Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
 
Commission File Number: 001-38160

 
Redfin Corporation
 
 
(Exact name of registrant as specific in its charter)
 

 
Delaware
 
74-3064240
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
1099 Stewart Street, Suite 600
Seattle, WA
 
98101
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
(206) 576-8333
 
 
(Registrant's telephone number, including area code)
 

 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Name of each exchange on which registered
 
 
Common Stock, $0.001 par value per share
 
The Nasdaq Global Select Market
 
 
 
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes
¨ No
 
 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
¨ Yes
þ No

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 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.
þ Yes
¨ 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).
þ Yes
¨ No
 
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
 
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
þ No

As of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant's common stock held by its non-affiliates, computed by reference to the price at which the common stock was last sold, was $1,755,832,823.
As of February 1, 2019, there were 90,488,242 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The portions of the registrant's proxy statement to be filed in connection with the registrant’s 2019 Annual Meeting of Stockholders that are responsive to the disclosure required by Part III of Form 10-K are incorporated by reference into Part III of this Form 10-K.




Redfin Corporation

Annual Report on Form 10-K
For the Year Ended December 31, 2018

Table of Contents
 
 
 
PART I
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
Item 16.
 
 
 
 
 




As used in this Annual Report on Form 10-K, the terms "Redfin," "the Company," "we," "us," and "our" refer to Redfin Corporation and its subsidiaries taken as a whole, unless otherwise noted or unless the context indicates otherwise.

Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Item 1A of this Annual 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 future events and trends 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. Accordingly, 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, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this report or to conform these statements to actual results or revised expectations.

Note Regarding Industry and Market Data

This Annual Report on Form 10-K contains information using industry publications that generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. While we are not aware of any misstatements regarding the information from these industry publications, we have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied on therein.




PART I

Item 1. Business

Overview

We help people buy and sell homes. Our primary business is a residential real estate brokerage, representing customers in over 85 markets throughout the United States and Canada. We pair our own agents with our own technology to create a service that is faster, better, and costs less. We meet customers through our listings-search website and mobile application.

We use the same combination of technology and local service to originate mortgage loans and offer title and settlement services; we also buy homes directly from consumers who want an immediate sale, taking responsibility for selling the home while the original owner moves on.

Our mission is to redefine real estate in the consumer’s favor.
    
Representing Customers

Our brokerage efficiency results in savings that we share with our customers. Our homebuyers saved on average over $2,100 per transaction in 2018. And we charge most home sellers a commission of 1% to 1.5%, compared to the 2.5% to 3% typically charged by traditional brokerages.

The results of our customer-first approach are clear. We:
helped customers buy or sell more than 170,000 homes worth more than $85 billion through 2018;
drew more than 27 million monthly average visitors to our website and mobile application in 2018, 21% more compared to 2017;
earned a net promoter score, which is a measure of customer satisfaction, that was 49% higher than competing brokerages, as measured by a study we commissioned in November 2018;
had customers return to us for another transaction at a 58% higher rate than competing brokerages;
sold Redfin-listed homes for nearly $2,800 more on average compared to the list price than competing brokerages’ listings in 2018, according to a study we commissioned;
had listings on the market for an average of 33 days in 2018 compared to the industry average of 37 days, according to a study we commissioned; and according to the same study approximately 83% of Redfin listings sold within 90 days versus the industry average of approximately 80%; and
employed lead agents who, in 2018, were on average three times more productive and earned a median income that was twice as much as agents at competing brokerages; our lead agents were also 24% more likely to stay with us from 2017 to 2018 than agents at competing brokerages.

To serve customers when our own agents can’t due to high demand or geographic limitations, we’ve developed partnerships with over 3,000 agents at other brokerages. Once we refer a customer to a partner agent, that agent, not us, represents the customer from the initial meeting through closing, at which point the agent pays us a portion of her commission as a referral fee.

Complete Customer Solution


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Our long-term goal is to combine brokerage, mortgage, title services, and instant offers into one solution, sharing information, coordinating deadlines, and streamlining processes so that a consumer's move is easier and often less costly. As we integrate these services more closely over time, we believe we can help consumers move much more efficiently than a combination of stand-alone brokerages, mortgage lenders, and title companies ever could.

Redfin Mortgage underwrites mortgage loans according to investor guidelines and, after originating each loan, Redfin Mortgage sells the loans to those investors. Redfin Mortgage does not intend to retain or service mortgage loans. As of December 31, 2018, Redfin Mortgage accepted applications from customers in Colorado, Georgia, Illinois, Minnesota, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, and the District of Columbia.

We offer title and settlement services through Title Forward. As of December 31, 2018, Title Forward operated in Colorado, Florida, Georgia, Illinois, Maryland, Minnesota, New Jersey, Pennsylvania, Tennessee, Texas, Virginia, Wisconsin, and the District of Columbia.

We buy homes directly from homeowners and resell them to homebuyers through RedfinNow. Customers who sell through RedfinNow typically get less money for their home than they would listing their home with a real estate agent. However, they get that money faster with less risk and fuss. In July 2018, we expanded our RedfinNow service from an experiment to a long-term customer offering. As of December 31, 2018, we had launched RedfinNow in the metropolitan areas of Inland Empire, Orange County, and San Diego.

Competition

The residential brokerage industry is highly fragmented, with numerous active licensed agents and brokerages, and is evolving rapidly in response to technological advancements, changing customer preferences, and new offerings. We compete primarily against other residential real estate brokerages, which include franchise operations affiliated with national or local brands, and small independent brokerages. We also compete with hybrid residential brokerages, which combine Internet technology and brokerage services, and a growing number of others that operate with non-traditional real estate business models. Competition is particularly intense in some of the densely populated metropolitan markets we serve, as they are dominated by entrenched real estate brokerages and are the primary markets for innovative and well-capitalized new entrants.

We believe we compete primarily based on:
access to timely, accurate data about homes for sale;
traffic to our website and mobile application, which themselves are subject to competition against real estate data websites that aggregate listings and sell advertising to traditional brokers;
the speed and quality of our service, including agent responsiveness and local knowledge;
our ability to hire and retain agents who deliver the best customer service;
the costs of delivering our service and the price of our service to consumers;
consumer awareness of our service and the effectiveness of our marketing efforts;
technological innovation; and
depth and breadth of local referral networks.


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For mortgage origination, we compete with numerous national and local multi-product banks as well as focused mortgage originators. We compete with other providers based primarily on product selection, interest rates, origination fees, and service.

For title and settlement services, we compete with numerous national and local companies that typically focus solely on these services. We compete primarily on fees and timeliness of service.

Our RedfinNow service competes with real estate companies whose primary service is buying and selling homes, and home rental companies that purchase homes and then rent them. We also compete with divisions of several residential real estate companies and a real estate data website. We compete primarily on the prices we offer customers to buy their homes.

Seasonality and Principal Markets

For the impact of seasonality on our business, see "Quarterly Results of Operations and Key Business Metrics" under Item 7 of this Annual Report on Form 10-K. For the principal markets for our brokerage business, see "Key Business Metrics-Revenue from Top-10 Markets as a Percentage of Real Estate Services Revenue" under Item 7 of this Annual Report.

Other Information

We were incorporated as Appliance Computing Inc. in Washington in October 2002. We reincorporated in Delaware in February 2005 and changed our name to Redfin Corporation in May 2006.

We regard our trademarks, copyrights, patents, domain names, trade secrets, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade-secret protection, and contractual provisions and restrictions to protect our proprietary rights. Our patents expire between June 2025 and February 2034.

As of December 31, 2018, we had 2,993 employees.

Our website is www.redfin.com. Through this website, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we file such material with, or furnish it to, the U.S. Securities and Exchange Commission.


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Item 1A. Risk Factors

You should carefully consider the risks described below, together with all other information in this Annual Report on Form 10-K, before investing in any of our securities. The occurrence of any single risk or any combination of risks could materially and adversely affect our business, operating results, financial condition, liquidity, or competitive position, and consequently, the value of our securities. The material adverse effects include, but are not limited to, not growing our revenue or market share at the pace that they have grown historically or at all, our revenue and market share fluctuating on a quarterly and annual basis, an extension of our history of losses and a failure to become profitable, not achieving the revenue and net income (loss) guidance that we provide, and harm to our reputation and brand.

Risks Related to Our Business and Industry

The health of the U.S. residential real estate industry and macroeconomic factors may significantly impact our business.

Our success depends largely on the health of the U.S. residential real estate industry. This industry, in turn, is affected by changes in general economic conditions, which are beyond our control. Any of the following factors could adversely affect the industry and harm our business:
seasonal or cyclical downturns in the U.S. residential real estate industry, which may be due to any single factor, or a combination of factors, listed below, or factors which are currently not known to us or that have not historically affected the industry;
slow economic growth or recessionary conditions;
increased unemployment rates or stagnant or declining wages;
inflationary conditions;
low consumer confidence in the economy or the U.S. residential real estate industry;
adverse changes in local or regional economic conditions in the markets that we serve, particularly our top-10 markets and markets into which we are attempting to expand;
increased mortgage rates; reduced availability of mortgage financing; or increased down payment requirements;
low home inventory levels, which may result from zoning regulations and higher construction costs, among other factors;
lack of affordably priced homes, which may result from home prices growing faster than wages;
volatility and general declines in the stock market or lower yields on individuals' investment portfolios;
newly enacted and potential federal and state legislative actions that would adversely affect the U.S. residential real estate industry, such as (i) the Tax Cuts and Jobs Act, which was signed into law in December 2017 and limited deductions of certain mortgage interest expenses and property taxes and (ii) potential reform relating to Fannie Mae, Freddie Mac, and other government sponsored entities that provide liquidity to the mortgage market;
changes that cause U.S. real estate to be more expensive for foreign purchases, such as (i) increases in the exchange rate for the U.S. dollar compared to foreign currencies and (ii)

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foreign regulatory changes or capital controls that make it more difficult for foreign purchasers to withdraw capital from their home countries or purchase and hold U.S. real estate;
changed generational views on homeownership and generally decreased financial resources available for purchasing homes; and
war, terrorism, political uncertainty, natural disasters, inclement weather, and acts of God.

Our business is concentrated in certain geographic markets. Disruptions in these markets or events that disproportionately affect those markets could harm our business. Furthermore, our failure to adapt to any substantial shift in the relative percentage of residential housing transactions from those markets to other markets in the United States could adversely affect our financial performance.

For the year ended December 31, 2018, our top-10 markets consisted of the metropolitan areas of Boston, Chicago, Denver (including Boulder and Colorado Springs), Los Angeles (including Santa Barbara), Maryland, Northern Virginia, Portland (including Bend), San Diego, San Francisco, and Seattle.

Local and regional economic conditions in these markets may differ significantly from prevailing conditions in the United States or other parts of the country. Accordingly, events may adversely and disproportionately affect demand for and sales prices of homes in these markets. Any overall or disproportionate downturn in demand or home prices in any of our largest markets, particularly if we are unable to increase revenue from our other markets, could result in a decline in our revenue and harm our business.

