# ZILLOW GROUP, INC. (Z) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ZILLOW GROUP, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1617640/000161764022000013/z-20211231.htm
Accession: 0001617640-22-000013
Filing date: 2022-02-10
Report date: 2021-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/Z/
All MD&A years: /company/Z/mda/
Next year: /company/Z/mda/fy2022/ (FY 2022)

Results of Operations

Given the remaining uncertainty surrounding the COVID-19 pandemic and our plans to wind down the Zillow Offers business, financial performance for prior and current periods may not be indicative of future performance.

Revenue

[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Total Revenue"],["","Year Ended December 31,","","2020 to 2021","","Year Ended December 31,"],["","2021","","2020","","$ Change","","% Change","","2021","","2020"],["","(in thousands)"],["Revenue:"],["Homes segment:"],["Zillow Offers","$","5,982,357","","","$","1,710,535","","","$","4,271,822","","","250","%","","73","%","","51","%"],["Other","33,421","","","4,840","","","28,581","","","591","","","\u2014","","","\u2014"],["Total Homes segment revenue","6,015,778","","","1,715,375","","","4,300,403","","","251","","","74","","","51"],["IMT segment:"],["Premier Agent","1,395,723","","","1,046,954","","","348,769","","","33","","","17","","","31"],["Other","490,059","","","403,278","","","86,781","","","22","","","6","","","12"],["Total IMT segment revenue","1,885,782","","","1,450,232","","","435,550","","","30","","","23","","","43"],["Mortgages segment","245,816","","","174,210","","","71,606","","","41","","","3","","","5"],["Total revenue","$","8,147,376","","","$","3,339,817","","","$","4,807,559","","","144","%","","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

Total revenue increased $4.8 billion, or 144%, to $8.1 billion:

•Homes segment revenue increased 251% to $6.0 billion, primarily due to an increase of $4.3 billion, or 250%, in Zillow Offers revenue. Zillow Offers revenue increased to $6.0 billion due to the sale of 15,436 homes at an average selling price of $387.6 thousand per home as compared to the sale of 5,337 homes at an average selling price of $320.5 thousand per home for the year ended December 31, 2020. The pause in home buying activities in Zillow Offers in the first half of 2020 in response to the COVID-19 pandemic resulted in lower inventory available for resale during the second half of 2020. We resumed home buying activities in all markets by early August 2020 and subsequently grew our acquisition and resale volumes, including accelerating resales as we wind down Zillow Offers operations, driving a year-over-year increase in revenue. We expect Zillow Offers revenue to decrease for the three months ending March 31, 2022 and to continue to decrease in subsequent quarters as we complete our wind down of Zillow Offers.

•IMT segment revenue increased 30% to $1.9 billion, primarily due to an increase of $348.8 million, or 33%, in Premier Agent revenue. The increase in Premier Agent revenue was primarily driven by an increase in Premier Agent revenue per visit, which increased by 26% to $0.137 for the year ended December 31, 2021 from $0.109 for the year ended December 31, 2020, driven primarily by continued strong demand across the residential real estate industry and growth in monetization of customer connections. We calculate Premier Agent revenue per visit by dividing the revenue generated by our Premier Agent and Premier Broker programs by the number of visits in the period. The increase in visits increased the number of impressions and leads we could monetize in our Premier Agent marketplace. Additionally, Premier Agent revenue for the year ended December 31, 2020 was negatively impacted by temporary discounts offered to our Premier Agent partners in response to the COVID-19 pandemic. Other IMT revenue increased $86.8 million, or 22%, primarily due to a 19% increase in revenue generated by our rentals marketplace, including our flat fee, pay per listing and rental applications products. The increase in rentals revenue was also impacted by COVID-19 related discounts offered during the first half of 2020. Other IMT revenue also increased due to a 58% increase in display revenue as display advertisers increased discretionary marketing spend after lower spend in 2020 as a result of the COVID-19 pandemic, and as a result of the addition of ShowingTime revenue beginning in the fourth quarter of 2021. We expect IMT segment revenue to increase in absolute dollars in future periods primarily as a result of increased lead and transaction volumes.

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•Mortgages segment revenue increased 41% to $245.8 million primarily due to growth in mortgage originations revenue, which drove 57% of the increase in Mortgages segment revenue, and growth in our Custom Quote and Connect advertising services revenue, which accounted for 41% of the increase in Mortgages segment revenue. The increase in mortgage originations revenue was primarily driven by an increase in loan origination volume from $1.8 billion to $4.1 billion, or 131%, as we continued to grow our mortgage originations business. We believe low interest rates coupled with growth of our mortgage originations business, driven by purchase origination growth from Zillow Offers, supported strong refinance and home purchase activity during the year ended December 31, 2021. This was partially offset by a 36% decrease in gain on sale margin driven by industry margin compression. Gain on sale margin represents the net gain on sale of mortgage loans divided by total loan origination volume for the period. Net gain on sale of mortgage loans includes all components related to the origination and sale of mortgage loans, including the net gain on sale of loans into the secondary market, loan origination fees, unrealized gains and losses associated with changes in fair value of interest rate lock commitments and mortgage loans held for sale, realized and unrealized gains or losses from derivative financial instruments and the provision for losses relating to representations and warranties. The increase in our Custom Quote and Connect advertising revenue was primarily due to a 20% increase in leads sold from our marketing products sold to mortgage professionals. We expect Custom Quote and Connect advertising revenue to increase in absolute dollars in future periods primarily due to seasonality, while we expect purchase and refinance activity through Zillow Home Loans to decrease due to the wind down of Zillow Offers operations and increasing interest rates, respectively.

Income (Loss) Before Income Taxes

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[[/GREPCENT_TABLE]]

(1) Certain corporate items are not directly attributable to any of our segments, including the gain (loss) on extinguishment of debt, interest income earned on our short-term investments included in other income and interest costs on our convertible senior notes included in interest expense.

Adjusted EBITDA

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA in total and for each segment, each a non-GAAP financial measure, within this Annual Report on Form 10-K. We have provided a reconciliation below of Adjusted EBITDA in total to net loss and Adjusted EBITDA by segment to income (loss) before income taxes for each segment, the most directly comparable GAAP financial measures.

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We have included Adjusted EBITDA in total and for each segment in this Annual Report on Form 10-K as they are key metrics used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.

Our use of Adjusted EBITDA in total and for each segment has limitations as an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;

•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•Adjusted EBITDA does not reflect impairment and restructuring costs;

•Adjusted EBITDA does not reflect acquisition-related costs;

•Adjusted EBITDA does not reflect the gain (loss) on extinguishment of debt;

•Adjusted EBITDA does not reflect interest expense or other income;

•Adjusted EBITDA does not reflect income taxes; and

•Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA in total and for each segment alongside other financial performance measures, including various cash flow metrics, net loss, income (loss) before income taxes for each segment and our other GAAP results.

