0001617640-18-000023.txt : 20181106 0001617640-18-000023.hdr.sgml : 20181106 20181106162209 ACCESSION NUMBER: 0001617640-18-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 92 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181106 DATE AS OF CHANGE: 20181106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZILLOW GROUP, INC. CENTRAL INDEX KEY: 0001617640 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 471645716 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36853 FILM NUMBER: 181163283 BUSINESS ADDRESS: STREET 1: 1301 SECOND AVENUE, FLOOR 31 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: (206) 470-7000 MAIL ADDRESS: STREET 1: 1301 SECOND AVENUE, FLOOR 31 CITY: SEATTLE STATE: WA ZIP: 98101 FORMER COMPANY: FORMER CONFORMED NAME: Zebra Holdco Inc. DATE OF NAME CHANGE: 20140822 10-Q 1 q32018form10-qdoc.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
 
x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934
For the quarterly period ended September 30, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-36853
 
_____________________________________________________
ZILLOW GROUP, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Washington
 
47-1645716
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1301 Second Avenue, Floor 31, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
(206) 470-7000
@ZillowGroup
(Registrant’s telephone number, including area code)
 _____________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x

 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
☐  
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x
As of October 31, 2018, 57,986,928 shares of Class A common stock, 6,217,447 shares of Class B common stock, and 139,042,266 shares of Class C capital stock were outstanding.
 



ZILLOW GROUP, INC.
Quarterly Report on Form 10-Q
For the Three Months Ended September 30, 2018
TABLE OF CONTENTS
 
 

i


As used in this Quarterly Report on Form 10-Q, the terms “Zillow Group,” “the Company,” “we,” “us” and “our” refer to Zillow Group, Inc., unless the context indicates otherwise.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those risks, uncertainties and assumptions described in Part II, Item 1A (Risk Factors) of this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
WHERE YOU CAN FIND MORE INFORMATION
Our filings with the Securities and Exchange Commission, or SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available on our website at www.zillowgroup.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this quarterly report on Form 10-Q or any other document we file with the SEC.
Investors and others should note that Zillow Group announces material financial information to its investors using its press releases, SEC filings and public conference calls and webcasts. Zillow Group intends to also use the following channels as a means of disclosing information about Zillow Group, its services and other matters and for complying with its disclosure obligations under Regulation FD:
 
Zillow Group Investor Relations Webpage (http://investors.zillowgroup.com)
Zillow Group Investor Relations Blog (http://www.zillowgroup.com/ir-blog)
Zillow Group Twitter Account (https://twitter.com/zillowgroup)
The information Zillow Group posts through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following Zillow Group’s press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q or any other document we file with the SEC, and the inclusion of our website addresses and Twitter account are as inactive textual references only.

1


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data, unaudited)
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
643,792

 
$
352,095

Short-term investments
999,241

 
410,444

Accounts receivable, net of allowance for doubtful accounts of $5,276 and $5,341 at September 30, 2018 and December 31, 2017, respectively
66,337

 
54,396

Inventory
43,257

 

Prepaid expenses and other current assets
38,904

 
24,590

Restricted cash
3,203

 

Total current assets
1,794,734

 
841,525

Contract cost assets
45,238

 

Property and equipment, net
124,281

 
112,271

Goodwill
1,931,076

 
1,931,076

Intangible assets, net
290,887

 
319,711

Other assets
16,241

 
25,934

Total assets
$
4,202,457

 
$
3,230,517

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,846

 
$
3,587

Accrued expenses and other current liabilities
58,533

 
61,373

Accrued compensation and benefits
25,612

 
19,109

Revolving credit facility
24,674



Deferred revenue
35,959

 
31,918

Deferred rent, current portion
2,566

 
2,400

Total current liabilities
153,190

 
118,387

Deferred rent, net of current portion
18,049

 
21,330

Long-term debt
690,338

 
385,416

Deferred tax liabilities and other long-term liabilities
21,861

 
44,561

Total liabilities
883,438

 
569,694

Commitments and contingencies (Note 17)

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.0001 par value; 30,000,000 shares authorized; no shares issued and outstanding

 

Class A common stock, $0.0001 par value; 1,245,000,000 shares authorized; 57,965,662 and 56,629,103 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
6

 
6

Class B common stock, $0.0001 par value; 15,000,000 shares authorized; 6,217,447 shares issued and outstanding as of September 30, 2018 and December 31, 2017
1

 
1

Class C capital stock, $0.0001 par value; 600,000,000 shares authorized; 138,974,244 and 127,268,598 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
13

 
13

Additional paid-in capital
3,894,757

 
3,254,146

Accumulated other comprehensive loss
(1,661
)
 
(1,100
)
Accumulated deficit
(574,097
)
 
(592,243
)
Total shareholders’ equity
3,319,019

 
2,660,823

Total liabilities and shareholders’ equity
$
4,202,457

 
$
3,230,517

See accompanying notes to condensed consolidated financial statements.

