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Trulia, Inc. (NYSE:TRLA)

Q3 2013 Earnings Conference Call

October 29, 2013 17:00 ET

Executives

Ian Lee - Head, Investor Relations

Pete Flint - Chief Executive Officer

Sean Aggarwal - Chief Financial Officer

Analysts

Lloyd Walmsley - Deutsche Bank

Bo Nam - JPMorgan

Andre Sequin - RBC Capital Markets

Deb Schwartz - Goldman Sachs

Ralph Schackart - William Blair

Kerry Rice - Needham

James Cakmak - Telsey Advisory Group

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2013 Trulia Earnings Conference Call. My name is Denise and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Ian Lee, Head of Investor Relations. Please proceed.

Ian Lee - Head, Investor Relations

Thanks, Denise. Good afternoon and welcome to Trulia’s third 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 integration of Market Leader and the growth of the combined business; our expectations regarding the continued use of products by consumers and real estate professionals; 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 not include the 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. The 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.

Please note that the financial statements in the press release today that accompanies this call reflect the stub period contribution from Market Leader in the third quarter from August 21, 2013, the day after we closed the acquisition through to September 30, 2013. To make it easier to compare Market Leader’s performance alongside Trulia’s in the third quarter, for illustrative purposes in the body of the press release and also in the slides that accompanying this call, we have shown Market Leader’s contribution to certain income statement items as if they were a part of Trulia for the entire third quarter of 2013. This conference call is also being webcast and is available through the Investor Relations section of Trulia’s website.

And now, I will turn the call over to Pete.

Pete Flint - Chief Executive Officer

Welcome and thank you for joining our Q3 2013 earnings call. I am pleased to say we had another outstanding quarter at Trulia. A tremendous quarter in which you have demonstrated the strong momentum we are seeing across all aspects of our business. As you know, Trulia is a marketplace that connects consumers with real estate professionals and this quarter, we closed the acquisition of Market Leader rapidly accelerating our progress on the professional side of our marketplace. We are now only the only company in the category capable of providing real estate professionals with a comprehensive end-to-end solution on which they can grow and manage their entire business. While it’s still early days, we are already witnessing the power of the combined Trulia and Market Leader platform. Real estate franchisors, brokers and agents are endorsing the strength of our comprehensive platform by signing up with us in record numbers.

Trulia now has 56,000 subscribers, more than anyone else in the category. In Q3, Trulia collectively added almost 5,900 subscribers, which Market Leader accounted for almost 1,600. The 4,300 subscribers of Trulia standalone added – represented the most subscribers we have ever added in a single quarter in our history and come from the heels of two record quarters of subscriber additions.

Last quarter, I talked about our vision for transforming our industry and the three parts on which that is built. This include one, delivering a killer experience for consumers, especially by mobile devices; two, growing our agent base and building the leading platform for the industry; and three, extending our marketplace into adjacent markets. We have been firing on all cylinders. For consumers, since the very beginning of Trulia, we have been relentlessly focused on creating an amazing user experience led by an engineering-driven culture and a commitment delivering their very best products. Our focus doesn’t stop there. In addition to creating great products, we are also dedicated devoting our outstanding brand by providing deep insights to help people with the information they need to find the right home, we are building our brand for Trulia that resonates for the transaction-ready consumer audience.

Our approach is succeeding. An extensive audience study we recently completed indicated that about 75% of online homebuyers and sellers are aware of the Trulia brand. The study was conducted by a third-party research firm and was an online survey of over 1,000 consumers who had use an online – used a home search website wrap in the last 30 days. The results of this study validate our strategy of building the best products and focusing on attracting a transaction-ready audience. We have achieved significant scale with consumers that matter. These are the consumers that agents want to connect with and help drive the high return on investment that our products deliver to real estate professionals.

In Q3, we continue to define the best user experience in that segment delivering insights on homes, neighborhoods and on agents. During the quarter, we launched our new Find an Agent directory. Part of the core consumer problem in the industry is not just finding the right home or neighborhood, it’s also finding the right agent. This agent directory makes it easy to search for an agent and to find a professional that’s the best match for consumer’s needs. The directory provides the option to filter searches based on relevant experience, languages spoken, the local expertise, sales history and client recommendations.

For consumers, our focuses go beyond providing data by giving prospective homebuyers the deepest and broadest insights helping them find the best place to live. We extended our leadership in this area by launching new map visualizations to inform homebuyers where hurricanes, wildfires and tornadoes historically strike. These new interactive maps allow users to visualize and understand where the prospective home is located and now understand risks posed by a range of natural hazards in the area. In addition to existing tools, we have built the most comprehensive set of information and insights on what is typically the single biggest financial decision an individual ever makes. Mobile remains the fastest growing area of our audience, with approximately 15 million monthly mobile visitors of Trulia’s properties in Q3, up 88% year-over-year. Continuous innovation in a mobile experience contributed to the growth.

