EX-99.2 3 a992.htm EXHIBIT 99.2 Exhibit


Exhibit 99.2


Reported Consolidated Results

ZILLOW GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
September 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,791,918

 
$
651,058

Short-term investments
531,679

 
903,867

Accounts receivable, net
77,674

 
66,083

Mortgage loans held for sale
36,762

 
35,409

Inventory
879,353

 
162,829

Prepaid expenses and other current assets
66,413

 
61,067

Restricted cash
75,004

 
12,385

Total current assets
3,458,803

 
1,892,698

Contract cost assets
46,047

 
45,819

Property and equipment, net
154,251

 
135,172

Right of use assets
218,564

 
—

Goodwill
1,984,907

 
1,984,907

Intangible assets, net
197,527

 
215,904

Other assets
15,889

 
16,616

Total assets
$
6,075,988

 
$
4,291,116

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,717

 
$
7,471

Accrued expenses and other current liabilities
76,061

 
63,101

Accrued compensation and benefits
33,540

 
31,388

Revolving credit facilities
698,280

 
116,700

Warehouse lines of credit
30,116

 
33,018

Deferred revenue
41,955

 
34,080

Deferred rent, current portion
—

 
1,740

Lease liabilities, current portion
17,937

 
—

Total current liabilities
907,606

 
287,498

Deferred rent, net of current portion
—

 
19,945

Lease liabilities, net of current portion
223,989

 
—

Long-term debt
1,478,719

 
699,020

Deferred tax liabilities and other long-term liabilities
13,796

 
17,474

Total liabilities
2,624,110

 
1,023,937

Shareholders’ equity:
 
 
 
Class A common stock
6

 
6

Class B common stock
1

 
1

Class C capital stock
14

 
14

Additional paid-in capital
4,327,003

 
3,939,842

Accumulated other comprehensive income (loss)
784

 
(905
)
Accumulated deficit
(875,930
)
 
(671,779
)
Total shareholders’ equity
3,451,878

 
3,267,179

Total liabilities and shareholders’ equity
$
6,075,988

 
$
4,291,116






ZILLOW GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Homes
$
384,626

 
$
11,018

 
$
762,022

 
$
11,018

IMT
335,290

 
313,638

 
957,231

 
900,435

Mortgages
25,292

 
18,438

 
79,637

 
56,766

Total revenue
745,208

 
343,094

 
1,798,890

 
968,219

Cost of revenue (exclusive of amortization) (1)(2):
 
 
 
 
 
 
 
Homes
370,796

 
10,226

 
733,947

 
10,312

IMT
24,318

 
25,186

 
74,628

 
72,070

Mortgages
4,721

 
1,260

 
13,829

 
3,736

Total cost of revenue
399,835

 
36,672

 
822,404

 
86,118

Sales and marketing (2)
181,347

 
128,734

 
530,367

 
413,752

Technology and development (2)
123,974

 
105,314

 
352,074

 
299,623

General and administrative (2)
88,493

 
70,743

 
267,106

 
187,395

Impairment costs
—

 
10,000

 
—

 
10,000

Acquisition-related costs
—

 
1,405

 
—

 
2,064

Integration costs
5

 
523

 
650

 
523

Total costs and expenses
793,654

 
353,391

 
1,972,601

 
999,475

Loss from operations
(48,446
)
 
(10,297
)
 
(173,711
)
 
(31,256
)
Other income
8,999

 
7,773

 
27,625

 
13,308

Interest expense
(26,502
)
 
(12,668
)
 
(61,865
)
 
(26,928
)
Loss before income taxes
(65,949
)
 
(15,192
)
 
(207,951
)
 
(44,876
)
Income tax benefit
1,300

 
14,700

 
3,800

 
22,700

Net loss
$
(64,649
)
 
$
(492
)
 
$
(204,151
)
 
$
(22,176
)
Net loss per share — basic and diluted
$
(0.31
)
 
$
—

 
$
(0.99
)
 
$
(0.11
)
Weighted-average shares outstanding — basic and diluted
207,002

 
202,416

 
205,766

 
195,208

_________________
(1) Amortization of website development costs and intangible assets included in technology and development
$
15,835

 
$
18,165

 
$
44,891

 
$
61,735

(2) Includes share-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of revenue
$
1,062

