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Zillow (NASDAQ:Z), a leading online real estate marketplace in the U.S., plans to raise $59 million by offering 3.5 million shares at a price range of $16 to $18, 31% above the midpoint of the original filing. Zillow is one of seven IPOs scheduled to price this week on the U.S. IPO calendar.

Background

Zillow was developed by the founders of Expedia.com who sought to translate their success in aggregating travel data for consumer convenience into a new offering designed to similarly transform the real estate market. The name "Zillow" stems from the founding idea of providing zillions of data points for U.S. properties, even those that are not currently listed. Currently, the company maintains data and property estimates ("Zestimates") on over 100 million U.S. home and rental properties, of which 28 million have been updated by individuals and real estate agents.

The company generates revenue from three different business segments. The company offers advertisers targeted ad space, allowing the advertisers to identify customers by zip code, price range or even acreage of the properties they browse. Zillow's premiere agent subscription is a fee based service for real estate agents and brokers with over 10,000 subscribers to date. The agents purchase a contract to receive prime advertising space with rates varying by zip code and property prices. Finally, Zillow recently rolled out its "Mortgage Marketplace." This service for lenders allows users to anonymously receive a personalized indicative rate on a mortgage, with Zillow receiving a fee for hosting the lender in the Marketplace. Zillow reports that 22 million unique users visited the website and mobile application in May 2011.

Financials

Zillow generated $30 million in sales (43% marketplace revenue, 57% million display advertising) in 2010, representing a 74% increase from $17 million in the prior year period. For the fiscal 1Q ended March, sales grew 111% to $11 million as a result of a 271% increase in marketplace revenue to 6.9 million and a 26% increase in display revenue to 4.4 million. Unique visitors were up 86% to 17.3 million and premier agent subscriptions grew 212% to 10,700. Operating losses narrowed as the company approached profitability. The company expected to post operating profits in 2012 while targeting operating margins in excess of 20% in the long term.

Risks

Zillow adheres to a different model than most online real estate sites. By offering an expansive database of real estate information, Zillow seeks to drive its business by attracting site traffic from individual buyers, sellers and renters for whom the site is free to use. However, Zillow must balance the pursuit of non-paying visitors without compromising its paying base of agents and brokers. The company depends on these agents and brokers for content and subscription revenue, but the aggregation of data and provision of Zestimates often rankles the agents who may believe that these Zestimates distort reasonable expectations by potential clients. There are numerous competitive websites, such as Realtor.com and other affiliated sites operated by Move, Inc. (14.5 million monthly visitors). The Zillow IP may be damaged by site copycats and data "scrapers" attempting to replicate Zillow's findings and estimates. Also, continued deterioration of the real estate market could cause real estate agents to drop their subscriptions.

Outlook

Zillow's model has seen success thus far in attracting site traffic and real estate agent subscribers. The continued growth of the user base provides valuable information for Zillow's viewer database and property valuation algorithms as owners and brokers update information on their properties. With less than 1% of total real estate agents as current subscribers, Zillow seems well positioned to expand its subscription service in its addressable market of 1.8 million brokers and agents. Managing the value offered to non-paying visitors and real estate clientele is the key concern for this story, the correct mix may determine the continued viability of the marketplace revenue model. To date, Zillow has balanced these competing interests and expects to expand its business through its newer offerings such as the mortgage market, mobile application proliferation and increased penetration of the online real estate market. Zillow, plans to list on the Nasdaq under the symbol "Z." Citi (NYSE:C) is the lead underwriter on the deal.

Zillow's upcoming deal joins a wave of recent Internet IPOs, with more expected to file in the coming months. The last time general interest in IPOs was as widespread as it is now was in the dot-com bubble just over10 years ago. It is tempting at first glance to compare the current environment to the bubble. However, there are significant differences between the two timeframes.

Source: Will Zillow's IPO Wow the Markets?