# ZILLOW GROUP, INC. (Z) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ZILLOW GROUP, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1617640/000161764023000010/z-20221231.htm
Accession: 0001617640-23-000010
Filing date: 2023-02-15
Report date: 2022-12-31
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/
Previous year: /company/Z/mda/fy2021/ (FY 2021)
Next year: /company/Z/mda/fy2023/ (FY 2023)

Results of Operations

Given continued uncertainty surrounding the health of the housing market, interest rate environment, inflationary conditions and the COVID-19 pandemic, financial performance for current and prior periods may not be indicative of future performance.

Revenue

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[[/GREPCENT_TABLE]]

Year Ended December 31, 2022 compared to year ended December 31, 2021

Total revenue decreased $174 million, or 8%, to $2.0 billion:

•Mortgages segment revenue decreased 52% to $119 million primarily due to a decline in mortgage originations revenue which drove 72% of the decrease in Mortgages segment revenue, and a decline in our Custom Quote and Connect advertising services revenue which drove 28% of the decrease in Mortgages segment revenue. The decrease in mortgage originations revenue was primarily due to a 62% decrease in loan origination volume from $4.1 billion to $1.5 billion, primarily resulting from a decrease in demand for refinance mortgages attributable to the rising and volatile interest rate environment. The decrease in mortgage originations revenue was also attributable to a 25% decrease in gain on sale margin driven by industry margin compression. Gain on sale margin represents the net gain on sale of mortgage loans divided by total loan origination volume for the period. Net gain on sale of mortgage loans includes all components related to the origination and sale of mortgage loans, including the net gain on sale of loans into the secondary market, loan origination fees, unrealized gains and losses associated with changes in fair value of interest rate lock commitments and mortgage loans held for sale, realized and unrealized gains or losses from derivative financial instruments and the provision for losses relating to representations and warranties. The decrease in our Custom Quote and Connect advertising revenue was primarily due to a 37% decrease in leads generated from marketing products sold to mortgage professionals. This decrease was driven by a decrease in demand for mortgages attributable to the rising and volatile interest rate environment, as well as an increase in leads consumed by Zillow Home Loans.

•IMT segment revenue decreased 2% to $1.8 billion, primarily due to a decrease of $105 million, or 8%, in Premier Agent revenue, partially offset by a $48 million, or 21%, increase in Other IMT revenue. The decrease in Premier Agent revenue was driven by macro housing market factors including interest rate and home price increases and volatility, as well as tight housing inventory levels. These factors resulted in a decrease in Premier Agent revenue per visit, which decreased by 10% to $0.123 for the year ended December 31, 2022 from $0.137 for the year ended December 31, 2021. We calculate Premier Agent revenue per visit by dividing the revenue generated by our Premier Agent programs by the number of visits in the period. Other IMT revenue increased primarily as a result of the addition of ShowingTime revenue beginning in the fourth quarter of 2021.

Beginning in the first quarter of 2023, we plan to report our financial results as a single reportable segment and plan to report revenue categories of Residential, Rentals, Mortgages and Other. The Residential revenue category will primarily include revenue for our Premier Agent and new construction marketplaces, as well as StreetEasy for-sale product offerings, Zillow Closing Services and ShowingTime+, which houses ShowingTime, Bridge Interactive, dotloop and interactive floor plans. Our Rentals and Mortgages revenue categories will remain consistent with our historical presentation, and our Other revenue category will primarily include revenue generated from display advertising.

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Year Ended December 31, 2021 compared to year ended December 31, 2020

Total revenue increased $508 million, or 31%, to $2.1 billion:

•IMT segment revenue increased 30% to $1.9 billion, due to increases of $349 million, or 33%, in Premier Agent revenue, $45 million, or 25%, in Other IMT revenue, and $42 million, or 19%, in rentals revenue.

◦Premier Agent revenue increased 33% to $1.4 billion, 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. 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 increased 25% to $226 million, primarily due to a 126% increase in StreetEasy for-sale revenue due to growth in StreetEasy Experts, a 58% increase in display revenue due to 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.

◦Rentals revenue increased 19% to $264 million, primarily due to an increase in revenue generated by our rentals 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.

•Mortgages segment revenue increased 41% to $246 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. The increase in our Custom Quote and Connect advertising revenue was primarily due to a 20% increase in leads generated from marketing products sold to mortgage professionals.

Income (Loss) from Continuing Operations 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, net and interest costs on our convertible senior notes included in interest expense.

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Adjusted EBITDA

The following table summarizes net loss, which includes the impact of discontinued operations, and Adjusted EBITDA in total and for each segment, both of which exclude the impact of discontinued operations (in millions, except percentages):

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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) from continuing operations before income taxes for each segment, the most directly comparable U.S. generally accepted accounting principles (“GAAP”) financial measures.