 
$
969

 
$
2,878

 
$
3,180

Sales and marketing
6,588

 
5,911

 
19,039

 
17,413

Technology and development
18,034

 
15,031

 
51,942

 
40,920

General and administrative
16,444

 
19,771

 
78,025

 
49,853

Total
$
42,128

 
$
41,682

 
$
151,884

 
$
111,366

Other Financial Data:
 
 
 
 
 
 
 
Segment income (loss) before income taxes
 
 
 
 
 
 
 
Homes segment
$
(87,870
)
 
$
(16,428
)
 
$
(204,197
)
 
$
(30,879
)
IMT segment
$
42,053

 
$
6,322

 
$
43,839

 
$
(184
)
Mortgages segment
$
(12,254
)
 
$
(623
)
 
$
(32,308
)
 
$
(625
)
Adjusted EBITDA (3)
 
 
 
 
 
 
 
Homes segment
$
(67,825
)
 
$
(13,409
)
 
$
(158,801
)
 
$
(25,274
)
IMT segment
91,102

 
75,363

 
216,204

 
181,764

Mortgages segment
(7,435
)
 
4,211

 
(15,342
)
 
11,985

Total Adjusted EBITDA
$
15,842

 
$
66,165

 
$
42,061

 
$
168,475

(3) Adjusted EBITDA is a non-GAAP financial measure; it is not calculated or presented in accordance with U.S. generally accepted accounting principles, or GAAP. See Exhibit 99.1 for more information regarding our presentation of Adjusted EBITDA and for a reconciliation of Adjusted EBITDA to net loss on a consolidated basis and income (loss) before income taxes for each segment, the most directly comparable GAAP financial measure, for each of the periods presented.




ZILLOW GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
September 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(204,151
)
 
$
(22,176
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
63,888

 
76,301

Share-based compensation expense
151,884

 
111,366

Amortization of right of use assets
16,710

 
—

Amortization of contract cost assets
26,722

 
27,227

Amortization of discount and issuance costs on convertible senior notes maturing in 2021, 2023, 2024 and 2026
29,868

 
17,990

Impairment costs
—

 
10,000

Deferred income taxes
(3,800
)
 
(22,700
)
Loss on disposal of property and equipment
5,744

 
3,129

Bad debt expense
1,894

 
1,053

Deferred rent
—

 
(3,116
)
Accretion of bond discount
(5,241
)
 
(2,172
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(13,485
)
 
(12,994
)
Mortgage loans held for sale
(1,353
)
 
—

Inventory
(716,524
)
 
(43,257
)
Prepaid expenses and other assets
(5,848
)
 
(15,012
)
Lease liabilities
(15,029
)
 
—

Contract cost assets
(26,950
)
 
(32,143
)
Accounts payable
2,999

 
2,254

Accrued expenses and other current liabilities
12,241

 
(3,751
)
Accrued compensation and benefits
2,152

 
6,503

Deferred revenue
7,875

 
4,041

Other long-term liabilities
122

 
—

Net cash provided by (used in) operating activities
(670,282
)
 
102,543

Investing activities
 
 
 
Proceeds from maturities of investments
859,142

 
261,675

Purchases of investments
(479,963
)
 
(848,838
)
Purchases of property and equipment
(45,140
)
 
(44,482
)
Purchases of intangible assets
(15,123
)
 
(8,179
)
Cash paid for acquisition, net
—

 
(2,000
)
Net cash provided by (used in) investing activities
318,916

 
(641,824
)
Financing activities
 
 
 
Proceeds from issuance of convertible notes, net of issuance costs
1,085,686

 
364,020

Premiums paid for capped call confirmations
(150,530
)
 
(29,414
)
Proceeds from issuance of Class C capital stock, net of issuance costs
—

 
360,345

Proceeds from borrowing on revolving credit facilities
581,580

 
24,674

Net repayments on warehouse lines of credit
(2,902
)
 
—

Proceeds from exercise of stock options
41,014

 
114,623

Value of equity awards withheld for tax liability
(3
)
 
(67
)
Net cash provided by financing activities
1,554,845

 
834,181

Net increase in cash, cash equivalents and restricted cash during period
1,203,479

 
294,900

Cash, cash equivalents and restricted cash at beginning of period
663,443

 
352,095

Cash, cash equivalents and restricted cash at end of period
$
1,866,922

 
$
646,995

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
25,837

 
$
4,800

Noncash transactions:
 
 
 
