Market Leader Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Market Leader, (LEDR)

Market Leader (NASDAQ:LEDR)

Q4 2012 Earnings Call

February 27, 2013 4:30 pm ET


Mark Lamb - Director of Investor Relations

Ian Morris - Chief Executive Officer, President and Executive Director

Jacqueline L. Davidson - Chief Financial Officer and Principal Accounting Officer


Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Raghavan Sarathy - Dougherty & Company LLC, Research Division

William R. Jones - Singular Research

Lisa O'Dell Rapuano - Lane Five Capital Management, LP

George Santana - Ascendiant Capital Markets LLC, Research Division


Good day, everyone, and welcome to the Market Leader fourth quarter and year-end investor call. Joining us on today's call are Market Leader Chief Executive Officer, Ian Morris; and Chief Financial Officer, Jackie Davidson. As a reminder, today's call is being recorded. And at this time, I would like to turn things over to the company's Director of Investor Relations, Mr. Mark Lamb. Please go ahead, sir.

Mark Lamb

Thanks Farrah, and welcome, everyone, to the Market Leader fourth quarter and year-end investor conference call. We really appreciate your joining us for the call today. Today's conference call contains forward-looking statements relating to the company's anticipated plans, products, services and financial performance. The words believe, expect, anticipate, intend and similar expressions identify forward-looking statements, but their absence does not mean the statement is not forward-looking. These statements and specifically, statements or predictions about the company's potential markets, product development plans and future financial performance are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in the forward-looking statements.

Factors that could affect the company's actual results include its ability to retain and increase its customer base, including enterprise customers and real estate professionals, to sell premium products to real estate professionals associated with enterprise customers, to continue to grow revenues, to respond to competitive threats and real estate market conditions, to develop new products and to develop new product revenue sources from its assets.

Please refer to the company's most recent 10-K filed with the Securities and Exchange Commission for a more detailed description of these and other risks that could materially affect actual results. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. The forward-looking statements are made as of today's date, and the company assumes no obligation to update any such statements to reflect events or circumstances after the date hereof.

This conference call will include discussions of adjusted EBITDA, a non-GAAP financial measure that is defined in Regulation G. For the purposes of this call, when we use the term EBITDA, we are referring to adjusted EBITDA. A reconciliation of adjusted EBITDA with net income, the most directly comparable GAAP measure, is presented in our press release as furnished to the SEC on February 27 on Form 8-K and posted to the Investor Relations section of our website located at

With that, I'll turn the call over to Ian Morris.

Ian Morris

Thanks, Mark, and thanks to everyone for joining us on today's call. I'm very pleased to recap to you the terrific year we had in 2012. But I'm even more excited to talk about what's driving our business today and why we're going to have an even stronger 2013.

Let's start with a quick financial summary. In 2012, Market Leader posted its second consecutive year of more than 30% top line growth. For the year, revenue increased 32% and today, we'll talk about why we're so confident that we'll deliver similar growth in 2013.

EBITDA in 2012 grew as well, by $9 million over 2011 and that's on an increase of $11 million in revenue. Or put another way, for every incremental dollar of revenue we generated in 2012, we delivered 80% of it, directly to the EBITDA line.

Our results are being driven, not only by our industry-leading SaaS platform, but also by our unique strategy, a strategy that sets us apart from the competition as we focus on the $24 billion opportunity in front of us. That's what's spent every year on real estate software and marketing services.

Of this total, Market Leader's current offerings address the $11 billion spent by residential real estate companies and their more than 1 million realtors across North America. So while $11 billion, certainly, represents the big opportunity, it's also a highly fragmented one. And that's where Market Leader's unique enterprise strategy comes in.

More and more, Market Leader is demonstrating that this spend can be highly influenced by the nation's leading franchises and brokerage companies. And that we can more efficiently capture these dollars by establishing long-term relationships with these enterprise partners. We're doing this by using our software to beachhead with these partners in order to gain access, access to the thousands of real estate agents in their networks. And by tightly integrating our platform with their enterprise-level systems, we're increasing the adoption and the stickiness of our software, as well as our ability to efficiently upsell our premium services.

This strategy is working because franchisors are realizing that they can't keep up with the pace of change in technology, so they are more and more open to outsourcing this function to technology providers, and that's where Market Leader comes in.

As the exclusive provider of the real estate industry's only comprehensive and integrated cloud-based software platform, we're offering real estate companies everything that they and their agents need to manage and grow their business. But there's a lot more to it than that. Our expertise and scale are also highly attractive to these companies because real estate software is still a cottage industry. It's serviced by hundreds of tiny little companies that provide narrow point solutions and simply don't have the wherewithal to be trusted with an enterprise-level deployment. So we're leveraging our scale, as well as the breadth of our system to squeeze out these small providers, paving the way to upsell our tightly integrated premium services.

