Zillow Group, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those described in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, including in the section titled “Note Regarding Forward-Looking Statements,” and those factors discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2023.

Overview of our Business

Zillow Group is reimagining real estate to make home a reality for more and more people. As the most visited real estate website in the United States, Zillow and its affiliates help people find and get the home they want by connecting them with digital solutions, dedicated partners and agents, and easier buying, selling, financing and renting experiences.

Our portfolio of affiliates, subsidiaries and brands includes Zillow Premier Agent, Zillow Home Loans, our mortgage origination business and affiliate lender, Zillow Rentals, Trulia, StreetEasy, HotPads and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions for the real estate industry, including ShowingTime+, Spruce and Follow Up Boss.

As of September 30, 2024, we had 6,835 employees, compared to 6,263 employees as of December 31, 2023.

Health of Housing Market

Our financial performance is impacted by changes in the health of the housing market, which is impacted, in turn, by general economic conditions. Current market factors have been driven by low housing inventory, volatility in mortgage interest rates, volatility in rental occupancy rates, as well as home price fluctuations and inflationary conditions. These factors may impact the number of transactions consumers complete using our products and services and demand for our advertising services. According to industry data from NAR, total transaction value increased 2% during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 and 3% during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. Despite the current market factors mentioned above, we continue to invest in the growth of our business. We believe this continued investment has resulted in year over year total revenue results, described below, for the three and nine months ended September 30, 2024 as compared to the same periods in the prior year, that exceeded industry performance for the same periods. The extent to which market factors impact our results and financial position will depend on future developments, which are uncertain and difficult to predict.

Revenue Overview

Our revenue is classified into four categories: Residential, Rentals, Mortgages and Other.

Residential. Residential revenue includes revenue generated by our Premier Agent and new construction marketplaces, as well as revenue from the sale of advertising and business technology solutions for real estate professionals through StreetEasy for-sale product offerings, ShowingTime+, including Listing Showcase, and upon acquisition on December 8, 2023, Follow Up Boss.

Premier Agent revenue is generated by the sale of advertising services, as well as marketing and technology products and services, to help real estate agents and brokers grow and manage their businesses and brands. We offer these products and services through our Premier Agent program. Premier Agent products, which include the delivery of validated customer connections, or leads, are offered on a share of voice (“market-based pricing”) and pay for performance (“Flex”) basis. For our market-based pricing offering, connections are distributed to Premier Agent partners in proportion to their share of voice, or a Premier Agent partner’s share of total advertising purchased in a particular zip code. With the Flex model, Premier Agent partners are provided with 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, generally within two years.

New construction revenue primarily includes advertising services sold to home builders on a cost per residential community or cost per impression basis.

Revenue generated through ShowingTime+ includes ShowingTime revenue, which is primarily generated by Appointment Center, a software-as-a-service and call center solution allowing real estate agents, brokerages and multiple listing services to efficiently schedule real estate viewing appointments on behalf of their customers. Appointment Center services also include call center specialists who provide scheduling support to customers. ShowingTime+ revenue also includes our dotloop real estate transaction management software-as-a-service solution, as well as Zillow Showcase, a listing marketing package.

Rentals. Rentals revenue includes advertising and a suite of tools sold to property managers on a cost per lead, lease, listing or impression basis or for a fixed fee for certain advertising packages through both the Zillow and StreetEasy brands. Rentals revenue also includes revenue generated from our rental applications product, through which potential renters can submit applications to multiple properties for a flat service fee.

Mortgages. Mortgages revenue primarily includes revenue generated through mortgage originations and the related sale of mortgages on the secondary market through Zillow Home Loans and from advertising sold to mortgage lenders and other mortgage professionals on a cost per lead basis, including our Custom Quote and Connect services.

Other. Other revenue includes revenue generated primarily by display advertising.

For additional information on our revenue categories, see Note 2 in our Notes to Consolidated Financial Statements in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Financial Overview

For the three months ended September 30, 2024 and 2023, we generated total revenue of $581 million and $496 million, respectively, an increase of 17%. The increase in total revenue was primarily attributable to the following:

• Residential revenue increased by $43 million, or 12%, to $405 million, due to increases in residential revenue per visit and the number of visits.
• Rentals revenue increased by $24 million, or 24%, to $123 million, due to increases in average monthly rentals unique visitors and quarterly revenue per average monthly rentals unique visitor.
• Mortgages revenue increased by $15 million, or 63%, to $39 million, driven by an increase in mortgage originations revenue.