Our top markets are primarily major metropolitan areas, where home prices and transaction volumes are generally higher than other markets. As a result, our real estate services revenue and gross margin are generally higher in these markets than in our smaller markets. To the extent people migrate to cities outside of these markets due to lower home prices or other factors, and this migration continues to take place over the long-term, then the relative percentage of residential housing transactions may shift away from our historical top markets where we have historically generated most of our revenue. If we are unable to effectively adapt to any shift, including failing to increase revenue from other markets, then our financial performance may be harmed.

Competition in each of our lines of business is intense, and if we cannot compete effectively, our business will be harmed.

We face intense competition nationally and in each of the markets we serve for each of our businesses - residential brokerage, mortgage, title and escrow, and buying and selling homes directly. Please see "Competition" under Item 1 of this Annual Report for a general discussion of the competitive conditions in each of our businesses.

Many of our competitors across each of our businesses have substantial competitive advantages, such as longer operating histories, stronger brand recognition, greater financial resources, more management, sales, marketing and other resources, superior local referral networks, perceived local knowledge and expertise, and extensive relationships with participants in the residential real estate industry, including third-party data providers such as multiple listing services, or MLSs. Consequently, these competitors may have an advantage in recruiting and retaining agents, attracting consumers, and growing their businesses. They may also be able to provide consumers with offerings that are different from or superior to those we provide. The success of our competitors could result in our loss of market share and harm our business.

Each of our businesses also faces competition from potential new entrants, particularly those driven by technology. These potential competitors may have substantial financial support that allows them to offer

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services superior to ours. The introduction of additional competitors may also adversely impact our market share and harm our business.

We may be unable to maintain or improve our current technology offerings at a competitive level or develop new technology offerings that meet customer or agent expectations. Our technology offerings may also contain undetected errors or vulnerabilities.

Our technology offerings, including tools, features, and products, are key to our competitive plan for attracting potential customers and hiring and retaining lead agents. Maintaining or improving our current technology to meet evolving industry standards and customer and agent expectations, as well as developing commercially successful and innovative new technology, is challenging and expensive. For example, the nature of development cycles may result in delays between the time we incur expenses and the time we introduce new technology and generate revenue, if any, from those investments. Anticipated customer demand for a technology offering could also decrease after the development cycle has commenced, and we would not be able to recoup costs, which may be substantial, we incurred.

As standards and expectations evolve and new technology becomes available, we may not be able to identify, design, develop, and implement, in a timely and cost-effective manner, new technology offerings to meet those standards and expectations. As a result, we may be unable to compete effectively, and to the extent our competitors develop new technology offerings faster than us, they may render our offerings noncompetitive or obsolete. Additionally, even if we implemented new technology offerings in a timely manner, our customers and agents may not accept or be satisfied by the offerings.

Furthermore, our development and testing processes may not detect errors and vulnerabilities in our technology offerings prior to their implementation. Any inefficiencies, errors, technical problems, or vulnerabilities arising in our technology offerings after their release could reduce the quality of our services or interfere with our customers' and agents' access to and use of our technology and offerings.

We may be unable to obtain and provide comprehensive and accurate real estate listings quickly, or at all.

We believe that users of our website and mobile application come to us primarily because of the real estate listing data that we provide. Accordingly, if we were unable to obtain and provide comprehensive and accurate real estate listings data, our primary channels for meeting customers will be diminished. We get listings data primarily from MLSs in the markets we serve. We also source listings data from public records, other third-party listing providers, and individual homeowners and brokers. Many of our competitors and other real estate websites also have access to MLSs and other listings data, including proprietary data, and may be able to source listings data or other real estate information faster or more efficiently than we can. Since MLS participation is voluntary, brokers and homeowners may decline to post their listings data to their local MLS or may seek to change or limit the way that data is distributed. A competitor or another industry participant could also create an alternative listings data service, which may reduce the relevancy and comprehensive nature of the MLSs. If MLSs cease to be the predominant source of listings data in the markets that we serve, we may be unable to get access to comprehensive listings data on commercially reasonable terms, or at all, which may result in fewer people using our website and mobile application.

We rely on business data to make decisions and drive our machine-learning technology, and errors or inaccuracies in such data may adversely affect our business decisions and the customer experience.

We regularly analyze business data to evaluate growth trends, measure our performance, establish budgets, and make strategic decisions. Much of this data is internally generated and has not been independently verified. While our business decisions are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring and interpreting the data, and we cannot be certain that the data are accurate. Errors or inaccuracies in the data could result in poor business decisions, resource allocation, or strategic initiatives. For example, if we

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overestimate traffic to our website and mobile application, we may not invest an adequate amount of resources in attracting new customers or we may hire more lead agents in a given market than necessary to meet customer demand.

We also use our business data and proprietary algorithms to inform our machine learning, such as in the calculation of our Redfin Estimate, which provides an estimate on the market value of individual homes. If customers disagree with us or if our Redfin Estimate fails to accurately reflect market pricing such that we are unable to attract homebuyers or help our customers sell their homes at satisfactory prices, or at all, customers may lose confidence in us.

We may be unable to attract homebuyers and home sellers to our website and mobile application in a cost-effective manner.

Our website and mobile application are our primary channels for meeting customers. Accordingly, our success depends on our ability to attract homebuyers and home sellers to our website and mobile application in a cost-effective manner. To meet customers, we rely heavily on traffic generated from search engines and downloads of our mobile application from mobile application stores. We also rely on marketing methods such as search engine optimization, targeted email campaigns, paid search advertising, social media marketing, and traditional media, including TV, radio, and billboard. In 2019 we intend to significantly increase our spending on mass media marketing.

The number of visitors to our website and mobile application downloads depends in large part on how and where our website and mobile application rank in Internet search results and mobile application stores, respectively. While we use search engine optimization to help our website rank highly in search results, maintaining or improving our search result rankings is not within our control. Internet search engines frequently update and change their ranking algorithms, referral methodologies, or design layouts, which determine the placement and display of a user’s search results. In some instances, Internet search engines may change these rankings in order to promote their own competing services or the services of one or more of our competitors. Similarly, mobile application stores can change how they display searches and how mobile applications are featured. For instance, editors at the Apple iTunes Store can feature prominently editor-curated mobile applications and cause the mobile application to appear larger than other applications or more visibly on a featured list.

Our marketing efforts, including our increased investment in mass media marketing in 2019, may fail to attract the desired number of additional customers. They may fail because, for example, the creative treatment for our advertisements may be ineffective or consumers may have find our advertisements offensive. Our efforts may also not succeed for reasons beyond our control, such as email providers implementing new or more restrictive email delivery policies and thereby making it more difficult for us to execute targeted email campaigns. Additionally, the paid advertising platforms that we use may raise their rates significantly, and, to the extent we choose to not pay the higher rates, we may use alternative platforms that may not be as effective. Furthermore, to the extent the social media platforms through which we advertise lose users or have users engaged at a less frequent rate, then our social media marketing may not produce the desired results.

To the extent we are unable to attract homebuyers and home sellers to our website and mobile applications through the methods described above or can do so only at a significant expense, our business may be harmed.

If we are unable to deliver a rewarding experience on mobile devices, whether through our mobile website or mobile application, we may be unable to attract and retain customers.

Developing and supporting a mobile website and mobile application across multiple operating systems and devices requires substantial time and resources. We may not be able to consistently provide a rewarding customer experience on mobile devices and, as a result, customers we meet through our mobile

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website or mobile application may not choose to use our services at the same rate as customers we meet through our website.

As new mobile devices and mobile operating systems are released, we may encounter problems in developing or supporting our mobile website or mobile application for them. Developing or supporting our mobile website or mobile application for new devices and their operating systems may require substantial time and resources. The success of our mobile website and mobile application could also be harmed by factors outside our control, such as:
increased costs to develop, distribute, or maintain our mobile website or mobile application;
changes to the terms of service or requirements of a mobile application store that requires us to change our mobile application development or features in an adverse manner; and
changes in mobile operating systems, such as Apple’s iOS and Google’s Android, that disproportionately affect us, degrade the functionality of our mobile website or mobile application, require that we make costly upgrades to our technology offerings, or give preferential treatment to competitors' websites or mobile applications.

Our business model of employing lead agents subjects us to challenges not faced by our competitors.

As a result of our business model of employing our lead agents, our lead agents generally earn less on a per transaction basis than traditional agents who work as independent contractors at traditional brokerages. Because our model is uncommon in our industry, agents considering working for us may not understand our compensation model or may not perceive it to be more attractive than the independent contractor, commission-driven compensation model used by most traditional brokerages. If we‘re unable to attract, retain, effectively train, motivate, and utilize lead agents, we will be unable to grow our business and we may be required to significantly increase our lead agent compensation or other costs, which could harm our business.

Also as a result of employing our lead agents, we incur costs that our brokerage competitors do not, such as base pay, employee benefits, expense reimbursement, training, and employee transactional support staff. As a result, we have significant costs that, in the event of downturns in demand in the markets we serve, we will not be able to adjust as rapidly as some of our competitors. In turn, such downturns may impact us more than our competitors. Additionally, due to these costs, our lead agent turnover may be more costly to us than to traditional brokerages. Our business may be harmed if we are unable to achieve the necessary level of lead agent productivity and retention to offset their related costs.

Referring customers to our partner agents or other third parties may harm our business.

We refer customers to third-party partner agents when we do not have a lead agent available due to high demand or geographic limitations. Our dependence on partner agents can be particularly heavy in certain new markets as we build our operations to scale in those markets. Our partner agents are independent licensed agents affiliated with other brokerages, and we do not have any control over their actions. If our partner agents were to provide diminished quality of customer service, engage in malfeasance, or otherwise violate the laws and rules to which we are subject, we may be subject to legal claims and our reputation and business may be harmed.

From time to time, we may enter into similar arrangements to refer consumers to other third parties when we are unable or unwilling to serve those consumers directly.

Our arrangements with third parties may limit our growth and brand awareness. For example, referring customers to partner agents potentially redirects repeat and referral opportunities to the partner agents. Any third-party arrangements may also dilute the effectiveness of our marketing efforts and may

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lead to consumer confusion or dissatisfaction when they are offered the opportunity to work with the third party rather than us.

If we do not comply with the rules, terms of service, and policies of MLSs, our access to and use of listings data may be restricted or terminated.

We must comply with an MLS’s rules, terms of service, and policies to access and use its listings data. We belong to numerous MLSs, and each has adopted its own rules, terms of service, and policies governing, among other things, how MLS data may be used and how listings data must be displayed on our website and mobile application. These rules typically do not contemplate multi-jurisdictional online brokerages like ours and vary widely among markets. They also are in some cases inconsistent with the rules of other MLSs such that we are required to customize our website, mobile application, or service to accommodate differences between MLS rules. Complying with the rules of each MLS requires significant investment, including personnel, technology and development resources, and the exercise of considerable judgment. If we are deemed to be noncompliant with an MLS’s rules, we may face disciplinary sanctions in that MLS, which could include monetary fines, restricting or terminating our access to that MLS’s data, or other disciplinary measures. The loss or degradation of this listings data could materially and adversely affect traffic to our website and mobile application, making us less relevant to consumers and restricting our ability to attract customers. It also could reduce agent and customer confidence in our services and harm our business.