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The following tables present a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, which is net loss on a consolidated basis and income (loss) before income taxes for each segment, for each of the periods presented (in thousands):

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2020"],["","Homes","","IMT","","Mortgages","","Corporate Items (2)","","Consolidated"],["Reconciliation of Adjusted EBITDA to Net Loss and Income (Loss) Before Income Taxes:"],["Net loss (1)","N/A","","N/A","","N/A","","N/A","","$","(162,115)"],["Income taxes","N/A","","N/A","","N/A","","N/A","","(7,523)"],["Income (loss) before income taxes","$","(320,254)","","","$","262,984","","","$","4,514","","","$","(116,882)","","","$","(169,638)"],["Other income","\u2014","","","(5,300)","","","(2,369)","","","(17,860)","","","(25,529)"],["Depreciation and amortization","13,315","","","89,862","","","6,854","","","\u2014","","","110,031"],["Share-based compensation","48,166","","","134,691","","","14,693","","","\u2014","","","197,550"],["Gain on extinguishment of debt","\u2014","","","\u2014","","","\u2014","","","(1,448)","","","(1,448)"],["Impairment and restructuring costs","\u2014","","","73,900","","","2,900","","","\u2014","","","76,800"],["Interest expense","16,804","","","\u2014","","","2,233","","","136,190","","","155,227"],["Adjusted EBITDA","$","(241,969)","","","$","556,137","","","$","28,825","","","$","\u2014","","","$","342,993"]]
[[/GREPCENT_TABLE]]

(1) We use income (loss) before income taxes as our profitability measure in making operating decisions and assessing the performance of our segments, therefore, net loss and income tax benefit (expense) are calculated and presented only on a consolidated basis within our financial statements.

(2) Certain corporate items are not directly attributable to any of our segments, including the gain (loss) on extinguishment of debt, interest income earned on our short-term investments included in other income and interest costs on our convertible senior notes included in interest expense.

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Costs and Expenses, Gross Profit and Other Items

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[[/GREPCENT_TABLE]]

Cost of Revenue

Cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount-related expenses, such as salaries, benefits, bonuses and share-based compensation expense, as well as revenue-sharing costs related to our commercial business relationships, depreciation expense, and costs associated with hosting our mobile applications and websites. Cost of revenue also includes amortization costs related to capitalized website and development activities, amortization of software, amortization of certain intangible assets and other costs to obtain data used to populate our mobile applications and websites, and amortization of certain intangible assets recorded in connection with acquisitions, including developed technology. For our Homes segment, cost of revenue also consists of the consideration paid to acquire and make certain repairs and updates to each home, including associated overhead costs, as well as inventory valuation adjustments. For our IMT and Mortgages segments, cost of revenue also includes credit card fees and ad serving costs paid to third parties. For our Mortgages segment, cost of revenue also consists of direct costs to originate loans, including underwriting and processing costs.

Cost of revenue increased $4.5 billion, or 243%, due primarily to increases of $4.5 billion in our Homes segment, $45.2 million in our Mortgages segment and $10.4 million in our IMT segment.

•The increase in Homes segment cost of revenue was primarily driven by a $4.2 billion increase in home acquisition costs due to the increase in homes sold during the period from 5,337 homes sold during the year ended December 31, 2020 to 15,436 homes sold during the year ended December 31, 2021. The increase in cost of revenue was also attributable to write-downs totaling $407.9 million related to homes in inventory during the year ended December 31, 2021 with a carrying value exceeding their net realizable value as a result of purchasing homes at higher prices than our current estimates of future selling prices. We expect Homes segment cost of revenue to decrease during the three months ending March 31, 2022 and to continue to decrease in subsequent quarters as we complete our wind down of Zillow Offers.

•The increase in cost of revenue in our Mortgages segment was primarily attributable to an increase in headcount-related expenses, including share-based compensation expense, of $18.3 million, an increase in lead acquisition costs of $17.7 million associated with growth in our Zillow Home Loans business, and an increase in mortgage loan processing costs of $4.2 million corresponding with the increase in loan origination volume.

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•The increase in cost of revenue in our IMT segment was primarily attributable to an increase of $12.8 million in depreciation and amortization expense, an increase of $9.2 million in direct product costs, an increase of $7.1 million in lead acquisition costs, and an increase of $6.5 million in headcount-related expenses, including share-based compensation expense, partially offset by a decrease of $27.7 million in data acquisition costs.

Gross Profit

Gross profit is calculated as revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross profit has and will continue to be affected by a number of factors, including the mix of revenue from our relatively higher gross margin segments, IMT and Mortgages, and our relatively lower gross margin Homes segment.

Gross profit increased by $279.8 million, or 19%, due to increases of $425.2 million in our IMT segment and $26.4 million in our Mortgages segment, partially offset by a decrease of $171.8 million in our Homes segment. Total gross margin decreased from 44% to 22%.

•The increase in IMT segment gross profit was driven by an improvement in gross margin from 87% to 89%, primarily associated with increased revenue, discussed above.

•The increase in Mortgages segment gross profit was driven by an increase in revenue, discussed above. However, gross margin declined from 78% to 66%, driven by increases in cost of revenue, primarily associated with additional lead acquisition costs and headcount-related expenses as a result of increased origination volume, which outpaced the growth in revenue, primarily due to industry margin compression.

•The decrease in Homes segment gross profit was primarily driven by a $211.0 million inventory write-down for homes that remain in inventory as of December 31, 2021. Gross margin decreased from 5% for the year ended December 31, 2020 to (2)% for the year ended December 31, 2021.

Sales and Marketing

Sales and marketing expenses consist of advertising costs and other sales expenses related to promotional and marketing activities, headcount-related expenses, including salaries, commissions, benefits, bonuses and share-based compensation expense for sales, sales support, customer support, including the customer connections team, marketing and public relations employees, depreciation expense and amortization of certain intangible assets recorded in connection with acquisitions, including trade names and trademarks and customer relationships. For our 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 incurred during the period that homes are listed for sale, including utilities, taxes and maintenance. For our Mortgages segment, sales and marketing expenses include headcount-related expenses for loan officers and specialists supporting Zillow Home Loans.

Sales and marketing expenses increased $385.1 million, or 56%, due to increases of $224.0 million in our Homes segment, $112.1 million in our IMT segment and $49.1 million in our Mortgages segment.

•The increase in sales and marketing expenses in the Homes segment was primarily attributable to a $181.7 million increase in home holding and selling costs driven by the increase in the number of homes sold during the year ended December 31, 2021 compared to the year ended December 31, 2020. Home holding and selling costs for the year ended December 31, 2020 were impacted by our pause in home buying activities in the first half of 2020, which resulted in lower inventory available for resale during the second half of 2020. The increase in sales and marketing expenses was also attributable to an increase in headcount-related expenses, including share-based compensation expense, of $23.7 million. During the year ended December 31, 2020, Homes segment sales and marketing expenses also included $5.5 million in expenses attributable to our efforts to pause home buying in response to the COVID-19 pandemic, which partially offset the aforementioned increases as no comparable costs were incurred during the year ended December 31, 2021. Sales and marketing expenses for the Homes segment include $62.3 million and $11.3 million in holding costs for the years ended December 31, 2021 and 2020, respectively. We expect sales and marketing expenses within the Homes segment to decrease throughout 2022 as we wind down Zillow Offers operations.

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•The increase in sales and marketing expenses in the IMT segment was primarily attributable to a $68.9 million increase in marketing and advertising costs and an increase in headcount-related expenses, including share-based compensation expense, of $45.5 million. Marketing and advertising costs for the year ended December 31, 2021 were higher than the comparable prior year period due to our pause in most discretionary spending associated with liquidity preservation in response to the COVID-19 pandemic in the comparable prior year period. We expect sales and marketing expenses within the IMT segment to increase in absolute dollars in future periods due to seasonal advertising and marketing spend, as well as due to increased investment in human capital.