During the three months ended September 30, 2024 and 2023, we generated gross profit of $441 million and $386 million, respectively, an increase of 14%.

Key Metrics

Management has identified visits, unique users and the volume of loans originated through Zillow Home Loans as relevant to investors’ and others’ assessment of our financial condition and results of operations.

Visits

The number of visits is an important metric because it is an indicator of consumers’ level of engagement with our mobile applications, websites and other services. We believe highly engaged consumers are more likely to use our products and services, including Zillow Homes Loans, or be transaction-ready real estate market participants and therefore more sought-after by our Premier Agent partners.

We define a visit as a group of interactions by users with our Zillow, Trulia and StreetEasy mobile applications and websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. Visits can occur on the same day, or over several days, weeks or months.

Prior to January 1, 2024, we measured visits to Zillow and StreetEasy using the Universal Analytics version of Google Analytics’ traffic measurement platform. Through Universal Analytics, visits to Zillow and StreetEasy ended either: (i) after thirty minutes of user inactivity or at midnight; or (ii) through a campaign change. A visit ends through a campaign change if a visitor arrived via one campaign or source (for example, via a search engine or referring link on a third-party website), left the mobile application or website, and then returned via another campaign or source.

Universal Analytics is no longer offered by Google as of July 1, 2024 and has been replaced by Google Analytics 4. As a result of this change, from January 1, 2024 through June 30, 2024, we measured visits to Zillow using an internal measurement tool, but continued to use Universal Analytics to measure visits to StreetEasy. As of July 1, 2024, we measure visits to both Zillow and StreetEasy using an internal measurement tool, and visits to Zillow and StreetEasy end after thirty minutes of user inactivity or at midnight. Trulia continues to measure visits with Adobe Analytics, and visits to Trulia end after thirty minutes of user inactivity.

We believe the use of an internal measurement tool to measure visits to Zillow and StreetEasy allows us to maintain control over and provide greater insight into our end-to-end data as we enhance our broader long-term analytics strategy, while also becoming less reliant on third-party providers. We have recast prior period visits to Zillow to conform with the current period measurement methodology. The change in our measurement platform for visits resulted in an approximately 10% decrease in reported visits for both the three and nine month periods ended September 30, 2023, primarily driven by the methodology for campaign changes.

The following table presents the number of visits to our mobile applications and websites for the periods presented (in millions, except percentages), recast for prior periods, as described above:

Unique Users

Measuring unique users is important to us because much of our revenue depends in part on our ability to connect home buyers and sellers, renters and individuals with or looking for a mortgage to real estate, rental and mortgage professionals, products and services. Growth in consumer traffic to our mobile applications and websites increases the number of impressions, clicks, connections, leads and other events we can monetize to generate revenue. For example, our revenue depends in part, on users accessing our mobile applications and websites to engage in the sale, purchase, renting and financing of homes, including with Zillow Home Loans, and a significant portion of our Residential revenue, Rentals revenue and Other revenue depend on advertisements being served to users of our mobile applications and websites.

We count a unique user the first time an individual accesses one of our mobile applications using a mobile device during a calendar month and the first time an individual accesses one of our websites using a web browser during a calendar month. If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. If an individual accesses more than one of our mobile applications within a given month, the first access to each mobile application is counted as a separate unique user. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain.

Prior to January 1, 2024, we measured unique users for Zillow, StreetEasy and HotPads using Universal Analytics. As discussed above, Universal Analytics is no longer offered as of July 1, 2024 and has been replaced by Google Analytics 4. As a result of this change, from January 1, 2024 through June 30, 2024, we measured unique users for Zillow using an internal measurement tool, but continued to use Universal Analytics to measure unique users for StreetEasy and HotPads. As of July 1, 2024, we measure visits to Zillow, StreetEasy and HotPads using an internal measurement tool. Trulia continues to measure unique users with Adobe Analytics.

Due to technological limitations, user software settings, or user behavior, our internal measurement tool and Universal Analytics may assign a unique cookie to different instances of access by the same individual to our mobile applications and websites. In such instances, although these tools capture the number of unique users in accordance with the defined methodology, there are inherent limitations in measuring the number of unique individuals accessing our mobile applications and websites.