We have included Adjusted EBITDA in total and for each segment in this 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 changes in, or cash requirements for, our working capital needs;

•Adjusted EBITDA does not reflect the results of discontinued operations;

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

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

•Adjusted EBITDA does not reflect impairment and restructuring costs;

•Adjusted EBITDA does not reflect acquisition-related costs;

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

•Adjusted EBITDA does not reflect interest expense or other income (expense), net;

•Adjusted EBITDA does not reflect income taxes; and

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

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

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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) from continuing operations before income taxes for each segment, for each of the periods presented (in millions):

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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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[[/GREPCENT_TABLE]]

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

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

Costs and Expenses, Gross Profit and Other Items

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[[/GREPCENT_TABLE]]

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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 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.

Year Ended December 31, 2022 compared to year ended December 31, 2021

Cost of revenue increased $44 million, or 14%, due primarily to an increase of $72 million in our IMT segment, partially offset by decreases of $16 million in our Mortgages segment and $12 million in our Homes segment.

•The increase in cost of revenue in our IMT segment was primarily attributable to a $41 million increase in depreciation and amortization expense driven by an increase in capitalized website and development activities, a $16 million increase in headcount-related expenses, including share-based compensation expense, which was impacted by the August 2022 Equity Award Actions, and a $9 million increase in data acquisition costs.

•The decrease in cost of revenue in our Mortgages segment was primarily attributable to a $13 million decrease in lead acquisition costs due to a decrease in volume associated with the macro housing market environment and a $3 million decrease in headcount-related expenses, including share-based compensation expense, partially offset by a $2 million increase in depreciation and amortization expense.

•The decrease in cost of revenue in our Homes segment was primarily attributable to a $7 million decrease in depreciation and amortization expense, a $5 million decrease in data acquisition costs and a $2 million decrease in software and hardware costs, resulting from the wind down of Zillow Offers and the reduction in indirect costs related to the Homes segment. The decrease was partially offset by an increase of $3 million in headcount-related expenses, including share-based compensation expense, which was impacted by the August 2022 Equity Award Actions.

We expect cost of revenue to increase in absolute dollars for the three months ending March 31, 2023 due to increased headcount-related spend as we continue to invest to support the growth of our business.

Year Ended December 31, 2021 compared to year ended December 31, 2020

Cost of revenue increased $68 million, or 27%, due primarily to increases of $45 million in our Mortgages segment, $13 million in our Homes segment and $10 million in our IMT segment.

•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 million, an increase in lead acquisition costs of $18 million associated with growth in our Zillow Home Loans business, and an increase in mortgage loan processing costs of $4 million corresponding with the increase in loan origination volume.

•The increase in cost of revenue in our Homes segment was primarily attributable to an increase in headcount-related expenses, including share-based compensation expense, of $7 million, and an increase in depreciation and amortization expense of $3 million.

•The increase in cost of revenue in our IMT segment was primarily attributable to an increase of $13 million in depreciation and amortization expense, an increase of $9 million in direct product costs, an increase of $7 million in lead acquisition costs, and an increase of $7 million in headcount-related expenses, including share-based compensation expense, partially offset by a decrease of $28 million in data acquisition costs.

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Gross Profit

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

Year Ended December 31, 2022 compared to year ended December 31, 2021

Gross profit decreased by $218 million, or 12%, primarily due to decreases in gross profit of $119 million in our IMT segment and $111 million in our Mortgages segment, partially offset by an increase of $12 million in our Homes segment. Total gross margin decreased from 85% to 81%.

•The decrease in IMT segment gross profit was driven by a decrease in revenue due to macro housing market factors, including rising interest rates and housing prices and volatility, which have reduced our Premier Agent revenue per visit compared to the year ended December 31, 2021, coupled with the increase in cost of revenue, discussed above. Gross margin decreased from 89% for the year ended December 31, 2021 to 85% for the year ended December 31, 2022.

•The decrease in Mortgages segment gross profit was driven by decreases in mortgage originations and Custom Quote and Connect advertising services revenue, discussed above. Gross margin decreased from 66% for the year ended December 31, 2021 to 43% for the year ended December 31, 2022.

Year Ended December 31, 2021 compared to year ended December 31, 2020

Gross profit increased by $440 million, or 32%, primarily due to increases of gross profit of $426 million in our IMT segment and $27 million in our Mortgages segment, partially offset by a decrease of $13 million in our Homes segment. Total gross margin increased from 84% to 85%.

•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.

Sales and Marketing

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

Year Ended December 31, 2022 compared to year ended December 31, 2021

Sales and marketing expenses decreased $51 million, or 7%, due to decreases of $41 million in our Homes segment and $30 million in our Mortgages segment, partially offset by an increase of $20 million in our IMT segment.

•The decrease in sales and marketing expenses in the Homes segment was primarily attributable to a $20 million decrease in marketing and advertising costs and a $17 million decrease in headcount-related expenses, including share-based compensation expense. The decreases resulted from the wind down of Zillow Offers and the reduction in indirect costs related to the Homes segment.