If we fail to comply with the requirements governing the licensing of our brokerage, mortgage, and title businesses in the jurisdictions in which we operate, then our ability to operate those businesses in those jurisdictions may be revoked.

Redfin, as a brokerage, and our agents are required to comply with the requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses in the markets where we operate. Furthermore, we are also required to comply with the mortgage broker and title insurance agency licenses in the states where we operate our mortgage and title businesses, respectively. Due to the geographic scope of our operations, we and our agents may not be in compliance with all of the required licenses at all times. Additionally, if we enter into new markets, we may become subject to additional licensing requirements. If we or our agents fail to obtain or maintain the required licenses for conducting our brokerage, mortgage, and title businesses or fail to strictly adhere to associated regulations, the relevant government authorities may order us to suspend relevant operations or impose fines or other penalties.

Our decision to expand our service offerings into new markets may consume significant financial and other resources and may not achieve the desired results.

We regularly evaluate expanding our brokerage and non-brokerage services into new markets. Any expansion may require significant expenses and the time of our key personnel, particularly at the outset of the expansion process. Expansion may also subject us to new regulatory environments, which could increase our costs as we evaluate compliance with the new regulatory regime. Notwithstanding the expenses and time devoted to expansion into a new market, we may fail to achieve the financial and market share goals associated with the expansion.

In January 2019, we announced plans to expand our operations into Canada. Canada is the first market outside of the United States where we will operate. Accordingly, we have no experience operating our business in a foreign country and lack experience complying with the regulatory environment of a foreign country. With this expansion, our business will become impacted by the macroeconomic factors affecting the Canadian residential real estate industry, as well the exchange rate between the U.S. dollar and the Canadian dollar. There is no assurance that our Canadian expansion will achieve the desired results that our management expects.

Expansion of our business to include non-brokerage services could fail to produce the desired results or harm our reputation.

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From time to time, we develop new services. Our current non-brokerage service offerings include Redfin Mortgage, our business of originating mortgage loans, Title Forward, our title and settlement business, and RedfinNow, our direct home purchase and resale business.

We have limited experience operating services outside of our brokerage business. Accordingly, we may not be able to operate any of our non-brokerage businesses at a profit. Our non-brokerage services may also fail to attract customers, reduce customer confidence in our brokerage business, undermine our customer-first reputation, create real or perceived conflicts of interest between us and our customers, expose us to increased market risks, or subject us to additional litigation.

In particular, in July 2018, we transitioned RedfinNow from an experimental offering to part of our long-term business. Our estimates of what a home is worth and the algorithm we use to inform those estimates may not be accurate and we may pay more for homes than their resale value. To determine whether a particular home meets our purchase criteria, we make a number of estimates, including the time of possession, market conditions and proceeds on resale, renovation costs, and holding costs. These estimates may not be accurate, especially in a declining real estate market. Additionally, unknown defects in any acquired homes may also affect their resale value. Furthermore, homes that we own might also suffer losses in value due to rapidly changing market conditions, natural disasters, or other forces outside our control. As a result, we may be required to write down the inventory value of homes and may not be able to resell homes for more than our costs of acquiring and renovating the homes, or at all.

We could be subject to significant losses if banks do not honor our escrow and trust deposits.

Through Title Forward, our title and settlement services business, we act as an escrow agent for numerous customers. As an escrow agent, we receive money from customers to hold until certain conditions are satisfied. Pending the satisfaction of the conditions, we deposit this money with various banks, but we remain contingently liable for the disposition of these deposits to the customer. The banks may hold a significant amount of these deposits in excess of the federal deposit insurance limit. If any of our depository banks were to become unable to honor any portion of our deposits when we require them for release to our customers, our customers could seek to hold us responsible for such amounts and, if the customers prevailed in their claims, we could be subject to significant losses.

We experience variability in our financial results and operating metrics on a quarterly and annual basis and, as a result, our historical performance may not be a meaningful indicator of future performance.

We historically have experienced, and expect to continue to experience, variability, on both a quarterly and annual basis, in our financial results and operating metrics. As a result of such variability, our historical performance, including from recent quarters or years, may not be a meaningful indicator of future performance and period-to-period comparisons also may not be meaningful. The variability may be due to the other risks described in this Item 1A, certain risks that are not currently material but may become material in the future, or risks currently unknown to us.

Cybersecurity incidents could disrupt our business or result in the loss of critical and confidential information.

Cybersecurity incidents directed at us or our third-party service providers can range from uncoordinated individual attempts to gain unauthorized access to information technology systems to sophisticated and targeted measures known as advanced persistent threats. Cybersecurity incidents are also constantly evolving, increasing the difficulty of detecting and successfully defending against them. In the ordinary course of our business, we and our third-party service providers collect and store sensitive data, including our proprietary business information and intellectual property and that of our customers and employees, including personally identifiable information. Additionally, we rely on third-parties and their security procedures for the secure storage, processing, maintenance, and transmission of information are

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critical to our operations. Despite measures designed to prevent, detect, address, and mitigate cybersecurity incidents, such incidents may occur to us or our third-party providers and, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption, or unavailability of critical data and confidential or proprietary information (our own or that of third parties, including personally identifiable information of our customers and employees) and the disruption of business operations. Any such compromises to our security, or that of our third-party providers, could cause customers to lose trust and confidence in us and stop using our website and mobile applications. In addition, we may incur significant costs for remediation that may include liability for stolen assets or information, repair of system damage, and compensation to customers, employees, and business partners. We may also be subject to government enforcement proceedings and legal claims by private parties.

We rely on third-party licensed technology, and the inability to maintain these licenses or errors in the software we license could result in increased costs or reduced service levels.

We employ certain third-party software obtained under licenses from other companies in our technology. Our reliance on this third-party software may become costly if the licensor increases the price for the license or changes the terms of use and we cannot find commercially reasonable alternatives. Even if we were to find an alternative, integration of our technology with new third-party software may require substantial investment of our time and resources.

Any undetected errors or defects in the third-party software we license could prevent the deployment or impair the functionality of our technology, delay new service offerings, or result in a failure of our website or mobile application.

We use open source software in some aspects of our technology and may fail to comply with the terms of one or more of these open source licenses.

Our technology incorporates software covered by open source licenses. The terms of various open source licenses have not been interpreted by U.S. courts, and if they were interpreted, such licenses could be construed in a manner that imposes unanticipated restrictions on our technology. If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in our use of such software, each of which could reduce or eliminate the value of our technologies.

Moreover, our processes for controlling our use of open source software may not be effective. If we do not comply with the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our services on terms that are not economically feasible, to re-engineer our technology to remove or replace the open source software, to discontinue the use of certain technology if re-engineering could not be accomplished on a timely basis, to pay monetary damages, to make generally available the source code for our proprietary technology, or to waive certain intellectual property rights.

We may be unable to secure intellectual property protection for all of our technology and methodologies or adequately enforce our intellectual property rights.

Our success and ability to compete depends in part on our intellectual property. To protect our proprietary rights, we rely on trademark, copyright, and patent law, trade-secret protection, and contractual provisions and restrictions. However, we may be unable to secure intellectual property protection for all of our technology and methodologies or the steps we take to enforce our intellectual property rights may be inadequate.

If we are unable to secure intellectual property rights, our competitors could use our intellectual property to market offerings similar to ours and we would have no recourse to enjoin or stop their actions. Additionally, any of our intellectual property rights may be challenged by others and invalidated through

11


administrative processes or litigation. Moreover, even if we secured our intellectual property rights, others may infringe on our intellectual property and we may be unable to successfully enforce our rights against the infringers because we may be unaware of the infringement or our legal actions may not be successful. If any of these events were to occur, our ability to compete effectively would be impaired.

The third-party networks and mobile infrastructure that we depend on may fail, and we may be unable to maintain and scale the technology underlying our offerings.

We depend on the reliable performance of third-party networks and mobile infrastructure to provide our technology offerings to our customers and agents. The proper operation of these networks and infrastructure is beyond our control, and if they fail, we may be unable to deliver our services to our customers or provide the necessary support for our agents.

As the number of homebuyers and home sellers, agents, and listings shared on our website and mobile application and the extent and types of data grow, our need for additional network capacity and computing power will also grow. Operating our underlying technology systems is expensive and complex, and we could experience operational failures. If we experience interruptions or failures in these systems for any reason, the security and availability of our services and technologies could be affected.

Our website is hosted at a single facility, the failure of which could interrupt our website and mobile application.

Our website and mobile application are hosted at a single facility in Seattle, Washington. If this facility experiences outages or downtimes for any reason, including human error, natural disaster, power loss, telecommunications failure, physical or electronic break-ins, terrorist attack, or act of war, we could suffer a significant interruption of our website and mobile application while we implement the disaster recovery procedures we have developed to restore the function of our website and mobile application on a cloud-based hosting service. This service interruption may be extended if we discover previously unknown errors in our disaster recovery procedures.

We are subject to a variety of federal, state and local laws, and our compliance with these laws, or the enforcement of our rights under these laws, may increase our expenses, require management's resources, or force us to change our business practices.

We are currently subject to a variety of, and may in the future become subject to additional, federal, state, and local laws. The laws include, but are not limited to, those relating to real estate, brokerage, title, mortgage, advertising, privacy and consumer protection, labor and employment, and intellectual property. These laws and their related regulations may evolve frequently and may be inconsistent from one jurisdiction to another. In some cases, it is unclear how certain laws may affect us based on our business model that is unlike traditional brokerages and the fact that those laws and regulations were created for traditional real estate brokerages.

These laws can be costly for us to comply with or enforce. Additionally, if we are unable to comply with and become liable for violations of these laws, or if courts or regulatory bodies provide unfavorable interpretations of existing regulations, our operations in affected markets may become prohibitively expensive, consume significant amounts of management's time, or need to be discontinued.

Data protection legislation is also becoming increasingly common in the United States at both the federal and state level. For example, the recently passed California Consumer Privacy Act, or the CCPA, to take effect on January 1, 2020 as currently enacted, is still in development and has the potential to impose additional onerous privacy requirements on companies serving California consumers, including us. We will need to carefully consider the compliance mandates of the California law as well as similar state or federal laws or interpretations currently being proposed. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data. The burdens imposed by the CCPA and other

12


similar laws that may be enacted at the federal and state level may require us to modify our data processing practices and policies and to incur substantial expenditure to comply.

We are subject to costs associated with defending and resolving proceedings brought by government entities and claims brought by private parties.

We are from time to time involved in, and may in the future be subject to, government investigations or enforcement actions and third-party claims arising from the laws to which we are subject or the contracts to which we are a party. Item 3 of this Annual Report on Form 10-K describes some of these types of investigations, actions, and claims. Any such investigations, actions, or claims can be costly to defend or resolve, require significant time from management, or result in negative publicity. Furthermore, to the extent we are unsuccessful in defending an action or claim, we may be subject to civil or criminal penalties, including significant fines or damages, the loss of ability to operate in a jurisdiction, or the need to change certain business practices (including redesigning, or obtaining a license for, our technology or modifying or ceasing to offer certain services).