We believe the use of an internal measurement tool to measure unique users for Zillow, StreetEasy and HotPads allows us to maintain control over and provide greater insight into our end-to-end data as we enhance our broader long-term analytics strategy, while also becoming less reliant on third-party providers. We have recast prior period unique users for Zillow to conform to the current period measurement methodology. The change in our measurement platform for unique users resulted in an approximately 2% increase in reported unique users for both the three and nine month periods ended September 30, 2023.

The following table presents our average monthly unique users for the periods presented (in millions, except percentages), recast for prior periods, as described above:

Loan Origination Volume

Loan origination volume is an important metric as it is a measure of how successful we are at the origination of mortgage loan products through our mortgage origination business, Zillow Home Loans, which directly impacts our Mortgages revenue. Loan origination volume represents the total value of mortgage loan originations closed through Zillow Home Loans during the period.

The following table presents loan origination volume by purpose and in total for Zillow Home Loans for the periods presented (in millions, except percentages):

During the three and nine month periods ended September 30, 2024, total loan origination volume increased 79% and 106%, respectively, compared to the three and nine month periods ended September 30, 2023. These increases were primarily driven by the continued growth in Zillow Home Loans purchase loan originations as we prioritize growth in Zillow Home Loans purchase originations.

Results of Operations

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

Revenue

(in millions, except percentages, unaudited)

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(in millions, except percentages, unaudited)

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Total revenue increased $85 million, or 17%, to $581 million:

• Residential revenue increased $43 million, or 12%. The increase in Residential revenue was partially driven by an 8% increase in Residential revenue per visit to $0.166 for the three months ended September 30, 2024 from $0.153 for the three months ended September 30, 2023, primarily due to the inclusion of revenue from Follow Up Boss, which we acquired in December 2023, growth in our Premier Agent revenue primarily due to continued improvement in our ability to convert connections into transactions, an increase in ShowingTime+ revenue as we expanded software services available to sellers and listing agents, and growth in our new construction revenue. We calculate Residential revenue per visit by dividing the revenue generated by our Residential offerings by the number of visits in the period. Residential revenue was also positively impacted by a 3% increase in the number of visits for the three months ended September 30, 2024 from the three months ended September 30, 2023. We expect Residential revenue to decrease in absolute dollars during the three months ending December 31, 2024, primarily due to the impact of seasonality on the residential real estate market.
• Rentals revenue increased $24 million, or 24%. The increase in Rentals revenue was primarily due to growth in average monthly rentals unique visitors, which increased 20% to 36 million during the three months ended September 30, 2024, from 30 million during the three months ended September 30, 2023. We have estimated average monthly rentals unique visitors using Comscore data as of September 2024, which measures average monthly unique visitors on rental listings on Zillow, Trulia and HotPads mobile apps and websites. The increase in Rentals revenue was also driven by a 4% increase in quarterly revenue per average monthly rentals unique visitor to $3.42 for the three months ended September 30, 2024, from $3.30 for the three months ended September 30, 2023, primarily driven by growth in multifamily property listings, which drove a 38% increase in multifamily rentals revenue. We calculate quarterly revenue per average monthly rentals unique visitor by dividing total Rentals revenue for the period by the average monthly rentals unique visitors for the period and then dividing by the number of quarters in the period.
• Mortgages revenue increased $15 million, or 63%. This increase was primarily driven by a $16 million increase in mortgage originations revenue. The increase in mortgage originations revenue was primarily due to a 79% increase in total loan origination volume to $819 million for the three months ended September 30, 2024 from $457 million for the three months ended September 30, 2023, primarily driven by continued growth in Zillow Home Loans purchase loan origination volume. The increase in mortgage originations revenue was also attributable to a 21% increase in gain on sale margin. 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 IRLCs 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.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Total revenue increased $211 million, or 14%, to $1.7 billion:

