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Zillow (NASDAQ:Z)

Q4 2012 Earnings Call

February 13, 2013 05:00 PM ET

Executives

Chad Cohen - CFO

Spencer Rascoff - CEO

Analysts

Neal Doshi - Citigroup

James Cakmak – Telsey Advisory Group

Michael Graham - Canaccord Genuity

Mark May - Barclays

Brad Safalow - PAA Research

Chad Bartley - Pacific Crest Securities

Mitch Bartlett - Craig Hallum

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to Zillow's fourth quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduction a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference may be recorded. It is now my pleasure to turn the floor over to Raymond Jones, Zillow's Investor Relations officer. Sir, the floor is yours.

Raymond Jones

Thank you. Good afternoon and welcome to Zillow’s fourth-quarter and full year 2012 earnings conference call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer, and Chad Cohen, Chief Financial Officer.

Before we get started, as a reminder, during the course of this call we will make forward-looking statements regarding the future events and the future financial performance of the Company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements made in the press release and on this conference call. These risk factors are described in our press release and are more fully detailed under the caption risk factors in our Quarterly Report on Form 10-K filed with the SEC on March 2, 2012.

In addition, please note that the date of this conference call is February 13, 2013, and any forward-looking statements that we make today are based on the assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. In our remarks, the non-GAAP financial measure adjusted EBITDA will be referred to simply as EBITDA, which excludes share-based compensation.

This call is being broadcast on the internet, and is available on the Investor Relations section of the investor relations section of the Zillow website at investors.zillow.com. A recording of this call will be available after 8:00 PM Eastern Time today. The earnings press release is available on our website, and after the call, a copy of today’s prepared remarks will also be available on the website. After management's remarks we will host a Q&A session.

I will now turn the call over to Spencer.

Spencer Rascoff

Thank you all for joining the call today to discuss our 2012 fourth quarter and full year results. I’ll start by reviewing some quarterly and full year financial highlights, and then I will outline our strategic priorities for 2013. Next, Chad will discuss our 2012 results in more detail, as well as our outlook for the first quarter and full year 2013. Then we'll open up the call for questions.

The fourth quarter turned out better than we expected. We achieved record revenue while executing a pricing model transition in our Premier Agent business. All during what’s typically the seasonally slowest period of the year in housing. Solid execution on the part of both our Premier Agent sales team and our Display sales teams resulted in Q4 revenue of $34.3 million, up 73% year-over-year. We also successfully closed three acquisitions: Mortech, which provides a CRM and pricing engine to the mortgage industry; HotPads, a consumer rental shopping site and suite of mobile apps; and BuyFolio, a collaborative shopping tool that enhances our Premier Agent offering. These acquisitions each accelerate development of our mortgage, rental and real estate marketplaces.

We ended 2012 on a strong note from Q4, and brought our full year revenue to nearly $117 million, growing 77% over full year 2011. Marketplace revenue reached almost $87 million, up 105% and grew from about 15,800 Premier Agents at the end of 2011 to almost 29,500 Premier Agents at the end of 2012.

Full-year Display Revenue grew 26% and exceeded $30 million for the year. EBITDA for 2012 was $25 million, up 112% year over year, and represented 22% of revenue. We also showed significant earnings growth with $5.9 million in net income, up from $1.1 million in 2011.

In addition to record revenue and profit, in 2012 we extended our usage lead as the largest real estate website and mobile platform. During the year, we hit a high of 37 million monthly unique visitors. We also tipped to mobile, with more monthly visits now coming from Zillow mobile than on the web.

While we are pleased with our fourth quarter and full year 2012 results, we now turn the page to 2013 and the tremendous market opportunities that lie ahead. In 2013, we have three priorities for the year: first, to continue the rapid expansion of our user base on mobile and desktop; second, to substantially grow our Premier Agent business; and third, to accelerate development of our emerging marketplaces in mortgages, rentals and home improvement. I will now spend some time discussing each priority.

Our first priority is to grow our user base and extend our leadership position across mobile and web. We are off to a good start, as January traffic reached nearly 46 million unique users for the first time, with just over half of our visits on a mobile device. Or, to put it another way, mobile traffic in January was larger than all of our traffic to Zillow just three years ago, in January 2010.

We now have 23 distinct mobile apps for consumers and professionals, across all platforms, and we have significant resources in 2013 devoted to improving our existing mobile experience, and launching new apps. In addition to mobile, our product development efforts this year are focused on expanding and improving our buyer experience which ultimately creates more leads for Zillow Premier Agents.

We recently added more than one million pre-market and foreclosure listings, for free, on Zillow. This is unique inventory that is typically not available on other sites, or an MLS. We are also in the midst of substantially improving our map-based home and neighborhood search experience, and redesigning major portions of our site to better serve the needs of buyers. We are testing new versions of our homepage and our listings detail pages. And we’re improving the timeliness of our listings, and user saved search and notification capabilities.

In support of our first priority of growing usage, following highly measured testing in 2012, we are now stepping on the gas in 2013 in several advertising channels that showed promise last year. We are focusing our advertising spend on home buyers, who are likely to contact our Premier Agents. For competitive reasons we will not get into specifics about our media plans, but overall we expect that our 2013 Sales & Marketing spend will be up about 70% year-over-year.