•The decrease in sales and marketing expenses in the Mortgages segment was primarily attributable to a $19 million decrease in headcount-related expenses, including share-based compensation expense, and a $12 million decrease in marketing and advertising costs driven by active cost management.

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•The increase in sales and marketing expenses in the IMT segment was primarily attributable to a $45 million increase in headcount-related expenses, including share-based compensation expense, primarily driven by the impact of the August 2022 Equity Award Actions, an $8 million increase in both travel expenses and trade shows and events expenses, and a $4 million increase in software and hardware costs. These increases were partially offset by a $32 million decrease in marketing and advertising costs, a $9 million decrease in professional services, both driven by active cost management, and a $4 million decrease in depreciation and amortization expenses.

Year Ended December 31, 2021 compared to year ended December 31, 2020

Sales and marketing expenses increased $180 million, or 34%, due to increases of $111 million in our IMT segment, $49 million in our Mortgages segment and $20 million in our Homes segment.

•The increase in sales and marketing expenses in the IMT segment was primarily attributable to a $69 million increase in marketing and advertising costs and an increase in headcount-related expenses, including share-based compensation expense, of $46 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 year ended December 31, 2020.

•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 million, and a $15 million increase in marketing and advertising expenses associated with growth of our Zillow Home Loans business.

•The increase in sales and marketing expenses in the Homes segment was primarily attributable to an $11 million increase in marketing and advertising costs and an increase in headcount-related expenses, including share-based compensation expense, of $7 million.

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.

Year Ended December 31, 2022 compared to year ended December 31, 2021

Technology and development expenses increased $77 million, or 18%, primarily due to increases of $120 million in our IMT segment and $18 million in our Mortgages segment, partially offset by a decrease of $61 million in our Homes segment.

•The increase in technology and development expenses in the IMT segment was primarily attributable to a $96 million increase in headcount related costs, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions, and a $14 million increase in professional services.

•The increase in technology and development expenses in the Mortgages segment was primarily attributable to an $11 million increase in headcount-related costs, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions, and a $6 million increase in professional services.

•The decrease in technology and development expenses in the Homes segment was primarily attributable to a $55 million decrease in headcount-related costs, including share-based compensation expense, which was primarily driven by the wind down of Zillow Offers and the reduction in indirect costs related to the Homes segment.

We expect technology and development expenses to increase in absolute dollars for the three months ending March 31, 2023 due to increased headcount-related spend as we continue to invest to support the growth of our business.

Year Ended December 31, 2021 compared to year ended December 31, 2020

Technology and development expenses increased $97 million, or 30%, primarily due to increases of $58 million in our IMT segment, $30 million in our Homes segment and $9 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 million, $28 million and $5 million for our IMT, Homes and Mortgages segments, respectively.

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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.

Year Ended December 31, 2022 compared to year ended December 31, 2021

General and administrative expenses increased $84 million, or 20%, due to increases of $117 million in our IMT segment and $13 million in our Mortgages segment, partially offset by a decrease of $46 million in our Homes segment.

•The increase in general and administrative expenses for our IMT segment was primarily attributable to a $94 million increase in headcount-related expenses, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions, a $9 million increase in professional services and a $6 million increase in software and hardware costs.

•The increase in general and administrative expenses for our Mortgages segment was primarily attributable to an $11 million increase in headcount-related expenses, including share-based compensation expense, primarily driven by the August 2022 Equity Award Actions.

•The decrease in general and administrative expenses for our Homes segment was primarily attributable to a $28 million decrease in headcount-related expenses, including share-based compensation expense, and $6 million decreases in both facilities costs and software and hardware costs, which were primarily driven by the wind down of Zillow Offers and the reduction in indirect costs related to the Homes segment.

Year Ended December 31, 2021 compared to year ended December 31, 2020

General and administrative expenses increased $90 million, or 28%, due to increases of $33 million in our IMT segment, $29 million in our Homes segment and $28 million in our Mortgages segment.

•The increase in general and administrative expenses for our IMT and Mortgages segments was primarily attributable to increases in headcount-related expenses, including share-based compensation expense, of $40 million and $20 million for our IMT and Mortgages segments, respectively, as we continued to invest in human capital to grow our businesses.

•The increase in general and administrative expenses for our Homes segment was primarily attributable to an increase in headcount-related expenses, including share-based compensation expense, of $21 million, a $3 million increase in professional services and a $3 million increase in software and hardware costs.