To highlight just a few examples during the quarter, we incorporated rental price data, seismic and flood maps and top-rated mobile apps. Over the past several months, Trulia has been optimizing its mobile apps for iOS 7 in creating leading apps for Samsung and other Android devices. Our commitment to innovation on mobile is fueling the growth of our transaction-ready audience. Our mobile users are highly engaged visiting our platform over 25% more often each month compared with web users. About half of our overall visitors now come from mobile devices and this jumps and the majority of it is on weekends when consumers are actually out and about looking for homes.

Moving to the second core focus area, we are growing our agent base and building the leading platform for the industry. In Q3, we once again demonstrated outstanding execution in our real estate marketplace. We continue to rollout our inventory expansion program across the subscriber base. The expansion, which is expected to be completed by the end of the year, continues to be positively received by agents. Most importantly, Trulia finished the third quarter with more than 56,000 subscribers and clear industry leadership in this critical metric. We are able to lever this leadership. Thanks to the success on a number of fronts.

First is becoming widely known in real estate that Trulia delivers results for agent customers. The formula for attracting transaction-ready consumers and providing professionals with the thought they need to convert this prospects into clients is working. This is best evidenced by the fact that during the third quarter, Trulia standalone grew its customer base by a record 4,300 agents, more than three times the number of subscribers that we added in Q3 of 2012. This is an excellent achievement by our agent team as it comes right after two quarters of record subscriber additions.

Last month, we announced an important milestone for Trulia Accelerate, a program that helps brokers recruit and retain agents by offering a customized package of products and services to accelerate their productivity. We launched this program in July with RE/MAX, which is one of the most productive sales forces in the industry. And since then we have added 15 new partners to the program. Trulia Accelerate now have 16 partners in total and empowers nearly 70,000 agents. Moving forward a central part of how we serve the real estate industry will include Market Leader. Just as we have empowered consumers with innovative tools and technology in the home search process, we are now best positioned to empower real estate professionals to be more efficient in their work and better able to serve their clients.

The combination of Trulia as leading marketplace to consumers and real estate professionals with Market Leader’s end-to-end service platform has given us truly unique capabilities that no other player in the industry can match. Market Leader’s software platform with approximately 150,000 users is the most comprehensive, fully integrated software platform in the real estate industry. It’s achieved a status, thanks to both the online strength of the platform and to the company’s deep channel relationships with some of the nation’s largest franchisors including Keller Williams, Century 21, and Better Homes & Gardens. These brokers and franchisors as well as many others have built their businesses on the Market Leader platform and act as advocates across the nation for platform adoption and engagement.

Now that we have completed the acquisition of Market Leader, we plan on helping the Market Leader team continue to extend its commanding lead in this critical segment. At the same time, we will accelerate the growth of the combined Trulia and Market Leader platform as the de facto operating system for the real estate industry. This is a truly open platform with a potential for immense scale, and it has the ability to aggregate and match leads and data for multiple agents, brokers and franchise or systems as well as other portals maximizing an agent’s performance and productivity.

We are extending our leads through continued innovation. For example, in recent months, Market Leader has created tools to manage platform to the other systems being used by its customers. Additionally, the company recently enabled all of its 150,000 users to automatically capture leads, generated by the leading consumer real estate sites in addition to those generated on the road and company websites. This feature called site stream was launched in June and thousands of agents are already using this innovative new feature. This combination of massive distribution and rapid product innovation are examples of our Market Leader’s open platform approaches providing benefits to other’s current match. We are also leaving little reason for customers large or small to invest in any competing platform. All of this is establishing our platform as the only one a real estate professional will ever need.

Now let’s put ourselves in the shoes of a real estate agent for a moment to illustrate how this works in practice. Today, she can use our platform to generate leads for Trulia’s mobile and web-based advertising products. To create a personalized website to develop online presence, provide virtual tools of firm she is marketing or established a targeted e-mail campaign to interested home shoppers in the area. She can use Market Leader’s CRM system to maintain contact with perspective customers and track their interest. And she can take advantage of Market Leader’s business reporting and analytic tools to help focus on the leads from the most motivated and active customers, phone in on buyers and close the sale. Collectively, our open platform enables real estate professionals to increase of their follow-up engagement and ROI and all the leads they would generate, no matter where they are coming from.

Just closing the transaction in August 20, we have begun the initial stages of implementing the integration process. The early focus has been between our sales forces and how they would collectively sell to a combined customer bases. Over the next year, our plan is not only to focus on selling to our respective customer bases, but also to introduce combined offerings that leverage the best of both Trulia and Market Leader’s platforms. So you can see that with the addition of Market Leader, we are bringing together the best of what our two organizations have to offer to create unprecedented value for customers and extending Trulia’s position as the leader in the online real estate category. You will see us leverage our leadership and our unique assets to rapidly add new subscribers, while also increasing our share of the billions of dollars that real estate professional spend on marketing and technology every year. We are tremendously excited about the opportunities ahead of us.

