Trulia's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: Zillow Group, (Z)

Trulia, Inc. (TRLA) Q2 2013 Results Earnings Call July 31, 2013 5:00 PM ET

Executives

Ian Lee - Head, Investor Relations

Pete Flint - Chief Executive Officer

Sean Aggarwal - Chief Financial Officer

Analysts

Lloyd Walmsley - Deutsche Bank

Mark Mahaney - RBC Capital Markets

Douglas Anmuth - JPMorgan

Ralph Schackart - William Blair

Kerry Rice - Needham

Deb Schwartz - Goldman Sachs

John Berg - Morgan Stanley

James Cakmak - Telsey Advisory Group

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Trulia's Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to hand the call over to Mr. Ian Lee, Trulia’s Head of Investor Relations. Please proceed.

Ian Lee

Thank you, Operator. Good afternoon. And welcome to Trulia's second quarter 2013 earnings call. Joining me today are Pete Flint, Trulia's Chief Executive Officer; and Sean Aggarwal, our Chief Financial Officer.

Before we start this call, I want to remind all of you that this presentation contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or our future financial or operating performance.

Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance and expectations for future periods, our expectations regarding our continued focus on our current strategy, our expectations regarding macro trends in the market, and our expectations for our products.

Our expectations and beliefs regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks include those set forth in the press release that we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission.

The forward-looking statements in this presentation are based on information available to us as of the date hereof and we disclaim any obligation to update any forward-looking statements except as required by law.

We also remind you that this call will include discussion of GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings press release that is available on our website. This conference call is also being webcast and is available through the Investor Relations section of Trulia's website.

And now, I'll turn the call over to Pete.

Pete Flint

Welcome and thank for joining our Q2 2013 earnings call. I’m pleased to say we had another outstanding quarter at Trulia, a record quarter in which we demonstrated the incredible momentum we are seeing across all aspects of our business.

We had record revenue of $29.7 million. We added a record number of subscribers by adding approximately 4,200 premium subscribers during the quarter and ARPU increased to $194.

And finally, we announced an acquisition that will transform the category as we know it while firmly positioning Trulia as a category leader, creating the only company capable of providing real estate professionals with a comprehensive end-to-end solution on which they can grow and manage their business.

As a company, we are focused on [boarding] [ph] the most vibrant and valuable marketplace. Our vision for transforming the real estate industry is built on three key parts. First, deliver consumers a killer user experience. We provide [inaudible] house hunters with insights not just on properties but on neighborhoods and on agents across the country.

Next, create value and be the leading partner for the industry. For agents, it means providing them with the industry’s first ever end-to-end offering, an offering that includes superb marketing tools, the broadest suite of software to help them build and manage their business. For franchisors and brokers we are building strategic partnerships that create opportunities to increase their visibility and provide additional value to their agents.

And third, extend our marketplace into adjacent markets, including rentals and mortgages. Our DNA as an engineering company enables us to create a strong platform built for adjacent expansion that drives value for the entire Trulia ecosystem.

Today, I’ll give you a recap of the quarter and put this in context as how we are executing against the three parts of our vision. I’ll then pass the call on to Sean for financial details.

As a company, we believe that building the best consumer experience in the category will create brand loyalty. The first part of our vision is to create the best user experience and as I said earlier that means delivering not just data but also insights in homes, neighborhood and on agents.

This past quarter we rolled out several new product innovations that help us deliver on our vision [to anticipate] [ph] in the kind of tools consumers want when they are searching for home, a neighborhood or an agent.

In addition to the hyper local neighborhood crime, school, commuter and property value data insights we are providing for some time, we took our industry-leading interactive maps to the next level. Our enhanced maps now visualize historical earthquake and flood data to depict the risk on this natural disasters on a block by block level. The interactive maps are a core part of our mobile experience and they deliver insights of what’s happening right where the consumer is standing.

Because of our relentless focus on product innovation we can rapidly create products to meet the changing needs of the market and consumers. Not only do we develop product for the here and now, we are also innovating for the future. In Q2, we created Trulia for Glass, the first working prototype of our home searching app using Google Glass.

Our technology and product centric culture continues to drive strong organic growth in our consumer traffic. Overall, our traffic grew 49% on a year-over-year basis to approximately 35 million in Q2. Mobile remains the fastest growing area of our audience, with approximately 30 million monthly mobile visitors in Q2, up 100% year-over-year.

In almost all of our top 100 metro areas across the country more than half of the [e-mail leads] [ph] generated were mobile. We now offer 15 mobile apps across platforms, including dedicated apps for renters, mortgage seekers and agents. During peak periods on the weekends the majority of our traffic is now coming via mobile devices.

As part of our ongoing efforts to build the best products we revamped our iPad app, adding new navigation menus and color coded map markers. Additionally, local info including median price and score ratings are now displayed directly on the property detail pages.

