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Zillow (NASDAQ:Z)

Investor and Analyst Day Conference

March 27, 2013 11:30 am ET

Executives

Raymond Jones

Richard N. Barton - Co-Founder and Executive Chairman

Spencer M. Rascoff - Chief Executive Officer and Director

Greg M. Schwartz - Chief Revenue Officer

Erin Lantz

David Vivero - Vice President of Rentals

Amy C. Bohutinsky - Chief Marketing Officer

David Beitel

Chad M. Cohen - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

Michael Graham - Canaccord Genuity, Research Division

Ronald V. Josey - JMP Securities LLC, Research Division

Neil A. Doshi - Citigroup Inc, Research Division

Kenneth Sena - Evercore Partners Inc., Research Division

James Cakmak - Telsey Advisory Group LLC

Raymond Jones

Good morning, everyone, and welcome to Zillow's First Investor and Analyst Day. Thank you very much for joining us. I'm RJ Jones, Zillow's Investor Relations Officer. And after some brief formalities to start off, we will move quickly to the main event.

First, I'd like to direct your attention to the standard disclosure statement that's also included in our reference materials. During the course of discussions today, we will be presenting forward-looking information. Please note that any forward-looking statements we make may differ materially from actual results and we maintain no obligation to update any such statements in the future. Also we will be referring to our non-GAAP measure, adjusted EBITDA, simply as EBITDA throughout the presentation. We provide a reconciliation of EBITDA to net income in our reference exhibit, which can also be found in our filings with the SEC.

Next, we are very near the end of our first quarter and plan to report our results for this period in early May. Due to the sensitive nature of this timing, we are very limited on what we may discuss regarding our upcoming report and appreciate your understanding.

With that, this event today is focused on Zillow's strategy, vision and long-term opportunity. And I'm privileged now to introduce to you our Executive Chairman and Co-founder, Rich Barton.

Richard N. Barton

Thanks, RJ. So I'm pretty excited about the percussion that we have here. Hopefully there'll be more of that throughout the presentation. Okay. Yesterday, while we were rehearsing here, we felt like the subway train was going underneath, so we may get some of that excitement here, too, some good augur for Zillow's future.

All right. I want to thank you guys for coming here today to spend some quality time with us and with the team, and not just with the folks that you see on a regular basis, not just with Spencer and Chad and myself, but to actually see the meat of the team. I'm going to set up the day simply by giving a little -- like a pretty brief overview of the vision and really to answer the question -- to ask and then answer the question of why we started Zillow and why so many talented engineers and businesspeople have come to work at Zillow, many of whom you'll meet today. And really the answer to that question in short is pretty simple.

On the one hand, on the right-hand, from a kind of create -- right brain perspective, from a creative perspective, an emotional perspective, it's because we're leading a revolution, a revolution in online real estate that is empowering consumers, and we believe, changing the world. And from a left brain perspective, from an analytical perspective, what appeals to us so much and has attracted all these people to Zillow and perhaps is the reason, one of the reasons you're sitting here today listening to us, is that it is a massive opportunity. It is just a huge business opportunity.

Okay. I'm going to answer this a little bit more fully by rewinding to 1984. I am 16 years old, and I am sitting at home doing what I think a typical 16-year-old would do come, at least back in 1984 before the iPhone. And that is, I was watching television. And I was watching Super Bowl XIII not because it was a great game. That's Marcus Allen on the screen. He ran right over Joe Theismann's Washington Redskins. It was a complete blowout. But this was a memorable game for me, not because of the game, but because of an advertisement that I remembered clearly that came on in the third quarter. This advertisement spoke to me. Let's watch it.

[Presentation]

Richard N. Barton

So this advertisement aired only once. It has become, from a critical acclaimed perspective, the most famous television advertisement of all time. Now a fair question is, why is that? And I think the simple answer to that question is that freedom is primally appealing to us as humans. We do not want to be sitting in those rows of drooling drones, nodding our heads at the giant head on the television screen. We do not want to be enslaved.

When we feel that we don't have freedom and we are not empowered, we self-organize to find a hammer to be thrown through the screen. We self-organize to have a revolution, tear down this wall, storm the Bastille. This is revolution and it's played out -- history books are full of revolutions. It's played out over and over again throughout human history.

Now revolution, it turns out, has played out over and over again through business history as well. This buffed-out athlete with the hammer, she is the personal computer. She is the Macintosh. She represents the Macintosh in this ad. She is the personal computer. She is the Internet. She is the smartphone. And industry after industry are being revolutionized by these technologies.

Now our Zillow leadership team, much of this team is the team that led this revolution in the travel industry when we started Expedia back in 1996.

So we turned to real estate, and in 2006, when we were shopping for homes ourselves, it struck us as quite weird that the Internet revolution had not yet taken hold in the United States, at least. Now there are lots of reasons for that. I think one of the prime reasons is that back in the mid-90s when the web was just beginning, the industry -- an industry consortium got together and knighted a single consortium player to be the one site on the web that would be able to have all of the for-sale listings that were available on MLSs. And in so knighting -- this sounded pretty good from a business perspective -- but in so knighting that company, what happened was that company got bound up by restrictions on how they could innovate on behalf of consumers. But because this consortium was powerful, it had a wet blanket effect on startup investment and competitive investment for the industry for a decade.

So when we started sniffing around the industry in 2006, we saw a situation, we can pattern recognize a little bit. And we saw a situation that looked very much to us like 1996 in travel. We saw frustrated consumers, hungry, frustrated consumers hungry for information, trying to access inaccessible information that was locked up inside of secret databases and inside of county courthouses. And we saw a platform that was antiquated from a technology perspective. This felt to us like all of the right ingredients for a real Internet-driven revolution to occur. And all this was before the smartphone had even happened. That is a hammer that's happened even since we started looking at this and it's just accelerated things.

So our challenge now was, how do we go about? As we looked at this industry that no one really has been able to enter in a successful way for a decade, how is it that we enter? How is it that we empower people? Well, what we did was build a database of every home in the country. And our vision was to fill that database with all of the information that we could possibly find from every source we could possibly find and make it free and accessible to the people to empower the people.

And the first and most critical bit of information we wanted to put in this database, we call the Zestimate, which you guys are familiar with, an estimated market value of every home in the country that we update every night. This is tough stuff, this Zestimate. We take lots of data and information, lots of feeds into the company. We've written -- we have really sharp PhD mathematicians and statisticians that have written in artificial intelligence algorithm, that does a really good job at estimating the market value of every home in the country.

So when we started this, we had 2 really interesting pictures on the whiteboard that we thought were killer pictures that we drew. The first picture that we had on the whiteboard was kind of an aerial view of a neighborhood, a helicopter-level aerial view of a neighborhood, looking down on rooftops. And our vision was to have a number on each rooftop and to have that number be what today's value or best guess of what today's value of that house was. We thought that would be a killer, killer feature, traditionally viral feature.

The second picture that we drew on the white board was what looked like a stock chart, but it was plotting the value of a home over time, a home that is such a valuable asset to so many Americans, such an important asset. Why can't we track that value of that asset like we do stocks?

Our fundamental insight was that people want to know about all homes, not just what happens to the small subset of homes that happened to be on the market but from the MLS right now. There are now 110 million homes in this living database, 132 million photos. 37 million-plus home profiles have been updated by the community. 80% of all homes in Zillow's database have been Zillowed -- they've been viewed by somebody on Zillow. This is a living database. It has all these feeds coming into it that are updating it constantly with new information, be it from robots or from industry feeds or from agents or homeowners that are uploading information. This thing is living and breathing.

This database is our competitive advantage. It is our competitive differentiator. It is what constitutes the moats around our business, and it is what serves as the connective tissue amongst all of the marketplaces that we're building, that you'll hear about.

Okay. So I was talking right brain, the passion stuff, the revolution stuff, so far. Let's turn to the left brain and think about the business opportunity and why we came to Zillow, why we started Zillow, from a business perspective and get the other perspective.

On the left-hand side of this picture is the demand side of the marketplace. The right-hand side is the supply side of the marketplace. And on the left-hand side, we encounter a massive and fragmented marketplace of consumers -- hundreds of millions of consumers, buyers and sellers of homes, buyers of mortgages and refinancers, renters, home improvers, okay. These people are -- these people spend maybe 10% of the U.S. economy every year in these industries, okay, well over a $1 trillion a year spent by the people on the left against services and products than the people on the right, okay. So big and fragmented.

Let's jump to the right-hand side, the supply side of the marketplace. And again, we find a huge -- we have tens of millions of professionals as real estate agents, mortgage providers, rental professionals and landlords, and all kinds of home services related professionals and products, okay. Huge industries, and a reasonable -- a reasonable estimate for what these industries spend on an annual basis in advertising alone is $34 billion. So that we see as our kind of most conservative and most identifiable TAM, target market, okay, that $34 billion.

The $34 billion breaks down in the following ways. I know we all try to come up with good estimates for these. My personal feeling is the exact numbers don't matter all that much. I do know they're quite large.

Okay, so it's a big business opportunity from that perspective. And now I want to show it from a slightly different perspective that I saw a couple of weeks ago. So my acronym here stands for an interesting graphic from a big shareholder, who showed us this graph -- who showed Spencer and me this graphic about 3 weeks ago, and we thought it was fascinating. And I'm going to show this, this is the kind of slide that is a bit out of character for me to show. It is a little bit crass. It is not as much -- I'd like to talk about vision and dream and strategy, and this is a little bit more mundane. I found it interesting nonetheless. And I hope you guys do as well. Okay.

So I'll set this up by visiting Australia, okay? And what this bubble represents is the size of the agent -- the real estate agent commission market in Australia, okay. This is $5.3 billion. And there is a far and away leader in Australia in the online real estate space called the REA Group. The big URL is Realestate.com.au. There is their enterprise value, $3.4 billion.

Now let's jump to the U.K. and look at those same numbers. $4.1 billion in agent commissions in the U.K., the leader, rightmove.co.uk has a $2.7 billion enterprise value. All right, you know where I'm going with this. And we'll now look at the U.S. And I'll tell you again, I want to caveat again, this is illustrative. These 2 bubbles that we're overlaying on one another are certainly interesting to look at together, They're not directly correlated, of course. And it's certainly not a fait accompli that things are going to look like this.

However, the biggest chunk of identifiable TM for Zillow in the U.S. is actually the agent commission dollars. So the U.S., to scale, it's a relative scale, looks like this: $59 billion in agent commissions, and Zillow's enterprise value currently at $1.7 billion.

This is why we started Zillow. The revolution has huge, huge emotional right brain appeal, all right. We as humans love to be excited about the revolution. But the huge opportunity to make a difference from a financial and analytical perspective is critical. It's critical to this.

Now the leadership team here that you know, many of you know some of us and you'll meet some new faces today, I will tell you that we are a team that wins. We are a team that is super focused on empowering customers. We are a team that dreams about leading a revolution. And we are a team that is playing a long game, okay?

It is now my pleasure to introduce Zillow's CEO, Spencer Rascoff, a guy who I am extremely lucky to know. Thank you.

Spencer M. Rascoff

The international comparison is interesting because it highlights just how baron the competitive landscape has been in the U.S. historically. And the reason that the U.S. market is still underdeveloped is the prior to Zillow, there was no market leader with a consumer orientation. The legacy historical market leader was created by the industry for the industry and it prioritized the realtor over the consumer.

Prior to Zillow, shopping for a home was like being in a dark room, where only the realtor held the flashlight. And she would show you one home for sale or another home for sale that as a consumer all you'd want to do was grab the flashlight for yourself, or better yet, just turn on the lights. And that's what we've done at Zillow: we've turned on the lights.

So on Zillow you can see not only the commoditized listings, those that are for sale by agents in the MLS, which are on thousands of websites. But we also show for-sale by owner listings, new construction listings, hundreds of thousands of rental listings, Make Me Move listings, the premarket price owners post on their own home, over 1 million foreclosure and pre-foreclosure listings. All of these are alternative listing types, which are not typically for sale on other websites because agents don't earn full commissions on these types of listings. And of course, prior sale data for every home sold in the country going back over 15 years.

This is data that is not typically available elsewhere. And of course, the iconic view of Zillow, showing all homes in the market with the Zestimate on every rooftop. It's this type of information transparency and market context that provides consumers with information they need to make informed decisions about real estate. We give consumers unparalleled access to information, giving them broad and deep data. And this unique content, combined with a fantastic user experience on desktop and mobile, and this comprehensive database of all homes, which is constantly updating and growing, creates a springboard from which we create marketplaces -- and you'll learn about 4 of them today -- marketplaces all of which hang off the home.

Our strategy to develop these marketplaces seems complex at first, but it's actually surprisingly simple once you understand it. It's a strategy we're taking to each of these 4 market places in turn, the marketplace to buy a home, the marketplace to get a mortgage, to find a rental and to plan a remodel. At the core is the living database of homes.

We then build great products on desktop and mobile, which attract a huge audience. And our CTO, David Beitel, today will talk to you more about how we create these products. Our CMO, Amy Bohutinsky, will talk to you about we raise awareness to these products in order to grow audience.

We then invite professionals, real estate practitioners, to interact with this consumer audience for free. For example, for the first few years in our real estate marketplace, we solely gave free exposure to real estate agents. We allowed them to post listings on Zillow for free, to use Zillow functionality on their own blogs or websites, to participate in discussions with consumers on Zillow Advice, where they can showcase their expertise, and to have past clients post consumer reviews of their services for free in order to demonstrate their credentials.

In our Mortgage Marketplace, for example, we allowed lenders to quote loans to borrowers for 2 years in order to build marketplace liquidity before starting to charge. We then started charging professionals for Marketplace access. And we iterate on the monetization model, tweaking it, and sometimes completely changing it, in order to find the right model which works for advertiser, consumer and for Zillow as the Web publisher. For example, in the case of mortgages, we changed from a cost-per-lead model to a cost-per-click model. In the case of real estate agent advertising, we changed from a share-of-voice model to a fix-number-of-impression model. We then provide software tools to real estate professionals, which improve their success with the program.

Greg Schwartz, our Chief Revenue officer, will explain how in our real estate marketplace we provide agents with their own websites, with a CRM tool to keep track of their client communications, and with other software tools. Erin Lantz,

who runs Zillow Mortgage Marketplace, will explain how our Mortech acquisition expanded us into the software tool space in mortgages.

And David Vivero, who runs Zillow Rentals, will explain how the SaaS tools that we provide in the rentals industry help us grow that marketplace.

We then take some of our profits and we reinvest them in the business, hiring more software developers to improve the product further and investing in advertising to grow audience further, and Amy Bohutinsky will discuss our product and advertising strategy further here.

When this strategy comes together in a marketplace, it's a beautiful thing. It's a virtuous cycle that allows us to create a very big business. We're following this strategy, and we've accomplished it before so far in 1 of our 4 marketplaces all the way around this cycle. And we're now doing it in each of these 4 marketplaces, each of which is at a different stage of its own development.

It's been just 20 months since we IPO-ed, but we're really a different company today than we were at the time of the IPO, and that was primarily the impetus for having this gathering today. Back then at the IPO, we had our core real estate marketplace and a growing but small mortgage business, and we had just acquired Postlets, which was the first time that we dipped our toe in the water of providing SaaS tools for professionals.

Today we have 4 marketplaces: real estate, mortgages, rentals and home improvement. And through 5 acquisitions, post-IPO, we've added significantly to the suite of software tools we provide to real estate professionals.

In the 20 months since the IPO, we've tracked very successfully against each of the goals that we set out for ourselves on our IPO roadshow. At the time of the roadshow, we said we would grow audience, and grow audience we have. We went from 23 million uniques at the time of the IPO to more than twice that today. At the time of the IPO, we said we'd slowly evolve into the SaaS space and provide more software tools, and we've certainly done that, providing tools like our CRM now for mortgage lenders, real estate agents and rental professionals, providing websites and other software tools in each of our marketplaces.

We said we'd invest in mobile, and in fact, we've tipped towards mobile now, where more than half of our visits and more than half of our homes viewed are now on mobile. At the time of the IPO, we were very proud to talk about 20 homes viewed every second on mobile. Today, 20 months later, that's 75 homes viewed every second on mobile.

We said we'd grow our Mortgages business. And in fact, in 2012, we more than doubled the size of our Mortgage business to over 12 million loan requests, and we acquired Mortech. We said someday we'd be in rentals, and we made 2 acquisitions in the rental space, and we launched the Zillow Rental network, which is the largest rental network on the Web, according to comScore. We said someday we might be in home improvement, and last month, we launched Zillow Digs, which Amy will talk to you more about.

And we said we'd continue to execute as we grow, and in fact, we now have 6 quarters, post-IPO, of exceeding the targets and commitments that we've made to investors and shareholders.

So I'm quite pleased with how we perform relative to each of the objectives that we laid out for ourselves at the IPO. But to see how that rolls through into our financial results, this is a look at how our actual results have compared with investor expectations at the time of the IPO. For example, when we went public in 2011, investors expected us to do about $115 million for revenue in 2013. But we actually did that much in 2012. When we went public in 2011, investors expected us to do about $170 million in revenue by 2015. But now investors expect us to do that in 2013, 2 years earlier.

So this was revenue -- this is the revenue look, which we've put forward by 1 to 2 years. And this is the EBITDA look. So on an EBITDA basis we're tracking about 1 year ahead of the IPO plan. So for example, at the time of the IPO, investors expected us to do about $35 million in EBITDA by 2014. They now expect us to do that in 2013. And you expected us to about $14 million in EBITDA in 2014, and now you expect that in 2013, about 1 year earlier. So a lot has changed in the company since the IPO in terms of our results, financial and otherwise.

But something else significant has changed since the IPO, and that's the housing market. The real estate market has changed dramatically since our IPO. At the time of our IPO in summer, 2011, the real estate market was its trough, with fewer than 4 million homes sold a year and home values at their low point. But the market's changed. We've seen 15 months in a row of appreciating home values, and we're forecasting 3% annual growth for 2013. Home sales have also picked up significantly and most analysts are expecting more than 5 million home sales and perhaps more than 6.5 million within the next couple of years.

To see how that housing recovery flows through into our unit economics of our largest marketplace, our Premier Agent business, let's look for a moment that the Premier Agent funnel. In January 2012, we had about 31 million unique users. We had 15,000 Premier Agents, and we were sending them about 15 contacts or leads per month. At about a 3% conversion rate at an average $200,000 home value, that rolls down to about and 8x ROI for an advertising agent.

In January 2013, 1 year later, traffic was a lot higher than a year before and our Premier Agent number was a lot higher. But contact of line grew significantly so we were able to still send about 15 contacts per Premier Agent per month.

The 10% increase in home values year-over-year also allowed the ROI to be up or flat -- flat to slightly up. So what happens when home values improve and when conversion rates improve? Well, as conversion goes up to, say, 5% through greater adoption of our software tools and through macro tailwinds, which cause home shoppers to become home buyers and as home values go up even just 3% a year, the ROI goes up dramatically. Now note that we don't think that we need to have a 10x to 20x ROI over the medium term. In fact, we think something closer to a 1x to 2x ROI is more appropriate for advertisers. But for now, we're quite comfortable of dramatically over-delivering on value to advertisers.

On our last earnings call, I explained that our priorities for 2013 were to grow audience, to grow our Premier Agent business and to grow our emerging marketplaces. Today, you'll hear from our team on initiatives and get more insight into their respective areas and what we're doing to deliver on each of these 3 priorities.

The team pursuing this massive opportunity is a cohesive team that's been working together on revolutionizing the real estate industry for the last 8 years, and many of us work together, revolutionizing the travel industry and creating a huge category leader in that space prior to Zillow.

Today you'll hear from Greg Schwartz, our Chief Revenue Officer, who runs our sales team for each marketplace and our Industry Relations team as well. You'll hear from the leaders of each of our 3 emerging marketplaces: Erin Lantz, who runs Mortgages, David Vivero, who runs Rentals; and Amy

Bohutinsky, who will discuss Zillow Digs.

And our CTO David Beitel will discuss how we develop products at Zillow to drive audience and provide greater value and software tools to professionals.

Amy will then discuss our marketing and advertising and we'll wrap up with our CFO, Chad Cohen, discussing longer-term financial targets.