With most of our current traffic coming to us for free, and in a category without a recognized incumbent brand leader, we have a tremendous opportunity to use advertising to grow our brand, usage and leadership position over the long term. Our proven Premier Agent model gives us great monetization, and our confidence in the size of the Total Addressable Market gives us the confidence to increase our advertising investment in 2013 in order to extend our leadership and drive long term revenue growth.

In addition to product development and advertising, both of which grow usage of Zillow, we were pleased last week to announce a new partnership with HGTV’s Frontdoor.com. Similar to our Yahoo partnership, Zillow will be the exclusive provider of all real estate listings for HGTV’s FrontDoor.com, and Zillow Premier Agents also will receive exposure through FrontDoor.

Our second priority for 2013, which is to grow our Premier Agent business. While we are growing rapidly on an absolute basis, off a much larger base than our competitors, we do not believe that the online real estate advertising category is mature enough to consider it a zero-sum market. Our most recent results show that our Premier Agent business is at about a $90 million run-rate, which we estimate is less than 2% of the total spent on advertising by agents each year. We are lightly penetrating a huge addressable market that derives from the estimated $50-$60 billion in commissions generated each year by real estate agents.

In terms of number of agents, today we have about 29,500 Premier Agent subscribers, a small fraction of the hundreds of thousands of active, practicing agents nationwide. We’re growing this business very quickly, Premier Agent revenue and subscribers were both up around 90% year over year in the quarter but we still have a lot of running room in front of us.

Having recently transitioned our pricing and inventory model, the opportunity in the near term is to bring more agents onto our platform as our impression inventory grows with traffic. We have built a highly-capable professional sales force that we can leverage efficiently as we grow. Our pricing can now adjust more dynamically as our subscriptions continue to increase in value. Agents working with Zillow view success in terms of increased sales and commissions compared to dollars spent, thus the more we can do to help agents gain clients from Zillow Mobile and Zillow.com, and increase their conversion through software tools, the more valuable a subscription with us becomes.

Further, as agents utilize more of our services like our CRM and Premier Agent websites, the more agents we retain for the long term. In 2013, we will continue to enhance our Premier Agent offering including adding new features to our CRM, and rolling out our Buyfolio service nationwide, as well as launching new software features. Supporting our growth plans, we will continue to expand our sales force, build new relationships with brokerages on a national and local basis through our Zillow Pro for Brokers program, and establish other partnerships that benefit both professionals and consumers.

Our third priority in 2013 is to continue building out and growing our emerging marketplaces. We often talk about the Premier Agent business in depth because it is the bulk of our revenue today, but our market opportunity is much larger than residential real estate advertising. It includes tens of billions of dollars spent by professionals in mortgage, rentals and home improvement on advertising and software. Just last week we launched Zillow Digs, which marks the debut of our fourth marketplace: home improvement. Digs is a beautiful new product one that is particularly well-suited for the form factor of the iPad, which we launched simultaneously with the desktop. Zillow Digs provides consumers with a compelling and immersive social experience in home improvement, one that reinforces the value of Zillow to homeowners. The launch includes a revolutionary new tool for consumers found only on Zillow: Digs Estimates, a first-of-its-kind remodeling cost estimate algorithm created by Zillow’s industry-leading team of economists and data analysts. The patent-pending technology in Digs Estimates helps home shoppers and homeowners understand what it might actually cost to recreate the looks they see in the thousands of photos of real bathrooms and kitchens on Zillow Digs. The early response to Zillow Digs has been extremely favorable, including strong reviews and featuring in the Apple App Store, and favorable media coverage and social media commentary.

Consistent with Zillow’s proven formula for creating marketplaces, we are focused first on building a product that consumers love, that is mobile centric, and that leads to traffic growth. The Zillow strategy for creating marketplaces is to initially allow professionals to connect with consumers for free, then look to monetize when we reach sufficient scale. Later we will seek to add software tools to the professional offering and refine our monetization approach. In 2013, our focus for Digs will be on creating a great consumer experience. Just as we did with Zillow Rentals starting three years ago and with Zillow Mortgage Marketplace starting five years ago, we are planting seeds with the launch of Zillow Digs. We are already seeing good revenue and profit contribution from mortgages, and we expect rentals and eventually Zillow Digs to pay off as well.

Continuing on the topic of our emerging marketplaces, I’ll now turn to our mortgage marketplace, where consumer usage and monetization continues to grow, and we remain busy integrating the operations of recently acquired Mortech. Consumer loan requests in the marketplace reached almost 12 million in 2012, more than doubling our 2011 query level of 5.5 million, resulting in revenue nearly doubling as well. Mobile continues to be a strong contributor to our Mortgages business, accounting for about a quarter of our searches and revenue. With more home buyers getting off the sidelines in this persistent low-mortgage-rate environment, we remain well positioned to benefit from the improving housing market.

