Zillow Management Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Zillow Group, Inc. (Z)
by: SA Transcripts

Zillow (NASDAQ:Z)

Q1 2013 Earnings Call

May 07, 2013 5:00 pm ET

Executives

Raymond Jones

Spencer M. Rascoff - Chief Executive Officer and Director

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

Analysts

Heath P. Terry - Goldman Sachs Group Inc., Research Division

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

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

James Cakmak - Telsey Advisory Group LLC

Ronald V. Josey - JMP Securities LLC, Research Division

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Bradley G. Safalow - PAA Research LLC

Operator

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Zillow First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. Now my pleasure to turn the floor to RJ Jones. Sir, the floor is yours.

Raymond Jones

Thank you. Good afternoon and welcome to Zillow's First Quarter 2013 Earnings Conference Call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer; and Chad Cohen, Chief Financial Officer.

Before we get started, as a reminder, during the course of this call, we will make forward-looking statements regarding the future events and the future financial performance of the company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements made in the press release and on this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our other filings with the SEC. In addition, please note that the date of this conference call is May 7, 2013, and any forward-looking statements that we make today are based on the assumptions as of this date. We undertake no obligation to update the statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. In our remarks, the non-GAAP financial measure, adjusted EBITDA, will be referred to simply as EBITDA, which excludes share-based compensation. This call is being broadcast on the Internet and is available on the Investor Relations section of the Zillow website at investors.zillow.com. A recording of this call will be available after 8:00 p.m. Eastern Time today. Please note that the earnings press release is available on our website and, after the call, a copy of today's prepared remarks and a new historical exhibit of our business metrics will also be available on our website.

After management's remarks, we will host a live question-and-answer session. During the Q&A, we will entertain questions via Twitter and Facebook, in addition to questions from those dialed into the call. Individuals may submit questions via Twitter using the #ZEarnings to the upload Twitter handle to the official Zillow Facebook page.

I will now turn the call over to Spencer.

Spencer M. Rascoff

Welcome. Today, we'll be discussing our first quarter 2013 performance. I'd also like to extend our thanks to those of you who joined our first ever Investor Day in March. We were grateful for the opportunity to speak at length with you about Zillow's strategy and results. To start off, I will briefly cover a few highlights from the quarter. Next, I'll give an update on our priorities for 2013, which consists of: one, growing our audience; two, growing our Premier Agent business; and three, growing our emerging marketplaces. Then, Chad will provide more detail on financial results, as well as give our guidance for the second quarter and full year.

The first quarter of 2013 was a breakout one for Zillow with record results in traffic, revenue and growth in our Premier Agent and Mortgage businesses, as well as the launch of our Home Improvement business, Zillow Digs. During the quarter, we attracted more than 50 million monthly unique users for the first time, widening Zillow's category leadership and marketing a significant milestone. Traffic growth accelerated even more in April, hitting more than 52 million unique users and year-over-year growth of 63%. Total revenue for the first quarter reached $39 million, up 71% year-over-year and ahead of our outlook by $2.5 million, driven primarily by the record addition of 4,557 Premier Agents in the quarter. This was the largest ever net quarterly adds for our Premier Agent business. As a result of strong sales, EBITDA reached $5.1 million, as most of the revenue upside flowed through to our bottom line. We are pleased with our fast start to the year.

I'll turn now to our priorities for 2013, starting with growing our audience. As I mentioned, we reached a significant landmark in March and April as we've exceeded 50 million monthly unique users across mobile and web. For perspective, it took us 4 years from our initial launch to get to 10 million monthly unique users. Now, just 3 years later, we have surpassed 50 million. The emergence of mobile as a medium of choice for real estate consumers continues to catalyze our business. We invested in mobile ahead of the curve. As a result, we have meaningful market leadership. Today, 55% of visits to Zillow occur on mobile devices, which jumps to over 60% on weekends. In April alone, more than 241 million homes were viewed on Zillow mobile or 93 homes per second. According to Experian, which measures mobile web traffic for the category, Zillow's mobile web audience is more than twice the size of the nearest competitor and more than 4x the size of the third place competitor. And on the Desktop, we continue to widen our lead as the largest real estate website, with accelerated growth in the first quarter. According to comScore, Zillow's unique users grew substantially during the quarter, while the nearest website competitors stayed essentially flat. What ultimately attracts such a large audience and drives our growth is a maniacal focus on consumer products, starting with our living database of more than 110 million homes. We have made significant strides in the past year to strengthen this database, with more than 1 million listings that often can't be found in the MLS or on other real estate websites. For example, buyers on Zillow can search and find homes for sale by owner, foreclosed homes and pre-foreclosures and make new move listings. Access to more potential homes for sale is incredibly important to buyers in this inventory-constrained housing market. We have also made significant improvements in the timeliness and accuracy of traditional listings inventory, including updating hundreds of MLS feeds multiple times each day and adding dozens of new brokerage partners to our Zillow Pro for Brokers platform, which improves listings accuracy. Additionally, on the products side, we recently upgraded and relaunched our mobile apps on iOS and Android with substantial enhancements to the user experience, including a complete redesign on iOS and a 3D map shopping experience on Android. Across 7 mobile platforms, we now have 24 apps for consumers and professionals that address all points in the life cycle of the homes and span our family of home-related brands.