Impairment and Restructuring Costs

Restructuring costs of $24 million and $10 million for the years ended December 31, 2022 and 2021, respectively, were attributable to the wind down of Zillow Offers operations and additional cost actions to streamline our operations and prioritize investments. Restructuring costs within our IMT and Mortgages segments and certain indirect costs of the Homes segment which do not qualify as discontinued operations related to employee termination costs and totaled $12 million, $4 million, and $8 million, respectively, for the year ended December 31, 2022, and $9 million and $1 million for the Homes and Mortgages segments, respectively, for the year ended December 31, 2021. For additional information regarding the restructuring, see Note 3 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Impairment costs of $77 million for the year ended December 31, 2020 consist of a $72 million non-cash impairment related to the Trulia trade names and trademarks intangible asset, of which $69 million was recorded to the IMT segment and $3 million was recorded to the Mortgages segment. Refer to Note 10 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on the impairment costs related to the Trulia trade names and trademarks intangible asset. Additionally, impairment costs include a $5 million non-cash impairment related to our October 2016 equity investment, the entirety of which was recorded to the IMT segment.

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Acquisition-Related Costs

Acquisition-related costs consist of investment banking, legal, accounting and tax costs associated with effecting acquisitions. We did not record any material acquisition-related costs for the years ended December 31, 2022 or December 31, 2020. Acquisition-related costs were $9 million for the year ended December 31, 2021, primarily as a result of our September 2021 acquisition of ShowingTime.

Gain (Loss) on Extinguishment of Debt

We recorded a $17 million loss on extinguishment of debt during 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”). For additional information on the 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, net

Other income, net consists primarily of interest income earned on our cash, cash equivalents and investments and fair value adjustments on an outstanding warrant.

Other income, net increased $36 million, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase was primarily driven by increases in returns on corporate investments due to rising interest rates, partially offset by a $7 million fair value adjustment on an outstanding warrant recorded within our IMT segment.

Other income, net decreased $18 million, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease was primarily due to a decrease of $16 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 ended December 31, 2021. There was also a decrease of $5 million of other income, net 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.

Interest Expense

Our corporate interest expense consists of interest and deferred issuance costs associated with our convertible senior notes. On January 1, 2022, we adopted guidance which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Upon adoption, we de-recognized the remaining debt discounts on the convertible senior notes and no longer recognize amortization of debt discounts to interest expense. Refer to Note 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 Mortgages segment, interest expense includes interest on the warehouse line of credit and interest on the master repurchase agreements related to our Zillow Home Loans business. For additional details related to our credit facilities, see Note 13 to our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Year Ended December 31, 2022 compared to year ended December 31, 2021

Interest expense decreased $93 million, or 73%, primarily due to a $91 million decrease in corporate interest expense not attributable to any of our segments. The decrease in corporate interest expense not attributable to any of our segments was primarily due to the adoption of guidance which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, which, as discussed above, eliminated the debt discounts on the convertible senior notes that were previously amortized to interest expense prior to adoption. Additionally, the settlement of conversions and redemptions of the 2023 Notes, 2024 Notes and 2026 Notes during the year ended December 31, 2021 decreased the outstanding principal balances of our convertible senior notes upon which interest was incurred.

Year Ended December 31, 2021 compared to year ended December 31, 2020

Interest expense decreased $10 million, or 7%, due to a $13 million decrease in corporate interest expense not attributable to any of our segments, partially offset by a $3 million increase related to our Mortgages segment.

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 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

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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”).

The increase in Mortgages segment interest expense was due to increased borrowings on our repurchase agreements and warehouse line of credit.

Income Taxes

We are subject to income taxes in the United States (federal and state), Canada, and Serbia. As of December 31, 2022 and December 31, 2021, we have provided a valuation allowance against our net deferred tax assets that we believe, based on the weight of available evidence, are not more likely than not to be realized. There is a reasonable possibility that within the next several years, sufficient positive evidence will become available to demonstrate that a significant portion of the valuation allowance against our U.S. net deferred tax assets will no longer be required. We have accumulated federal tax losses of approximately $1.8 billion as of December 31, 2022, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $63 million (tax effected) as of December 31, 2022.

We recorded income tax expense of $3 million for the year ended December 31, 2022, primarily driven by state taxes. We recorded an income tax benefit of $1 million for the year ended December 31, 2021 that was comprised of a $3 million income tax benefit from a decrease in the valuation allowance associated with our September 2021 acquisition of ShowingTime, partially offset by the recognition of $2 million of tax expense related to state and foreign income taxes. We recorded an income tax benefit of $8 million for the year ended December 31, 2020, primarily driven by a $10 million income tax benefit associated with the $72 million non-cash impairment we recorded during the year ended December 31, 2020. Refer to Note 10 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on this non-cash impairment charge.

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 continued uncertainty surrounding the health of the housing market, interest rate environment and the COVID-19 pandemic. 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 millions, except per share data which are presented in thousands, unaudited, and we have presented the financial results of Zillow Offers as discontinued operations (see Note 3 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional details regarding discontinued operations).