• Residential revenue increased $104 million, or 9%. The increase in Residential revenue was driven by a 6% increase in Residential revenue per visit to $0.166 for the nine months ended September 30, 2024 from $0.158 for the nine months ended September 30, 2023, primarily due to the inclusion of revenue from Follow Up Boss, which we acquired in December 2023, growth in our Premier Agent revenue primarily due to continued improvement in our ability to convert connections into transactions, an increase in ShowingTime+ revenue as we expanded software services available to sellers and listing agents, and accelerating growth in our new construction revenue. The increase in Residential revenue was also attributable to a 4% increase in the number of visits for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.
• Rentals revenue increased $73 million, or 28%. The increase in Rentals revenue was primarily due to a 24% increase in quarterly revenue per average monthly rentals unique visitor to $3.62 for the nine months ended September 30, 2024 as compared to $2.93 for the nine months ended September 30, 2023, primarily driven by growth in multifamily property listings, which drove a 42% increase in multifamily rentals revenue. The increase in rentals revenue was also due to growth in the number of average monthly rentals unique visitors, which increased 3% to 31 million during the nine months ended September 30, 2024, from 30 million during the nine months ended September 30, 2023.
• Mortgages revenue increased $30 million, or 41%. This increase was driven by a $45 million increase in mortgage originations revenue, partially offset by a $12 million decrease in Custom Quote and Connect advertising services revenue. The increase in mortgage originations revenue was primarily due to a 106% increase in total loan origination volume to $2.2 billion for the nine months ended September 30, 2024 from $1.1 billion for the nine months ended September 30, 2023, primarily driven by continued growth in Zillow Home Loans purchase loan origination volume. The increase in mortgage originations revenue was also attributable to a 20% increase in gain on sale margin. The increase in mortgage originations revenue was partially offset by a $12 million decrease in Custom Quote and Connect advertising services revenue, which was primarily due to a 20% decrease in leads generated from marketing products sold to mortgage professionals. This decrease in leads was primarily driven by our focus on organic growth of our mortgage origination business.

Adjusted EBITDA

The following table summarizes net loss and Adjusted EBITDA (in millions, except percentages):

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

We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q as it is a key metric used by our management and Board to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure 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 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 loss on extinguishment of debt;
• Adjusted EBITDA does not reflect interest expense or other income, 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 alongside other financial performance measures, including various cash-flow metrics, net loss and our other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods presented (in millions, unaudited):

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Costs and Expenses, Gross Profit and Other Items

(in millions, except percentages, unaudited)

(in millions, except percentages, unaudited)

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. Cost of revenue also includes credit card fees and ad serving costs paid to third parties, direct costs to provide our rental applications product, and direct costs to originate mortgage loans, including underwriting and processing costs.

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Cost of revenue increased $30 million, or 27%, primarily driven by increases of $14 million in depreciation and amortization expense primarily due to an increase in amortization of website development costs, $4 million in mortgage loan processing costs due to increased purchase loan origination volume, $3 million in lead acquisition costs related to partnerships, and $2 million in connectivity costs.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Cost of revenue increased $87 million, or 28%, primarily driven by increases of $47 million in depreciation and amortization expense primarily due to an increase in amortization of website development costs, $12 million in mortgage loan processing costs due to increased purchase loan origination volume, $7 million in lead acquisition costs related to partnerships, $5 million in connectivity costs, and $4 million in headcount-related expenses, including share-based compensation expense.

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 various product offerings.

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Gross profit increased by $55 million, or 14%, primarily due to an increase in revenue, discussed above. Total gross margin decreased from 78% to 76%.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Gross profit increased by $124 million, or 11%, primarily due to an increase in revenue, discussed above. Total gross margin decreased from 79% to 77%.

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 and mortgage loan officers and specialists, 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.

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Sales and marketing expenses increased $53 million, or 32%, due to increases of $25 million in marketing and advertising costs as we continue to invest in the growth of our rentals marketplace and $23 million in headcount-related expenses, including share-based compensation expense. We expect sales and marketing expenses to decrease in absolute dollars during the three months ending December 31, 2024 as marketing and advertising costs decrease in line with typical seasonal media spend.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Sales and marketing expenses increased $95 million, or 19%, due to increases of $52 million in headcount-related expenses, including share-based compensation expense, $33 million in marketing and advertising costs as we continue to invest in the growth of our rentals marketplace, and $4 million in travel expenses.

Technology and Development

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

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Technology and development expenses increased $3 million, or 2%, due primarily to an increase of $3 million in headcount-related expenses, including share-based compensation expense.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Technology and development expenses increased $17 million, or 4%, due to increases of $19 million in headcount-related expenses, including share-based compensation expense, as we continue to invest in human capital to grow our businesses, $7 million in software and hardware costs, and $3 million in travel expenses. These increases were partially offset by a $10 million decrease in third-party professional service fees driven by active cost management.