In addition to great product, distribution partnerships are important to growing our audience and solidifying Zillow as the destination for home shopping and a testament our value proposition as new partners continue to seek as out. Recently, we launched 3 new distribution partnerships: first, we launched with HGTV's FrontDoor.com, whereby we powered their real estate search; second, we were selected by Google to be a launch partner and are currently their only real estate partner for their new predictive search experience on Android phones called Google Now; and most recently, Zillow began powering real estate information and search on AOL's Patch, a network of over 900 community news and information sites visited by 13 million unique users each month. These new partnerships, along with the Yahoo!-Zillow Real Estate network, provide unparalleled reach for our advertisers and Premier Agents. Note that the 50 million unique users stat does not include the full reach provided by these partnerships as we do not include Yahoo or other non-Zillow-owned sites in that metric. With continued product improvement and broadening distribution, we've been able to continue our substantial audience growth and widen our category leadership. However, as we explained in our Investor Day, we see a significant opportunity in front of us to grow brand awareness and traffic. While we are the largest web and mobile player in our category, our unaided brand awareness still is only about 12%. Put another way, 88% of Americans can't come up with Zillow when asked to name a real estate-related website and 27% of Americans can't name any brand at all, not one. This brand white space is unmatched in just about any other Internet or mobile category. Seizing this opportunity, we began our first limited test of brand advertising late last year, specifically television advertising, to understand what impact this could have on our business. The initial test showed promising results, so we ran a larger, more involved test in the first quarter of this year, increasing the scope and scale of TV and testing other complementary brand advertising channels. We measured this test with the same analytical rigor we use in all areas of our business and saw statistically significant increases in high-value traffic and home shopper engagement all the way down our measurement funnel, including a halo effect of making all of our other unpaid and paid marketing activities perform even better.

Based on our Q1 results, we believe convincingly that advertising is working for Zillow. It is driving increased brand awareness, which creates long-term benefits, and it is increasing the quality and quantity of leads we provide to our advertisers, which yields near-term benefits. The test results, in addition to our strong organic momentum and business optimism, give us the confidence to step on the gas, to go after that brand white space. Therefore, we have made the decision that starting in the second quarter and through the remainder of the year, we are almost doubling our planned advertising spend across a number of channels, increasing it by an additional $10 million to $15 million this year. We'll also be taking up our full year revenue guidance from the midpoint of $167.5 million to a midpoint of $180 million. While this increased investment directly impacts our EBITDA levels in the near-term, we believe firmly that advertising will allow us to achieve greater revenue scale more rapidly.

Now, onto our second priority for 2013, growing our Premier Agent business. We made excellent headway during the quarter, adding nearly 4,600 new Premier Agents for a total of more than 34,000 subscribers. Also, we completed the transition to selling a fixed number of impressions. Our team executed this transition to align our inventory with our traffic growth. So now when traffic increases, we have more impressions available to sell. Next, to further benefit our Premier Agents, we just released 2 frequently requested enhancements to the free CRM we provide to Premier Agents. First, with our new lead-forwarding rules, agents can set up automated responses and e-mail rules to better manage their leads. Next, with our new e-mail functionality, Premier Agents can keep their clients and potential clients informed with market updates and saved search notifications that automatically send new listings as they hit the market. These enhancements to our CRM and the individualized websites we provide for free to Premier Agents were made possible by our acquisition of Diverse Solutions, which now connects to over 390 MLSs, up from about 130 MLSs at the time of our acquisition 18 months ago.

Looking now at our third priority this year, growing our emerging marketplaces. We continue to gain meaningful traction in our Mortgage and Rentals businesses. In Zillow Mortgage Marketplace, we have made exciting progress for both consumers and mortgage providers. This quarter, we integrated Zillow Mortgage Marketplace into all of our Zillow mainline mobile real estate apps. Mobile now accounts for 31% of Zillow Mortgage Marketplace revenue. We now also offer mortgage quoting for underwater borrowers seeking refinancing. This new feature is unique the Zillow and especially valuable to the large number of homeowners with negative equity, which Zillow economists estimate to be 27% of homeowners with a mortgage. Zillow is now the only destination for those consumers to find refi quotes for underwater borrowers, which is beneficial to both our consumer and professional audiences.

Next, in our Rentals marketplace. During the quarter, we launch new Rentals apps on Android and iPad that were both featured in their respective app stores, with the new Android app supporting Spanish language. Rental shopping skews heavily towards mobile and our investment there is paying off. On listings count, the majority of our more than 600,000 rental listings are now sourced via direct relationships with property managers and landlords, which differentiates us from competitors. We remain on track for greater focus on monetization in our Rentals marketplace late this year and into 2014. We anticipate a hybrid approach tailored to the different segments of the rental market that both encompasses the sale of advertising, as well as Software as a Service technology tools.