We have, in the past, been the subject of complaints alleging that we had misclassified third-party licensed sales associates as independent contractors instead of employees. The complaints generally sought compensation for unpaid wages, overtime, and failure to provide meal and rest periods, as well as reimbursement of business expenses. While we settled these complaints, we may be subject to additional lawsuits or administrative proceedings claiming that certain of our independent contractor associate agents should be classified as our employees rather than as independent contractors. These lawsuits and proceedings typically seek substantial monetary damages (including claims for unpaid wages, overtime, and unreimbursed business expenses), injunctive relief, or both.

We have, in the past, been the subject of complaints alleging that we had improperly classified certain of our employees as exempt from minimum wage and overtime laws. The legal tests for determining overtime exemptions consider many factors that vary from state to state and have evolved based on case law, regulations, and legislative changes, as well as complicated factual analysis. We may be subject to additional complaints or administrative proceedings regarding our employee classification.

If we fail to maintain an effective system of disclosure controls or internal control over financial reporting, we may not be able to produce timely and accurate financial statements.

We have established, and intend to maintain, effective disclosure controls and internal control over financial reporting. As a newly public company, we have not historically been required to maintain the effectiveness of these types of control systems. If we fail to maintain effective disclosure controls or internal control over financial reporting, we could fail to meet our financial reporting obligations, may be required to restate previously issued financial statements, or cause investors to lose confidence in our reported financial statements, even after we remedy the failure.

Some of our potential losses may not be covered by insurance. We may not be able to obtain or maintain adequate insurance coverage.

We maintain insurance to cover costs and losses from certain risk exposures in the ordinary course of our operations, but our insurance may not cover one hundred percent of the costs and losses from all events. We are responsible for certain retentions and deductibles that vary by policy, and we may suffer losses that exceed our insurance coverage limits by a material amount. We may also incur costs or suffer losses arising from events against which we have no insurance coverage. In addition, large-scale market trends or the occurrence of adverse events in our business may raise our cost of procuring insurance or limit the amount or type of insurance we are able to secure. We may not be able to maintain our current coverage, or obtain new coverage, in the future on commercially reasonable terms or at all. Incurring uninsured or underinsured costs or losses could harm our business.


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We intend to evaluate acquisitions or investments in third-party technologies and businesses, but we may not realize the anticipated benefits from, and may incur substantial costs related to, any acquisitions, mergers, joint ventures, or investments that we undertake.

As part of our business strategy, we regularly evaluate strategic opportunities, including acquisitions of or investment in third-party technologies and businesses. However, we may be unable to execute a strategic opportunity on a commercially reasonable basis or at all. To the extent we make an acquisition or investment, the transaction may not result in the intended benefits to our business or require us to record impairment charges associated with the acquisition. Furthermore, the process of integrating an acquired company, business, technology, or personnel into our company may subject us to additional costs and require substantial time from our management. Finally, we may assume liability for activities of the acquired company or business that existed prior to the acquisition but that did not become known until afterwards.

We depend on our senior management team to grow and operate our business, and if we are unable to hire, retain, manage, and motivate them, or if new members of our senior management team do not perform as we anticipate, our business may be harmed.

Our future success depends on our continued ability to identify, hire, develop, manage, motivate, and retain members of our senior management team, particularly those who have specialized skills and experience in technology fields and the residential real estate industry. We do not have employment agreements with any employee, including our senior management team, and we do not maintain key person life insurance for any employee. Any changes in our senior management team may be disruptive to our business. If we fail to retain or effectively replace members of our senior management team, or if our senior management team fails to work together effectively and to execute our plans and strategies, our business could be harmed.

Risks Relating to Ownership of Our Common Stock

Events unrelated to our performance may cause the trading price of our common stock to be volatile, and if such volatility results in litigation, then we may be subject to increased costs.

The trading price of our common stock may fluctuate significantly due to events beyond our control and unrelated to our performance, including:
the overall performance of the U.S. and global equity markets and the performance of the technology and real estate sectors;
announcements by our competitors of technical innovations, new business offerings, or changes in pricing;
negative publicity related to our service offerings;
rumors and market speculation involving us or our competitors; and
political uncertainty in the markets in which we operate, the threat or occurrence of war or terrorism, and acts of God.

If any such fluctuation causes our stock price to decrease, we may become subject to litigation as a result of the decreased price. If any litigation occurs, it could subject us to substantial costs, harm our reputation, and divert resources and the attention of management from our business.

If securities or industry analysts do not publish research or publish unfavorable research about our business, or if our financial results do not compare favorably to analysts' or investors' expectations, our stock price or trading volume could decline.


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The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our industry, and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or otherwise provide negative views of our stock, our stock price would likely decline. Additionally, if one or more of these analysts cease covering us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

Furthermore, many analysts who cover us publish quarterly and annual estimates for certain of our financial metrics. We do not assist analysts in preparing these estimates and have no control over the expectations that they set through their estimates. If our actual quarterly and annual financial results do not compare favorably to analysts' or investors' expectations, then our stock price could decline.

Sales of a substantial number of shares of our common stock, or the perception that they might occur, may cause the price of our common stock to decline.

We may need to raise capital in the future by selling shares of our common stock or securities convertible into our common stock. Additionally, our directors, executive officers, and significant stockholders may also sell their holdings of our common stock, in accordance with securities laws and our policies. Sales of a substantial number of shares of our common stock by us or our insiders, or the perception that these sales might occur, could cause the price of our common stock to decline.

Provisions in our organizational documents and under Delaware or Washington law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our restated certificate of incorporation and our restated bylaws may discourage, delay, or prevent a merger, acquisition, or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
establish a classified board of directors so that not all members of our board are elected at one time;
permit only the board of directors to establish the number of directors and fill vacancies on the board;
provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;
require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws, unless the amendment is approved by two-thirds of the board of directors;
authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan, also known as a “poison pill”;
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
do not permit cumulative voting; and

15


establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

Moreover, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances. These provisions prohibit a “target corporation” from engaging in any of a broad range of business combinations with any stockholder constituting an “acquiring person” for a period of five years following the date on which the stockholder became an “acquiring person.”

Any of these provisions of our organizational documents or Delaware or Washington law could, under certain circumstances, depress the market price of our common stock.

Our restated certificate of incorporation designates the Court of Chancery of the State of Delaware and the U.S. federal district courts as the sole and exclusive forums for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our restated certificate of incorporation provides that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware, or the Court of Chancery, will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our restated certificate of incorporation, or our restated bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our restated certificate of incorporation or our restated bylaws, or (iv) any action asserting a claim that is governed by the internal affairs doctrine, in each case subject to personal and subject matter jurisdiction requirements.

Our restated certificate of incorporation further provides that, unless we consent in writing to an alternative forum, the U.S. federal district courts will be the exclusive forum for any complaint asserting a cause of action arising under the Securities Act of 1933, subject to personal and subject matter jurisdiction requirements.

The foregoing choice of forum provisions may limit our stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or employees, which may discourage such lawsuits against us and our directors, officers, and employees even though an action, if successful, might benefit our stockholders.

Alternatively, if a court were to find these provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or claims, we may incur additional costs associated with resolving such matters in other jurisdictions. For example, a Delaware court recently ruled that exclusive forum provisions for claims under the Securities Act of 1933 are not enforceable as a matter of Delaware law and application of that ruling could result in such claims being litigated in one or more courts, including state courts. 

Risks Related to Our Indebtedness, Including Our Convertible Senior Notes

Conversion of our convertible senior notes may dilute the ownership interest of our stockholders or may otherwise depress the price of our common stock.

The conversion of some or all of our convertible senior notes may dilute the ownership interests of our stockholders. Upon conversion of our convertible senior notes, we have the option to pay or deliver, as

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the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock. If we elect to settle our conversion obligation in shares of our common stock or a combination of cash and shares of our common stock, any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could be used to satisfy short positions, or anticipated conversion of the notes into shares of our common stock could depress the price of our common stock.

Certain provisions in the indenture governing our convertible senior notes may delay or prevent an otherwise beneficial takeover attempt of us.

Certain provisions in the indenture governing our convertible senior notes may make it more difficult or expensive for a third party to acquire us. For example, the indenture will require us to repurchase our convertible senior notes for cash upon the occurrence of a fundamental change (as defined in the indenture) of us and, in certain circumstances, to increase the conversion rate for a holder that converts its notes in connection with a make-whole fundamental change. A takeover of us may trigger the requirement that we repurchase our convertible senior notes and/or increase the conversion rate, which could make it more costly for a potential acquirer to engage in such takeover. Such additional costs may have the effect of delaying or preventing a takeover of us that would otherwise be beneficial to investors.

Servicing our debt, including our convertible senior notes, will require a significant amount of cash. We may not have sufficient cash flow to make payments on our debt, and we may not have the ability to raise the funds necessary to settle conversions of our convertible senior notes or to repurchase our convertible senior notes upon a fundamental change, which could adversely affect our business, financial condition and results of operations.

Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including our senior convertible notes, depends on our future performance, which is subject to economic, financial, competitive and other factors that may be beyond our control. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition and business performance at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including our convertible senior notes or otherwise.

In addition, holders of our convertible senior notes have the right to require us to repurchase their notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest. Upon conversion of our convertible senior notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the notes being converted. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the notes surrendered therefor or at the time the notes are being converted. Our failure to repurchase our convertible senior notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the notes would constitute an event of default. If the repayment of any indebtedness were to be accelerated because of such event of default (whether under the notes or otherwise), we may not have sufficient funds to repay the indebtedness and repurchase the notes or make cash payments upon conversions thereof. An event of default under the indenture may lead to an acceleration of our convertible senior notes. Any such acceleration could result in our bankruptcy. In a bankruptcy, the holders of our convertible senior notes would have a claim to our assets that is senior to the claims of our equity holders.

In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;

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limit our flexibility in planning for, or reacting to, changes in our business and our industry;
place us at a disadvantage compared to our competitors who have less debt; and
limit our ability to borrow additional amounts for working capital and other general corporate purposes, including to fund possible acquisitions of, or investments in, complementary businesses, products, services and technologies.

Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.

The conditional conversion feature of our convertible senior notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of our convertible senior notes is triggered, holders of notes will be entitled to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

The accounting method for convertible debt securities that may be settled in cash at the option of the issuer, such as our convertible senior notes, could have a material effect on our reported financial results. In May 2008, the Financial Accounting Standards Board issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20.

Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as our convertible senior notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for our convertible senior notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at issuance, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component. As a result, we will be required to record a greater amount of non-cash interest expense as a result of the amortization of the discounted carrying value of the notes to their face amount over the term of the notes. We will report lower net income or greater loss in our financial results because ASC 470-20 will require interest to include both the amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the notes.

