Zillow's CEO Discusses Q2 Results - Earnings Transcript

| About: Zillow Group, (Z)

Start Time: 05:00

End Time: 05:57

Zillow Inc. (NASDAQ:Z)

Q2 2012 Earnings Call

August 7, 2012 05:00 PM ET


RJ Jones – Investor Relations Officer

Spencer Rascoff – Chief Executive Officer

Chad Cohen – Chief Financial Officer


Ronald Josey – ThinkEquity

Michael Graham – Canaccord Genuity

Aaron Kessler – Raymond James

Mark Mahaney – Citigroup

Chad Bartley – Pacific Crest Securities

Brad Safalow – PAA Research

James Dobson – The Benchmark Company


Good day ladies and gentlemen and thank you for standing by and welcome to the Zillow’s Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference may be recorded.

And now it is my pleasure to turn the floor over to RJ Jones, Zillow’s Investor Relations Officer. Sir, the floor is yours.

RJ Jones

Good afternoon everyone. This is RJ Jones, Zillow’s Investor Relations Officer. Thank you for joining our conference call to discuss our financial results for the second quarter of 2012.

Presenting today are Spencer Rascoff, Zillow’s Chief Executive Officer and Chad Cohen, Zillow’s Chief Financial Officer. As a remainder today’s discussions will include predictions, estimates and other information that maybe considered forward-looking statements under the Private Securities Litigations Reform Act of 1995. These statements may include but are not limited to Zillow’s expected financial performance as well as Zillow’s strategic and operational plans, anticipated future products and services and estimated market demand along with additional examples and metrics that will contained in today’s earnings release.

These statements are subject to risks and uncertainties and actual results could differ materially. For a listing of these risk factors, please refer to our Form 10-K filed with the SEC.

On our call today, the non-GAAP financial measure, adjusted EBITDA will be referred to simply as EBITDA which excludes share-based compensation in the provided GAAP to non-GAAP reconciliations within today’s earnings release including EBITDA and net income, the most directly comparable GAAP financial measure.

And now I’d like to turn the call over to Spencer Rascoff, Zillow’s Chief Executive Officer.

Spencer Rascoff

Welcome and thank you all for joining us today. During the second quarter, Zillow once again posted excellent marks. We achieved record levels of revenue and usage across mobile and web and we advanced the evolution of our marketplace for real estate professionals.

Also we continued to be acquisition of RentJuice and are now leading forward in building our rental market place for consumers and professionals, a large green field opportunity for us. We continue to see strong momentum in our business and remained passionately focused on execution.

I will start the discussion today by briefly reviewing our results and business model, next I will highlight some recent initiatives to support our growth first with consumers on mobile and web, then our product development efforts for local professional.

I will also discuss our opportunity in the rental marketplace and how we continue to differentiate and extend and our leading position as the largest and most vibrant real estate marketplace.

Then I will turn the call over to Chad, who will go into more detail on our financial results and provide our outlook for the remainder of the year.

Turning now to our results from the second quarter, we once again set records in quarterly revenue and usage across mobile and web. Total revenue for the second quarter was $27.8 million, increasing 75% compared to the same period last year.

Our marketplace revenue category which includes our mobile subscription-based Premier Agent business as well as Zillow mortgage marketplace increased 102% versus last year to $19.6 million.

Marketplace revenue now comprises 71% of total revenues, up from 61% in the same period last year, a desirable mix shift towards more endemic and useful advertising for our consumers.

Our display revenue category which comes primarily from home related national brand advertisers was $8.1 million in the quarter, 43% higher than last year. Both revenue categories attained record high performances during the quarter.

In addition to revenues, usage at Zillow on mobile and desktops continues to increase significantly. During the month of July, $37 million unique users visited our Zillow Inc. mobile app and website, which is an all-time record and represented growth of 59% over July of 2011.

By exceeding our outlook for revenue, our EBITDA benefited from the operating leverage in our model. Flow-through of higher than expected revenue led to EBITDA of $5.3 million in the quarter, representing 19% EBITDA margin and six percentage point up side variance from our guidance. These results, once again, demonstrate the incremental margin potential in our model over the long-term.

For those newer to our story, the large total addressable market opportunity for Zillow stands from our unique living database of over 100 million homes, which allows us to build marketplaces around all stages of renting, home buying or selling and home ownership. In the process, we connect consumers with local professionals who can help them.