•The increase in sales and marketing expenses in the Mortgages segment was primarily attributable to an increase in headcount-related expenses, including share-based compensation expense, of $32.1 million, and a $14.7 million increase in marketing and advertising expenses associated with growth of our Zillow Home Loans business. We expect sales and marketing expenses within our Mortgages segment to decrease in absolute dollars in future periods due to decreased loan origination volumes primarily as a result of the wind down of Zillow Offers operations.

Technology and Development

Technology and development expenses consist of headcount-related expenses, including salaries, benefits, bonuses and share-based compensation expense for individuals engaged in the design, development and testing of our products, mobile applications and websites and the tools and applications that support our products. Technology and development expenses also include equipment and maintenance costs and depreciation expense.

Technology and development expenses increased $84.2 million, or 22%, due to increases of $57.4 million in our IMT segment, $18.3 million in our Homes segment and $8.5 million in our Mortgages segment.

The increase in technology and development expenses for each of our segments was primarily attributable to increases in headcount-related expenses, including share-based compensation expense, of $54.4 million, $15.4 million and $5.0 million for our IMT, Homes and Mortgages segments, respectively.

We expect technology and development expenses within the Homes segment to decrease throughout 2022 due to the wind down of Zillow Offers operations. We expect technology and development expenses to increase in absolute dollars in future periods for our IMT and Mortgages segments due to increased headcount related spend as we continue to invest in the development of technology to help high-intent movers find and win their homes.

General and Administrative

General and administrative expenses consist of headcount-related expenses, including salaries, benefits, bonuses and share-based compensation expense for executive, finance, accounting, legal, human resources, recruiting, corporate information technology costs and other administrative support. General and administrative expenses also include legal settlement costs and estimated legal liabilities, legal, accounting and other third-party professional service fees, rent expense, depreciation expense and bad debt expense.

General and administrative expenses increased $92.1 million, or 26%, due to increases of $33.4 million in our IMT segment, $31.8 million in our Homes segment and $26.9 million in our Mortgages segment.

The increase in general and administrative expenses for each of our segments was primarily attributable to increases in headcount-related expenses, including share-based compensation expense, of $40.1 million, $22.6 million and $20.0 million for our IMT, Homes and Mortgages segments, respectively, as we have continued to invest in human capital to grow our businesses.

We expect general and administrative expenses within the IMT segment to increase in absolute dollars as we continue to invest to grow our business. We expect general and administrative expenses within the Homes segment to decrease throughout 2022 due to the wind down of Zillow Offers operations.

Impairment and Restructuring Costs

Restructuring costs for the year ended December 31, 2021 primarily relate to our wind down of Zillow Offers operations and include employee termination costs, contract termination costs, and charges related to write-offs of assets pertaining to Zillow Offers. Restructuring costs of $72.2 million for the year ended December 31, 2021 include $60.8 million for employee termination costs, $10.0 million of contract termination costs, and $1.4 million related to write-offs of assets pertaining to Zillow Offers. For additional information regarding the restructuring, see Note 22 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

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Impairment costs recorded for the year ended December 31, 2020 consist of a $71.5 million non-cash impairment related to the Trulia trade names and trademarks intangible asset, of which $68.6 million was recorded to the IMT segment and $2.9 million was recorded to the Mortgages segment. Additionally, impairment costs include a $5.3 million non-cash impairment related to our October 2016 equity investment, the entirety of which was recorded to the IMT segment. For additional information about these impairments, see Note 9 and Note 10 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Acquisition-Related Costs

Acquisition-related costs consist of investment banking, legal, accounting and tax costs associated with effecting acquisitions. Acquisition-related costs were $8.6 million for the year ended December 31, 2021 primarily as a result of our September 2021 acquisition of ShowingTime. We did not record any acquisition-related costs for the year ended December 31, 2020.

Gain (Loss) on Extinguishment of Debt

We recorded a $17.1 million loss on extinguishment of debt for the year ended December 31, 2021 associated with conversions of the convertible senior notes maturing in 2023 (“2023 Notes”), 2024 (“2024 Notes”) and 2026 (“2026 Notes”). During the year ended December 31, 2020, we recorded a $1.4 million gain on extinguishment of debt primarily associated with the repurchase of the convertible senior notes maturing in 2021 (“2021 Notes”). For additional information on the gain (loss) on extinguishment of debt, see Note 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Other Income

Other income consists primarily of interest income earned on our cash, cash equivalents and investments. Other income decreased $15.3 million, or 60%, due to a decrease of $15.6 million in corporate other income not directly attributable to our segments driven by lower cash and investment balances during the second half of the year. Also driving the decrease was $5.3 million of other income in our IMT segment related to the gain recognized on the sale of our October 2016 equity investment during the year ended December 31, 2020. For additional information on the gain on sale, see Note 9 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Interest Expense

Our corporate interest expense consists of interest on our convertible senior notes and also includes the amortization of the debt discount and deferred issuance costs for the convertible senior notes. Refer to Note 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for stated interest rates and interest payment dates for each of our convertible senior notes.

For our Homes segment, interest expense includes interest on borrowings, funding fees and other fees, including the amortization of deferred issuance costs, on the credit facilities related to Zillow Offers. Borrowings on these credit facilities bear interest at the one-month London Inter-Bank Offered Rate (“LIBOR”) plus an applicable margin, and in certain cases are subject to a LIBOR floor, as defined in the credit agreements. Interest expense also includes interest on the term loans and variable funding lines associated with our 2021-1 and 2021-2 securitization transactions beginning in August 2021 and October 2021, respectively, including the amortization of the debt discount for the term loans and the amortization of deferred issuance costs for the term loans and variable funding lines. The term loans bear interest at a fixed rate and the variable funding lines bear interest at LIBOR plus an applicable margin. Refer to Note 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on Homes segment financing.

For our Mortgages segment, interest expense includes interest on the warehouse lines of credit and interest on the master repurchase agreements related to our Zillow Home Loans business. Borrowings on the warehouse lines of credit and master repurchase agreements bear interest at the one-month LIBOR plus an applicable margin, and in certain cases are subject to a LIBOR floor, as defined in the agreements.

Interest expense increased $36.7 million, or 24%, due to a $47.0 million increase related to our Homes segment and a $2.8 million increase related to our Mortgages segment, partially offset by a $13.2 million decrease in corporate interest expense not attributable to any of our segments.

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The increase in Homes segment interest expense was primarily attributable to the increased number of homes financed on our credit facilities and through our securitization transactions, as described above. We expect interest expense for the Homes segment to decrease throughout 2022 as we wind down Zillow Offers operations and inventory levels decline. The increase in Mortgages segment interest expense was due to increased borrowings on our repurchase agreements and warehouse line of credit.

The decrease in corporate interest expense not attributable to any of our segments was primarily attributable to the settlement of the convertible senior notes due in 2020 (the “2020 Notes”) and the 2021 Notes during the year ended December 31, 2020 and the settlement of the 2023 Notes, 2024 Notes and 2026 Notes during the year ended December 31, 2021, which decreased the outstanding principal balances of our convertible senior notes upon which interest was incurred. The decrease in corporate interest expense was partially offset by the impact of additional interest for the May 2020 issuance of the convertible senior notes due in 2025 (the “2025 Notes”).

Income Taxes

We are subject to income taxes in the United States (federal and state), Canada, and Serbia. As of December 31, 2021 and December 31, 2020, 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 consolidated financial statements. We have accumulated federal tax losses of approximately $2.1 billion as of December 31, 2021, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $72.7 million (tax effected) as of December 31, 2021. The income tax expense/benefit was immaterial in both 2021 and 2020.