2


ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data, unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
IMT
$
332,076

 
$
281,839

 
$
957,201

 
$
794,464

Homes
11,018

 

 
11,018

 

Total revenue
343,094

 
281,839

 
968,219

 
794,464

Cost of revenue (exclusive of amortization) (1):
 
 
 
 
 
 
 
IMT
26,386

 
22,152

 
75,832

 
62,644

Homes
10,286

 

 
10,286

 

Total cost of revenue
36,672

 
22,152

 
86,118

 
62,644

Sales and marketing
128,734

 
107,108

 
413,752

 
344,266

Technology and development
105,314

 
83,389

 
299,623

 
234,798

General and administrative
70,743

 
54,226

 
187,395

 
153,038

Impairment costs
10,000

 

 
10,000

 

Acquisition-related costs
1,405

 
218

 
2,064

 
366

Integration costs
523

 

 
523

 

Total costs and expenses
353,391

 
267,093

 
999,475

 
795,112

Income (loss) from operations
(10,297
)
 
14,746

 
(31,256
)
 
(648
)
Other income
7,773

 
1,407

 
13,308

 
3,970

Interest expense
(12,668
)
 
(6,906
)
 
(26,928
)
 
(20,526
)
Income (loss) before income taxes
(15,192
)
 
9,247

 
(44,876
)
 
(17,204
)
Income tax benefit (expense)
14,700

 
(41
)
 
22,700

 
(41
)
Net income (loss)
$
(492
)
 
$
9,206

 
$
(22,176
)
 
$
(17,245
)
Net income (loss) per share — basic and diluted
$

 
$
0.05

 
$
(0.11
)
 
$
(0.09
)
Weighted-average shares outstanding — basic
202,416

 
187,692

 
195,208

 
185,447

Weighted-average shares outstanding — diluted
202,416

 
196,425

 
195,208

 
185,447

 ____________________
(1) Amortization of website development costs and intangible assets included in technology and development
$
18,165

 
$
23,537

 
$
61,735

 
$
69,957

See accompanying notes to condensed consolidated financial statements.


3


ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(492
)
 
$
9,206

 
$
(22,176
)
 
$
(17,245
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on investments
(428
)
 
99

 
(537
)
 
(103
)
Currency translation adjustments
42

 

 
(24
)
 

Total other comprehensive income (loss)
(386
)
 
99

 
(561
)
 
(103
)
Comprehensive income (loss)
$
(878
)
 
$
9,305

 
$
(22,737
)
 
$
(17,348
)
See accompanying notes to condensed consolidated financial statements.

4


ZILLOW GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Nine Months Ended
September 30,
 
2018
 
2017
Operating activities
 
 
 
Net loss
$
(22,176
)
 
$
(17,245
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
76,301

 
81,576

Share-based compensation expense
111,366

 
84,162

Amortization of contract cost assets
27,227

 

Amortization of discount and issuance costs on 2021 and 2023 Notes
17,990

 
13,391

Impairment costs
10,000

 

Deferred income taxes
(22,700
)
 

Loss on disposal of property and equipment
3,129

 
4,085

Bad debt expense
1,053

 
5,861

Deferred rent
(3,116
)
 
3,072

Amortization (accretion) of bond premium (discount)
(2,172
)
 
451

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(12,994
)
 
(19,272
)
Inventory
(43,257
)
 

Prepaid expenses and other assets
(15,012
)
 
4,434

Contract cost assets
(32,143
)
 

Accounts payable
2,254

 
224

Accrued expenses and other current liabilities
(3,751
)
 
13,174

Accrued compensation and benefits
6,503

 
1,194

Deferred revenue
4,041

 
1,775

Other long-term liabilities

 
41

Net cash provided by operating activities
102,543

 
176,923

Investing activities
 
 
 
Proceeds from maturities of investments
261,675

 
204,520

Purchases of investments
(848,838
)
 
(303,241
)
Purchases of property and equipment
(44,482
)
 
(51,580
)
Purchases of intangible assets
(8,179
)
 
(9,377
)
Purchase of equity investment

 
(10,000
)
Proceeds from divestiture of a business

 
579

Cash paid for acquisition, net
(2,000
)
 
(11,147
)
Net cash used in investing activities
(641,824
)
 
(180,246
)
Financing activities
 
 
 
Proceeds from issuance of 2023 Notes, net of issuance costs
364,020

 

Premiums paid for Capped Call Confirmations
(29,414
)
 

Proceeds from issuance of Class C Capital Stock, net of issuance costs
360,345

 

Proceeds from borrowing on revolving credit facility
24,674



Proceeds from exercise of stock options
114,623

 
80,010

Value of equity awards withheld for tax liability
(67
)
 
(337
)
Net cash provided by financing activities
834,181

 
79,673

Net increase in cash, cash equivalents and restricted cash during period
294,900

 
76,350

Cash, cash equivalents and restricted cash at beginning of period
352,095

 
243,592

Cash, cash equivalents and restricted cash at end of period
$
646,995

 
$
319,942

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
4,800

 
$
4,458

Noncash transactions:
 
 
 
Capitalized share-based compensation
$
6,674

 
$
8,915

Write-off of fully depreciated property and equipment
$
18,687

 
$
12,685

Write-off of fully amortized intangible assets
$
10,797

 
$
5,454

See accompanying notes to condensed consolidated financial statements.

