Move Q1 2007 Earnings Call Transcript

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Move, Inc. (MOVE)
Q1 2007 Earnings Call
May 01, 2007 5:00 pm ET

Executives

Mollie O'Brien - Investor Relations
Mike Long - CEO
Lew Belote - CFO

Analysts

Jeetil Patel - Deutsche Bank Securities
Stewart Barry - ThinkEquity
Imran Khan - J.P. Morgan
Mark May - Needham & Co.
Gene Munster - Piper Jaffrey
Mark Argento - Craig-Hallum

Presentation

Operator

Good day, ladies and gentlemen. And welcome to your First Quarter 2007 Move Earnings Conference Call. My name is Gene. I will be your conference coordinator today. At this time all lines are on a listen-only mode and towards the end of the conference call, we'll be taking questions. (Operator Instructions).

At this time, we will turn the call over to your host, Ms. Mollie O'Brien, Vice President of Investor Relations. Ma'am, please proceed.

Mollie O'Brien

Thank you operator. Good afternoon and welcome to our call today. On the call are Mike Long, our Chief Executive Officer, and Lew Belote, our Chief Financial Officer. Today's call is being webcast from the Investor Relations' section of our website investor.move.com and will be available for replay shortly after we conclude. A copy of our press release issued earlier this afternoon is also available on our website.

Please be advised that some of the comments that will be made today constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act that involve potential risks and uncertainties concerning Move's expected financial performance, as well as Move's strategic and operational plans.

These potential risks and uncertainties include, among others, decreases or delays in advertising spending, in market acceptance of new products and service. Additional factors are discussed in the Company's annual and quarterly reports, which are filed with the SEC and available on our website.

All information discussed on this call is as of May 1, 2007, and Move undertakes no duty to update this information. Results projected on the call today may differ materially from actual results and should not be considered as a guarantee of future performance.

On this call we will also be discussing some non-GAAP financial measures and talking about the performance. Reconciliations of those measures to GAAP measures can be found in a table attached to our press release.

I will now turn the call over to Mike Long.

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Mike Long

Yes, thank you, Mollie, and thank you for joining us today for a view of our first quarter results. In today's call, we would like to spend a few minutes talking about the quarter, what met our expectations and what did not. Even more importantly, we'd like to share with you our assessment of the markets we serve, our positioning in those markets relative to customers and competitors, where we are well-positioned and why, and where we are not, and why, and what we are doing about it.

Over the last few years, we have gained a tremendous understanding of the behavior of the 30 million consumers who move each year and the needs and attributes of the advertisers seeking to get their message efficiently to those consumers.

As we have shared with you in prior calls, it is a huge advertising market, largely underserved by online media. Out of the midst of a very difficult turnaround, we built a company that for the first time had strong profitability and cash flow capabilities and we expect those trends to continue.

Our biggest challenge after the turnaround has been consistent growth throughout all our businesses. Consistently strong growth is of course a goal of any successful company, but in our company, it is additionally important for us to maintain our leadership position. In a nascent online real estate market, we will need to absorb what we believe will be a huge shift of billions of dollars in offline advertising spend to online media.

In order to defend our position, we need to grow as fast or faster than the rate at which the online real estate market is growing. While the industry numbers are not as precise as we would like, we believe that our current internal growth rate is not adequate to accomplish our goal. At the beginning of last year, we committed ourselves to improving profitability, a strong balance sheet fueled by positive cash flow and consistently improving revenue growth.

To accomplish these financial goals, we build a strategy around three growth engines each supported by unique category of advertisers. The REALTOR market anchored by our market leading REALTOR.com and TOP PRODUCER offerings, the new homes and rental market and advertisers who provide what we called Move related services of which are Welcome Wagon business is a key part.

Our progress and improving profitability is substantial during the first quarter our EBITDA margins improved from 6% a year ago to 10% this quarter. Our balance sheet is now rock solid with $188 million in cash and short-term investments.

However, the sources of revenue growth have been very erratic and overall revenue growth for the quarter was 3%. Our REALTOR business has performed well in spite of the biggest decline in the residential real markets in over 18 year.

During the quarter our REALTOR business grew 18% over the last year. Slower than a year ago growth rates, but very strong in the face of a difficult market.

Our thesis at top producing agents would continue or even increase their advertising spend in a slowing market has proven true. We are also experiencing consistently high renewal rates among top producing agent customer and as evidence by the 24% growth in our Top Producer business, their willingness to spend is strong.

