as) we satisfy~~estimates, see Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our ~~performance obligations by transferring control of~~Annual Report on Form 10-K for the ~~promised products or services~~year ended December 31, 2018. There have been no material changes to our ~~customers~~critical accounting policies and estimates as previously disclosed in ~~an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services.~~

~~As a practical expedient, we do not adjust the promised amount of consideration~~our Annual Report on Form 10-K for the ~~effects of a significant financing component as the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service is one~~ year ~~or less.~~

In our IMT segment, we generate revenue from the sale of advertising services and our suite of marketing software and technology solutions to businesses and professionals primarily associated with the residential real estate, rental and mortgage industries. These professionals include real estate, rental and mortgage professionals and brand advertisers. Our four primary revenue categories within our IMT segment are Premier Agent, Rentals, Mortgages and Other.

~~In our Homes segment, we generate revenue from the resale of homes on the open market through our Zillow Offers program.~~

~~Premier Agent Revenue.~~ Premier Agent revenue is derived from our Premier Agent and Premier Broker programs. Our Premier Agent and Premier Broker programs offer a suite of marketing and business technology products and services to help real estate agents and brokers achieve their advertising goals, while growing and managing their businesses and brands. All Premier Agents and Premier Brokers receive access to a dashboard portal on our mobile application or website that provides individualized program performance analytics, our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent or Premier Broker through our mobile and web platforms and our account management tools. We have concluded that the marketing and business technology products and services promised to Premier Agents and Premier Brokers represent distinct performance obligations.

We offer our Premier Agent and Premier Broker advertising products on a cost per impression basis. Impressions are delivered when a sold advertisement appears on pages viewed by users of our mobile applications and websites. We determine the cost per impression delivered in each zip code using an auction-based pricing method in consideration of the total amount spent by Premier Agents and Premier Brokers to purchase impressions in the zip code during the month. A Premier Agent’s or Premier Broker’s share of voice in a zip code is determined by their proportional monthly budgeted spend in that zip code as a percentage of the total monthly budgeted spend of all Premier Agents and Premier Brokers in that zip code. The cost per impression that we charge is dynamic - as demand for impressions in a zip code increases or decreases, the cost per impression in that zip code may be increased or decreased accordingly. The price paid for each impression is representative of the price at which we would sell an impression separately to a customer, or the stand-alone selling price.

In April 2018, we began testing a new form of lead validation and distribution related to our auction-based pricing model whereby the share of voice purchased by Premier Agents and Premier Brokers will represent both the share of impressions delivered as advertisements appearing on pages viewed by users of our mobile applications and websites, as well as the proportion of validated consumer connections a Premier Agent or Premier Broker receives. When consumers who are interested in connecting with a real estate professional do not select a specific Premier Agent or Premier Broker advertisement on one of Zillow Group’s mobile applications or websites, the validated consumer leads will be distributed to Premier Agents and Premier Brokersended December 31, 2018.

in proportion to their share of voice. We believe distributing validated consumer connection leads on the basis of share of voice creates better experiences for consumers and further strengthens our partnerships with real estate professionals. We expect in the future to apply this new form of lead validation and distribution more broadly with nationwide adoption by the end of 2018. We are unable to predict whether this change will have a material impact on revenue or other results of operations.

~~Mortgages Revenue.~~Mortgages revenue primarily includes marketing products sold to mortgage professionals on a cost per lead basis, including our Custom Quote and a portion of our Connect services, and on a subscription basis, including a portion of our Connect service. For our Connect and Custom Quote cost per lead mortgage marketing products, participating qualified mortgage professionals typically make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Mortgage professionals who exhaust their initial prepayment prepay additional funds to continue to participate in the marketplace. For our Connect subscription mortgage marketing product, participating qualified mortgage professionals generally prepay a monthly subscription fee, which they then allocate to desired geographic counties. In Zillow Group’s Connect platform, consumers answer a series of questions to find a local lender, and mortgage professionals receive consumer contact information, or leads, when the consumer chooses to share their information with a lender. Consumers who request rates for mortgage loans in Custom Quotes are presented with customized quotes from participating mortgage professionals.

~~Other Revenue.~~ 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. Our new construction marketing solutions allow home builders to showcase their available inventory to home shoppers. New construction revenue primarily includes revenue generated by advertising sold to builders on a cost per residential community basis, and revenue is recognized on a straight-line basis during the contractual period over which the communities are advertised on our mobile applications and websites. Display revenue primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions or cost per click basis to advertisers promoting their brands on our mobile applications and websites. We recognize display revenue as clicks occur or as impressions are delivered to users interacting with our mobile applications or websites, which is the amount for which we have the right to invoice.