5


ZILLOW GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Description of Business
Zillow Group, Inc. operates the largest portfolio of real estate and home-related brands on mobile and the web which focus on all stages of the home lifecycle: renting, buying, selling and financing. Zillow Group is committed to empowering consumers with unparalleled data, inspiration and knowledge around homes, and connecting them with great real estate professionals. The Zillow Group portfolio of consumer brands includes real estate and rental marketplaces Zillow, Trulia, StreetEasy, HotPads, Naked Apartments, RealEstate.com and Out East. In addition, Zillow Group provides a comprehensive suite of marketing software and technology solutions to help real estate professionals maximize business opportunities and connect with millions of consumers. Beginning in April of 2018, Zillow Offers provides homeowners in certain metropolitan areas with the opportunity to receive offers to purchase their home from Zillow. When Zillow buys a home, it makes certain repairs and updates and lists the home for resale on the open market. We also own and operate a number of business brands for real estate, rental and mortgage professionals, including Mortech, dotloop, Bridge Interactive and New Home Feed. Zillow, Inc. was incorporated as a Washington corporation in December 2004, and we launched the initial version of our website, Zillow.com, in February 2006. Zillow Group, Inc. was incorporated as a Washington corporation in July 2014 in connection with our acquisition of Trulia, Inc. (“Trulia”). Upon the closing of the Trulia acquisition in February 2015, each of Zillow, Inc. and Trulia became wholly owned subsidiaries of Zillow Group.
Certain Significant Risks and Uncertainties
We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: rates of revenue growth; our ability to manage advertising inventory or pricing; engagement and usage of our products; our investment of resources to pursue strategies that may not prove effective; competition in our market; the stability of the residential real estate market and the impact of interest rate changes; changes in government regulation affecting our business; outcomes of legal proceedings; natural disasters and catastrophic events; scaling and adaptation of existing technology and network infrastructure; management of our growth; our ability to attract and retain qualified employees and key personnel; our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments; protection of customers’ information and other privacy concerns; protection of our brand and intellectual property; and intellectual property infringement and other claims, among other things.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include Zillow Group, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes included in Zillow Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 15, 2018. The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited financial statements of Zillow Group, Inc. as of that date.
The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2018, our results of operations and comprehensive income (loss) for the three and nine month periods ended September 30, 2018 and 2017, and our cash flows for the nine month periods ended September 30, 2018 and 2017. The results of the three and nine month periods ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any interim period or for any other future year.

6


Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to the net realizable value of inventory, amortization period and recoverability of contract cost assets, website and software development costs, recoverability of long-lived assets and intangible assets with definite lives, share-based compensation, income taxes, business combinations, and the recoverability of goodwill and indefinite-lived intangible assets, among others. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on revenue from contracts with customers. The guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those products or services. It also states that an entity should recognize as an asset the incremental costs of obtaining a contract that the entity expects to recover and amortize the costs consistent with the transfer to the customer of the products or services to which the asset relates. The guidance requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this guidance effective January 1, 2018 using the modified retrospective transition approach applied to all contracts at the date of initial application. We recorded an adjustment of $40.3 million to decrease accumulated deficit as of January 1, 2018 related to the accounting for the cost of sales commissions, primarily related to sales commissions for our Premier Agent and Premier Broker advertising products. Historically, we expensed these sales commission costs as incurred, but under the new guidance, the cost of certain sales commissions is recorded as a contract cost asset and recognized as an operating expense over the period that we expect to recover the costs.
The amount by which each financial statement line item is affected by the application of this guidance for the three months ended September 30, 2018 is as follows (in thousands, except per share data):
 
 
New Guidance
 
Prior Guidance
 
Change
Condensed Consolidated Statement of Operations:
 
 
 
 
 
 
Sales and marketing
 
$
128,734

 
$
130,588

 
$
(1,854
)
Total costs and expenses
 
353,391

 
355,245

 
(1,854
)
Loss from operations
 
(10,297
)
 
(12,151
)
 
1,854

Loss before income taxes
 
(15,192
)
 
(17,046
)
 
1,854

Income tax benefit
 
14,700

 
14,992

 
(292
)
Net loss
 
(492
)
 
(2,054
)
 
1,562

Net loss per share — basic and diluted
 

 
(0.01
)
 
0.01


7


The amount by which each financial statement line item is affected by the application of this guidance as of and for the nine months ended September 30, 2018 is as follows (in thousands, except per share data):
 
 
New Guidance
 
Prior Guidance
 
Change
Condensed Consolidated Statement of Operations:
 
 
 
 
 