Quarterly Results of Operations

The following tables set forth our unaudited quarterly statements of operations data for each of the periods presented below. In the opinion of management, the data has been prepared on the same basis as the audited consolidated financial statements included in this Annual Report on Form 10-K, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the data. The results of historical periods are not necessarily indicative of the results of operations of any future period, particularly given the uncertainty surrounding the COVID-19 pandemic and our plans to wind down the Zillow Offers business. You should read the data together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Amounts are in thousands, except per share data, unaudited, and prior period amounts have been recast to conform to the current format (see Note 2 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional details regarding the reclassifications).

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[[GREPCENT_TABLE]]
[["","Three Months Ended"],["","December 31, 2021","","September 30, 2021","","June 30, 2021","","March 31, 2021","","December 31, 2020","","September 30, 2020","","June 30, 2020","","March 31, 2020"],["Statement of Operations Data:"],["Revenue:"],["Homes","$","3,348,323","","","$","1,186,158","","","$","777,145","","","$","704,152","","","$","304,145","","","$","187,105","","","$","454,252","","","$","769,873"],["IMT","483,169","","","480,195","","","476,090","","","446,328","","","423,838","","","415,389","","","280,339","","","330,666"],["Mortgages","50,821","","","70,290","","","56,745","","","67,960","","","60,969","","","54,198","","","33,761","","","25,282"],["Total revenue","3,882,313","","","1,736,643","","","1,309,980","","","1,218,440","","","788,952","","","656,692","","","768,352","","","1,125,821"],["Cost of revenue (1):"],["Homes","3,331,920","","","1,422,899","","","707,522","","","644,603","","","281,040","","","183,056","","","434,900","","","735,759"],["IMT","61,597","","","51,371","","","43,444","","","47,037","","","47,698","","","49,992","","","45,354","","","50,053"],["Mortgages","21,695","","","21,790","","","20,619","","","19,680","","","14,000","","","10,725","","","7,229","","","6,586"],["Total cost of revenue","3,415,212","","","1,496,060","","","771,585","","","711,320","","","342,738","","","243,773","","","487,483","","","792,398"],["Gross profit","467,101","","","240,583","","","538,395","","","507,120","","","446,214","","","412,919","","","280,869","","","333,423"],["Operating expenses:"],["Sales and marketing (1)","354,492","","","294,354","","","229,434","","","197,955","","","166,114","","","155,894","","","160,667","","","208,444"],["Technology and development (1)","114,141","","","111,491","","","128,463","","","120,301","","","97,410","","","94,774","","","97,507","","","100,481"],["General and administrative (1)","120,087","","","113,130","","","115,102","","","100,454","","","93,338","","","85,804","","","85,380","","","92,200"],["Impairment and restructuring costs (1)","72,173","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","76,800"],["Acquisition-related costs","892","","","3,235","","","3,671","","","817","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Integration costs","680","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total operating expenses","662,465","","","522,210","","","476,670","","","419,527","","","356,862","","","336,472","","","343,554","","","477,925"],["Income (loss) from operations","(195,364)","","","(281,627)","","","61,725","","","87,593","","","89,352","","","76,447","","","(62,685)","","","(144,502)"],["Gain (loss) on extinguishment of debt","\u2014","","","(14,785)","","","(931)","","","(1,403)","","","(4,943)","","","\u2014","","","6,391","","","\u2014"],["Other income","4,198","","","1,964","","","1,587","","","2,439","","","2,803","","","3,018","","","10,115","","","9,593"],["Interest expense","(68,188)","","","(44,737)","","","(39,430)","","","(39,555)","","","(40,575)","","","(39,470)","","","(37,590)","","","(37,592)"],["Income (loss) before income taxes","(259,354)","","","(339,185)","","","22,951","","","49,074","","","46,637","","","39,995","","","(83,769)","","","(172,501)"],["Income tax benefit (expense)","(1,854)","","","11,011","","","(13,310)","","","2,890","","","(601)","","","(425)","","","(679)","","","9,228"],["Net income (loss)","$","(261,208)","","","$","(328,174)","","","$","9,641","","","$","51,964","","","$","46,036","","","$","39,570","","","$","(84,448)","","","$","(163,273)"],["Net income (loss) per share:"],["Basic","$","(1.03)","","","$","(1.29)","","","$","0.04","","","$","0.21","","","$","0.20","","","$","0.17","","","$","(0.38)","","","$","(0.78)"],["Diluted","$","(1.03)","","","$","(1.29)","","","$","0.04","","","$","0.20","","","$","0.18","","","$","0.16","","","$","(0.38)","","","$","(0.78)"],["Weighted-average shares outstanding:"],["Basic","254,013","","","254,074","","","248,152","","","243,234","","","235,341","","","229,719","","","219,467","","","210,674"],["Diluted","254,013","","","254,074","","","261,496","","","259,346","","","251,499","","","242,632","","","219,467","","","210,674"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Three Months Ended"],["","December 31, 2021","","September 30, 2021","","June 30, 2021","","March 31, 2021","","December 31, 2020","","September 30, 2020","","June 30, 2020","","March 31, 2020"],["(1) Includes share-based compensation as follows:"],["Cost of revenue","$","2,735","","","$","2,573","","","$","2,972","","","$","2,688","","","$","2,064","","","$","1,855","","","$","1,364","","","$","1,402"],["Sales and marketing","12,161","","","12,733","","","13,350","","","9,887","","","8,370","","","8,631","","","9,116","","","6,993"],["Technology and development","28,495","","","28,077","","","34,951","","","26,091","","","21,212","","","19,555","","","21,421","","","18,688"],["General and administrative","36,822","","","36,022","","","37,122","","","25,007","","","20,799","","","18,918","","","20,450","","","16,712"],["Impairment and restructuring costs","5,506","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","$","85,719","","","$","79,405","","","$","88,395","","","$","63,673","","","$","52,445","","","$","48,959","","","$","52,351","","","$","43,795"]]
[[/GREPCENT_TABLE]]

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The following tables present our revenue by type and as a percentage of total revenue for the periods presented (in thousands, unaudited):