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[[GREPCENT_TABLE]]
[["","Three Months Ended"],["","December 31, 2022","","September 30, 2022","","June 30, 2022","","March 31, 2022","","December 31, 2021","","September 30, 2021","","June 30, 2021","","March 31, 2021"],["Revenue","$","435","","","$","483","","","$","504","","","$","536","","","$","535","","","$","550","","","$","533","","","$","514"],["Gross profit","346","","","394","","","407","","","444","","","440","","","468","","","460","","","441"],["Income (loss) from continuing operations","(83)","","","(51)","","","5","","","36","","","32","","","55","","","55","","","97"],["Net income (loss) from continuing operations","(72)","","","(51)","","","10","","","25","","","6","","","18","","","19","","","59"],["Net income (loss)","(72)","","","(53)","","","8","","","16","","","(261)","","","(329)","","","10","","","52"],["Net income (loss) from continuing operations per share:"],["Basic","$","(0.31)","","","$","(0.21)","","","$","0.04","","","$","0.10","","","$","0.02","","","$","0.07","","","$","0.08","","","$","0.24"],["Diluted","$","(0.31)","","","$","(0.21)","","","$","0.04","","","$","0.10","","","$","0.02","","","$","0.07","","","$","0.07","","","$","0.23"],["Net income (loss) per share:"],["Basic","$","(0.31)","","","$","(0.22)","","","$","0.03","","","$","0.06","","","$","(1.03)","","","$","(1.29)","","","$","0.04","","","$","0.21"],["Diluted","$","(0.31)","","","$","(0.22)","","","$","0.03","","","$","0.06","","","$","(1.00)","","","$","(1.24)","","","$","0.04","","","$","0.20"],["Weighted-average shares outstanding:"],["Basic","236,246","","","240,080","","","243,942","","","248,542","","","254,013","","","254,074","","","248,152","","","243,234"],["Diluted","236,246","","","240,080","","","245,163","","","265,945","","","261,181","","","265,112","","","261,495","","","259,346"]]
[[/GREPCENT_TABLE]]

Total revenue decreased in all quarters presented with the exception of the three months ended March 31, 2022, which remained flat with the preceding quarter. The sequential decreases in revenue throughout 2022 were attributable to the ongoing macro housing market factors, including interest rate and home price increases, as well as tight housing inventory levels. Total revenue increased sequentially in all quarters in 2021 with the exception of the three months ended December 31, 2021. The sequential decrease in revenue for the three months ended December 31, 2021 was attributable to a decrease in visits driven by seasonality related to the normal cycles of the residential real estate market coupled with tighter inventory due to a new COVID-19 variant. Total revenue increased in all other quarters throughout 2021 due primarily to increases in visits and unique users and persistent low interest rates throughout 2021.

Seasonality

Portions of our business are affected by seasonal fluctuations in the residential real estate market, advertising spending and other factors. We believe that customers’ responses to macro housing market factors including interest rate and home price increases and volatility as well as tight housing inventory levels may mask seasonality in revenue. Although the impact of macroeconomic factors in 2022 and the COVID-19 pandemic impact during 2021 and 2022 may have masked seasonality during the last two years, we would generally expect Premier Agent and rentals revenue to peak in the three months ended June 30th or September 30th, consistent with the average number of visits and unique users which have historically peaked during the three months ended June 30th or September 30th, aligning 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 generally resulted in seasonal fluctuations in revenue in corresponding periods. Within the Mortgages segment, 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.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows from operations, debt financing and equity offerings. Our cash requirements consist principally of working capital, general corporate needs and mortgage loan originations. We generally reinvest available cash flows from operations into our business and to service our debt obligations.

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Sources of Liquidity

As of December 31, 2022 and 2021, we had cash and cash equivalents, investments and restricted cash of $3.4 billion and $2.8 billion, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions and money market funds. Investments consist of fixed income securities, which include U.S. government treasury securities, U.S. government agency securities, investment grade corporate securities, and commercial paper. Restricted cash primarily consists of amounts held in escrow related to funding customer home purchases in our mortgage origination business. Amounts on deposit with third-party financial institutions exceed the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable. As of December 31, 2022, Zillow Group and its subsidiaries were in compliance with all debt covenants specified in the facilities described below.

We believe that cash from operations and cash and cash equivalents and investment balances will be sufficient to meet our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operations, debt financing and equity offerings, as applicable.

The cash flows related to discontinued operations have not been separated. Accordingly, the consolidated statements of cash flows and the following discussions include the results of continuing and discontinued operations. See Note 3 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on discontinued operations, including supplemental cash flow information. The following table presents selected cash flow data for the periods presented (in millions):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Cash Flow Data:"],["Net cash provided by (used in) operating activities","$","4,504","","","$","(3,177)","","","$","423"],["Net cash provided by (used in) investing activities","(1,533)","","","1,088","","","(1,038)"],["Net cash provided by (used in) financing activities","(4,341)","","","3,148","","","1,163"]]
[[/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, builders and brand advertisers, as well as cash received from sales of mortgages originated by Zillow Home Loans and, prior to September 30, 2022, from customers for sales of homes through Zillow Offers. Our primary uses of cash from operating activities include marketing and advertising activities, mortgages funded through Zillow Home Loans and employee compensation and benefits. Additionally, uses of cash from operating activities include costs associated with operating our mobile applications and websites and other general corporate expenditures. Prior to the wind down of Zillow Offers operations, our primary uses of cash from operating activities also included payments for homes purchased through Zillow Offers.