Second, tier agents with fewer listings and new agents have been quite resistant to increasing their advertising spend, but our renewal rates from prior advertising commitments from these categories of agents has remained largely unchanged. In new sales to this segment appeared to have stabilized.

Our commitment to rapidly increase the number of enhanced listings on REALTOR.com by selling our company showcase products to brokers, to supplement our individual agents sales has been extremely well received.

In the first quarter we added over 800-company showcase customers compared to 1200 during all of 2006. Bringing the total agents represented through company showcase to almost a 170,000.

However, that continued success of company showcase in practice actually diminishes our individual agent sales opportunity. But we think the rapidly increasing number of enhancements on REALTOR.com is worth the trade off.

So, overall we remained pleased with our REALTOR business. New leadership led by Errol Samuelson has been in place since early March. We believe any improvements in the overall real estate markets will create upside for our REALTOR business as well.

As expected, our new homes and rentals business struggled to gain traction during the quarter. Their completely new business models were launched at the expense of losing much of their existing revenue.

Revenues from these businesses are now much more strategic and are now based on our new products and pricing methods, which include cost per click. Although new home advertising ended the quarter on an uptick, combined revenues for this business was 22% lower than the same quarter last year.

Our Move related services segment consist of what had previously been four separate businesses, Welcome Wagon, Retail Advertising, Moving.com and Home Plans. Welcome Wagon is a wonderful brand with a highly motivated sales and operational staff, burdened with a dated business model.

Revenue, which today is exclusively print-based, was also hurt in the quarter by a reduction in new movers during the quarter, reducing demand for its print products, as well as our decision to eliminate unprofitable markets.

Our retail advertising business, which sales online ads to non-real estate advertisers was historically overly dependent on online mortgage lead generation companies. This class of advertiser thrived during the boom years with declining interest rates, but now are retrenching and reducing advertising spending.

On a positive note, our moving and home and garden categories have improved performance over the last year. Overall, revenue from our Move-Related Services segment declined 11% from the first quarter of last year.

During the quarter, all three of our major businesses extended significant research and development dollars and in spite of the revenue performance, the overall company has improving profitability and positive cash flows, but continuing at this pace will not get us to where we wish to go and sustain us as the unquestioned leader in our market.

To accomplish our goal, we are making major changes to the company and improvements in our strategies. This initiative referred to internally as the Americas On The Move Project is having a profound affect on the company.

We believe satisfying consumers with the most comprehensive information around the real estate experience is the key to our strategy. This means going beyond having the most property listings to include in-depth neighborhood information, community content, social networking, and home enthusiast content all in one place.

In so doing, we will be able to offer advertisers the premier platform to reach 30 million consumers moving annually and tens of millions more who are either thinking about moving or are looking for information to help them settle into their community.

The historical anchor of our corporate growth has been our REALTOR business. The centerpiece of this business is REALTOR.com, which has enjoyed a ten-year run as the most visited real estate web site in the world. Many competitors have tried and failed to unseat REALTOR.com as the destination of choice for tens of millions of consumers.

However, we are not content to rely upon the power of this brand, nor or distinct listings advantage to protect our market leadership long-term. Therefore, we have made commitments in two important areas to protect and enhance our competitive future, technology and marketing.

We are upgrading REALTOR.com to take advantage of new web 2.0 capabilities, which includes enhancing the site's underlying technology and design to make it incredibly easy for consumers and REALTORs to use. It will be a collaborative site based around community and we are committed to REALTOR.com being the most trusted, comprehensive site in the real estate category where consumers and advertisers can expect to get completely transparent information about buying and selling a home.

We expect this new version of REALTOR.com to be in the market by the end of the second quarter. In addition to these technical improvements, we are launching in parallel a national consumer multimedia campaign to create greater awareness among home sellers, home buyers, and REALTORs of the wonderful benefits of using REALTOR.com.

Our partners at the NAR have committed significant advertising dollars to supplement our own to enhance the effectiveness of this campaign. Some of the initial TV spots have just aired, with the campaign achieving broad coverage this summer.

During 2006 we focused on communicating to investors these significant changes we intend to make in our New Homes and Rentals businesses. With the launch of Move.com, we sunset our HomeBuilder.com and RENTNET.com brands with a paid inclusion advertising models in favor of a powerful vertical search solution.