[[GREPCENT_TABLE]]
[["","Three Months Ended"],["","December 31, 2021","","September 30, 2021","","June 30, 2021","","March 31, 2021","","December 31, 2020","","September 30, 2020","","June 30, 2020","","March 31, 2020"],["Revenue:"],["Homes segment:"],["Zillow Offers","$","3,336,660","","","$","1,172,693","","","$","772,030","","","$","700,974","","","$","301,703","","","$","185,904","","","$","453,816","","","$","769,112"],["Other","11,663","","","13,465","","","5,115","","","3,178","","","2,442","","","1,201","","","436","","","761"],["Total Homes segment revenue","3,348,323","","","1,186,158","","","777,145","","","704,152","","","304,145","","","187,105","","","454,252","","","769,873"],["IMT segment:"],["Premier Agent","353,799","","","358,852","","","348,754","","","334,318","","","314,213","","","298,673","","","191,962","","","242,106"],["Other","129,370","","","121,343","","","127,336","","","112,010","","","109,625","","","116,716","","","88,377","","","88,560"],["Total IMT segment revenue","483,169","","","480,195","","","476,090","","","446,328","","","423,838","","","415,389","","","280,339","","","330,666"],["Mortgages segment","50,821","","","70,290","","","56,745","","","67,960","","","60,969","","","54,198","","","33,761","","","25,282"],["Total revenue","$","3,882,313","","","$","1,736,643","","","$","1,309,980","","","$","1,218,440","","","$","788,952","","","$","656,692","","","$","768,352","","","$","1,125,821"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Three Months Ended"],["","December 31, 2021","","September 30, 2021","","June 30, 2021","","March 31, 2021","","December 31, 2020","","September 30, 2020","","June 30, 2020","","March 31, 2020"],["Percentage of Revenue:"],["Homes segment:"],["Zillow Offers","86","%","","68","%","","59","%","","58","%","","38","%","","28","%","","59","%","","68","%"],["Other","\u2014","","","1","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total Homes segment revenue","86","","","68","","","59","","","58","","","39","","","28","","","59","","","68"],["IMT segment:"],["Premier Agent","9","","","21","","","27","","","27","","","40","","","45","","","25","","","22"],["Other","3","","","7","","","10","","","9","","","14","","","18","","","12","","","8"],["Total IMT segment revenue","12","","","28","","","36","","","37","","","54","","","63","","","36","","","29"],["Mortgages segment","1","","","4","","","4","","","6","","","8","","","8","","","4","","","2"],["Total revenue","100","%","","100","%","","100","%","","100","%","","100","%","","100","%","","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

Total revenue increased sequentially in all quarters presented with the exception of the three months ended June 30, 2020 and three months ended September 30, 2020. The decreases in revenue for these periods were primarily due to measures taken in response to the COVID-19 pandemic. For additional information regarding the impact of the COVID-19 pandemic, see the subsection titled “COVID-19 Impact” under “Overview of our Business” above in this Item 7. For all other quarters, revenue increased, primarily due to growth of our Zillow Offers business.

Homes Segment

Homes segment revenue increased sequentially in all quarters presented with the exception of the three months ended September 30, 2020 and the three months ended June 30, 2020. The decreases in revenue for these periods were primarily driven by the pause in home buying activities in our Zillow Offers business in the first half of 2020 in response to the COVID-19 pandemic, which resulted in lower inventory available for resale during the second half of 2020. For the three months ended December 31, 2020, we began to see a sequential increase in revenue as we increased our inventory levels following the home buying pause earlier in 2020. For all other quarters, Homes segment revenue increased, which was primarily attributable to an increase in the number of homes sold in each period as we grew our acquisition and resale volumes, including accelerating resales as we wind down Zillow Offers operations. We expect Homes segment revenue to decrease throughout 2022 as we wind down Zillow Offers operations.

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IMT Segment

Premier Agent Revenue. Premier Agent revenue increased sequentially in all quarters presented with the exception of the three months ended December 31, 2021 and the three months ended June 30, 2020. The sequential decrease in revenue for the three months ended December 31, 2021 was attributable to a sequential decrease in visits driven by seasonality related to the normal cycles of the residential real estate market coupled with tighter inventory due to the latest COVID-19 variant which decreased the number of customer connections and leads we monetized in our Premier Agent marketplace. The decrease in revenue for the three months ended June 30, 2020 was primarily due to the temporary discounts offered to our Premier Agent partners in response to the COVID-19 pandemic. For all other quarters, Premier Agent revenue increased due primarily to increases in the number of visits and unique users to our mobile applications and websites for the respective periods.

Other Revenue. Other revenue increased sequentially in all quarters presented with the exception of the three months ended September 30, 2021, the three months ended December 31, 2020 and the three months ended June 30, 2020. The decrease in revenue for the three months ended September 30, 2021 was primarily driven by a decrease in our rentals revenue as a result of high occupancy rates, which created headwinds for advertising demand. The decrease in revenue for the three months ended December 31, 2020 was driven by a decrease in display advertising sales and aligns to the seasonality of the residential real estate market. The decrease in revenue for the three months ended June 30, 2020 was primarily driven by the COVID-19 pandemic, as many display advertisers decreased discretionary marketing spend. We also offered temporary discounts on certain of our other IMT products in response to the COVID-19 pandemic to help mitigate the impact of the pandemic on our customers, which adversely impacted other IMT revenue in the second quarter of 2020. For all other quarters, other revenue increased due primarily to increased rental advertising revenue resulting from the increased adoption of our rentals pay per listing, applications processing and pay per lease products. Additionally, beginning in the fourth quarter of 2021, other IMT revenue includes the financial results of ShowingTime which contributed to the increase in other IMT revenue for the three months ended December 31, 2021.

Mortgages Segment

Mortgages revenue increased sequentially in all quarters presented with the exception of the three months ended December 31, 2021 and three months ended June 30, 2021. The decrease in revenue for the three months ended December 31, 2021 was primarily related to the wind down of Zillow Offers operations. Additionally, the decrease in revenue for the three months ended December 31, 2021 as well as the three months ended June 30, 2021 was due to a decrease in revenue generated by Zillow Home Loans associated with lower loan origination volumes and lower gain on sale margins driven by industry margin compression. Mortgages revenue increased sequentially in all other quarters presented, primarily driven by revenue generated by Zillow Home Loans, due to higher sales volume reflective of market demand as low interest rates have resulted in strong refinance activity.

Seasonality

Portions of our business may be affected by seasonal fluctuations in the residential real estate market, advertising spending and other factors. With respect to our Homes segment, the rate of revenue growth as we have increased our home buying and home selling activities over the past two years may have masked seasonality in revenue. Similarly, the Zillow Home Loans growth rate, driven in part by historically low interest rates and operational investment, may mask seasonality in revenue within the Mortgages segment, as we believe that seasonality would result in higher purchase origination volumes in the spring and summer high seasons. Our Connect and Custom Quote mortgage marketing products display similar seasonal fluctuations. Should the revenue growth rate related to our IMT segment slow, seasonal variances may become pronounced, causing our operating results to fluctuate. For example, excluding the impact of COVID-19 related discounts in 2020, Premier Agent and Other revenue have generally peaked in the three months ended June 30th or September 30th, in line with peak residential real estate activity in the spring and summer seasons over the last two years. However, we believe that customers’ increased desire and ability to move in response to the COVID-19 pandemic may mask seasonal impacts. In addition, the average numbers of visits and unique users have historically peaked during the three months ended June 30th or September 30th, consistent with peak residential real estate activity in the spring and summer months. Because the number of visits and unique users impacts impression inventory, leads and connections to real estate professionals, clicks and other events we monetize, we believe this trend in the average number of visits and unique users has resulted in seasonal fluctuations in revenue in corresponding periods.

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Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows from operations, debt financing and equity offerings. Our cash requirements consist principally of working capital, general corporate needs, mortgage loan originations and purchasing homes through Zillow Offers, all of which home purchases closed by January 31, 2022. We generally reinvest available cash flows from operations into our business and to service our debt obligations.

Sources of Liquidity

As of December 31, 2021 and 2020, we had cash and cash equivalents, investments and restricted cash of $3.4 billion and $4.0 billion, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions, money market funds and municipal securities. Investments consist of fixed income securities, which include U.S. government agency securities, municipal securities, treasury bills and certificates of deposit, investment grade corporate securities and the beneficial interests in our Homes segment securitization transactions. Restricted cash consists of amounts funded to the reserve and collection accounts related to our credit facilities, home sales proceeds held in restricted accounts associated with our credit facilities and securitizations 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. As of December 31, 2021, Zillow Group and its subsidiaries were in compliance with all debt covenants specified in the facilities described below.