~~Inventory~~

~~fees, staging, and holding costs, including utilities, taxes and maintenance, are expensed as incurred and included in sales and marketing expenses.~~

~~Contract Cost Assets~~

We capitalize certain incremental costs of obtaining contracts with customers which we expect to recover. These costs relate to commissions paid to sales personnel, primarily for our Premier Agent and Premier Broker programs. As a practical expedient, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. Capitalized commission costs are recorded as contract cost assets in our condensed consolidated balance sheets. Contract cost assets are amortized to expense on a straight-line basis over a period that is consistent with the transfer to the customer of the products or services to which the asset relates, generally the estimated life of the customer relationship. Amortization expense related to contract cost assets is included in sales and marketing expenses in our condensed consolidated statements of operations. Our determination of the estimated life of the customer relationship involves significant judgment. In determining the estimated life of our customer relationships, we consider quantitative and qualitative data, including, but not limited to, historical customer data, recent changes or expected changes in product or service offerings, and changes in how we monetize our products and services. The amortization period for our Premier Agent and Premier Broker programs ranges from two to three years.

~~Website and Software Development Costs~~

We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our mobile applications and websites, assess the ongoing value of capitalized assets, or determine the estimated useful lives over which the costs are amortized, the amount of website and software development costs we capitalize and amortize could change in future periods.

~~Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets~~

Unforeseen events, changes in circumstances and market conditions and material differences in estimates of future cash flows could adversely affect the fair value of our assets and could result in an impairment charge. Fair value can be estimated utilizing a number of techniques including quoted market prices, prices for comparable assets, or other valuation processes involving estimates of cash flows, multiples of earnings or revenues, and we may make various assumptions and estimates when performing our impairment assessments, particularly as it relates to cash flow projections. Cash flow estimates are by their nature subjective and include assumptions regarding factors such as recent and forecasted operating performance, revenue

trends and operating margins. These estimates could also be adversely impacted by changes in federal, state, or local regulations, economic downturns or developments, or other market conditions affecting our industry.

~~Share-Based Compensation~~

We measure compensation expense for all share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest. We use the Black-Scholes-Merton option-pricing model to determine the fair value for option awards and recognize compensation expense on a straight-line basis over the option awards’ vesting period. For restricted stock units and restricted units, we use the market value of our Class A common stock and Class C capital stock, as applicable, on the date of grant to determine the fair value of the award, and we recognize compensation expense on a straight-line basis over the awards’ vesting period.

Determining the fair value of option awards at the grant date requires judgment. If any of the assumptions used in the Black-Scholes-Merton model changes significantly, share-based compensation expense for future option awards may differ materially compared with the awards granted previously. In valuing our option awards, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives. We account for forfeitures as they occur.

~~Risk-free interest rate.~~ ~~Risk-free interest rates are derived from U.S. Treasury securities as of the option award’s grant date.~~

~~Expected dividend yields.~~ ~~Expected dividend yields are based on our historical dividend payments, which have been zero to date.~~

~~Volatility.~~ ~~The expected volatility for our Class A common stock and Class C capital stock is estimated using our historical volatility.~~

~~Expected term.~~ ~~The weighted-average expected life of the option awards is estimated based on our historical exercise data.~~

We will continue to use judgment in evaluating the expected volatility and expected terms utilized for our share-based compensation expense calculations on a prospective basis. Actual results, and future changes in estimates, may differ substantially from management’s current estimates. As we continue to accumulate additional data related to our Class A common stock and Class C capital stock, we may have refinements to the estimates of our expected volatility and expected terms, which could materially impact our future share-based compensation expense. In future periods, we expect our share-based compensation expense to increase as a result of our existing, unrecognized share-based compensation that will be recognized as the awards vest, and as we grant additional share-based awards to attract and retain employees.

~~Income Taxes~~

Our assumptions, judgments, and estimates relative to the value of our deferred tax assets take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments, and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.

Since inception, we have typically incurred annual operating losses, and accordingly, we have generally not recorded a material current provision for income taxes, though we have historically in certain instances recorded income tax benefits in connection with acquisitions.

legislation or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain untaxed earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and how AMT credits are utilized; (5) the additional limitations on deducting executive compensation under IRC Section 162(m); and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Shortly after enactment, implementation guidance was released by the Securities and Exchange Commission that requires a company to reflect the income tax effects of those aspects of the Tax Act for which the accounting under the accounting rules is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, it should record a provisional estimate in the financial statements. Further, the implementation guidance also provides for a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting pursuant to the accounting rules.

For the year ending December 31, 2018, we expect an overall statutory tax rate (including federal, state and foreign taxes) of approximately 24%, but in the absence of the Tax Act we would have expected an overall tax rate of approximately 38%. In 2018, we expect to record income tax benefits to the extent we generate additional operating loss carryforwards.