The goal for today's agenda is to give you plenty of time with people other than the usual suspects, me and Chad. So you can hear directly from the rest of the leadership team at Zillow. I hope that by the end of the day you'll leave with good insights into how we're developing the business and how each business leader runs their functional areas.

Two housekeeping notes, we will be distributing these slides on memory sticks, and during the breaks, there are 2 tables set up with a variety of mobile devices, so you can see how Zillow works on different mobile devices that you might not necessarily be as familiar with.

It's now my pleasure to introduce Greg Schwartz, our Chief Revenue Officer. The speaker bios are in the handouts that we've given you, but Greg joined us from CNN Money and Yahoo! before that. When Greg joined Zillow 6 years ago to create a revenue organization, we were doing about $7 million in annual revenue. Greg and his team have grown revenue over twentyfold since then. Greg?

Greg M. Schwartz

Good morning. So I'm excited to have a few minutes here to talk you about our Premier Agent program, which is our principal line of revenue today, and one that's still growing nicely. We'll have a few slides to roll through, and then if you have questions, I'm happy to take them. So the Premier Agent program has been a very robust program for growth-oriented real estate agents. It's for those that want to grow their businesses, and be systematic in their approach.

And the core premise of the program is to take the millions, the many millions of buyers and sellers, who use our mobile applications and desktop experience and connect them with world class real estate professionals, to help them complete these really complicated and demanding and intimidating real estate transactions, which we're all quite familiar with.

There are 4 key components to the Premier Agent platform, and it really is a platform today. There's -- where you see mobile and web advertising, it's a locally targeted, display advertising approach, which really helps agents develop their reputations and brands within their target zip codes and neighborhoods. We have a contact generation platform, which is a very powerful flow of leads, which typically roll about 15 leads or contacts each month, which comparatively is quite strong for real estate agents. For free, we arm all of our Premier Agents which a robust set of CRM tools, which is -- which are easy to use, mobily-centric and really help them in conversion, the key critical element is, when we're sending 15 contacts for real estate agents, we have to arm them with efficient ways to manage that high flow of customers. And then finally, a robust training platform, which I'll tell you about, both in market and in online training, to help our agents share best practices with each other, and really unlock the code for how to succeed on our platform.

So I'm going to dig a little deeper on the key elements of the platform. First, and foremost is our buyer's agent list, which runs on both our for sale and not for sale, primarily, or a Zestimate home detail pages. This is a very powerful platform that does 2 key things. It generates -- it's the principal generator of that leads that go from our platform to our Premier Agents and it's a powerful discovery mechanism for wonderful real estate agents as well. Interestingly, the buyer's agent list translated very, very well to the mobile revolution. It monetizes just as well on our mobile applications, as it is on a desktop experience, which has been a terrific fuel for our business. As you -- as I'm sure you're familiar with, the Premier Agent program is priced and sold on a per impression, per zip code basis, so it's quite a locally-focused slice of our business and we manage it that way.

Actually, before we go on, I think -- here's a shot of it on the mobile application. There's something that's occurred, that's a big magic on our buyer agent list, and it's these agent reviews. So there are hundreds and thousands of professionals and reviews now on the platform, and I hear from our Premier Agents every day that they get calls and e-mails and texts from real estate buyers and sellers, from home shoppers, really, who selected them based on the premise of these proprietary reviews. It's a very, very important part of this ecosystem.

So featured listings, the second compelling advertising element, allows our Premier Agents to exclusively be present on their own listings, it's a very important brand mechanism, listing generation tool and lead tool as well.

So our Premier Agent websites have been a lot of fun. They've been disruptive and very effective, so we allow all of our tiers of Premier Agents, so there's 3 tiers of our Premier Agent program, Platinum, Gold and Silver. Platinum is our most intensive and engaged customers, it includes impressions on our buyers' agent list. Gold includes featured listings and our Premier Agent website, and Silver is just that Premier Agent website. So those are our 3 tiers, and this website product is part of each of those. The website provides a real estate agent a reasonably priced, and I'll talk a lot about that, a little bit about that actually, reasonably priced, personalized website with a domain that they select, MLS-based search, available on both desktop and mobile. It was pretty darn disruptive, and still is a year later after we've launched, and it's been very well adopted. Inman, which is our trade news service in the real estate business, named it the most innovative new technology of 2012. So not only is the software, the service quite robust, but the pricing, really knocked the socks off the industry, so we offer the website product for free to all for Premier Agents, and at just $10 per month to our Silver package customers.

That was a shot across the bow of an entire industry, I think it really drove adoption of this important platform. So let's keep on rolling here.

So our CRM platform. So we're sending 15 contacts a month, and ever-growing to our premier agents. We need -- it's strategic to us and to our customers to arm them with easy-to-use, mobily-centric software to help them manage this significant flow of customers. As Spencer pointed out, it's extremely strategic to us to drive the conversion rate of the leads we send to our customers ever higher, so that they make more money, we can charge more, we can sell them more impressions and sell them more leads, ultimately.

So the software platform is, I think, would be -- we'll be working on this one for years to come. It's already very well adopted, with over 75% of our Premier Agents logging into the service, multiple times each month, and we've got a lot of good work to come. We've purchased a company not long ago called Buyfolio, which is a wonderful and innovative approach to co-shopping, you'll [ph] see us bring that national in the coming quarters. So this is a very important part of the strategy.

So Zillow Academy and our agent training platform is really, really important. So we call it "the code", so Premier Agents and real estate agents who unlock the code to success stay with us, and we'll talk a little bit about our retention numbers shortly. But the code is a pretty simple approach to business, which some agents know and we teach others.

It's being systematic, rigorous and fast in our follow-up to Internet real estate consumers. We expect the same high level of service from a real estate agent that we find online, as we expect from Expedia, Amazon or any of the other e-commerce services. We probably expect a higher level of service, often driven by text messaging of our real estate agents, because it's such an important and large transaction for us. So it behooves us to share best practices in a system with our agents, so that they can be ever more successful. So we do thousands, thousands of end market events each year, both -- almost every day, if you go to Zillow Academy, you'll see us running a webinar, and then, we've got a whole team of folks who do large market events and large tier events, which you'll see some photos from in Irvine, we had 150 Premier Agents in a room 2 weeks ago, they spent a day with us, learning best practices, all the way down to individual trainers with groups as small as 12 folks.

So if an agent unlocks "the code", which is being rigorous and systematic in their approach to business, we can scale their business, turn an individual proprietor into a company, and they stay with us forever.

So I hear from our Premier Agents, Spencer and I and Rich had a dinner last evening with 25 top agents, some were customers, some were prospects, and soon will be customers, last evening. And nothing makes me happier as a guy responsible for this line of business, than hearing from them that based on the back of the systems, leads and inquiries that we connected them with, they're hiring buyers' agents, assistants, licensing software and building companies, when they used to be sole proprietors. I hear that every single day, and that means success.

In the TAM, we're going to -- I have a whole section addressing the total addressable market, TAM, we'll talk quite a bit about that, we have the ability to king make agents, and build many companies; we love that. This is a big part of it, teaching them the skills to get there.

I'm just going to take a moment, if I can see that far, and read you a quote from a tweet after our Irvine event 2 weeks ago. "Attended a Zillow seminar yesterday, and got more in 5 hours from them than my local board -- so that's real estate board, has even me in 10 years." Now it's a bit of an indictment about his real estate board and I hope they're doing more from that -- than that, but it speaks to the connection we're forming with our 30,000 Premier Agents.

So we have a rather robust service platform, and it's not just a selling platform for our Premier Agents because again, we want to bind them to us, teach them the code and to have them grow their businesses and their spend with us. So we've got a robust sales team of about 200 folks based in our Seattle headquarters, and also in Irvine, California. This is a world-class, rigorous inside sales organization, carefully measured and quantified, run almost like a military operation, we like that. We like that a lot. Our sales people are extremely productive for us, and so we'll grow that team this year.

So they bring thousands of new Premier Agents onto the platform every month for us, but then the process goes from a selling process to an engagement platform. So we have a large account management team that then gets on the phone with every one of our Premier Agents on a regular basis, and teaches them the code and helps them along. We also have specialized service and support teams. So this is a very important part of our success.

So speaking of customers. As you can see, at the end of the fourth quarter, we had 30,000 Premier Agents, and you can see some pretty rapid growth rates. I'm often asked about why some agents succeed, vast majority of them, by the way, and why some don't. And it's going back to this rigorous and systematic approach to business, because selling real estate isn't a hobby if you partner with us, it's a really serious, high-volume business. Those that do leave the platform and we'll talk a little bit about those numbers, typically leave for 2 reasons, and I want to be open about those 2 reasons. It's primarily people that are getting out of the real estate business, and my guys and gals probably shouldn't have sold advertising to them, if they're on their last legs in the business, and it's then a set of customers who, once they've discovered what was required to succeed with an Internet real estate shopper, it wasn't for them, and that's okay, it is a big component of the business that will still generate their leads, their business, their customers through familiar relationships at baseball games, at the local Kiwanis club, that's just fine, but that's not the part of the market we're trying to serve and, frankly, the larger part of the market, it is our area. So those customers tend to come, they start getting 15 inquiries or leads each month, they tend not to be mobily-centric. They probably have an e-mail address that they've had for 10 or 15 years, they're not checking it second by second. And this isn't for them, and we wish them well.

But I don't want end on or speak to that negative note. Let me read you this recent e-mail that Spencer got with a copy of the real check. We have proven -- we have a proven ability to help grow champion agents. So here it is: "Spencer, this check represents the most expensive transaction I have ever closed in my 8 years in the business, and the largest paycheck I have ever gotten," you see that $29,000 paycheck, "This house I sold is 3x the average cost of homes in my marketplace. I would never have had this opportunity if I were not a participant in your Premier Agent program, which I have been a member of for the past 3 years. I've closed over 50 Zillow leads in the time I've been in your program, so I can certainly attest to its success."

We hear these stories each and every day. I'm often asked by prospective Premier Agents, what kind of price point we do best in, and my quick and cute answer is, all folks looking for homes in America want exceptional real estate solutions, whether you're buying a humble home in South Florida for $50,000, because there's still some of those, or buying a home here in California at $10 million, you want to use a world-class suite of applications, mobile applications and desktop experience. One of the agents last evening at dinner, was telling Spencer and I that she met a $10 million customer, international buyer, all-cash buyer, on Zillow, and 30 days later, had closed the deal at full commission. She will be with us forever. And I hear those every day.

Okay. So getting into customer retention. So this is some new data that we've not shared with you in the past, and I want to get this across to you. When our agents figure out the code, they're with us for good. So what this data takes us through is, after the 6-month mark, our average spend with our customers, the number of zip codes they buy impressions in, and ultimately the number of contacts they get, rapidly escalate. If you pass that 6-month, you're with us. We did a quick, cohort analysis for you, which speaks the same opportunity, which is really after 16 months, if you figured it out, you're with us for good, you'll love this, this has become a big part of your program. I hear from agents every day that between 30% and 50% of the transactions they do come from the Premier Agent program.

I guess one more comment on this. As we talk about the big tent that the real estate industry is, 2.1 million licensed real estate professionals in the United States last year. So there's this model starting to emerge, which we are driving. And it's a team or a more structured business model. We sent high volumes of lead -- leads to a Premier Agent, they start to see commission checks at a high ROI, which Spencer was talking to you about, between 7x and 10x ROI. They have, then, working capital to reinvest in more impressions with Zillow. Suddenly, they're using our software tools throughout the day. They're up at 1:00 in the morning, responding to international buyers, I hear that every day. They're buying more and more impressions and suddenly it's not 15 leads they're getting from us, but 100 leads. They blink, suddenly they've got 2 or 3 buyers' agents on their team, they typically will be charging them a 35% referral fee on the leads they give to their buyers' agents, and they've got this enterprise growing and growing and growing. That's one very prototypical model, which really addresses the TAM opportunity which we'll talk about next.

One of the other prototypical model is a single proprietor, who's getting 15 leads a month from us, seeing between 7 and a 10 times return, and is thrilled with what we're doing for their business. Okay.

Just talking about total addressable market or TAM, we look at it 3 different ways, and I'm going to dive into each one of these waves in more depth, hopefully not painful depth. The first way we look at it is, we do a derivative of, of the number of licensed real estate agents. The 2.1 million licensed real estate professionals, 30,000 of whom are Premier Agents, you see the common theme here is, there's a lot of blue sky for us, there's a lot of growth and a lot of work for us to come here. So while this is our most significant business, Rich Barton likes to call it, much like a fifth grader, right? So we've gotten out of kindergarten, we know how to read. We see our path for schooling, we can add pretty well, I was working on multiplication tables with my kid yesterday, by phone, but we've got a lot, a lot, a lot of work to do here.

So this fifth-grader of business year, we've got 30,000 Premier Agents. We believe there are about 6 -- between $6 billion and $12 billion spent on real estate agent -- by real estate agents and teams on advertising and software, so we're at a $90 million run rate in the Premier Agent business, lots of blue sky. And finally, the approach that we actually use in our operations to drive for business, is a transaction approach. So 5 million homes sold last year, each home has 2 sides to it, those 10 million transaction sides and our model, which I'll share with you, we conservatively look at 159,000 transaction sides.

So the job here, and why this is a funnel is, the more buyers we put in this funnel and sellers, real estate transactors, the higher number of them that we connect with world-class real estate agents, who then have world-class software tools to convert more of them. The more and the larger the addressable opportunity is for us.

So going through each one of these models. So TAM by agent count. 2.1 million licensed real estate professionals, 963,000 of whom are a member of our industry body, the National Association of Realtors. Well over 400,000 of whom have set up their profiles in Zillow. We love calling our inside sales team and our outside sales team, love calling folks, and we do it every single day. Those 400,000 agents get a lot of communication from us, about joining the platform. They're very good prospects for us. 30,000 of whom, just under 30,000 of whom, were Premier Agents the end of the fourth quarter. So 1.4% of all the real estate professionals are currently Premier Agents. I think you get that model.

Second model is, is an advertising approach. So $1.1 million -- I'm sorry, $1.1 trillion, big number, in transaction value. So $59 billion in gross commission dollars, at a 5.2% commission rate. The industry norm or belief is that between 10% and 20% of commission dollars are reinvested in marketing and software services. So conservatively, using the 10% metric, we're looking at about a $6 billion market spent, marketing spend, Burrell, the esteemed research company, uses a 15% metric at $8 billion, we wanted to go conservative here. Burrell believes 70% of the overall market is spent online on websites, software tools and online display advertising and search. It's about $4 billion addressable market and again, a $90 million run rate today. So we've got a lot of work to do and a lot of opportunity. So the approach, finally here, TAM by transactions is again how we drive and think of the business. 10 million transaction sides in the U.S. last year, 4.6 million were on existing homes, 400,000 new homes. So according to the -- we believe according to the NAR statistics, 40% of transaction sides are addressed through an offline or an existing relationship, either an agent you've worked with in the past, a family member or just something that occurs already. So we've removed 4 million transaction sides from our addressable market. We then apply our -- a conservative transaction model. So 15 contacts per month, per agent, is what we typically send, and we apply a 3% conversion rate, which is super conservative, to those contacts.

To give you scope, a systematic, software-centric mobily-centric, well operated team on our platform will convert, certainly at a 10% conversion rate, but we don't want to assume everyone is, has yet got the code, and that's why we're working really hard on communicating the code throughout the system. So we use that 3% number, which takes us to 159,000 transaction sides, or 2.6% of the addressable market. So a really, really interesting and large opportunity.

So I'm going to jump over to a topic, which many of you asked RJ and Chad and Spencer about, and I spend a lot of my -- actually a decent amount of my time on, is our relationship with real estate brokers and MLSs, so that's one of my principal responsibilities at Zillow. We've got thousands of very varied relationships with brokers and MLSs across the country. They span a number of different types, brokers who are mobily-centric in their marketing, so they're out of the paper, they're not doing bus sides anymore, they don't have sandwich boards as the core of their marketing approach; we tend to have very, very robust, very integrated, very thoughtful relationships which are many of the largest companies, real estate brokers companies in America, they're typically buying featured listings, they're typically running display ads, and they typically have a great handle on their metrics, so we've got a high ROI program with them, and we've got a whole team of folks that fly around the country and build and foster those relationships and they're a lot of fun.

We've got other folks and partners who are quite conversion-focused. They've got business models where they charge a referral fee, typically 33% or 35% on every lead they bring in, off of the Internet, so they'll charge a referral fee to their agents. We love those partners as well, they're counting and quantifying every lead they can possibly get out of us, because it's a net profit source for them. And they're typically featuring our listings, where, if they don't want to put the capital into it, they're running our Zillow For Professionals program, where they feed us their listings in near-realtime and they put their listing agents in the first slot, on our buyers' agent list. Other brokers who are less engaged in Internet-centric model, typically send us their listings directly, or through an aggregator, and we'll go ahead and post those on the website with up to 75 photos at no cost, and we'll mark their agents on their listings.

So quite a varied set of relationships, and I'm happy to talk about those in lots of depth. We spent lots of time on them, and they're good friends of ours.

So, listings data. It's a topic that I hear from time-to-time mentioned by investors. So we have the widest breadth of listings, and we're quite proud of them, of any destination online. Let me repeat that one more time. Zillow has the widest breadth of listings, most varied type and sources, of any platform, anywhere online. So those listings, about 2.4 million for-sale listings as of midnight, last night, I think, RJ? Because that changes all time. About 2.2 million of those, are what I would call traditional listing source from MLSs, or indirectly from MLSs. It's robust, it's a robust set of data that we have, and an important one. But then we have over 150,000 for-sale, unique listings you typically don't find in any other platform, so for sale by owner homes, new construction homes, and homes that banks feed us directly. We also have these really, really unique, over a 1 million unique listings that we would call premarket listings, so our very popular Make Me Move listings, which I hear from real estate agents every day, that they actually prospect for listings on, and I hear from consumers all the time, including my family members. And then pre-foreclosure listings that have had a notice of default, I'm sorry, homes that have had a notice of default put on them by the bank, which are a very interesting set of data and listings that soon will be in market, hopefully.

So we run 700 -- over 700 feeds throughout the day, each and every day. And those are sourced from many, many different sources. We'll often get the same listing multiple times, our algorithms and system then matches those listings, picks the most reliable and timely source and publishes it on the website.

So I think the key theme that I want to leave you with on listings is, why this breadth of listings? And I know some other folks talk about timeliness from time-to-time, including competitors. What I would say on competitive studies, if it's okay, is that when a competitor runs a study, it's partisan by nature. So I would read that with the gullible meter. I will say this. Those folks who market their services based on timeliness, or greater timeliness than us, have not seen anything yet. We are very, very serious in deploying capital, technology and business resources to be world-class, not just in the breadth of our data, which is better than anyone online, but also in the timeliness. You'll hear lots about that in the months and years to come from us and from me. No heat on that, I promise.

So some recent survey data, pivoting back to the Premier Agent program, from our Premier Agents, which was really, really interesting. We asked our Premier Agents to rank the importance of various marketing tactics in their businesses. And being a Zillow Premier Agent was second, not by a lot, only to being listed in the MLS. This is a program that's only been around for 6 years. MLS, far longer than that, and we're almost as important to them in their business as their MLS. That's really a compelling statement on the value of the advertising services we provide.

Second, something we haven't talked about and I'm sure Amy will in her marketing section is, top reasons about becoming a Premier Agent. Most -- the most frequently provided answer was the breadth of our network. So as you know, we power Yahoo! Homes, formerly called Yahoo! Real Estate. We've got the widest used, most used mobile applications and desktop experience. Next week, am I allowed to say that? Well, I just did. Next week, we'll launch HGTV's FrontDoor, using our listings and our advertising platform, and of course, HotPads, which is a recent acquisition, which uses our listings data. So we've got by far, both on our owned and operated properties and our partner properties, the largest reach of U.S. home shoppers, of any platform available anywhere.

So I thought it would be a really interesting way to finish out the prepared remarks by hearing from some of our very successful Premier Agents. So let's...