To preserve our liquidity in response to the COVID-19 pandemic, during the first half of 2020 we temporarily paused hiring for non-critical roles, paused the majority of our advertising spending and reduced other discretionary spending. As our financial position strengthened, we increased our hiring and marketing and advertising activities. Additionally, we temporarily paused home buying through Zillow Offers in the first half of 2020 and resumed home buying activities in all markets in early August 2020.

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 following table presents selected cash flow data for the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["Cash Flow Data:"],["Net cash provided by (used in) operating activities","$","(3,176,694)","","","$","424,197"],["Net cash provided by (used in) investing activities","1,088,279","","","(1,038,489)"],["Net cash provided by financing activities","3,147,630","","","1,162,318"]]
[[/GREPCENT_TABLE]]

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, as well as cash received from customers for sales of homes through Zillow Offers and sales of mortgages originated by Zillow Home Loans. 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.

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For the year ended December 31, 2021, net cash used in operating activities was $3,176.7 million. This was primarily driven by a net loss of $527.8 million, adjusted by an inventory valuation adjustment of $407.9 million, share-based compensation expense of $311.7 million, depreciation and amortization expense of $129.8 million, amortization of debt discount and debt issuance costs of $104.4 million, impairment and restructuring costs of $56.8 million, amortization of contract cost assets of $41.6 million, amortization of right of use assets of $22.7 million, a loss on extinguishment of debt of $17.1 million and $12.5 million in other adjustments to reconcile net loss to net cash used in operating activities, including deferred income taxes. Changes in operating assets and liabilities offset these adjustments by $3,753.5 million. The changes in operating assets and liabilities are primarily related to a $3,826.7 million increase in inventory due to home purchases outpacing the sale of homes through Zillow Offers for the year ended December 31, 2021, an $82.3 million increase in accounts receivable due primarily to an increase in revenue from products and services billed in arrears, an $81.6 million increase in prepaid expenses and other current assets due to the timing of payments, a $29.3 million decrease in lease liabilities, a $26.3 million increase in contract cost assets due primarily to capitalized sales commissions and an $11.4 million decrease in other long-term liabilities. These changes were partially offset by a $224.0 million decrease in mortgage loans held for sale, a $61.5 million increase in accrued expenses and other liabilities driven by the timing of payments, $13.2 million in accrued compensation and benefits and a $4.7 million change in accounts payable.

For the year ended December 31, 2020, net cash provided by operating activities was $424.2 million. This was primarily driven by a net loss of $162.1 million, adjusted by share-based compensation expense of $197.6 million, depreciation and amortization expense of $110.0 million, amortization of debt discount and debt issuance costs of $102.4 million, non-cash impairment costs of $76.8 million, amortization of contract cost assets of $36.5 million, amortization of right of use assets of $24.3 million and $4.8 million in other adjustments to reconcile net loss to cash provided by operating activities. This was partially offset by a $7.5 million change in deferred taxes and a gain on extinguishment of debt of $1.4 million. Changes in operating assets and liabilities increased cash provided by operating activities by $42.9 million. The changes in operating assets and liabilities are primarily related to a $345.3 million decrease in inventory due to the sale of homes and a decrease in home purchases through Zillow Offers during the year ended December 31, 2020 associated with our temporary pause in Zillow Offers home buying activity to preserve liquidity in response to COVID-19, a $15.3 million increase in accrued expenses and other liabilities driven by the timing of payments, a $13.0 million increase in accounts payable, a $10.2 million increase in other long-term liabilities, a $9.9 million increase in accrued compensation and benefits and a $9.2 million increase in deferred revenue. These changes were partially offset by a $294.3 million increase in mortgage loans held for sale, a $42.0 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $16.0 million increase in prepaid expenses and other current assets due primarily to timing of payments and growth in our contract assets, a $5.6 million increase in accounts receivable due to an increase in revenue from products and services billed in arrears and a $2.1 million decrease in lease liabilities due to scheduled lease payments.

Cash Flows Provided By (Used In) Investing Activities

Our primary investing activities include the purchase and sale or maturity of investments, the purchase of property and equipment and intangible assets and cash paid in connection with acquisitions.

For the year ended December 31, 2021, net cash provided by investing activities was $1,088.3 million. This was the result of $1,690.0 million of net proceeds from the maturity of investments, partially offset by $497.3 million of net cash paid for our September 2021 acquisition of ShowingTime, and $104.4 million of purchases of property and equipment and intangible assets.

For the year ended December 31, 2020, net cash used in investing activities was $1.0 billion. This was the result of $940.0 million of net purchases of investments in connection with investment of a portion of the net proceeds from our May 2020 issuance of the 2025 Notes and offering of our Class C capital stock, and $108.5 million of purchases for property and equipment and intangible assets, partially offset by $10.0 million in proceeds from the sale of an equity investment.

Cash Flows Provided By Financing Activities

Net cash provided by financing activities has primarily resulted from net proceeds from the issuance of convertible notes, net proceeds from equity offerings, the exercise of employee option awards and equity awards withheld for tax liabilities, proceeds from and repayments of borrowings on our credit facilities related to Zillow Offers and proceeds from borrowings on the warehouse lines of credit and master repurchase agreements related to Zillow Home Loans.

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For the year ended December 31, 2021, cash provided by financing activities was $3,147.6 million, which was primarily related to $1,838.4 million of net borrowings on our credit facilities related to Zillow Offers, $1,138.2 million in proceeds from the issuance of the 2021-1 and 2021-2 term loans, net of issuance costs, $544.6 million in proceeds from the sale of 3,163,502 shares of Class C capital stock under our equity distribution agreement and $127.2 million of proceeds from the exercise of option awards. These cash inflows were partially offset by $302.3 million of cash paid for share repurchases pursuant to our stock buyback program and $197.1 million of net repayments on our warehouse line of credit and master repurchase agreements related to Zillow Home Loans.

For the year ended December 31, 2020, cash provided by financing activities was $1.2 billion, which was primarily related to net proceeds from the issuance of the 2025 Notes of $553.3 million, net proceeds from the public offering of our Class C capital stock of $411.5 million, $444.0 million of proceeds from the exercise of option awards and $278.6 million of net borrowings on our warehouse line of credit and master repurchase agreements related to Zillow Home Loans. These cash inflows were partially offset by $330.4 million of net repayments of borrowings on our credit facilities related to Zillow Offers and $194.8 million of cash paid for the extinguishment of our 2021 Notes.