The third part of our vision is to expand our business and grow into adjacent markets. In rentals, our business continues to perform very well and have significant growth in traffic and lease generated during Q3. Market visitors and mobile visitors business doubled year-over-year. E-mail leads sent for Trulia also roughly doubled year-over-year when the majority coming from mobile devices. We are focused on leveraging technology to provide insights to consumers faced with difficult decisions. For example, in September, we introduced an enhanced rent versus buy tool. This does not only easily customize one, user friendly, but also basically stunning and a very informative for perspective movers.

In summary, we had a fantastic quarter on both the consumer and professional sides of our marketplace. A large base of transaction ready consumers continues to expand driven by rich user experience and product innovation. Our mobile audience continues to grow and be fully engaged. We added approximately 5,900 subscribers to what is now the largest base of professional customers in our industry. This is early but very clear evidence of the power of the combined Trulia and Market Leader platform. We are now well down the path of capturing the immense opportunity ahead of us in building substantial capacity moats around our business. We are using technology to transform these expenses to consumers and now also professionals in a way that no one else is doing today in the real estate industry.

With that, I will pass the call to Sean.

Sean Aggarwal - Chief Financial Officer

Thanks Pete. We experienced strong growth across our business in the third quarter. Our focus on building the best products in our industry enabled us to grow consumer traffic, while achieving strong financial results. These factors led to another quarter of record revenues and adjusted EBITDA profitability. And as you will see from our quarterly results, Trulia’s management team has remained laser-focused on executing on our core business, while also beginning the integration with Market Leader. We closed the Market Leader transaction on August 20 and therefore Q3 is the first quarter in which we are reporting our results on a combined basis for the Trulia and Market Leader businesses.

Let me talk about how we intend to disclose the Market Leader results going forward. We will break out a number of financial and operational metrics for Market Leader in Q3 and Q4 of this year. Some items, such as revenue, were reported by Market Leader when it was a standalone public company and are therefore available on a historical basis. Other metrics such as visitors, subscribers, and ARPU were not historically disclosed by Market Leader. And therefore with regards to these new Market Leader metrics that we are disclosing for the first time, historical numbers and year-over-year comparisons will not be provided in my remarks.

Starting in 2014, we will report the results and metrics of the two companies on a consolidated basis. This is driven by the fact that as the sales forces of the two companies begin to cross sell each other’s products and we integrate our product offerings it will no longer be possible to attribute the sale to Trulia versus Market Leader. As Ian Lee mentioned earlier, the financial results in the press release that accompanies this call reflects the stub period contribution from Market Leader from August 21 through September 30.

For illustrative purposes, in the body of the press release, in the slides that accompany this call, and in my prepared remarks here, we have presented certain Market Leader results as if they were part of Trulia for the entire third quarter of 2013. I will now turn to third quarter results. Today, I will cover three items, an overview of key metrics, a review of third quarter results, and guidance for the fourth quarter. My prepared remarks are accompanied by a presentation which is viewable on this webcast and also available on Trulia’s Investor Relations website.

I will start with key metrics. I will first cover our three key consumer metrics, total visitors, global visitors, and amounts of user-generated content. Traffic to the combined Trulia plus Market Leader platforms totaled approximately 32 million monthly unique visitors. Breaking that down, we had approximately 35 million monthly unique visitors during the quarter to the Trulia platform, an increase of 42% year-over-year.

Mobile traffic growth remains strong, with mobile monthly unique visitors of 14.5 million for the quarter, an increase of 88% year-over-year. In addition, Market Leader, through its software platform, enables real estate agents to quickly and seamlessly create fully featured websites. Market Leader is the number one provider of agent websites in the nation powering over 120,000 agent websites. These local agent websites attract a highly transaction-ready audience. Market Leader traffic to these agent websites totaled approximately 6 million monthly unique visitors.

Another key consumer metrics is new contribution of user-generated content. During the quarter, our users made approximately 1.2 million new contributions to our site, a 39% increase over the third quarter of 2012. We finished the quarter with a cumulative total of over 10 million user-generated contributions in our database, up from approximately 6.5 million a year earlier. On the agent side of our marketplace, we focus on two key metrics, the number of subscribers and average revenue per user or ARPU.

Q3 was a record quarter of new subscriber additions for our company. The combined Trulia and Market Leader platform added approximately 5,900 new subscribers in the quarter. This is a strong validation of the value real estate agency in the end-to-end platform the two companies have created, as well as one early proof point that this acquisition is already paying dividends. Breaking down the subscriber ads, we added approximately 4,300 new subscribers to Trulia’s platform ending the quarter with 36,400 paying subscribers with 60% year-over-year increase. As Pete mentioned, Q3 was another quarter of record subscriber additions for Trulia. The success was driven by ongoing rollout of our inventory expansion program, continued penetration of our mobile subscription product and strong execution by our inside sales team.

Market Leader added approximately 1,600 new subscribers in the quarter, ending the quarter with approximately 25,000 premium subscribers. The combined company now has over 56,000 subscribers. This takes into account the 20% overlap between the subscribers of Trulia and Market Leader. With 56,000 subscribers on a combined platform, we now have the largest subscriber base of any company in our industry.