In 2013, we will continue to add lenders to our platform and expand our suite of services we offer to mortgage professionals that go beyond advertising. Finally in our rental marketplace, we continue to build out both the consumer and professional sides of the market. Currently we are assimilating our first consumer-facing acquisition of HotPads into the operations of Zillow Rentals. Along with a talented and very experienced product development team, HotPads brings a complementary and highly engaged audience to the Zillow Rental Network in addition to the more than six million current renters that come to Zillow each month.

Also we are growing our listings count, which now exceeds 600,000 with more direct relationships coming aboard daily. Recently we expanded our suite of services for pros to include free websites for property managers. Our projected timeline for monetizing the rentals marketplace has accelerated into late 2013, with increased traffic across our network facilitating the growth of our listings count, driving increased consumer usage and adoption by professionals.

So to summarize, our top three priorities for 2013 are: one, increase our audience on desktop and mobile; two, grow our Premier Agent business; three, build our emerging marketplaces of Home Improvement, Mortgages and Rentals.

Before I conclude, let me discuss our 2013 outlook. We expect full-year 2013 revenue to be in the range of $165 million to $170 million. And as I’ve outlined, a core 2013 priority for us is to grow our user base, and with this we have decided to meaningfully increase our advertising this year. We plan to strategically increase our sales and marketing spend in 2013 by about 70% year over year. Due to this increased advertising investment, we expect our EBITDA margin percentage will be flat to slightly down compared to 2012.

Investing in our brand today is the right thing for our business over the long term, because of the huge brand white space in this category. We remain excited about our tremendous leadership potential as we further advance our home-related marketplaces in the coming year and beyond.

To conclude, I would like to sincerely thank all of our employees, partners, Premier Agents and shareholders as we work hard to give both consumers and real estate professionals an edge in real estate.

And now I will turn the call over to our CFO, Chad Cohen.

Chad Cohen

Thanks Spencer. First I'm going to run through the details of our fourth quarter and full year financial results, and then I'll share our outlook for the first quarter of 2013. I'll also spend a few minutes giving some more perspective on the coming year. Starting with our traffic in the fourth quarter, more than 34.5 million average monthly unique users visited Zillow's mobile applications and websites. That's up 47% from the same quarter last year.

Total revenue for the fourth quarter increased 73% year over year to a record $34.3 million, up from $19.9 million in the same quarter last year. Total revenue in the fourth quarter exceeded the midpoint of our guidance of $30.5 million by approximately 12%. We continue to see a favorable shift in our revenue mix as we ended the fourth quarter with 78% of our revenue coming from our marketplace category, while 22% came from display.

Partial period revenue contributions from our acquisitions of Mortech and HotPads were immaterial due to the timing of the completed transactions landing late in the quarter which was consistent with our expectations.

Taking a deeper dive into our primary revenue category, marketplace revenue grew 95% year-over-year to $26.8 million. We continue to see strong growth rates across our Premier Agent, Mortgage and Diverse Solutions businesses. Drilling down further in the marketplace category, we are almost finished with the transition of our subscriber base from percentage-share-of-voice to fixed-impression-based subscription terms. Moving through this transition in the methodical way that we planned, our sales team connected superbly with our customers and helped them navigate the changes with ease.

Over the course of the fourth quarter, approximately two-thirds of the agents that converted to impression-based contracts kept their spending levels the same with us, while one-third increased their spend. Very few agents decided not to renew their subscriptions, which is a testament to the strong Premier Agent value proposition.

In addition, as new inventory became available, we brought three times as many new Premier Agents onto our platform as we did a year ago. By the end of this week, we will be completely through our transition to impression-based pricing and our subscriber base will be fully converted, which sets us up nicely for continued growth in 2013.

Back to our results, during the quarter we added 2,770 net new Premier Agents, and ended the period with 29,473 subscribers. The vast majority of additions were at the Platinum level, reflecting an even healthier mix of new agents by Platinum into the third quarter, continuing the trend we’ve seen throughout the year. Average monthly revenue per user, or ARPU, was $267 in the fourth quarter, and, while 3% higher than the figure in the same period last year, sequentially ARPU was essentially flat compared to our third quarter. Looking at our bookings, over 40% of our new sales were to existing agents buying more exposure across mobile and web in their sales territories, which was slightly higher than in the third quarter.

As a reminder, pricing of our Platinum Premier Agent subscriptions varies by market reflecting local home values, as well as contact liquidity and demand for impressions in a ZIP code.

Looking at our other revenue category, display revenue in the fourth quarter grew 22% year over year to $7.5 million. This represented approximately a 10% sequential seasonal decrease from the third quarter. As a reminder, display advertising is less predictable than marketplace due to shorter lead times and non-subscription nature.

Shifting now from revenue to our operating costs, total operating expenses were $33.8 million compared to $19 million during the fourth quarter 2011. Our acquisition of RentJuice earlier in the year resulted in non-comparable increases in our operating expenses during the quarter compared to 2011, with the bulk of them primarily related to headcount occurring in Sales and Marketing as well as Technology and Development lines. As mentioned earlier, the acquisitions of Mortech and HotPads had minimal impact due to the timing of the close of the transactions.