Capital Resources

We continue to invest in the development and expansion of our operations. Ongoing investments include, but are not limited to, improvements in infrastructure, networking equipment and software, release improvements to our software code, as well as investments in sales and marketing. To finance these investments and ongoing operations, and in the event that we require additional funding to support strategic business opportunities, we have issued convertible senior notes. As of December 31, 2021, we have outstanding a total of $1.7 billion aggregate principal of convertible senior notes. The convertible notes are senior unsecured obligations, and interest on the convertible notes is paid semi-annually. On May 26, 2021, we submitted notice to the trustee to exercise our right to redeem the remaining $372.8 million in aggregate principal amount of the 2023 Notes on July 6, 2021 (the “Redemption Date”). Holders of the 2023 Notes had the option to convert their 2023 Notes in whole or in part into shares of Class C capital stock prior to the Redemption Date. During the year ended December 31, 2021, holders of the 2023 Notes elected to convert $371.5 million of aggregate principal amount prior to the Redemption Date. We satisfied these conversions through the issuance of approximately 4.7 million shares of Class C capital stock and an immaterial amount of cash in lieu of fractional shares. The remaining $1.3 million of aggregate principal amount was redeemed on July 6, 2021 for $1.3 million in cash, plus accrued and unpaid interest. The following table summarizes our convertible senior notes as of the periods presented (in thousands, except interest rates):

[[GREPCENT_TABLE]]
[["","","","","","","December 31, 2021","","December 31, 2020"],["Maturity Date","","Aggregate Principal Amount","","Stated Interest Rate","","Carrying Value","","Carrying Value"],["September 1, 2026","","$","498,800","","","1.375","%","","$","368,773","","","$","347,566"],["May 15, 2025","","564,998","","","2.75","%","","443,505","","","414,888"],["September 1, 2024","","608,382","","","0.75","%","","506,946","","","524,273"],["July 1, 2023","","\u2014","","","1.50","%","","\u2014","","","326,796"],["Total","","$","1,672,180","","","","","$","1,319,224","","","$","1,613,523"]]
[[/GREPCENT_TABLE]]

Refer to Note 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our convertible senior notes, including conversion rates, conversion and redemption dates and the related capped call transactions.

On February 17, 2021, we entered into an equity distribution agreement with certain sales agents and/or principals (the “Managers”), pursuant to which we may offer and sell from time to time, through the Managers, shares of our Class C capital stock, having an aggregate gross sales price of up to $1.0 billion, in such share amounts as we may specify by notice to the Managers, in accordance with the terms and conditions set forth in the equity distribution agreement. During the year ended December 31, 2021, we issued and sold 3,163,502 shares of our Class C capital stock for total proceeds of $550.6 million and net proceeds of $544.6 million, after deducting $6.1 million of commissions and other offering expenses incurred. For additional information regarding the equity distribution agreement, see Note 15 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

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On December 2, 2021, Zillow Group’s Board of Directors authorized the repurchase of up to $750.0 million of its Class A common stock, Class C capital stock or a combination thereof (the “Stock Repurchase Program”). Repurchases may be made in open-market transactions or privately negotiated transactions, or in such other manner as deemed appropriate by management, and may be made from time to time as determined by management depending on market conditions, share price, trading volume, cash needs and other business factors, in each case as permitted by securities laws and other legal requirements. We reserve the right to terminate or suspend the Stock Repurchase Program at any time, and it does not have an expiration date. During the year ended December 31, 2021, we repurchased 4,944,462 of Class C capital stock at an average price of $61.12 per share for an aggregate purchase price of $302 million. As of December 31, 2021, $447.8 million remained available for future repurchases pursuant to the Stock Repurchase Program, which repurchases decrease our liquidity and capital resources, when effected. For additional information on our Stock Repurchase Program, see Note 15 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Homes

Zillow Group’s purchase of homes through the Zillow Offers program and sale of homes has had a significant impact on our liquidity and capital resources as a cash and inventory intensive business. We use credit facilities, and beginning in the third quarter of 2021, asset-backed securitizations, to fund a portion of the purchase price of homes and certain related costs. On October 18, 2021, Zillow Group announced that Zillow Offers would not sign any new, additional contracts to buy homes through the end of 2021. Subsequently, on November 2, 2021, the Board of Directors of Zillow Group made the determination to wind down Zillow Offers operations. As a result, we expect home financing to decrease in 2022 as we have ceased home buying activities. In the meantime, if we are unable to continue financing the purchase of homes, we may be required to use cash and cash equivalents to fund the purchase price of homes and certain related costs. The following table summarizes our credit facilities as of the periods presented (in thousands, except interest rates):

[[GREPCENT_TABLE]]
[["Lender","","Final Maturity Date","","Maximum Borrowing Capacity","","Outstanding Borrowings at December 31, 2021","","Outstanding Borrowings at December 31, 2020","","Weighted Average Interest Rate"],["Goldman Sachs Bank USA","","April 21, 2023","","$","750,000","","","$","548,345","","","$","145,825","","","2.90","%"],["Citibank, N.A.","","May 2, 2022","","1,000,000","","","770,306","","","87,103","","","2.84","%"],["Credit Suisse AG, Cayman Islands","","December 31, 2022","","1,500,000","","","834,906","","","128,238","","","2.92","%"],["","","Total","","$","3,250,000","","","$","2,153,557","","","$","361,166"]]
[[/GREPCENT_TABLE]]

Refer to Note 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on Zillow Group’s credit facilities.

IMT

Our principal sources of liquidity for the IMT segment are cash flows from operations within the segment. On September 30, 2021, Zillow Group acquired ShowingTime in exchange for approximately $511.8 million in cash, subject to certain adjustments. For additional information regarding our acquisition of ShowingTime, see Note 9 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

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Mortgages

Zillow Home Loans continues to impact our liquidity and capital resources as a cash intensive business that funds mortgage loans originated for resale in the secondary market. We primarily use debt financing to fund mortgage loan originations. The following table summarizes our warehouse line of credit and master repurchase agreements as of the periods presented (in thousands, except interest rates):

[[GREPCENT_TABLE]]
[["Lender","","Maturity Date","","Maximum Borrowing Capacity","","Outstanding Borrowings at December 31, 2021","","Outstanding Borrowings at December 31, 2020","","Weighted Average Interest Rate"],["Credit Suisse AG, Cayman Islands","","March 18, 2022","","$","300,000","","","$","76,392","","","$","149,913","","","2.50","%"],["Citibank, N.A.","","June 10, 2022","","100,000","","","16,912","","","90,227","","","1.85","%"],["Comerica Bank","","June 25, 2022","","60,000","","","18,656","","","68,903","","","2.50","%"],["","","Total","","$","460,000","","","$","111,960","","","$","309,043"]]
[[/GREPCENT_TABLE]]

Refer to Note 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on Zillow Group’s warehouse line of credit and master repurchase agreements.

Contractual Obligations and Other Commitments

Convertible Senior Notes - Includes the aggregate principal amounts of the 2024 Notes, 2025 Notes and 2026 Notes due on their contractual maturity dates, as well as the associated coupon interest. As of December 31, 2021, we have an outstanding aggregate principal amount of $1.7 billion, none of which is payable within 12 months. Future interest payments associated with the convertible senior notes total $105.0 million, with $29.5 million payable within 12 months. Refer to Note 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for maturity dates, stated interest rates and additional information on our convertible senior notes.

Homes Segment Credit Facilities - Includes principal amounts due for amounts borrowed under the credit facilities used to provide capital for our Zillow Offers business. As of December 31, 2021, we have outstanding principal amounts of $2.2 billion. We classify these credit facilities as current liabilities as amounts drawn to purchase homes are typically due as homes are sold, which we expect to be within one year, if not replaced by new real estate inventory of equal or greater value. Amounts exclude an immaterial amount of estimated interest payments. Given the wind down of Zillow Offers operations, we expect to incur prepayment penalties of approximately $6 million to $8 million associated with the pay-down of one of our credit facilities.