The strategic benefits of a solution that presented consumers with the most choices of any competing site are somewhat obvious. However, in the short-term, eliminating our long-standing advertisers almost exclusive advertising venue, replacing it with more consumer choices, therefore more competition for our advertisers, we anticipated would be a painful transition and it has been.

Since we believe New Homes and Rentals share similar products in customer characteristics and the consistent customer messaging about the benefits of converting to a cost-per-click model, we combined these businesses under one leader, Stephen Feltner.

Steven has a great track record with our company of product financial and customer relationship management. Our current view is that new home customers will adopt new advertising model faster than our rental customers.

In December we recruited Eric Torkelson to take our valuable but underperfoming assets in our Move-Related Services segment, improve them to create a world class destination for consumers to find content in the home enthusiast category, helping them settle into their new homes and communities.

By supplementing the Find a Home and Find a Neighborhood services elsewhere in the Move network, Eric and his team believe they can offer a must have recurring new service to the millions of consumers who visit our network each month.

And so doing, we can attract significant advertising dollars from thousands of large national advertisers and tens of thousands of local merchants who seek an introduction to our community of consumers and professionals. Eric's team expects to have the strategy complete and the implementation underway by the end of the second quarter.

As we mentioned on our last call, we are building a fourth engine of growth to complement our current businesses. Though we have declined to publicly name the venture or describe its mission and products, we committed one of the real estate industry's strongest leaders, Allan Dalton, launching this enterprise. Allan took on this challenge after long successful run as the leader of REALTOR.com.

Yesterday we announce that David Lereah, the Chief Economist for the National Association of REALTORs and one of the industry's most visible and respected experts, has joined Allan as Chairman of the new venture. These two industry luminaries and the great team they are building believe strongly in the potential of this new venture. We look forward to sharing details with you when we launch its services currently scheduled for this August.

With so many changes underway and the enormous opportunity that is available to us, leadership will be the key to our success. With new leadership in place for all of our businesses, today we announced we have attracted an exceptional leader to be the new President of Move.

It is a real pleasure for me to introduce Lorna Borenstein to you. Earlier this afternoon we issued a press release describing Lorna's appointment and background. The board and I have spent a large part of the last eight months evaluating candidates to be our President. The quality and interest of candidates in the position was unusually high, but Lorna stood out from everyone else.

Her background and skills align perfectly with our needs to drive a growth agenda for our company and to secure the long-term market leadership we seek. Lorna should be here full time by the end of May. But given the extraordinary diligent she did on the company and our market before expecting the position she will definitely hit the ground running.

As you can tell we are making major changes in the company to secure the future that our employees, customers, partners and shareholders expect of us. The scout and materiality of the changes we are making in products, strategy and leadership cannot be fully articulated on a short conference call.

Accordingly we will be hosting an investor day in New York during the last week of June. The day we'll give you an opportunity to meet Lorna and hear directly from the leaders of our businesses concerning their product and market development strategies.

This will be a special opportunity for investors to thoroughly understand our markets, the implications of all the changes we are making in our business, and ask questions directly to the leaders who are implementing them. We hope you can join us.

In light of these changes we are making in the business including the new REALTOR.com, which will be in the market this summer. The retooled, New Homes and Rentals a revamped move related services strategy and offering, and a high potential new venture that is not yet in the marketplace. It makes little sense to attempt to provide any meaningful financial guidance at this time.

We have based our financial and competitive future on success of four growth engines. Only one of which our REALTOR business, has a long-term track record upon, which to base a reliable forecast.

In the second half of the year, we will know if our New Homes and Rentals business is meeting the market need, how our new Move related services business model delights consumers and advertisers alike. And we will launch and be able to share the new venture led by Allan Dalton and David Lereah, which we believe is a transformational opportunity.

I'll now let Lew provide some more details. Lew?

Lew Belote

Thanks, Mike. Revenue for the quarter grew 3% over the first quarter of 2006 and was slightly below last quarter. As Mike mentioned the results continued to reflect widely different performance for individual business units, with REALTOR.com and Top Producer remaining our best performers.

EBITDA was $7.1 million or 10% of revenue compared to $3.9 million or 6% of revenue last year. We reported GAAP net income of $163,000 compared to a $2.3 million loss in the first quarter of last year.

Excluding expense from stock-based compensation under FAS 123R, net income would have been $5.6 million in the quarter compared to $1 million in the first quarter of 2006.