General and Administrative

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

Three months ended September 30, 2024 compared to three months ended September 30, 2023

General and administrative expenses decreased $8 million, or 6%, primarily due to a $6 million decrease in third party professional service fees driven by active cost management and a $5 million decrease in rent expense primarily driven by cost savings associated with changes in the use of certain office space in our lease portfolio. These decreases were partially offset by an increase of $4 million due to the change in fair value of contingent consideration associated with our acquisition of Follow Up Boss.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

General and administrative expenses decreased $21 million, or 5%, primarily due to a decrease of $18 million in headcount-related expenses, including share-based compensation expense. The decrease in headcount-related expenses was primarily driven by $18 million in share-based compensation expense associated with the departures of certain executive personnel incurred during the nine months ended September 30, 2023. The decrease in general and administrative expenses was also due to a $12 million decrease in rent expense primarily driven by cost savings associated with changes in the use of certain office space in our lease portfolio. These decreases were partially offset by increases of $8 million due to the change in fair value of contingent consideration associated with our acquisition of Follow Up Boss and $3 million in travel expenses.

Impairment and Restructuring Costs

Impairment and restructuring costs were not material for the three months ended September 30, 2024 and 2023. Impairment and restructuring costs were $6 million and $9 million for the nine months ended September 30, 2024 and 2023, respectively, and were primarily associated with changes in the use of certain office space in our lease portfolio. Impairment and restructuring costs incurred during the nine months ended September 30, 2023 also included $3 million that pertained to employee termination costs.

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 decreased $7 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, and was primarily driven by fair value adjustments on an outstanding warrant, partially offset by increases in returns on investments due to the higher interest rate environment as compared to the prior year period.

Income Taxes

We are subject to income taxes in the United States (federal and state) and certain foreign jurisdictions. As of September 30, 2024 and December 31, 2023, 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 $1.4 billion as of December 31, 2023, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $56 million (tax effected) as of December 31, 2023.

Income tax expense was not material for the three and nine month periods ended September 30, 2024 and 2023.

In 2021, the OECD, a global policy forum, released Pillar Two, designed to ensure that multinational groups with consolidated financial statement revenue in excess of €750 million annually pay a minimum 15% tax in each jurisdiction in which they operate. The OECD continues to release guidance and countries are implementing legislation to adopt these rules, which are expected to be effective for accounting periods beginning on or after December 31, 2023. The United States has not yet enacted legislation implementing Pillar Two. We have evaluated the impact of these rules and currently believe they will not have a material impact on our financial position, results of operations or cash flows due to certain transitional safe harbors. We will continue to monitor and refine our assessment as further guidance is made available.

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 continue to invest in the development and expansion of our operations using available cash flows from operations. Ongoing investments include, but are not limited to, improvements in our technology platforms, investments in new products and services, and continued investments in sales and marketing. We also use cash flows from operations to service our debt obligations and to repurchase Class A common stock, Class C capital stock, outstanding Notes or a combination thereof through our Repurchase Authorizations or otherwise.

Sources of Liquidity

As of September 30, 2024 and December 31, 2023, we had cash and cash equivalents, investments and restricted cash of $2.2 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, investment grade corporate securities, U.S. government agency securities, and commercial paper. Restricted cash primarily consists of amounts used to fund 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 September 30, 2024, 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, strategic acquisitions and investments 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.

Summarized Cash Flow Information

The following table presents selected cash flow data for the periods presented (in millions, unaudited):

Cash Flows Provided By 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. 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.

For the nine months ended September 30, 2024, net cash provided by operating activities was $306 million. This was driven by a net loss of $60 million, adjusted by share-based compensation of $329 million, depreciation and amortization of $178 million, accretion of bond discount of $23 million, amortization of contract cost assets of $14 million, amortization of right of use assets of $8 million, impairment costs of $6 million, amortization of debt issuance costs of $4 million, and $14 million in other adjustments to reconcile net loss to cash provided by operating activities. Changes in operating assets and liabilities decreased cash provided by operating activities by $164 million. The changes in operating assets and liabilities are primarily related to a $73 million increase in prepaid expenses and other current assets primarily due to an increase in revenue from products and services billed in arrears, a $64 million increase in mortgage loans held for sale due to an increase in purchase loan origination volume, a $31 million decrease in lease liabilities due to contractual lease payments, a $21 million increase in accounts receivable primarily due to an increase in revenue from products and services billed in arrears, and a $15 million increase in contract cost assets primarily due to capitalized sales commissions. These changes were partially offset by a $25 million increase in accounts payable driven by the timing of payments, an $8 million increase in accrued expenses and other current liabilities primarily driven by the timing of billings, and a $5 million increase in deferred revenue consistent with an increase in revenue.