Homes Segment Securitizations - Includes the principal amounts of the 2021-1 and 2021-2 term loans due on their contractual maturity dates, and the principal amounts due for amounts borrowed on the 2021-1 and 2021-2 variable funding lines associated with the securitizations as well as the associated coupon interest. As of December 31, 2021, we have outstanding principal amounts of $1.3 billion associated with our Homes segment securitizations. Contractual future interest payments associated with the 2021-1 and 2021-2 term loans, if held to maturity, total $75.0 million, with $29.8 million payable within 12 months. Interest amounts exclude an immaterial amount of estimated interest payments on amounts borrowed on the 2021-1 and 2021-2 variable funding lines. However, given the wind down of Zillow Offers operations, we expect to settle the principal amounts associated with the securitization term loans and variable funding lines within the next 12 months, including contractual interest due and related prepayment penalties associated with the term loans. We estimate the related prepayment penalties will be approximately $9 million to $12 million. Refer to Note 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on our securitizations.

Mortgages Segment Credit Facilities - Includes principal amounts due for amounts borrowed under the warehouse line of credit and master repurchase agreements to finance mortgages originated through Zillow Home Loans. As of December 31, 2021, we have outstanding principal amounts of $112.0 million. We classify these credit facilities as current liabilities as amounts drawn to purchase homes are typically due as homes are sold, which we expect to be within one year, if not replaced by new real estate inventory of equal or greater value. Amounts exclude an immaterial amount of estimated interest payments.

Homes under Contract - As of December 31, 2021, we have obligations related to homes under contract to purchase totaling $108.7 million, however, these contracts could be cancelled without significant penalty and all closed by January 31, 2022.

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Operating Lease Obligations - Our lease portfolio primarily comprises operating leases for our office space. As of December 31, 2021, we have operating lease obligations totaling $251.5 million, with $35.3 million payable within 12 months. For additional information regarding our operating leases, see Note 12 to our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. Additionally, as of December 31, 2021 and 2020, we had 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.

Purchase Obligations - We have non-cancellable purchase obligations for content related to our mobile applications and websites and certain cloud computing costs. As of December 31, 2021, we have purchase obligations totaling $140.7 million, with $73.7 million payable within 12 months. For additional information regarding our purchase obligations, see Note 18 to our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Restructuring Payments - We expect to make future cash payments of approximately $81 million to $97 million, excluding prepayment penalties associated with financing facilities, related to the wind down of Zillow Offers operations. We expect these additional cash payments to be made during 2022 and to primarily relate to employee termination costs and contract termination costs. For additional information regarding our restructuring costs, see Note 22 to our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We evaluate our estimates, judgments and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates, and the COVID-19 pandemic as well as our decision to wind down Zillow Offers operations have introduced significant additional uncertainty with respect to estimates, judgments and assumptions, which may materially impact our estimates.

We believe that the estimates, judgments and assumptions associated with accounting for certain revenue offerings, the net realizable value of inventory, restructuring costs, amortization period and recoverability of contract cost assets, website and software development costs, recoverability of intangible assets with definite lives and other long-lived assets, and share-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Accounting for Certain Revenue

Accrued Revenue. We accrue revenue for certain of our products, primarily our Premier Agent Flex and rentals pay per lease offerings. With Premier Agent Flex, Premier Agents and Premier Brokers are provided validated leads at no initial cost and pay a performance advertising fee only when a real estate transaction is closed with one of the leads. With this pricing model, the transaction price represents variable consideration, as the amount to which we expect to be entitled varies based on the number of validated leads that convert into real estate transactions and the value of those transactions. The transaction price for leases generated through our rentals pay per lease product also represents variable consideration. We estimate the amount of variable consideration based on the expected number of qualified leases to be secured and the expected price per closed lease. As of December 31, 2021, we had accrued $77.9 million in revenue associated with these products.

Although 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 real estate transactions to be closed and qualified leases to be secured is resolved, judgment is required to determine the quantity and value of transactions and leases that are expected to be realized in a future period based on the number of leads delivered during the current period. Our estimated revenue is based on a number of assumptions, which include estimating the conversion rate of a lead to a real estate transaction or qualified lease, estimating the velocity of conversions and estimating the fee amounts likely to be received. Estimates are primarily developed based on historical data and our future expectations based on current market trends.

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Mortgage Origination Revenue. Mortgage origination revenue generated by Zillow Home Loans reflects origination fees on purchase or refinance mortgages and the corresponding sale, or expected future sale, of a loan. When an interest rate lock commitment is made to a customer, we record the expected gain on sale of the mortgage, plus the estimated earnings from the expected sale of the associated servicing rights, adjusted for a pull-through percentage (which represents the probability that an interest rate lock commitment will ultimately result in a closed loan), as revenue. Judgment is required to determine the appropriate pull-through rate, which is estimated based on expected changes in market conditions, loan stage and historical borrower behavior. Revenue from loan origination fees is recognized at the time the related purchase or refinance transactions are completed, usually upon the close of escrow and when we fund the purchase or refinance mortgage loans.

Inventory

Inventory is comprised of homes acquired through Zillow Offers and is stated at the lower of cost or net realizable value. Each quarter we review the value of homes held in inventory for indicators that net realizable value is lower than cost. The calculation of net realizable value is based on several estimates which may ultimately vary materially from actual results, including our estimate of the price at which we expect to sell each home in inventory and the associated expected costs to sell those homes. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of inventory a critical accounting estimate.

In determining the value of our inventory, we consider indicators that net realizable value may be lower than cost at the portfolio level, market level, and in certain circumstances by structure type (single family residence, condo, etc.) by reviewing economic analyses, recent trends in home price appreciation and changes to resale strategy. Factors we analyze include gross margin on homes closed in recent months, projected gross margin on homes under contract to sell, historical list price to resale price variances, and trends in gross margin, selling prices and average selling concessions or other costs of selling homes. Our estimates of net realizable value are significantly impacted by estimates of the sales price and timing of future sales of homes, which may be impacted by supply and availability of renovation services, location and desirability of our inventory, pricing and use of incentives by us and our competitors, and local economic and demographic trends.

When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized in cost of revenue. We estimate that a 1% decrease in our estimate of selling prices as of December 31, 2021 would result in an increase to our inventory valuation adjustment of $17.8 million.

Restructuring Costs

Identifying and calculating the restructuring costs associated with the wind down of Zillow Offers operations requires certain assumptions and estimates to be made. For costs classified within impairment and restructuring costs, the most significant assumptions pertain to the timing and amount of current and anticipated future liabilities relating to employee termination costs and contract termination costs. Judgment is required to determine which employees under one-time employee termination benefits have met all criteria for recognition and to develop our estimates pertaining to which employees are expected to meet those criteria in future periods. Judgment is required in determining both the timing and amount of benefits recognized under ongoing employee benefit arrangements based on when it becomes probable that employees are entitled to the severance benefits and in developing an estimate of the cost of the benefit to recognize. Adjustments to asset values also requires judgment in determining the fair value of such assets and their remaining useful lives. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and other related charges included in could be materially different than those we have recorded.

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. 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. 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 capitalized contract costs related to our Premier Agent and Premier Broker programs are approximately three years.

We monitor our contract cost assets for impairment and recognize an impairment loss in the statement of operations to the extent the carrying amount of the asset recognized exceeds the amount of consideration we expect to receive in the future and

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that we have received but have not recognized in revenue less the costs that relate directly to providing those goods or services that have not yet been recognized as expenses.

Website and Software Development Costs

The costs incurred in the preliminary stages of website and software 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.

Capitalized development activities placed in service are amortized over the expected useful lives of those releases, currently estimated at one to five 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.

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

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.

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, pandemics such as COVID-19, 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.

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.

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.

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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 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.

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 Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

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