 
Sales and marketing
 
$
413,752

 
$
418,668

 
$
(4,916
)
Total costs and expenses
 
999,475

 
1,004,391

 
(4,916
)
Loss from operations
 
(31,256
)
 
(36,172
)
 
4,916

Loss before income taxes
 
(44,876
)
 
(49,792
)
 
4,916

Income tax benefit
 
22,700

 
23,892

 
(1,192
)
Net loss
 
(22,176
)
 
(25,900
)
 
3,724

Net loss per share — basic and diluted
 
(0.11
)
 
(0.13
)
 
0.02

Condensed Consolidated Balance Sheet:
 
 
 
 
 
 
Contract cost assets
 
45,238

 

 
45,238

Total assets
 
4,202,457

 
4,157,219

 
45,238

Deferred tax liabilities and other long-term liabilities
 
21,861

 
20,669

 
1,192

Total liabilities
 
883,438

 
882,246

 
1,192

Accumulated deficit
 
(574,097
)
 
(619,335
)
 
45,238

Total shareholders’ equity
 
3,319,019

 
3,282,422

 
36,597

Total liabilities and shareholders’ equity
 
4,202,457

 
4,157,219

 
45,238

Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the FASB issued guidance related to a customer’s accounting for implementation costs incurred in hosting arrangements. The guidance aligns the requirements for capitalizing implementation costs incurred in cloud computing arrangements with the requirements for capitalizing costs to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. This guidance may be applied either retrospectively or prospectively. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.
In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. This guidance removes, modifies and adds disclosures related to fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim and annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial statement disclosures.
In June 2018, the FASB issued guidance related to contributions received and made. This guidance assists entities with evaluating whether a transfer of assets is considered a contribution or an exchange transaction. This guidance is effective for interim and annual reporting periods beginning after June 15, 2018 for contributions received and after December 15, 2018 for contributions made, and early adoption is permitted. The guidance should be applied on a modified prospective basis, though retrospective application is permitted. We expect to adopt this guidance on January 1, 2019. The adoption of this guidance is not expected to have a material impact on our financial position, results of operations or cash flows.
In February 2018, the FASB issued guidance on income tax accounting related to the Tax Act. This guidance permits a reclassification from accumulated other comprehensive income (loss) to accumulated deficit for the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate under the Tax Act. It also requires certain disclosures regarding these reclassifications. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. This guidance must be applied either on a prospective basis in the period of adoption or retrospectively to each period in which the effect of the change in the corporate income tax rate is recognized. We expect to adopt this guidance on January 1, 2019. The adoption of this guidance is not expected to have a material impact on our financial position, results of operations or cash flows.

8


In March 2017, the FASB issued guidance related to the premium amortization on purchased callable debt securities. This guidance shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. This guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We expect to adopt this guidance on January 1, 2019. The adoption of this guidance is not expected to have a material impact on our financial position, results of operations or cash flows.
In June 2016, the FASB issued guidance on the measurement of credit losses on financial instruments. This guidance requires the use of an expected loss impairment model for instruments measured at amortized cost. For available-for-sale debt securities, an entity is required to recognize credit losses through an allowance for credit losses rather than as a write-down. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. The adoption of this guidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We expect to adopt this guidance on January 1, 2020. We have not yet determined the impact the adoption of this guidance will have on our financial position, results of operations or cash flows.
In February 2016, the FASB issued guidance on leases. This guidance requires the recognition of a right-of-use asset and lease liability on the balance sheet for all leases. This guidance also requires more detailed disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. In July 2018, the FASB issued certain targeted improvements to the accounting and disclosure requirements for leases, including an additional optional transition method that allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. We will adopt this guidance on January 1, 2019 using the optional transition method. Under this approach, we will not restate the prior financial statements presented. As we progress through our implementation of this guidance, we continue to expect a significant impact on our financial position upon adoption, primarily due to our office space operating leases, as we will be required to recognize lease assets and lease liabilities on our condensed consolidated balance sheet. As our leases do not provide an implicit rate, we plan to use our incremental borrowing rate based on information available at the commencement date to determine the present value of future payments. We continue to evaluate the incremental borrowing rate, changes to our internal control structure, accounting policies and disclosures. We continue to assess the impact the adoption will have on our results of operations and cash flows.
Note 3. Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
 
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.
We applied the following methods and assumptions in estimating our fair value measurements:
Cash equivalents — The fair value measurement of money market funds is based on quoted market prices in active markets. The fair value measurement of corporate notes and bonds, commercial paper, U.S. government agency securities and certificates of deposit is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Short-term investments — The fair value measurement of our short-term investments is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

9


Restricted cash — Restricted cash consists of cash received from the resale of homes through Zillow Offers which is used to repay amounts borrowed on the Revolving Credit Facility (see Note 12) as well as certain reserves we are required to maintain pursuant to the Revolving Credit Facility. The carrying value of restricted cash approximates fair value due to the short period of time amounts borrowed on the Revolving Credit Facility are outstanding.