Our marketplace team has also continued its success with regards to selling our mobile subscription product to an increasing number of subscribers. Of the total 36,400 core Trulia subscribers, over 11,000 subscribers or 31% have now purchased a mobile subscription product, up from 26% in Q2. As you know, the mobile subscription product is priced at a premium to the web subscription product.

ARPU for Trulia subscribers in the third quarter averaged $186, up 21% over the same period in the prior year. ARPU was down $8 sequentially due to the record subscriber growth Trulia has achieved in recent quarters. When new subscribers first sign up, they typically spend lower amounts than existing subscribers as they test and become familiar with our products. This puts downward pressure on ARPU in the short-term. Given the record number of new subscriber additions this year, this downward pressure is more visible in the ARPU trends this quarter than it has been in the past.

As these customers mature, we expect to up-sell them and increase their ARPUs. In fact, in Q4, we expect ARPU to increase modestly compared with Q3. Beyond the short-term trend, we continue to expect strong ARPU growth as we move towards our longer term ARPU targets of $450 per month.

Having public key metrics, I will turn next to a review of third quarter financial results. Third quarter revenue reflecting Market Leader’s contribution from the date of acquisition was $40.3 million. Assuming a pro forma full quarter contribution from Market Leader, third quarter revenue was $48.1 million. Full year standalone revenue was $33.8 million and 82% year-over-year increase. The 82% year-over-year increase in Trulia standalone business is an acceleration compared to the 77% year-over-year growth recorded in the prior quarter.

Total revenue further breaks down into three categories: marketplace, media and Market Leader. Marketplace revenue, which is comprised primarily of revenue from our subscription products sold to real estate professionals, was $24.8 million for the quarter, a 96% year-over-year increase. This was driven by overall subscriber growth, price increases and increasing penetration of our mobile subscription product. The 96% year-over-year growth in our marketplace is an acceleration compared with the 90% year-over-year growth in the prior quarter. Media, which includes sales of display ads to national advertisers, also performed strongly with revenues of $9 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 homebuilders. As the real estate market continues this recovery, we are well-positioned to benefit from the uptick in marketing spend. For Market Leader, third quarter revenue from the date of acquisition was $6.5 million. Assuming a pro forma full quarter contribution, Market Leader achieved revenue of $14.3 million, an increase of 22% year-over-year. This was driven by the continued rollout of Market Leader’s premium software offerings to its expanding base of real estate professionals. Please note that due to purchase accounting rules, we were not able to recognize approximately $300,000 of deferred revenue that otherwise would have been recognized as revenue in the third quarter by Market Leader.

I will next discuss earnings and then walk down the P&L commenting briefly on each P&L line item. Third quarter adjusted EBITDA, reflecting Market Leader’s contribution from the date of acquisition was $4.8 million or 12% of revenue. Assuming if pro forma full quarter contribution from Market Leader, adjusted EBITDA was $5.7 million, or 12% of revenue. Full year standalone adjusted EBITDA was $4.7 million or 14% of revenue compared with 11% of revenue in the prior quarter.

Please note 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 Q3, we incurred approximately $4 million of acquisition-related costs primarily due to legal and investment banking fees. For Trulia standalone, the gross margin for the quarter was $29.5 million or 87% of revenue compared with 85% in the prior quarter. For the consolidated business, on a GAAP basis, gross margin was 85% of revenue. Gross margin for Market Leader tends to run in the 75% of revenue range.

For Trulia standalone, sales and marketing expenses were $15 million, or 44% of revenue compared with $12.8 million, or 42% in the prior quarter. The increase in sales and marketing was driven by growth in our inside sales team and the variable compensation pay. The Trulia standalone technology costs were $6.4 million, or 19% of revenue compared with $6 million, or 20% in the prior quarter. Our continued investment in engineering headcount was offset by the revenue leverage.

For Trulia standalone, G&A expenses were $4.9 million, or 15% of revenue, about flat compared with $4.7 million, or 16% in the prior quarter. For Trulia standalone, stock-based compensation was $6.2 million, or 18% of revenue compared to 7% in the prior quarter. The sequential increase was driven primarily by the impact of performance-based stock awards that were issued in connection with the Market Leader acquisition. For modeling purposes, we expect stock-based compensation to be in the range of 15% to 18% of revenue in the fourth quarter. In this quarter, we recorded a $15.3 million one-time income tax credit, which was related to the purchase accounting of the Market Leader acquisition.

Having covered the P&L let me touch on the balance sheet. We finished the quarter with approximately $42 million of cash and equivalents and total debt exiting the quarter was just under $9 million. I will now close by covering guidance for Q4. We expect the strong momentum in our business to continue into the fourth quarter. Based on these strong trends, we now expect Q4 to be yet another record quarter for our company. Please note that our guidance now incorporates Market Leader. We expect total Q4 revenue to be in the range of $48.5 million to $50 million. Breaking this down further, for Trulia standalone we expect Q4 revenue to be in the range of $34 million to $35 million and Market Leader revenue to be in the range of $14.5 million to $15 million. The marketplace is expected to represent approximately 75% of the Trulia standalone revenue.