For the nine months ended September 30, 2023, net cash provided by operating activities was $268 million. This was driven by a net loss of $85 million, adjusted by share-based compensation of $342 million, depreciation and amortization of $134 million, accretion of bond discount of $29 million, amortization of right of use assets of $18 million, amortization of contract cost assets of $16 million, impairment costs of $6 million, and amortization of debt issuance costs of $4 million. Changes in operating assets and liabilities decreased cash provided by operating activities by $135 million. The changes in operating assets and liabilities are primarily related to a $55 million increase in mortgage loans held for sale due to an increase in purchase loan origination volume, a $26 million increase in accounts receivable primarily due to an increase in revenue from products and services billed in arrears, a $24 million decrease in lease liabilities due to contractual lease payments, a $22 million increase in prepaid expenses and other current assets primarily due to an increase in revenue from products and services billed in arrears, a $16 million increase in contract cost assets primarily due to capitalized sales commissions, a $4 million decrease in other long term liabilities, and a $3 million decrease in accrued expenses and other current liabilities. These changes were partially offset by a $7 million increase in accounts payable and a $4 million increase in accrued compensation and benefits both driven by the timing of payments, and a $4 million increase in deferred revenue.

Cash Flows Provided By Investing Activities

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

For the nine months ended September 30, 2024, net cash provided by investing activities was $121 million. This was the result of $251 million of net proceeds from maturities and sales of investments and $130 million of purchases of property and equipment and intangible assets.

For the nine months ended September 30, 2023, net cash provided by investing activities was $339 million. This was the result of $498 million of net proceeds from the maturity of investments, $125 million of purchases of property and equipment and intangible assets, and $34 million of cash paid for acquisitions, net of cash acquired.

Cash Flows Used In Financing Activities

Our primary financing activities include repurchases of Class A common stock and Class C capital stock, the exercise of employee option awards, repayments of borrowings on the warehouse line of credit and master repurchase agreements related to Zillow Home Loans and settlement of long-term debt including a portion of the Notes.

For the nine months ended September 30, 2024, net cash used in financing activities was $847 million, which primarily related to $697 million of cash paid for the settlement of the 2024 Notes and partial repurchase of the 2025 Notes, and $301 million of cash paid for share repurchases. The cash outflows were partially offset by $96 million of proceeds from the exercise of option awards and $55 million of net borrowings on our master repurchase agreements related to Zillow Home Loans.

For the nine months ended September 30, 2023, net cash used in financing activities was $226 million, which primarily related to $336 million of cash paid for share repurchases, partially offset by $56 million of proceeds from the exercise of option awards and $54 million of net borrowings on our warehouse line of credit and master repurchase agreements related to Zillow Home Loans.

Capital Resources

Notes

As of September 30, 2024, we have a total of $918 million aggregate principal amount of Notes outstanding. The Notes are senior unsecured obligations, and interest on the Notes is paid semi-annually. The following table summarizes our Notes as of the periods presented (in millions, except interest rates):

Settlement of 2024 Notes. The 2024 Notes matured on September 1, 2024. During the period from March 1, 2024 through the close of business on August 29, 2024, holders of the 2024 Notes elected to convert all outstanding 2024 Notes in accordance with the terms of the indenture. We settled these conversions with aggregate cash payments totaling $610 million, which included $608 million in principal repayments, $2 million for accrued interest and a nominal cash payment in lieu of fractional shares, and the issuance of 1.9 million shares of Class C capital stock. In September 2024, we received 2.1 million shares of Class C capital stock from the settlement of the capped call transactions we entered into in connection with the issuance of the 2024 Notes.

2025 Notes. We may from time to time seek to redeem, retire or purchase outstanding debt through cash purchases and/or exchanges for cash, shares of stock or a combination of cash and stock, pursuant to the redemption terms of such debt securities, in open market purchases, privately negotiated transactions or otherwise. Such redemptions, repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.