In addition, under certain circumstances, convertible debt instruments (such as our convertible senior notes) that may be settled entirely or partly in cash at the option of the issuer are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the notes, then our diluted earnings per share would be adversely affected.


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In addition to our existing convertible senior notes, we may still incur substantially more debt or take other actions which would intensify the risks discussed above.

We and our subsidiaries may incur substantial additional debt in the future, some of which may be secured debt. For instance, we may enter into additional loans or sources of capital to finance the operations of properties. We will not be restricted under the terms of the indenture governing our convertible senior notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing the notes that could have the effect of diminishing our ability to make payments on the notes when due.


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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease our principal executive office in Seattle, Washington and maintain numerous other office leases throughout the United States. As of the end of the period covered by this Annual Report on Form 10-K, our properties business owned 48 properties. We do not believe that any single office lease or any single property in inventory is material to our business, for purposes of Item 102 of Regulation S-K.

Item 3. Legal Proceedings

From time to time, we are involved in litigation, claims, and other proceedings arising in the ordinary course of our business. Such litigation and other proceedings may include, but are not limited to, actions or claims relating to employment law (including misclassification), intellectual property, privacy and consumer protection, the Real Estate Settlement Procedures Act of 1974, the Fair Housing Act of 1968 or other fair housing statutes, cybersecurity incidents, data breaches, and commercial or contractual disputes. They may also relate to ordinary-course brokerage disputes, including, but not limited to, failure to disclose property defects, failure to meet client legal obligations, commission disputes, personal injury or property damage claims, and vicarious liability based upon conduct of individuals or entities outside of our control, including partner agents and third-party contractor agents. We do not believe that any of our pending litigation, claims, and other proceedings is material to our business.

Item 4. Mine Safety Disclosures

None.


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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information, Holders of Record, and Dividends

Our common stock is listed on The Nasdaq Global Select Market under the symbol “RDFN.”

As of February 1, 2019, we had 281 holders of record of our common stock.

We have no intention of paying cash dividends in the foreseeable future.

Unregistered Sales of Securities

During the period covered by this Annual Report on Form 10-K, we have not sold any equity securities that were not registered under the Securities Act of 1933.

Use of IPO Proceeds    

On July 27, 2017, the U.S. Securities and Exchange Commission declared effective the Registration Statement on Form S-1 (file number 333-219093) for our initial public offering. There has been no change to the information provided under "Use of Proceeds" in Part II, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.

Purchases of Equity Securities

During the quarter ended December 31, 2018, there were no purchases of our common stock by or on behalf of us or any of our affiliated purchasers, as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.


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Item 6. Selected Financial Data

The selected financial data set forth below should be read in conjunction with the information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes in Item 8 of this Annual Report on Form 10-K.

 
As of and for Year Ended December 31,
 
2018(1)
 
2017
 
2016
 
2015
 
2014
 
(in thousands, except per share data)
Statements of Operations Data
 
 
 
 
 
 
 
 
 
Revenue
$
486,920

 
$
370,036

 
$
267,196

 
$
187,338

 
$
125,363

Cost of revenue
367,496

 
258,216

 
184,452

 
138,492

 
93,272

Total operating expenses
163,358

 
127,792

 
105,528

 
79,135

 
57,174

Loss from operations
(43,934
)
 
(15,972
)
 
(22,784
)
 
(30,289
)
 
(25,083
)
Net loss
(41,978
)
 
(15,002
)
 
(22,526
)
 
(30,236
)
 
(24,730
)
Accretion of redeemable convertible preferred stock

 
(175,915
)
 
(55,502
)
 
(102,224
)
 
(101,251
)
Net loss attributable to common stock—basic and diluted
(41,978
)
 
(190,917
)
 
(78,028
)
 
(132,460
)
 
(125,981
)
Net loss per share attributable to common stock—basic and diluted
(0.49
)
 
(4.47
)
 
(5.42
)
 
(9.87
)
 
(11.76
)
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and short-term investments
$
432,608

 
$
208,342

 
$
65,779

 
$
87,341

 
$
112,127

Inventory
22,694

 
3,382

 

 

 

Working capital
450,029

 
204,349

 
60,445

 
83,234

 
106,196

Total assets
542,821

 
281,955

 
133,477

 
125,054

 
142,113

Convertible senior notes, net
113,586

 

 

 

 

Redeemable convertible preferred stock

 

 
655,416

 
599,914

 
497,699

Total stockholders’ equity (deficit)
371,938

 
235,430

 
(563,734
)
 
(495,713
)
 
(370,595
)

(1) 2018 is presented on a different basis than prior periods due to a change in the accounting standard related to revenue recognition, but this change did not have a material impact on our financial results. See Note 1 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.


22


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Annual Report on Form 10-K. In particular, the disclosure contained in Item 1A of this Annual Report may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources.

The following discussion contains forward-looking statements, such as statements regarding our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations. Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements. The following discussion also contains information using industry publications. Please see "Note Regarding Industry and Market Data" for more information about relying on these industry publications.

When we use the term "basis points" in the following discussion, we refer to units of one‑hundredth of one percent.

Prior to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, we had one reportable segment ("Real estate") that reflected revenue derived from commissions and fees charged on real estate services transactions closed by us or partner agents representing customers in buying and selling homes. Beginning with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, we recognized a new reportable segment ("Properties") that reflects revenue from when we sell homes that we previously bought directly from homeowners. Concurrent with our recognition of the new "Properties" segment, we changed the name of our "Real estate" segment to "Real estate services." Prior to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, we included the results from our "Properties" segment as part of our "Other" segment. We have separated our "Properties" segment results from "Other" segment results for all periods presented.

Overview
We help people buy and sell homes. Our primary business is a residential real estate brokerage, representing customers in over 85 markets throughout the United States and Canada. We pair our own agents with our own technology to create a service that is faster, better, and costs less. We meet customers through our listings-search website and mobile application.
We use the same combination of technology and local service to originate mortgage loans and offer title and settlement services; we also buy homes directly from consumers who want an immediate sale, taking responsibility for selling the home while the original owner moves on.
Our mission is to redefine real estate in the consumer’s favor.

Key Business Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, develop financial forecasts, and make strategic decisions.

23


 
Year Ended December 31,
 
2018
 
2017
 
2016
Monthly average visitors (in thousands)
27,261

 
22,623

 
16,215

Real estate services transactions
 
 
 
 
 
Brokerage
42,954

 
35,038

 
25,868

Partner
11,608

 
10,755

 
9,482

Total
54,562

 
45,793

 
35,350

Real estate services revenue per transaction
 
 
 
 
 
Brokerage
$
9,459

 
$
9,429

 
$
9,436

Partner
2,229

 
1,971

 
1,719

Aggregate
7,921

 
7,677

 
7,366

Aggregate home value of real estate services transactions (in millions)
$
25,812

 
$
21,280

 
$
16,199

U.S. market share by value
0.81
%
 
0.67
%
 
0.54
%
Revenue from top-10 Redfin markets as a percentage of real estate services revenue
67
%
 
69
%
 
72
%
Average number of lead agents
1,390

 
1,023

 
763


Monthly Average Visitors
The number of, and growth in, visitors to our website and mobile application are important leading indicators of our business activity because these channels are the primary ways we meet customers. For a particular period, monthly average visitors refers to the average of the number of unique visitors to our website and mobile application for each of the months in that period. Monthly average visitors are influenced by, among other things, market conditions that affect interest in buying or selling homes, the level and success of our marketing programs, and seasonality. We believe we can continue to increase monthly visitors, which helps our growth.
Given the lengthy process to buy or sell a home, a visitor during one month may not convert to a revenue-generating customer until many months later, if at all.
When we refer to "monthly average visitors" for a particular period, we are referring to the average number of unique visitors to our website and our mobile application for each of the months in that period, as measured by Google Analytics, a product that provides digital marketing intelligence. Visitors are tracked by Google Analytics using cookies, with a unique cookie being assigned to each browser or mobile application on a device. For any given month, we count all of the unique cookies that visited our website or either our iOS or Android mobile application during that month; each such unique cookie is a unique visitor. If a person accesses our mobile application using different devices within a given month, each such mobile device is counted as a separate visitor for that month. If the same person accesses our website using an anonymous browser, or clears or resets cookies on his or her device, each access with a new cookie is counted as a new unique visitor for that month.

Real Estate Services Transactions
Increasing the number of real estate services transactions in which we or our partner agents represent homebuyers and home sellers is critical to increasing our revenue and, in turn, to achieving profitability. Real estate services transaction volume is influenced by, among other things, the pricing and quality of our services as well as market conditions that affect home sales, such as local inventory levels and mortgage interest rates. Real estate services transaction volume is also affected by seasonality and macroeconomic factors. We include a single transaction twice when we or our partner agents serve both the homebuyer and the home seller of a transaction.

Real Estate Services Revenue per Transaction

24


Real estate services revenue per transaction, together with the number of real estate services transactions, is a factor in evaluating business growth and determining pricing. Changes in real estate services revenue per transaction can be affected by, among other things, our pricing, the mix of transactions from homebuyers and home sellers, changes in the value of homes in the markets we serve, the geographic mix of our transactions, and the transactions we refer to partner agents.
We generally generate more real estate services revenue per transaction from representing homebuyers than home sellers. However, we believe that representing home sellers has unique strategic value, including the marketing power of yard signs and digital marketing campaigns, and the market effect of controlling listing inventory. To keep revenue per brokerage transaction about the same from year to year, we expect to reduce our commission refund to homebuyers if more of our brokerage transactions come from home sellers. From 2017 to 2018, the percentage of brokerage transactions from home sellers increased from slightly over 35% to slightly over 40%.
We calculate real estate services revenue per transaction by dividing brokerage, partner, or aggregate revenue, as applicable, by the corresponding number of real estate services transactions in any period.

Aggregate Home Value of Real Estate Services Transactions
The aggregate home value of real estate services transactions completed by our lead agents and of the real estate services transactions we refer to partner agents is an important indicator of the health of our business, because our revenue is largely based on a percentage of each home’s sale price. This metric is affected chiefly by the number of customers we serve, but also by changes in home values in the markets we serve. We include the value of a single transaction twice when we or our partner agents serve both the homebuyer and home seller of a transaction.

U.S. Market Share by Value
Increasing our U.S. market share by value is critical to our ability to grow our business and achieve profitability over the long term. We believe there is a significant opportunity to increase our share in the markets we currently serve.
We calculate the aggregate value of U.S. home sales by multiplying the total number of U.S. home sales by the mean sale price of these sales, each as reported by the National Association of Realtors, or NAR. We calculate our market share by aggregating the home value of real estate services transactions conducted by our lead agents or our partner agents. Then, in order to account for both the sell- and buy-side components of each transaction, we divide that value by two-times the estimated aggregate value of U.S. home sales.

Revenue from Top-10 Markets as a Percentage of Real Estate Services Revenue
Our top-10 markets by real estate services revenue are the metropolitan areas of Boston, Chicago, Denver (including Boulder and Colorado Springs), Los Angeles (including Santa Barbara), Maryland, Northern Virginia, Portland (including Bend), San Diego, San Francisco, and Seattle. We expect our revenue from top-10 markets to decline as a percentage of our total real estate services revenue over time.