Capitalized share-based compensation
$
8,942

 
$
6,674

Write-off of fully depreciated property and equipment
$
28,951

 
$
18,687

Write-off of fully amortized intangible assets
$
9,959

 
$
10,797





Non-GAAP Net Income (Loss) per Share
Our presentation of non-GAAP net income (loss) per share excludes the impact of share-based compensation expense, impairment costs, acquisition-related costs and income taxes. This measure is not a key metric used by our management and board of directors to measure operating performance or otherwise manage the business. However, we provide non-GAAP net income (loss) per share as supplemental information to investors, as we believe the exclusion of share-based compensation expense, impairment costs, acquisition-related costs and income taxes facilitates investors’ operating performance comparisons on a period-to-period basis. You should not consider non-GAAP net income (loss) per share in isolation or as a substitute for analysis of our results as reported under GAAP.

The following table sets forth a reconciliation of non-GAAP net income (loss), adjusted, to net loss, as reported on a GAAP basis, and the calculation of non-GAAP net income (loss) per share - basic and diluted, for each of the periods presented (in thousands, except per share data, unaudited):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net loss, as reported
$
(64,649
)
 
$
(492
)
 
$
(204,151
)
 
$
(22,176
)
Share-based compensation expense
42,128

 
41,682

 
151,884

 
111,366

Impairment costs
—

 
10,000

 
—

 
10,000

Acquisition-related costs
—

 
1,405

 
—

 
2,064

Income tax benefit
(1,300
)
 
(14,700
)
 
(3,800
)
 
(22,700
)
Net income (loss), adjusted
$
(23,821
)
 
$
37,895

 
$
(56,067
)
 
$
78,554

Non-GAAP net income (loss) per share — basic
$
(0.12
)
 
$
0.19

 
$
(0.27
)
 
$
0.40

Non-GAAP net income (loss) per share — diluted
$
(0.12
)
 
$
0.18

 
$
(0.27
)
 
$
0.38

Weighted-average shares outstanding — basic
207,002

 
202,416

 
205,766

 
195,208

Weighted-average shares outstanding — diluted
207,002

 
211,746

 
205,766

 
204,926


Non-GAAP net income (loss) per share - diluted for the periods presented is calculated using weighted-average shares outstanding - diluted, which includes potential shares of Class A common stock and Class C capital stock for the periods in which their effect would have been dilutive. The potential shares of Class A common stock and Class C capital stock were excluded from the calculation of non-GAAP net loss per share for the periods presented because their effect would have been antidilutive as a result of the non-GAAP net loss incurred in such periods. The following table reconciles the denominators used in the basic and diluted non-GAAP net income (loss) per share calculations (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Denominator for basic calculation
207,002

 
202,416

 
205,766

 
195,208

Effect of dilutive securities:
 
 
 
 
 
 
 
     Option awards
—

 
7,678

 
—

 
8,333

     Unvested restricted stock units
—

 
1,242

 
—

 
1,385

Class A common stock issuable upon conversion of the 2020 Notes
—

 
410

 
—

 
—

          Denominator for dilutive calculation
207,002

 
211,746

 
205,766

 
204,926





Segment Results of Operations
The following table presents our segment results for the periods presented (in thousands, unaudited):
 
Three Months Ended
September 30, 2019
 
Three Months Ended
September 30, 2018
 
Homes
 
IMT
 
Mortgages
 
Homes
 
IMT
 
Mortgages
Revenue
$
384,626

 
$
335,290

 
$
25,292

 
$
11,018

 
$
313,638

 
$
18,438

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
370,796

 
24,318

 
4,721

 
10,226

 
25,186

 
1,260

Sales and marketing
49,186

 
118,514

 
13,647

 
4,650

 
117,522

 
6,562

Technology and development
20,651

 
94,656

 
8,667

 
6,128

 
93,930

 
5,256

General and administrative
22,174

 
55,749

 
10,570

 
6,010

 
60,678

 
4,055

Impairment costs
—

 
—

 
—

 
—

 
10,000

 
—

Acquisition-related costs
—

 
—

 
—

 
—

 
—

 
1,405

Integration costs
—

 
—

 
5

 
—

 
—

 
523

Total costs and expenses
462,807

 
293,237

 
37,610

 
27,014

 
307,316

 
19,061

Income (loss) from operations
(78,181
)
 
42,053

 
(12,318
)
 
(15,996
)
 
6,322

 
(623
)
Segment other income
—

 
—

 
344

 
—

 
—

 
—

Segment interest expense
(9,689
)
 
—

 
(280
)
 
(432
)
 