And these enterprise partners are eager to work with us to drive adoption of their platform and also sales of our premium services. That's because our seamless integration with their existing systems drive agent productivity and loyalty, while also providing business insight not previously available at the franchise level.

For example, after launching our platform to their network in February 2011, the average Keller Williams agent did 17% more transactions than they did in 2010. That's more than double the average productivity gains seen by other national franchises during the same period. And that's across the base of 80,000 real estate agents.

Our unique enterprise-centric approach is not only driving results today, but it's also a strategy that will be far more dependable [ph] and far more durable than those strategies being pursued by others. And that's why we're incredibly bullish about the opportunity in front of us, our ability to capture more than our fair share of the spend and the positive momentum this is going to provide us in 2013 and beyond.

Now let's talk more about 2013, and the 3 core objectives that we're focused on. First, we'll further extend our software leadership. Second, we'll continue to grow our unmatched access to real estate professionals. And third, we'll increase our share of wallet.

Let me give you a bit more insight into these objectives, the substantial progress we've made in 2012 but most importantly, even more significant progress we'll make in 2013.

I'll begin with how we'll extend our software leadership. Now recognized as providing the industry's leading enterprise platform, Market Leader is quickly becoming the central nervous system of the real estate industry. And during 2012, we extended our sizable lead in real estate software by making significant upgrades to our platform. The most important of these was the integration of the industry's leading e-mail and print marketing suite, which we acquired in 2011. That marketing suite is now seamlessly joined with the rest of our software platform, enabling real estate professionals to both generate thousands of leads and communicate with these consumers in an automated fashion, from their early-stage research and agent selection, on through to the real estate transaction.

Throughout this process, Market Leader delivers everything that real estate professionals need to cultivate these consumer relationships and run their business. All of this means that Market Leader's software platform is playing a bigger and bigger role in the lives of our customers and in the real estate industry at large.

In fact, in just the past month, we've had more than 12 million visits to Market Leader websites. And thanks to our comprehensive MLS relationships, these future home buyers and sellers can see every home for sale in markets that now cover 94% of the U.S. population, as well as more than 14 million pieces of user-generated content on our social media network.

And of course, we provide our real estate professionals with all the tools they need to engage these consumers, from tire-kicking to closing. What's more, our customers are now managing more than 26 million active prospects via the Market Leader system and they're sending out more than 1.3 million updates to these consumers every single day. Updates that include real-time home listing alerts, neighborhood information, educational content, off-line marketing materials and much, much more.

All of these tools enable Market Leader customers to manage thousands of relationships, while our industry-leading predictive analytics help customers target and personalize their follow-up with these consumers.

Hopefully, these highlights give you just a quick sense of why we see software as the linchpin to establishing deep, long-term relationships with real estate professionals and why we're so confident in our ability to monetize these relationships far more deeply in the quarters and years ahead.

In 2013, we'll continue to make enhancements that extend our leadership in this critical software segment, while also delivering more value for our growing base of customers. A few examples. We plan to extend and enhance our mobile platform, utilize our vast real-time consumer data to provide even more compelling analytics to our customers and roll out tools that help real estate professionals manage the efficacy of their marketing spend across all of their lead sources. I'm looking forward to sharing more on these and other upcoming enhancements in the months ahead.

Turning to our second objective, Market Leader will continue to expand its access to real estate professionals during 2013. Access that's already unmatched in our industry, access that creates a core competitive advantage for our company and access that will be very difficult for others to replicate.

Over the past 2 years, we've increased our customer base from less than 20,000 agents to nearly 125,000. This growth began with the signing and rollout of our first national enterprise partner during the first quarter of 2011, and the results from this partnership are remarkable.

As the first national franchise to provide their agents with a comprehensive software platform, Keller Williams Realty International not only significantly increased agent productivity, but they also enhanced their ability to recruit and retain these professionals.

In fact, just last week, Keller Williams announced that they are now the #1 real estate franchise company in the United States. Not surprisingly, their success has grabbed the attention of other franchises.

In 2012, we signed 2 more of these agreements with 2 of the nation's leading national franchises. The first of these new enterprise rollouts began in the fourth quarter of 2012, but requests for additional integration and functionality required more time than we anticipated. While this delayed our original plans for the full rollout and resulted in fourth quarter revenue which fell shy of our expectations, this is exactly the type of integration that further deepens our enterprise relationships and will assure even more extensive access to these real estate professionals. We look forward to completing these rollout later in the coming months, and as a result, you should expect to see increased access and increased revenue from these partnerships during the second half of this year.

But these enterprise relationships won't be the only source of increased growth in 2013. And based on our success, the success of our partners and the current state of our pipeline, we fully expect to bring on additional partners this year, partners that will further extend our access to real estate professionals in the quarters and years ahead.