Currently we monetize two marketplaces, residential real estate and mortgages and we are now aggressively building out our third marketplace, in rentals. Of the tens of billions of dollars spent by professionals in advertising and services in these market places, we have less than 1% revenue market share. We were still in the early stages of our growth potential as a technology-driven media Company in the real estate category.

Zillow has built on the ethos of empowering consumers with products and tools to help them become smarter about real estate during all stages of buying, financing, renting or improving our home.

In all of these areas, consumers conduct an enormous amount of research to help fuel their decisions and they use Zillow for information not found anywhere else. In addition to our proprietary estimate home values as well as market listings and fundamental data on homes we recently reached significant milestones in user generated content.

One third of the homes in our database or more than 33 million U.S. homes have now been edited by home owners and their agent representative to create more accurate home profile.

Additionally, more than 100 million photos of home have been uploaded, enhancing the consumer search and home shopping experience. The strong empowerment we enable for consumers leads to usage of our platform which continues to break records every month and set Zillow apart in the online real estate category.

According to comScore Media Metrics, in June 2012 zillow.com was the most visited real estate website, 25% larger than the nearest competitor website and the Yahoo!-Zillow Real Estate Network which we sell across for our Premier Agents is the largest real estate advertising network on the web, but we’re 100% larger than the nearest competitor. Note that these traffic statistics are for desktop usage only and do not include mobile where Zillow operates the largest mobile platform in real estate.

Building on the success of this advertising network, we recently expanded our relationship with Yahoo! to become the exclusive provider of rental listings on Yahoo! homes. Zillow now powers all for sale and for rent listings across Yahoo! homes and our Yahoo!-Zillow real estate network sells advertising across those platforms. And while traffic across our platforms continues to grow substantially, mobile is leading the way as one of our fastest growing sources of traffic.

Earlier this year, Zillow tips towards mobile and today more homes are viewed on Zillow via mobile devices and then on desktops. Shopping for homes either for sale or rent is substantially enhanced on mobile because of location awareness.

Home shoppers can view homes on our apps in real time as they walk or drive through neighborhoods or they can research and shop for a mortgage where and when they like. We foresaw this trend in mobile and positioned ourselves to benefit directly from the explosive growth of smartphone and tablet usage.

Today our mobile app lineup consists of 13 total apps, 10 for consumers and three for professionals. This is up from five total apps when we went public one year ago.

Across our mobile platforms, 63 homes are viewed per second on a mobile device, up from 21 homes per second when we went public just over a year ago. As our mobile usage growth, our mobile revenue growth, because monetization of our platform works as well across the mobile as it does on the web.

Each home viewed on Zillow mobile presents consumers who are shopping for home, the opportunity to make connections with our local Premier Agents. As our mobile usage grows, our Premier Agents continues to get customer contacts through click-to-call, text or email and a value of their advertising increases. In fact, our data shows a mobile user at Zillow is three times more likely to contact an agent than a desktop user.

Mobile usage has also become a significant source of traffic and revenue for Zillow mortgage marketplace and as with our Premier Agent business, monetizing here is platform agnostic. Approximately one quarter of our mortgage revenue in the second quarter can be attributed to mobile.

Drilling down on mortgages for a moment, as a remainder consumers engage in Zillow mortgage marketplace by submitting a loan request anonymously and this is markedly different from traditional online mortgage shopping services, which either list generic unactionable leads or sell your personal information multiple times to vendors who went to look at you directly. Unlike their services, we let the consumer decide whom to contact and when to contact them.

In the first two quarters of 2012, consumers submitted nearly 5.5 million of loan request on Zillow mortgage marketplace, which of course is the number of loan request made during the full-year of 2011. And during the month of June we topped 1 million of loan request per month for the first time. The majority of consumer loan request are for purchase loans as suppose to refinance loans, which positions us well going into a likely higher mortgage rate environment and a healthier real estate market.

On the product side, we have two standalone mobile mortgage apps on iOS and Android. During the quarter we continued to integrate Zillow mortgage marketplace into our consumer mobile experience, adding it to top rank real estate shopping app for Android.

Before we move on to the professional side of our marketplace, I would like to share a few insights on how we innovate in our consumer businesses. As we extend our lead on mobile and web going forward, continuously innovating remains vital to strengthening our competitive advantage.

Our most recent product enhancements for consumers include research features on our Zillow rentals app for Android, continued investment in our custom search email program and the accelerated launch of our neighborhood compare feature. This feature actually originated as a hack from one of our most recent hack weeks during the quarter.