Looking at our segments in real estate services, which includes REALTOR.com, Top Producer, New Homes and Rentals, we reported revenue growth of 9% over the fourth quarter of last year.

The operating margin in the first quarter improved slightly in the first quarter of 2006. While REALTOR.com had improved profitability in the quarter, it was offset by our investment in Allan Dalton's new venture and increase stock-based compensation.

REALTOR.com grew 17% over the first quarter of last year. As Mike said, over the last couple of quarters, we've increased our focus in REALTOR.com on selling products directly to real estate brokers, in addition, to the individual real estate agents.

In the quarter we added over 800 new Company Showcase customers, bringing the total number to over to 2000 companies representing almost a 170,000 agents. This compares to 1200 broker customers at the end of 2006.

Among individual agent-customers renewal rates among our top-producing agents remains very high. And the overall renewal rates for all individual agent customers is as we expected considering to the tough market for the mid and lower tier agents.

Our biggest challenge in the REALTOR.com business is adding new individual agent customers. There are two main reasons for this weakness. The success of Company Showcase, which eliminates the need for an agent to purchase enhanced listings on their own.

And we have achieved at relatively high level of penetration of the top producing agents and while we still strive to increase that penetration there are much fewer in quantity than the mid to lower tier agents and because of slower market these mid to lower tier agents are much more hesitant to spend marketing dollars in the current climate.

The performance of our Top Producer software business was another positive in the quarter. Our core CRM software fueled a 24% revenue growth, but two new products, Market Snapshot and Web sites are showing traction and starting to contribute to revenue as well.

We are also expanding the mobile wireless capabilities of the software products, so real estate agents can access their contacts, e-mails and schedule, quickly and efficiently without having to carry a separate pager or mobile phone or laptop computer.

In March, we introduced Top Producer for BlackBerry. In this past week we introduced the beta launch of Top Producer for vendors mobile, which will allow agents to use the program on devices offered by RIM, Treo and Hewlett-Packard.

Under Errol Samuelson's leadership, we expect to realize synergies between REALTOR.com and Top Producers as we move forward. One immediate benefit is our REALTOR.com sales force is now selling the market snapshots and the New Agent Website products.

Staying within our real estate segment, during in the first quarter we again experienced mixed results in the ongoing transition of our New Homes and Rentals business. As expected the combine businesses experienced a 22% revenue decline, compared to the first quarter of 2006. Sequentially the New Homes business generated revenue slightly above the fourth quarter while our rental unit declined.

The return to revenue growth in these businesses is taking longer than expected. In hindsight side we missed a crucial opportunity during the transition, because we could not adjust our products in the second half of 2006 due to the code freeze from our data center Move.

The acceptance of our products was not as strong as we hoped and some customers grew frustrated, because we didn’t have the products exactly right. We were not able them monetize them affectively. While we have made many improvements over the last quarter we’ve slow to win back the mindsets of customers who were disappointed early on.

The good news is that we have began to see both New Home and Rental customers adjusting their cost for click bids, for the features listings products. We will be launching self-service functionality in early third quarter so that customers will be able to manage their marketing programs themselves.

We still expect the New Homes business to generate both sequential and year-over-year revenue improvement in the second half of the year. Our Reynolds business is in a much more competitive market and we don’t expected it to turn the corner as quickly as New Homes.

Revenues for the quarter from our Move related services segment declined 11% from the first quarter of 2006. This decline was primarily attributed to Welcome Wagon, which declined 15% from last year, while the retail business, which now includes moving.com grew 2%. This segment was also impacted by a decline in revenue in the Homeplans business. As expected, this segment was not profitable due primarily to continued investments.

The reasons for these results were several. A portion of the revenue decline was attributable to decisions we have made to eliminate on profitable or no growth activities in Welcome Wagon. The reduction in real estate transactions also impacted Welcome Wagon directly as fewer movers remains fewer books to deliver.

We do not have the optimal product set for our national advertisers and thus shipped fewer national advertising products. And our retail advertising business continues to suffer from the market decline and the mortgage sector. The good news is while we are still experiencing weaker revenue in the finance category, we are seeing positive growth in the Home And Garden and Moving categories.

As Mike mentioned, Eric Thorkilsen is addressing these issues and evaluating on entire business model in the segment. We will report on our progress at the analyst day in late June. Our unallocated or corporate expense for the first quarter was $12 million, a decrease of $800,000 from the same period in 2006.