Which brings me to our third objective for 2013, increasing our share of wallet. While our #1 priority has been, and will continue to be, to expand our assets, our top line growth demonstrates that we're already beginning to monetize our existing relationships and these relationships will continue to drive strong and predictable growth for many years to come.

We estimate that Market Leader's current customer base is responsible for nearly $1.5 billion in real estate software and marketing spend. And yet, we capture less than 5% of their spend today.

But that share is growing, and it will continue to grow in 2013 and beyond. You see, there are now 125,000 customers using our software. That's 125,000 professionals who are a click away from our best-in-class premium software and now from our highly differentiated marketplace offerings.

These marketplace products are exactly the type of solutions that agents are looking for in this rapidly improving market. And these products offer robust and differentiated value proposition, including things like neighborhood exclusivity on and the targeting of coveted home sellers via We just recently integrated both of these products with our software platform and this integration further distinguishes them while providing customers with unprecedented value that competitors simply can't match.

All of this will enable us to increase our share of wallet as we generate additional revenue from our installed base, now 125,000 agents strong.

By focusing on these 3 key objectives, we'll increase our share of this $11 billion in spend and drive another year of very strong growth for Market Leader. This growth will come from sales of our premium services through our enterprise partners, as well as growth from outside these networks. And this growth will be assisted by what looks to be the strongest real estate market that we've seen in more than 6 years. Numerous studies from Case Shiller, NAR and many others suggest that in 2013, we'll see a strong real estate market with both increased transaction levels and increased prices. In fact, according to REAL Trends, existing home sales for 2013 are projected to be at the highest level we've seen since 2006.

Not surprisingly, for the first time in many years, real estate professionals are becoming incredibly bullish. Earlier this year, we conducted a survey of the 330,000 members of our social media network, the largest of its kind in real estate, to get their take on local market conditions. The findings from this research were very compelling. 84% of real estate professionals expect their local markets to improve this year, both in terms of transaction and in terms of pricing.

This renewed optimism motivates agents and brokers to invest more in the tools will help them grow their business, and Market Leader has already seen this dynamic play out in the form of our own salesperson and productivity. Productivity which remained very strong despite the addition of new sales people and typical Q4 seasonality.

As you may remember from our last call, we began adding and training new sales personnel late in Q3 in response to improving market conditions. In retrospect, we would have been better served by capitalizing on this opportunity even earlier, because our current -- our recent results validate these new investments in customer acquisition, investments that will clearly drive stronger growth in Q1 and throughout 2013. Growth that will also help us further invest in our software leadership and our access to real estate professionals.

Jackie is going to talk more about what this all means for 2013 in just a moment, but suffice to say, we're very pleased with the results that we've put down in 2012, and we're even more excited by what's ahead as we move towards our next milestone of $100 million in revenue and 25% adjusted EBITDA margin by the end of 2015.

Now for more on our financials, I'll turn it over to Jackie. Jackie?

Jacqueline L. Davidson

Thanks, Ian. 2012 was another strong year for Market Leader. We grew revenue over 30% for the second year running, while also returning to EBITDA profitability. All the while, we continue to invest to firmly position ourselves for similar growth again in 2013.

Today, I'll touch on the highlights of our financial performance, then, close with some more specifics on our outlook.

First, our financials, where you'll see that our top line growth is driving significantly improved operating results.

We finished the year with $45 million in revenue, up 32% over last year driven by both strong demand for our end-to-end SaaS platform, as well as our new integrated marketplace offerings.

Our 2012 net loss was significantly reduced from the prior year and we also saw a pretty dramatic improvement in EBITDA.

Adjusted EBITDA for the year was a positive $1.7 million, compared to an EBITDA loss of $7.3 million last year. Both strong revenue growth and significant operating leverage contributed to this performance.

For the year, we contributed over 80% of incremental revenue to the EBITDA line. We're pleased with this demonstration of the operating leverage in our business, as we believe we're still very early in the process of scaling what we expect will soon be a much larger business.

A few comments on the recent quarter. Q4 represented the 12th consecutive quarter of revenue growth for Market Leader, our third year of uninterrupted quarterly revenue growth. Revenue was $12 million, up 27% over last year. Q4 revenue was shy of our expectations due to the timing issue Ian mentioned earlier, and we've incorporated this change in timing into our outlook.

Adjusted EBITDA was in line with previous expectations despite lower revenue. Our Q4 EBITDA profit of $900,000 was a significant improvement from the EBITDA loss of $800,000 in Q4 last year.

To further illustrate the scale we're seeing in the business, let's take a look at expenses. Our Q4 sales and marketing expenses were $7.3 million, up just 9% from last year, on a revenue increase of 27%.

Sales and marketing expenses include both the cost to acquire customers, as well as the cost to service them.

Customer acquisition costs were $4.2 million, up 20% from last year. As we indicated on our Q3 call, we stepped up customer acquisition to capitalize on improving market conditions and you can begin to see the impact of that decision in the fourth quarter.