Finally, the entry into our newest marketplace of home improvement has gone well so far. After its launch in January, during which Apple featured the Zillow Digs app, we have seen terrific uptake in user-generated content, with more than 76,000 photos added by our community users and 80,000 content boards created. Notably, the Zillow Digs iPad app experiences 10x the page views per session versus the desktop, a strong validation of our mobile first strategy. We are diligently working to grow usages of Zillow Digs and will focus on monetization down the road. In each of our 4 distinct yet interconnected marketplaces -- real estate, mortgages, rentals and home improvement -- Zillow is making significant investments now, which plant seeds for the future. We are digging our own wells here rather than outsourcing these adjacent verticals to third-parties and going for short-term profit. We are playing the long game. Similar to our increased commitment to advertising, we're making investments in each of these 4 marketplaces, which delay short-term margin in favor of long-term value creation. First, investing in software tools for our core Premier Agent marketplace makes this more valuable to our Premier Agents. It increases advertiser retention and allows us to achieve a larger portion of the almost $10 billion a year agents spend to market themselves; second, investing in our emerging marketplaces takes our addressable market from around $10 billion from agents to $35 billion, including mortgages, rentals and home improvement; third, investing in advertising helps us achieve greater traffic and mindshare leadership for consumers and advertisers. When you look across other online media companies, category leaders are able to achieve significant revenue leadership because they become a must-buy for advertisers.

Q1 was a breakout quarter for Zillow, as we reached new heights in our audience and revenue and continue to extend our lead on mobile and web. We remain focused on our 3 strategic priorities this year of growing our audience, growing our Premier Agent business and growing our emerging marketplaces. We are very pleased with our progress, but are still very early with much to do.

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

Chad M. Cohen

Thank you, Spencer. First quarter traffic grew 47% year-over-year to 46.7 million average monthly unique users and peaked in March at 50 million. As Spencer mentioned, traffic continued to grow even more into April, with year-over-year growth accelerating to 63% during that month. We posted Q1 total revenue of $39 million, a record, and up 71% year-over-year. One modeling note: remember that growth in our audience does not immediately translate to new Premier Agent revenue, rather it works gradually into our results. As traffic grows and becomes sustained, new impression inventory is created. New inventory can then be sold in subscriptions to existing or new Premier Agents, which then becomes recognized as impressions are delivered over the life of the contract and beyond. Compared to our outlook, we exceeded the 36.5 million midpoint of our range by 2.5 million, driven primarily by out-performance in our marketing category. Marketplace Revenue reached $31 million, representing 87% year-over-year growth and 80% of total revenue. To provide increased transparency and for a better understanding our business, in our SEC filings, starting with this reporting period, we are now presenting 2 subcategories within the Marketplace Revenue category. This will be Real Estate and Mortgages. Taking a deeper dive into our Real Estate Marketplace Revenue made up of Premier Agent, Diverse Solutions and our Rental businesses, revenue was $26.1 million in the quarter and grew 84% year-over-year. The primary driver of growth was our Premier Agent business, where we added 4,557 Premier Agents in the quarter with a net increase of 15,414 Premier Agents from this time last year. Average monthly revenue per subscriber, or ARPU, was $259 in the quarter and represented at 2% decrease from last year and a 3% decrease sequentially from the prior quarter. The slight ARPU decline is primarily related to a record number of new adds as new Premier Agents typically start their subscription levels lower than our average, as well as timing of many net new adds later in the quarter. As a reminder, the ARPU metric is an output and not something by which we run the business, as our inventory model allows agents to purchase impressions at an amount based on their budget and at prices that are determined based on local market dynamics.

Moving now from real estate to our mortgages marketplace, which consists of our B2C Zillow Mortgage Marketplace and our B2B Mortech business, revenue reached $4.9 million and grew 104% year-over-year. During the quarter, 4.5 million loan requests were submitted to Zillow Mortgage Marketplace, growing 74% over last year's figure. The vast majority of the loan request submitted were for purchase loans as opposed to refinancing.

Looking now at our Display revenue. Revenues were $7.9 million, up 27% year-over-year, representing 20% of our total revenue. Our Display business continues to complement our marketplace strategy and delivers a strong contribution margin.

Moving on to our expenses. Total operating expenses were $42.8 million in the first quarter as compared to $21.1 million in the same quarter last year. The increase in expenses versus last year is primarily due to one, growth in headcount-related expenses reflecting an increase from 380 employees to over 600 employees in the quarter; and two, increased advertising investments. Our OpEx increased year-over-year would have been closer to 80%, excluding the advertising increase.

Now I'll touch briefly on each major expense line item, starting with cost of revenues. For the first quarter, our cost of revenues were $4.1 million or 11% of revenues as compared to $3.4 million or 15% of revenue in the same period last year. The leverage reflects higher levels of engagement of Zillow-owned and operated properties versus our partners, which is accounted for in our revenue sharing agreements and that is combined with a fixed cost of operating our platform. Next, sales and marketing expenses, which include our Premier Agent sales team, marketing team and advertising activity, were $19.8 million or 51% of revenue as compared to $8.3 million or 36% of revenue in the same period last year. A large part of the variance from last year resulted from our increased investments across advertising channels to support our long-term growth objectives, which resulted in a broadly positive signal related to the growth in our audience, greater shopper engagement and increased buyer activity. Technology and development costs were $10.6 million or 27% of revenue compared to $5 million or 22% of revenue last year. The increase in expenses was driven by the increase in our engineering team headcount and ongoing product initiatives in both our organic and acquired operations. Lastly, G&A costs were $8.2 million or 21% of revenue as compared to the same period in the prior year at $4.4 million or 19% of revenue. This is driven by incremental headcount, professional services and facilities to support our growth.

Turning now to profitability. Our EBITDA for the quarter was $5.1 million, representing 13% of revenue. This result exceeds our guidance midpoint by $1.9 million due to the beat on revenue. On a GAAP basis, net loss for the quarter was $3.7 million, representing a non-GAAP loss per share of $0.11 for basic shares of $34 million. We ended the quarter with approximately $204 million in cash, cash equivalents, as well as short-term and long-term investments. We currently have no debt and our credit lines remain untapped.