[Presentation]

Greg M. Schwartz

So there's just some compelling stories. So I'll finish up by a little tale from last evening. So we walked into our dinner and one of the participants, a great real estate agent, walked up and gave me a bear hug. And I'm not hug kind of guy, especially with dudes I don't know that well. And this fellow gave me a big bear hug and I ask, why, naturally. And so he's sort of taking me through his business model and he told me he did $649,000 in gross commission income in 2012 from his Zillow Premier Agent spend. Now he spent a lot of money with us, thankfully, well over $60,000 a year in advertising. So he's an outlier, but this fellow, and I won't say his name because he'll be irritated, there was a red Ferrari up front, I thought it was his, it wasn't, after he told me that story. This fellow had figured out the code. We're trying to replicate that code across our base, and so far, we're getting there. So we want more of those.

So I don't know how much time we have but we've got a few minutes here for questions, you can throw me some softballs if you'd like.

Question-and-Answer Session

Raymond Jones

Just to be sure, when you ask your questions, make sure you have the microphone because of the webcast.

Unknown Analyst

Just curious what percentage of your impressions are currently being monetized as in what percentage of your impressions have Premier Agents assigned to them?

Greg M. Schwartz

Sure. Well, while we don't release the number I can give you some sort of guidance around that. So we always fill every one of our slots. You see, there are 3 or 4 slots on our buyers’ agent lists, depending on the area, and so we always put a Premier Agent in those slots even if it isn't sold, with the theory that if it's unsold and we put a Premier Agent in there and they get a lead, that's good news for us all. The sell-through thing is an interesting thing, and you'll see it in Amy's data, which is our audience is rapidly growing. By converting from a share-of-voice to an impressionable model, we're able to absorb those impressions and monetize them on an at-will basis. So our sell-through is never constant, to tell you that the truth, because our top line continues to grow. We've got a lot of -- how about this? We've got a lot of blue sky ahead of us. And so I showed a 200-person sales team, so they've got a lot of ground to cover, yet.

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

Mark Mahaney at RBC. When you talk about those ROIs, 8x, 9x, 10x, those sound very compelling to us. When you're in the marketplace, do you find that people generally agree with those ROIs? They don't sign up because they find better ROIs somewhere else? That they don't be leaving the ROIs or there's something else, like -- to talk about the challenges in selling, why can't you get the -- I know it takes time to build-out the business, but why isn't it $60,000 or $100,000, given those ROIs that sound so compelling?

Greg M. Schwartz

Yes. So interesting, on the ROIs. It's this thing I keep muttering about here, the code. Because some folks convert or the ROI is directly in correlation to the conversion. When I say conversion, I mean from a lead we forward to getting a transaction. Some folks converted 0% and others at 10%. And when we look at leaves the platform in who stays in the platform; those that leave the platform get 15 contacts or leads a month from us on average. And those that stay on the platform get 15 contacts per month from us as well. So it's about this systematic approach to business, which seems to be the defining feature of our success. There are lots and lots and lots of real estate agents who have been a very with successful with of traditional methods of -- which they call, the sphere of influence. Your friends and peers hitting you up at dinners and cocktail parties. So this is our newer method of business, which is a high-volume method. So, great teams, what I'm mentioning here, great folks who are good that this, convert at 10%. That means 90% of the inquiries or connections they make don't lead to a transaction immediately. That rejection isn't for everyone. When I showed that slide of 2.1 million real estate agents, many of them came from outside of a sales career. So they're not used to having no said to them. That can hurt. So this method that we push, this code, is not for everyone and so our job is to find the right agents and bring them on the platform or find those that are willing to grow their businesses and give them the skills, the software and the tools to get the code. And that's really the only limit to the business, is can we drive enough folks, through exceptional product development and marketing, into the funnel, so to speak? Can we become the primary shopping experience? Can we connect them with exceptional world-class real estate agents? And can we train those real estate agents to be really, really exceptional in lead conversion? And that's the only limiting factor on the business.

Michael Graham - Canaccord Genuity, Research Division

It's Michael Graham from Canaccord. I just wanted to ask about the depth of the market and for real estate agents. Like, one thing that we hear, from an outsider's perspective, is that only the top tier of the agents are generating most of the business in the industry and that if as get down to -- I know you said 2.1 million professionals. As you get down to the bottom, say, 0.5 million of those, they really don't do any business, and therefore, can't afford to spend any money with you guys. Can you comment on that?

Greg M. Schwartz

Sure, happy to. We talk about that with investors and it's an important way to look at the business. Operationally, our operational teams haven't ever hit a point where we don't have compelling agents to call, right? And with 200 folks making 100 calls a day, we haven't hit the depth where it's not profitable for us. And I don't see that day coming. With that said, I think this is an important part in why we think about that TAM issue from a transaction model, is we king, make teams. We king make real estate agents in their zip codes. We give them the awareness, right? So the people, when they run to them in the gym, shake their hand, we give them the reviews to set them apart. And then most importantly, we give them enough business with the conversion tools that we really can king make them. And so, that's why there are those approaches TAM and it was important to share all 3 of them, but absolutely, we're extremely focused on the volume of transactions. If we can generate the transactions, I promise you we can monetize them, right?

Unknown Analyst

[indiscernible]

Spencer M. Rascoff

Two recent examples. So, at our last Premier Agent gathering, in Orange County, about 3 weeks ago, that Greg mentioned, I was talking with an agent and had entered the business 9 months ago, and prior to Zillow, she ran Internet sales for BMW of Orange County. She was the person that, when Internet buyers, e-mailed the car dealership, she would deal with them. No real estate experience before, and she'd been with us for 9 months now and was one of the top agents in her office and one of the top agents in Orange County, after 9 months, because some of the same skills that she had learned by being very responsive on e-mail, working incredibly hard, having customer service orientation in that other career, served her really, really well and now she's one of our big spenders in Orange County after just 9 months. At the dinner last night there was a team of 5 agents -- or the head person and she had 4 agents to work for. She ran Nordstrom's -- basically ran the Nordstrom store here in San Francisco, and she had recruited 4 other people from Nordstrom and this team of 5 Nordstrom people now, after having been in the industry for 1 year, as a Premier Agent team, the team kept expanding. So the point is this kind of 2.1 million, the 700,000 -- 900,000 members of them are -- that's not really the way we look at the business, we look at the business more from the consumer lead flow. Do we have enough of -- a large enough consumer audience that if we can find consumer-oriented agents that can plug into it, then they can become very, very successful. So, the limit or the issue is audience, not so much agents.

Richard N. Barton

Not to over make this point. But so, Rich Davis, the CEO of Century 21 was sharing some data, with a group of us the other day, and really surprised by it. Century 21, the largest franchise network in the country. Rick was sharing that his top quadrant of agents, so his top 10% of agents, virtually none of them have been in the business 5 years ago. Virtually every single one of -- and I think they have 100,000 agents or something massive like that, every single one of the top quadrant have been in the business less than 5 years and they were leveraging this to drive GCI, because it's so much more efficient if you're willing to leverage these technology and tools and the rigorous and systematic.

Unknown Analyst

Greg, do you have a sense, among your Premier Agents, what percentage of their marketing spend Zillow represents and what the other big pieces of that pie look like now? What other areas they're spending in? And then, also, if you've got that for the brokerage side of things as well.

Greg M. Schwartz

Yes. So I wouldn't say that we have any hard quantifiable numbers because most folks don't want to report that to us, because they're concerned about this understanding leverage on their business. I would say this, when we talk to Premier Agents about what component of their business budget we occupy, they think of us as sales promotion rather than advertising. So I don't ever hear advertising budget. I hear, I made a return of what I spent with you guys, thus, if I want to be busier and do more, right? Some people want do golf after covering their note [ph] . If I want to do more, I'll spend more. So it's just not really that connected to an advertising budget like when you think about print or bus sides, which are really an expense that didn't have a quantifiable return. Spence you have a different point of view on that?

Spencer M. Rascoff

[indiscernible]

Greg M. Schwartz

Yes. You know, suburbia [ph] is just a relatively small amount of money for brokerages. Some interesting things happened during the downturn, different franchise, worse than brokerages, which is commission margins really contracted, in many cases, across the country, for brokers. They went from a business that was a 50-50 split between broker and agent commission dollar to, in many parts of the country, 85 or 90-10 where the agent was taking 90% of the commission and 10% was given to the broker for overhead. So many, many, many brokerages across the country have really deferred or pushed marketing spend to the agent, because that's where the margin is. There are certainly some great departures for that model and if franchise -- were certainly spent quite a bit with us and on online and on Super Bowl ads as well. But brokers are relatively nominal in our overall pie today.

John Devir

John Devir from PIMCO. You mentioned you have 400,000 agents with profiles in Zillow, you have 29,500 Platinum Agents. What is the growth rate of that 400,000 number and is the low-hanging fruit converting that number? People who are on the system, who are familiar with it and getting them to, as one user said, instead of going wide, go deep?

Greg M. Schwartz

Yes, undoubtedly, I would -- and R.J. always reminds me, it's well over 400,000, it's almost 500,000, I should have said that way. So we have lots and lots of profiles in the platform. Yes, those are wonderful customers who are familiar with the brand. They've got some preference for the Internet, to have spent some time to set up their profile and maybe gotten a few reviews, put their photo up there, put a bio up there, maybe uploaded a video, maybe uploaded some information about their service partners. So those are certainly great folks for us to sell to. But even so, the common belief in the industry is, about 10% of the agent base comes and goes every year in our industry data, so there's always new individuals entering our industry. And those are great prospects as well. They may not have as much neighborhood expertise or transaction expertise, but what they certainly have is they tend to be younger, understand technology and mobile, and they tend to be rather, rather hungry for opportunities. I'm just going to say like [ph] that.

Unknown Analyst

[indiscernible]

Greg M. Schwartz

I haven't tracked the growth rate. R.J., have you? No. I know it's not stagnant, I remember it being 300,000. Ironically, the last time, I looked at this, about a year ago, in the 300s, but we haven't studied it closely. Okay.

Ronald V. Josey - JMP Securities LLC, Research Division

Ronald Josey with JMP. Two quick questions on the sourcing side. One is the listing, you talk about having 2.4 million. I just wanted to understand how that relates to the 4.5 million homes sold per year. And then if you could talk a little bit more about your brokerage relationships and just where they are now relative to, say, 3, 4, 5 years ago, with Century 21, et cetera?

Greg M. Schwartz

Yes. I think your list -- the first listing question, I would interpret, is a coverage question. So we don't have every -- nor does any website have every for-sale listing in the country. We have the overwhelming majority of the listings and the most [ph] listings publicly available. And I can't share the exact percentage because it's very hard to get to. But we do a lot of work on that and we have the overwhelming majority of listings.

Richard N. Barton

I think the delta, Ron, is that home-sell, after 6 months, is -- what? I think it's around 5 or 6 months now, is the average counting [ph] time. So there are 2-point-something for sale at any time but 4-ish sell per year. That's what that is.

Greg M. Schwartz

Yes. I'm, sorry, what was half the second half of your question?

Ronald V. Josey - JMP Securities LLC, Research Division

Just the historical [indiscernible] .

Greg M. Schwartz

All right, yes. It's a lot more fun today, it's a lot more fun today. Fun for a few different reasons. I think we recalibrated our communication with the brokerage and MLS industry. And it took some maturity in understanding our business and our company to be able to calibrate the right communication. We're a software development company, a technology company which monetizes itself through very effective marketing and advertising solutions. We're not a real estate brokerage, we don't intend to be a real estate brokerage. We're not a transaction company. We needed to understand that and we need to say that for 6 years to make the industry comfortable with us. We're a more efficient way for them to invest their marketing dollars or their sales promotion dollars than any medium they've ever had in their history. And I think the majority of brokers are getting more and more comfortable with that. Not everyone loves that they have to spend advertising or marketing dollars to grow their business, but I think they vastly prefer us. There'll be a level of friction to relationships with some parties always. Some folks are looking for advantage over their competitors and their peers, some folks take pride in their websites and the strength of them, the local markets. We're either the first or second largest real estate website and group of applications in every single one of the top 200 markets in America. So there's not a market anywhere where we're not extremely relevant. And we're part of the -- the last part, and I'm going the hook on time, I think, as -- after being in the business for 7 years, we're part of the club now. So when Spencer and I are at the Industry Conferences, with our peers and CEOs of all the brokerages, they know us, they understand us, they're comfortable with us. They know our intent isn't to get into their business.

Raymond Jones

Right here.

Unknown Analyst

You mentioned the 5.2% industry commission rate. I was wondering -- I know you don't have data on the closings that you may be responsible for, but if you have any studies or surveys that would give information around what the commission rate is, of the closures that agents actually get from Zillow, and the way you think about that and Zillow influencing commission rates, over time, to the extent there is anything there. And then secondly, you referenced increasingly being a kingmaker. And the way that you also think about -- or any evidence that you've seen yet, in the way that, that's changing the industry, in terms of agents breaking off, becoming brokerages on their own and then actually hiring agents into their business and the way that, that could change, actually, the numbers of NAR agents, over time, as Zillow gets more successful.

Richard N. Barton

We don't have a direct hand in agent broker commission rates. We're very careful to leave that to the domain of our partners and customers, the brokers and the agents. And I think we're unequivocal, for anyone listening to this on the Internet, that we're not going to get in as a participant to the transaction itself. So I don't know that we're directly impacting commission rates. I will say this, I think Internet leads, in many cases, tend to develop referral fees between a team leader or a broker. In many cases, referral fees typically 30% to 35%. So there's new revenue streams being developed for Internet-centric brokerages and team leaders. So I think that may be impacting income. But I think that's the output of who has the capital to invest and who doesn't, and who has gotten on this whole software-on-the-code. But we don't direct. We don't survey, we don't ask and we don't have a direct hand in the commission issue.

Spencer M. Rascoff

And from an ROI standpoint, I don't know why commissions that agents earn from Zillow leads would be any different than the industry average of 5.2%.

Greg M. Schwartz

I suppose, the only speculation -- and it will only be speculation, is the company dollar, or the split between company and agent, tends to be 50-50 for new agents entering the business, and steepest for veteran agents doing lots of transactions. So maybe as we help to king, make these agents, they're able to negotiate better splits. I don't know, I haven't really thought about it.

Neil A. Doshi - Citigroup Inc, Research Division

Neil Doshi with Citi. I know you talked briefly about agents leaving and churn. Any -- I know you guys don't give churn numbers, but any comments on how retention has been in some of your key markets, over time? And then, of your agent base, can you provide any anecdotal evidence as to what percent are using other online services and how you guys have been able to gain more wallet share from these agents?

Greg M. Schwartz

Sure. So, as you can imagine being a data-intensive analytical company, we track price and monitor every zip code, individually, in the United States and we've built a rather large algorithmic system and approach to do it. So pricing is different in every ZIP code and we see different trends in zip codes, but you need a model to do that with tens of thousands of zip codes to monitor at any given time. I would say this, I don't see fundamental differences in success factors across regions. There will be a ZIP code from time-to-time that maybe has had a, believe it or not, a weather event. So, in New Jersey, after the terrible hurricanes, we gave a number of our customers relief, who had been wiped out. Just seemed like the thing to do. But beyond those unusual occurrences, we don't typically see big churn differences by region, and when we do, it tracks into the model and that impacts pricing automatically. So, a moment in pricing, without going too deep into the proprietary. We look at how much traffic we have in the ZIP code, what the average home prices are in the ZIP code and how much demand we have for each specific ZIP code, and that impacts are very localized pricing. The second part of the question was?

Neil A. Doshi - Citigroup Inc, Research Division

[indiscernible]

Greg M. Schwartz

Yes. That's interesting. So, even with all this traction, we believe we're relatively early in the transition of the Internet-driven real estate model. So, my desk actually, so we sit in, what I think is probably familiar that all of you, is in a trading floor environment. So my portion of a long desk is right in the middle of several hundred of our sales people, so I've got a very good sense for what's being said all the time, which is very healthy for a sales leader. And I don't hear the other typical suspects, the Rs or the Ts -- I can't say their names out loud -- the Rs or the Ts mentioned all that much as an obstacle. Comes up from time-to-time, but a more significant -- the most significant obstacle I hear our sales guys running into is, do you want to do the work, because we're pretty clear about setting expectations before we bring customers on board. Do you want to work 15 opportunities a month where, if you're exceptional, you'll convert 10% of them. If you don't want to do this, this isn't for you. Do you want to get texted by our customers who want to see a home tomorrow? If you don't want to do that, this isn't for you. That's been the limiting factor, frankly, not the competitive set. I think if you combined the online revenues of all 3 of these companies, that we typically look at, there's lots of growth opportunity for all of us for years to come. I promise you, when we have high penetration of the opportunity, we're aggressive enough to slug it out. But that day hasn't really come yet.

Raymond Jones

So we have time for one more question.

Unknown Analyst

Can I throw a question in, from the back? All the questions have been about the professional real estate agent, but I think when you started this business, as you been building it, you've taken a differentiated approach to focus on the consumer. That was probably what was missing in a marketplace, that's why we have never had a really big online real estate business in the past. So could you talk about what you think you're done right for consumer, to date, and what's still missing? With do you think you'd like to do? What do you think consumers would like to get out of Zillow in the next 5 years?

Greg M. Schwartz

Thank you, that was an awesome question. So we've done something fundamentally different for the consumer, and you can see us sort of stretch throughout everything we do. We have a core belief, a North Star, that if we empower the consumer to make more informed better decisions for them, everything we do is more available for the professional as well. So, I'll give you an example, these agent reviews were really pretty darn controversial when we launched them, because no professional really wants to get reviewed, right? Except for the most exceptional. So these hundreds of thousands of reviews that we have in the platform today really have great impact. So when an agent has 5 or more reviews, they see a doubling of their conversion on Zillow, and that's just an example of transparency. The other element that we did, which was a departure, so we shudder, kind of, when we hear the word, "leads". We call these, "customer contacts". Because in every environment, every opportunity to connect a consumer with a world-class professional, the consumer has to affirmatively choose a named professional to work with, whether that's in mortgage or real estate or, ultimately, in home improvement. Every one of those professionals has to be open to being rated if they want to be in our platform, and if they don't want to be rated, this is not for them. The consumers then choose to contact a very specific professional who is named, pictured, probably had a video about themselves, had a bio, had reviews. And then that consumer typically converts at a much, much, much higher percentage, for a real estate agent or for a lender, as a result of being empowered. And that's core to our belief system and transparency and I think driven our success.

Raymond Jones

So we're going to cover the consumer side of business, at length, in a little bit. I'd say, but a high-level -- you want to do one more? Okay, we'll do one more question and then I'll come back to -- go ahead.

Kenneth Sena - Evercore Partners Inc., Research Division

Ken Sena, Evercore. I just had a question, just on the leads that agents do get, in terms of, sometimes, the noise leads and the tools that you're providing those agents to maybe clean up any inaccurate data that is listed on the site. Because sometimes I hear, when I talk to agents, if -- when I ask them if they're using Zillow, and they are -- sometimes they will express a frustration that you do gets leads, which would be like, why is my house priced so low. And it might not just even be those estimates but it might be just like, list my house as being in a foreclosure or it could be any number of things.

Greg M. Schwartz

Happy to. So we put excessive efforts into having the most accurate data we can on the website. But, by nature, this is a pretty complex undertaking. So sometimes folks will contact an agent about a not-for-sale home, for example, a Zestimate home. And the agent will get there, get that inquiry, put it in the MLS and not find it. While the home wasn't listed for sale, it was a Zestimate home. Our great agents, I hear this every day, laugh at that complaint to tell you the truth, not to be a little fickle here, because they just look at that as an interested buyer who probably is prequalified, looking for a home. If you're fast on your feet and you have a little bit of software on your phone or in your hands, you take an inquiry on a $300,000 for-sale home that turns out to be pending or no longer for sale, and you say, oh, it looks like that's no longer for sale, it sold 12 months ago, but I know every home in that neighborhood and there's a great pink house down the block that I can show you tomorrow. And the great agents, who have figured out the code, look at that as a wonderful opportunity. Something I missed in talking about the uniqueness of our platform -- and I'll give the microphone back. I tend to just use the microphone and not give it up because we're passionate about this, is something that's very distinctive about the Premier Agent program, is there are both buyer and seller leads in this. And that creates opportunity and sometimes some confusion, which is this, we've got millions and millions of people coming to look at those Zestimates, look at comps in advance of putting their home one the market. We call that a pre-market seller. That is gold in this world of tight inventory, and our shrewd Premier Agents hunt those, love those and really value them. But there are times when a home might have been -- gone pending in the MLS and we don't have pen data, yet, on it, because it wasn't given to us quite yet or we haven't processed the file yet. And a good agent can turn that around pretty darn quickly.