Q4 servicing costs were $2.8 million, down from last year. This is an area where we're demonstrating significant operating efficiency while accommodating a rapidly growing customer base, one that's increased to a 125,000 over the course of the year.

We're also seeing continued leverage in technology and G&A costs, both of which decreased as a percent of revenue over the past year, even as we continued to expand our software leadership and support a larger customer and employee base.

We ended the year with 278 employees. We also ended the year with a strong balance sheet, $22 million in cash and no long-term debt, as well as $48 million in NOLs.

And now for our business outlook. We command an enviable position in the industry today with clear leadership both in terms of software and access to real estate professionals, and we expect to extend both in 2013.

At the same time, we'll also extend our strong revenue trajectory, with expectations for a third consecutive quarter of 30% top line growth. This growth will be driven by the strong demand we're seeing for our unique products at both the professional and enterprise level, an improving real estate market, and our ability to upsell premium services to our existing customer base, now 125,000 agents strong.

It's notable that of the 125,000, we've already got nearly 20% or about 24,000, buying premium services from us. These factors are driving revenue growth now and will continue to do so throughout 2013. In fact, we expect revenue growth to accelerate through the year, as we see incremental revenue both from sales we're making today, as well as from our coming enterprise rollouts.

As we continue to grow our business, our priorities will be to extend both our software leadership and our access to real estate professionals. Given planned investments to extend our leadership in both of these areas and to capitalize on improving market conditions, we expect annual adjusted EBITDA margins in the range of 8% to 12% for 2013. And similar to our revenue trajectory, we expect EBITDA margins to increase through the year, starting from Q1 EBITDA, which will be lower than Q4 due to the investments we're making at customer acquisitions.

These investments are being driven not only by the size of the opportunity in front of us, but also by the excellent results we're seeing from our recent investments in customer acquisition. Investments that we are confident will drive another very strong year for Market Leader. All of this will move us even closer towards our next milestone, $100 million in revenue with 25% EBITDA margins by the end of 2015.

And with that, Ian and I would be happy to take your questions.

Question-and-Answer Session


[Operator Instructions] We'll hear first from Brandon Dobell of William Blair.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

A couple of questions, Ian, on your comments about the push out on the franchise rollout. Maybe, what kind of deeper integration and requirements are you working on now? And in conjunction with that, do you think it puts you -- or kind of -- what kind of position does it put you in to kind of raise the barriers for other solutions that those agents might want to use? And then, a follow-up, kind of related to that, that 125,000 users you mentioned, I would imagine that doesn't include Century 21 and Better Homes and Gardens yet, given the timing of the rollout, I want to make sure I'm getting those numbers correct.

Ian Morris

Brandon, this is Ian. Yes, as far as franchise rollout is concerned, we did begin the roll out in the fourth quarter. As you know, a lot of these franchises are made up of hundreds of brokerage companies. Some of them are pretty large and have some of their own systems and what we found was as we were doing this rollout, some of those large brokers in the network wanted some additional integration, some tie-in to functionalities that they already had, and so on. So those are the right things to do to get those big brokers who are influential completely behind the rollout. We regrouped, we're doing -- we're adding that functionality, adding those integrations and we'll be rolling it out in the coming months. We're doing a number of these in the coming months. And really, it just creates a timing issue for us. Nothing has changed about the size of the opportunity, or our bullishness on it. It's just a timing issue, before we put the full weight of our marketing, and our partner marketing behind us, we want to make sure everything is in place. So that's what all this is meant for the rollout. A little bit of a bump in Q4, no impact on the opportunity and we're expecting to see revenue bumps throughout this year, particularly in the second half. As far as the 125,000, there are some customers in there, but to your point, far more not in there. The rollout did begin, so you have some customers who signed up, so you've got a few in there but for the most part, they are not included in the 125,000, as you suspect.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. And then, taking that one step further, the 24,000 users that are going to buy in premium services now that Jackie mentioned, any sense of what our revenue per user for that group of people would look like relative to other kinds of buckets you could look at? Perhaps, the non-franchise average user, broader franchise user, I'm just trying to get a sense of, I guess, order of magnitude to people who have really signed up for a lot more of than the average.