We continue to experience strong consistent growth in consumer usage across our web and mobile platforms, and we are investing in providing the very best products for transaction ready consumers.

Second part of our vision is to be the leading partner to the real estate industry and deliver products to grow their business and grow their brands. In Q2, we made tremendous strides in our ability to serve the entire industry. We undertook several steps to [inaudible] tie us to some of the largest franchisors and brokers.

We recently, and most recently we announced the strategic partnership with RE/MAX Corporate. This expands Trulia’s offering for the RE/MAX which is one of the most productive agent bases in the industry.

The 2013 REALTrends 500 survey, showed RX/MAX agents average 17.1 transaction size in 2012, compared with the survey average of 7.9. The partnership provides their agents premium branded profiles, custom training curriculum and valuable marketing and advertising products, features that can help them amplify their consumer reach, win more listings and close more deals.

The RE/MAX partnership was part of a broader program that we officially launched in July called Trulia Accelerate. This initiative helps brokers accelerate the success of their agents while providing tools to capture more market share, recruit and retain top performers, and expand their brand visibility. Trulia Accelerate is a win for franchisors and brokers, a win for agents and a win for the Trulia brand.

In Q1, we commenced our inventory expansion program, freeing up valuable inventory and enabling us to tap demand in previously sold out zip codes. In Q2, we continually -- continue to gradually roll out the program across our subscriber base and we expect it to be completed in the second half of 2013. The expansion has been well-received and we are pleased with this progress.

As a whole, our product and sales force delivered strong results in our marketplace business. By the end of the quarter, we had approximately 32,100 subscribers, up about 4,200 sequentially, while ARPU increased to $194, up from $187 in Q1 of 2013.

To accelerate the second part of our vision, in early May we announced the propose acquisition of Market Leader. Let me remind you why we are so excited about the Market Leader acquisition.

We are combining our leading marketplace for consumers and real estate professionals with Market Leader’s comprehensive suite of SaaS solution. We like to think of this as an operating system for franchises, brokers and agents as a real estate industry is transformed by technology. When the acquisition closes later in Q3, Trulia will have the leading and most comprehensive platform for the real estate industry.

Market Leader is very unique because not only does it deliver the best and most relevant tools, real estate professionals need to grow their business, it is doing it at upscale. Market Leader has build deep general relationships with several national franchises including partnerships with Keller Williams, CENTURY 21, Better Homes & Gardens and also with six of the countries 10 largest brokers. The strength of Market Leader software platform is clearly demonstrated in the market.

As we mentioned at the time we announced the proposed acquisition, the company have more than 135,000 professional customers and 23,000 premium subscribers. Just as recruiters rely heavily on LinkedIn and sales professionals rely heavily on Salesforce.com to be successful, real estate professionals depend on Market Leader to engage with the pipeline of prospects and need to tail their marketing efforts, manage their daily work flow and increase their productivity.

This is why Market Leader software platform is quickly becoming the operating system for the real estate industry. The scope of Market Leader platform goes far beyond what is provided by any other player in our industry, so much so that. So much so that replicating the breadth and depth of this offering would likely require years of development work and several acquisitions.

While others are busy working to replicate its functionality, which is so critical to establishing category leadership to expand -- extending our lead. At the same time, we’ll be leveraging this platform leadership to extend our partnerships with leading real estate companies, relationships which will power customer acquisition, engagement and of course, share of wallet.

We believe Market Leader will complement the tremendous business we have built and into our scale, product set and customer reach. Agents and brokers will continue to leverage Trulia's innovative marketing solutions to engage with our transaction-ready audience, generate leads and gain exposure for themselves.

We will complement this with Market Leader’s comprehensive operating system, including CRM and lead engagement tools. Collectively, these will enable real estate professionals to increase their follow-up engagement and ROI on the leads they generate.

We are now well positioned to be the leader in our sector and to further penetrate the enormous market opportunity that lies before us and drive incremental opportunities to grow revenues. This acquisition will help us grow our share of wallet and further extend our leadership in the quarter and years to come. The combined companies will have approximately 50,000 premium subscribers, the largest in the category.

Since we announced the proposed acquisition, we received many positive reactions from our industry partners. They see the opportunity that combined company presents and are excited to hear more from us when the deal closes.

I'm also happy to report that integration planning is going well. As we continue with integration planning, more and more opportunities continue to present themselves. The third part of our vision is to expand our business and grow adjacent markets. We are tremendously excited about progress we continue to make in our rentals business.

The rental business continues to perform very well with significant growth in traffic and leads generated in Q2. Monthly visitors run more than 100% year-over-year. Mobile visitors were up more than 100% year-over-year an e-mail leads sent for Trulia grew more than 100% year-over-year, with the majority coming from mobile devices.