—

 
—

Income (loss) before income taxes (1)
$
(87,870
)
 
$
42,053

 
$
(12,254
)
 
$
(16,428
)
 
$
6,322

 
$
(623
)
 
Nine Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2018
 
Homes
 
IMT
 
Mortgages
 
Homes
 
IMT
 
Mortgages
Revenue
$
762,022

 
$
957,231

 
$
79,637

 
$
11,018

 
$
900,435

 
$
56,766

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
733,947

 
74,628

 
13,829

 
10,312

 
72,070

 
3,736

Sales and marketing
107,457

 
380,608

 
42,302

 
7,035

 
384,241

 
22,476

Technology and development
51,130

 
276,886

 
24,058

 
12,154

 
270,978

 
16,491

General and administrative
54,339

 
181,270

 
31,497

 
11,964

 
163,303

 
12,128

Impairment costs
—

 
—

 
—

 
—

 
10,000

 
—

Acquisition-related costs
—

 
—

 
—

 
—

 
27

 
2,037

Integration costs
—

 
—

 
650

 
—

 
—

 
523

Total costs and expenses
946,873

 
913,392

 
112,336

 
41,465

 
900,619

 
57,391

Income (loss) from operations
(184,851
)
 
43,839

 
(32,699
)
 
(30,447
)
 
(184
)
 
(625
)
Segment other income
—

 
—

 
1,059

 
—

 
—

 
—

Segment interest expense
(19,346
)
 
—

 
(668
)
 
(432
)
 
—

 
—

Income (loss) before income taxes (1)
$
(204,197
)
 
$
43,839

 
$
(32,308
)
 
$
(30,879
)
 
$
(184
)
 
$
(625
)




(1) The following table presents the reconciliation of total segment loss before income taxes to consolidated loss before income taxes for the periods presented (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Total segment loss before income taxes
$
(58,071
)
 
$
(10,729
)
 
$
(192,666
)
 
$
(31,688
)
Corporate interest expense
(16,533
)
 
(12,236
)
 
(41,851
)
 
(26,496
)
Corporate other income
8,655

 
7,773

 
26,566

 
13,308

Consolidated loss before income taxes
$
(65,949
)
 
$
(15,192
)
 
$
(207,951
)
 
$
(44,876
)

Key Metrics
The following table sets forth our key metrics for each of the periods presented:
 
Three Months Ended
September 30,
 
2018 to 2019
% Change
 
2019
 
2018
 
 
(in millions)
 
 
Average Monthly Unique Users (1)
195.6

 
186.6

 
5
%
Visits (2)
2,104.9

 
1,888.9

 
11
%
(1)
Zillow, StreetEasy, HotPads and Naked Apartments measure unique users with Google Analytics, and Trulia measures unique users with Adobe Analytics.
(2)
Visits includes visits to the Zillow, Trulia and StreetEasy mobile apps and websites. We measure Zillow and StreetEasy visits with Google Analytics and Trulia visits with Adobe Analytics.

Non-GAAP Average Return on Homes Sold After Interest Expense
To provide investors with additional information regarding our Homes segment financial results, this Exhibit includes a calculation of Average Return on Homes Sold After Interest Expense, which is a non-GAAP financial measure. We have provided a reconciliation of Average Return on Homes Sold After Interest Expense to the most directly comparable GAAP financial measure, which is average gross profit per home for the Homes segment.
We believe that Average Return on Homes Sold After Interest Expense is a useful financial measure to investors as it is one of the primary measures used by management in making investment decisions, measuring unit level economics and evaluating operating performance for the Zillow Offers business. The measure is intended to convey the unit level economics of homes sold during the period by presenting the average revenue and associated expenses directly attributed to the homes sold. We believe this average per unit measure facilitates meaningful period over period comparisons notwithstanding variability in the number of homes sold during a period and indicates ability to generate average returns on assets sold after considering home purchase costs, renovation costs, holding costs and selling costs.
We calculate the average return on homes sold after interest expense as revenue associated with homes sold during the period less direct costs attributable to those homes divided by the number of homes sold during the period. Specifically, direct costs include, with respect to each home sold during the period (1) home acquisition and renovation costs, which in turn include certain labor costs directly associated with these activities; (2) holding and selling costs; and (3) interest costs incurred.
Included in direct holding and interest expense amounts for the periods presented are holding and interest costs recorded as period expenses in prior periods associated with homes sold in the current period, which are not calculated in accordance with, or as an alternative for, GAAP and should not be considered in isolation or as a substitute for results reported under GAAP. Excluded from certain of these direct cost amounts are costs recorded in the current period related to homes that remain in inventory at the end of the period, as shown in the tables below. We make these period adjustments because we believe presenting Average Return on Homes Sold After Interest Expense in this manner provides a focused view on a subset of our assets - homes sold during the period - and reflecting costs associated with those homes sold from the time we acquire to the time we sell the home, which may be useful to investors.