Spencer M. Rascoff

I sometimes got asked by investors, is all of your focus on real estate professional tools, in some way, countering your consumer empowerment message? How can you take riches, revolution, power to people, throwing the hammer into the giant monitor? How is that reconcilable with everything that you're doing for real estate professionals? And I just sort of, internally, laugh at that question a little bit because, for me, actually providing these software tools to professionals and trying to them is incredibly empowering to the consumer. But every time there's a close call, we are going to choose the consumer 10 times out of 10. So 2 very recent examples, for example, we're the only website on the Internet to put around 1.5 million foreclosure and pre-foreclosure listings up on the site, because we continue to push the boundaries of information transparency, and we think that's great data. Consumers may not like it, some homeowners may not like, but it's a really important market context and it's really important information, and that's why we've just done it. Even to the extent that it forces us to forgo short-term revenue. And then even more recently, we now put price predictions on every single home details page. So if you pull up -- on the Zillow iPhone app or Android App, for example, at your desk here, and you're looking at the listing of a for-sale or a not-for-sale home, it'll say, Zillow predicts values in this neighborhood will go up 6.2% over the next 12 months. Well, that is something incredibly controversial, almost as controversial as the fact that we have a Zestimate on that home. But it's really important information for the consumer, and so we are always erring on the side of the consumer wherever there's a close call.

We're going to take a brief break, right now, and going reconvene about 15 minutes and talk about our emerging market places. So, 15 minutes. Thank you.

[Break]

Spencer M. Rascoff

We think of each of these 4 marketplaces; real estate, mortgages, rentals and home improvement, sort of like children, as a couple people referenced, where the real estate marketplace that Greg just got on discussing, is our largest marketplace, our most mature. But we still think of it kind of as a fifth grader internally in terms of its stage of development. Mortgages is sort of the second grader, if you will. Rentals is a toddler. And home improvement is the newborn, the infant that's just a couple weeks old, really.

So on stage with me today are the leaders of these 3 emerging businesses: Erin, David and Amy. They're going to each briefly present on their marketplaces, and then we'll answer questions from the audience. Erin Lantz joined Zillow about 3 years ago from Bank of America, where she ran their direct-to-consumer purchase mortgage business. When she joined Zillow, the mortgage business in Zillow was just getting started. And in the 2.5 years that she's been with us, she's helped grow Mortgage revenue more than fourfold. Erin Lantz.

Erin Lantz

So when we launched the Zillow Mortgage Marketplace back in 2008 -- I guess, we've already graduated the second grade pretty quickly; we're an overachiever. We introduced a way of mortgage shopping that was radically different from any other experience you could find offline or online. Because on Zillow, the borrower stays in control and is anonymous to the lender until he or she chooses to contact them.

So instead, on Zillow Mortgage Marketplace, on ZMM, borrowers submit a loan request without any personal contact information. Lenders return their quotes in seconds that matches exactly the parameters of the loan request. So there's no teaser rates, there's no marketing rates. It's just what the borrower asked about. And then we display those quotes in a way that highlights the best quotes for that borrower. So this open and competitive marketplace is what drives down rates and fees to consumers.

And then our ratings and reviews platform, which now has over 30,000 lender reviews, lets borrowers select the lender that they prefer based on that lender's reputation for service.

So as it turns out, borrowers like low rates and great service. So we've seen a really incredible interest in our model. We now have over 1 million loan requests every month on ZMM and our total requests are up 114% year-over-year, and increasingly those requests are coming from borrowers who find us while shopping on a mobile device.

So it's probably also worth mentioning that unlike traditional mortgage, lead-gen sources, most of our loan requests are for purchase mortgages, not for refinances, which, we think, positions us really well for limited volatility as the market shifts away from refis and towards purchase. And we expect that once this current refi boom subsides that we'll find even more lender demand for ZMM contacts as lenders are seeking additional sources of qualified purchase traffic.

So the way we monetize ZMM is through a cost-per-click model. When a borrower is interested in a quote and wants to learn more, they can click on either the View Details button or on the link to the lender's website. And when they do that, we charge for that click.

Our clicks range from $0 to $12 per click. They average about $3 per click, and we monetize exactly the same way on mobile. And what goes into the click price is a dynamic pricing model that relies on a whole source -- whole set of inputs but largely depends on lender demand to quote a particular loan request.

So this model works really well for lenders because besides wanting to be where millions of shoppers are, they also want high-quality contacts. And that's what our marketplace delivers for a couple different reasons: First, borrowers have already done their research, comparing quotes, comparing lender ratings and reviews, and only contact if they're interested about a particular custom quote and a particular lender. And secondly, borrowers only receive quotes that they're eligible for based on what information they've provided to a lender on their loan request.

So for example, if you're interested in refi-ing your co-op in New York and you have mediocre credit, you'll only receive quotes back that -- include the actual rate adjustments that you'll actually receive. So you're not misled into contacting a lender about a quote you can't actually get.

So that's our core monetization model. In addition, we also sell text and display advertising to lenders who are interested in getting access to our audience and to those lenders who just want to reinforce their brand alongside their quotes similar to Google's adjacent paid and organic search results.

So as this model gain liquidity and we started to gain critical mass on both the borrower's side and the lender's side of the marketplace, we started looking at ways to help our lenders do a better job converting the contacts that we send them. This should sound like a very familiar strategy to you by now. And so that's largely why, last year -- at the end of last year, we acquired Mortech, which is a leading supplier of mortgage technology to lenders.

So Mortech's subscription base offer does a few different things. First, it's a product and pricing engine, which lets lenders publish their quotes to sites online like Zillow. And by acquiring them, we secured an important source of quotes to our marketplace.

Second, they also have a suite of lead and prospect management tools, which help lenders market to and manage their prospects as they mature from lead to application.

And then more recently, Mortech launched a lender website product, which has a full online application that is integrated directly into Mortech's CRM, into their lead management system. So lenders using the software can efficiently move their borrowers through the application process and track their progress in real time.

So here's how that works. So borrower comes to an online mortgage shopping site like Zillow, they're interested in a particular quote, they click to learn more, they visit that lender's website, this is the website that was built by Mortech, the borrower clicks to Apply Now. They want to start the application process. And immediately, they can start filling out the full online application at their convenience. And as they're doing that, the lender can log in to their Mortech dashboard, see the full profile of their interaction with that borrower and specifically drill down into the status of that borrower's online application.

And if they get stuck or if they finish it, the lender is informed, and that triggers an opportunity for that lender to reach out to that consumer. That's great customer service. And that's a great example of how we're investing in these tools to help real estate professionals. And in this case, lenders do a better job of serving this increasingly wired, increasingly mobile, increasingly well-informed generation of homebuyers.

And these are the buyers that are coming to us and saying that they want real-time and personal information at their fingertips. And they want service and they want self-service whenever they want it, wherever they want it. And they're asking for professionals, in this case, lending professionals to accompany them through this often long and extended home purchase process and give them advice from -- advice about what they can afford, to helping them get preapproved to helping them ultimately fund their loan. And Mortech gives lenders tools to meet these demands.

So that's it, that's a bit of an overview of what we're doing in both the consumer-facing side and the lender facing side of our mortgage business.

And here's a quick look at how we're doing. So we've never before had as many loan requests in our marketplace. We had over 3 million loan requests last quarter. We've never before had as many quotes per loan request. We're averaging over 30 quotes per loan request, which compares to the 4 or 5 quotes you may see on other online shopping sites. And we now have over 30,000 lender reviews. So despite this really rapid growth, which we're really excited about, in a market as big as mortgage, we estimate that the mortgage advertising market is around $11 billion each year. We think with Zillow Mortgage Marketplace, we're just getting started.

Spencer M. Rascoff

Thank you, Erin. David Vivero joined Zillow through our acquisition of RentJuice, where he was Founder and CEO. And David now oversees our consumer and our B2B rentals business, including our most recent HotPads acquisition. David?

David Vivero

Thanks, Spencer. Given that I'm the toddler, you might be wondering how I got to be 6'2". But thank you. Rentals is an incredibly important marketplace for Zillow. Basically since I've been a toddler, my family has been in the property management business. And for as long as I can remember, I've been a tenant. And I'm one of 43 million rentals on the supply side of the market.

The vacancy rate in rentals is about 9%. So we estimate the total available number of listings at any given time to be about 4 million on the rentals side of things. The interesting thing about rentals as compared to a lot of our other businesses is that they turn over far more frequently, about 6x as much as frequently, they'll turnover. That means the listings' content is incredibly fleeting, and that means that the use of tools and having actionable information extremely accessible to you is incredibly important as well.

So it's incredibly fragmented on the supply side, but even more fragmented, obviously, on the consumer side of things. About 100 million people live in rental units across the U.S. If you look at the turnover in the market, because of that velocity that you see in rentals, that 6x number, if you look at the 36.5 million movers in 2012, about 70% of those folks were rentals. So that's about 27 million people who are moving each year into or firm [ph] rental housing.

And so you got this amazingly large market in terms of its underlying activities, and that drives people on the supply side of the market to spend. And they spend about $5 billion each year, ensuring that they're not sitting on a vacancy. Vacancies, as you might guess, cost money. And the longer they stay available, the more you're losing. And that drives professionals in the market especially to spend about $5 billion a year, trying to make sure that they have as little vacancy as possible.

They're doing that in a number of ways on the web, and that includes pay-per-lease models, pay-per-lead models, in which you get that introduction to a prospective tenant, as well as paid placement or sort order and other sort of offerings that might be offered to those folks advertising.

And that Zillow Rentals is trying to bring together supply and demand on the rental side of the business, leveraging in a lot of ways the existing traffic and the existing tools that we can provide to folks, while also innovating and thinking about what's special about rentals.

And so one way is that we're building on our database of all homes. And on our popularity of our flagship Marketplace in homes for sale. As a result of doing that, our rentals marketplace has organically grown to about 7 million renters visiting Zillow each month.

As with our real estate marketplace, our rent Zestimates, which is the estimate of what you should be paying in rent for a particular home, as well as any rental market report in which you can find information, not just about a particular home but kind of helicopter up and see sort of communities, cities, zip codes and larger areas. Those provide unique content that drives consumers and the press to think about Zillow increasingly as a rental brand.

In 2012 and in early 2013, we also began to accelerate our rentals marketplace substantially by launching dedicated consumer rental apps on iPhone, Android and most recently on iPad. Just this week, we launched an update to our Android app that is available -- makes it available in Spanish language. So really it's about broadening the access to the consumers.

And one of those decisions that we made also was our acquisition of HotPads in the last quarter of last year. It was our first consumer acquisition. It added substantially to the number of leads we generate for owners and property managers, while adding a very complementary rentals-focused demographic among its 2.8 million unique users at the time of the acquisition. That allows us to invest in a new brand there that is focused on rentals and allows us to sort of add those to the existing contacts that are already generated to help us produce the largest rental network on the web according to comScore.

We've also grown our listings substantially in the past 6 months to approximately 600,000, a little over 600,000. Based on the current vacancy rate in the U.S., that represents coverage of about 6.9 million homes that are for rent. Each of the owners and managers who post their listings into Zillow reach the entire Zillow Rental network. So that's Zillow, that's Yahoo! Homes, that's HotPads, and that's all of the real estate and dedicated rental apps that are provided by all of those brands. That network, as I mentioned earlier, comScore has named the largest rental network available anywhere.

We believe that offering simple and engaging tools to landlords creates a unique Marketplace experience. I joined Zillow with the acquisition of my previous company, RentJuice, in May 2012. RentJuice was a software-as-a-service CRM for property managers and brokers to market their rentals. Our team at Zillow now manages the suite of products that we offer to landlords, including Zillow Rentals and Postlets, our free-listing syndication tool. And after the acquisition, about October 2012, we rebranded RentJuice into Zillow Rentals and made it free for everyone, which has really allowed us to allow any property manager, irrespective of budget, to be able to use our professional tools to bring in leads but also to give them a free website, leveraging what happens with diverse solutions and what we're doing with our Mortgage websites and our Premier Agent websites to deliver property manager websites, as well as figure out new ways, including Facebook widgets and other ways that we can drive tenants into their properties.

To ensure that we continue holding our leadership position among competitors for rental consumers, we've invested heavily in building direct relationships with those suppliers of listings. These include not only the tools that we built internally or acquired over the history of Zillow, but also the direct relationships we're making with feeds and other sorts of connections with property managers and owners, not with aggregators. And as a result of that activity, nearly half of all the listings that appear in the Zillow Rental network arrive there via a Zillow-owned source.

As with our other marketplaces at Zillow, we believe that the best monetization strategy follows after firmly establishing our product and audience lead, a strategy that seems familiar after meeting a few of our other marketplaces. This is especially true in rentals. There's currently no rental MLS or proven market leader on the consumer side, and it's -- there's no market leader among consumers or suppliers. We're not focused yet on monetization in the rentals marketplace, as we continue to improve the set of free apps that we provide to both consumers and to suppliers.

On the consumer side, we think that unique content is valued by rental consumers, which we've already discussed, like our Rent Zestimates and map-based interfaces available on mobile phones. But our consumers also benefit from our software tools for owners and managers of rentals. And it's true for -- one part of the reason is because of very similar concept to our other marketplaces that you get a faster response, you get a deeper connection with those owners. But because there's no sort of outside data source for rental listings, we also think that, that's an important value proposition to give to suppliers, to get unique inventory, long tail homes and rental housing that wouldn't otherwise make it, either on the web or specifically to Zillow, unless we provided tools that are accessible to people who can't afford to spend money or don't want to spend money on large, expensive property management software.

So as a result of doing this, we really think that we can bring together a unique experience for consumers. We're taking our cue not from classified advertising, which a lot of online rentals businesses have over the past decade. We're really taking our cue from other online marketplaces that provide a unique experience, driving unique content and connection through to the transaction.

As a result of participating, not just in connecting buyer and seller or renter and landlord, in this case, but by participating maybe even deeper in the transaction, we think our total addressable market may also include in the future not just advertising but rent payments, things like tenant screening, which are incredibly important features for the long tail of landlords, as well as some paid software options and upgrades.

Our hard work is paying off across a number of metrics that we believe capture liquidity in our marketplace on Zillow and on HotPads. As I mentioned earlier, our rentals listings nearly doubled in 2012 to over 600,000 rental listings, providing more results on more searches for more rental consumers in our network. Awareness of our rental offering among all Zillow visitors has grown, driving increases in total rental traffic. And our conversions into listing page views and into e-mail contacts has grown substantially as well.

For scale perspective, we already deliver more contacts in rentals than we do in our for sale business. And I'm excited because we're still in the earliest stages of this marketplace. In fact, I can't wait to get to elementary school. So thank you very much.

Spencer M. Rascoff

Thanks, David. Our CMO, Amy Bohutinsky, will now discuss our newest emerging marketplace, home improvement, Zillow Digs.

Amy C. Bohutinsky

So Zillow Digs, the baby of the bunch, is our first foray into home improvement. It launched just about 6 weeks ago in early February, and this is something we're extraordinarily excited about, something we wanted to do for years, for a couple of reasons: First of all, how it complements our other real estate-related marketplaces. A full 75% of buyers will embark on some sort of home improvement project in the 6 months following their home purchase. 25% of buyers will fully remodel a kitchen or a bathroom within 6 months of their home purchase. So people buy a home and they immediately start thinking about the changes they're going to make to that home to make it theirs. We think this business is so complementary to what we're already doing because close to 50 million people are visiting Zillow every month on the web and mobile, many of those people are buyers, most of those people are homeowners.

We're also excited about this business because it's the first time we ever launched a business on mobile first, and what we mean by that is the first day that Zillow Digs became live in February, it was an iPad app that was featured by Apple and it was also on the web. We did it because home improvement, first of all, is insanely visual. People want to dig in, use their hands, look at photos. It was created for the iPad. But we also did that because that's where our users and where our buyers are. And as I'll talk about in the marketing presentation in a little while, more than half of Zillow's visits now come from a mobile device. It makes sense for us to launch new products on mobile first.

We're also excited about this opportunity because over the long term, there's a very large total addressable market in home improvement, $11 billion is spent every year on advertising by home improvement professionals. This isn't something that we're focusing on today in the infancy of this product, but it's one of the reasons we're doing it. And over the long term, we see a very big opportunity there.

So I want to walk you through quickly what the consumer product looks like. I see a lot of you guys in the audience have iPads. I would encourage you to download this free app because it's really a lot of fun and quite immersive.

Here's what it looks like when you launch into the iPad. You immediately see photos, beautiful photos from homes. And if you scroll through with your finger, you're going to see thousands and thousands of photos. Home improvement is something that, on the one hand, is very, very heavily driven by content. The way people have gotten home improvement ideas in the past, the way people do it now is you dog ear the pages of remodeling magazines and design books. You pull out things you like, you stuff them into a folder. You show them to your spouse. You show them to your design professional. You say these are ideas I have. These brings it to life on the iPad and makes it very, very immersive.

And one of the exciting things about Zillow launching this product is we did not have to start from 0. We are sitting on an enormous content database of over 100 million beautiful photos from homes for sale. So what we did is we spent a year going through these photos, tagging, categorizing them so that they can be easily searchable and found by people looking for home improvement ideas.

So on the app, if you look ahead to the left side, you can see where and how you can search. So by spaces, I'm interested in kitchens, bathrooms, patios, closets; by styles, I'm interested in modern kitchens, tropical patios; or by cost, luxury modern kitchens, budget bathroom remodels. You can spend hours and hours looking at photos and going through the thousands and thousands of photos on Zillow Digs to get ideas for these areas.

You can also search via keywords. So for example, photos of quartz countertops. The other day, my husband and I were searching for photos of fire pits because we want to build one out on our patio. You can search, and again, we've spent the man hours to tag all these thousands of photos.

One note on the photos, too, when we launched 6 weeks ago, we launched with 20,000 tag and categorized photos taken from our database. In just 6 weeks, that number has doubled via user-generated content. So we now have 40,000 photos within Zillow Digs, a full half of them have been added by our users in the first 6 weeks of this product. So you can see how over time this product is going to grow and become more and more immersive, as homeowners post pictures of the projects they've done. Design professionals, architects, contractors start to play within Zillow Digs, showcasing what they're doing and sharing it with others.

On the sharing side, this is also a very social product. Here's a picture, when you click into one of the kitchens you see here, and you'll notice a couple of things: On the upper right-hand side, there's a little heart with the number 140. This photo has been "dug" by people 140 times, which means they like it. They're saving it. There's 10 comments on this photo. So one of the things, when it comes to home improvement, people like to talk about it obsessively with their friends over dinner parties, with their spouse, should we do this, I like this, look at this picture. I mean, there's whole cable networks built around people talking about home improvement and design. And Zillow Digs facilitates this conversation. So you can go on and you can say, "Does anyone know what color this paint is?" "What kind of dishwasher?" "What kind of range is that?" There are conversations happening even in these very early days, very, very deeply on Zillow Digs. It's very social.

And on that front, it's something that you can then share. So people like to share photos of homes and design they're interested in to their social network.

It's interesting, we've studied social a lot on Zillow over the last 7 years as we've had the product. And we learned a lot about what works in real estate and what doesn't. Saying I want to buy this $500,000 home and I'm going to view it with my agent right now is not really social. You're not going to post that on Facebook and tell your 500 friends exactly what house you're looking to buy. You may want to tell them and people do tell them, "Oh my God, I love this kitchen. I love this patio." I mean Pinterest is built all around sharing things you love and sharing beautiful things. So there's -- home improvement is inherently very, very social because there are beautiful pictures that people like to see and share, and we see a tremendous opportunity in the viral-ity of our product in building more social tools here.