This guidance takes into account the typical seasonality that is experienced by the real estate industry in Q4 when consumers and real estate professionals tend to be less active relative to earlier quarters. The guidance also takes into account the impact of purchase accounting rules, such that we are not able to recognize approximately $300,000 of deferred revenue that otherwise would have been recognized as revenue by Market Leader in the fourth quarter. We expect adjusted EBITDA to be in the range of $6.6 million to $7 million or 14% of revenue at the midpoint.

Looking back at the third quarter and into the fourth quarter, you can see that we continued to deliver strong operating and financial results. I will close by recapping three highlights. First, we added approximately 5,900 new subscribers in Q3, a new record for our company. This is an early proof point of the power of the combined Trulia and Market Leader platform. With a combined total of over 56,000 subscribers, we are now the number one player in our space, as measured by subscribers. Second with the addition of Market Leader, there is a step change increase in the size and scale of our business. We expect to exit 2013 at an approximately $200 million revenue run rate with clear opportunities for significant additional growth in 2014. And third, we exceeded the midpoint of our Q3 revenue guidance by 9% and also outperformed the midpoint of our Q3 adjusted EBITDA guidance by 9%.

I will now pass the call back to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Lloyd Walmsley with Deutsche Bank. Please proceed.

Lloyd Walmsley - Deutsche Bank

Thanks guys. I had two questions if I may that are related. The first is just do you expect these kind of step function level higher sub-add levels to continue. And then if you could parse out the secondly the impact of that on ARPU between kind on the positive side, selling these new subs at a higher price per share of zip code and then seeing the spend rising the older cohorts with TMA adoption versus on the negative side what impact to ARPU was from just selling initially a smaller share of voice and then growing it over time and then of course just mathematically bringing in subs who don’t contribute revenue throughout the entire quarter, if you can just walk us through how each of those may have impacted the ARPU and how we should think about that going forward, that’ll be great?

Pete Flint

Great, thanks Lloyd. I will take the first part around subscribers and Sean will take the second part on ARPU. As we share the record quarter in subscriber ads from Trulia’s perspective 4,300 was an outstanding performance driven by three factors. One was solid execution which really is accumulative impact of productivity and product improvements over the last several quarters. Two has been the inventory expansion program and we expect that rollout to be completed by the end of this year. And then we have just started testing in a small number of limited markets. The ability for a third slot and we will make a decision early 2014 about whether we roll that out consistently across the platform. And then three, we are seeing the impact of Market Leader so what we are hearing from customers is that the prospect of a combined company offering both marketing and software is very attractive to them. And that’s really providing a halo effect in driving engagement from agent customers into our platform. So we see tremendous opportunities ahead for us to grow subscriber numbers albeit in the – looking into Q4 is obviously the quietest season and the quietest quarter for the entire industry.

Sean Aggarwal

And Lloyd, let me touch on the ARPU question. So as you saw from the numbers, ARPU for the third quarter was $186, down $8 sequentially versus Q2. And big picture as we see a tremendous opportunity to grow subscribers really, really fast and get more agents on our platform as in the longer term this will allow us to up-sell, cross-sell and significantly maximize the revenue opportunity. So we are really focused on driving a huge number of subscribers onto the platform. There is some sort of upward pressure and downward pressure that goes on in ARPU and let me break that down for you at least conceptually. So some of the factors that bring ARPU up and have brought ARPU up over the last few quarters are things like as subscribers mature, they typically buy more zip codes, they will increase their share of market or they will buy additional products such as Trulia mobile product, so that takes ARPU up.

Another factor that’s a positive on ARPU is obviously pricing where we take pricing up. And typically though keep in mind because of the seasonality of the industry, our pricing power is greater in Q1 and Q2. And as we go into the second half of the year, the pricing power is relatively speaking less strong but nonetheless that’s an upward force. And then the third upward force on ARPU is new subscribers, when they come in, they come in at a higher price point. This has been the case when we started rolling out the inventory expansion program in Q1 of this year. The new subscribers that came in for every point of market share their price was higher than what the existing subscribers were paying. So those are three factors that push ARPU up. The factors that push – put downward pressure on ARPU are one that new subscribers, when they come in, typically like in many businesses tend to start out with a smaller market share even though they are paying more per share of market, they may buy a smaller share of market. They will typically buy one product and then over time, they step up. But the initial all-in price point in ARPU for a new subscriber is lower than that of an existing subscriber.

And the second downward pressure is as new subscribers are added in the middle to late part of the quarter, while they show up in the subscriber number they yet are really not producing any significant revenue. So mathematically that just puts downward pressure on ARPU. So those are all the factors that go on. Because of the success we have had with new subscribers and we have now added 12,000 new subscribers over the course of this year, year-to-date. Those factors led to ARPU being down sequentially in Q3. As I mentioned in the prepared remarks, we are already seeing ARPU increase in Q4 versus Q3. And we are confident that we will see a modest increase in ARPU in Q4 versus Q3. We also expect ARPU to grow over the course of 2014 and we remain very confident in our long-term ARPU projection of $450.