Excluding the effective stock-based compensation from both years, corporate expense decline $2 million from last year. This is a direct result of decrease technology cost related to the data center move completed last year. The August launch of the new venture led by Allan Dalton and David low Ray is expected to generate some modest revenue this year. However, the startup expenses will likely exceed revenue for the year by as much as $6 million.

Looking at our consolidated results, our gross margin in the first quarter of 79% was an improvement over last year’s 76% due to the elimination of unprofitable new mover books in under performing markets. Taking our expense line-by-line, sales and marketing expense in the first quarter of $27.9 million was $2.6 million higher than the first quarter of 2006, reflecting increase traffic distribution costs and personnel.

Product development expense in the first quarter of $8.8 million or 12% of revenue was $500,000 higher than 2006. General and Administrative expense of $20.7 million for the first quarter was flat compared to the first quarter of 2006.

The $2 million decrease in costs associated with the data center relocation was offset by an increase in stock-based compensation expense. All of our expenses for the quarter were inline with our expectations.

We expect REALTOR.com and Top Producer to continue to perform, which will lead our expected growth even with the challenges in our other business units. We expect the company will remain profitable and continue to generate positive cash flow as we invest in our future.

Our cash and short-term investments in March 31st were $188.4 million, an increase of $30.6 million from the end of 2006. Our sources of cash during the quarter were as follows: $7.1 million on EBITDA, $15.7 million from the sales of our LoopNet investment, $5.2 million from our interest and in insurance policy, $2.5 million from the exercise of stock options, $2.3 million increase in interest income and $2.4 million increase from working capital.

These were offset by $4.1 million in capital expenditures and $500,000 in payments on capital leases and restructuring charges.

At this point I'd like to turn the call back over to Mike.

Mike Long

Thank you Lew. And we're very interested in your questions. So operator please open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take a question from Jeetil Patel of Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank Securities

Thanks, a couple of questions. Can you -- that 10% EBITDA margins in Q1. How do you get operating leverage back into the 15 to 20% range as you go forward in the business? Do you think it's more expense management or topline?

And I guess, how long do you think the new initiatives that you have out there today or that you're planning for throughout the summer are going to pay out in terms of the returns from a top-line standpoint? When do you think we'll start to see evidence of that, the impact there? And then I have a quick follow-up.

Mike Long

Jeetil, we don't expect to see leverage coming from expense cuts. As we've said, we're investing fairly heavily in sales and marketing as well as product development. It's really going to come from the revenue growth from those initiatives. So that's where we expect to see it.

Timing as to when is one of the reasons why we're not giving direct guidance, because there's a number of moving pieces at this point and while we're hopeful we're going to see some of these benefits in the second half of the year. It’s not possible for us to project exactly when each of those will come about.

Jeetil Patel - Deutsche Bank Securities

All right. A couple questions, marketing spend, you alluded to this event, but can you give us a sense of what magnitude marketing program or marketing spend looks like for the next several quarters, given that that's a pretty new initiative for you?

And the second is your view of the 20% growth, 20% margin formula changed any with the newer products rolling out in terms of time horizon or opportunity to get there?

Mike Long

Yes. This is Mike, Jeetil. As far as the second part of your question, we're not at this particular time prepared to confirm our commitment to the 20/20 objective, which we've shared with investors in the past. We do believe that that is an important goal for the company and we're quite committed to it. We're not today prepared to commit to the timeframe for which we'll achieve it.

As opposed to the marketing investment, we are -- based on my earlier comments on the call, we are going to promote both new and REALTOR.com heavily with our marketing investments in 2007 and that is different than where we were a few months ago where the majority of our marketing and promotional investment dollars was going to be focused on just the Move brand.

And instead, we're going to allocate essentially the same total amount that we planned at the beginning of the year. We're going to split that allocation between direct real consumer promotion of REALTOR.com in partnership with the national association of REALTORs, which will allow us to leverage almost potentially dollar-for-dollar with their parallel marketing investment and also promote Move as well for essentially the same dollars.

Lew Belote

And there'll be some incremental promotional dollars, marketing dollars relative to Allan Dalton's new venture, much of which we'll incur in the third quarter. But we're not prepared to quantify that or the exact timing at this point.

Jeetil Patel - Deutsche Bank Securities

Thanks.

Mike Long

Thanks, Jeetil.

Operator

Now, we'll take our next question from Stewart Barry from ThinkEquity.