Now the one thing I haven't hit on yet but which is probably the most important component of Zillow Digs and what makes it the most differentiated of anything that exists is the analytical side. At Zillow, we built our company and we built our product based on analytics and deep data, starting with the Zestimate to our home value reports, to all of the information we give about homes. That same team that analyzes the housing market, built something that's called a Digs Estimate that is on thousands and thousands of photos within this database. And what it is, is an estimated cost to recreate this exact room you're looking at in your home today.

So for example, on this photo, you'll see below it, there's a Digs Estimate. It is localized. This is one -- a snapshot I took in Seattle. But if you're sitting here on your iPad today and you pull up a kitchen, you'll see a Digs Estimate that is localized for what it would cost to recreate this kitchen here in San Francisco, which, as you know, one kitchen in San Francisco is going to be a markedly different cost than remodeling that kitchen in Kansas City.

How we've done it is quite sophisticated and very deep. We have a team of contractors that work for us that view each and every photo of kitchens and bathrooms in our database and tell us things like, "What's the estimated square footage in this room? What are the appliances and what do they cost? What's the cost of materials? What's the cost of laborers to do this? What's the cost of those cabinets and what would it cost to install them?" All of this by dozens of contractors is fed into an algorithm that then rounds out the room and says based on all of these input, here's the estimated cost to remodel this exact room on this photo we're looking at, and then it localizes it based on where you are. So you powered up on your iPad, the iPad recognizes where you are and you are seeing a localized Digs Estimate for that room that you're seeing today. We have Digs Estimates on thousands and thousands of photos. And every time a new photo of a kitchen or bathroom is added into our database through user-generated content, we will add a Digs Estimate to it within 1 week.

This is something that's never before been done in home improvement. In fact, estimating the cost of home improvement is sort of the last bastion of data transparency that surrounds homes. Zillow broke down that wall first with Zestimates. We broke it down second with Rent Zestimates and with mortgages. And now we're taking it on in home improvement, and there's an extraordinary opportunity here around consumer transparency in what it costs to do home improvement and design projects.

Because many of the homes in the Digs database are connected to homes for sale, we also take you to those homes for sale, so as someone looking for ideas, if you like the kitchen in a particular home, chances are, you'll probably like the design of the bathroom or other rooms, you can click into that further.

And on the social aspect and the sharing aspect, anyone can save a board on Zillow Digs. And what that means is it's a place to save the stuff you love. Since we launched the product 6 weeks ago, 60,000 boards have been saved by individuals on Zillow. It's a place you can collect photos of ideas you like to share with your spouse, your designer, your architect or the whole world. And it's a pretty extraordinary opportunity for home improvement professionals.

So here, you see an example of a designer who's created a board. It is connected to his Zillow profile, where he has then been rated and reviewed by, I think, that says 48 people who have used him in the past. Even though we've never marketed this product to home improvement professionals, even though it's brand new, it's 6 weeks old, there are already 20,000 home improvement professionals with profiles on Zillow. All of these home improvement professionals can be rated and reviewed by people who use them. And all of these home improvement professionals can create boards of things they love.

Think about the marketing opportunity in that down the line. If you're looking at photos of things you love and it connects you to the local designer who created that room who can help do it for you and you can contact them. And so you can see where we're going long term with this when you hear about our other marketplaces.

That said, Zillow Digs is still an infant. And today, our focus for Zillow Digs is on building out the product to be the best it can be for consumers. So first of all, improving discoverability of photos you love, of people you want to follow, of how to find more ideas. Second, making the product more social. We know that home improvement is inherently social, that people want to talk about it and share it, and we'll be adding more ways you can share and find information on Zillow Digs. And then third is launching the other platforms. So it's on iPad now. As you know mobile is very important to our business and we very much believe in the future of mobile. So we'll have this across all mobile platforms like our other marketplaces in the future.

Spencer M. Rascoff

Thanks, Amy. So the way these marketplaces tie together is of course they all key off the living database of homes and they all complement and augment one another. And in particular, the big brother, the real estate marketplace, is directly tied to each of these.

So for example, when you're looking to buy a home, you typically need a purchase mortgage. When a homeowner is looking at the Zestimate of their home, they might be interested in a refi mortgage. When people are shopping to buy a home, about 25% of home shoppers dual track, which means they're looking to buy a home or considering a rental at the same time. And as Amy mentioned, 75% of the time that people buy a home, they go on to remodel a home. So these marketplaces are not disparate. We're planting seeds across these emerging marketplaces, but they're all tied to the database of homes and they're all connected with one another.

So I have a couple of questions for each of you, and then we'll open it up to the audience. So in each of your marketplaces, what does success look like to you? And as importantly, how should investors, looking at external data kind of from the outside of the company, how should they track the relative maturity, relative growth of each of these marketplaces? We'll start with Erin.

Erin Lantz

So the mortgage market size being so huge, I think we're really just scratching the surface. So I guess the way that I would monitor the health of the business and look at our -- the success that we're having as we grow is to look at metrics on both the borrower's side and the lender's side of our marketplace. So on the borrower's side, we share with you loan requests. That's a great indication of how many users are interacting with our product. And then internally, we certainly manage very closely to how those borrowers progress through our funnel. On the lender's side, we are very interested in lender engagement. So how many lenders are on our platform? How many quotes does a particular loan request receive? And that's actually an indication both of lender interest in our product, lender engagement, lenders' opinion that our pricing is appropriate. But we think it also offers a really great consumer offering, when you've got a broad choice of quotes that drives down costs from the competition between those quotes. So the level of engagement on both the consumer and the lender side is a really important indication of the health of our business and something that we monitor really closely as we're growing. Certainly, even though we're a CPC model, we know that lenders ultimately care about contact cost and cost per funded loan. So we're also carefully monitoring the volume of contacts that we're generating and the effect of cost of those contacts to our lenders.

In terms of modeling our business, we don't make it terribly straightforward yet. But ZMM revenue is included in the Marketplace revenue segment. And we share with you ARPU and average agent count, so you can back out what PA revenue is and get to a kind of noisy number, which includes mostly ZMM revenue plus diverse and a few other things. And so you can watch as that line item continues to grow as we improve engagement on both sides of the Marketplace.

David Vivero

On rentals, we're focused on 2 things this year. First, is growing the audience, so continuing to see the growth that we've seen already. So there's 27 million folks who move every year who are renters, and we want to be speaking to those people and making sure that our listings are put in front of them. So continuing to grow the audience is going to be an incredibly important success metric for us. The second metric is growing our listings count. We're north of 600,000 now. That's almost double what was last year. We think that the opportunity's incredibly large. Obviously, there's a leader in this space with craigslist that we think has 700-some odd thousand listings by a little north of that. And we're already sort of a majority of the way there, having been there less than half the way there last year. So we want to sort of race past that on our way to the 4 million at some point. That's when I think we'll be truly, truly happy. But this year, we're really trying to get to a point where we're scaling both of those, and then as I mentioned, the sort of monetization part of that is not yet our focus. But certainly, we want to start to begin operationalizing some experiments sometime at the end of this year, so that we can make the right choices about how we want to approach monetization.

Amy C. Bohutinsky

Success -- am I on? Success for Zillow Digs in the early years really is about building out the product to make it extraordinary and building consumer scale. The exciting thing about that is that we are not starting this business as a brand-new brand from 0. We have a base of 50 million monthly use [ph] -- close to 50 million use [ph] already on Zillow. We're doing something connected with the home. And that, from a marketing perspective, is so exciting because if we think about just competitors in real estate in general, when someone buys a home, they delete the app, they go away from the website, they go away for 7 years. We have a reason on Zillow to continue talking to them and continue being relevant and to offer them a new app to download when they walk into home improvement, and that's what made this extraordinarily exciting.

Spencer M. Rascoff

So a competitive question, and we'll start with home improvement. Who is your competitive set and how do you think your Marketplace is differentiated and positioned to succeed relative to the others?

Amy C. Bohutinsky

So there's offline and online competitors. The biggest competitor right now is the way people get design ideas and get estimates for the cost of home improvement projects, which is a very old-fashioned way. It's pulling out pages in magazines and dog-earing them and putting them in a binder for -- to work with your architect. I mean, it's very old school to-date. Now there are some online components for the ideation phase. There's Pinterest, of course, which is very broad, but Pinterest is a broad universe of cupcake recipes and outfits and purses I like, as well as rooms. So we really, really like the narrow focus of Zillow Digs. And then also, there is House [ph] , which is an idea database for home improvement projects. What Zillow offers, though, to that idea side is the Digs Estimate, the data component that's just not available online or offline, to understand what something costs before you pick up the phone and call a professional.

David Vivero

Right. In rentals, the competitive set is kind of, I think about it's sort of as divided into 2 groups. On the one hand, you got the folks who are really rental; that's part of their identity. There's a lot of companies like that. Some of them call them ILSs. They're brands like apartments.com and Rent.com, Property Guide, iMedia, et cetera. And all of those companies you kind of have pay -- you have to pay to get on those sites. They are very different from us, also, in how they acquire traffic. We have a very strong brand that drives a lot of organic traffic, which Amy will discuss later today. And so on the traffic side, very unique in that regard. On the listing side, incredibly different. We're multiples in size in terms of the listings count, but also the listings breadth and diversity, that's available to consumers, which we think that's -- it's incredibly important. On the other side, you've got free sites, the leader in that would be craigslist. Craigslist is interesting in some ways, and when you talk about Pinterest, it's broad, right? They've got autos and jobs and other things like that. So we think that that's a unique position that we have. But not only that, we work with a really structured data and direct relationships with these landlords. It allows us to give mobile and web experiences that are map-based, that are easy to search, where you can save searches. So we take a user experience approach, also, in differentiating against craigslist. And I think the highlight in that is being mobile. Because particularly in rentals, where you've got high velocity on those transactions, having a mobile device, walking around town here in San Francisco, getting push notifications when listings come on the market, that level of sort of interaction that we have, I think, differentiates us against most of the free sites as well. So we kind of compete well, I think, in both directions.

Erin Lantz

So on Mortgage, our direct competitors in the near term are with other online Mortgage comparison shopping sites. From -- what differentiates us, which I spoke to initially, is around our consumer-first orientation, and despite the fact that we've been working on this for a few years and there has been some folks that have been imitating what we initiated in terms of shopping anonymously. You'll see throughout our product that it's really built with a user-first orientation. That's why we always sort by APR because we think that's what's best for the consumer. That's why ratings and reviews, which don't exist anywhere else, are very prominent on our site because we think that's a really crucial differentiator for lenders who deliver really exceptional service. So that user-first orientation has defined our product and will continue to define our product iterations going forward. I also think it's important, from a competitive standpoint, that we're focused deep on the home. And for Mortgage, that means we're focused deep on this very complex transaction that becomes even more complex in a purchase world. And that's where providing tools like Mortech CRM and Mortech's lender website, is something that I don't think you'll see our competitors doing in the near term. And I think it gives us a lot of opportunities as we think more broadly around how we can help lenders succeed in this purchase ecosystem with the relationship with agents, and that sort of thing. Longer-term, I actually think that our competitors are broader than online set. It's looking at the offline world, where a lot of folks are getting their Mortgages right now. So we're excited about expanding into that competitive set longer-term.

Spencer M. Rascoff

So last question, and we'll start with Mortgages. What are you most worried about? What's the biggest challenge to your business?

Erin Lantz

I guess it's related to the last, which is how do we make Zillow synonymous with Mortgage so that the first place you go when you think about getting a Mortgage is not necessarily who your dad told you to go to, or what your bank has told you in the flyer they sent you, but it's Zillow because that's where you'll find the best deal and the best professionals. And so, scaling that audience is a challenge and a big opportunity for us. And I think scaling that consumer audience while we scale our lender audience, and balancing that in a marketplace is a challenge. It's something that we're working towards really well, and it's kind of a nice thing that it's a lot easier for us to build the lender side of a marketplace all of a sudden, now that we have such a strong brand in the lender community and the reputation for the quality of our contacts is so high. So I'm worried and excited about making sure that we're bringing in enough consumer contacts to keep this growing lender base satisfied.

David Vivero

On the rental side, it's actually quite similar. I mean, we're focused a lot on trying to make sure that when you come to Zillow you feel like have an experience that's really tailored to rentals when you start dong searches on rentals. So that involves updating and changing the product, just focus on rentals, and continuing to improve that. It involves really broadcasting the value of the tools that we provide to landlords and to professionals. We think that's a big differentiator, for us, is that as I mentioned in my talk, is that really taking cues from a marketplace, not from a classified ads business. And so how can we drive people to connect more on Zillow, on -- for both professionals and consumers, which involves educating and reaching out to both landlords, multi-family professionals, which are folks who may have hundreds or thousands of units, as well as consumers to get them to download our apps and to think of Zillow when they want to, not just find a rental, but when they want to actually connect with the landlord, eventually be screened as a tenant, and sign a rental application, things like that.

Amy C. Bohutinsky

With Zillow Digs, what is our biggest advantage, which is our existing skill and user base, if not played right could be a disadvantage, in that we need to put the appropriate resources behind the product to be able to build it and scale it over time and know when and where to do that. The disadvantage could be if we did not do that at the right time. So I think we're very well-aligned with the advantage side of this. But it's something I think about and that we think about all the time and figuring out when and where and how is the appropriate way to grow this business.

Spencer M. Rascoff

Okay, we'll now open it up to any questions with the audience. We'll start over here, please?

James Cakmak - Telsey Advisory Group LLC

James Cakmak from Telsey. David, you talked about how you get more leads from rentals than you do from for-sale homes. And as you work to digitize the rental process, the credit applications and so forth, you're going to be collecting a ton of data on people, the demographics, the location, the financial profile. So how are you thinking about leveraging that data as the consumers graduate to for-sale homes and really thinking about how you can create a real estate consumer profile akin to what OpenTable is doing on the diner side? And secondly, with respect to Mortgages, you talked about making Zillow synonymous with Mortgages. Right now, you monetize on a CPC front, $11 billion opportunity. Can you just provide any more insight into how you can expand beyond a CPC model?

David Vivero

On your question, I, at least personally for sure, think of housing as a career, right? And you start in rental housing, most people do. And so, you're building a huge profile for yourself with all of your history of rental housing. It's your largest expense, basically, between your ages of 22 and -- or 20 and 35, say, when you're more likely to become a homeowner. And so a couple of things that we do that I think are interesting. One is that, already, if you go to Zillow right now and you look at a rental listing and you go to the right side and the right area, we call it -- we called it rental profile. A very unique offering, it's benefiting both sides. It allows me to add to what would otherwise be a pretty slim contact form and tell people what I'm -- or when I'm planning to move, if I had a dog, how much money I make, things like that, that allow me to differentiate myself for this transaction. And those get sort of attached to your profile and sort of you have this kind of identity that differentiates you for the landlord. It also really solves a problem for the landlord right now, just getting for this transaction, a cleaner idea of who you are. That's unique that we're offering. The other thing is that with the lead that we have in tools, and the database of all homes, we don't think of the listings as these fleeting documents that get posted, as advertisements put on a punchboard inside of a college dorm hall. We think of them as records that also have couriers [ph] . And we've already historically tracked price changes, we've tracked transactions. What we are doing for -- on the rental side with the rental protools that we offer, is also tracking when the properties have come on and are off the market. You can save all those photos, you can save all that history of who you rented the apartment to, but you also, even today, can fill out a rental application and check someone's credit right through our rental protools. As result of doing that, and as we continue to evolve our tools, we absolutely want to start really bringing that together, so it's easier for properties to come on and off the market for people, who if you took photos a year ago, but it's also easier for a consumer as you get to your fourth, fifth unit. I think I'm on number 10 by now in San Francisco. But when you get your first home, you kind of have that profile that includes all the transactions you've done, whether you've been a pain-in-the-butt tenant or whether you've been on time with your rents. And so, absolutely the effect of being more involved allows us to hopefully get back to the for-sale Marketplace. I know some of what's it given to us in terms of speeding up our adoption. So...

Erin Lantz

So how do we make Mortgages bigger? And do we play around with business models? So I think my primary focus in terms of growth is around awareness. We're actually quite pleased with the way our model's working, and I think the most important thing to look at is how do we drive more people into that model. So a few places where we're looking on that, one is around mobile. We got started early in mobile, especially for the Mortgage competitive set and we have a really prominent position there. So we're continuing to invest in that segment and to grow that channel. We're also doing quite well in SEO, but have a lot more work to do there, and so we think that there's additional traffic that we can get from there. And although we think we've built a pretty great funnel, we also think that there's a lot of incremental conversion opportunity that we can unlock, which would drive even more contacts from our existing user base. And then certainly, we're looking at ways to kind of supercharge the amount of Zillow users who become ZMM users. So the traffic model -- the traffic inflow, I think is the most important way that we're driving at that bigger growth opportunity. We experiment with monetization models all the time. We're certainly open to experimenting with new products and new ideas as we encounter them. But for right now, I think we're focused on maximizing what we can of our current model.

Spencer M. Rascoff

Next question.

Unknown Analyst

Just first on the -- you made the comment earlier that Zillow was not a transaction company. I think Greg made that comment. And then, we heard a notion that maybe in rentals, we could get into rental payments or perhaps maybe, be more transaction-oriented and that probably applies to Mortgages, too. Can you comment on like, is that a philosophical difference maybe because there's no broker community in your businesses that you have to deal with? And then as a bit of a follow-on, are these the marketplaces, Spencer, that are the ones that we're going to see for a while, like insurance is popping up as something that could make sense? So could you just comment on that?

Spencer M. Rascoff

Sure. So we are closer to the transactions, certainly, and especially on the protools side, the protools that rentals provides, the protools that Mortgage provides, are in the transaction for sure. So I guess I would answer it by saying we make the monetization decision in a kind of how deep in the transaction we get on a Marketplace-by-Marketplace basis. In the case of home improvement, for example, I'm quite certain, you're never going to have a Zillow contractor going to your home to remodel your bathroom. So I know we won't go that deep into the transaction once we start developing monetization models. But somewhere between here and there, we'll end up. Do you have anything on rentals or Mortgages, and then I'll answer the...

David Vivero

I mean, rentals by their very nature, are just easier. There's no home inspectors, there's no contractors, there's no agents, typically. There's lots of other things that make it just far more complex. And the tools and the registrations and the deeds and the public works, all that stuff just doesn't exist in rentals. You sign a lease, you put it in your drawer right now, and your landlord puts it in his or her drawer. So the ability to be there to facilitate the transaction is something that we think is going to be a huge benefit that we offer. We also think that for consumers, and what we're doing on rentals because of that turnover and because of the ongoing interaction, hopefully, you don't deal with your home seller, 6 months, a year afterward. But you may be calling your landlord. And so we think the interactions, the profiles, the roles we play in rentals are just different than for-sale.

Spencer M. Rascoff

So in terms of other future Marketplaces, the cadence here, if -- you may have -- those paying very close attention have probably figured this out. It's basically every 2 years, we roll out a new Marketplace. So I guess we have about 2 years to answer that question. But I'll say this, no, we're not done. We think there are other Marketplaces that hang off the home, that the brand can flex to incorporate, that complement these other Marketplaces that we've already planted seeds in. Although, we certainly have a lot of running room in front of us with this $35 billion TAM from these 4 Marketplaces. So that will keep us busy for a while.

Unknown Analyst

Great. So 2 questions, one on rentals and one or Mortgages. On the rentals plays, David, I know you think about all the different opportunities out there, and I feel like the strategy's pretty diverse, right? You have tools for property managers, you have tools for single-family homes. If you have a second home, you rent out with HotPads, you also have apartments. So I mean, what are you -- what's the focus or is there a focus? And if you could provide any sort of insight into how maybe you could monetize? I know we just talked about transactions, but maybe cost per lease, or something to help us a little bit to think about how big the adjustable -- I know how big the adjustable market is, but what could happen here? And then on Mortgages, just talking about Mortech. I think the technology is licensed out. If I'm not mistaken, I think you might have said that maybe that's a competitive advantage that Zillow has. So I wanted to get your take on that.

Erin Lantz

So I'll take the Mortech piece, first. Mortech has a few different products. Some of their rate publishing services, they license out. And we are continuing to have them offer all 3 types of their products. So the product and pricing engines and all of its variations, the lead management and the website product. So we plan to continue that and continue to work together to identify the best places to develop those businesses as lenders are seeking new tools to help them grow their business.