Lloyd Walmsley - Deutsche Bank

Great, thanks guys. Nice quarter.

Sean Aggarwal

Thank you.

Operator

Our next question comes from Doug Anmuth with JPMorgan. Please proceed.

Bo Nam - JPMorgan

Hi. This is Bo Nam on for Doug. Thanks for taking our questions. So just quickly on that last comment you made about your long-term ARPU being $450, is that more for Trulia standalone or is that including the consolidated ARPU that you are going start reporting starting next year which includes Market Leader. And then secondly, for TMA and then previously you have mentioned that the pricing remains at a premium at about 15% to 20%, if there any update to that figure and how you are thinking about potential pricing increases on TMA as they continue to come up for renewal as we move forward? Thanks.

Pete Flint

Well, the first part of your question around long-term ARPU target just to remind folks as part of our IPO roadshow we had shared with investors long-term targets for the business and in particular we see 225,000 subscribers on our platform at an ARPU of $450 per month. With the acquisition of Market Leader, it only increases our confidence and potentially accelerates the path to getting to that long-term ARPU number. So at this point, I would just leave that $450 ARPU as a number that applies to the combined entity, including Market Leader.

And then on the second part of your question around TMA, as a reminder as you know, we introduced TMA in Q2 of last year. And from the beginning, it has been positioned and priced as a premium product. And we initially priced it at a 10% to 20% premium to the web product and all through the course of second half of 2012 and through the first three quarters of this year we have successfully maintained that pricing premium. And in Q3, TMA continued to be priced at approximately a 10% to 20% premium to the web product, which obviously positions us really well as the penetration of TMA grows 31% of our subscribers own TMA and the traffic of mobile grows were 50% of our traffic now is mobile. So we feel very well-positioned for the mobile world. Particularly around price increases related to TMA, we have discussed previously that the ROI for the web products is about 10x and anecdotal feedback from our customers, real estate agents suggests that the quality of the leads on TMA is equal to if not higher than the web products, which would suggest that the ROI on the mobile product is likely higher than the web product, which creates the opportunity for us to increase price for mobile over time and do exactly the same thing with mobile pricing that we have successfully done for web pricing over the last three years or so. And you can look for some of those pricing actions to happen over the course of 2014.

Bo Nam - JPMorgan

Great, thank you.

Operator

Our next question comes from Andre Sequin with RBC Capital Markets. Please proceed.

Andre Sequin - RBC Capital Markets

Great, thank you. First, if we could talk about the linearity of sub-growth during the quarter, did you see an acceleration in sub-growth after the acquisition was completed and if so, would you attribute that more to new subs coming on to the platform or to the rapid adoption by current subs moving across the aisle and using the other platform too? And then secondly, if you could talk just a little more about the sales approach to new subs coming to the platform, you mentioned offering packages combining the Trulia and Market Leader offerings, do you have a sense of timing around the development of the packages in the sales, as well as the retraining of the sales staff to actually sell the combined offering? Thanks.

Pete Flint

Yes. So on the progress within the quarter and new subs, obviously it’s the summer quarter. There is a fair amount going along, so I wouldn’t – there is not too much to know that’s fairly consistent throughout the quarter in terms of that the pace of subscriber additions. I think we, the Market Leader, that the acquisition we have, we are early on in the integration process and I think while the acquisition close towards the end of the second half of the quarter, we see in the halo effect kind of more noticeably kind of since then, but I think the numbers and the contribution is fairly modest relative to the other initiatives around the inventory expansion in the sales productivity and product improvements, but we see clear potential there in terms of the combination. With regard to the timing of our integrated packages, cross-training, as Sean mentioned, we see that going into 2014 will be more – providing more ability to have integrated packages and then cross-sell, hence not to breakout the Market Leader’s specific numbers. So it’s our intention really going into 2014 and principally the first half, we will be executing on those initiatives.

Andre Sequin - RBC Capital Markets

Okay, great. Thank you.

Operator

Our next question comes from Deb Schwartz with Goldman Sachs. Please proceed.

Deb Schwartz - Goldman Sachs

Great, thanks. Just wondering now that you are two or three months into the integration of Market Leader, if you could give us anymore clarity on what you would expect to achieve from a cross-sell, up-sell standpoint for Market Leader software subs using the Trulia platform? And when we think about the 150,000 or so subs or software subs in Market Leader, I mean, are those all – how should we think about that from an addressable audience perspective and whether or not you segment them based on near-term, long-term opportunities and their, I guess, readiness to engage with the Trulia advertising platform?