Average Number of Lead Agents
The average number of lead agents, in combination with our other key metrics such as the number of brokerage transactions, is a basis for calculating agent productivity and is one indicator of the potential future growth of our business. We systematically evaluate traffic to our website and mobile application and customer activity to anticipate changes in customer demand, helping determine when and where to hire lead agents.

25


We calculate the average number of lead agents by taking the average of the number of lead agents at the end of each month included in the period.
Components of Our Results of Operations

Revenue
We generate revenue primarily from commissions and fees charged on real estate services transactions closed by our lead agents or partner agents, and from the sale of properties.
Real Estate Services Revenue
Brokerage RevenueBrokerage revenue consists of commissions earned on real estate services transactions closed by our lead agents. We recognize commission-based revenue on the closing of a transaction, less the amount of any commission refund or any closing-cost reduction, commission discount, or transaction-fee adjustment. Brokerage revenue is affected by the number of real estate services transactions we close, the mix of brokerage transactions, home-sale prices, commission rates, and the amount we give to customers.
Partner RevenuePartner revenue consists of fees partner agents pay us when they close referred transactions, less the amount of any payments we make to customers. We recognize these fees as revenue on the closing of a transaction. Partner revenue is affected by the number of partner transactions closed, home-sale prices, commission rates, and the amount we give to customers.
In December 2017, we stopped giving any portion of our referral fee to the customer.
Properties Revenue
Properties revenue is earned when we sell homes that we previously bought directly from homeowners. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home. RedfinNow is our primary properties offering.
Other Revenue
Other services revenue includes fees earned from mortgage banking services, title settlement services, Walk Score data services, and advertising.
Intercompany Eliminations
Intercompany eliminations represents revenue earned from transactions between operating segments which we eliminate in consolidating our financial statements.

Cost of Revenue and Gross Margin
Cost of revenue consists primarily of personnel costs (including base pay, benefits, and stock-based compensation), transaction bonuses, home-touring and field expenses, listing expenses, office and occupancy expenses, depreciation and amortization related to fixed assets and acquired intangible assets, and property costs related to our properties business. Property costs include the property purchase price, capitalized improvements, selling expenses directly attributable to the transaction, and property maintenance expenses.
Gross profit is revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has and will continue to be affected by a number of factors, but the most important are: the mix of revenue across our segments, real estate services revenue per

26


transaction, agent and support-staff productivity, personnel costs and transaction bonuses, and the cost of properties relative to their final sales price.

Operating Expenses
Technology and Development
Our primary technology and development expenses are building software for our customers and employees to work together buying and selling homes, and building a website and mobile application to meet customers looking to move. These expenses consist primarily of personnel costs including stock-based compensation, data-license expenses, software costs, and equipment and infrastructure costs, such as for data centers and hosted services. Technology and development expenses also include amortization of capitalized internal-use software and website and mobile application development costs.
Marketing
Marketing expenses consist primarily of media costs for online and offline advertising, as well as personnel costs including stock-based compensation. We expect to increase offline advertising media costs to approximately $37 million to $47 million in 2019, compared to around $12 million in 2018.
General and Administrative
General and administrative expenses consist primarily of personnel costs including stock-based compensation, facilities costs and related expenses for our executive, finance, human resources, and legal organizations, depreciation related to our fixed assets, and fees for outside services. Outside services are principally comprised of external legal, audit, and tax services.
Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents and short-term investments. During the year ended December 31, 2018, we did not have any short-term investments.
Interest Expense
Interest expense consists of interest payable on our convertible senior notes, which we issued in July 2018. Interest is payable on the notes at the rate of 1.75% semiannually in arrears on January 15 and July 15, commencing on January 15, 2019. Interest expense also includes the amortization of debt discount and issuance costs related to the notes.
Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods.


27


 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in thousands)
Revenue
$
486,920

 
$
370,036

 
$
267,196

Cost of revenue(1)
367,496

 
258,216

 
184,452

Gross profit
119,424

 
111,820

 
82,744

Operating expenses:
 
 
 
 
 
Technology and development(1)
53,797

 
42,532

 
34,588

Marketing(1)
44,061

 
32,251

 
28,571

General and administrative(1)
65,500

 
53,009

 
42,369

Total operating expenses
163,358

 
127,792

 
105,528

Loss from operations
(43,934
)
 
(15,972
)
 
(22,784
)
Interest income
5,416

 
882

 
173

Interest expense
(3,681
)
 

 

Other income, net
221

 
88

 
85

Net loss
$
(41,978
)
 
$
(15,002
)
 
$
(22,526
)

(1) Includes stock-based compensation as follows:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in thousands)
Cost of revenue
$
5,567

 
$
2,902

 
$
2,266

Technology and development
7,576

 
3,325

 
2,383

Marketing
662

 
487

 
469

General and administrative
6,633

 
4,387

 
3,295

Total
$
20,438

 
$
11,101

 
$
8,413



 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(as a percentage of revenue)
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue(1)
75.5

 
69.8

 
69.0

Gross profit
24.5

 
30.2

 
31.0

Operating expenses:
 
 
 
 
 
Technology and development(1)
11.0

 
11.6

 
12.9

Marketing(1)
9.0

 
8.7

 
10.7

General and administrative(1)
13.5

 
14.3

 
15.9

Total operating expenses
33.5

 
34.6

 
39.5

Loss from operations
(9.0
)
 
(4.4
)
 
(8.5
)
Interest income
1.1

 
0.3

 
0.1

Interest expense
(0.8
)
 

 

Other income, net

 

 

Net loss
(8.7
)%
 
(4.1
)%
 
(8.4
)%

(1) Includes stock-based compensation as follows:

28


 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(as a percentage of revenue)
Cost of revenue
1.1
%
 
0.8
%
 
0.8
%
Technology and development
1.6

 
0.9

 
0.9

Marketing
0.1

 
0.1

 
0.2

General and administrative
1.4

 
1.2

 
1.2

Total
4.2
%
 
3.0
%
 
3.1
%
Comparison of the Years Ended December 31, 2018 and 2017

Revenue
 
Year Ended December 31,
 
Change
 
2018
 
2017
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Real estate services revenue
 
 
 
 
 
 
 
Brokerage revenue
$
406,293

 
$
330,372

 
$
75,921

 
23
%
Partner revenue
25,875

 
21,198

 
4,677

 
22

Total real estate services revenue
432,168

 
351,570

 
80,598

 
23

Properties revenue
44,993

 
10,491

 
34,502

 
329

Other revenue
9,882

 
7,975

 
1,907

 
24

Intercompany elimination
(123
)
 

 
(123
)
 
 
Total revenue
$
486,920

 
$
370,036

 
$
116,884

 
32

Percentage of revenue
 
 
 
 
 
 
 
Real estate services revenue
 
 
 
 
 
 
 
Brokerage
83.4
 %
 
89.3
%
 
 
 
 
Partner revenue
5.3

 
5.7

 
 
 
 
Total real estate services revenue
88.7

 
95.0

 
 
 
 
Properties revenue
9.3

 
2.8

 
 
 
 
Other revenue
2.0

 
2.2

 
 
 
 
Intercompany elimination
0.0
 %
 
0.0
%
 
 
 
 
Total revenue
100.0
 %
 
100.0
%
 
 
 
 
In 2018, revenue increased by $116.9 million, or 32%, as compared with 2017. Brokerage revenue represented $75.9 million, or 65%, of the increase. Brokerage revenue grew 23% during the period, driven by a 23% increase in brokerage real estate transactions and a 0.3% increase in real estate services revenue per brokerage transaction. The increase in brokerage transactions was attributable to higher levels of customer awareness of Redfin and increasing customer demand for Redfin services. Properties revenue grew $34.5 million, or 329%, as compared with 2017, driven by greater market presence and consumer awareness of RedfinNow, which resulted in a 267% increase in the number of properties sold. Other revenue increased $1.9 million, or 24%, as compared with 2017.

Cost of Revenue and Gross Margin

29


 
Year Ended December 31,
 
Change
 
2018
 
2017
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Cost of revenue
 
 
 
 
 
 
 
Real estate services
$
309,069

 
$
237,832

 
$
71,237

 
30
 %
Properties
46,613

 
10,384

 
36,229

 
349

Other
11,937

 
10,000

 
1,937

 
19

Intercompany elimination
(123
)
 

 
(123
)
 
N/A

Total cost of revenue
$
367,496

 
$
258,216

 
$
109,280

 
42

 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Real estate services
$
123,099

 
$
113,738

 
$
9,361

 
8
 %
Properties
(1,620
)
 
107

 
(1,727
)
 
N/A

Other
(2,055
)
 
(2,025
)
 
(30
)
 
(1
)
Total gross profit
$
119,424

 
$
111,820

 
$
7,604

 
7

 
 
 
 
 
 
 
 
Gross margin (percentage of revenue)
 
 
 
 
 
 
 
Real estate services
28.5
 %
 
32.4
 %
 
 
 
 
Properties
(3.6
)%
 
1.0
 %
 
 
 
 
Other
(20.8
)%
 
(25.4
)%
 
 
 
 
Total gross margin
24.5
 %
 
30.2
 %
 
 
 
 
In 2018, total cost of revenue increased by $109.3 million, or 42%, as compared with 2017. This increase in cost of revenue was primarily attributable to a $34.8 million increase in personnel costs and stock-based compensation due to increased lead agent and related support-staff headcount, a $32.6 million increase in the cost of homes purchased through properties, a $17.9 million increase in transaction bonuses, and a $12.6 million increase in home-touring and field costs.
Total gross margin decreased 570 basis points for 2018 as compared with 2017, driven primarily by a decrease in real estate services gross margin and the growth of our properties business.
In 2018, real estate services gross margin decreased 390 basis points as compared with 2017. This was primarily attributable to a 210 basis-point increase in personnel costs and stock-based compensation, a 60 basis-point increase in transaction bonuses, a 60 basis-point increase in home-touring and field costs, a 30 basis-point increase in operating costs, and a 25 basis-point increase in listing expenses, each as a percentage of revenue.
In 2018, we decreased the number of customers introduced to our lead agents as compared with 2017, but did not see improvement in customer close rate. That change resulted in us hiring more lead agents, which contributed significantly to the 210 basis-point increase in personnel costs and stock-based compensation from 2017 to 2018. In 2019, we plan to increase the number of customers introduced to our lead agents to slightly above 2017 levels.
In 2018, properties gross margin decreased 460 basis points as compared with 2017. This was primarily attributable to a 280 basis-point increase in the cost of homes purchased, a 110 basis-point increase in personnel costs and stock-based compensation, and a 70 basis-point increase in transaction bonuses, each as a percentage of revenue.
In 2018, other gross margin increased 460 basis points as compared with 2017. This was primarily attributable to a 230 basis-point decrease in operating expenses, a 170 basis-point decrease in depreciation and amortization, and a 90 basis-point decrease in office and occupancy expenses, each as a percentage of revenue. This was partially offset by a 50 basis-point increase in personnel costs and stock-based compensation.