Now I'll discuss our outlook starting with the second quarter of 2013. In the second quarter, as a result of our successful transition to fixed impression-based contracts and projected growth in our Mortgage and Display businesses, our revenue is expected to be in the range of $43.5 million to $44.5 million, representing 58% year-over-year growth at the midpoint of the range. Our EBITDA for the second quarter is expected to be approximately $750,000 to $1.25 million. During the second quarter, we anticipate an incremental investment in advertising of $4 million to $5 million, above our previously planned levels of around $5 million, which directly impacts our EBITDA versus our prior plan. Looking closely, the sales and marketing line item in the second quarter, which encompasses all of our sales, marketing and advertising activity, we anticipate recording total expenses of $34 million to $35 million for the period. Included in this line will be a onetime, nonrecurring stock-based compensation charge of approximately $7 million due to an accelerated provision related to a prior acquisition. While this noncash expense does not impact our projected EBITDA results, it does affect the amount of sales and marketing expense recorded in our income statement. Looking at the projected reconciling figures to EBITDA, total stock-based compensation in the second quarter is expected to be the range of $10 million to $10.5 million and depreciation and amortization expenses are expected to be in the range of $5 million to $5.5 million. Although we do not provide a GAAP EPS outlook, we expect a basic weighted average share count of approximately 35 million shares for the quarter.

For full year 2013, we anticipate total depreciation and amortization expenses to be in the range of $23 million to $24 million, share-based compensation to be the range of $22 million to $24 million, and CapEx and capitalized data content to be in the range of $10 million to $13 million. We expect fourth quarter 2013 basic and diluted share counts to be 36 million and 39 million weighted average shares, respectively.

Moving to the sales and marketing. We are projecting approximately $96 million to $98 million in total expenses for the year, which includes approximately $3 million to $4 million of stock-based compensation, but excludes the onetime stock charge. Previously, we've provided an outlook of 70% year-over-year growth in this expense line, which translated into a mid-$80 million range for these expenses inclusive of the stock-based compensation. The increase from a mid-$80 million range to an upper $90 million range is the incremental ad spend we've already discussed. Based on our performance in the first quarter, in addition to our Q2 guidance, we are raising our full year revenue guidance, which we now expect to be in the range of $178 million to $182 million, representing 54% year-over-year growth at the midpoint of the range. Consistent with the recent results, we expect a favorable mix shift from Display to Marketplace Revenue of a few percentage points to continue year-over-year. As a result of our strategic decisions in how we run the business, we now expect approximately $20 million in full year EBITDA. Looking back to February when we first provided our outlook for 2013, we projected that EBITDA, as a percent of sales, to be flat to down compared to last year. From our previous revenue guidance, this translated into low to mid-$30 million range for EBITDA. Most of the reduction in the full year 2013 EBITDA comes from the decision to increase advertising by $10 million to $15 million.

In conclusion, we are quite pleased with our first quarter numbers. We achieved record results in traffic and revenues, widened our traffic lead versus our competitors and began to step up our strategic investments in the long-term. We are still very -- in the very early days as we pursue the massive market opportunity in front of us and we remain focused on growing our audience, growing our Premier Agent business and growing our emerging marketplaces on mobile and on the web.

Thank you for your time today. With that, we'd like to open up the call for questions. I'd also like to remind you that, for the first time, we will be considering questions submitted via Twitter with the #ZEarnings.

Question-and-Answer Session

Operator

[Operator Instructions] And it looks like our first question will come from the line of Heath Terry with Goldman Sachs.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Great. I appreciate the -- taking the question. I was wondering if you could give us a sense of what you're seeing, how much of the traffic acceleration you feel like you're seeing is from the increase in marketing spend. Obviously, with the plan to set things up further from here, would suggest that it's a significant contributor. And as you think about the sustainability of -- or where you want margins to go longer-term, whether you expect this to be kind of permanent shift in what you see the target model for Zillow being, or is this an investment phase that has more of a limited time horizon to it?