Pete Flint

Yes, Deb, let me help by answering that. So on the cross-sell, up-sell one of the positive indications since we closed the acquisition is the 20% overlap. And what you – I think we were all positively surprised going into the due diligence and since closing off that limited overlap. So you think about that overlap within a large addressable market, within a product set that is very complementary, we see tremendous opportunities both in adding new subscribers, as well as adding to ARPU given that the majority of Market Leader subscribers who are buying software are not buying marketing from Trulia. So we see incremental opportunities that are quite obvious to us to execute in both areas.

I think another couple of proof points one is that when we speak to customers what they care about is simplicity. And this has been one of the key piece of feedback we have heard from agents since we announced the acquisition, is that real estate agents don’t want to work with half a dozen different services providing different components. Simplicity, given the nature of the individual entrepreneurs, is critical. And so for us as a service that can provide the breadth of products in an easy-to-use way with strong technology is very attractive to them. And so we see that continuing to grow both ARPU as well as the overall sub counts.

And then we finally announced – we had a sort of physical manifestation of this in the – towards the end of the quarter, we had our first joint event. So there was a Keller Williams Mega Camp, which is an industry event where top agents in Keller Williams attended and it is the first conference, where Trulia and Market Leader together were interfacing with real estate agents of scale. And we heard directly from agents about the positive – very positively about the prospects of the combined company providing both these services and we also saw the impact in dollars as well. We exceeded our sales targets for that event by 300% and that’s an early – but it’s more indication of the confidence that we have in this acquisition and give clear clarity that we think this is working today.

So in your second part, in terms of the all our 150,000, so these are licensees of the Market Leader software and you counter that with the active real estate professionals on Trulia’s platform, which is about 400,000 and we haven’t done the overlap of both of those subscribers, but we think that it gives Trulia the opportunity to touch the vast majority of active real estate professionals in the U.S. on a regular basis with software as well as marketing updates. And so that – as we think about how do we execute on that and that the touch points, we have entirely developed a pretty sophisticated segmentation service. And so we will be continuing to build on that segmentation analysis to most effectively drive productivity within our sales force.

Deb Schwartz - Goldman Sachs

Great, thank you.

Operator

Our next question comes from Ralph Schackart with William Blair. Please proceed.

Ralph Schackart - William Blair

Good afternoon. First question, Sean, would you be willing to give us the percent of zip codes that were sold out in the third quarter this year and how that compared to last year? And then just any updated thoughts on the monetization of rental and mortgage as we sort of turn the calendar in 2014?

Sean Aggarwal

Yes, I’ll start with the high demand zip codes. And just as a reminder for everyone on the call, there are 31,000 zip codes in the U.S. and we operate in every single one. And also approximately 4,000 are what we call high demand. And high demand zip code is one where our brand is known, we have consumer traffic, agents have come in and bought out 100% of our inventory, and there was at least one real estate agent on the wait list. If those things are true, we label it a high-demand zip code and so the number of them, Ralph, a little over 4,000. The focus this year has been more about going deeper in those high-demand zip codes and selling more inventory and getting agents off the wait list and into our billing system and paying us, if you will.

A few more sort of color points to share around high-demand zip codes is that in numbers roughly 4,000 out of 31,000, so 12%, 13% of all our zip codes are high-demand, but about a third of all of our paying subscribers come from these high demand zip codes. So about 13,000 out of the 36,000 subscribers are in high demand zip codes and there is still, in spite of our inventory expansion efforts over the course of this year, there are still roughly 5,000 agents that are on the wait list in these high demand zip codes that have put themselves on our wait list in the past six months. So they are sort of ready demand that we yet have to address.

And then additionally, high demand zip codes drive today in Q3 about 60% of our marketplace revenue, up from roughly 50% last year. And this is a function of the fact that once the market, a high demand market gets to a tipping point, our ability to increase price goes up in a non-linear fashion and the bulk of our price increases are concentrated in these high demand zip codes. And so these are incredibly profitable markets and this remains one of our core strategies going forward to turn more and more normal zip codes into high demand zip codes.

Pete Flint

So on the second part of the question around adjacencies, so on the mortgage side of the business, we are at the stage where we are very focused on building out the product, building out these experience, building out engagement in the service, yet to focus on monetization. But we see that presents a significant opportunity for us. And one of the data points there is that we have a 90% of the consumer increase on that platform of purchase loans not refi loans, so in a rising rate environment where we are well suited to monetize our platform. But it’s – at the phase of growth we are at, we are very much focused on the product stage as opposed to the monetization stage. But we see that presents an attractive significant opportunity going into 2014 and beyond.

On rental side, similar story, we are focused on growth engagement presents a significant opportunity in the future years. In a way as we shared on the prepared remarks, the engagements, the lead volume is approximately doubling year-over-year. And just to give you a sense of the scale of that audience and engagement, we are generating consistently during the third quarter over 1 million leads per month, which we’re confident puts us as one of the biggest and largest rental sites in the U.S. And given the growth rates of those – of that platform we see meaningful opportunities to monetize in the future years. But at this stage, we are very much focused on our growth and being the leader within that category.

Ralph Schackart - William Blair

Great, thank you.

Operator

Our next question comes from Kerry Rice with Needham. Please proceed.