Our cost of revenue during the quarter was $3.8 million, or 11% of revenue, compared to $3 million, or 15% of revenue, in the fourth quarter 2011. We continue to see favorable leverage with our revenue-sharing arrangements due to higher growth from our owned and operated properties relative to those of our partners. Sales and Marketing expense was $14.5 million, or 42% of revenue, compared to 38% of revenue, or $7.6 million, in the fourth quarter of 2011. In the fourth quarter we continued to expand our targeted advertising testing across a number of mobile, online and offline channels. Total advertising and marketing spend in the fourth quarter was approximately $4 million, which was nearly $2 million more than in the fourth quarter of 2011.

Technology and Development costs in the quarter were $9.1 million, or 26% of revenue, compared to $4 million, or 20% of revenue, in the fourth quarter 2011. The increase reflects higher depreciation and amortization costs and increased headcount related expenses, mostly non-comparable year over year related to our acquisitions. G&A costs in the fourth quarter were $6.4 million, or 19% of revenue, as compared to fourth quarter 2011 of $4.5 million, or 22% of revenue. The primary increase in absolute dollars year over year is attributed to transaction related and integration costs, as well as higher facilities expenses.

EBITDA for the quarter was $6.8 million, representing a 20% margin, which was up from $3.3 million, or 17% margin in the fourth quarter 2011. As our expense structure came in mostly on plan, a significant portion of the revenue upside flowed through the earnings. Net income was $549,000 in the fourth quarter, compared to $922,000 in the fourth quarter 2011. Fourth quarter 2012 basic and diluted earnings per share were $0.02, based on 33.4 million and 36.3 million weighted average shares outstanding, respectively.

Now moving now to our full-year 2012 performance, total revenue increased 77% to $116.9 million, up from $66.1 million generated in 2011. In our revenue categories, marketplace revenue increased 105% year over year to $86.7 million, up from $42.2 million in 2011.

Display revenue for 2012 was $30.2 million, increasing 26% from $23.9 million in 2011. Our revenue mix for the year consisted of 74% of revenue coming from our Marketplace category, while 26% came from Display a 10% point favorable shift over 2011 results, reflecting the healthy advance of our Marketplace businesses.

EBITDA for the full year 2012 was $25.2 million representing 22% of sales, and was 112% higher than our 2011 full year EBITDA of $11.9 million.

Net income for 2012 was $5.9 million, which was $0.20 per basic share, and $0.18 per diluted share. And in 2011 net income was $1.1 million, or $0 per basic and diluted share under GAAP.

Turning briefly to our balance sheet, we ended the year with approximately $204 million in cash, cash equivalents and investments, and we had no debt. Zillow continues to generate positive and fast cash-flow cycles. In 2012, operating cash flow totaled $32.3 million or 28% of revenue, enabling significant flexibility in our capital structure to support operational and strategic initiatives in pursuit of our long-term growth opportunities.

Zillow ended 2012 with just over 550 employees, up from approximately 330 at the end of 2011, and we continue to grow in support of our strategic priorities which are growing traffic, increasing the size of our Premier Agent business, and developing our three emerging marketplaces.

Now let me provide a few comments on our outlook for the first quarter of 2013. Our revenue for the first quarter of 2013 is expected to be in the range of $36 to $37 million. This outlook represents 60% year-over-year growth at the midpoint of the range. For our first quarter outlook on EBITDA, we expect a range of $3 million to $3.5 million. And at the midpoint of our range, this represents approximately a 9% margin. Although we are not providing a GAAP EPS outlook for the first quarter, we expect a basic and diluted weighted average share count of approximately 34 and 35 million shares for the first quarter, respectively.

Looking now at the full year 2013, as Spencer mentioned, we expect full-year revenue of between $165 million and $170 million, and we expect EBITDA margin percentage to be flat to slightly down year over year. Supporting our priorities to grow usage, to grow our Premier Agent business, and to grow our emerging marketplaces, we will be expanding investments in product development and advertising across various channels over the course of the year. These are very early days for us, and the investments we are making support our efforts to gain market share and extend our leadership in the real estate category.

While we have successfully demonstrated throughout 2012 that our model has high operating leverage, we are prioritizing building competitive advantages and deepening our competitive moats for the long term rather than focusing on near-term profit maximization. To assist in modeling for the full year 2013, we expect depreciation and amortization to be in the range of $24 million to $26 million, share-based compensation in the range of $14 million to $17 million, and CapEx and capitalized data content in the range of $10 million to $13 million.

We expect full year 2013 basic and diluted share counts to be approximately 36 million and 39 million weighted average shares, respectively. Zillow had an outstanding fourth quarter, capping off an exceptional year. We are extremely pleased with our growth and the advancement of our home-related marketplaces and even more excited about our potential in 2013 and beyond.

In parting, to accommodate investor schedules, we are adjusting the date and location of our investor day to Wednesday, March 27 in San Francisco. We will be following up with details in the weeks ahead, and we look forward to seeing you at our event. We would now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line Neal Doshi with Citigroup. Please go ahead. Your line is now open.

Neal Doshi - Citigroup

Great. Thanks, guys. A few quick questions. Spencer, and Chad, on the revenue guidance, how much of that is organic versus revenue coming from HotPads and Mortech and some of the other acquisitions? And then also, on Q4, were all those subscribers organic, or were some of them coming from some of the other acquisitions that you had? And then I have a follow-up.