Spencer M. Rascoff

So we've been testing advertising now for 2 quarters. And I can say, unequivocally, it has near-term advantages and long-term advantages. So the near-term advantages are, we've proven in a statistically significant way, to our satisfaction, that it grows audience, it grows shoppers, so a specific types of audience. It also grows lead volumes to Premier Agents. And it increases the affinity that Premier Agents have for Zillow because these agents can't afford a TV advertising on their own and so they view Zillow's ad spend as a way for them to get leverage from their own marketing investment in us. The longer-term advantages, we believe, are brand awareness, which will drive revenue growth acceleration and margin expansion down the road. The question of why do it now, why double-down now, why step on the gas now is clearly, because of the brand white space, because there's just this huge amount of running room in front of us and we think that there's an opportunity now to chase it quickly. We also feel that we have the P&L to support it. We are taking profit and reinvesting in order to push out margin expansion. So even with this stepping on the gas, we're still looking at around $20 million in full year EBITDA, still quite profitable, but in the near-term, we have a P&L to support this type of investment. Your -- the second part of your question is how much of the near-term traffic acceleration is from advertising versus something else in the business? I'll give you 4 numbers here: year-over-year unique user growth for January was 45%; February was 40%; March was 55%; April was 63%. So there's clearly something going on in the business here where traffic is growing quite rapidly. Part of that is driven by advertising. Part of it is product development. Part of it is growing brand awareness and PR. Part of it is surely macro housing. It's a combination of different things, but advertising is definitely part of that. The last part of your question is about kind of how does this tie back to a long-term model and is this kind of a near-term investment or should we expect this sort of ad infinitum? I'd say, we control the levers of the business. So just to take this, I guess, driving metaphor one step too far, I guess. If we're stepping on the gas, we have 2 hands on the steering wheel, we have a third hand on the emergency brake and we're staring intently at the road in front of us. So we're choosing what margin to have in Q2 and for full year 2013 because of what we've seen with advertising over the last 2 quarters and the size of the white space in front of us. I can't give 2014 numbers right now, but I guess I'll say it's up to us and we'll make -- keep making that decision on a quarter-by-quarter basis and keep investors updated. I still think that the target model that we've laid out, all -- dating all the way back to the IPO and, again, at the Investor Day the other day -- the other month -- a couple of weeks ago, is the right margin framework for the business, that there's -- at $500 million of revenue, we should have EBITDA margins in the 40% to 50% range. And we may choose to do that, we may choose to have higher margins than that, we may choose to have lower margins than that at that point depending upon what we see in front of us around revenue growth rate, but it will be our choice at that point in time.

Operator

And our next question in queue comes from the line of Mark Mahaney with RBC.

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

Let me ask 3 questions, please. First, how much of the growth, do you think, is there a way to attribute to the recovering housing market? In other words, can you see in those geographic areas where housing prices seem to be building up that you're seeing greater traffic growth? Second, how much of your increase spend this year is due to a sales force buildout, or is it really all primarily driven by advertising ramp up? And then third, any new thoughts on your ability or willingness to charge a premium for mobile solutions for real estate professionals?

Spencer M. Rascoff

Thanks, Mark. I'll take macro housing and Chad will take the second 2. I think of macro housing as a nice gravy for us. It's a tailwind. So we grew incredibly quickly through the downturn. We're growing incredibly quickly through the upturn. And it's -- we're benefiting from it because Asians are feeling more bullish about their prospects and choosing to invest more in advertising, but I don't think it's what's driving the business. I think it's gravy, is the way I would describe it. Chad, on sales headcount and marketplace revenue?

Chad M. Cohen

Yes. So if you back out the assumptions that we gave you on our prepared remarks with respect to the investments we're making in advertising, we're continuing to also step on the gas in terms of building out the sales platform, adding sales heads, sales support, account management across both our teams here in Seattle and in Orange County as well. So there's a significant number of sales heads that we'll continue to add through the year in the third and fourth quarters. So we're in no means stepping off on our investments there. And then with respect to your last question, in terms of charging a premium for mobile. Well, I think that's really already baked into the pricing that we charge for our Premier Agents subscriptions. We take into consideration housing values, local market dynamics, contact rates, submissions and everything we know about mobile in our pricing. And all our agents, in fact, are part of our mobile platform. So we're the one platform out there where we can say 100% of our agents are mobile.

Spencer M. Rascoff

So we'll take 2 questions from Twitter now. One, first one, from Michael Graham at Canaccord Genuity, which is at CG_Internet. Michael asked: In the Mortgage business with $4.5 million loan requests and $4.9 million in revenue, can you comment on lender quote density and CPC pricing?

So on mortgage, loan request in April were $1.64 million, which was up 78% year-over-year. That was an acceleration from March, which was up 75% from year-over-year. So huge borrower growth mid -- up mid-70s year-over-year. And loan quotes continues to grow incredibly rapidly also. So in March, borrowers were seeing around 3 -- I'm sorry, around 30 loan quotes per loan request. So for a typical borrower that's used to online mortgage shopping where if they go to a retail bank, for example, they'll essentially see one quote from that bank on the bank's website, or if they go to traditional mortgage shopping site on the web, they might see 3 or 4, we were showing over 30 in March. So Zillow Mortgage Marketplace is a dramatically better way to shop for a mortgage than the other thing -- other websites or off-line mortgage shopping experiences. On the CPC part of it, average CPC is in the $3 to $4 range. I'd say, at high level, strategically, we're still not in CPC maximization mode. We're not -- if you think of each of our 4 marketplaces, real estate, mortgage, rentals and home improvement on a spectrum in terms of kind of at one end of the spectrum in full modernization mode and the other end of the spectrum, Zillow Digs, is not at all in the monetization mode. Mortgage is still in kind of the mid-game, I'd say, in terms of maximizing monetization. For us, building marketplace liquidity, growing borrower awareness, building out software tools for mortgage lenders through our Mortech acquisition, those are as important or more important strategically than milking the mortgage marketplace for every piece of monetization.

The next question from Twitter and then we'll go back to the call, from, let's see -- from Brian Bolan with Zacks: The underwater mortgage quotes, are they priced higher or lower than regular mortgage quotes?

So we price the CPCs for mortgage quotes real-time, based on the borrowers circumstance. So for example, if it's a refi, where the borrower has a ton of equity and a great credit score, we're going to price that at a very high CPC because we don't need -- if we price at low CPC, we'd have hundreds of lenders quoting back. And if it's a purchase loan with very little money down and a low credit score, we'll price it at a very low CPC, perhaps $0.00 CPC, in order to entice as many lenders as possible who will send quotes to that borrower. In the case of underwater, I'd say, in general, the CPCs are going to be lower because we're trying to entice lenders to quote and those are generally more complicated loans to close. So we have a lower CPC than, at the extreme, a refi with a lot of equity in the home.