Stewart Barry - ThinkEquity

Hi, good afternoon. Thank you. Is the revenue -- or the lowing of revenue growth in REALTOR.com being driven more by audience declines or is it a function of weakening ad demand? It seems you're indicating that ad demand continues to be pretty strong.

If that's the case, what's your ability to increase prices on the inventory with REALTOR.com? And then the same question applies with New Homes and Rentals. Is it audience declines, which would probably be more of a fundamental issue, or is it transitioning advertiser on, that make it more solvable of an obstacle or problem?

Mike Long

Yes, Stewart. It's Mike long. Your first question, it's not a function of audience. We're comfortable with our audience and particularly where we are with traffic given the overall weakness in the real estate category.

But the issue has been ad demand among the second tier REALTORs, the TOP PRODUCERS, as I suggested earlier in my comment have continued to spend and increased their spending. That's not been the case with some of the Second Tier REALTORs who have fewer listings or new agents who may not have virtually any listings.

So there has been an ad demand weakness among the Second Tier REALTORs. As far as pricing, we in fact are in some cases lowering pricing, which we think will actually stimulate some demand by lowering pricing.

We've been very aggressive in increasing pricing over the last four years and in some cases and in some markets, our products are probably a bit too aggressively priced. And we think it was having some affect on demand. So we're making some adjustments there as opposed to using price increases to drive growth.

In the New Homes and Rentals category, it’s almost the issue there, it’s almost exclusively a change in business model and in changing the business model, we changed all of our products, primarily changing from a paid inclusion subscription model to a cost-per-click model and we are transitioning our customer base both in Rentals and New Homes to that model and it's proven to be more difficult and taking longer than we would have hoped, but we still think it's the right strategy and we're going to stay the course.

Mike Long

And we have not spent the marketing dollars to promote the Move site; therefore, our traffic numbers have not expanded for those two sites.

We're getting approximately the same number of leads through that traffic, but not all those leads are being monetized, whereas before when everything's a paid inclusion model, you could argue that everything was being monetized that came through our site.

Stewart Barry - ThinkEquity

Okay. I understand you may not be losing share of audience to peers and online real estate, but is it safe to say that just the category has been down here in the first quarter, just in terms of overall traffic?

Stewart Barry - ThinkEquity

That's right. Just to add a little bit of color to that, comparing our March numbers of this year versus March '06, our traffic is down 3%.

The overall category is down more than that and we've been able to maintain -- more of the statistics we look at very closely is the number of unique visitors that we have relative to our competition and the amount of minutes that consumers spend on our site versus the competition.

And we've been able to maintain about 2X the number of unique and about 5X the number of minutes from our closest competitors, even with the overall category being down a bit.

Stewart Barry - ThinkEquity

Great, thank you.

Mike Long

Thank you.

Lew Belote

Thanks, Stewart.

Operator

And we'll take our next question from Imran Khan of J.P. Morgan.

Imran Khan - J.P. Morgan

Yes, hi, thank you for taking my questions. A couple of questions.

First I was wondering it seems like there be some spending associated with Allan Dalton's project. I was wondering is it fair to think that EBITDA margins will be down during the second half of this year compared to Q1 reported EBITDA margins?

And secondly, can you give us some sense the mix between what percentage of your revenue comes from the top-producing customers versus the mid-and lower quality agents? And because it seems like the top quality agents are doing well, but mid-and lower quality are not going that fast, so can you give us some mix?

Mike Long

Yes, Imran. Thank you for your question. And as far as the new venture led by Allan, I do want to update comments I made on the last call when it was very early in the last quarter's call.

It was very early in launching that new venture and we were just putting together the budgets for that venture for the year and our current view as shared by Lew with his earlier comments is that we're expecting about $6 million of net expense. That's revenues minus operating expenses for the entity that there'll be about $6 million of incremental expense, which will be layered on to our prior previous expectations for the year.

But we do expect to generate some revenue from that venture this year and of course 2008 will be a very important year for that venture.

As far as the ratio of top-producing agents to what we call second tier agents, we actually historically have not provided that information and it's a…

Lew Belote

And it's hard to draw the line.

Mike Long

It's really hard. The industry is not even clear with this definition that what a Top Producer is versus a second tier agent. And we've made some internal determinations that for our purposes of defining what a Top Producer is versus a second tier and we're not yet prepared maybe to have that debate with the industry at large.

Lew Belote

It depends market-by-market. You compare Des Moines market to Southern California market, an agent who is a Top Producer is going to have substantially more listings than say, Beverly Hills, than they would have if they're in Des Moines, Iowa.