Chad Cohen

Hi, this is Chad. I will take those. We are providing any guidance with respect to the acquisitions that we made. I think the best way to think about the contribution from top line perspective to just understand the size of the companies. More fact is about employees and operating at a cash profitable basis when we were a part of them and had about 20 employees and were operating at an unusual base in terms of profitability for a year. So we're not providing a specific guidance there but the vast majority of that growth is coming from organic business line. In terms of Q4 subscriber growth all of that is reflected by our Primer Agents and (inaudible).

Neal Doshi - Citigroup

Okay. Great. And then, could you talk a little bit about mobile? I think in the past, you guys have noted that mobile leads are about three times more valuable to agents versus desktop leads. How far along are we in terms of doing variable pricing at some point, where you can actually charge different for a mobile lead versus a desktop lead? And it seems like this could potentially extend even into the Zillow Digs, as well, if you were to extend this model to provide leads for contractors and plumbers, et cetera. Any insight in that would be helpful. Thanks

Spencer Rascoff

Hey, it is Spencer. So I think that you are referring to, as we said in the past that a home shopper using Zillow on mobile is three times more likely to become a lead, three times more likely to contact an agent (inaudible) than a home shopper using Zillow on a desktop. We don't price our product separately between mobile and desktop, and we view that as a strategic advantage. So we can say the real estate agent takes view similarly with Zillow, you are covered on the internet in terms of desktop or mobile as well as on the partner side job will have which of course is on an operated HGTV, smartphone. You get a free CRM, you get free website that includes listings from your NLS and you'll get a collaborative shopping tool by Buyfolio. So that kind of one stop shop for both desktop and mobile regeneration software tools is part of the value proposition that we provide to real estate agents. Likewise in our mortgage business, on a CPC basis, we price it the same between desktop and mobile and think that simplicity is valuable to our vendors as well. So mobile has had a huge accelerators to our business in terms of usage and monetization but we are not charging different CPM or CPL based on desktop versus mobile.

Operator

Thank you, Doshi. Our next question comes from a line of James Cakmak with Telsey Advisory Group. Please go ahead. Your line is now open.

James Cakmak – Telsey Advisory Group

Can you talk about what type of assumptions you are making on ARPU as you look at your 2013 guidance? You talked about being able to incorporate price increases, or increased spending from about a third of the subscribers during the pricing transition. How should we think about ARPU in 2013? And then secondly, any more detail you can provide around the sales and marketing spend? Is this primarily geared towards off-line, online and how is that area planning on targeting the consumers?

Chad Cohen

Hi, James this is Chad, I will take first question ahead of Spencer. In terms of ARPU, I know it’s an important for the folks on the phone, for the investor community but that’s not really how we managed the business and so we're not providing any color with respect to guidance on ARPU. For instance it’s an output that reflects pricing very good products at the local level and the market dynamics and the local contact liquidity that can crack those prices. And also the number of agents, and the mix of agents that we've been in and the timing of those agents through the year. So I think that's important to keep in mind. What we do manage to do is net new revenue and as you can see in the fourth quarter numbers were up by 90% year-over-year and 80 count by 70% year-over-year, we're really pleased with those numbers, I think looking ahead to 2013 we continue to see expected growth across all our business lines, but I don't (inaudible) in terms of how we view ARPU metric for 2013.

Spencer Rascoff

And James as I said, the advertising question. So, when I talk about brand whitespace, what I really mean is that even though Zillow is more interested in real estate one side in the category, and even though most of our traffic comes to us organicallyand for free, we still have a relatively known brand. So we've actually done extensive consumer research in US and if you ask American to name an online real estate website, more people say I don’t know or I can’t name one than say Zillow and we're the number one site in the category. And more people Amazon who don't even have a real estate section at their website than say the company that's number two in the category.

So just to paint a picture to you by what I mean by brand whitespace, we believe that by advertising and by continuing to invest in product development, we have an opportunity to create a massive enduring brand that from which significant shareholder value breaking and margin expansion comes. But in a near term we are going to continue focus on brand growth, traffic growth and revenue growth at the expense of margin maximization. And we've been driving this Ferrari kind of around this suburban neighborhood and after extensive testing and learning in 2012 its time to take it on the open road and see what it can do. So that's the way we are looking at 2013. We control our margin in 2013 and the guidance that we've given to you today is slightly down full year EBITDA margin because we think there is so much brand whitespace in front of us.

Operator

Thank you, sir. Our next question comes from the lien of Michael Graham with Cannaccord. Please go ahead. Your line is open.

Michael Graham - Canaccord Genuity

Hi, thanks guys. Two questions. One is can you talk about what you expect to see for the ramp of margins throughout the year? You've got flat to down for the year, you guys said 9% for Q1. So should we expect to be exiting the year at a materially higher than where we were for the year 2012, and how you see the ramp progressing? The second thing, it's a little bit of an ARPU-related question that was asked a minute ago. But the agents that are coming in that are new in the ZIP codes or in the areas that are full, and they are the add-on agents that are coming in, can you comment, are they coming in at much lower prices than the average for some of your high rent ZIP codes, or have you already generated enough impressions that they can come in at a level that's close to the average in some of those high rent ZIP codes? I just noticed that your Premier Agent ARPU was down a little bit sequentially. I am just trying to get a feel for where that's coming from.