The following tables present the balances of assets measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):
 
September 30, 2018
 
Total
 
Level 1
 
Level 2
Cash equivalents:
 
 
 
 
 
Money market funds
$
543,703

 
$
543,703

 
$

Commercial paper
3,490

 

 
3,490

Certificates of deposit
249

 

 
249

Short-term investments:
 
 
 
 
 
U.S. government agency securities
717,927

 

 
717,927

Corporate notes and bonds
121,875

 

 
121,875

Commercial paper
92,674

 

 
92,674

Municipal securities
43,154

 

 
43,154

Foreign government securities
17,905

 

 
17,905

Certificates of deposit
5,706

 

 
5,706

        Total
$
1,546,683

 
$
543,703

 
$
1,002,980

 
December 31, 2017
 
Total
 
Level 1
 
Level 2
Cash equivalents:
 
 
 
 
 
Money market funds
$
233,508

 
$
233,508

 
$

Corporate notes and bonds
6,199

 

 
6,199

Commercial paper
3,987

 

 
3,987

U.S. government agency securities
1,748

 

 
1,748

Certificates of deposit
249

 

 
249

Short-term investments:
 
 
 
 
 
U.S. government agency securities
298,758

 

 
298,758

Corporate notes and bonds
44,607

 

 
44,607

Commercial paper
39,325

 

 
39,325

Municipal securities
11,459

 

 
11,459

Certificates of deposit
10,297

 

 
10,297

Foreign government securities
5,998

 

 
5,998

        Total
$
656,135

 
$
233,508

 
$
422,627


See Note 12 for the carrying amount and estimated fair value of the Company’s Convertible Senior Notes due in 2023, Convertible Senior Notes due in 2021 and Trulia’s Convertible Senior Notes due in 2020.
We did not have any Level 3 assets as of September 30, 2018 or December 31, 2017. There were no liabilities measured at fair value on a recurring basis as of September 30, 2018 or December 31, 2017.

10


Note 4. Cash and Cash Equivalents, Short-term Investments and Restricted Cash
The following tables present the amortized cost, gross unrealized gains and losses, and estimated fair market value of our cash and cash equivalents, available-for-sale investments and restricted cash as of the dates presented (in thousands):
 
September 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
Cash
$
96,350

 
$

 
$

 
$
96,350

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
543,703

 

 

 
543,703

Commercial paper
3,490

 

 

 
3,490

Certificates of deposit
249

 

 

 
249

Short-term investments:
 
 
 
 
 
 
 
U.S. government agency securities
719,380

 

 
(1,453
)
 
717,927

Corporate notes and bonds
121,987

 
1

 
(113
)
 
121,875

Commercial paper
92,674

 

 

 
92,674

Municipal securities
43,237

 

 
(83
)
 
43,154

Foreign government securities
17,940

 

 
(35
)
 
17,905

Certificates of deposit
5,706

 
1

 
(1
)
 
5,706

Restricted cash
3,203

 

 

 
3,203

        Total
$
1,647,919

 
$
2

 
$
(1,685
)
 
$
1,646,236

 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
Cash
$
106,404

 
$

 
$

 
$
106,404

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
233,508

 

 

 
233,508

Corporate notes and bonds
6,200

 

 
(1
)
 
6,199

Commercial paper
3,987

 

 

 
3,987

U.S. government agency securities
1,748

 

 

 
1,748

Certificates of deposit
249

 

 

 
249

Short-term investments:
 
 
 
 
 
 
 
U.S. government agency securities
299,814

 

 
(1,056
)
 
298,758

Corporate notes and bonds
44,661

 
1

 
(55
)
 
44,607

Commercial paper
39,325

 

 

 
39,325

Municipal securities
11,494

 

 
(35
)
 
11,459

Certificates of deposit
10,296

 
2

 
(1
)
 
10,297

Foreign government securities
6,000

 

 
(2
)
 
5,998

        Total
$
763,686

 
$
3

 
$
(1,150
)
 
$
762,539


The following table presents available-for-sale investments by contractual maturity date as of September 30, 2018 (in thousands):
 
Amortized
Cost
 
Estimated Fair
Market Value
Due in one year or less
$
846,217

 
$
844,993

Due after one year through two years
154,707

 
154,248

Total
$
1,000,924

 
$
999,241


Note 5. Accounts Receivable, net
The opening balance of accounts receivable, net was $54.4 million as of January 1, 2018.
The following table presents the changes in the allowance for doubtful accounts (in thousands):
Balance as of January 1, 2018
$
5,341

Bad debt expense
1,053

Less: write-offs, net of recoveries and other adjustments
(1,118
)
Balance as of September 30, 2018
$
5,276


Note 6. Inventory
The components of inventory, net of applicable lower of cost or net realizable value write-downs, were as follows (in thousands):
 
September 30,
2018
 
December 31,
2017
Work-in-progress
$
16,010

 
$

Finished goods
27,247

 