Operator, we'll go back to the call now and then we'll go back to Twitter a little bit later.

Operator

And our next question on the phone line comes from the line of Dan Kurnos with Benchmark Company.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Just a point of clarification. Does the guidance that you've now provided include all of the benefits of that increase in spend? And if so, it kind of seems to imply sort of a declining ROI, at least initially, on your marketing spend since you seem to get some pretty good operating efficiencies in Q1. So we maybe your thoughts there. And then secondly, is there any concern that as you continue to add all of these traffic that conversion rates might decline and that might ultimately put pressure on pricing?

Spencer M. Rascoff

I'll take the first one and then I may need a clarification on the second on. So the short answer is yes. The updated revenue guidance of $180 million at the midpoint assumes our increase in advertising. It's important to understand that this is not an eCommerce funnel in terms of advertising. An eCommerce company spends out -- spends on advertising, it grows traffic and then there are transactions at the bottom of the funnel and they have some profit from it. For us, when we advertise, we get more impressions in a given zip code. Well, now there's more inventory to sell, the sales team have to go sell those impressions either to new Premier Agents or existing Premier Agents, that's on a 6-month contract and then the revenue kind of flows through on a subscription basis. So it's not quite as dramatic, the flow through -- or no, as a media flow through, I'd say. The reason that we're -- the primary reason that we're advertising is to grow brand awareness for the company over the medium-term and the long-term. And we think that will make Zillow a must-buy for real estate agents and mortgage lenders, 1, 2, 3, 10 years from now. So it's terrific to have near-term benefits from increased audience, increased shoppers, increased contact volumes and better affinity between advertisers and Zillow, but it's really more about the medium-term and long-term and that's why it's not a dollar-for-dollar increase between ad spend and revenue, for example. On the second question, Chad, did you...

Chad M. Cohen

Yes. I think what you're trying to get at is what we see -- is there going to be any compressions in terms of conversion rate. I would just say that conversion is really a function of how well these Premier Agent work the contact that we send them. It's about developing a systemized approach to the platform that we give them in terms of their subscription, what they do with their Premier Agent website, how they use the CRM features. And we're continuing to invest very heavily in Pro Tools, and Spencer outlined some of those investments and features that we laid out and released in the quarter, to help Premier Agents do a better job in converting those contacts to closes transactions. So no, we don't expect that conversion rates will decline as a function of the increased advertising.

Next question, operator?

Operator

Our next question comes from the line of James Cakmak with Telsey Advisory Group.

James Cakmak - Telsey Advisory Group LLC

Could you comment on the broader strategy, on the advertising, in terms of the markets that you want to target? Is this going after -- is this across-the-board, essentially, in every market, or are you trying to raise awareness in certain strategic geographic areas where relative traffic may be lower? And then, perhaps, if you can comment on the quality of that traffic. Are you seeing the engagement rates are equal or higher than the traffic that you were getting before the campaign began?

Spencer M. Rascoff

It's national advertising and it is because there's a huge opportunity to for -- to raise brand awareness. Yes, we're measuring and pleased, very pleased, with not just the traffic that advertising is driving to us, but the type of traffic: homebuyer traffic likely to contact agents, home shoppers, people in the purchase path, people that want to talk to Premier Agents to help them buy or sell a home. And so yes, yes, yes.

We'll do one question from Twitter, from @Wally at Seeking Alpha asked about the total addressable market for Agent advertising.

So we talked about this a little bit at Investor Day. We look at TAM for agents 3 ways: we look at it in terms of the number of agents in the industry and what our penetration is among Premier Agent; we look at it in terms of what the number of sides are, of home that sell every year and what percent of those Zillow is responsible for connecting buyer or seller with the agent; and then we look at from a dollar standpoint, which is how much do agents spend on advertising and what's our share of that. By all 3 of those measures, Zillow is in the kind of 1% to 2%, maybe 3% range, depending upon certain assumptions around the map and the size of those markets. My preferred -- having spent a lot of time thinking about it, I think the best way to look at it is on a dollar basis. And just to give you the highlights of that funnel: real estate agents in the U.S. help consumers sell about $1.2 trillion in residential real estate, they collect $50 million to $60 billion in commissions each year and they spend $6 billion to $10 billion or 10% to 15% of that advertising themselves and advertising their listings. That's the market that Zillow goes after. And our Premier Agents business, kind of in the $100 million annualize range, is a very, very small portion of that $6 billion to $10 billion in total spend.

Next question is from Shawn Rizzoli, Internet analyst with Needham, via Twitter. He writes: Consensus revenue estimates for Marketplace imply 9% quarter-over-quarter growth. Traffic is up 17% quarter-to-date. Why under -- any reason why under new impression-based model, revenue marketplace revenue growth shouldn't keep pace with traffic growth?