David Vivero

Okay. On the rentals side, our focus is on the consumer, first and foremost, in all of our Marketplaces. And one of the things that consumers need in rentals is breadth of inventory and a unique offer. And as a result of doing that, we look at all the different segments on the supply side, and say, how can we understand them more to deliver them an offering that allows us to bring them both together. If you zoom in on the supply side of rentals, there are people who have expensive property management software and they still need us because they want to fill those units with tenants. And so we'll build a relationship with them, where they're just providing a direct feed of their listings or some sort of connection to their listings, and we're sending them those introductions. That's a great relationship, it's very clean. The other relationships are just different. And so if you look at our segments, as I mentioned in my talk a little bit, you've got this sort of 60,000 or so property managers who are professionals in the Marketplace. They would love using our tools; it reduces their cost of doing business and allows them to be more efficient. If you think about property management companies, huge fixed costs to operate and then you'd really need to scale the number of listings that you're able to market and process, I guess, on a given weekly basis. So that segment is using our tools. The tools that we provided with RentJuice. But interestingly, our goal is to sort of have that single engine, that's at the base of RentJuice or -- and now Zillow Rentals, and it's at the base of Postlets and whatnot. And then just have a different kind of bodies you sort of put on top of that engine. You might need to cush your engine, that it maybe only seats one person if you only have one unit. And so we're building that experience. But certainly, part of our strategy is trying to, with the team we have, focus on delivering the core and think about what makes each segment unique. So that if you come to Zillow, you get the most listings and you have the closest possible relationship to your landlord.

Spencer M. Rascoff

So the inventory segmentation in the rental space is pretty interesting and surprising, I think, for most outsiders. Most of the inventory is in a long tail, about 2/3 of the inventory in rentals is single-family or multi-family, small, duplex, quadplex-type inventory. To address that market, we're giving or selling software tools. The types of tools that can help them manage vacancies, syndicate listings and just sort of manage their business. Those are the types of people that are definitely posting on craigslist and back to the competitive differentiator, the fact that we're giving them software tools is a big differentiator relative to craigslist, because we aim to build a tighter relationship with them and make sure that between Zillow and HotPads, we give them enough listings distribution, that they don't need other companies as a place to list. The fathead, is approximately 1/3 of inventory or even less, depending upon where you want to cut the number of units, are these huge apartment buildings that we probably all think of when we think of rentals, the giant buildings in Manhattan or other urban areas. And for those folks, we're basically taking listing feeds and charging them on a cost per lease basis. So we will charge them on a cost per lease basis. So we're not really providing them software tools, because they're going to buy ERP-type software from a real page or a yardie and that's great, but we have a different type of relationship with them, one that looks much more like an advertising relationship. In terms of monetization, I think we'll experiment with some combination of cost per lease, paid inclusion, paid sort order, future listings, et cetera. As I explained in our strategy, one thing we've gotten quite adept at is learning from early monetization strategies and then pivoting quickly. And we've done that in Mortgages, we certainly did it in real estate, and I suspect we'll do something similar in rentals. Next question?

Unknown Analyst

How do you think about the vacation rental market, or do you think about it as an opportunity in the rental area?

Spencer M. Rascoff

We don't think of it as -- it's certainly not a near-term opportunity. I think, as we've made clear, we approach this -- all of these Marketplaces from a consumer orientation. And in my opinion, and in Rich's opinion, having spent a long time in the travel space, we really view the vacation rental transaction from a consumer standpoint as a very different type of transaction. They're in a travel mindset, they're thinking about going on vacation somewhere, and that's very different from the home primary residence, real estate experience. There is some gray area there, where somebody looking at buying a vacation rental property, for example, who in order -- they might buy that property in Florida and want to rent it out as a vacation property, they might use Zillow to find the property to buy and they might want the Rent Zestimate to ferret out how much they can rent it out for. And so there is kind of a gray area there. But I don't think you'll see us competing for the consumer around -- I have a 2-week vacation in Hawaii, I'm shopping on Expedia, HomeAway, and Airbnb, and Zillow. That's not the direction we're going. I think we have time for one more question, if there are any? Over here.

Unknown Analyst

On the Mortgages side, when you think about the cross-selling capability that the company has, do you think you've -- how extensively have you been able to use that so far? Do you find you've got people who are coming just for mortgages? Do you feel like there a lot of tweaks you could still make to the core Zillow business to get them to think about Zillow Mortgages? Do think that there are a lot of people who use Zillow who have no idea that you also offer Mortgages?

Erin Lantz

So yes, we think about this a lot. Most people who use Zillow don't know that we have Mortgages. So that's the low-hanging fruit, and we're doing a lot of things on the site and off the site to try to improve that awareness. To give you a sense of the sources of our traffic, about 3/4 of ZMM traffic comes from zillow.com. So that is the most common path. Somehow, throughout your experience browsing homes, contacting agents, you notice one of our messages about Zillow Mortgage Marketplace and it's relevant at that point and then you come on over to ZMM. The other 1/4 of our traffic comes from SEO. And so those folks are coming in without coming through Zillow. They're coming directly from a Mortgage calculator to ZMM, or directly to ZMM from some sort of Mortgage rate-related query. So we definitely see that that -- that's direct to ZMM-specific traffic. And I think going forward, we'll definitely explore building that Zillow user to ZMM user path because we think that there's a lot of opportunity there. But like I had mentioned before, around kind of the big white space in Mortgage, I think there's also a lot of opportunity to educate people just about Zillow as a destination for Mortgage shopping, and we have a lot more work to do there.

Spencer M. Rascoff

This is one of the other advantages of moving into mobile, that if you're in the App Store on iOS or in the Google Play store on Android, and you're searching for a mobile app, you'll see a dedicated Zillow Mortgage Marketplace app. And between 25% and 35% of our total Zillow Marketplace usage and revenue comes from mobile. And now that includes Zillow Mortgage Marketplace being incorporated in the real estate shopping apps across those platforms, and a lot of it is dedicated -- are dedicated mobile apps now across iPhone, Android and iPad, where we have ZMM-dedicated apps across each...

Unknown Analyst

So Erin, 75%, 25% was just dot-com?

Erin Lantz

Just dot-com. That's right.

David Vivero

Mobile is direct.

Spencer M. Rascoff

Mobile is additional, yes. And it is a much more -- it's a much less competitive landscape on mobile, where literally from a standing start 18 months ago when we first started focusing on mobile for Mortgages, we've dramatically increased our usage and our awareness within mobile because there just are not that many competitors on mobile. All right, Erin, David, and Amy, thank you very, very much. We now are going to hear from David Beitel, our CTO. David joined Zillow 8 years ago. Like me, he followed Rich and our cofounder, Lloyd Frink, from Expedia, to help start Zillow. David was the CTO at Expedia, where he was on the founding team there, and before that he was at Microsoft. David?

David Beitel

Thanks, Spencer. As Spencer mentioned, I'm Zillow's Chief Technology Officer. I like to think that we all believe that we have the best jobs at Zillow, the folks that have spoken. I know that I do, as Greg mentioned, we're a technology company. And as Rich mentioned, it's the products that we're building that is really fueling this revolution in our space.

So to build great products, we start with great people. Zillow's engineering team is about 160. Most of those folks are in Seattle, but also we have engineers in San Francisco, Irvine, Lincoln, Nebraska, and New York City, through our recent acquisitions. We also have a team of engineers in India and in the Ukraine. We're proud of our team of data scientists. We've talked about some of those products, estimates and other things that they've built. They're really leading the forefront of the -- of revolutionizing our space through the data modeling and analytics products that they create. And our Senior Team comes from a lot of great successes, big companies that you've heard of, from certainly, like Microsoft and Expedia and Amazon, but also lots of smaller startups, some of which you've never even heard.

As Spencer mentioned, I've worked with Rich and Lloyd, our cofounders, and now Spencer, for nearly 20 years. It's been a great run and continues to be a lot of fun. First at Microsoft, then Expedia and now Zillow. And the senior managers and engineers at our company are folks that I worked with for a really long time, and I think that's a great advantage. This -- so what's really important is that we stuck together and we built a great product and a great team. We've organized into smaller product teams to focus around kind of key areas of ownership and this has worked well for us. We use an agile development model and modern technologies and open-source tools to keep our release flywheel spinning. We measure ourselves on how quickly we're shipping software, that's our most important thing; get software out the door. We've learned from some of our mistakes, we had a lot of successes at Expedia, we also made mistakes along the way, where a major code base and infrastructure investments were sometimes delayed, and major rewrites were needed. Our new model is working well for us because of the ways that we've organized our teams, our code and the use of these modern tools and technologies.

From the first launch of our site with the living database of all homes, and Zestimates to Rent Zestimates, or the Zindex forecasting and as Amy described, our Digs Estimates -- or our Digs cost analysis, our data scientists are really creating unique content that can only be found on Zillow. But more importantly, they're creating content that are super valuable to homeowners, sellers and buyers and our professionals. We're really proud of the pace of innovation and product innovation at Zillow. We have a fast, fast ship-often [ph] culture, and even as we've grown, we still have that strong, kind of startup culture within us. We pivot quickly on new ideas, and a great example of that is our investments in mobile. I'll talk a little bit more about that in a second. We've made heavy and deep investments in both kind of our native apps and our mobile web experience. And this has led to very great innovations on the product side and a mobile leadership position.

Zillow has one of the best design and user experience teams that's helping drive our overall customer experience. We're fans of a persona-driven product design process that makes sure that we're building the right products for the right users and helping them succeed in their jobs and tasks. You've heard of companies like Facebook and Google hold hackathons over a 24-hour period or a long weekend. Well, we've decided to take that a step further and we do hack weeks several times a year. This is a great opportunity to let teams just dream and form up in small teams and work together to help create some of the new features and business ideas that will fuel us in the future and times to come.

It turns out it's really hard to build this great software. We are shipping updates on a daily basis, we make major, kind of heavy-feature enhancements every 2 weeks. Engineers are dealing with very large data sets. We're processing terabytes of data across hundreds of computers and advanced data systems. And what we've had to do is hire and build the expertise to help deal with this complexity. And we've done that. With nearly 45 million monthly visitors, we've had to build services to handle this in a very -- this scale in a very cost-effective manner. And unlike many startups, we made early investments in a rock-solid operations and test team. From Day 1, we've built our services with scale and operability in mind, and it really shows. We have a hybrid-data center model with our co-lo in Seattle, but also data redundancy in AWS that Amazon provides.

Let me talk a little bit about how we build our products. We have a design and data mentality. You've heard a lot about this. Let me go into a little bit more depth. When we built our first homepage, you see a very Google-like, simple homepage that directs users into our site.

And we measure the results not just on this page but all of our site in great detail, both the usage and satisfaction metrics. That led to the design of our new homepage where we've seen a drop in our bounce rate, where user comes and then leaves our site, fall by over 5%. We also think this new page is more engaging and more supportive of the brand that we're trying to create. We do this type of multi-variant kind of AB-style testing all day long at Zillow as we look to improve our customer experience.

This kind of drive for excellence and scientific rigor has led to a number of great user experience improvements in our site. Sometimes these are big feature changes, sometimes they're really subtle, small text or layout changes. For example, this is a small section of our home details page, and we were experimenting with the layout of our photos and our key home information. So what do you think happened when we just simply move the photo from the left to the right side of the page, something as simple as that? Well, we tested that, and we saw a noticeable improvement in both engagement and usage, as well as contacts to agents, 2 of our key metrics.

Let's talk a little bit about mobile, obviously, something that's really fueling our growth in business. When the Apple iOS SDK came out a few years ago, we really pivoted as a company. We recognized where the game was going, and we wanted to get ahead of it. So we reorg-ed our team, we made sure we have the right engineering resources lined up behind the opportunity and we were really excited about the notion of having this rich, map-based search experience, kind of travel and go with you wherever you went.

We realized it was not going to be easy to build the technology to support the apps and the mobile APIs, but we really like these hard problems. We like the challenges that other organizations find difficult to solve. We've been able to staff this opportunity in a way that really others just can't, and it's really solidified our leadership position.

All of these early investments are really paying off. We were fortunate to be highlighted at the iPad launch on stage when Steve Jobs launched the iPad. We took a real fresh approach with our iPad app. It means obviously a great device. The form factor works well. It's very engaging. And so we took, from scratch, a design approach. And I think with all of our applications on our mobile devices, just people love them because they're so engaging and interactive.

Spencer mentioned this, but I'd like to highlight again, when we first talked to you around our IPO, we had 5 apps. We now have 24 apps across different platforms and devices in real estate, mortgage, rentals and home improvement and for our professionals. No one else has this level of product offering in our space.

And these investments in mobile have been fueling our growth and success. While many of the companies, many of the ones I'm sure you're covering, are struggling to extend their business models into mobile, ours accelerates. We have 3x the higher contract rate than on our desktop, and engagement metrics are also through the roof. 202 million homes were viewed on mobile devices in January. And as Spencer mentioned, our growth in terms of the number of homes viewed in a second went from 20 to now 75. That's just an incredible amount of growth in a short period of time.

We're also finding real clever ways of taking the innovations that we're seeing in our mobile apps and integrating them into our desktop experience. Our initial design for our search in our home shopping experience featured a map with a list of homes beneath it. But on the iPad, we took a fresh approach and have more of a unified experience across our map and list. So we extended that onto the desktop, and we've seen measurable improvements in most of our engagement metrics, really, all of our engagement metrics. This is exciting.

Another mobile feature that we built on mobile first is the ability to hand draw a search region. This is one of those hack week projects I was talking about earlier. We've made -- we've more recently extended this functionality into our desktop experience, and our users really appreciate this kind of seamless experience across all of our platforms.

And a final example I mentioned is the interaction between our map and our home details page. On the iPad, this is an integrated experience where a user stays within the context of the map while looking at homes. And just this month, we've begun testing in a small way, AB-style way, this on the desktop and are seeing very promising results.

So innovation in our mobile space is not just seen in our products but also in our partnerships. We were selected as a launch partner for real estate on Google Now. Users who have Android devices with Google Now will see Zillow results integrated into that experience. This is very exciting for us, and we're excited about where this might go.

I hope you can see that we are investing in our mobile products and really all of our services. We are proud of the technology team we've created, and the fact that after 8 years, we still have that same fire in our belly that we did as a startup.

We look forward to sharing a lot of advancements in the years to come. Thank you. I'm happy to take questions or you might have lunch if you don't have questions.

Spencer M. Rascoff

Yes, just a mobile competitive point. A very large shareholder of ours is actually here, mentioned to me at the Domino's Pizza Analyst Day -- I never thought we'd have something in common with Domino's Pizza, but I guess we do. At their Analyst and Investor Day, they put up a slide that showed market share from the national pizza companies over the last 10 years relative to some of the local kind of mom-and-pop pizza companies, and for about 10 years, it was pretty stagnant, market share for big guys, market share for local guys. And about 2 years ago, something interesting happened. The national pizza delivery companies gained about 5 or 10 points of share against the local delivery guys. And what happened was the smartphone. All of a sudden now, people are ordering pizzas using smartphone apps, using mobile apps. And the local mom-and-pop pizza places really can't compete with the national pizza chains that are investing in mobile. And we're seeing something very, very similar where on the desktop, we have a great website. But there are also other great real estate websites out there, many of which are operated by local brokerages or real estate agents, some of which we provide for free to real estate agents and brokerages. But on mobile, our lead is even greater because David's team is able to invest dramatically in mobile. So as more and more users shift towards mobile, that benefits the national technology companies like Zillow that are able to invest in mobile, especially across multiple platforms. And if you want to understand how complex this is, go to the mobile table outside and look at all of the plethora of different devices, all of which require native codes -- native code and native apps in order to have great software across those different devices.

Any questions for David or me? Okay. We'll take a 15-minute break, and we'll resume a couple of minutes before noon. Thank you, David.

[Break]

Spencer M. Rascoff

We take punctuality very seriously, so -- at least I do. So one housekeeping note. In your packets is a feedback form. This is our first Investor Day, and we want to take your inputs and make sure that these events in the future continue to get even better and more helpful to you. So please fill it out and, in exchange, at the table outside, give us your survey, and we'll give you a USB, which has the slides. We won't look at the survey before giving you the USB though. It also has the data book with all sorts of great housing information, but don't fill out the survey until Amy and Chad get their chance, please.

So I'm now very pleased to introduce Amy Bohutinsky. When I joined Rich 8 years ago from Expedia to help start Zillow, he told me that we had to find a way to become the largest real estate site in the category, but we had to do it initially without an advertising budget, solely based on product and word-of-mouth. And we knew that David's team was going to help with the product, but I knew that we needed a partner to help with the marketing side of things. So my first phone call literally that week was to Amy, who led marketing at Hotwire. We worked there together for years where she helped create a brand from scratch, and I convinced her to come to Zillow to move to Seattle and to try to do it again on an even larger scale in this even larger category of real estate. And she has certainly delivered over the last 7 years. Amy?

Amy C. Bohutinsky

Thanks, Spencer. As Spencer mentioned, I and my team are responsible at Zillow for creating a Zillow brand, growing the brand and for traffic acquisition. And what I want to talk about today is, what does marketing mean? What are all the channels we use to fuel our growth? And why are we taking a bet this year and making a significant investment in advertising? What's driving that? And what do we expect from it?

So to talk about marketing at Zillow, we always have to start with a product because at Zillow, we very deeply believe that all marketing begins with product. And if we can build beautiful, immersive, interesting products that empower consumers, that's the biggest thing we can do because people want to talk about these, they want to spread the words on these and the voracious use turns viral.

So product is at the base of everything we do, but then we use PR to spread the word. And at Zillow, we have a very sophisticated and deep PR program that's been the cornerstone of our marketing program for years. In fact, for the first 5 or 6 years at Zillow, PR was basically all we did. The results of the strategic program, we get over 1,000 press mentions every month throughout radio and broadcast and newspapers and social, and I want to show you a couple of our recent favorites right here.

[Presentation]

Amy C. Bohutinsky

[indiscernible] because they felt the competition was a little too formidable. So hand-in-hand with PR is our housing and analytics bureau, which is led by Dr. Stan Humphries, our Chief Economist. Zillow puts out housing reports on a weekly basis that fuel a number of press articles. Here, you could just see headlines over just the past 3 or 4 weeks, all fueled by Zillow housing data. Our housing data is used by economists, by those in the federal government. It is the basis for policymaking in Washington, and you can see -- actually, it's not loading well, but there's a picture of our Chief Economist, Stan Humphries, testifying in front of Congress that should be showing here.

The Zillow Home Value Index, which is our barometer of the housing market, is now forecasted by over 100 of the nation's top economists every quarter. Housing data is the basis of much of our PR, much of our brand awareness, and it fuels traffic growth.

Also incredibly important to our marketing is our social media engagement, and we have, by far, more than 3.5x the largest social media audience of any company in our category, 3.5x the size of our nearest competitor. Every day, there are thousands of pieces of content shared from Zillow on a social media, conversations happening on social media with Zillow staffers and real consumers and real estate agents and professionals. Every time Zillow is out there in social media, it builds brand affinity, ultimately bringing people to try the site, download our apps and increases our traffic.

And we've also taken our product on the road with our distribution partnerships. Zillow powers Yahoo! Homes and HGTV's FrontDoor.com, two of the top 10 sites in our category. We also have dozens of other distribution partnerships. And just recently, we announced that we are the real estate partner and one of the founding partners of Google's predictive search experience, Google Now.

These are many of the strategies we've used to bring new users into Zillow, to introduce the Zillow brand for them and get them to try the product. But once they're within Zillow, we begin our life cycle marketing programs where we find reasons for people to come back. So if you're a home shopper searching for a specific neighborhood, we will tell you -- the minute new listings hit our database of homes for sale in that neighborhood, we will tell you about price drops, we will tell you about home value changes, we'll tell you about new rental listings on the market if you're a renter, we'll tell you when the time is right as a buyer about what's happening with mortgage rates and personalized mortgage rates to fuel your purchase loan. And when the time is also right, we will introduce you to life cycle marketing products like Zillow Digs. As I mentioned when I discussed Digs, so many buyers embark on a home improvement project within a year of buying, and there is such a tremendous opportunity here for us to capture a consumer and be able to communicate with them truly for the rest of their lifetime with relevant information. We do not lose consumers the minute they buy a home. We just start a lifelong conversation with them.