There were no repurchases of Notes during the three months ended September 30, 2024. During the nine months ended September 30, 2024, we repurchased $88 million aggregate principal amount of the 2025 Notes through open market transactions for $89 million in cash, including accrued interest.

On or after November 15, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date for the 2025 Notes, holders may convert the 2025 Notes at their option at the applicable Conversion Rate then in effect. Any conversions of the 2025 Notes will be settled on the maturity date. We expect to settle the principal amount of the 2025 Notes in cash and any conversion premium in shares of Class C capital stock. In addition, we may redeem the 2025 Notes if the last reported sale price of our Class C capital stock equals or exceeds $87.36 per share (130% of the conversion price) for a specified period of trading days. If we elect to redeem the 2025 Notes, we would expect to settle any conversions in cash up to the principal amount and shares of Class C capital stock for any conversion obligation in excess of the principal amount.

Redemption of 2026 Notes. On October 8, 2024, we submitted notice to the trustee to exercise our right to redeem the remaining $499 million in aggregate principal amount of the 2026 Notes on December 18, 2024 (the “Redemption Date”). The 2026 Notes may be converted by the holders at any time prior to 5:00 p.m. (New York City time) on December 17, 2024. The conversion rate for the 2026 Notes is 22.9830 shares of Class C capital stock per $1,000 principal amount of 2026 Notes converted (subject to adjustment under certain circumstances as set forth in the indenture governing the 2026 Notes). We expect to settle the principal amount of the 2026 Notes in cash and any conversion premium in shares of Class C capital stock. For any holder of the 2026 Notes that does not elect to convert their 2026 Notes, we will be required to redeem the 2026 Notes in cash at a redemption price equal to 100% of the principal amount of 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the Redemption Date.

Refer to Note 7 of our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information regarding our Notes, including conversion rates, conversion and redemption dates and the related capped call transactions.

Share Repurchases

The Board has authorized the repurchase of up to $2.5 billion of our Class A common stock, Class C capital stock, outstanding Notes or a combination thereof. During the nine months ended September 30, 2024, we repurchased 1.1 million shares of Class A common stock and 6 million shares of Class C capital stock at an average price of $42.26 and $42.45 per share, respectively, for an aggregate purchase price of $46 million and $255 million, respectively. As of September 30, 2024, $381 million remained available for future repurchases pursuant to the Repurchase Authorizations, which repurchases decrease our liquidity and capital resources when effected. For additional information on these authorizations, see Notes 11 and 13 of our Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Credit Facilities

Zillow Home Loans operations 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 master repurchase agreements as of the periods presented (in millions, except interest rates):

(1) Agreement was amended and renewed on May 2, 2024, increasing the total maximum borrowing capacity from $100 million to $150 million.

(2) Agreement was amended and renewed on September 6, 2024, increasing the total maximum borrowing capacity from $100 million to $150 million.

(3) Agreement expired on March 11, 2024 and was not renewed.

Refer to Note 7 of our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information on Zillow Group’s master repurchase agreements.

Contractual Obligations and Other Commitments

Notes - Includes the aggregate principal amounts of the Notes due on their contractual maturity dates, as well as the associated coupon interest. As of September 30, 2024, we have an outstanding aggregate principal amount of $918 million, $419 million of which is payable within 12 months. Future interest payments associated with the Notes total $25 million, with $18 million payable within 12 months. Subsequent to September 30, 2024, we provided notice to the trustee that we will redeem the remaining $499 million in aggregate principal amount of the 2026 Notes on December 18, 2024. Refer to Note 7 of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for maturity dates, stated interest rates and additional information on our Notes.

Credit Facilities - Includes principal amounts due for amounts borrowed under the master repurchase agreements to finance mortgages originated through Zillow Home Loans. Principal amounts under the master repurchase agreements are due when the related mortgage loan is sold to an investor or directly to an agency. As of September 30, 2024, we have outstanding principal amounts of $148 million. Amounts exclude an immaterial amount of estimated interest payments.

Operating Lease Obligations - Our lease portfolio primarily comprises operating leases for our office space. During the nine months ended September 30, 2024, there were no material changes to our operating lease obligations disclosed in Note 10 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Additionally, as of September 30, 2024, we had outstanding letters of credit of approximately $11 million, which secure our lease obligations in connection with certain of the operating leases of our office spaces.