For the year ended December 31, 2022, net cash provided by operating activities was $4.5 billion. This was primarily driven by a net loss of $101 million, adjusted by share-based compensation expense of $451 million, depreciation and amortization expense of $157 million, amortization of contract cost assets of $30 million, amortization of debt discount and debt issuance costs of $26 million, amortization of right of use assets of $23 million, a loss on extinguishment of debt of $21 million and an inventory valuation adjustment of $9 million. This was partially offset by $3 million in other adjustments to reconcile net loss to net cash provided by operating activities. Changes in operating assets and liabilities increased cash provided by operating activities by $3.9 billion. The changes in operating assets and liabilities are primarily related to a $3.9 billion decrease in inventory and an $82 million decrease in accounts receivable as we wound down Zillow Offers operations, a $66 million decrease in mortgage loans held for sale driven by increased interest rates which decreased demand for mortgages, a $6 million decrease in prepaid expenses and other current assets due to the timing of payments and a $7 million increase in other long-term liabilities primarily due to our outstanding warrant agreement. These changes were partially offset by a $71 million decrease in accrued expenses and other liabilities and a $60 million decrease in accrued compensation and benefits driven primarily by the wind down of Zillow Offers operations, a $21 million decrease in lease liabilities primarily due to lease payments, an $18 million increase in contract cost assets and a $7 million decrease in deferred revenue.

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For the year ended December 31, 2021, net cash used in operating activities was $3.2 billion. This was primarily driven by a net loss of $528 million, adjusted by an inventory valuation adjustment of $408 million, share-based compensation expense of $312 million, depreciation and amortization expense of $130 million, amortization of debt discount and debt issuance costs of $104 million, impairment and restructuring costs of $57 million, amortization of contract cost assets of $42 million, amortization of right of use assets of $23 million, a loss on extinguishment of debt of $17 million and $12 million in other adjustments to reconcile net loss to cash used in operating activities, including deferred income taxes. Changes in operating assets and liabilities offset these adjustments by $3.8 billion. The changes in operating assets and liabilities are primarily related to a $3.8 billion increase in inventory due to home purchases outpacing the sale of homes through Zillow Offers for the year ended December 31, 2021, an $82 million increase in accounts receivable due primarily to an increase in revenue from products and services billed in arrears, an $82 million increase in prepaid expenses and other current assets due to the timing of payments, a $29 million decrease in lease liabilities, a $26 million increase in contract cost assets due primarily to capitalized sales commissions and an $12 million decrease in other long-term liabilities. These changes were partially offset by a $224 million decrease in mortgage loans held for sale, a $61 million increase in accrued expenses and other liabilities driven by the timing of payments, $13 million in accrued compensation and benefits and a $5 million change in accounts payable.

For the year ended December 31, 2020, net cash provided by operating activities was $423 million. This was primarily driven by a net loss of $162 million, adjusted by share-based compensation expense of $197 million, depreciation and amortization expense of $111 million, amortization of debt discount and debt issuance costs of $102 million, non-cash impairment costs of $77 million, amortization of contract cost assets of $37 million, amortization of right of use assets of $24 million and $3 million in other adjustments to reconcile net loss to cash provided by operating activities. This was partially offset by a gain on extinguishment of debt of $1 million. Changes in operating assets and liabilities increased cash provided by operating activities by $41 million. The changes in operating assets and liabilities are primarily related to a $345 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 million increase in accrued expenses and other liabilities driven by the timing of payments, a $13 million increase in accounts payable, a $10 million increase in other long-term liabilities, a $10 million increase in accrued compensation and benefits and a $9 million increase in deferred revenue. These changes were partially offset by a $294 million increase in mortgage loans held for sale, a $42 million increase in contract cost assets due primarily to the capitalization of sales commissions, a $16 million increase in prepaid expenses and other current assets due primarily to timing of payments and growth in our contract assets, a $7 million increase in accounts receivable due to an increase in revenue from products and services billed in arrears and a $2 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, 2022, net cash used in investing activities was $1.5 billion. This was primarily the result of $1.4 billion of net purchases of investments and $140 million of purchases of property and equipment and intangible assets.

For the year ended December 31, 2021, net cash provided by investing activities was $1.1 billion. This was the result of $1.7 billion of net proceeds from the maturity of investments, partially offset by $497 million of net cash paid for our September 2021 acquisition of ShowingTime, and $105 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 $939 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 $109 million of purchases for property and equipment and intangible assets, partially offset by $10 million in proceeds from the sale of an equity investment.