Ian Morris

Well, it ranges -- that's a great question. It's a range because we have premium software upgrade, which is typically about $100 per agent, per month. And then, we have some of the marketplace offerings, the premium marketing services on top of that, which can also be a few $100 more on average. So it's a mix of those 2 things and the more premium software upgrades we get, the better. Because it does leave us plenty of room to, then, upgrade to even more marketplace offerings, but that $100 a month is less than we see on those offerings. So as we roll out, you can think of it as a flow throughout, get people on the platform with access. That's our #1 priority. Try to get them at a very low cost, very effective upgrade to our premium software and then, as we get them more and more using our software, to get to be able to show them the ability to add leads, to accelerate their growth, to engage with our premium marketing solutions and get the full benefit out of them and now our integrated software. And you know the improving market conditions are going to be a big help there because agents are now, for the first time in many years, really starting to look at, "Okay. But what can I do to step on the gas here?" And that's, I got to tell you, been through the downturn, that is a pleasant shift.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Yes. No doubt. And then, final one for me, any, I guess, potential color around conversion rates or your confidence and satisfaction level with moving people from the basic software to the premium software? And then, moving people from a premium software user to being a marketplace user? Any kind of penetration statistics or adoption statistics you can give us, so we can kind of get a feel for how that supply chain works from just signing somebody up on a basic to getting them to spending several $100 per month would be?

Ian Morris

I don't know if we have a lot more color to add. We're definitely -- the focus is top of the funnel, get people on using the system. Get that access number, get the 125,000 number up. And I think you know our background very well. For people who don't, I think the important thing to stress there is that's the strategic advantage of the company. These enterprise relationships, getting people using our software to run their business. It's so different than what most people are doing in the space, where it's just going after people one at time. Yes, they will spend $300, $400, $500 at a cliff that way, but those dollars can move around a lot faster, too, as an agent gets a listing, gets some thousands of dollars in their pocket, then goes on a dry streak. It's harder to keep those dollars. Our goal is to get largely through these partnerships, get that 125,000 number up. We know full well that we'll be able to monetize those customers, both by getting them to click a button and upgrade to our premium software and then, adding on some of the more expensive marketplace services and typically, we're seeing that happen now with not just online but also on webinars. We get 1,000-plus agents on webinars all the time now. Very easy for them to just click a button and upgrade to these services. So we're very bullish about that. But we do prioritize getting the access, getting these relationships as the #1 priority and we're very confident that the monetization follows, perhaps, even faster than it's followed thus far, but it's already happening.


[Operator Instructions] We'll hear next from Raghavan Sarathy of Dougherty & Company.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

So I wanted to go down on the Keller Williams Partnership. Can you give us some sense for about how many agents have activated the base level and then, upgraded to premium services? And then what sort of expectations do you have from a revenue perspective from this account?

Ian Morris

So I can only share so much about any specific partner. As you can imagine, from a competitive standpoint, for them, I would say that -- it's safe to say that as far as the base platform, we're very integrated with their other system. Their corporate internet, their transaction management, things like that. As a result, it's safe for you to assume that the vast majority of their 80,000 agents have now engaged in the base platform. As far as specifics around how many is, then, upgraded to different services, we don't provide that other than to say, it has been a very rapid ramp-up. I think we announced a number of quarters ago, maybe, it was the first quarter of last year that we had gone -- that, that had become a $10 million plus run rate business for us after just the 3 quarters with them. So we've seen a significant ramp and it has continued to grow from there. We're bullish that there's a lot of headroom left in that number and we're even more bullish about the fact that we've got a couple of other relationships that will take growth paths, not just for 1 year or 2 but potentially, for many, many years to come given the success that we've seen with our first partnership, and that they see with us.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

And then, just one quick follow-up. Can you talk about the traction of the success outside of the enterprise customers, the last year. Of the 125,000 agents, how many are outside of the base, the big customers?

Ian Morris

Sure. I don't have a specific number for you on the last part of that question. I will say that a lot of the bullish tone you're hearing here is the fact that, that business outside of the enterprise is better than we've seen it, probably, since about early '06, late '05. So we're really seeing some great movement there and that comes in the form of salesperson productivity. We saw good productivity in the fourth quarter, which is typically a slower time, as you can imagine. A lot of real estate professionals, they move into the holiday season, homeowners aren't doing a lot of transactions. So you typically -- it's pretty hard to get people to spend then. We had a very strong Q4. We're seeing strong results now and we're adding salespeople. I wish -- frankly, I look back at the last year and I think we started adding people a little more aggressively at the tail end of Q3. If I had to do it over again, that probably would've been at least a quarter earlier, if not more. I think we saw this -- we saw it coming in Q3, I would like to go back and get it going even earlier. I think you'd see even faster growth now. And as we talked about, we're expecting accelerated growth through the year as those salespeople come up to speed, they get trained, it takes them a few months to get to full productivity. But based on what we're seeing now, we're very bullish about that piece of the business.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

And then, so on that topic, can you talk about the investments you're going to make on the sales side? Is it going to be more focused on enterprise? Maybe outside of that box, can you give us some color around that?