Average Return on Homes Sold After Interest Expense is intended to illustrate the performance of homes sold during the period and is not intended to be a segment or company performance metric. Average Return on Homes Sold After Interest Expense is a supplemental measure of operating performance for a subset of assets and has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Average Return on Homes Sold After Interest Expense does not reflect capital expenditure requirements for such replacements or for new capital expenditure requirements;
•
Average Return on Homes Sold After Interest Expense does not consider the potentially dilutive impact of share-based compensation;
•
Average Return on Homes Sold After Interest Expense does not include period costs that were not eligible for inventory capitalization associated with homes held in inventory at the end of the period;
•
Average Return on Homes Sold After Interest Expense does not reflect indirect expenses included in cost of revenue, sales and marketing, technology and development, or general and administrative expenses, some of which are recurring cash expenditures necessary to operate the business; and
•
Average Return on Homes Sold After Interest Expense does not reflect income taxes.

On a GAAP basis, Homes segment average gross profit per home was $11,420 for the three months ended September 30, 2019.

The following table presents the total return on homes sold after interest expense and the Average Return on Homes Sold After Interest Expense for the period presented (in thousands, except average per home amounts, unaudited):
 
 
 
Three Months Ended
September 30, 2019
 
 
 
Total
 
Average
Per Home
Homes sold
 
 
1,211

 
 
Homes revenue
 
 
$
384,626

 
$
317,610

Operating costs:
 
 
 
 
 
Home acquisition costs (1)
 
 
347,844

 
287,237

Renovation costs (1)
 
 
15,449

 
12,757

Holding costs (1)(2)
 
 
4,634

 
3,827

Selling costs
 
 
16,835

 
13,902

Total operating costs
 
 
384,762

 
317,723

Interest expense (1)(2)
 
 
5,708

 
4,713

Return on homes sold after interest expense
 
 
$
(5,844
)
 
$
(4,826
)
(1) Amount excludes expenses incurred during the period that are not related to homes sold during the period.
(2) Holding costs and interest expense include $1.8 million and $2.9 million, respectively, of costs incurred in prior periods associated with homes sold during the current period.





The calculation of Average Return on Homes Sold After Interest Expense includes only those expenses directly attributed to the homes sold during the period. To arrive at return on homes sold after interest expense, the Company deducts from Homes segment gross profit (1) holding costs incurred in the current period and prior periods for homes sold during the period that are included in sales and marketing expense, (2) selling costs incurred in the current period for homes sold during the period that are included in sales and marketing expense and (3) interest expense incurred in the current and prior periods for homes sold during the period. The Company adds to Homes segment gross profit (1) inventory valuation adjustments recorded during the period associated with homes that remain in inventory at period end, net of inventory valuation adjustments recorded in prior periods related to homes sold in the current period, and indirect expenses included in cost of revenue and (2) share-based compensation expense and depreciation and amortization expense included in cost of revenue. The following table presents the calculation of Homes segment average gross profit per home and Average Return on Homes Sold After Interest Expense and a reconciliation of return on homes sold after interest expense to Homes segment gross profit (in thousands, except average per home amounts, unaudited):
Calculation of Average Gross Profit per Home
Three Months Ended
September 30, 2019
Homes segment revenue
$
384,626

Homes segment cost of revenue
370,796

Homes segment gross profit
$
13,830

Homes sold
1,211

Average gross profit per home
$
11,420

Reconciliation of Non-GAAP Measure to Nearest GAAP Measure
 
Homes segment gross profit
$
13,830

Holding costs included in sales and marketing (1)
(4,634
)
Selling costs included in sales and marketing (2)
(16,835
)
Interest expense (3)
(5,708
)
Inventory valuation adjustments and indirect expenses included in cost of revenue (4)
7,153

Share-based compensation expense and depreciation and amortization expense included in cost of revenue
350