So all of this marketing has contributed to, what, for Zillow has been pretty phenomenal traffic growth. In January, we had a record-breaking 46 million unique users across the web and mobile, and we are trending towards another record-breaking month, probably trending towards 50 million unique users this month. Now this is a measure based on Google Analytics, internal tracking tools, which measure both web and mobile, and that's incredibly important for us to be able to capture both because, today, more than half of our visits now come on a mobile device.

From a competitive standpoint, this is looking at unique user growth just on the web, which comScore tracks. You can see Zillow in red here. You can see in the fall of 2011 when we became the #1 real estate website and how we've broadened and widened our lead since on the web.

On mobile, our lead is even larger. On the left-hand side, you can see our growth over the last couple of years in mobile. Now we don't specifically break out unique users in mobile because we don't sell that way. When we sell to Premier Agents, we sell across both platforms. But our closest competitor does, and I can tell you that on unique users, as of Q4, we're 70% larger than our closest competitor. Xperience hit-wise just put out a report a few weeks ago, looking at mobile web traffic. They pegged us at twice the size of our nearest competitor in mobile web traffic and 4x the size of a #3 player in the category of mobile web traffic. So we have a lot -- wide lead in traffic. We have an even wider lead in mobile, and that lead is growing. We're investing very heavily in mobile, and it's very important to us and to the future of real estate.

So that's the scope of our traffic. I want to dig a little bit deeper into the quality of our traffic now and where it comes from, who these people are. 90% of our traffic today comes to us for free based on many of the marketing strategies I just walked you through, and 2/3 of it is branded. What that means is for 2/3 of our traffic, somebody is either typing in zillow.com in the URL, they're searching for Zillow on Google or they are downloading and using a Zillow app. This is a tremendously important traffic metric to look at because it means that when people use Zillow, when they come to Zillow, they are intending to visit our brand, they know our name and our traffic is not dependent on search engines or Google algorithms for the bulk of our traffic. People who come to Zillow know our name, and they want to be at Zillow. 3/4 of our users are in the market, which means they're looking to rent, buy or sell a home. So these are people that are directly relevant to our revenue model and are ready to make a transaction in some way.

So great traffic stats. We've undoubtedly had really terrific growth over the last couple of years. However, when I look ahead into the next 8 years at Zillow, I am staring down an enormous opportunity, enormous, like something in no other relevant category or similar category to us online, and that's the awareness opportunity. So there are 235 million adults online in the United States. 70% of them own a home, 29% of them rent, and we believe Zillow has an opportunity to be vitally relevant to nearly all of them.

However, when we look at awareness and we look at an IPSO study we did recently, more than 60% of online Americans have never heard of Zillow. This is when given a list of real estate-related websites and say, "Which of these do you recognize?" 60% have never ever heard the word Zillow before. In unaided awareness, which is another measure where we say, "Name a real estate or a home shopping-related website," a shocking 27% of Americans can't come up with one single brand, not one, and only 12% come up with the name Zillow.

This is the largest brand awareness in our category. We are the largest real estate website and mobile app platform in our category, yet 88% of Americans cannot come up with the name Zillow when asked to name a real estate or home shopping-related website. Now if someone who has been working on marketing at Zillow for 7.5 years now, you might think that I'd find this depressing, but actually, I find this extraordinarily exciting.

This opportunity is mind blowing, and it's not something you can see in other Internet categories. Think about it. Travel, jobs, financial services, these are all categories with dominant consumer brand, but online real estate, there is not a national dominant consumer brand. And we know from our testing of the product that all we have to do is introduce people to the name Zillow, that when they hear it and learn what they do, they try it out. And when they try it out, they use us, and they're users for life. All we have to do is introduce people to the word Zillow and open up this opportunity for us, and I find that extraordinarily exciting.

So this is how we're going to do it. As Spencer mentioned on our Q4 call, brand advertising is something we're investing in for the first time this year, and we see a significant opportunity there. And what we're trying to solve with brand advertising is, first of all, getting people just to know our name, to know the word Zillow as a place to shop for real estate. And as we know, there's an 88% opportunity of Americans that we can do that with. But beyond that, we need them to understand, why should I care about Zillow? Why should I go there? How is Zillow different? What is Zillow offering me that will help me when I'm looking for a home? And then, ultimately, we want them to use Zillow as their primary home shopping site. It's a full funnel of awareness that we're going after with this.

And to get to this point, we did a tremendous amount of research. Zillow, as a company, has always -- we are incredibly analytical people. We have been doing deep research on our users and on buyers and sellers for years. But this past year, when we started thinking about going after this opportunity, thinking that this was the right time in our life cycle at Zillow to go after this opportunity, we dug in even deeper; we went and we talked to buyers all over the country to try to understand their needs when they're home buying what they're looking for. And it's a really interesting tale that buyers tell. It's a left brain, right brain tale of on the one hand, buying a home is an incredibly emotional process. There is so much tied up in that home purchase. Your family, your family's happiness, where your kids are going to go to school, your spouse's happiness, your financial future, the community you live in, the friends you're going to make, there's so much tied up in that, it's very, very high stakes and people are emotionally wrought about getting it right with this decision. They want to get it right. They want to be in control and they want to do it at 10 p.m. in their pajamas.

It's also a very visual experience where home shoppers want to imagine the possibilities, imagine the places their life can go, and what they yearn for and what they want are very visual, visceral experiences where they can surf through on an iPad, look at big photos, compare homes, really dig in and feel it.

But buying a home isn't just about the emotional soft side. There is a very hard analytical side to it as well because this is, for most Americans, the most expensive purchase they're ever going to make in their lifetimes. They are spending a lot of money on this home, and they can't get it wrong.

So people want to know much more than, "What are the homes for sale listed by an agent today?" They want to know, "Has this home been put on and off the market, and what does that mean? Can I go after a foreclosure? How do I do this? What homes might be coming on the market in the near future because this inventory here is tight, and I'm getting in bidding wars in my community; I need more listings." People want deep information, they want home value information and they want to know everything. It's a yin and a yang, a left brain and a right brain. And what we learned in our research is that, more so than any other resource, Zillow is uniquely positioned to answer to both these sides, the soft emotional and the analytical, and that's really exciting for us as we embark on this advertising campaign.

So what I'm going to show you now is our TV ad that's been in circulation now about 6 weeks. We're just kicking off our 2013 advertising, but it's something that's trying to speak to buyers at this level and also talk to them about why Zillow is the right resource for them to use.

[Presentation]

Amy C. Bohutinsky

So this is airing nationwide currently right now, and as I said, it's been on the air a couple of weeks. We're also testing on a more limited basis other forms of brand advertising that we might layer on top of it, like radio and digital.

So advertising is not just about beautiful, emotional, creative, although I wish it were. There's obviously a very high-stake analytical game here, and this is something that we measure very, very deeply and we measure very voraciously and daily. And I want to talk you through what we're able to measure with this and why we have the confidence to jump into this at this point.

So brand advertising is something that we at Zillow are able to measure all the way down the funnel, starting at the top with simply who sees the ad, going down into brand awareness. How does this impact our brand awareness? We did a small, limited test of this last year where we learned what this could impact, and now we're putting it into practice this year.

But even deeper than brand awareness because it's great if everybody knows your name; it's what we want them to do, and does that actually translate into real ROI metrics? And the answer for us in our test and what we're learning is, yes, we're able to measure all of our metrics down the funnel from traffic to shopping traffic, to new shopping traffic that contacts the Premier Agent. This is something we measure and we watch very, very carefully, and it's tightly integrated into our entire brand advertising campaign. We're nuts about this stuff.

So the other thing that's important to us about brand advertising that I think is important to mention is it's not just about raising the brand awareness and the direct impact of the traffic you bring in from that campaign, but we also think about it in the sense of a rising tide lifts all boats. When you have a brand that more people are aware of, all of your marketing work harder, your PR works better. When people read about Zillow data in The New York Times and they recognize the brand from seeing the commercial, they visit the site. It increases conversion on natural and paid search results. Think about it if you're searching for San Francisco real estate. Let's say Zillow is the #2 result. The #1 result is a brand you don't recognize, you click on that #2. It increases conversion on natural and paid search results makes those things work harder. It increases opens on emails. It increases download and usage of mobile apps. It increases conversion to other life cycle products when you bring buyers in the door. The rising tide of brand advertising has a positive effect on everything we do in marketing, both free and paid, and this is something we're very, very excited about.

Before I close, I want to bring it back to the point I made at the beginning of this, which is, at Zillow, all marketing begins with product. And a deep, deep product focus is not something that's mutually exclusive from spending on advertising. You cannot do one without the other. We're going after our opportunity with both hand-in-hand. So investing deeply in the product is still the core of what we do, it's something we'll continue doing, but we are now using advertising to amplify the good work that David and his team are doing on product. We think using advertising to amplify this will catapult us ahead of our competitors and this opportunity we're going after. And we're really excited to jump into it today. We think we're at probably the most exciting point in our history from a marketing perspective as far as what we can go over.

That's what I have, and I'd love to open for questions.

Amy C. Bohutinsky

Here comes the microphone. Okay.

Unknown Attendee

So 2/3 of your, I guess, traffic is free. How has that changed over time? Obviously, doing new television campaigns, it seems just my anecdotal evidence, this is your first campaign. So what is that indicative of? What should outside investors infer from that kind of position?

Amy C. Bohutinsky

So 90% of our traffic is pre. 2/3 of our traffic is direct people coming to the brand. So how that might change over time? Well, first of all, we're not going to abandon all of the other marketing channels we do that bring in pre-traffic. It's gotten to us where we are -- it's gotten us to where we are today, with almost 50 million unique users, and we're going to continue that. Advertising is certainly going to amplify that. But as I mentioned in the last slide, a rising tide lifts all boats, and it's going to make that work harder. So we actually don't expect that mix to change significantly this year as we start to spend on brand advertising because we think it's actually going to amplify and help all of our free marketing efforts. Was there a second part to that? I can't remember. I think that was it.

Unknown Attendee

Yes, these emerging market places, that mortgage and the rentals in the Digs, is that going to be part? Are you going to try to push that within the advertising message?

Amy C. Bohutinsky

That's a good question, and I actually meant to cover that in here. So we're starting our advertising with buyers. We think it's a terrific entrée into Zillow because when you're looking to buy a home, you need a mortgage. And as I mentioned in the Digs presentation, chances are you're going to do a home remodeling project. We also think our advertising speaks to renters, and that it's home shopping advertising and home shopping can span rental and for sale. So by starting with largely a buyer message or a home shopping message, we think we can naturally move onto those other categories, and there's other areas of marketing we can do to help that. So there's merchandising across the site, there's email and life cycle marketing, but we think it's sort of the best and most lucrative entrée into Zillow where we can then introduce them to other products with other marketing tactics.

Unknown Attendee

I just wanted to ask on the -- the guidance for the company for marketing spend is like another $35 million incremental for this year, roughly. Can you just give us a feel in broad terms for like what should we expect to see for that? Is it mostly television? Is it a bunch of commercials as we get through the year and airing all year? And maybe just related to that, just comment on the timing that you -- we should expect to see. Does it coincide with the real estate seasonality?

Amy C. Bohutinsky

Yes. And I think Spencer, correct -- Spencer and Chad, correct me if I'm wrong. The numbers we cited in Q4 for increased this year was advertising and sales. So that also includes inside sales. So I wouldn't just peg that number at advertising. So what we expect to see from this and what we're doing with it. So first of all, we kicked off a national television campaign. So this ad you saw was our first ad. We are testing other branded things such as radio and digital to see the impact that makes on a more limited basis. If we see a signal from that, we will layer on top of it. We could layer other things in the future. But the way we typically approach this is, in a limited scope, highly measured way, we test new channels, and we measure them all the way down the funnel. And when we see a signal, we layer it on, and we layer it on to our channel mix. As far as what to expect this year, where this impacts at the top of the funnel more directly is the traffic. We know from our research that when people start home shopping, they often do it many, many months on Zillow before they're ready to pick up the phone and contact a real estate agent. So that revenue that's a result of this extra traffic would be further down the line. And just a note about how we think about brand advertising in general. When I think about the opportunity, I think about a long-term opportunity. We are building a brand here that our children and our grandchildren will know. We're not going after this as a 1-, 2-quarter, even 2-year out proposition, but we want to build a massive [ph] consumer brand that's here forever. So when I think about the impact it's going to make, I'm thinking much more longer term.

Unknown Attendee

Yes. I was wondering if you could just respond to the notion that it's hard to see much effectiveness when you just dip a toe in the TV, that you need to really go and spend real money to make an impact. Is that -- do you share that view? And then are you seeing -- kind of as a separate question, are you seeing any particular strength or response in markets where there's a stronger housing recovery?

Amy C. Bohutinsky

So on the kind of dipping our toe in the television advertising, the way I would characterize our approach is religiously test and learn. And we did a test this fall to understand the impact of television advertising and in what levels. So this is very analytically driven, and we believe the approach we're taking is one that we are going to see an impact. And we're happy with the approach we're taking, and it's something that will build on itself over time. And then the second was housing market. What did you say about the housing?

Unknown Attendee

[indiscernible] .

Amy C. Bohutinsky

Got it. So our timing in this is terrific in that when we felt we were right at our own life cycle to begin brand advertising happens to be at a time that we have a strong housing market that's coming back. There's many more buyers on the market. What you do here in a number of markets is that inventory is tight, and that's why when I talked about the buyer sentiment of there's this very heavy analytical side, there's this anxiety that they don't see everything. We've learned from our research that Zillow is so uniquely positioned to these buyers to offer them something they're not finding in other resources. So to offer them homes outside that realm of homes listed for sale by an agent today, to show them homes that are in pre-foreclosure, that they could make an offer to help the homeowner out of foreclosure, make a short sale offer, to show them homes that have been foreclosed by the bank but haven't actually been put on the market yet, to show them Make Me Move homes. We show them for sale by owner homes. We have a large number, more than 1 million listings that you're not going to find at other resources that are incredibly important to buyers and this housing market in these markets where inventory is tight and they need to know what else is out there. So we think we're really, really well-positioned at this point.

Unknown Attendee

You obviously tried or did some testing around advertising before starting this full nationwide campaign in a few specific markets. Can you share some of the numbers around either increases in traffic or what you saw from lead generation in that handful of markets that was the reason that you decided that it was worth going ahead to do this nationwide?

Amy C. Bohutinsky

So for competitive reasons, I'm not going to share numbers, but I can tell you that the results gave us the confidence to launch this year. There's one over here.

Unknown Attendee

I'm just trying to tie back with what David was saying earlier on the product changes that we're expecting. I think Spencer laid it out in 4Q earnings with new maps, better experience in the layout. Can we assume most of that is done given we're now in a national ad campaign, and we're sort of -- we -- you all are advertising the new product now that it's probably ready to go? Does that make sense?

Amy C. Bohutinsky

Yes, I mean, the changes David talked about are iterative. We're making changes in improvements all the time. The product just keeps getting better and better. So certainly, when we advertise, we're showing the product that's live today. And when we develop new ads, we'll be updating those with a new product. But there's new stuff all the time that's making it better. And a lot of the new stuff we build is based on the research when we're out there talking to buyers, what they're looking for, how the changing market is impacting what they're looking for and how they use mobile in their search.

Unknown Analyst

And one quick follow-up, just in talking about 50 million uniques. I think that's maybe a record or close to it. Is it fair to assume that was -- we're 6 weeks into the ad campaign, we're seeing the results already and that likely continues as the housing market recovers, et cetera?

Amy C. Bohutinsky

There's a number of things that go into our traffic growth. First of all is seasonality. March is always bigger than January. And as we start to head into the buyer season of the peak buyer season of May, June, July, August, September, there's a seasonal traffic trend we go after. But also, we do feel that a number of the marketing strategies we're employing right now are working. Our traffic growth is pretty phenomenal, and our year-over-year traffic growth is pretty phenomenal. All right. Thank you.

Spencer M. Rascoff

So our last formal speaker today is somebody that you know very well, somebody I intentionally put last because we wanted to make sure that we had lots of time for you to meet other people that you don't get to spend as much time with ordinarily.

Chad has been with Zillow for about 6 or 7 years now. He's been CFO for the last several. He led us through the IPO and our follow-on offering, and he's known to many of you. And Chad will now talk about our financial results and our longer-term financial model.

Chad M. Cohen

It's great to see so many familiar faces today, by the way. So you've just heard from the team how we're investing in content. We're growing audience and growing marketplaces, and I'm going to talk to you about how all that translates into our financial results in the near term and in the short term.

Our subscription-based real estate products, in addition to our largely self-service cost-per-click mortgage products, and our Display business deliver high contribution margins, with relatively low variable costs. These variable costs include sales commissions, credit card fees and accretive revenue sharing partnerships with large traffic sources. Our fixed costs are primarily controllable payroll costs and capital outlays to power our living database of all homes, which provide us for a substantial leverage as we continue to scale revenues and traffic.

As you can see on the slide, in 2012, we achieved a 22% EBITDA margin, representing $25 million on approximately $117 million in revenues. This margin represents a 4-point improvement over our 2011 results and 112% year-over-year growth in absolute dollars. In the near term, we are committed to ramping our EBITDA margin towards the 30% to 35% near-term target model when we reach $200 million to $250 million in revenues and believe we can achieve further leverage as our top line grows towards $500 million given the relatively fixed nature of our investments that we're making. Our margin profile provides us with a significant degree of flexibility to reinvest our profits back into product, grow our sales team and improve our reach through various advertising initiatives, which we tested last year and are accelerating in the current year. The leverage in our model already exists to achieve the near-term margins, but we are making a conscious decision to invest in growing our brand into the massive whitespace opportunity ahead of us, especially now that we have transitioned to a business model that benefits from our growth in audience.

As you can see in the top chart, our revenue mix, represented by the green lines, is now almost 80% Marketplace and shifted significantly from its Display roots. We're obviously very happy with this intentional shift as our Marketplace products are primarily subscription-based, giving us great visibility into delivery of future revenues. And our professionals in the Marketplace do a fantastic job of servicing the needs of our consumers. And our consumers view our Marketplace products as content rather than advertising. As a result, we dedicate a lot more territory on our page for our Marketplace products. Our Marketplace category in the fourth quarter grew 95% year-over-year and 105% for the full year. And in addition, our Display category also performs nicely as we obtain premium CPMs based on the targeting we can perform across our platform at scale. This category grew 22% year-over-year in the fourth quarter and 26% in 2012.

To give you a better understanding of how this mix shift toward our Marketplace products is impacting overall monetization, as well as our Display business, we have highlighted our traffic results over the past 12 quarters and compared those results to our revenue metrics and then more discreetly to our Marketplace and Display revenues recognized. As you can see, our investments in our Marketplace businesses not only benefit our consumers, which have driven traffic levels up 47% year-over-year to 34.5 million average monthly unique users in the fourth quarter of 2012, but has also benefited our revenue model. As in the fourth quarter, we derived $0.99 per average monthly unique user as compared to just $0.57 just less than 3 years ago in the first quarter of 2010.

Over the past 3 years, we have achieved improved monetization of our traffic through investing in marketplaces. And during that time, our quarterly marketplace revenue per unique increased to $0.78 from $0.20, which also drove display revenue per unique down to $0.22 in the fourth quarter of 2012 from $0.37 in the first quarter of 2010. The decline in our display revenue per unique had been intentional as we made continual product decisions, which decreased the number of display ad placements on both our search and maps page, as well as our home detail pages, improving overall user engagement by focusing on the user experience and connecting more of our audience with our marketplace professionals.

The mix shift away from display also benefits our cash flow cycles as 100% of our marketplace revenues are transacted through credit cards from which a significant portion are actually prepaid.

As we look ahead to the future, we anticipate continued and sustainable growth in our revenue per unique user metric, but also know that as we build out our marketplaces, display revenue per unique user will decline as a function of more of the territory on our pages dedicated to providing a superior user experience.