30


Operating Expenses
 
Year Ended December 31,
 
Change
 
2018
 
2017
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Technology and development
$
53,797

 
$
42,532

 
$
11,265

 
26
%
Marketing
44,061

 
32,251

 
11,810

 
37

General and administrative
65,500

 
53,009

 
12,491

 
24

Total operating expenses
$
163,358

 
$
127,792

 
$
35,566

 
28

Percentage of revenue
 
 
 
 
 
 
 
Technology and development
11.0
%
 
11.6
%
 
 
 
 
Marketing
9.0

 
8.7

 
 
 
 
General and administrative
13.5

 
14.3

 
 
 
 
Total operating expenses
33.5
%
 
34.6
%
 
 
 
 
In 2018, technology and development expenses increased by $11.3 million, or 26%, as compared with 2017. The increase was primarily attributable to a $10.3 million increase in personnel costs and stock-based compensation due to increased headcount and a $1.4 million increase in outside services including cloud-based technology. These expenses were related to improving real estate services operations, and building new capabilities for Redfin Mortgage and properties.
In 2018, marketing expenses increased by $11.8 million, or 37%, as compared with 2017. The increase was primarily attributable to an $11.1 million increase in marketing media costs as we expanded advertising.
In 2018, general and administrative expenses increased by $12.5 million, or 24%, as compared with 2017. The increase was attributable to an $8.1 million increase in personnel costs and stock-based compensation, largely the result of increases in headcount to support continued growth, and a $3.2 million increase in outside services expenses, driven by public-company compliance requirements, including the design, implementation, and assessment of the operating effectiveness of internal control over our financial reporting and related audit.
Comparison of the Years Ended December 31, 2017 and 2016
Revenue
 
Year Ended December 31,
 
Change
 
2017
 
2016
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Real estate services revenue
 
 
 
 
 
 
 
Brokerage revenue
$
330,372

 
$
244,079

 
$
86,293

 
35
%
Partner revenue
21,198

 
16,304

 
4,894

 
30

Total real estate services revenue
351,570

 
260,383

 
91,187

 
35

Properties revenue
10,491

 

 
10,491

 
N/A

Other revenue
7,975

 
6,813

 
1,162

 
17

Total revenue
$
370,036

 
$
267,196

 
$
102,840

 
38

Percentage of revenue
 
 
 
 
 
 
 
Real estate services revenue
 
 
 
 
 
 
 
Brokerage revenue
89.3
%
 
91.4
%
 
 
 
 
Partner revenue
5.7

 
6.1

 
 
 
 
Total real estate services revenue
95.0

 
97.5

 
 
 
 
Properties revenue
2.8

 

 
 
 
 
Other revenue
2.2

 
2.5

 
 
 
 
Total revenue
100.0
%
 
100.0
%
 
 
 
 

31


In 2017, revenue increased by $102.8 million, or 38%, as compared with 2016. Brokerage revenue represented $86.3 million, or 84%, of the increase. Brokerage revenue grew 35% during the period, driven by a 35% increase in brokerage real estate transactions and offset by a 0.1% decrease in real estate services revenue per brokerage transaction. The increase in brokerage transactions was attributable to higher levels of customer awareness of Redfin and increasing customer demand for Redfin services. Properties revenue increased $10.5 million as compared with 2016, as there was no properties revenue in 2016. Other revenue increased $1.2 million.

Cost of Revenue and Gross Margin
 
Year Ended December 31,
 
Change
 
2017
 
2016
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Cost of revenue
 
 
 
 
 
 
 
Real estate services
$
237,832

 
$
176,408

 
$
61,424

 
35
 %
Properties
10,384

 

 
10,384

 
N/A

Other
10,000

 
8,044

 
1,956

 
24

Total cost of revenue
$
258,216

 
$
184,452

 
$
73,764

 
40

 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Real estate services
$
113,738

 
$
83,975

 
$
29,763

 
35
 %
Properties
107

 

 
107

 
N/A

Other
(2,025
)
 
(1,231
)
 
(794
)
 
(65
)
Total gross profit
$
111,820

 
$
82,744

 
$
29,076

 
35

 
 
 
 
 
 
 
 
Gross margin (percentage of revenue)
 
 
 
 
 
 
 
Real estate services
32.4
 %
 
32.3
 %
 
 
 
 
Properties
1.0
 %
 
N/A

 
 
 
 
Other
(25.4
)%
 
(18.1
)%
 
 
 
 
Total gross margin
30.2
 %
 
31.0
 %
 
 
 
 
In 2017, total cost of revenue increased by $73.8 million, or 40%, as compared with 2016. This increase in cost of revenue was primarily attributable to a $27.1 million increase in personnel costs and stock-based compensation due to increased lead agent and related support-staff headcount, a $15.6 million increase in transaction bonuses, an $11.9 million increase in home-touring and field costs and a $9.5 million increase in the cost of homes purchased through properties.
Total gross margin decreased 75 basis points for 2017 as compared with 2016, primarily driven by the launch of the properties business in 2017.
In 2017, real estate services gross margin increased 10 basis points as compared with 2016. This was primarily attributable to a 38 basis-point decrease in transaction bonuses, a 12 basis-point decrease in operating expenses, and a 10 basis-point decrease in personnel costs and stock-based compensation, each as a percentage of revenue. This was partially offset by a 29 basis-point increase in office and occupancy expenses and a 23 basis-point increase in home-touring and field costs, each as a percentage of revenue.
In 2017, other gross margin decreased 730 basis points as compared with 2016. The decrease was primarily attributable to a 520 basis-point increase in depreciation and amortization, and a 190 basis-point increase in operating costs associated with the launch of our mortgage business.

Operating Expenses


32


 
Year Ended December 31,
 
Change
 
2017
 
2016
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Technology and development
$
42,532

 
$
34,588

 
$
7,944

 
23
%
Marketing
32,251

 
28,571

 
3,680

 
13

General and administrative
53,009

 
42,369

 
10,640

 
25

Total operating expenses
$
127,792

 
$
105,528

 
$
22,264

 
21

Percentage of revenue
 
 
 
 
 
 
 
Technology and development
11.6
%
 
12.9
%
 
 
 
 
Marketing
8.7

 
10.7

 
 
 
 
General and administrative
14.3

 
15.9

 
 
 
 
Total operating expenses
34.6
%
 
39.5
%
 



 
 
In 2017, technology and development expenses increased by $7.9 million, or 23%, as compared with 2016. The increase was primarily attributable to a $7.1 million increase in personnel costs and stock-based compensation due to increased headcount and a $0.5 million increase in outside services including cloud-based technology.
In 2017, marketing expenses increased by $3.7 million, or 13%, as compared with 2016. The increase was primarily attributable to a $3.7 million increase in marketing media costs as we expanded advertising. Personnel costs and stock-based compensation were flat as compared with 2016.
In 2017, general and administrative expenses increased by $10.6 million, or 25%, as compared with 2016. The increase was attributable to a $6.4 million increase in personnel costs and stock-based compensation, largely the result of increases in headcount to support continued growth, a $1.6 million increase in outside services expenses, and a $1.5 million increase in occupancy and office expenses. Included in the 2016 expenses is $1.8 million related to the proposed settlement of three lawsuits.
Quarterly Results of Operations and Key Business Metrics
The following tables set forth our unaudited quarterly statements of operations data for the most recent eight quarters, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Quarterly Results

33


 
Three Months Ended
 
Dec. 31, 2018
 
Sep. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sep. 30, 2017
 
June 30, 2017
 
Mar. 31, 2017
Revenue
$
124,129

 
$
140,255

 
$
142,642

 
$
79,893

 
$
95,754

 
$
109,479

 
$
104,935

 
$
59,868

Cost of revenue(1)
97,920

 
97,950

 
97,429

 
74,197

 
66,583

 
70,166

 
67,975

 
53,492

Gross profit
26,209

 
42,305

 
45,213

 
5,696

 
29,171

 
39,313

 
36,960

 
6,376

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology and development(1)
13,692

 
14,310

 
13,033

 
12,762

 
11,287

 
11,483

 
10,090

 
9,672

Marketing(1)
8,054

 
8,236

 
14,435

 
13,336

 
6,072

 
5,588

 
10,132

 
10,459

General and administrative(1)
16,969

 
16,470

 
15,288

 
16,772

 
14,181

 
11,995

 
12,466

 
14,367

Total
38,715

 
39,016

 
42,756

 
42,870

 
31,540

 
29,066

 
32,688

 
34,498

Income (loss) from operations
(12,506
)
 
3,289

 
2,457

 
(37,174
)
 
(2,369
)
 
10,247

 
4,272

 
(28,122
)
Interest income
2,334

 
1,775

 
729

 
577

 
495

 
311

 
32

 
43

Interest expense
(2,071
)
 
(1,610
)
 

 

 

 

 

 

Other income, net
21

 
21

 
21

 
158

 
76

 

 

 
13

Net income (loss)
$
(12,222
)
 
$
3,475

 
$
3,207

 
$
(36,439
)
 
$
(1,798
)
 
$
10,558

 
$
4,304

 
$
(28,066
)

(1) Includes stock-based compensation as follows:
 
Three Months Ended
 
Dec. 31, 2018
 
Sep. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sep. 30, 2017
 
June 30, 2017
 
Mar. 31, 2017
Cost of revenue
$
1,506

 
$
1,370

 
$
1,392

 
$
1,300

 
$
774

 
$
715

 
$
699

 
$
714

Technology and development
2,241

 
2,135

 
1,726

 
1,473

 
1,024

 
819

 
751

 
731

Marketing
231

 
155

 
157

 
119

 
124

 
121

 
123

 
119

General and administrative
1,988

 
1,838

 
1,503

 
1,304

 
1,151

 
1,054

 
1,065

 
1,117

Total
$
5,966

 
$
5,498

 
$
4,778

 
$
4,196

 
$
3,073

 
$
2,709

 
$
2,638

 
$
2,681



 
Three Months Ended
 
Dec. 31, 2018
 
Sep. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sep. 30, 2017
 
June 30, 2017
 
Mar. 31, 2017
 
(as a percentage of revenue)
Revenue
100.0
 %
 
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
 %
 
100.0
%
 
100.0
%
 
100.0
 %
Cost of revenue(1)
78.9

 
69.8

 
68.3

 
92.9

 
69.5

 
64.1

 
64.8

 
89.3

Gross profit
21.1

 
30.2

 
31.7

 
7.1

 
30.5

 
35.9

 
35.2

 
10.7

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology and development(1)
11.0

 
10.2

 
9.1

 
16.0

 
11.8

 
10.5

 
9.6

 
16.2

Marketing(1)
6.5

 
5.9

 
10.1

 
16.7

 
6.3

 
5.1

 
9.7

 
17.5

General and administrative(1)
13.7

 
11.7

 
10.7

 
21.0

 
14.9

 
11.0

 
11.8

 
24.0

Total
31.2

 
27.8

 
29.9

 
53.7

 
33.0

 
26.6

 
31.1

 
57.7

Income (loss) from operations
(10.1
)
 