The rental team is tirelessly focusing on assuring the highest quality of listings on our platform and that quality combined with our local insight is contributing to the rapid growth in this business. Consistent with other areas of our business, we introduced a number of product innovations and rentals during the quarter. We launch a new iPad app for rentals giving renters mobile access that Truila’s popular heat maps for rental prices, nearby amenities, schools, crime, commute and natural disasters.

Our playbook is to built scale in our rental audience and then monetize. We see a large opportunity ahead. In closing, we remain tremendously excited about executing against our vision. As a reminder, our vision for transforming the real estate industry is built on three key paths, first deliver consumers a killer user experience, providing digital health hunters with insights, not just on properties but on neighbors and agents, all across the country.

This will drive Trulia’s traffic, engagement and brand. Next, create value and be the leading partner for the industry, building and scaling unique end-to-end platform and deepening our industry partnerships. This will drive overall subscribers, ARPU and ultimately revenue. And third, extend our marketplace into adjacent markets, including rentals and mortgages. This will grow out total market opportunity.

With that, I’ll pass the call to Sean.

Sean Aggarwal

Thanks Pete. We continue to experience significant momentum in our business in the second quarter. Our focus on building the best product in our industry enabled us to grow consumer traffic while achieving strong results in adding new subscribers and growing ARPU. These factors led to another quarter of record revenues and adjusted EBITDA profitability.

Today I will cover three items, an overview of key metrics, review of second quarter results and guidance for the third quarter. My prepared remarks are accompanied by presentation which is viewable on this webcast and also available on Trulia's investor relations website.

A quick note before I start, I will not cover details of Market Leader's performance on this call as the transaction has not yet closed. We expect the transaction to close within the third quarter and to provide details on our Q3 earnings call.

I’ll start with key metrics. We focus on three key consumer metrics, total visitors, mobile visitor and amount of user generated content. We had an average of approximately 35 million monthly unique visitors during the quarter, an increase of 49% year-over-year.

Mobile traffic growth remains exceptionally strong with mobile monthly unique visitors of 13 million for the quarter, an increase of 100% year-over-year. Since February, when traffic grew 50% year-over-year, the growth in traffic has powered ahead at unchanged levels.

We have consistently seen 48% to 50% year-over-year growth in each month since February. This demonstrates that our strategy of growing our traffic by building the very best products is working. And there has been no impact to our traffic due to increased marketing spend by competitors.

Another key consumer metric is new contributions of user-generated content. During the quarter, our users made 1.1 million new contributions to our site, a 44% increase over the second quarter of 2012. We finished the quarter with a cumulative total of over $9 million user generated contributions in our database, up from approximately $6 million a year earlier.

On the agent side of our marketplace, we focus on two key metrics, number of subscribers and average revenue per user or ARPU. At the end of Q2, they were approximately 400,000 agents that were active on our site. This large pool of active agents is a primary target for our marketplace sales force.

We added approximately 4200 net new subscribers to our platform, ending the quarter with 32,100 paying subscribers, a 49% year-over-year increase. This is the single largest quarter of subscriber additions in Trulia's history. The success was driven by the ongoing rollout of our inventory expansion program, continued penetration of our mobile subscription product and strong execution by our inside sales team.

Our market place team also continued it success with regards to selling our mobile subscription product to an increasing number of subscribers. Of the total 32,100 subscribers, approximately 8200 subscribers or 26% have now purchased a mobile subscription product, up from 24% in Q1.

As you know the mobile subscription product is priced at a premium to the web subscription product. We launched the mobile product in May of 2012. So we started to see our long-term contracts come up for renewal during Q2 of this year.

Retention has been in line with our other subscription products. We are very pleased with the success of our mobile subscription product. ARPU in the second quarter averaged $194, up 31% over the same period in the prior year. This was our 14th quarter of consecutive increase in ARPU on both a year-over-year and sequential basis.

Having covered key metrics, I'll turn next to a review of second quarter financial results. Revenue for the quarter was $29.7 million, an increase of 77% over the second quarter of last year. Total revenue further the breaks down into two categories, marketplace and media.

Marketplace revenue, which is comprised primarily of revenue from our subscription products sold to real estate professionals was $20.9 million for the quarter, an 89% year-over-year increase. This was driven by overall subscriber growth, price increases and increase in penetration of our mobile subscription product. Marketplace accounted for approximately 70% of our total revenue.

Media, which includes sales of display ads to national advertisers also performed strongly with revenue of $8.8 million, up 52% year-over-year. Our media business continues to be driven by solid execution and rapid growth in our unique visitors.

The real estate market recovery has delivered strength across many verticals, including areas such as mortgage providers and home builders. As the real estate market continues its recovery, we are well positioned to benefit from the uptick in marketing spend.