Ian Morris

Yes. I mean, on the enterprise side, it's not really about ramping resources. As you can imagine, our focus is on these largest of enterprise customers, the large national franchises, that's a very senior level relationship building type of relationship. It's something we do every day. So we don't need to add resources there, it's more on the day-to-day, the on -- sales people who are calling out and on the marketing that supports them. So for instance, in the first quarter of each year, you'll see a lot of big events, national franchises do their annual conferences, so we're very busy right now and have a strong presence at those events. So that's the kind of spend you see to support the sales efforts and those sales and marketing efforts do affect -- they're largely focused outside of the enterprise relationships, but they're certainly -- we certainly do have an effect of those salespeople inside of those relationships as well, because not all these sales come in at the click of a button. I love them when they do, but they're certainly follow-ups from these webinars and things like that. So getting those -- getting people into those seats and following up on those is another huge opportunity and it helps drive the enterprise sales as well. Does that make sense?


[Operator Instructions] Moving on, we'll take a question from Bill Jones of Singular Research.

William R. Jones - Singular Research

Ian and Jackie, congratulations on another solid year of growth. I was going to ask you, you had talked about the 3 guiding kind of principles for 2013 and also, growth from existing enterprise relationships, new deals and upselling or increasing share of wallet from existing relationships. Without getting into granularity, just can you give us like an order of magnitude what drives that 30%-or-so growth more in your mind?

Ian Morris

Sure. I think it's a balance of both expanding the customer base and growing -- and getting those folks to upgrade to our premium solution. On any given day, obviously, it's the latter. It's getting -- moving folks from just using our software to paying for the enhancements, to expanding into our marketing services. But from what we've seen over the past 2 years, even though the monetization comes in on the -- increasing our share of their wallet, the strategic focus of the company is much more slanted towards getting that 125,000 number up. If we do that and when we do that, you're going to see the monetization follow. It doesn't follow the next day, but it does follow. The software is good, they get engaged with it, it becomes very cost-effective to, then, upsell them. So that's really the focus of the company. If you look at the last year, what you see is a lot of growth came from just pure expansion of our access, and a good chunk of it also came from those customers, us getting more share of their spend. And the exciting thing for me about where we're at today is we don't really have the products in place that address the $11 billion that these folks spend. And if you look at just our customers, you'd probably have about $1.5 billion worth of spend each year and we're a $50 million-ish company, right? So we don't have to make a market here. We don't have to convince people to go buy some new concept. We just need to move their dollars from the many places they're spending today, which still includes things like the newspapers and the real estate rack publications and so on, and more and more of it is moving online. We just need to create a compelling opportunity for them to spend those dollars with us and the more that we are the backbone that they use, that they're in our software because they can take a lead off their website, or off one of our own sites and see what that consumer's doing and have them directly driven into the software platform. Click a button and click that consumer that came in from onto a campaign that says online mail, off-line, and so on. The more we can do that, the more we're going to see those upgrades happen and they're going to shift dollars from other places to us. And then, the fact that they look to be spending more dollars because the market is turning, that's even better.

William R. Jones - Singular Research

Excellent. And what about other opportunities outside of that, like, are you still looking for tuck-ins or? Obviously, you're always looking.

Ian Morris

I never rule it out. They tend to all get brought our way, which is great. Not a core focus right now. We were pretty aggressive in 2011, we went into the year with some specific gaps we were looking to fill and I'm very pleased that we were able to fill them before the market started to turn a bit here. The platform is in place. I would never rule out that you'd see us -- but there will be things that we feel like are very opportunistic as far as adding strategic value and being at a price point that just makes a ton of sense for shareholders. But right now I think we have in place what we need to target the $11 billion and we've got less than 5% of it. So that's the core focus right now.

William R. Jones - Singular Research

Okay. And one final question, if I may. You mentioned -- you gave some pretty specific guidance for 2013, and you also mentioned a longer-term goal of $100 million in revenue. To me, there's potentially another more near-term milestone of EPS positive. Do you want to say anything in that regard? I mean, obviously, we can do the math but do you think that's important or something that you're focused on?

Jacqueline L. Davidson

Yes, Bill. You've clearly laid out the next milestone, as you mentioned, of getting to $100 million revenue and expecting around 25% EBITDA margins as we approach that mark by the end of 2015. And if you look at the, I'd say, the below EBITDA expenses, we clearly get there along the way. We're not really calling a particular quarter when we'll get there, but that -- as EBITDA grows, as EBITDA improves during that time line, we'll also get to positive net income and EPS.

Ian Morris

And clearly, our priority right now -- I'm sorry, I was just saying, and clearly, the priority right now is all about the top line. The business has great scale to it, great operating leverage so EBITDA and cash will follow and then, obviously, a positive EPS is great, but we've always looked at the business, first and foremost, in terms of the top line and then, the EBITDA generation.


[Operator Instructions] We'll hear next from Lisa Rapuano with Lane Five Capital Management.

Lisa O'Dell Rapuano - Lane Five Capital Management, LP

I want to talk about the scale that you're talking about, and this going to 25% EBITDA margins by the end of 2015, which I'm assuming means the run rate on the fourth quarter, right?