Inventory
$
43,257

 
$


Note 7. Contract Cost Assets
As of September 30, 2018, we had $45.2 million of contract cost assets. During the three and nine month periods ended September 30, 2018, we recorded no impairment losses. During the three and nine month periods ended September 30, 2018, we recorded $8.9 million and $27.2 million, respectively, of amortization expense related to contract cost assets.
Note 8. Property and Equipment, net
The following table presents the detail of property and equipment as of the dates presented (in thousands):
 
September 30,
2018
 
December 31,
2017
Website development costs
$
147,416

 
$
130,072

Leasehold improvements
58,354

 
47,321

Computer equipment
30,896

 
30,071

Construction-in-progress
26,150

 
28,150

Office equipment, furniture and fixtures
26,221

 
22,887

Property and equipment
289,037

 
258,501

Less: accumulated amortization and depreciation
(164,756
)
 
(146,230
)
Property and equipment, net
$
124,281

 
$
112,271


We recorded depreciation expense related to property and equipment (other than website development costs) of $5.1 million and $3.8 million, respectively, during the three months ended September 30, 2018 and 2017, and $14.2 million and $11.5 million, respectively, during the nine months ended September 30, 2018 and 2017.

We capitalized $8.0 million and $13.4 million, respectively, in website development costs during the three months ended September 30, 2018 and 2017, and $26.6 million and $39.8 million, respectively, during the nine months ended September 30, 2018 and 2017. Amortization expense for website development costs included in technology and development expenses was $6.2 million and $10.1 million, respectively, during the three months ended September 30, 2018 and 2017, and $24.2 million and $30.0 million, respectively, during the nine months ended September 30, 2018 and 2017.

11


Note 9. Equity Investments
In June 2017, we purchased an equity interest in a privately held corporation for approximately $10.0 million.
In October 2016, we purchased a 10% equity interest in a privately held variable interest entity within the real estate industry for $10.0 million. The entity is financed through its business operations. We are not the primary beneficiary of the entity, as we do not direct the activities that most significantly impact the entity’s economic performance. Therefore, we do not consolidate the entity. Our maximum exposure to loss is $10.0 million, the carrying amount of the investment as of September 30, 2018.
These investments are equity securities without readily determinable fair values which we account for at cost minus any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. During the three months ended September 30, 2018, we recognized a non-cash impairment charge of $10.0 million related to our June 2017 investment. The impairment charge is included in Impairment costs within our condensed consolidated statements of operations. In connection with our quarterly qualitative assessment of this investment for impairment indicators, we identified factors that led us to conclude that the investment was impaired and the fair value of the investment was less than the carrying value. The most significant of such factors was related to the business prospects of the investee. Accordingly, we performed an analysis to determine the fair value of the investment and concluded that our best estimate of its fair value was $0.0 million as of September 30, 2018. This is considered a Level 3 measurement under the fair value hierarchy.
There has been no impairment or upward or downward adjustments for our October 2016 equity investment as of September 30, 2018 that would impact the carrying amount of the investment. The October 2016 investment is classified within other assets in the condensed consolidated balance sheet.
Note 10. Intangible Assets, net
The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):
 
September 30, 2018
 
Cost
 
Accumulated
Amortization
 
Net
Purchased content
$
39,105

 
$
(27,978
)
 
$
11,127

Software
21,893

 
(12,534
)
 
9,359

Customer relationships
103,900

 
(57,304
)
 
46,596

Developed technology
111,980

 
(69,137
)
 
42,843

Trade names and trademarks
4,900

 
(4,658
)
 
242

Intangibles-in-progress
3,720

 

 
3,720

Total
$
285,498

 
$
(171,611
)
 
$
113,887

 
December 31, 2017
 
Cost
 
Accumulated
Amortization
 
Net
Purchased content
$
35,260

 
$
(20,480
)
 
$
14,780

Software
18,957

 
(8,899
)
 
10,058

Customer relationships
103,900

 
(46,365
)
 
57,535

Developed technology
113,380

 
(56,664
)
 
56,716

Trade names and trademarks
4,900

 
(3,943
)
 
957

Advertising relationships
9,000

 
(8,525
)
 
475

Intangibles-in-progress
2,190

 

 
2,190

Total
$
287,587

 
$
(144,876
)
 
$
142,711



12


Amortization expense recorded for intangible assets for the three months ended September 30, 2018 and 2017 was $12.0 million and $13.4 million, respectively. Amortization expense recorded for intangible assets for the nine months ended September 30, 2018 and 2017 was $37.6 million and $39.9 million, respectively. These amounts are included in technology and development expenses.
We have an indefinite-lived intangible asset that we recorded in connection with our February 2015 acquisition of Trulia for Trulia’s trade names and trademarks that is not subject to amortization. The carrying value of the Trulia trade names and trademarks intangible asset was $177.0 million as of September 30, 2018 and December 31, 2017.
Intangibles-in-progress consists of software that is capitalizable but has not been placed in service.
Note 11. Deferred Revenue
The following tables present the changes in deferred revenue for the periods presented (in thousands):
 