I will next discuss earnings and then walk down to P&L, commenting briefly on each P&L line item. Adjusted EBITDA was $3.4 million or 11% of revenue compared with minus $1.8 million in the year-ago period. The top line strength in our business enabled us to drive significant operating leverage.

Please note that our calculation of adjusted EBITDA excludes certain infrequently occurring items that we believe are not indicative of ongoing results, such as acquisition related costs. In Q2, we incurred approximately $2 million of acquisition related costs primarily due to legal and investment banking fees.

More details of these costs are listed in the appendix of the presentation that accompanies this call. As we close the Market Leader transaction in Q3, we expect to incur additional acquisition related costs again due primarily to legal and investment banking fees.

Cost of revenue for the quarter was $4.4 million or 15% of revenue compared with $2.5 million or 15% in the second quarter of last year. Cost of revenue as a percent of revenue was higher than the 13% recorded in Q1 due to a catch up related to state sales tax. Till then marketing expenses were $13.3 million in the second quarter or 45% of revenue compared with $9.1 million or 54% of revenue in the prior year period.

Sales and marketing expense, as a percent of revenue, was lower than the 51% recorded in Q1 of this year as we experienced operating leverage from higher revenues. Second quarter research and development costs were $6.5 million or 22% of revenue compared with $5.3 million or 31% of revenue in the same period last year and above the 20% of revenue in Q1 of 2013. This sequential increase was related to our continued investment in engineering headcount.

G&A expenses were $7.6 million in the second quarter or 25% of revenue excluding acquisition related costs, G&A expenses were $5.6 million or 19% of revenue. This compares to $3.1 million or 18% of revenue in the prior year period and to 22% of revenue in Q1 of this year.

Q2 marks the fourth consecutive quarter since our IPO in which we have increased adjusted EBITDA, up from 2% of revenue in Q3 of 2012, 3% in Q4, 5% in Q1, and now 11% in Q2. This consistent increase in adjusted EBITDA combined with rapid top line growth demonstrates the power of our operating model and points to the inherent long-term profitability of our business.

Having covered the P&L, let me touch briefly on the balance sheet. We finished the quarter with approximately $216 million of cash and equivalence and total debt exiting the quarter was just under $9 million.

I will now close by covering guidance for Q3. We expect the strong momentum in our business to continue into the third quarter. Our Q3 guidance reflects the record levels of consumer and agent engagement we have seen in the first half of the year.

Based on these strong trends, we now expect Q3 to be yet another record quarter for our company. Therefore we anticipate revenue to be in the range of $30.5 million to $31.5 million. At the mid-point, this represents a 67% year-over-year increase.

For modeling purposes, we expect market place to be approximately 70% of total revenues in Q3. We expect adjusted EBITDA to be in the range of $4 million to$4.5 million or 14% of revenue at the midpoint. Please note that this revenue and adjusted EBITDA guidance does not yet reflect any contribution from market leader.

Looking ahead to Q3, we are excited about closing the market leader transaction. Integration planning is well under way and our teams have been busy laying the ground work to fuel the future growth of our combined companies.

As you can see from this quarters' strong performance, our management team has been able to balance the integration planning while remaining extremely focused on delivering strong results in our core business. I’ll now pass the call back to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Lloyd Walmsley with Deutsche Bank. Please proceed.

Lloyd Walmsley - Deutsche Bank

A question, wondering if you can just give us a sense of how much of the big sub growth number came from the new inventory expansion and kind of give us a sense of where you are in that process in terms of the percent of zip codes that you have expanded inventory on and whether we should expect that to continue to be an incremental driver of sub growth going forward. And then what you’re seeing in terms of price outside of that? Do you continue to tip high-density zip codes outside of the inventory expansion to help on price?

Pete Flint

Thanks Lloyd. I will start and share a little bit about the execution in the market place business, inventory expansion and then Sean may add some additional comments as well. So, overall in Q2, really it was a combination of factors that delivered the strong subscriber adds during the quarter.

The inventory expansion program certainly helped strong sales force execution, again continued productivity improvements and then of course the large consumer audience growth aided it. Just to touch on your specific question on inventory expansion, so as a reminder we at the end of Q1, we initiated an inventory expansion program which enabled us the ability to add an additional slot for an agent in sold out zip codes.

We also increased the prominence of our lead forms on a webpage to increase the overall lead volume. And then obviously this is a win for us as a company because it enables us to monetize high demand zip codes more effectively and also helps service our agents more effectively who are really in key need of additional leads in those areas.

We are really in the middle of that rollout. So it's -- we expect to finish it by the end of the year. It's -- I would say very much we are in the middle of it, right now. It certainly helped and as we kind of think about the future, we’re certainly continuing to watch that roll out very carefully and focus on completing the efforts by the end of the year.