Chad Cohen

We are not really providing any guidance with respect to the ramping of the margins throughout the year. I think typically the way we traditionally find the year is we take a lot of our investments upfront and I think that's no different this year in terms of thinking about how the margin ranks. With respect to the ARPU question, I think it’s more mechanical than anything I think in terms of sort of slightly down 267 versus 270 last quarter. We invested a transition which is (inaudible) that number but mechanically its revenue down slightly or up slightly less than the number of average new Premier Agents that we brought on in the quarter and so that's bringing the number down from 270 to 267. I would say the model that we move to in terms of fixed impression based pricing allows us to bring new agents more of the street levels so that they can buy and test smaller amount of our Premier Agent Platinum product, and as they see value delivered and you see that in a current quarter, 40% of our sales coming from agents by more than they can put in those spending levels up to higher amounts down the road.

Operator

Thank you, sir. Our next question comes from the line of Mark May from Barclays. Please go ahead, your line is open.

Mark May - Barclays

On the guidance on sales and marketing spend this year, now with the impression-based revenue model pretty much fully intact, how does that change, if at all, the way that you think about your marketing spend? Is that really what's driving your planned increased here? And talk to us how this might change the way that you manage your marketing on a month-to-month quarterly basis, might you be more tactical if you're seeing it actually working and the sales process for the freed up inventory selling well, might you even step on the accelerator even more so than what you're planning right now?

Chad Cohen

I'd say that it is not a coincidence that we are choosing to start advertise more expensively now that we're fully transited to a pricing model where we make more revenue when we have more traffic. But the prime reason that we're advertising is because we think there is an opportunity to create a much more well-known brand, which then drives greater revenue growth down the road. So yes we grow, if we double traffic in a given fiscal for example, we now have a model where we can actually make a lot more revenue from those extreme impressions where the old model didn't have that opportunity. But I would call that an important coincidence. But the primary impetus for advertising is this brand whitespace. And we've seen this quite in other categories and considering internet in the US, where early leaders who build brands through PR and word of mouth and MTL, have been in a privileged position in terms of profitability, where they unlike their competitors can invest extensively in product development and in advertising in order to extend their reach. And we've also seen that play out in international real estate in the market leaders in respective countries in Europe and in Asia and in Australia. So we are following those recipes that we've seen other companies leave that trial in the past.

Mark May - Barclays

And if I could ask a follow up. I know you're not giving specific guidance on ARPU, but given that you are still very early on in terms of penetrating the active agents in the markets, when we look back in 2012, I think you were averaging over 3,000 net adds a quarter, obviously with some seasonal variation. And your net adds, I think, have increased every year for the last few years. Should we expect if that kind of rate continues into '13, and if not, why?

And then last question is a follow-up to Neil's earlier. The three acquisitions that you completed in Q4, can you give us a ballpark, they may not have been that material in Q4, but the rough contribution in Q1 and for full year '13 would be helpful.

Spencer Rascoff

So there is a tradeoff between ARPU and sub count and again the focusing on the fact that we control the destiny on a lot of these business levers we control on destiny on what the EBITDA we want to take for the full year. And we control our destiny on (inaudible) display revenue to grow for example based on how much screen real estate, how much ad inventory we can go to display in terms of marketplace. And we control our destiny on the ARPU sub count trade off because when our sales team can either focus on growing sub count where new subs come in at a lower ARPU or they focus on growing ARPU but upselling existing customers which raises ARPU and the flat sub count or potentially or lower sub counts.

And we have a strategic bias towards growing sub count because we think it’s the next great crop of Premier Agents, perhaps just enter the business. There are always new folks that be coming real estate agents who are starting to use internet market as part of their business plans and so we believe its imp to continue to grow subscriber count, but it is a tradeoff between ARPU and subaccounts. We don’t manage the business to either of those two metrics. We manage the business to total revenue from the Premier Agents, that agent segment and ARPU and sub count and sort of ARPU is not really input in terms of how we manage the business. So if we come to focus that, basically on the topic of kind of ARPU sub count modeling, we don’t give that guidance because the way we manage the business is to total revenue, not to either of those inputs to that number.

Chad Cohen

Mark, this is Chad. Just to give more color. One of the strategic priorities that Spencer outlined was growing these emerging market places and many of the acquisitions that gained in the year in support of that. I the way to think again is just when I said to Neil which is Mortech and HotPads was closed in the prior quarter. Mortech is 14 point in Nebraska so obviously different levels of overheads and employee was typically in the fiscal I would say the mix of those employees are very similar to the mix of employees at Zillow, focused in technology development and sales and marketing and HotPads 20 employees here in San Francisco slightly higher cost of headcount, slightly higher overhead relative to where they are in Nebraska and again with same relative mix in terms of the sales and marketing versus technology development has, Buyfolio is two employees based in New York. We're not providing any more specific color in terms of operating expense base or the revenue contributions that helps with the models and the expenses in 2013.