Ian Morris

That's right.

Lisa O'Dell Rapuano - Lane Five Capital Management, LP

Okay. So if we think about the elements of expense going into that, I just want to make sure I understand how you're thinking about it. So we know what's in G&A, and we know how that scales, that one's easy. But the one that's a little -- and we know that you're going to invest more in sales and so that's growing to grow, hopefully, less than sales, but it's going to continue to grow. But the one I'm not as clear on is the technology and product development line. Just given what you're talking about with mobile and these other transitions, so can you help me understand what sort of maintenance levels you need to maintain at, and what are the opportunities to invest more there that could drive that sales line further?

Ian Morris

It's a great question. We will clearly continue to invest there. So far, we've shown some scale in that line item even as we have invested more, but we will continue to invest. And I think, clearly as we mentioned, the software leadership is absolutely core to us, we feel like we have a multi-year lead there and it's something we'll continue to invest in. So that's not the area where I would model a lot of operating efficiencies. Clearly, as you said, G&A, sales and marketing, will be some as well. We're trying it, but we will continue to invest in making the software better and better and many of the enhancements we talked about today, but also numerous others.

Lisa O'Dell Rapuano - Lane Five Capital Management, LP

Okay. And then, on the sales and marketing, I'm a little bit behind in my knowledge here, I understand. But the people that you are currently, or that you have just started hiring when you said you were a little late, they are focused on enterprise, you said, right?

Ian Morris

It's a mix. It's more out -- once they get to that level, the salespeople can be focused on one of these accounts or they can be focused outside of the networks themselves. The key thing for us is that when it's within these enterprise networks, the productivity is dramatically higher. We've got people signing up via e-commerce. We have people going on our webinar 1,000-plus at a time, who are either clicking a button or calling into a small group of salespeople, so you'll see dramatically better cost efficiencies and higher productivity for those folks. But the role they're doing is not dramatically different, so we are staffing up people, it does affect both sides of the business and I do expect productivity to remain strong while we staff up, which is always a challenge. It's one of the reasons why sales and marketing is tough to assess on a monthly or quarterly basis because when you're in a period like this and you're adding in more people, you have the expense of recruiting them, you have the expense of hiring them. You have the time of training them and getting them up to speed. So you're not going the payback on that for a number of months out. And we're there today, but based on what we're seeing, I mean, people are coming up to speed faster and productivity is strong. So like I said, I think it's not that we were late for the game, but if I had to do it over again, I would certainly be at least a quarter earlier.

Lisa O'Dell Rapuano - Lane Five Capital Management, LP

And you talked a little bit -- last thing -- you've talk a little bit about how you're focused on that 125,000 number. Because if you can get them in the funnel, they're going to start buying more as they go through the experience. So can you give us any anecdotal, descriptive information about sort of your earliest cohorts and how they behaved? I mean, like, what level they're spending with you now versus what they might have started where they were 1 year ago or right when they came on? Can you give us anything along those lines, so we can just think about how one individual working through the system typically behaves?

Ian Morris

I think the best way we can add color to that is probably the first enterprise relationship that we launched in the first quarter of 2011. Within 3 quarters of that, we had gone from a $2 million revenue stream with that enterprise to over $10 million on a run-rate basis. The majority of that came from their agents who were just using the base level system to clicking on and upgrading to our professional version, which is $100 per month. That was most of the growth we saw in 2011. We are -- and I would say, of that base of users, a much lower percentage of them have our marketing solutions than the rest of the base. So, if you look outside of the enterprise relationship, the penetration level of our marketing tools was much higher. It's one of the reasons why we think there's so much more headroom amongst the enterprise relationships. So I don't know -- they're all going to roll out a little bit differently, but I still think a good way to look at it is, they start using the software, they see features that they want, they learn the features they want, they go to educational programs and they learn that "oh, they can also do X, Y and Z," if they just upgrade it to pro and they move there. And then, we've really got them fully engaged and their -- it increases the opportunity for us to get that extra $200, $300, $400, $500 a month in marketing services. So that, I think, is the best way to look at it.


[Operator Instructions] We'll move on to George Santana of Ascendiant.

George Santana - Ascendiant Capital Markets LLC, Research Division

Quickly, this may elicit as a comment of no change but can you just address the competitive landscape and whether you're seeing anybody step into the field and challenge you in any major way, or is it mostly still each of the franchises' internal systems that's the main competition?