Sean Aggarwal

And Lloyd, I will add on to your question about what are we seeing with regards to pricing as we roll out the inventory expansion program. As we had shared previously, what we are finding is as we open up the second slot in high demand zip codes, where we have tremendous consumer traffic we have agents on the wait list and we open up the second slot, we are able to command a price for the second slot that is typically equal to or greater than the price that was being paid by the agent in the first slot. So those trends are continuing to hold and we are just very pleased with how the rollout is progressing.

Lloyd Walmsley - Deutsche Bank

And a follow-up if I may, it looks like you may be experimenting with adding in some places more than one slot, how should we think about that in terms of what you are seeing, in terms of result on that, and how aggressive you might be in further expanding that inventory?

Sean Aggarwal

So in most of the cases, our focus is on adding a second slot. These are high demand zip codes where we had one slot, inventory sold out, adding a second slot, allows us to bring in more subscribers. In a select few cases at this point, we are experimenting with adding a third slot or perhaps even a fourth slot.

And this is really with an eye towards the future, in our high demand zip codes. We remain sold out and in many cases even where we have added a second slot, we are yet again sold out. And agents have gobbled up that second slot and yet agents continue to experience a 10x ROI on our platform.

So all those factors have let us to experiment with a third and fourth slot in a select few zip codes. I would characterize that today as a sort of test and learn approach and the focus for the rest of the year will really be on completing what we started in Q1 which is expanding to the second slot in the majority of the country.

Lloyd Walmsley - Deutsche Bank

Thanks, guys.

Operator

Your next question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed.

Mark Mahaney - RBC Capital Markets

Thanks. Two questions please. Just a follow-up on that last question, I know that you are saying as you filled out more slots you are still seeing a 10x ROI. I can't -- can you put some context around that. There must be some level to be a risk event, that customer subscribers are going to see a slightly lower ROI or do you think that it is just too early to see that and the inventory impact is just isn't material enough to have a reduction in ROI.

And then secondly, just a repeat of the question I asked a quarter ago, the overall recovery in housing market, did that clearly show up in demand trends that you see in those zips where that are recovering more quickly than others, is it clear to you that you see greater both consumer usage and potential subscriber usage of the service? Thank you.

Sean Aggarwal

Mark, it’s Sean. I’ll take the first one and I know Pete will want to comment on your second question around larger macro trends. So, with regards to ROI in zip codes where we’re rolling out the inventory expansion program, opening up the second slot, in some ways it is too early to measure it. As you know, the way we measure ROI is based on a survey where we’ll go out every so often and query our paying subscribers and sort of from that data we will assess the ROI calculation. So it’s obviously early to do that. However, a good proxy that we have for that is the number of leads that we’re generating on our platform and sending to agents.

And historically, when we had one agent or one slot on average an agent would get 10 to 20 leads from us per month. As we have opened up the second slot and added more subscribers, we are continuing to send the same number of approximate leads, 10 to 20 leads, per month to the agents that are in the second slot as well and that is a function obviously of the fact that these are high demand zip codes with tremendous consumer traffic, and we’ve got plenty of consumer interest and leads that can be shared across the agents.

So that’s the proxy we have at this point which leads us to feel quite confident that the ROI that the agents are getting, even the ones that are coming into the second slot, is a very strong ROI.

Pete Flint

And, Mark, on your question around the macro and how that impacting - is that adding any velocity to our business. So, clearly, we’re in a housing recovery stage with all metrics are on a national basis are looking promising.

I think the sort of metrics that really drive agent marketing activity are more likely to be related to volume as opposed to pricing and you see volume held back because of inventory constraints in the overall housing market.

And furthermore, you also have an industry which has been relatively in a state of entrenchment over the last several years. So, our view is that we have yet to see any broad benefit from the housing recovery in a significant way in our business at this point.

Where we are, that is specifically on the marketplace, this is where we are seeing benefit in the media business very clearly, mortgage advertisers, builder advertisers, the new endemic that we focus on within that category is helping us and I think we broadly feel very fortunate as a company to be in the industry that we’re in at this time with the scale and products that we have, as we look out over the next several years and see that the broad housing market in a state of growth and recovery.

Mark Mahaney - RBC Capital Markets

Thank you, Pete. Thank you, Sean.

Operator

Your next question comes from the line of Douglas Anmuth with JPMorgan. Please proceed.

Douglas Anmuth - JPMorgan

Thanks for taking the questions. I just wanted to ask two things. First, just on ARPU and overall pricing, are you getting the pricing increases that you’ve expected in TLA and then also in the expiring TMA subs, the ones from a year ago who first started with the product and then six months ago? And also just trying to understand how much of that re-price might have been felt here in the second quarter relatively to obviously getting more of a full quarter effect in 3Q?

And then secondly, can you just help us understand the deferred revenue number? You obviously added a lot of agents here but the deferred revenue looks like filling up about a 100,000, if you could help us understand that? Thanks.