Mark May - Barclays

Okay and they were all roughly, it sounds like kind of pre-revenue company like us.

Chad Cohen

Well, as I mentioned Mortech was operating on a cash profitable base when the requirement and HotPads is running about 39.

Operator

Thank you, sir. Our next question comes from the line Brad Safalow with PAA Research. Please go ahead. Your line is open.

Brad Safalow - PAA Research

Just this first question factual do you have the mortgage request number for the quarter?

Spencer Rascoff

I’m looking for that right now. Go one with your next question.

Brad Safalow - PAA Research

Sure. In terms of your full year guidance give a sense or your expected contribution for revenue perspective for rentals. Is it material or non-material?

Spencer Rascoff

This is Spencer. I think I guess full year of 165 to 170 is probably not material for the full year but what we have that is we approach the end of the year it will become more important on quarterly basis.

Chad Cohen

Brad that’s about $3 million loan request in the fourth quarter.

Brad Safalow - PAA Research

3 million okay. It seems like I guess based on my math that your revenue yield on those request then increase significantly year over year? Is that fair to say? Your revenue what everyone calls CBC, increased significantly year-over-year, is it fair to say?

Spencer Rascoff

Yes.

Brad Safalow - PAA Research

Okay. And where do you stand in terms of progress in terms of cross selling you’re getting (inaudible) platform to existing large lenders who use the Mortech technology for their mortgage pricing, where do you guys stand on getting into some other institutions?

Spencer Rascoff

It's so very early; you know the acquisitions have been closed for less than a quarter, our sales team in Seattle. Also Zillow mortgage market place is at Seattle and the Mortech sale team in Lincoln are working very closely together but it's so very early just couple of months.

Brad Safalow - PAA Research

Okay. So that's on the rise. Can you comment at all what the ARPU trends, the correlation in ARPU trends in markets where you're seeing significant home price appreciation, versus those where you're seeing modest or things are still flattish to down?

Chad Cohen

We don’t have anything specific there but as you know the way we price our product is market based and we take into consideration what happened to both local home values, contact liquidity you know to what extent is that traffic converting to new contact for region as well as demand for Zillow but I don’t have anything to share with you there.

Brad Safalow - PAA Research

Okay. I don't know if you can disaggregate this for us, at least maybe qualitatively, but how much of your agent growth in the quarter came as a function of, hey, we have this, now we have all this excess inventory that we previously had not monetized, versus hey, we were underpenetrated just overall relative to the 12 slots model in a number of markets and we got a lot of agents in that manner? It's a same market growth in agent count versus maybe not a new market, but an underpenetrated market growth question.

Chad Cohen

Again it's hard one for me to answer. I can say that we move for model that allows us to effectively grow in number of impression we can serve for our agents as traffic grows, and that gives us a lot of headroom in this business and set the stuff very nicely for continued growth into a value out of that out of that Premier Agent business going forward. I am not making any specifics to share with you right now Brad.

Brad Safalow - PAA Research

Okay. And then just the last question on the advertising. I don't know exactly where that spend was concentrated, but what was the actual experience in terms of -- was there an immediate impact to traffic? And now that you're -- I assume you tested in markets in which you have the CPM model in place, how much of a lag is there between when you can actually capture revenues without increasing traffic?

Spencer Rascoff

So, this is Spencer. Like Q3 and Q4 we tested TV, CRM, online display, mobile and other phones of advertising. And what we learned with our tough spend of last year, all which were relative small, so we wouldn't really expect them to have revenue number coming out at the other end and we’re significant but they were very instructive to help us plan our 2013 numbers, what we are doing in 2013 is spending on TV and radio and other forms online advertising that I mentioned as well some other thing this year. As I said although it is nice that we now have a revenue model where when traffic grows revenue increases because impressions grow, that's not the primary reason, primary reason why we’re advertising is to build a traffic and build brand awareness which we believe that we create the company’s more valuable down the road because there is more opportunities to have real estate advertising for Premier Agents and other market participants.

So I guess the point being its direct respond advertising you may might see in other categories where one might try to arbitrage for example with CRM and online lead generation. So they buy a particular keywords and then they sell on cost per lead basis to local advertisers. That’s not really our advertising strategy at this stage. For advertising strategy at this stage is grow awareness among home buyers in the United States that Zillow is a great place to come and shop for home.

Operator

Thank you, sir. Our next question comes from the line of Chad Bartley with Pacific Crest Securities. Please go ahead. Your line is open.

Chad Bartley - Pacific Crest Securities

The breakdown in agents maintaining their spend versus increasing their spend after the model transition is helpful. Better than it was expected and after the summer Q4 guidance, and then as it relate to the transition, any other metrics or comments that you can share in terms of how it went. How it might impacted subscriber growth and their spending etcetera going forward, that would be helpful.