Chad M. Cohen

Yes. I think I'll take that one, Spencer. So as I mentioned in my prepared remarks, increased traffic from the investments that we're making, from organic investments that we're making in the product, increase our impression inventory. It increases our capacity. We then have to go out and actually sell that inventory to existing or new Premier Agents. So the revenue recognized, as a result of growing the traffic, you won't see until outer quarters. So in a near term, in the short term, you will potentially see growth in traffic as we continue to grow our feature set, grow our emerging marketplaces, investing our audience, outpace near-term revenue growth. But as we continue to grow out the Premier Agent platform, as we start to monetize some of these emerging marketplaces further out, you will definitely see monetization start to keep pace with or outpace, traffic growth over the long-term.

Spencer M. Rascoff

Next question, operator, from the phone, please?

Operator

Our next question comes from the line of Ron Josey with JMP Securities.

Ronald V. Josey - JMP Securities LLC, Research Division

I wanted to ask about -- a little bit about ARPU, which at $2.59, as you pointed out, was slightly lower year-over-year. I understand it's an output and newer Premier Agents typically start at lower impressions and more agents are actually added later in the quarter. So I'm wondering if this lower ARPU is a direct result of a shift to impressions as we trade off market share gains with pricing, and as newer agents come on, maybe there might not be sufficient impressions for specific zip codes. I guess the question is, wondering if this is sort of a new level set for pricing. And then just the second one on 2Q, wondering if there, historically, is any sort of one month that's stronger than the other in terms of net adds and wonder if we see a similar sort of pattern here as we did in 1Q.

Chad M. Cohen

So Ron, this is Chad. We've got plenty of inventory. Moving to the impression-based pricing model, lifted the ceiling over our head quite a bit with being able to realign our capacity with our traffic growth. So it's definitely not a function of that. And ARPU to us is not a proxy for pricing. Pricing is set at the local market level, it's based on local market dynamics. And really, it was simply a function of adding a lot of more Premier Agents towards the end of the quarter. Where you have these agents in the denominator for the quarter, but the revenue related to those agents, you aren't going to see until you get further into the contracts, in the second and third quarters.

Ronald V. Josey - JMP Securities LLC, Research Division

And in 2Q, is this sort of linear -- if you -- if there's been enough history to know that or something that is...

Chad M. Cohen

Yes. There's not enough history to know that at this stage. And we're not providing any sort of guidance with respect for ARPU for Q2.

Spencer M. Rascoff

Operator, next question, please.

Operator

Our next question comes from Chad Bartley with Pacific Crest.

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Just a follow-up to the previous questions. Because I know you don't focus on ARPU, but given the strength in the market, the successful model transition, accelerating user growth and, obviously, strong impression, how do you think about pricing power and managing pricing and potentially raising those prices during future renewal periods? How should we think about that longer-term?

Chad M. Cohen

I'd say, it's -- so we price all newly sold impressions at what we believe market price to be. When agents come off contract, we don't necessarily move them to the new pricing right away. And you've seen that in the past quarters because the team's focus is on selling new impression, either to new PAs or existing PAs. But so, I guess, I'd say now that we're on a fixed impression model, we don't -- we won't end up again with the huge disconnect that we once had, where the ROI that someone is getting 6 months later, 6 months after buying the initial package of inventory, is dramatically different than the way that we had priced it initially because traffic is growing. But I'd say -- your question was kind of where is the strategy at with respect to price changes and I would say, if faced with a strategic choice between selling new impressions to a new PA and letting an existing PA kind of sort of drive-by on historical pricing on a CPM basis, I would accept that trade-off for sure. Said another way, we walked through ROI at Investor Day and we showed that we believe that most PAs who convert our leads are getting around a 10x ROI. And I've said that, I think, long-term, that could probably be in the 1x to 2x ROI; i.e. choose pricing power over the long-term. But that is not a priority, closing that ROI gap, if you will, increasing pricing on [indiscernible] basis in order to lower their ROI, that is not the priority. The priority is growing Premier Agents count and selling more impressions rather than dramatically changing the ROI.

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Okay. That's very helpful. And just a quick follow-up. Are you still offering the, I think, $50, the Gold plan? Is that also in there and kind of skewing the reported ARPU?

Spencer M. Rascoff

Yes, we are. The mix of the Premier Agents, in terms of the Silver, Gold and Platinum level, still represent -- they're roughly comparable to prior quarters. So we haven't seen any huge mix changes there in terms of what we're selling. The sales team is still very focused on selling the premium Platinum product from which they -- which is our subscription product, which has the most benefits. So no real changes there.

Chad M. Cohen

We'll do 1 or 2 quick Twitter questions. [indiscernible] asked: With the revenue beat and guide up, but an increase in spending, is it fair to say that you're pushing out your steady-state EBITDA date?

So I guess we've never said what steady-state EBITDA date might be, so it's kind of hard to say whether we're pushing it out or not. What I'd say is we are absolutely in high-growth mode, where we're choosing revenue growth and market share leadership over margin maximization. That -- it won't be like that forever, but we are in investment mode now. We're focused on high-growth rather than margin maximization. If we wanted to run the business at 50-plus percent EBITDA margins, we could do it right away. We could stop investing in our 3 emerging marketplaces. We could stop investing in Professional tools for the real estate agents. We could stop advertising. And boom, we'll at 50 plus EBITDA margins overnight. I do not think that is the right decision for the long-term value creation here. And so we are investing right now and we're choosing the margin that we're at.

We'll do one more from Twitter and then go back to the call. Brian Bolan, or bbolen@1: As the year progresses, would we see an increase in marketing for Digs?