Mike Long

That's exactly right. There's complexity associated with it.

Lew Belote

You can be a number one agent in Des Moines and Iowa, and be a second tier player in Orange County easily.

Imran Khan - J.P. Morgan

So, maybe asking a follow up question, so if I look at your total number of top producing customers that the way you define it, on an year-over-year basis, what's the growth rate on that?

Lew Belote

In terms of providing growth rates, it's just not possible to do that for a segment of the customer base.

Imran Khan - J.P. Morgan

Okay. Thanks.

Operator

We'll take our next question from Mark May of Needham and Company.

Mike Long

Gene, could you repeat that, please?

Operator

And we'll take our next question from Mark May of Needham and Company.

Mike Long

Hey, Mark, how are you?

Operator

And Mr. May, your line might be muted.

Mike Long

Hello, Mark?

Mark May - Needham & Co.

Yeah, sorry about that. Wanted to dig into the Realtor.com business and company showcase. Can you give us a sense of how large you think the addressable market there is in terms of the number of brokers that you can eventually penetrate?

Mike Long

Well, the industry stats suggest that there are -- when you get to the distinction between who has a broker's license and who is just a producing agent, there are probably 100,000 broker licenses out there or more compared to the $1.3 million Realtors. But we tend to focus on the top 10,000 brokers as actually having a substantial brokerage business employing multiple agents working for them as opposed to just owning a brokers' license.

Mark May - Needham & Co.

Okay.

Mike Long

So it's about 10,000.

Mark May - Needham & Co.

And your about 2,000-company showcase brokers at this point?

Mike Long

At this point. Yeah, right.

Mark May - Needham & Co.

So at what point I mean there's been accelerating growth in the number of company showcase additions in the last couple of quarters. When do you think you hit the peak rate of new additions? Is that likely to happen in the middle of this year or do we still have a few quarters of accelerating growth in terms of adds in the company showcase?

It sounds like from your commentary that pricing could be coming down overall at Realtor, but the growth has been coming from unit growth of company showcase. And you also mentioned that individual agents are harder to penetrate. So I guess the question we’re just trying to get a sense of the timing as to when the growth from company showcase broker additions slows?

Mike Long

Yes, Mark. This is, I don't think, an issue for 2007 and probably not '08. In the earlier comments about some of the price adjustments we're making are exclusively in our very upper end display advertising products, not on our enhanced listings.

So we believe that we still have some pricing power on some of our more, our lower-priced products. But we were getting we were really pushing the envelope on some of our display products, I am talking about the once that might sell for $10,000, $20,000.

And we're finding with the market slowing, it's being well received when some of our very our long-term customers are up for renewal, and then selling into new TOP PRODUCERS by giving them an opportunity to buy in price points that were available several years ago, they're viewing us as being a more sensitive to current market conditions.

So the marketing benefits of it, we think, are substantial and we think it's stimulating demand among Top Producers.

Mark May - Needham & Co.

Okay. Thanks for that clarification.

Operator

(Operator Instructions) We have a question from Gene Munster Piper Jaffrey.

Gene Munster - Piper Jaffrey

Good afternoon. I guess just kind of piggybacking on Mark's question, the showcase business you have, expectations that it will be kind of hanging in there. Does any of the changes of some of the new products that are coming in the second quarter here, is that going to create some sort of accelerated decline? It seems like one of the bright spots in the March quarter.

Mike Long

As far as accelerated decline, no, we don't think so. Actually the changes we're making in REALTOR.com, we think will actually increase audience, because it will increase recurring use of the site the way we're designing these new services is to encourage consumers to come back even more frequently to REALTOR.com, which will increase audience participation and therefore make the advertising products that are available on REALTOR.com even more productive.

So we think the new REALTOR.com does nothing but enhance the attractiveness to an advertiser of using it as a primary advertising vehicle.

Gene Munster - Piper Jaffrey

I know you guys didn't give guidance, but when we think about how we should model for the June quarter, we should think about that as obviously a very strong part of the business, that none of this is going to be impacting any of that.

Mike Long

We're confident about our REALTOR business, as we said earlier. And we think it's holding up well in the face of a very, very challenging residential real estate market where this slowdown, the depth and breadth of this slowdown has been greater than anyone had forecasted.

So we think our REALTOR business, because of the way it's positioned, particularly with its focus on top-producing successful agents, who are going to, we predicted would do well even in a slow market, because homes are still being bought and sold.