Sean Aggarwal

Doug, it’s Sean. I’ll talk about ARPU trends first and what we’re seeing there. So as you saw from the numbers, ARPU grew to $194 in Q2 and it was up $7 quarter-over-quarter, and this was our 14th consecutive quarter of increasing ARPU and we continue to see and implement the same playbook, which we have been for the last 14 quarters, which is increasing prices on our TLA products.

With regards to our mobile subscription product, which we launched in May of 2012, as I mentioned in my prepared remarks, this year Q2 was the first quarter these contracts out for renewal, we are very pleased with the renewal rates we’ve seen.

We have not yet increased prices on our mobile subscription product, but that is to come, because the ROI on that product is at least equal to our web product of 10x, if not higher. So there is clearly a playbook here to be implemented over the coming quarters in increasing TMA prices just like we have increased prices on the TLA product. So, all of that is sort of to come.

On deferred revenue, so deferred revenue for Q2 was $14.8 million and that compared to Q1 of 2013, where it was also approximately $14.8 million. So your question around, why is it that the deferred revenue did not grow much between Q1 and Q2.

So, two things to keep in mind, one, mobile subscription product, we sold these as 12-month contracts back in Q2 of last year and we booked the deferred revenue on the balance sheet 12 months of it and so at the end of Q1 there was still three months of deferred revenue that was sitting on the books. By the end of Q2 that deferral had gone away because all of that revenue had been recognized from the mobile subscription products.

So, that’s sort of one factor. The second factor is that over the course of this year in the first half, we have introduced a couple of new sales vehicles to our insights inside sales environment and one of them is installment payments. So what that means is, you as a real estate agent can come in and previously where you would have bought a six-month contract, we would have taken all of the money upfront, put it on the balance sheet as deferred revenue, instead now you have the option to sign up for the six months contract but pay us in three installments.

And in this case we will only defer the first payment. We’ll put that on the balance sheet versus putting the entire six months on the balance sheet. So that’s the second factor that impacts the comparison of deferred revenue from Q1 to Q2.

So those are the couple of factors. And then the last thing I’ll say on this is, deferred revenue is an output metric. It’s not a metric we try and manage, if you will. We’re focused obviously on ensuring subscriber growth, ARPU and revenue, and then depending on what incentives and strategies we’re using in our sales environment, it can impact the amount of deferred revenue from one quarter to the other.

Douglas Anmuth - JPMorgan

Okay. Great. Thanks. Very helpful color.

Operator

Your next question comes from the line of Ralph Schackart with William Blair. Please proceed.

Ralph Schackart - William Blair

Hi. Good afternoon. I was just looking at the acceleration of sub growth at 49% year-over-year and then also looking at the ARPU growth sort of 31% year-over-year, I know sometimes these metrics bounce around. I’m just curious if there was sort of linearity when you added the subs sort of causing that dispersion?

And then second, just a housekeeping question, Sean, can you also breakout the mobile-only subs as it currently stands right now?

Sean Aggarwal

Yeah. Ralph, on the first question around the relationship between subscriber growth and ARPU trends. You’re quite right. So in Q2, as we’ve discussed, we added just a record number of subscribers, 4,200 new subscribers, largest and best quarter in our history. And new subscribers typical come in at a lower price point than the average ARPU. They’ll tend to buy a smaller market share and just getting used to the platform. And in a quarter where we had a very large number of new additions as we did in Q2, that can impact the growth or the increase in ARPU as it modestly did in Q2.

We do have a very long history of brining in these new subscribers and showing them the power of the Trulia platform and then up-selling them to a larger market share, higher price points, cross-selling them to more products and thereby, growing their ARPU over time.

So that’s some color on ARPU. With regards to TMA and the subscriber there, here’s some numbers. So all of our total 32,100 subscribers at the end of Q2, 26% or 8,200 were also Trulia mobile subscription -- subscribers and in all those 8,200, the vast majority, 65% to be exact, also had another mobile subscription product in addition to the, sorry, they had a subscription to another product in addition to the mobile subscription product.

Ralph Schackart - William Blair

Okay. That’s helpful. Thank you.

Operator

Your next question comes from the line of Kerry Rice with Needham. Please proceed.

Kerry Rice - Needham

Thanks. Great quarter, guys. Pete you talk a little bit about the adjacent businesses, mortgages, rentals and kind of building scale there. Can you put any timeframe or any kind of framework around when we should think about, you shifting to more monetization or any kind of metrics or benchmarks you’re looking at to when you kind of flip that switch?

And then the other question I wanted to ask is around the competitive landscape if you’re seeing any changes in the landscape?

Pete Flint

Yeah. So just a couple of updates, there is only adjacent businesses, probably we are tremendously excited about both rentals and mortgage, and there is very sizable opportunities. I would characterize 2013 as the year of one way we’re driving scale, we’re optimizing the product experience and we’re experimenting with monetization. With to your question, monetizing is very much experimentation.