Return on homes sold after interest expense
$
(5,844
)
Homes sold
1,211

Average return on homes sold after interest expense
$
(4,826
)
(1) Amount represents holding costs incurred related to homes sold in the current period that were not eligible for inventory capitalization and were therefore expensed as period costs in the current period and prior periods. These costs primarily include homeowners association dues, property taxes, insurance, utilities, and cleaning and maintenance costs incurred during the time a home is held for sale after the renovation period is complete. On a GAAP basis, the Company incurred a total of $7.7 million of holding costs included in sales and marketing expense for the period presented.
(2) Amount represents selling costs incurred related to homes sold in the current period that were not eligible for inventory capitalization and were therefore expensed as period costs in the current period. These costs primarily include agent commissions paid upon the sale of a home.
(3) Amount represents interest expense incurred related to homes sold in the current period that was not eligible for inventory capitalization and was therefore expensed as a period cost in the current period and prior periods.
(4) Amount includes inventory valuation adjustments recorded during the period associated with homes that remain in inventory at period end, net of inventory valuation adjustments recorded in prior periods related to homes sold in the current period, as well as corporate costs allocated to the Homes segment such as headcount expenses and hosting-related costs related to the operation of our website.





On a GAAP basis, Homes segment average gross profit per home was $11,645 for the nine months ended September 30, 2019.

The following table presents the total return on homes sold after interest expense and the Average Return on Homes Sold After Interest Expense for the period presented (in thousands, except average per home amounts, unaudited):
 
 
 
Nine Months Ended
September 30, 2019
 
 
 
Total
 
Average
Per Home
Homes sold
 
 
2,411

 
 
Homes revenue
 
 
$
762,022

 
$
316,061

Operating costs:
 
 
 
 
 
Home acquisition costs (1)
 
 
689,508

 
285,984

Renovation costs (1)
 
 
29,614

 
12,283

Holding costs (1)(2)
 
 
8,441

 
3,501

Selling costs
 
 
33,053

 
13,709

Total operating costs
 
 
760,616

 
315,477

Interest expense (1)(2)
 
 
10,895

 
4,519

Return on homes sold after interest expense
 
 
$
(9,489
)
 
$
(3,935
)
(1) Amount excludes expenses incurred during the period that are not related to homes sold during the period.
(2) Holding costs and interest expense include $0.9 million and $1.0 million, respectively, of costs incurred in prior periods associated with homes sold during the current period.





The following table presents the calculation of Homes segment average gross profit per home and Average Return on Homes Sold After Interest Expense and a reconciliation of return on homes sold after interest expense to Homes segment gross profit (in thousands, except average per home amounts, unaudited):
Calculation of Average Gross Profit per Home
Nine Months Ended
September 30, 2019
Homes segment revenue
$
762,022

Homes segment cost of revenue
733,947

Homes segment gross profit
$
28,075

Homes sold
2,411

Average gross profit per home
$
11,645

Reconciliation of Non-GAAP Measure to Nearest GAAP Measure
 
Homes segment gross profit
$
28,075

Holding costs included in sales and marketing (1)
(8,441
)
Selling costs included in sales and marketing (2)
(33,053
)
Interest expense (3)
(10,895
)
Inventory valuation adjustments and indirect expenses included in cost of revenue (4)
14,376

Share-based compensation expense and depreciation and amortization expense included in cost of revenue
449

Return on homes sold after interest expense
$
(9,489
)
Homes sold
2,411

Average return on homes sold after interest expense
$
(3,935
)
(1) Amount represents holding costs incurred related to homes sold in the current period that were not eligible for inventory capitalization and were therefore expensed as period costs in the current period and prior periods. These costs primarily include homeowners association dues, property taxes, insurance, utilities, and cleaning and maintenance costs incurred during the time a home is held for sale after the renovation period is complete. On a GAAP basis, the Company incurred a total of $14.3 million of holding costs included in sales and marketing expense for the period presented.
(2) Amount represents selling costs incurred related to homes sold in the current period that were not eligible for inventory capitalization and were therefore expensed as period costs in the current period. These costs primarily include agent commissions paid upon the sale of a home.
(3) Amount represents interest expense incurred related to homes sold in the current period that was not eligible for inventory capitalization and was therefore expensed as a period cost in the current period and prior periods.
(4) Amount includes inventory valuation adjustments recorded during the period associated with homes that remain in inventory at period end, net of inventory valuation adjustments recorded in prior periods related to homes sold in the current period, as well as corporate costs allocated to the Homes segment such as headcount expenses and hosting-related costs related to the operation of our website.