Further into the future, growth in revenue per unique will result from increased brand awareness and shopper traffic; higher mobile traffic, which converts 3 times better than desktop traffic; higher revenues per contact as more Premier Agents use more of our software to help them convert our lead flow; pricing power from the implicit ROI in our Premier Agent business; and eventual monetization of our emerging marketplaces in rentals, mortgages and home improvement.

That's all for my prepared remarks. I'm happy to open up for questions now.

Unknown Analyst

So one of the earlier chart shows getting a lot of leverage in the sales and marketing line, but I think in the last quarterly call, someone on the management team discussed kind of reinvesting in the business, and so not getting operating leverage, right, next year or this year, excuse me, this calendar year. Correct me if I'm mistaken. So when should we expect to see that kind of tipping point when you get that leverage if you're not going to get it this year, in spite of revenue growth?

Chad M. Cohen

Yes, so what we discussed on the call was spending 70% more on sales and marketing, which includes advertising, pure advertising and marketing, as well as growing the sales team to support the growth in our various marketplaces, specifically Premier Agent. And so what we're showing here is the 30% to 35% target model in the near term when we reach about $200 million to $250 million in revenues. And what we're seeing today is that we haven't pivoted off of that yet. That's still absolutely attainable to us. And if you look at our 2012 results, we spent about 15 points of margin into advertising and marketing activities. And so we have a lot of discretion in our P&L in terms of where we want to invest and how we want to invest. And this year, we're stepping on the accelerator a little bit in pursuit of that whitespace opportunity. But in the near term, we have, again, lots of flexibility in our model that can get us to achieve the 30% to 35%. And have we not spend those dollars last year, you would have seen that flow-through all the way to those target model numbers.

Unknown Analyst

Chad, does your midterm and your long-term model include potential contributions from Rentals, Digs, and other opportunities that you have there?

Chad M. Cohen

Absolutely. So the $500 million model, we consider a mid-term model as opposed to a long-term model. But absolutely, this year we're going to start monetizing Rentals towards the end of the year. That's the hope and we anticipate to start monetizing it to the Zillow Rentals network. We're already monetizing it through cost per lease, cost per lead type monetization products on the HotPads platform. We hope to bring that to the Zillow Rentals network as early as end of the year, but no later than sometime next year. And then with respect to mortgages, we're already monetizing that and home improvement is something that we'll monetize at the right time when we gain a sufficient level of liquidity in that marketplace. But what you've typically seen with all marketplaces is that happens 2 to 3 years out generally from the time that we launched a product.

Unknown Analyst

I just want to tie back into an earlier topic, which was potential new marketplaces and how they take a couple of years or you pursue them every couple of years. And one of the things that has delayed operating leverage has been acquisitions and expenses with no offsetting revenue. And I think you guys have been delivering a message that you're sort of taking your foot off the gas a little bit in terms of M&A in the near term. But could that change as we get through the course of the year? And kind of the question is, how far in advance of announcing or launching a new marketplace do you think you need to be investing? And how much of that investment is built into the near-term model?

Chad M. Cohen

Well, I would say that, that -- feel free to follow on, Spencer. That this anticipates what we currently understand in terms of the direction and the path that we're headed with our emerging marketplaces. To the extent other opportunities out there in acquiring a unique audience or a unique data or content or bolstering the products and the features that we provide to our professionals, that may, change how we view this. But in the near term, this is based on what we know today.

Spencer M. Rascoff

In 2012, we bought 5 companies. The smallest was a couple of million dollars, the largest was about $40 million. The smallest was a couple of employees, the largest was about 40 employees. So these are all relatively small companies that we acquired. We looked at over 100 acquisitions and Kathleen Philips, who is our General Counsel and runs M&A, and I and Chad and the rest of the team evaluated over 100 companies in 2012 and we ended up selecting 5 to buy. I think what I said on the last call, I would reiterate today, which is -- are already high bar, got a little higher, once we -- once we bought our sixth company in total and our fifth over 18 months, as we focus on integrating these companies, making sure that each of these acquisitions comes to their fruition. So we're always looking at other acquisitions and we will continue to do that, but I don't expect that 2013 will be as acquisitive a year as it was in 2012.

Unknown Analyst

Yes, just had a few quick questions on this stuff. First, just nitty gritty, the COGS line, looks like it's deleveraging on the $250 million.

Spencer M. Rascoff

Yes, let me explain that for a second. The $200 million, $250 million model here represents the original model that we went on the road with in our RPO. So the 14% to 16%, we're not expecting to deleverage. Those are numbers that we socialized with the Street about 20 months ago.

Unknown Analyst

Okay. And that may explain my next question, which is if you look at that $250 million profile, that's the consensus numbers on 2014 are almost there and yet the Street has margins way below that. So it feels like you may be telling us that Street numbers on that year are too low?

Spencer M. Rascoff

Yes. Again, just back to my earlier remarks, we haven't pivoted off of this yet, but understandably, this sell side might have a different expectation of where we're going to end up next year or the year after.

Unknown Analyst

Yes. I think the Street's at 24-ish percent margins?

Chad M. Cohen

Any other questions? Mark?

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

When you think about the new areas, new emerging marketplaces and then the places that maybe every 2 years are going to come up with. I assume the biggest investment areas against those are, are they going to be sales and marketing, and tech and devs or anything that's going to dramatically change your COGS outlook in the future? This always going to be likely an 80%, 85% gross margin business?

Chad M. Cohen

If you look at the focus of the most recent acquisition, let's say, they are much more skewed to technology and development investments than sales and marketing investment with respect to HotPads, Mortech and RentJuice. The focus was much more on the products, the team that we're acquiring, their engineering talent. And obviously, we'll make -- we'd like to make some investments in sales and marketing going forward, but we hope to gain efficiencies from the platform we've already built and the ability to cross-sell those across those new marketplaces in the future.

Spencer M. Rascoff

I mean, COGS is driven by credit card fees and partner distribution costs like our revenue share with Yahoo!, for example, when we power Yahoo! Homes. So I think to answer your question very directly, yes, I think I don't see any reason why the COGS margin would change very much looking out a couple of years. Do you?

Chad M. Cohen

No. I mean, I was just trying to make a point, if anything that can benefit from the platform [indiscernible] .

Spencer M. Rascoff

Yes.

Unknown Analyst

Can you give us an idea of how the average home sales price per Premier Agent has changed over time?

Chad M. Cohen

Sure. So we don't -- what we haven't shown investors what the average contact -- what the average home value is on homes that a buyer contacts an agent on. When we show our ROI numbers, we shows the NRS medium. If you were weighting it based on contact leads, it would be higher and the ROI would be even greater. But we tend to look at the average of the NAR [ph] number of around 200,000 or so, which is up about 10% year-over-year. So we are forecasting home values to go up 3% in 2013. In 2012, they went up 6% nationwide. After 2013, Zillow economists and most others are kind of in a plus 3% to 5% year-over-year in 2014, 2015, et cetera. Does that answer your question?

Unknown Analyst

Sort of. So would an actual number be materially higher than $200,000? Could it be as high as $300,000? Because you're entering some smaller markets, Kansas, et cetera, that would suggest that the number would be falling over time.

Chad M. Cohen

Yes. We haven't given up. It would depend -- there's a lot of noise in that based on which areas we sell, which areas have the highest contact rates, what's happening in the local home values, et cetera. And so, we've kind of just taken a very sort of down approach when we model ROI.

Unknown Analyst

I guess you get the data from the surveys as opposed to having sort of hard data, right?

Chad M. Cohen

Yes. I mean, do you have any color on it? We haven't ...

Unknown Executive

Yes. Let's see [indiscernible] either traffic or things that [indiscernible] So I was saying, we follow quite closely where leads come from and with the average home prices in each one of those ZIP Codes and we calculate, and track that number quite closely. Leads come from areas of high population density, right now, high housing density. So our selling impressions sort of more and more widely across the country to make sure we have full national coverage. The most growth in housing is coming in California, in Florida, in Arizona where things are pretty hot and appreciating right now. So I don't expect a down draft, so to speak, in average lead correlated to average adjustment to home price.

Chad M. Cohen

We try to take a pretty conservative view, I said very conservative view when we look at that Premier Agent ROI funnel because there's a lot of uncertainty especially around the conversion percentage, this 3% number. We know it's sometimes higher than 10%, we know it's 0% sometimes. And so we take a conservative view on the home price number in order to kind of give us a little bit more leeway on that funnel. Yes?

Unknown Analyst

I have a question. If you go back to that margin slide. The tech and development, I guess that's a function of just leveraging larger revenue base but it seems like a pretty big drop. How does that compare to other kind of tech companies? I guess my point is, would it probably be higher? Just the 13 to 15 seems kind of low.

Spencer M. Rascoff

Let me give you a sense for what's actually in that line item. So we have engineering costs from our core product teams, design teams, our quality assurance test team in Seattle, as well as in India. We have a development team out in the Ukraine, as David noted. But also within there is a very healthy investment in the building blocks, the structural information, the powers, the living database of all homes. So these are relationships that we have with a number of different vendors in which they go out and they scrape County Courthouse records and bring to us the data relating to beds, baths, square footage lot sizes, parcel sizes and it's David's team that does all the complicated work in terms of putting that all together for a seamless view for the consumer. So those contracts, we spend a few million dollars a year on those, they don't go up with traffic or revenue, those are largely fixed cost contracts that we have across number of different vendors that are long term in nature. So we get a substantial amount of leverage from just the other element; not only the payroll cost, which are fixed, but with the capital that we deploy to help power the living database of homes.

Unknown Analyst

Just want to ask a quick one on Display revenue. We had the big foreclosures.com sort of step down shift that happened late last year. And as you look out, I know, I would imagine you expect Display to be -- continue to become a smaller portion of the revenue base. But can you just comment on, a, are there any other big factors in there that you might bring out and shift it to marketplace's revenue like you do with foreclosures? And can you just maybe make a comment on whether Display is going to grow or not as we go forward?

Spencer M. Rascoff

Display will absolutely continue to grow in terms of absolute dollars. It's a very nice revenue stream for us with extremely high contribution margins. We have a small sales team out in New York City and we have a small Display team in Chicago, as well as San Francisco and Seattle. But it's a very nice revenue stream for us just given the leverage that we get from those sales. I think you've just heard from the team that we're going to continue to skew towards our marketplace products and the content that's developed by us internally and through the content in the form of the professionals and the ratings and reviews, and the service orientation of those marketplaces that we're growing that where the consumer sees that information as content rather than a news insert or advertising. And so we made many trade-offs over the past few months to improve the user experience on our sites specifically on the search and maps page, where you've take off certain advertisements that used to be generating some level of revenue for us. But to give that consumer a better view and frankly, to keep them on the site longer in terms of better engagement, more page views, more listings view, more time on site. And so you continue to see us skew towards marketplaces. But we're going to have to give up -- that territory is going to have to come in large part from some of those Display advertisements.

Chad M. Cohen

Display will likely continue to decline on a per UU basis but not on an absolute dollar basis, where it's been growing in the 20 -- in the high-teens, low-20s range but on dollar -- on revenue per UU basis, it would [indiscernible] .

Unknown Analyst

Yes. I was just going to ask going back to that chart that Rich showed at the beginning with REA Group and Rightmove and kind of the opportunity there. I was curious to get your thoughts on the kind of how similar and how different the markets are given REA Group has like a 45% EBITDA margin, Rightmove has a 70% EBITDA margin, partially because these are markets that are winner-take-all where there is no MLS. So there's one place for listings and that's pretty much it. They both have almost 80% share of traffic. So how does the U.S. market mimic that or is it different, do you think, over the long term? It -- can you get similar kind of economics in a duopoly-like market or does it have to be through a consolidation eventually in the U.S? How do you guys kind of compare and contrast the long-term opportunity here versus there?

Chad M. Cohen

Well, so what you're -- for those that are less familiar, what you're pointing out is there's a structural difference between some other countries and the way that the real estate market operates in the U.S. Notably in the U.S., the norm is when an agent takes a listing, they post it in the MLS and that MLS syndicates it to the Internet. And in a lot of other countries, there is no MLS structure so the place to see all the listings is on site x, site y, site z, the leading website in each of those territories. Therefore, those companies typically have a paid inclusion model where they can actually charge brokers and agents for listings instead of taking those listings for free. The opportunity for us definitely exists in rentals to become the marketplace, where you kind of have to list your rental if we achieve rental scale. And the opportunity exists on the for-sale site with alternative listing types, where we think if we can gain a big enough buyer audience, then if you want to have a listing that's marketed widely on the Internet -- to Internet buyers, you have to make sure that it's on Zillow. The opportunity also exists for us, to a great extent, on mobile, where if you're a seller or a listing agent and you want to make sure that in your community in Cincinnati or Miami or San Francisco that mobile shoppers find your listing, well, it kind of has to be on Zillow if Zillow is where most mobile shoppers are. The opportunity probably doesn't exist for us on desktop in the same way in the U.S. that it does in some other countries. And I think that's why Rich was -- Rich kind of conceded that point when he said, this is kind of an awkward comparison but here's why we think there's a big opportunity here. So I'd say, I think the comparison holds as we achieve more and more marketplace scale, but more so on the mobile and on the rental side than on the, what we've been calling, commoditized for-sale by agent listings that are in the MLS. Feel free to pile on if you want.

David Beitel

I would say that those markets were fragmented ones as well.

Spencer M. Rascoff

Yes.

Unknown Analyst

Sorry to follow-on in a prior question, but I just wanted to make sure that the $250 million kind of P&L that, Chad, you referenced was what you put out 20 months ago. Is that still -- is that how you think of it today in terms of at $250 million that is what the P&L looks like within those bands such that you get to 30 to 35? I mean -- or you're just not updating that? Is that what...

Chad M. Cohen

We haven't updated that. Obviously, you've seen us achieve leverage on some line items faster than others, specifically our cost of revenue so there's probably a little movement within some of these but for the large part, it's mainly intact with the exception being our cost of revenues.

Spencer M. Rascoff

I mean, this is the first time we've put a line in the sand around $500 million of revenue and basically said to investors that very clearly, we think longer term we can be higher margin than what we've said at $200 million to $250 million in revenue. So if we think that growing revenue even faster and achieving a higher margin at a later date, if we can achieve that end state by foregoing a near-term profitability, which frankly is the bet that we're making in 2013. We've told investors that we're taking on the order of 10 points of 2013 margin and investing it in advertising and sales and marketing growth. And that's absolutely the decision that we've made for 2013. And we believe that we made that decision still believing that we would have industry-leading margins for the full year of 2013. So I guess, to put a finer point on it, we're not updating what we've said at the $250 million level, but we are saying that we think that's intermediate and it will get better than that down the road and we'll see.

Unknown Analyst

Spencer, just wanted to follow up on the question about the structural differences in some of the other international markets, but maybe you can talk a little bit about how you think about international expansion. Any in particular some of the key characteristics you'd be looking for in those markets?

Spencer M. Rascoff

So as you can see, we have a pretty big TAM here in the U.S. and we certainly have our hands full in these 4 different market places and growing audience and growing brand awareness and U.S. But we have actively studied a lot of other international opportunities and thought deeply about it either organically or through acquisition. And obviously, to date, we're just in the U.S. I think we've always believed that eventually we would be international, but we've been very deliberate and focused on making sure that we achieve everything we want to achieve in the U.S. and focus our limited resources here. So we'll see. We certainly have -- we don't have blinders on to the international opportunity but we do have a lot of buyers in the fire here in the U.S. and that $35 billion TAM just in these 4 marketplaces in the U.S.

Unknown Analyst

Just a real quick question. I don't think we've spoken too much about pricing, but I want to get your take on pricing as it relates to the ROI that we talked about earlier in the day? And particularly as, I think you said maybe get to one-times ROI, maybe better, but more room to grow?

Spencer M. Rascoff

Yes, so what's the right ROI? Well, when you talk to an agent, if they're doing 5 or 10 Zillow sides a year, a lot of the times, those clients are then referring 2 or 3 other clients to that. And so, I definitely believe that you could be in the 1 to 2x ROI, even arguably on some lifetime value-type model even below 1x ROI, especially considering that we're providing a couple of hundred dollars a month worth of free software bundled with it with the advertising package. The reason that we're not racing to that is -- far from racing to it, instead quite comfortable over-delivering on ROI, is we're still in this stage where we're growing very, very quickly. We're growing the number of Premier Agents. We're growing this revenue on this line -- on this unit in the order of 75% to 100% year-over-year. And maximizing revenue per user isn't the focus just yet. And one of the breaks, I was also replaying for somebody how the conversation goes with a new advertiser. You'll be on the phone with an agent, perhaps, who calls in to inquire about Zillow or perhaps we've made a call to them, and we'll say, do you want to grow your business? If you invest to Zillow, you can gain a lot of business. He'll say, oh, okay, great. How much -- how many leads will I get? We'll say, well, we don't actually sell leads. We sell impressions. The agent will say, well, what's an impression? We'll say, well, it's when you show up on mobile or on the desktop on this buyer's agent list. Okay, great. Well, how much does that cost? Well, it's $100 a month for 50,000 impressions in the given zip code. Okay, how many leads will I get? Well, we don't sell leads because we don't know who the consumer is going to choose to contact. They're going to read ratings and reviews, read your profile page and that $100 spent might be tons of contacts or might be no contacts depending upon who the other agents are that the consumer's going to see. Agent says, okay, thank you, I get it. Well, how many of those leads, however many they might be, will become transactions? Well, we say, I don't know. It depends how good a real estate agent you are. The conversion rate varies dramatically. And by the end of that conversation, it's kind of abstract to an advertiser to determine what will the ROI be at this ad spend. So it's much more important to us to get them in the door. The data that Greg showed you was really interesting. It shows that as agents spend longer with us, their ARPU goes up, the number of zip codes goes up, the number of contacts go up, a lot of people dip their toe in the water, $50, $100, $150 a month spend. Then they get some leads. Then they get some sales. Then they start buying more impressions. Then they hire an admin. Then they hire a buyer's agent. Then they hire a colleague. They put on salary. And before too long, they're spending $5,000 or $10,000 a month with us and they've got a whole business built around Zillow. So to the ROI question, I'm much more interested in getting people in the door even at a lower-than-average ARPU in order to create the next generation of super ARPU, super high performing Premier Agents rather than turn the screws on ROI in the near term.

Unknown Analyst

[indiscernible] is there a possibility that -- I don't know if it's the right [ph] thing to do, but would you ever do maybe 5, 6, 7 as impressions lead -- as impressions continue to grow and you have a lot more inventory of agents?

Spencer M. Rascoff

We think 3 to 4 is the right number of agents to surface to a buyer without inundating and overwhelming them. If a buyer wants to have a broader choice, they can go into our directory and see every agent in a community, ratings and reviews and choose among hundreds or thousands of agents choosing who to contact. But especially in a mobile setting where really you're looking at the house on a small screen and then you're seeing, okay, which agent can help me see the house or answer a question about it, I think in the order of 2 to 4 is the right number.

We have time for probably 1 or 2 more questions.

Chad sneaking away. I guess Chad is done with questions. Are there any other questions before I wrap up? Okay. Okay, so thank you for your time today. As I mentioned, it's our first Investor Day. Hopefully, we helped you understand a little bit more about the business and get a better sense of the company and get a better sense of the people running the company. The priorities for the year are clear. This is what you should judge me on. This is what I judge my team on. Grow audience, grow our Premier Agent business and grow our 3 emerging marketplaces. Have these 3 small kidlings and infant grow up to become much bigger marketplaces like their big brother in the Premier Agent business. So when we're sitting here 20 months from now, this is what I think you should judge us on. We're saying here now that over the next 20 months, we're going to grow our audience, we're going to grow our Premier Agent business, we're going to invest in mobile, we're going to grow our mortgage revenue, we're going to monetize Rentals, we're going to grow home improvement and we're going to execute as we grow. We're going to try to turn this startup into a significant company, a giant business and an enduring brand for the generations. Our next earnings call will be in May, and we look forward to talking to you all then. The Zillow team will stick around here in front, happy to talk with you. Please remember, turn in the forms to get the data book and the slides. And thank you for being here.

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