As part of the specific metrics within that is really a combination of factors that we’re looking at and really it is a learning experience for us and broadly why we’re so excited about it is that, the core search experience and product components that help us succeed into sale, very applicable to the rental industry where we’ve got, we demonstrated some very strong traction.

And on the mortgage industry, particularly in today’s environment where you don’t see an uptick in rates, mortgage banks are looking for purchase leads over re-fi leads and so we have a very attractive platform for mortgage banks to target potential homebuyers.

Just data point there, we’re seeing that 90% of the inquiries that come off mortgage platform are for purchase leads as opposed to re-fi leads, which relative to kind of other mortgage lead gen platforms in the mortgage industry is a total opposite to what you see. So, we feel in time a substantial opportunity here and very much this year is about experimentation to start turn on monetization in 2014 we anticipate.

Kerry Rice - Needham

Can I ask just quick follow up to that one, I know that you had originally partnered with Mortech, have you added any new partners on the mortgage side?

Pete Flint

Yes. Correct. So we no longer partner with Mortech and we have transitioned to other folks.

Kerry Rice - Needham

Okay. Thank you. And then the competitive landscape.

Pete Flint

Yeah. The competitive landscape, probably a couple of things to note there. Firstly, as we shared in the call, we’re seeing tremendous traffic growth, so we’ve not been impacted by competitive marketing activity and we just feel really good about our playbook, both to drive consumer engagement, as well as our ability to satisfy and growth real estate agent subscribers.

The other piece that you may have seen the NAR changed the operating agreement with Move enabling reality.com to add rental and new home construction listing to their platform. As we’ve shared with investors, our belief is that listings are critically important, but they’re just table stakes. And we’ve spent our focus and energy and our strategy complemented listings with insights with unique user generate content and great experience. And consequently, we see this change in the operating agreement not having a material fact in the competitive -- on the competitive environment.

Kerry Rice - Needham

Thanks a lot.

Operator

Your next question comes from line of Deb Schwartz with Goldman Sachs. Please proceed.

Deb Schwartz - Goldman Sachs

Great. Thanks and congrats on the quarter. You mentioned that you haven’t really seen much of an impact on competitors’ ads on your traffic trends. We’ve actually noticed some Trulia ads on both Google and Facebook. I’m curious has something changed about the way your thinking, about your marketing investment and are able to share any early results from this campaigns? And then finally, I guess, as we think about your Q3 guide, should we assume an acceleration in marketing spend?

Pete Flint

So, I’ll take the first part and Sean, may touch on any comments on the guide. First, we shared with investors that our focus is to build and invest heavily on product and driving traffic organically. And that’s our overwhelming focus and over the years we've experimented with trade marketing, traffic driving initiatives.

And I believe in our bias towards product unless the marketing is not a religious belief, it’s very much a data-driven belief. And so we -- of course we need data to inform our decisions and consequently from time to time we run small scale test across multiple different channels. These are the characterize, these as very small scale and more than 99% of our traffic is organic.

But it’s obviously prudent as a data driven company to generate data to make an informed decision. And maybe it’s helpful just, in your follow up part, just what is -- so what are we looking at, so what is the -- what are characteristics and the results that tends to work that we are looking at.

And I think from our perspective we are not just looking at traffic for traffic sake. We are very much looking at what is the intent of this audience, are they looking to make the single largest financial decision of their lives and will it be engagement that audience. So, very much focus our intent.

Secondly, as the business we take a very long-term view and we don't want to be focus on just short-term metrics. So consequently we are looking at how sustainable is this, it’s clearly easy to spend money and see a benefit short-term, but what happens is if the marketing spend is turned-off. So sustainability of marketing spend is also very important to that. And those are couple of the lenders that we look through as we evaluate the data that comes from this test.

Sean Aggarwal

And Deb, I’ll comment on your second part of you question. No, there is no discretionary marketing spend of any significance contemplated in Q3, as you heard from Pete. That's not what we're doing. There some small amounts we continue to spend on test and learn, so we can inform our data-driven decision-making, but there is no change in our strategy and no intention to spend any significant sums in discretionary marketing in Q3.

Deb Schwartz - Goldman Sachs

Great. That’s helpful. Thanks.

Operator

Your next question comes from the line of Scott Devitt with Morgan Stanley. Please proceed.

John Berg - Morgan Stanley

Hi. This is John E. Berg for Scott. Just a quick on costs, I know you just talked about sales and marketing now increasing the paid acquisition are doing so rather. On the cost of revenue, you mention a one-off items affecting at this quarter, should we expect that to revert towards where you’ve been in prior quarters? And also where would you see some of the leverage that’s implied by your guidance elsewhere in the cost items? Thanks.