Cash Flows Provided By (Used In) Financing Activities

Net cash provided by (used in) financing activities has primarily resulted from repurchases of Class A common stock and Class C capital stock, settlement of long term debt including our securitization term loans, net proceeds from equity offerings, the exercise of employee option awards, proceeds from our securitization transaction, proceeds from and repayments of borrowings on our credit facilities related to Zillow Offers and repayments of borrowings on the warehouse lines of credit and master repurchase agreements related to Zillow Home Loans.

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For the year ended December 31, 2022, cash used in financing activities was $4.3 billion, which was primarily related to $2.2 billion of repayments on borrowings of our credit facilities and 1.2 billion for the repayment of the term loans associated with the wind down of Zillow Offers operations, $947 million of cash paid for share repurchases and $76 million of net repayments on our warehouse line of credit and master repurchase agreements related to Zillow Home Loans. These cash outflows were partially offset by $46 million of proceeds from the exercise of option awards.

For the year ended December 31, 2021, cash provided by financing activities was $3.1 billion, which was primarily related to $1.8 billion of net borrowings on our credit facilities related to Zillow Offers, $1.1 billion in proceeds from the issuance of the 2021-1 and 2021-2 term loans, net of issuance costs, $545 million in proceeds from the sale of 3 million shares of Class C capital stock under our equity distribution agreement and $127 million of proceeds from the exercise of option awards. These cash inflows were partially offset by $302 million of cash paid for share repurchases pursuant to our stock buyback program and $197 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 million, $444 million of proceeds from the exercise of option awards, net proceeds from the public offering of our Class C capital stock of $412 million, and $279 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 million of net repayments of borrowings on our credit facilities related to Zillow Offers and $195 million of cash paid for the extinguishment of our 2021 Notes.

Capital Resources

We continue to invest in the development and expansion of our continuing operations. Ongoing investments include, but are not limited to, improvements in our technology platforms, infrastructure and continued investments in sales and marketing. To finance these investments and ongoing operations, and in the event that we require additional funding to support strategic business opportunities, we have issued convertible senior notes. As of December 31, 2022, we have a total of $1.7 billion aggregate principal of convertible senior notes outstanding. The convertible notes are senior unsecured obligations, and interest on the convertible notes is paid semi-annually. The following table summarizes our convertible senior notes as of the periods presented (in millions, except interest rates):

[[GREPCENT_TABLE]]
[["","","","","","","December 31, 2022","","December 31, 2021"],["Maturity Date","","Aggregate Principal Amount","","Stated Interest Rate","","Carrying Value","","Carrying Value"],["September 1, 2026","","$","499","","","1.375","%","","$","495","","","$","369"],["May 15, 2025","","565","","","2.75","%","","560","","","443"],["September 1, 2024","","608","","","0.75","%","","605","","","507"],["Total","","$","1,672","","","","","$","1,660","","","$","1,319"]]
[[/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 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, 2022, we did not sell any shares under the equity distribution agreement. During the year ended December 31, 2021, we issued and sold 3 million shares of our Class C capital stock for total proceeds of $551 million and net proceeds of $545 million, after deducting $6 million of commissions and other offering expenses incurred. For additional information regarding the equity distribution agreement, see Note 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 million of our Class A common stock, Class C capital stock or a combination thereof. On May 4, 2022, the Board of Directors authorized the repurchase of up to an additional $1 billion (together the “Repurchase Authorizations”) of our Class A common stock, Class C capital stock or a combination thereof. During the year ended December 31, 2022, we repurchased 4.1 million shares of Class A common stock and 18.2 million shares of Class C capital stock at an average price of $44.14 and $42.30 per share, respectively, for an aggregate purchase price of $179 million and $768 million, respectively. During the year ended December 31, 2021, we repurchased 4.9 million shares 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, 2022, $500 million remained available for future repurchases pursuant to the Repurchase Authorizations, which repurchases decrease our liquidity and capital resources when effected. On November 1, 2022, the Board of Directors further expanded the Repurchase Authorizations to allow for the repurchase of a portion of our outstanding convertible senior notes. There were no repurchases of convertible senior notes during the year ended December 31, 2022. For additional information on our Repurchase Authorizations, see Note 15 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

IMT

Our principal sources of liquidity for the IMT segment are cash flows from operations within the segment.

Mortgages

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

[[GREPCENT_TABLE]]
[["Lender","","Maturity Date","","Maximum Borrowing Capacity","","Outstanding Borrowings at December 31, 2022","","Outstanding Borrowings at December 31, 2021","","Weighted Average Interest Rate"],["Credit Suisse AG, Cayman Islands","","March 17, 2023","","$","100","","","$","23","","","$","77","","","6.16","%"],["Citibank, N.A.","","June 9, 2023","","100","","","3","","","17","","","6.18","%"],["Comerica Bank","","June 24, 2023","","50","","","11","","","19","","","6.22","%"],["","","Total","","$","250","","","$","37","","","$","113"]]
[[/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.