Ian Morris

Yes. So to your latter point, I mean, you nailed it. The biggest challenge we have is internal inertia. I think more and more, these large brokerage companies, the large franchises are realizing it makes more sense for them to focus their attention and their capital on the real estate business and to move more of their software outside. That said, many of them have built out nice building blocks over the years and they want to leverage those building blocks and they have their agents using those building blocks, let's say, a corporate Internet, which they may have built from scratch, they may have gotten from another vendor. Usually, it's something in between, where it's a customized version of something another vendor provided. So our biggest challenge is to get in there and be able to show them how we can integrate with a building block or 2 that they have with the rest of our building blocks. It's the biggest challenge in sales, it's most of the work on the technology creation and rollout. Our backbone itself is very extensible, very scalable, it really doesn't take much to customize it in the form of private labeling and making it look very different. The biggest challenge we face is always getting sold in, such that they see the benefit of integrating with their systems and then, doing that integration. That's the custom work. But it's also the area of greatest value. I mean, once we're integrated with something like a corporate Internet, and there's a button on that page at the agency every day when they log and it says, "My Contacts," and they click on it and they're in our system, not at the homepage of our system, but they're in the contact manager piece of our system or "My Leads," and they see that they have 3 new leads that came in today and they click on the 3, and they're seeing those new leads in our system. So it's things like that, it's that level of integration that creates so much value for us, for the agents and for the franchise. And I think it becomes -- that's -- when we talk about the revenue being very defensible and very durable, that's what we look at, that's where the stickiness comes in, it's the integration, and the value, that provides for everybody in the process. Does that make sense?

George Santana - Ascendiant Capital Markets LLC, Research Division

Absolutely. Sure, I mean, it's difficult enough to get people off of their blackberries, right? I mean, so you can just see the stickiness and then once you change once -- well, you don't want to change again, I presume?

Ian Morris

Yes. Fortunately, we're seeing great results. So people see that and it gets us into the room and then it's a question of how do we make this work for the partner and I do think our biggest competition is inertia. In the enterprise space, it's still very much -- we're the only scale player of the -- we know of 3 enterprise-wide deals like this that have taken place and we've won all 3 of them. So we feel very good about our chances to get others to move our way.

George Santana - Ascendiant Capital Markets LLC, Research Division

Very good. A quick follow-up question. You mentioned the number of salespeople and how you're hiring more aggressively there. What number are you at now and where would you like to go?

Jacqueline L. Davidson

Yes. We've grown our employee base and a large part of that has been our sales force. We ended the year with 278 employees, that continues to be -- the preponderance of those are in the sales and marketing category, but we've never kind of explicitly broken out, like, the exact number of sales people, George. But we continue to have a vast majority of employees in the company, outside of technology of course, focused on customer facing, roles both in sales and customer support.

George Santana - Ascendiant Capital Markets LLC, Research Division

Right. You have 2 separate teams, right? One on the inside sales and the other out in the field?

Ian Morris

Yes. Although, I would say, the out in the field side is very small. We have a lot of top-level inside people go out and do those in advance. We certainly have some senior-level business development people and some people who talk to the larger companies and so on. But most of what we do is inside sales, but it's a pretty high end inside sales. And those folks are more than capable of going out to these national franchise events and doing something that I would characterize between business development and sales at those events.

George Santana - Ascendiant Capital Markets LLC, Research Division

Do you see a need to grow that number -- those numbers significantly this year? Or is it just less than 20% growth, say, in the sales force?

Ian Morris

I don't know that we'd put a number on it today. I would assure you that we're pretty disciplined about this part. It's never obvious, exactly, how many people to add. And it takes a month to play the numbers through. Having been here for over 10 years and having played through a very, very, very good market and then a very challenging market, you will see us take a more disciplined approach than we did back in '04 where we were pouring people in as fast as we possibly could. But as we see productivity levels, we'll keep steadily increasing and right now we're in that phase. But the great thing about where we're in today versus '04, '05 is, it is more efficient today. The enterprise relationships make this a much easier business to manage because once we get these partnerships in place, now there is that ability to get them to click a button and upgrade, to get them hundreds or thousands plus on a webinar where they're really going on to learn how to use their base system. But while they're learning about their base system, they learn a few things that are only available in the Professional Edition and they can literally go and click a button and now they've moved up. So it's a much more efficient process today, but you're still going to see these chunks of growth coming from inside salespeople calling out. The great thing about today versus 2004, 2005, again, is back then, it was really a leads-based sale. Now that software, whether they're on the enterprise side or not, we've got a very sticky software application there. That, again, can be used to run their whole business. So that's going to make even the non-enterprise revenue that much more durable.


[Operator Instructions] And it appears there are no further questions at this time. Mr. Morris, I'll turn the conference back to you for any additional or closing remarks.

Ian Morris

Great. Well, I just want to thank everyone, again, for joining us today. As you can probably tell, we're pleased by our growth but we're even more excited about what lies ahead and our ability to capture more than our fair share of this market. Jackie and I look forward to seeing many of you in the coming months at the ROTH Conference, the William Blair Real Estate Summit and at many other upcoming events. And of course, we look forward to updating you on all of our continued progress throughout the year. Thank you.


Ladies and gentlemen, that does conclude today's conference. We thank you all for joining us.

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