Debt instruments can have a huge effect on stockholder equity and EPS, depending on the precise nature of the debt that a company issues. Today let’s look at two examples of convertible debt, and how companies try to manage its attendant EPS implications, from the technology firms Snap ($SNAP) and Zillow ($Z). 

First, a refresher on how convertible debt works. Convertible debt is a financing instrument that combines elements of both debt and equity. While the interest rate on convertible bonds is generally lower than the rate on traditional bond instruments, investors gain the option to turn their debt holdings into company shares at some predetermined "conversion price" set in the terms of the debt agreement. 

For the shareholders, the downside of the conversion is dilution — because the conversion of debt into equity increases the number of shares outstanding, which therefore decreases the corresponding EPS.

One way to avoid that outcome is through a type of call option. A call option gives its holder the right (but not the obligation) to buy a specific stock or other asset at a predetermined price — commonly known as the “strike price” — within a set period of time. 

“Capped call” transactions are a hedging tool that convertible bond issuers often use to protect against shareholder dilution. When a company issues a convertible bond, it can buy call options on its own stock with a strike price equal to the bond's conversion price and a cap that limits the counterparty's exposure. 

A capped call transaction effectively raises the price point at which dilution begins, and that shields shareholders from having their ownership diluted until the shares trade well above the conversion price. The trade-off is cost: capped calls typically consume 7 to 9 percent of the debt proceeds upfront, as Calcbench explained in its previous piece using Uber’s ($UBER) $141 million hedge to illustrate. 

Importantly, capped calls involve separate transactions between the issuer of the convertible and third-party underwriters, subject to a separate agreement that lays out terms and conditions. But since capped calls are used to protect against conversion-related dilution, we typically expect the companies to unwind capped calls promptly once the convertible security is redeemed or expires upon maturity of the convertible. 

The logic here is simple: capped calls are costly, and unwinding them is a liquidity-positive event that generates cash inflow. So why pay for a hedge when the dilutive convertible instrument no longer exists? 

Example 1: Snap

In February and May 2024, Snap repurchased its 2025 convertible notes. Upon completion of the repurchase of convertibles in May 2024, Snap terminated its capped call transactions, recording a $62.7 million inflow from cash from financing. Snap disclosed the transaction as follows (emphasis added):

“Our financing activities for the six months ended June 30, 2024 primarily consisted of the Note Repurchases for $859.0 million, repurchases of our Class A common stock for $311.1 million, and the purchase of the 2030 Capped Call Transactions for $68.9 million, partially offset by the issuance of the 2030 Notes for net proceeds of $740.4 million and the termination of the 2025 Capped Call Transactions for proceeds of $62.7 million.”

But not every company reports a capped call transaction this way. Sometimes you find an outlier. Zillow seems to be such an exception.

Example 2: Zillow

In September 2019, Zillow issued a $500 million convertible note with maturity in 2026, a conversion price of $43.51, and the initial cap price of $80.575. The terms of the convertible and the capped call imply that Zillow purchased an anti-dilution hedge, which protects shareholders from dilution when the stock trades between $43.51 and $80.575. 

Put differently: the hedge effectively raises the dilution threshold to $80.575. On Sept. 27, 2019, Zillow’s stock closed at roughly $29.53, more than 30 percent below the initial conversion price. 

Five years later, in December 2024, Zillow redeemed its 2026 convertible note. In contrast to Snap, Zillow decided to keep the associated capped calls outstanding (again, emphasis added):

“In connection with settling our 2026 Notes in December 2024, we elected to keep the associated capped call transactions outstanding.”

The capped calls were terminated on Aug. 25, 2025, about eight months after the redemption of the convertible note:

“On August 25, 2025, Zillow Group, Inc. (the “Company”) will enter into agreements … to unwind and terminate certain capped call transactions by and between the Company and each Counterparty (such transactions, the “Capped Calls,” and the unwind and termination of the Capped Calls, the “Unwind Transactions”)... Upon settlement of the Unwind Transactions, the Company will have no remaining capped call transactions outstanding.

The Company expects to receive from the Counterparties an aggregate of 3.1 million shares of the Company’s Class C capital stock, which will reduce the Company's Class C capital stock outstanding, and $38.2 million in cash (the “Unwind Amount”), upon the Unwind Transactions. In connection with the Unwind Transactions, the Counterparties may buy or sell shares of the Company’s Class C capital stock in secondary market transactions and/or unwind various derivative transactions with respect to such Class C capital stock.”

Why did Zillow elect to delay the termination of capped calls? We don’t know. Recall, however, that the economics of the capped call transactions is a company buying a call option on its own stock. Buyers of the call options usually believe that the price of the underlying instrument is likely to increase, sending a bullish signal to the market.

One possible explanation is that Zillow's management believed that Zillow's stock price was likely to increase, and incorporated this belief into their decision not to terminate the calls. Zillow’s stock price closed at $76.6 on Dec. 24, 2024 — about 5 percent below the initial cap of $80.575. The stock closed around $88.80 on Aug. 25, 2025, an increase of 16 percent over the eight-month period. For comparison, the S&P 500 increased about 6.6 percent over the same period.

Let’s also remember that Zillow received both cash and shares as part of consideration received for unwinding the capped call transaction. Another possible explanation is that Zillow preferred to receive the shares — effectively reducing dilution — in 2025 rather than in 2024. 

Why would a company do that? Perhaps to match the timing of accretive capped calls unwinding with dilution related to the issuance of shares upon exercise of stock options. 

According to Zillow’s Q2 2025 filing, the company issued 1.32 million Class C shares upon exercise of stock options, 2.97 million shares upon vesting of RSUs, and repurchased 4.2 million Class A and 1.4 million Class C shares in the first half of 2025:

“During the six months ended June 30, 2025, we repurchased 4.2 million shares of Class A common stock and 1.4 million shares of Class C capital stock at an average price of $70.09 and $73.19 per share, respectively, for an aggregate purchase price of $297 million and $103 million, respectively.”

The company also reported the transaction in the following table:

For comparative purposes, during the first six months of 2024 Zillow repurchased 1.1 million of Class A stock and 5.996 million of Class C stock. So the 3.1 million of Class C capital stock received by Zillow in August 2025 as part of the consideration could have potentially reduced the buybacks needed to mitigate the dilutive effect of options issuances and RSUs vesting in 2025. 

Of course, there could also be other reasons besides stock price expectations and buyback considerations that we did not discuss here. But Zillow’s delay in unwinding the hedge looked unusual, certainly interesting enough to ponder a few ideas. 

For the readers interested in conducting similar research in their own companies that they follow, convertible debt, capped calls, and note hedges are all easy to find using Calcbench’s Interactive Disclosure and Multi-Company pages.

For example, we searched “capped call” in the 2024 disclosures of S&P 500 companies and found more than 75 results, including NRG Energy, Super Micro Computer, Las Vegas Sands, and more. From there you can conduct your own analysis much as we did here with Snap and Zillow.

Editor’s note: Olga Usvyatsky is an author of Deep Quarry newsletter and occasional contributor to the Calcbench blog. Usvyatsky enjoys raising interesting questions about financial disclosures, and can be reached at olga@deepquarry.com.