Contingent Consideration - In connection with the acquisition of Follow Up Boss, we are obligated to pay contingent consideration upon the achievement of certain performance metrics over a three-year period. For additional information regarding this contingent consideration, see Note 3 and Note 5 of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Purchase Obligations - We have non-cancelable purchase obligations for content related to our mobile applications and websites and certain cloud computing costs. During the nine months ended September 30, 2024, there were no material changes to the purchase commitments disclosed in Note 16 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We evaluate our estimates, judgments and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates, and the health of the housing market and the broader economy have introduced significant additional uncertainty with respect to estimates, judgments and assumptions, which may materially impact our estimates. For information on our critical accounting policies and estimates, see Part II Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.

Interest Rate Risk

Under our current investment policy, we invest our excess cash in money market funds, U.S. government treasury securities, U.S. government agency securities, investment grade corporate securities and commercial paper. Our current investment policy seeks first to preserve capital, second to provide sufficient liquidity for our operating and capital needs and third to maximize yield.

Our short-term investments are exposed to market risk due to the fluctuation of prevailing interest rates that may reduce the yield on our investments or their fair value. For our investment portfolio, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio.

As of September 30, 2024, we had approximately $918 million aggregate principal amount of Notes. All outstanding Notes bear fixed rates of interest and, therefore, do not expose us to financial statement risk associated with changes in interest rates. The fair values of the Notes change primarily when the market price of our stock fluctuates or interest rates change.

We are also subject to market risk which may impact our mortgage loan origination volume and associated revenue and the net interest margin derived from borrowings under our master repurchase agreements that provide capital for Zillow Home Loans. Market risk occurs in periods where changes in short-term interest rates result in mortgage loans being originated with terms that provide a smaller interest rate spread above the financing terms of our master repurchase agreements, which can negatively impact our results of operations. This risk is primarily mitigated through the expedited sale of our loans. As of September 30, 2024 and December 31, 2023, we had $148 million and $93 million, respectively, of outstanding borrowings on our master repurchase agreements which bear interest at a floating rate based on SOFR plus an applicable margin, as defined by the governing agreements. We manage the interest rate risk associated with our mortgage loan origination services through the use of forward sales of MBSs. Assuming no change in the outstanding borrowings on the master repurchase agreements, we estimate that a one percentage point increase in SOFR would not have a material effect on our annual interest expense associated with the master repurchase agreements as of September 30, 2024 and December 31, 2023.

For additional details related to our credit facilities and Notes, see Note 7 to our Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Inflation Risk

The macroeconomic environment in the United States has experienced, and continues to experience, inflationary pressures. While it is difficult to accurately measure the impact of these inflationary pressures on our business, we believe these effects have been pervasive throughout our business during the past several quarters. In response to ongoing inflationary pressures in the United States, the Federal Reserve implemented a number of increases to the federal funds rate during 2022 and 2023. Despite inflation stabilizing beginning in the second half of 2023 and the federal funds rate decreasing in the second half of 2024, prior federal funds rate increases have impacted other market rates derived from this benchmark rate, including mortgage interest rates. The persistently high mortgage interest rates across the industry relative to recent years has impacted the number of transactions consumers complete using our products and services and the demand for our advertising services and mortgage origination offerings and, in turn, had an adverse impact on our revenue.

If inflationary pressures persist, our costs, in particular labor, marketing and hosting costs, may increase and we may not be able to fully offset such higher costs through price increases. In addition, uncertain or changing economic and market conditions, including inflation or deflation, may continue to affect demand for our products and services and the housing markets in which we operate. Our inability or failure to quickly respond to inflation could harm our business, results of operations and financial condition. We cannot predict the duration or magnitude of these inflationary pressures, or how they may change over time, but we expect to see continued impacts on the residential real estate industry, our customers and our company. Despite these near-term effects, we do not expect these inflationary pressures to have a material impact on our ability to execute our long-term business strategy.

Foreign Currency Exchange Risk

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

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of September 30, 2024. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective as of September 30, 2024.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Securities Exchange Act of 1934, as amended, that occurred during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have not been any material changes to the risk factors affecting our business, financial condition or future results from those set forth in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. However, you should carefully consider the factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.