There may be fewer homes, but it means the TOP PRODUCER’s actually tend to gain share. So our topline growth may not be as robust as it was before the slowdown when every agent was a potential, even new agents were so optimistic about the market that they were prepared to entertain proposals to spend online, now that's not the case.

Lew Belote

And we're confident that the performance of REALTOR and TOP PRODUCER are going to carry the company while we deal with these transitions and the other business models.

Gene Munster - Piper Jaffrey

That's exactly what I was getting at. And I guess, just in terms of your secret weapon that's coming out here, you guys have talked a lot about it but really haven't given a lot of details. It's obviously impossible for you guys to give any sort of guidance around it, but the fact that you keep talking about it makes us believe it's going to be something that's material.

Should we think of it as something that's potentially material in '07, or is it '08?

Mike Long

Well, first of all, you wouldn't devote the resources of two guys like Allan Dalton and David Lereah to a venture if you didn't think it was ultimately going to material. And as we said, 2007, we're in launch mode getting this thing off the ground. So we're hopeful we're going to see substantial contribution in 2008.

Mike Long

And if David and Allan didn't have such a high profile in the industry, we wouldn't talk about it at all at this point. So we really have no choice but at least to inform everyone that they're part of our company and they're working on a new venture.

Gene Munster - Piper Jaffrey

Great, thank you.

Operator

We'll take our next question from Mark Argento, Craig-Hallum.

Mark Argento - Craig-Hallum

Good afternoon. In terms of the strategy, I know you guys have been moved over the last year so this kind of a whole ecosystem where you had existing homes New Homes and Rentals, and the whole $20 billion opportunity, have your -- the way you think about the market, has that changed at all? And if so, could you let us know how.

And then relating to the Rentals in New Homes business, this continues to be a drain on you guys quarter in quarter out despite additional capital being put into the business and the business model changes. At what point in time do you say enough is enough and do you think about moving on in terms of your additional investments spend in that category?

Lew Belote

We are committed to -- we have a network of destination online that consumers can expect to find all of the housing choices available in the marketplace, all the inventories, whether it's new homes, existing homes, or rental options.

And then as we have shared with you, we expect to, by attracting the largest audience in the overall real estate moving category that we will then be able to attract all kinds of advertisers, real estate professionals, REALTORS, apartment managers and home builders and also all of those national and local merchants who are trying to get their message through to the new movers moving into their community.

And that is our strategy. We think that we're absolutely convinced of the magnitude of the market being approximately $20 billion. We believe it is migrating offline to online, albeit this has been the market that has probably been the slowest to migrate online of any other vertical market.

We believe it is happening and will happen and will accelerate and we expect to be the primary beneficiary of that migration online, of that $20 billion. So, we are absolutely committed to the New Homes and Rentals category, which we think is complementary with the resell -- our leadership in the resale category and the Move-related services led by Eric Thorkilsen.

We think this is an exciting opportunity to leverage the tens of millions of consumers that come to our site obviously looking for housing options to also take advantage of the home enthusiast content that we will find there after the implementation of Eric's strategy.

Mike Long

And Mark, to your question about New Homes and Rentals, while we were building the vertical search capabilities last year, obviously the profitability of those two ventures went down, but much of that engineering talent is now working on other things.

And so the overall performance -- the bottom-line performance of Rentals and New Homes, it's not like it's killing us. Your question suggested that we're taking a bath on it. We're really not. It's just tweaking it and beginning to grow it again, so that it generates strong operating margins.

Mark Argento - Craig Hallum

So to better understand that, the spend in terms -- from a go-forward bases on those businesses is really going to be mitigated to reallocating those resources somewhere else, or we shouldn't see a lot of incremental spend in those categories or that category?

Mike Long

Yeah, nothing like we incurred last year when we were building the vertical search capability.

Mark Argento - Craig Hallum

Okay. That's helpful. Thanks.

Mike Long

Thanks, Mark.

Operator

At this time, I'm showing no questions. I'll turn the call back over to the presenters for closing remarks.

Mike Long

Yes, we do appreciate your joining us this afternoon for the call and we look forward to, if you're able to participate in our Investor Day in June in New York, of seeing you there in person and sharing with you what we think is going to be an increasingly exciting story for our investors.

So, we'll see you in New York or on the next quarterly conference call in August. Thank you.

Operator

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.

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