Homes

Prior to its wind down, Zillow Group’s purchase of homes through the Zillow Offers program had a significant impact on our liquidity and capital resources as a cash and inventory intensive business. We previously used credit facilities, and beginning in the third quarter of 2021, asset-backed securitizations, to fund a portion of the purchase price of homes and certain related costs. On November 2, 2021, the Board of Directors of Zillow Group made the determination to wind down Zillow Offers operations and as of September 30, 2022, the wind down was complete. As a result of the wind down, during the first half of 2022, certain wholly owned subsidiaries of Zillow Group repaid all amounts drawn on the Zillow Offers credit facilities and all principal on the securitization term loans. We incurred prepayment penalties of $6 million associated with the pay-down of our credit facilities and $8 million in connection with the pay-down of the securitizations. Refer to Note 3 of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on the Zillow Offers wind down.

Contractual Obligations and Other Commitments

Convertible Senior Notes - Includes the aggregate principal amounts of the 2024 Notes, 2025 Notes and 2026 Notes due on their contractual maturity dates, as well as the associated coupon interest. As of December 31, 2022, 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 $75 million, with $27 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.

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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, 2022, we have outstanding principal amounts of $37 million. Amounts exclude an immaterial amount of estimated interest payments.

Operating Lease Obligations - Our lease portfolio primarily comprises operating leases for our office space. As of December 31, 2022, we have operating lease obligations totaling $229 million, with $42 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, 2022 and 2021, we had outstanding letters of credit of approximately $16 million, which secure our lease obligations in connection with certain of the operating leases of our office spaces.

Purchase Obligations - We have non-cancellable purchase obligations for content related to our mobile applications and websites and certain cloud computing costs. As of December 31, 2022, we have purchase obligations totaling $111 million, with $79 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.

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 health of the real estate market, the broader economy and the COVID-19 pandemic (including variants) 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, 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, recoverability of goodwill, 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, rentals pay per lease (“Zillow Lease Connect”) and StreetEasy Experts offerings. With Premier Agent Flex, Premier Agents 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 within two years. 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 prices for leases generated through Zillow Lease Connect and real estate transactions executed through our StreetEasy Experts product also represent variable consideration. We estimate the amount of variable consideration for Zillow Lease Connect based on the expected number of qualified leases to be secured and the expected price per closed lease. We estimate the amount of variable consideration for StreetEasy Experts based on the number of validated leads that convert to real estate transactions and the value of those transactions. As of December 31, 2022, we had accrued $71 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.

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 program. Contract cost assets are amortized 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 program 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 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

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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.

Recoverability of Goodwill

Goodwill is measured as the excess of consideration transferred for an acquired business over the net of the acquisition date fair value of the assets acquired and liabilities assumed, and is not amortized. We assess the impairment of goodwill at the reporting unit level on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired. In our evaluation of goodwill, we first perform a qualitative assessment to determine whether the carrying value of each reporting unit is greater than its fair value. If it is more likely than not that the carrying value of a reporting unit is greater than its fair value, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of carrying value of the reporting unit over its fair value.

We exercise judgment in determining whether it is more likely than not that the carrying value of each reporting unit is greater than its fair value. The following events and circumstances are considered when performing the qualitative assessment:

•Macroeconomic conditions, industry and market considerations, and entity-specific conditions, such as changes in cost factors and financial performance;

•The amount by which the fair values of each reporting unit exceeded their carrying values as of the date of the most recent quantitative assessment;

•Changes in interest rates since the most recent quantitative assessment;

•Changes in our business or strategy since our most recent quantitative assessment;

•The current reporting unit forecasts as compared to the forecasts included in the most recent quantitative assessment;

•Changes in our market capitalization and overall enterprise value.

The examples noted above are not all-inclusive, and we consider other relevant events and circumstances that affect the fair value of a reporting unit in determining whether to perform a quantitative assessment.

Commencing in the first quarter of 2023, our operating structure will be realigned into one reportable segment. This change may result in the identification of new reporting units, which may require us to perform a goodwill impairment test for each reporting unit immediately before and after the segment change. While we believe the assumptions used in our 2022 impairment analysis are reasonable and representative of expected results for our 2022 reporting unit structure, we may recognize a goodwill impairment charge immediately after the segment change as the reassigned carrying values of the reporting units may exceed their respective estimated fair values. At December 31, 2022, our total goodwill balance was $2.4 billion.

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. When determining the grant date fair value of share-based awards, management considers whether an adjustment is required to the observable market price or volatility of our Class C capital stock used in the valuation as a result of material non-public information.

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.

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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 expected terms utilized for our share-based compensation expense calculations on a prospective basis. We will also continue to use judgment when determining whether an adjustment is required to the observable market price or volatility as a result of material non-public information. 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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