~~Business Combinations~~

~~Recoverability of Goodwill and Indefinite-Lived Intangible Assets~~

For our most recent goodwill impairment assessment performed as of October 1, 2017, we chose to forgo the initial qualitative assessment and performed a quantitative analysis whereby we determined that our market capitalization is well in excess of the book value of our common stock, and therefore, we concluded that the fair value of goodwill exceeds its carrying value.

qualitative assessment to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired. If so, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of the carrying value of the indefinite-lived intangible assets over their fair value.

~~Recently Adopted Accounting Standards and Recently Issued Accounting Standards Not Yet Adopted~~

For information about our recently adopted accounting standards and recently issued accounting standards not yet adopted, see Note 2 of the accompanying notes to our condensed consolidated financial statements included within this report.

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, certificates of deposit, U.S. government agency securities, commercial paper, foreign government securities, municipal securities and corporate notes and bonds. 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 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. As our investment portfolio is short-term in nature, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio.

As of June 30, ~~2018,~~2019, we have outstanding $373.8 million aggregate principal Convertible Senior Notes due in 2023 (the “2023 Notes”), $460.0 million aggregate principal Convertible Senior Notes due in 2021 (the “2021 Notes”) and $9.6 million aggregate principal Convertible Senior Notes due in 2020 (the “2020 Notes”). The 2023 Notes were issued in July 2018 and carry a fixed interest rate of 1.50% per year. The 2021 Notes were issued in December 2016 and carry a fixed interest rate of 2.00% per year. ~~As of June 30, 2018, we also have outstanding $9.6 million aggregate principal Convertible Senior Notes due in 2020 (the “2020 Notes”).~~ The 2020 Notes were guaranteed by Zillow Group in connection with our February 2015 acquisition of Trulia, Inc. ~~The 2020 Notes~~and carry a fixed interest rate of 2.75% per year.

Since the ~~2020~~2023 Notes, 2021 Notes and ~~2021~~2020 Notes bear interest at fixed rates, we have no direct financial statement risk associated with changes in interest rates as of June 30, ~~2018.~~2019. However, the fair values of the ~~2020~~2023 Notes, 2021 Notes and ~~2021~~2020 Notes change primarily when the market price of our stock fluctuates or interest rates change.

~~For these reasons,~~We are subject to market risk by way of changes in interest rates on borrowings under our revolving credit facilities that provide capital for Zillow Offers. As of June 30, 2019, we ~~do not expect that~~have outstanding $409.8 million of borrowings on our ~~results of operations or cash flows would be materially affected by~~revolving credit facilities which bear interest at a ~~sudden change~~floating rate based on the one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin. Accordingly, fluctuations in market interest ~~rates.~~rates may increase or decrease our interest expense. Assuming no change in the outstanding borrowings on our revolving credit facilities, we estimate that a 1% increase in LIBOR would increase our annual interest expense by approximately $4.1 million.

We are also subject to market risk by way of changes in interest rates on borrowings under our warehouse lines of credit that provide capital for Zillow Home Loans. As of June 30, 2019, we have outstanding $30.1 million of borrowings on our warehouse lines of credit which bear interest at a floating rate based on LIBOR plus an applicable margin. 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 lines of credit, we estimate that a 1.0% increase in LIBOR would increase our annual interest expense associated with the warehouse lines of credit by approximately $0.3 million.

Inflation Risk

We do not believe that inflation has had a material effect on our business, results of operations or financial condition. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, results of operations and financial condition.

Foreign Currency Exchange Risk

We do not believe that foreign currency exchange risk has had a material effect on our business, results of operations or financial condition. As we do not maintain a significant balance of foreign currency, we do not believe an immediate 10% increase or decrease in foreign currency exchange rates relative to the U.S. dollar would have a material effect on our business, results of operations or financial condition.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Management, under the supervision and with the participation of our Chief Executive Officer and our ~~Interim~~ Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of June 30, ~~2018.~~2019. Based on that evaluation, the Chief Executive Officer and the ~~Interim~~ Chief Financial Officer concluded that these disclosure controls and procedures were effective as of June 30, ~~2018.~~2019.

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 June 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding legal proceedings in which we are involved, see Note 17 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.

Item 1A. Risk Factors

There have not been any material changes to the risk factors affecting our business, financial condition or future results from those set forth in Part ~~II,~~I, Item 1A (Risk Factors) in our ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarterly period~~year ended ~~March~~December 31, 2018. ~~You~~However, you should carefully consider the factors discussed in our ~~Quarterly~~Annual Report on Form ~~10-Q for the quarterly period ended March 31, 2018,~~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 June 30, ~~2018.~~2019.

Item 6. Exhibits

The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.