Sean Aggarwal

John, its Sean. I’ll comment on cost of revenues first. So, as I mentioned in my prepared remarks, cost of revenue for the quarter was about 2 points lower than the prior quarter and it was because a one-time catch-up entry that we made related to state sales tax and I’ll give you a little bit more color on what that is. So there are three states where we have access and we accrue sales tax against the products that we sell in those states and we record that as an expense within our cost of revenues.

We recently hired a new tax advisor one of the big four firms and they wrapped up their work and based upon their recommendations, we have increased the accrual that we had on the books to account for some of the additional sales that we had made in those three states over the last two years. So all of that net, net resulted in about $500,000 one-time catch-up entries that we made to cost of revenues in Q2 and that will not obviously repeat in Q3 as that was one-time catch-up. So that's on cost of revenues.

And then the second question around, where might, where do we expect leverage? So, one I’ll just remind everyone again of the continued leverage we are delivering in the business. This is now the fourth consecutive quarter post IPO in which we have increased EBITDA -- adjusted EBITDA consistently up into the right in our Q3 guidance further as a data point to that series all consistent up into the right.

And as you think about leverage, the one area where we are investing and will continue to invest is in engineering, that's in our DNA. We are building -- focused on building the very best products in the category and adding to and will continue to add to our superb engineering team here in San Francisco. So, you will not see leverage there. And it is likely that all the other lines you’ll see modest leverage as revenue grows in Q3, you should see leverage in across all of the lines other than technology.

John Berg - Morgan Stanley

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of James Cakmak with Telsey Advisory Group. Please proceed.

James Cakmak - Telsey Advisory Group

Hi, thanks. Wanted to ask about Market Leader, I know the deal hasn't closed yet so you’re limited to as to what you’d say. But can you just talk to us about how you're thinking about on the revenue opportunities from this acquisition. I know, you have the cross-selling opportunities but is this something that largely will be served to help, sell through to your advertising customers or will this be an opportunity to grow independently and then add on advertising products to those CRM customers over time?

Just help me -- help us understand how are you thinking about, how you can built revenue from that over the longer term. And then secondly, the Market Leader was a sizable acquisition on the kind of backend of services but are you comfortable or do you see any opportunities to possibly make investments or acquisitions on the consumer side to boost traffic or what have you and or do you feel comfortable with your engineering and the content and the services that you are ruling out on the consumer side in-house? Thanks.

Sean Aggarwal

James, I’ll comment on the Market Leader and the synergy potential. We're just tremendously excited about these two companies coming together. And as the team has started to work together on integration plans, we’re just -- it's very clear that one plus one will equal three here. And the way that one plus one equals three is going to come about is in two forms, they are two clear areas where we expect to realize incremental revenue over and above what these two businesses independently are going to achieve.

And those two areas are first cross-sell. And this is Trulia's sales force selling to its 400,000 active agents, Market Leader software. And on the other hand, this is Market Leader salesforce selling to their 135,000 licensees that are using Market Leader software, selling them Trulia’s lead gen products. So that's sort of the immediate obvious low-hanging opportunity here on cross-selling each others products into each other's subscriber bases and driving incremental revenue.

The second tier area of incremental revenue creation is going to be through increasing the efficacy off Trulia's lead gen products. And what that looks like is this, that today Trulia sent a lead to real estate agent and then there is likely a six-month period over which that real estate agent has to nurture that lead and turn that into a sale.

By putting the Market Leader software in the hands of that real estate agent, we're going to dramatically increase the effectiveness of that agent and their ability to turn that lead with a greater degree of certainty into a sale at the end of six months. Not only that when that house actually sells, you will make sure in the Market Leader software, it is clear to the agent that lead six months ago originated from Trulia, in case they forgot.

All of which we believe will drive that real estate agent like that Trulia to buy even more of our lead gen service. So, those are the two areas where we are focused on as we work on our integration plans. And as you will recall, when we announced the transaction, we had provided an estimate that we expect to create $15 million in incremental revenue by the year -- by the third year of the combination.

And then your second question around potential M&A, on the consumer side and so on, our strategy has not changed which we've talked about previously. However, at this point we are heads down focused on the Market Leader transaction. It’s a big transaction for us. We are very excited. We see the opportunity to create something very special here. So for the near-term, our focus is going to be on doing a killer job on integrating Market Leader into the Trulia platform and delivering incremental revenue. So that’s our focus on M&A for now.

James Cakmak - Telsey Advisory Group

Thank you.

Pete Flint

Great. Thanks everyone and looking forward to speaking to you again in three months.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone may now disconnect and have a great day.

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Zillow (Z): Q2 EPS of -$0.30 misses by $0.19.

Revenue of $46.9M beats by $2.5M.

Earnings call at 5 ET to include FY13 business outlook.

Shares -7% AH. (PR)