Kerry Rice - Needham

Thank you. Couple of questions, I just wanted to follow-up on the discussion about high demand zip codes. So about 4,000 or a little over 4,000 of the 31,000 that you guys have penetrated today, any thoughts or on what percentage of those 31,000 can be high demand zip codes, I assume some may never make it to that point? So that’s the first question. And then the second question is around Trulia Accelerate, when I look at the marketplace revenue and kind of look at the ARPU times the number of subscribers, there is a part that kind of gets squeezed out. And when I owe that kind of stub piece to Trulia Accelerate and I will stop there.

Sean Aggarwal

Kerry, on the first question around high-demand zip codes, yes, you are absolutely right, there are 31,000 zip codes in the country, but we have also driven through zip codes where there is not a house to be seen. So those will not be high demand zip codes. It turns out, of the 31,000 there are 16,000 zip codes that matter. 16,000 zip codes account for about 95% of all housing stock and housing transactions in the country. So that’s obviously the group that we are focused on 4,000 today and penetrating and getting to all 16,000, which will give us near full coverage and penetration of high demand zip codes in the country.

On the second part of your question, let’s see, the – within our marketplace, when you do the math of subscribers in ARPU, you get roughly 85% to 90% of our total marketplace revenue. The balance comes from our, what we call, our broker revenue. These are relationships that we form through programs like Trulia Accelerate, where we will go in and with brokerages we will sign a relationship and sell them our lead gen products on a group basis. And for that typically, a broker will sign up one broker, but four or five agents in their office might be using that product. In that case, we have chosen conservatively do not count those folks, that broker or their agents in our count of subscribers, but we count the revenue. So that’s why about 10% to 15% of the marketplace revenue have these broker relationships, which does not show up in the ARPU and subscriber numbers, hope that helps.

Kerry Rice - Needham

That does help. Thank you.

Operator

(Operator Instructions) Our next question comes from James Cakmak with Telsey Advisory Group. Please proceed.

James Cakmak - Telsey Advisory Group

Hi, thanks. Pete, you mentioned that you guys are evaluating a potential third slot for agents as you look into 2014. Can you talk about how the second slot has trended I think in past you’ve said you were able to price it at and sometimes even above what the first slot was. So any details you can provide on how that’s going and how we should be thinking about our first slot addition? And secondly on the MLS front, a lot of you guys have been able to formulate or form direct relationships with some MLS as we are also seeing them – some of them leave listing syndicators. So can you just talk about what’s going on with the MLSs and your relationships and your ability to continue to build data and content on your site? Thanks.

Pete Flint

Yes. So on the – at the beginning of the year, we announced the roll of our entry expansion program and we are really focused on – sort of the strategy here and the approach here is really what we found is that in many zip codes, these particularly the high demand zip codes, we saw significant consumer engagement, our consumers wanting to contact real estate professionals. We also saw a significant agent demand for those zip codes. So the strategy here is to how do we sales by consumer and agent demand within those zip codes. And what we are looking at very closely in the incremental rollout of this platform and this change is the agent satisfaction and overall engagement within those zip codes. So what we – and that’s been an incremental rollout we really – we don’t want to disrupt the ecosystem and the current advertised array. And we have been very, very positively described as I would say the agent reactions been neutral to positive in the rollout throughout the year. So we have been incrementally rolling out and we have been very happy with the impact to our business and the impact to our existing subscriber base. And that’s obviously given us the confidence to evaluate the expansion to a third slot.

So we have started – very recently started limited testing of a third slot and we will make a decision early in 2014 whether we will roll that out. So we have seen from an agent perspective, we deliver a tremendous ROI to real estate professionals and we are focused on making sure that we maintain that ROI for agents. And then obviously we look very closely at overall agent satisfaction rate. So those are the things that we monitor.

On the MLS front, just a couple of things there, so obviously with an audience of 35 million unique users, predominantly those that are looking to purchase homes, we are an extremely valuable partner with these agents, brokers, MLSs that are looking to get access to that audience. So we have got significant number of relationships with strong coverage data quality across the U.S. And we have seen the direction of the key metrics around quality coverage steadily improve over the last several years and they continue to improve. There was an announcement recently from the Austin Board of Realtors and really what this was about was a policy change by the Austin Board of Realtors rather than the MLS choosing to syndicate, they really enabled the broker to make the individual decision whether they wanted to syndicate or not. And we obviously have direct relationships with many of the brokers in the area. So it’s not a large scale change and really a policy change. And for every Austin Board of Realtors that chooses to make those changes, we also hear from MLSs that are striking direct relationships. Couple of examples there would be the North Alabama MLS and the Midwest Real Estate Data group and they are – they have chosen to forge direct relationships. And I think what we are seeing in the industry is there is little bit of noise here and there, but overall, the direction is to – is pro-syndication, getting access for the listings on Trulia and other large real estate sites as it’s an essential form of marketing for most real estate professionals.

James Cakmak - Telsey Advisory Group

Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Have a great day.

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