Three Months Ended
September 30, 2018
Balance as of July 1, 2018
$
35,920

Deferral of revenue
253,571

Less: Revenue recognized
(253,532
)
Balance as of September 30, 2018
$
35,959


 
Nine Months Ended
September 30, 2018
Balance as of January 1, 2018
$
31,918

Deferral of revenue
742,427

Less: Revenue recognized
(738,386
)
Balance as of September 30, 2018
$
35,959


During the three months ended September 30, 2018, we recognized as revenue a total of $33.0 million pertaining to amounts that were recorded in deferred revenue as of June 30, 2018. During the nine months ended September 30, 2018, we recognized as revenue a total of $30.6 million pertaining to amounts that were recorded in deferred revenue as of December 31, 2017.
Note 12. Debt
Revolving Credit Facility
On July 31, 2018, certain wholly owned subsidiaries of Zillow Group entered into a revolving credit agreement with Credit Suisse AG, Cayman Islands Branch, as the directing lender, and certain other parties thereto (the “Revolving Credit Facility”). The Revolving Credit Facility provides for a maximum borrowing capacity of $250.0 million (the “Maximum Amount”) with a current borrowing capacity of $25.0 million as of September 30, 2018, which amount may be increased up to the Maximum Amount subject to the satisfaction of certain conditions, through a non-recourse credit facility secured by a pledge of the equity of certain Zillow Group subsidiaries that purchase and sell select residential properties through Zillow Offers. In certain circumstances Zillow Group may be obligated to fund some or all of the payment obligations under the Revolving Credit Facility. Zillow Group formed certain special purpose entities to effectuate the transactions contemplated by the agreement underlying the Revolving Credit Facility. Each special purpose entity is a wholly owned subsidiary of Zillow Group and a separate legal entity, and neither the assets nor credit of any such entity are available to satisfy the debts and other obligations of any affiliate or other entity.
The Revolving Credit Facility has an initial term of one year which may be extended for up to three years, subject to agreement by the directing lender. The Revolving Credit Facility includes customary representations and warranties, covenants (including financial covenants applicable to Zillow Group), and provisions regarding events of default. As of September 30, 2018, Zillow Group was in compliance with all financial covenants and no event of default had occurred. Availability under the Revolving Credit Facility is limited by a formula equal to the lower of 85% of the aggregate acquisition cost of financed residential properties or 85% of the aggregate market value, which for each residential property is the sum of the value established by an independent broker-pricing opinion and renovation costs paid.

13


Pursuant to the terms of the Revolving Credit Facility, we are required to establish, maintain, and in certain circumstances fund, certain specified reserve accounts. These reserve accounts include, but are not limited to, interest reserves, insurance, tax and HOA fee reserves, renovation cost reserves and special reserves. The credit facility reserve accounts and the collection account into which funds are deposited upon the resale of financed residential properties, which funds are used to repay amounts borrowed on the Revolving Credit Facility, are under the sole control of Credit Suisse AG, New York Branch, as defined in the agreement governing the Revolving Credit Facility. Amounts funded to these reserve accounts and the collection account have been classified within our condensed consolidated balance sheets as restricted cash. Borrowings on our Revolving Credit Facility bear interest at the one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin. We are also required to pay a funding fee for each financed residential property and certain other fees to certain other parties to the agreement. Interest, funding fees and other fees, including the amortization of deferred issuance costs, are classified within interest expense in our condensed consolidated statements of operations.
As of September 30, 2018, we have outstanding $24.7 million of borrowings on the Revolving Credit Facility and approximately $0.3 million is currently available for future borrowings.
Convertible Senior Notes due in 2023
On July 3, 2018, Zillow Group issued $373.8 million aggregate principal amount of Convertible Senior Notes due 2023 (the “2023 Notes”), which includes $48.8 million principal amount of 2023 Notes sold pursuant to the underwriters’ option to purchase additional 2023 Notes. The 2023 Notes bear interest at a fixed rate of 1.50% per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2019. The 2023 Notes are convertible into cash, shares of Class C capital stock or a combination thereof, at our election. The 2023 Notes will mature on July 1, 2023, unless earlier repurchased, redeemed, or converted in accordance with their terms.
The net proceeds from the issuance of the 2023 Notes were approximately $364.0 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. We used approximately $29.4 million of the net proceeds from the issuance of the 2023 Notes to pay the cost of the Capped Call Confirmations described below. The Company intends to use the remainder of the net proceeds for general corporate purposes.
Prior to the close of business on the business day immediately preceding April 1, 2023, the 2023 Notes are convertible at the option of the holders only under certain conditions. On or after April 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2023 Notes at their option at the conversion rate then in effect, irrespective of these conditions. The Company will settle conversions of the 2023 Notes by paying or delivering, as the case may be, cash, shares of the Company’s Class C capital stock, or a combination of cash and shares of Class C capital stock, at its election. The conversion rate will initially be 12.7592 shares of Class C capital stock per $1,000 principal amount of 2023 Notes (equivalent to an initial conversion price of approximately $78.37 per share of Class C capital stock). The conversion rate is subject to customary adjustments upon the occurrence of certain events. The Company may redeem for cash all or part of the 2023 Notes, at its option, on or after July 6, 2021, under certain circumstances at a redemption price equal to 100% of the principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (as defined in the indenture governing the 2023 Notes). The conversion option does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock.
If the Company undergoes a fundamental change (as defined in the indenture governing the 2023 Notes), holders may require the Company to repurchase for cash all or part of their 2023 Notes at a repurchase price equal to 100% of the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date (as defined in the indenture governing the 2023 Notes). In addition, if certain fundamental changes occur, the Company may be required in certain circumstances to increase the conversion rate for any Notes converted in connection with such fundamental changes by a specified number of shares of its Class C capital stock. Certain events are also considered “Events of Default,” which may result in the acceleration of the maturity of the 2023 Notes, as described in the indenture governing the 2023 Notes. There are no financial covenants associated with the 2023 Notes.
We may not redeem the 2023 Notes prior to July 6, 2021. We may redeem for cash all or any portion of the 2023 Notes, at our option, in whole or in part on or after July 6, 2021 if the last reported sale price per share of our Class C capital stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period.
In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion

14


option, was determined by deducting the fair value of the liability component from the par value of the 2023 Notes. The difference between the principal amount of the 2023 Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the condensed consolidated balance sheet and amortized to interest expense using the effective interest method over the term of the 2023 Notes. The equity component of the 2023 Notes of approximately $78.6 million is included in additional paid-in capital in the condensed consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.
Interest expense related to the 2023 Notes for the three and nine month periods ended September 30, 2018 was $5.0 million, which is comprised of approximately $3.6 million related to the amortization of debt discount and debt issuance costs and $1.4 million for the contractual coupon interest.
The effective interest rate on the liability component of the 2023 Notes for the three and nine month periods ended September 30, 2018 is 6.99%. Accrued interest related to the 2023 Notes as of September 30, 2018 was $1.4 million and is recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheet.
The following table presents the outstanding principal amount and carrying value of the 2023 Notes as of the date presented (in thousands):
 
Outstanding
Principal
Amount
 
Unamortized
Debt Discount
and Debt
Issuance Costs
 
Carrying
Value
September 30, 2018
$
373,750

 
$
(82,717
)
 
$
291,033


As of September 30, 2018, the unamortized debt discount and debt issuance costs for the 2023 Notes will be amortized to interest expense over a remaining period of approximately 57 months.
The estimated fair value of the 2023 Notes was $344.3 million as of September 30, 2018. The estimated fair value of the 2023 Notes was determined through consideration of quoted market prices. The fair value is classified as Level 3 due to the limited trading activity for the 2023 Notes.
The Capped Call Confirmations are expected generally to reduce the potential dilution of our Class C capital stock upon any conversion of 2023 Notes and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2023 Notes in the event that the market price of the Class C capital stock is greater than the strike price of the Capped Call Confirmations (which initially corresponds to the initial conversion price of the 2023 Notes and is subject to certain adjustments under the terms of the Capped Call Confirmations), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Confirmations. The Capped Call Confirmations have an initial cap price of $105.45 per share, which represents a premium of approximately 85% over the public offering price of the Company’s Class C capital stock in the concurrent share offering of $57.00, and is subject to certain adjustments under the terms of the Capped Call Confirmations. The Capped Call Confirmations will cover, subject to anti-dilution adjustments substantially similar to the 2023 Notes, the number of shares of Class C capital stock that will underlie the 2023 Notes. The Capped Call Confirmations do not meet the criteria for separate accounting as a derivative as they are indexed to our own stock. The premiums paid for the Capped Call Confirmations have been included as a net reduction to additional paid-in-capital within shareholders’ equity.
Convertible Senior Notes due in 2021
On December 12, 2016, Zillow Group issued $460.0 million aggregate principal amount of 2.00% Convertible Senior Notes due 2021 (the “2021 Notes”), which amount includes the exercise in full of the $60.0 million over-allotment option, to Citigroup Global Markets Inc. as the initial purchaser of the 2021 Notes in a private offering to the initial purchaser in reliance on the exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) for resale to qualified institutional buyers as defined in, and pursuant to, Rule 144A under the Securities Act. The 2021 Notes bear interest at a fixed rate of 2.00% per year, payable semiannually in arrears on June 1 and December 1 of each year. The 2021 Notes are convertible into cash, shares of our Class C capital stock or a combination thereof, at the Company’s election. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased, redeemed, or converted in accordance with their terms.

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The net proceeds from the issuance of the 2021 Notes were approximately $447.8 million, after deducting fees and expenses. The Company used approximately $370.2 million of the net proceeds from the issuance of the 2021 Notes to repurchase a portion of the outstanding 2020 Notes (see additional information below under “Trulia’s Convertible Senior Notes due 2020”) in privately negotiated transactions. In addition, the Company used approximately $