So digs is still in product development mode, not advertising mode. So no, you're not going to see us advertising Zillow Digs. It obviously benefits from, overall, Zillow advertising. And we've mentioned at Investor Day that -- and I alluded to it on the call, that we believe TV advertising produces a halo effect for other advertising and other types of marketing, including SEO. So Zillow Digs benefits from that, but no, in the near-term anyway, you won't see Zillow Digs advertising on TV, for example.

Operator, we'll do a question from the line, please.

Operator

[Operator Instructions] Our next question in queue comes from the line of Brad Safalow from with PAA research.

Bradley G. Safalow - PAA Research LLC

I just wanted to walk through the calculus again on the marketing expense side. Chad, I think you said that 8% -- or assuming without the marketing increase, OpEx would have been up 80% year-over-year. Is that cash OpEx or total?

Chad M. Cohen

That's total OpEx.

Bradley G. Safalow - PAA Research LLC

Okay. And then from that spend, you're talking the another $5million-plus per quarter throughout the year?

Chad M. Cohen

Well, not exactly. We haven't really given you the seasoning of that spend. But the strategy is generally to spend when shoppers are more engaged. So you should have that baked into your model. And typically, we see the shopping season peak between the second and third quarters.

Bradley G. Safalow - PAA Research LLC

Okay. And then in terms of creative, is it going to be totally focused on the purchase market?

Chad M. Cohen

Yes.

Bradley G. Safalow - PAA Research LLC

Okay. And what has been the reaction from the brokerage community? I'm not talking about the agents, the brokers.

Spencer M. Rascoff

I think the reaction from the brokers community has been -- I don't know. I'm not sure there's been much reaction from the real estate industry, from the real estate brokerage community. I think individual agents love it. I haven't -- I don't think there there's been much.

Bradley G. Safalow - PAA Research LLC

Okay. And I don't know how you guys think about this, but I'm curious to hear your thoughts. You're spending quite a bit of money to drive traffic growth. Given the velocity of home sales in the country and you have 52 million uniques, I don't know how many actual individuals that is, but what is the upper bound, in your view, on traffic, and how do you think about it in terms of that upward bound, what your peers might be getting in terms of their own uniques and how you think about your ad spend?

Spencer M. Rascoff

So I don't know what the upward bound is, to be perfectly candid. I -- when I look internationally -- I guess, there are 3 ways that I'll try to answer that: one, I look internationally at countries with much smaller populations. And if you kind of populate and adjust, then you end up at significantly more than 50 million, kind of north of 100 million potential users in the U.S. A second way to look at it is brand awareness. 9 out of 10 in Americas don't know Zillow. So that doesn't mean that we can grow audience ten-fold, obviously. But it does mean that there's a lot of upside from where we are. And so I guess those are at least 2 ways to look at it. For the third, I do look at other companies like Yelp, for example, at over 100 million uniques. Now they've got, I think, 10 or so international. But there are other companies that are in kind of adjacent spaces with 2x to 3x the traffic. So I think we still have a lot of potential to grow audience there.

Bradley G. Safalow - PAA Research LLC

Okay. So your thought process is not around, okay, here is the adjustable market and audience. It's more I'm pushing on the spend and I'm getting a favorable ROI. And until that changes, you'll continue to increase marketing?

Spencer M. Rascoff

Yes. I would -- I'd mostly agree with that. I guess, I would -- let me just make one sort of clarifying point, which is, we control this on a near-weekly basis. I think sometimes there's an impression that when you do TV advertising, for example, it's this kind of lump sum that you spend on January 1 and you kind of can't change anything during the course of the year. So yes, I agree with the way you've just characterized it, but it's much more near-term control. We're looking at metrics constantly, both metrics that are near-term, as well as metrics that we think are leading indicators for longer-term result. And we'll increase, decrease or stay the same as we go.

So, let's see. We'll do a quick Twitter call from @classifiedtiger: Looking for more details on AOL Patch.

So we're excited about this, partly because we haven't had a -- we've had a Zillow Mortgage Marketplace partnership with AOL, but AOL historically has work with another company for real estate. And so we are very excited to be powering Patch from a real estate shopping standpoint. If you go to Patch now, you'll see Zillow listings, you'll see Zillow Real Estate search experience. And AOL is investing heavily in Patch. And so we're excited to power the real estate search there.

Next question from the call, please.

Operator

[Operator Instructions] Presenters, at this time, I'm showing no additional phone line questions. I'd like to turn the program back over to Spencer Rascoff.

Spencer M. Rascoff

Okay. I'll end with the last question from Twitter, which is [indiscernible] from Add Intangible Value: With the crowded field in your market, how do you intend to differentiate yourself long-term?

So the Zillow strategy is all about focusing on all homes. Creating a living database of all homes that grows audience. We then, create these marketplaces. We provide software tools in each of these marketplaces. We monetize. We iterate on monetization and then we take profits from the marketplace and we invest in product and people and advertising to grow audience at the top of the funnel. So we're following the strategy across each of our 4 marketplaces. It is a differentiated strategy from the competition, both in breadth and depth, relative to others.

I'd like to thank you, all, for owning and supporting Zillow as we accelerate our drive to creating ubiquitous brand and a highly profitable business long-term in this marketplace of real estate. The further we get in the Zillow adventure, the longer -- the larger the opportunity seems and the better position we are to capture it. Thank you very much for speaking with us today and we'll talk to you, all, soon.

Operator

Thank you, presenters. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.

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