2.4

 
1.8

 
(46.6
)
 
(2.5
)
 
9.3

 
4.1

 
(47.0
)
Interest income
1.9

 
1.3

 
0.5

 
0.7

 
0.5

 
0.3

 

 
0.1

Interest expense
(1.7
)
 
(1.1
)
 

 

 

 

 

 

Other income, net

 

 

 
0.2

 
0.1

 

 

 

Net income (loss)
(9.9
)%
 
2.6
 %
 
2.3
%
 
(45.7
)%
 
(1.9
)%
 
9.6
%
 
4.1
%
 
(46.9
)%

(1) Includes stock-based compensation as follows:

34


 
Three Months Ended
 
Dec. 31, 2018
 
Sep. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sep. 30, 2017
 
June 30, 2017
 
Mar. 31, 2017
Cost of revenue
1.2
%
 
1.0
%
 
1.0
%
 
1.6
%
 
0.8
%
 
0.7
%
 
0.7
%
 
1.2
%
Technology and development
1.8

 
1.5

 
1.2

 
1.9

 
1.1

 
0.7

 
0.7

 
1.2

Marketing
0.2

 
0.1

 
0.1

 
0.1

 
0.1

 
0.1

 
0.1

 
0.2

General and administrative
1.6

 
1.3

 
1.1

 
1.7

 
1.2

 
1.0

 
1.0

 
1.9

Total
4.8
%
 
3.9
%
 
3.4
%
 
5.3
%
 
3.2
%
 
2.5
%
 
2.5
%
 
4.5
%
Revenue for the periods above has followed a seasonal pattern largely consistent with the residential real estate industry. Accordingly, revenue in 2018 and 2017 increased sequentially from the first quarter to the second quarter. In 2018, revenue declined sequentially by 2% from the second quarter to the third quarter (in contrast to a 4% increase for the same period in 2017), we believe as the result of less favorable market conditions compared the same period in the prior year. Revenue in the fourth quarters of 2018 and 2017 declined sequentially.
Cost of revenue has also reflected seasonality. Cost of revenue in 2018 and 2017 increased sequentially from the first quarter through the third quarter. In the fourth quarters of 2018 and 2017, the cost of revenue declined sequentially due to lower real estate services transaction volume. In 2018, the sequential cost of revenue decline was less in the fourth quarter when compared to 2017 because of increased revenue, and a related increase to cost of revenue, from our properties business.
Technology and development expenses are influenced period to period by the timing of development project expenses, including the additional use of contract software developers as well as the utilization of interns, who typically work with the company during the third quarter. Marketing expenses are influenced by seasonal factors and the timing of advertising campaigns. We have historically spent more on advertising during the first half of the year than the second half of the year.

Quarterly Key Business Metrics

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dec. 31, 2018
 
Sep. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sep. 30, 2017
 
June 30, 2017
 
Mar. 31, 2017
Monthly average visitors (in thousands)
25,212

 
29,236

 
28,777

 
25,820

 
21,377

 
24,518

 
24,400

 
20,162

Real estate services transactions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brokerage
9,822

 
12,876

 
12,971

 
7,285

 
8,598

 
10,527

 
10,221

 
5,692

Partner
2,749

 
3,333

 
3,289

 
2,237

 
2,739

 
3,101

 
2,874

 
2,041

Total
12,571

 
16,209

 
16,260

 
9,522

 
11,337

 
13,628

 
13,095

 
7,733

Real estate services revenue per transaction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brokerage
$
9,569

 
$
9,227

 
$
9,510

 
$
9,628

 
$
9,659

 
$
9,289

 
$
9,301

 
$
9,570

Partner
2,232

 
2,237

 
2,281

 
2,137

 
2,056

 
1,960

 
1,945

 
1,911

Aggregate
$
7,964

 
$
7,790

 
$
8,048

 
$
7,869

 
$
7,822

 
$
7,621

 
$
7,687

 
$
7,548

Aggregate home value of real estate services transactions (in millions)
$
5,825

 
$
7,653

 
$
7,910

 
$
4,424

 
$
5,350

 
$
6,341

 
$
6,119

 
$
3,470

U.S. market share by value
0.81
%
 
0.85
%
 
0.83
%
 
0.73
%
 
0.71
%
 
0.71
%
 
0.64
%
 
0.58
%
Revenue from top-10 Redfin markets as a percentage of real
estate services revenue
66
%
 
66
%
 
68
%
 
66
%
 
69
%
 
69
%
 
69
%
 
68
%
Average number of lead agents
1,419

 
1,397

 
1,415

 
1,327

 
1,118

 
1,028

 
1,010

 
935

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Similar to our revenue, monthly average visitors to our website and mobile application has typically followed a seasonal pattern, increasing sequentially in 2018 and 2017 from the first quarter through the third quarter. Monthly average visitors declined sequentially during the fourth quarters of 2018 and 2017 following seasonality.

35


U.S. market share by value declined sequentially from the third quarter of 2018 to the fourth quarter of 2018.
Liquidity and Capital Resources
As of December 31, 2018, we had cash and cash equivalents of $432.6 million, which consist of cash on deposit with financial institutions and money market funds.
    
On July 23, 2018, we completed follow-on public offerings of 4,836,336 shares of our common stock and $143,750,000 aggregate principal amount of our convertible senior notes. We received approximately $107.6 million in proceeds from the common stock offering and approximately $139.0 million in proceeds from the convertible senior notes offering, in each case after deducting underwriting discounts and other issuance costs. The convertible senior notes mature on July 15, 2023, unless earlier repurchased, redeemed or converted. Interest is payable in arrears on January 15 and July 15 of each year, commencing on January 15, 2019.
We believe that our existing cash and cash equivalents, together with cash to be generated from future operations, will provide sufficient liquidity to meet our operational needs and fulfill our debt obligations. However, our liquidity assumptions may change or prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. As a result, we may elect to raise additional funds at any time through equity, equity-linked, or debt financing arrangements. We cannot assure you that any additional financing will be available to us on acceptable terms or at all.

Cash Flows
The following table summarizes our cash flows for the periods indicated:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in thousands)
Net cash provided by (used in) operating activities
$
(36,702
)
 
$
5,355

 
$
(9,352
)
Net cash used in investing activities
(10,303
)
 
(10,364
)
 
(13,567
)
Net cash provided by financing activities
$
273,402

 
$
149,822

 
$
1,744


Net Cash Provided By (Used In) Operating Activities
Our operating cash flows result primarily from cash received from our real estate services and sales of homes from our properties business. Our primary uses of cash from operating activities include payments for personnel-related costs, including employee benefits and bonus programs, marketing and advertising activities, purchases of homes for our properties business, and outside services costs. Additionally, our mortgage business generates a significant amount operating cash flow activity from the origination and sale of loans held for sale, but which have resulted in a net immaterial impact to our cash provided by or used in operating activities.
Net cash used in operating activities was $36.7 million for the year ended December 31, 2018, primarily attributable to a net loss of $42.0 million, offset by $28.9 million of non-cash items related to stock- based compensation, depreciation and amortization expenses, and amortization of debt discounts and issuances costs. Changes in assets and liabilities increased cash used in operating activities by $26.2 million driven primarily by an increase of $19.3 million in inventory related to our properties business. This was partially offset by a $4.2 million increase in accrued liabilities due primarily to $3.3 million of payroll liabilities.
Net cash provided by operating activities in 2017 consisted of $15.0 million of net losses, an $18.3 million positive impact from non-cash items related stock based compensation and depreciation and amortization expenses, an $8.4 million reduction in miscellaneous receivables when the landlord for our

36


Seattle headquarters office reimbursed us for tenant improvements, and a $4.9 million net increase in accrued expenses and accounts payable due to the timing of when amounts came due. These benefits were partially offset by a $4.2 million increase in prepaid expenses, the introduction of $3.4 million in home purchases from testing our properties business, a $2.7 million increase in accrued revenue due to the collection and timing of real estate services transactions that had closed, and $1.9 million in mortgage loans funded but not yet sold.
Net cash used in operating activities in 2016 consisted of $22.5 million of net losses, a $14.7 million positive impact from non-cash items, a $7.2 million net increase in accrued expenses and accounts payable due to the timing of when amounts came due, and a $2.2 million decrease in prepaid expenses. These benefits were partially offset by a $6.0 million increase in other long-term assets, including a $5.4 million deposit with the landlord for our new Seattle headquarters office space. We also incurred a $5.0 million increase in accrued revenue due to the collection and timing of real estate services transactions that closed.
Net Cash Used In Investing Activities
Our primary investing activities include the purchase of property and equipment, primarily related to capitalized software development expenses and leasehold improvements and the purchase and sale or maturity of short-term investments.
Net cash used in investing activities was $10.3 million for the year ended December 31, 2018, primarily attributable to $8.3 million of purchases of property and equipment, related to $5.3 million of capitalized software development expenses and $1.2 million of leasehold improvements, and a $2.0 million equity investment.
Net cash used in investing activities in 2017 consisted of $12.1 million of fixed asset purchases, including $6.5 million of leasehold improvements, equipment and furnishings for our new Seattle headquarters office space and $4.4 million of capitalized software development expenses. This was partially offset by a net $1.8 million from the sale and maturity of short-term investments as we liquidated all our short-term investments by the end of 2017.
Net cash used in investing activities in 2016 consisted of $13.6 million of fixed asset purchases, including $8.0 million of construction in progress for our new Seattle headquarters office space and $3.2 million of capitalized software development expenses.
Net Cash Provided By Financing Activities
Our primary financing activities have come from our initial public offering in August 2017, our follow-on offerings of common stock and convertible senior notes in July 2018, and the exercise of stock options. Additionally, our mortgage business generates a significant amount financing cash flow activity due to borrowings from and repayments to our warehouse credit facilities, but which have resulted in a net immaterial impact to our cash provided by financing activities.
Net cash provided by financing activities was $273.4 million for the year ended December 31, 2018, primarily attributable to net proceeds from our follow-on offerings of common stock and convertible senior notes. The net proceeds consisted of $107.6 million from the issuance of common stock and $139.0 million from the issuance of notes.
Net cash provided by financing activities in 2017 primarily consisted of $144.5 million in net proceeds from our initial public offering, $3.0 million in proceeds from the exercise of stock options and $2.0 million in net borrowing from our warehouse credit facilities for mortgage origination.
Net cash provided by financing activities in 2016 primarily consisted of $1.5 million in proceeds from the exercise of stock options.
Contractual Obligations

37


Contractual obligations are cash amounts that we are obligated to pay as part of certain contracts that we have entered into during the normal course of business. Below is a table that shows our contractual obligations as of December 31, 2018:
 
Payments Due by Period
 
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More Than 5 Years
 
(in thousands)
Convertible senior notes
$
143,750

 
$

 
$

 
$
143,750

 
$