Exhibit Number		Description

~~4.1~~		Indenture, dated as of July 3, 2018, by and between Zillow Group, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee (Filed as Exhibit 4.1 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~4.2~~		Form of 1.50% Convertible Senior Note due 2023 (included in Exhibit 4.1 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~10.1~~		Base Capped Call Confirmation, dated June 28, 2018, between Zillow Group, Inc. and Goldman Sachs & Co. LLC (Filed as Exhibit 10.1 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~10.2~~		Base Capped Call Confirmation, dated June 28, 2018, between Zillow Group, Inc. and Citibank, N.A. (Filed as Exhibit 10.2 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~10.3~~		Base Capped Call Confirmation, dated June 28, 2018, between Zillow Group, Inc. and Royal Bank of Canada, represented by RBC Capital Markets, LLC as its agent (Filed as Exhibit 10.3 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~10.4~~		Base Capped Call Confirmation, dated June 28, 2018, between Zillow Group, Inc. and Bank of America N.A. (Filed as Exhibit 10.4 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~10.5~~		Additional Capped Call Confirmation, dated July 2, 2018, between Zillow Group, Inc. and Goldman Sachs & Co. LLC (Filed as Exhibit 10.5 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~10.6~~		Additional Capped Call Confirmation, dated July 2, 2018, between Zillow Group, Inc. and Citibank, N.A. (Filed as Exhibit 10.6 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~10.7~~		Additional Capped Call Confirmation, dated July 2, 2018, between Zillow Group, Inc. and Royal Bank of Canada, represented by RBC Capital Markets, LLC as its agent (Filed as Exhibit 10.7 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

~~10.8~~		Additional Capped Call Confirmation, dated July 2, 2018, between Zillow Group, Inc. and Bank of America, N.A. (Filed as Exhibit 10.8 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018, and incorporated herein by reference).

10.9*		Executive Employment and Retirement Agreement and Release, dated May 3, 2018, between Zillow Group, Inc. and Kathleen Philips (Filed as Exhibit 10.2 to Zillow Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2018, and incorporated herein by reference).

31.1		Certification of Chief Executive Officer pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance ~~Document.~~Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document).

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.




101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

*		~~Indicates a management contract or compensatory plan or arrangement.~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Dated: August ~~6, 2018~~7, 2019	ZILLOW GROUP, INC.

	By:	/s/ JENNIFER ROCK
	Name:	Jennifer Rock
	Title:	~~Interim Chief Financial Officer and Interim~~ Chief Accounting Officer

6154



		Page
	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive Loss	4
	Condensed Consolidated Statements of ~~Cash Flows~~Shareholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	68
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3026
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5448
Item 4.	Controls and Procedures	5549

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	5650
Item 1A.	Risk Factors	5751
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5852
Item 6.	Exhibits	5953

	Signatures	6154



	New Guidance			Prior Guidance			Change
Condensed Consolidated Statement of Operations:
Sales and marketing	$	147,727		$	148,646		$	(919	)
Total costs and expenses	334,841			335,760			(919		)
Loss from operations	(9,595		)	(10,514		)	919
Loss before income taxes	(13,693		)	(14,612		)	919
Income tax benefit	10,600			12,190			(1,590		)
Net loss	(3,093		)	(2,422		)	(671		)
Net loss per share — basic and diluted	(0.02		)	(0.01		)	(0.01		)



	December 31, 2017
	Total		Level 1		Level 2
Cash equivalents:
Money market funds	$	233,508	$	233,508	$	—
Corporate notes and bonds	6,199		—		6,199
Commercial paper	3,987		—		3,987
U.S. government agency securities	1,748		—		1,748
Certificates of deposit	249		—		249
Short-term investments:
U.S. government agency securities	298,758		—		298,758
Corporate notes and bonds	44,607		—		44,607
Commercial paper	39,325		—		39,325
Municipal securities	11,459		—		11,459
Certificates of deposit	10,297		—		10,297
Foreign government securities	5,998		—		5,998
Total	$	656,135	$	233,508	$	422,627



Balance as of January 1, 2018	$	5,341
Bad debt expense	(352		)
Less: write-offs, net of recoveries and other adjustments	(748		)
Balance as of June 30, 2018	$	4,241



	Three Months Ended June 30, 2018
Balance as of April 1, 2018	$	35,297
Deferral of revenue	250,735
Less: Revenue recognized	(250,112		)
Balance as of June 30, 2018	$	35,920



	Outstanding Principal Amount		Unamortized Debt Discount and Debt Issuance Costs			Carrying Value
June 30, 2018	$	460,000	$	(75,217	)	$	384,783
December 31, 2017	$	460,000	$	(84,721	)	$	375,279



	Restricted Stock Units		Weighted- Average Grant- Date Fair Value
Unvested outstanding at January 1, 2018	4,016,405		$	33.22
Granted	2,369,968		53.57
Vested	(834,788	)	34.01
Forfeited or cancelled	(371,500	)	37.69
Unvested outstanding at June 30, 2018	5,180,085		42.10