Spencer Rascoff

I would add to that is as I mentioned earlier is renewal owners stuck in this construct of agent buying and 25% of share voice allotment. Agents can come in with much smaller, more street level to spend through a six-month contract, see how they are able to use the product and the platform that we provide to them and hopefully there are forms of compacts and those compacts come into commission checks, and they get an opportunity to once they are key value delivered to increase that spend in future quarters or when their contract expires. So, that the trend that we're seeing is agents can come in with much more discreet level of spend and test out the product and see if it works for them. It's also much simpler and I think to real estate agent talking to them on the phone and saying hey for X-dollars a month you will show up Y times, it is a zipcode across Zillow.com, Zillow Mobile, HotPads.com, HotPads Mobile, Yahoo Real Estate HGTV FrontDoor and you get a free website that can that can (inaudible) and you get a CRM and they don’t have to kind of seek through the pricing of desktop versus mobile, they just know that for a particular out of pocket that’s for a particular number of times. That made sense, so these whole for a particular out of pocket you'll show up a percentage of the time, which is to be old model and they will say how often is that and we will say we don’t know it's how many total visitors we have but it's X percent of something.

That was very abstract so I’m very glad, I know that the sales team is very glad that as of this week we will be fully transitioned to this fixed impression model and I think it has set us up very nicely for a much clearer simpler sell throughout 2013.

Chad Bartley - Pacific Crest Securities

Okay. And one quick follow up. On the last quarter call, we talked a lot about the display ad business and some of the issues around foreclosures and all of that. I'm just curious if that transition is behind us, there is no other issues to think about, whether it's Q1 or sometime in 2013, in terms of that display line?

Spencer Rascoff

Well, we mentioned on that call that we are taking different strategic path in terms of the content that we are providing for our consumers, it is specifically foreclosure content and changed how we powered that part of our marketplace. It's been beautiful in terms of being able to provide additional 1 million to 1.2 million new foreclosure listings that previously our consumers didn’t have access to and nothing there with respect to the display. We typically see fourth quarter as seasonally slow, and in the past we have seen it down it's called 15% to 20% sequential quarter-over-quarter and based on the superb execution of the sales team in the fourth quarter, we are only down seasonally 10% in the fourth quarter. But that is a seasonable business from advertisers our core advertisers, builders, brokerages and financial institutions tend to spend more chasing home shoppers during the second third quarter and you have seen that trend year-over-year for the past few years.

Operator

(Operator Instructions) Thank you, sir. All right, our next question comes from the line of Mitch Bartlett with Craig Hallum. Please go ahead. Your line is open.

Mitch Bartlett - Craig Hallum

Thank you. Spencer, maybe you could remind us on the importance, or where you're at, on agent productivity tools, the CRM, whether that can be extended, whether there's a lot of other tools that can be developed either in-house or they're out there in the marketplace to be purchased. What does that look like?

Spencer Rascoff

So the suite of tools that we provide to real estate agents is still in its early days. The Premier Agent website that we provide for free to platinum and premium agents came to us through an acquisition by the company called Diverse Solutions and we believe that it's the best in breed IDX website which made pulls listings from an agent's MLS.

We have been growing that out to platinum and premium agents for a couple of quarters now, we are very pleased with how it's going and with the impact that it's having on the value proposition that we provide to primary agents. And the second type of pull that we provide to real estate agents is CRM, and there I would describe our current CRM as still very much of work in progress, over the course of 2013 we will be adding core features to it with agents that come to expect from real estate CRMs, which they typically pay couple $100s a month for.

We’re offering this CRM integrated into their My Zillow of this whole website for free but we have some work to do in terms of improving its functionality so that more real estate agents will use it. The third software tool is BuyPolio which we acquired, it was a year old product only live in New York City, about 10% of all the transactions that occur in New York City are done using the BuyPolio Desktop or mobile app allows a real estate broker in New York and a home shopper in New York to kind of interact with one another and collaboratively shop. We are in the process of rolling that nationwide and that will take at least a couple of quarters to expand the BuyPolio service.

So we have high hopes for what impact that might have on the value proposition that we are able provide to premier agents because we have seen what impact it can have on New York where it was a paid service and yet it's done very high adoption and very retention rate amongst its paid subscribers.

So this is core pieces of functionality that we offer to real estate agents, it is an absolutely important part of our strategy to marry de-generation with software tools. And for the most part to provide those software service for free and monetize those software tools by charging more on the effective CPM basis for the ad product that we’re selling them. And we are following that strategy also in the rental space and the mortgage space, so in case of rentals of course the Renters acquisition allowed us to start providing allowed more software tools to property managers and landlords and in the space of the mortgages the Mortech acquisition allows to do something similar with mortgage lenders.

Operator

Thank you. And it appears that does conclude our time for questions. I will like to turn the call over back to Mr. Cohen for any additional remarks and Mr. Rascoff for any closing remarks.

Chad Cohen

Hi, this is Chad I just have one point of clarification. For basic and diluted weighted average share count for the first quarter we’re expecting between 34 and 37 million shares, not 34 and 35.

Spencer Rascoff

So thanks very much for joining our call today and to discuss 2012 and 2013 strategic priorities, the priorities for the year. Just remind you our increasing audience, growing our business and growing our premier agent business and building out our emerging marketplaces and we look forward to speak with you all again soon. Thanks very much.

Operator

Thank you gentlemen. Again ladies and gentlemen this does conclude today’s conference. Thank you for your participation and have a wonderful day. Attendees you may log off at this time.

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