During a hack week, we unleash the talents of our team to focus their creative forces on opportunities to improve features or create new ones on mobile and web. Previous hack weeks saw many Zillow features such as Facebook integration and drawn searches on our mobile and tablet apps as well as many math interaction and layout enhancements. Important internal testing and development processes have naturally emerged from hack weeks as well, driving new efficiencies into our management of innovation.

As a technology and software company at our core, our hack weeks are an expression of the drive to innovate that’s imprinted in our DNA. We expect more to come from future hack weeks and other events that inspire us to create new and exciting products in the future.

Now let’s turn toe the professional side of our marketplace, starting with the Premier Agents business. The evolution of our Premier Agent business from strictly advertising to a suite of marketing and productivity services continues to advance. For Premier Agents, Zillow provides an expanding mobile and web platform that offers contact generation and relationship management as well as productivity tools and personal branding.

Through our software as a service and premium approach, we continue to increase our relevance with a broader set of agents by positioning Zillow as a central hub around which they can manage and market their businesses.

As part of our ongoing evolution, during the quarter we launched Premier Agent website, a landmark product with a disruptive pipeline. Developed by combining forces with our recent acquisition of diverse solutions, Premier Agent websites empower agents in promoting their businesses on mobile and on the web.

Many real estate agents consistently expressed us that to be competitive in today’s housing market, agents must have their own website, the one that features their personal brands and local property listing.

For an agent to build his or her own website however, the task is at best inconvenient, or at worse expensive and cumbersome, forcing many agents to outsource with designers, developers and hosting service providers for hundreds or thousands of dollars.

Zillow’s Premier Agent websites address their critical need at an unprecedented price point of $10 per month or three for Platinum and Gold’s Premier Agents. Premier Agent websites are personally tailored and independently branded on mobile and web, easy to construct and maintain and displaying at agent’s local MLS listings. So far this service has been very well received by the industry and 1000s of agents already have websites from Zillow.

To give you a sense of their response, one industry media headline read, Zillow brings real estate websites out of the dark ages. Another prominent industry blogger posted, Zillow has thrown a harpoon into this hired lumbering mass known as the agent website business. And just last week, Premier Agent websites won the 2012 Innovator Award for Most Innovative New Technology at Inman Realty Connect, the leading real estate industry conference.

Serving the needs of real estate agents in this way, we strengthen our competitive advantage by increasing our relevance with a broader set of agents and further streamlining the everyday activities of agents as they build and manage their businesses.

Fundamental to the professional side of our marketplaces is our relationship with real estate industry. While Zillow provides compelling value to real estate agents and brokers by connecting them with consumers on mobile and web. In turn those agents and brokers give consumer value in executing real estate transactions.

As we have all, strengthening and expanding these relationships with industry professionals will allow us to pursue common goals and marketplace opportunities together. To this effect, we recently launched zPro for brokers, and formed our Zillow Agent Advisory Board. Our zPro for broker’s initiative enhances property looking listing of accuracy, increases the visibility of listing agents, and provides brokers with reporting and contact management tools.

Our initial data beat test to the program was originally setup to include 10 brokers, but due to high interest in participating, we are pleased to start the program with 15 brokers in the beta launch. We also recently formed our agent advisory board, comprised of agents around the country participating from a variety of viewpoints, business entities and experience. Through this program advisory agents provide feedback on the features of new and existing products and services, as well as help us to better understand their local market needs. We are thrilled with the composition of the board and the positive reception of the program by agents across the country.

Next I will look at the progress we are making in our rentals market place. Nine weeks ago, we completed our acquisition of RentJuice and laid the groundwork for a significant development of our rentals marketplace. Combining Zillow’s category leading presence on mobile and web with RentJuice’s technology suite for rental professionals create the marketplace foundation on arrival by any model in our competitive landscape. On this foundation, we are building listing’s liquidity and visibility into the rentals marketplace, which will result in multiple paths to monetization.

Today we lightly monetize the marketplace through the suite of tools RentJuice offers for professionals. The RentJuice offering including their iPhone, iPad and Android apps for rental professionals substantially simplifies the marketing of rental units and the prospecting and on-boarding of potential tenants.

While not likely a 2012 or 2013 events, we foresee significant long-term revenue potential for rentals just like we have done previously in our developed marketplaces, we are creating supplying demands from the ground up.

On the professional side, we are improving the RentJuice tool set, widening it’s distribution and usage and lowering it’s price all with an eye toward getting as many rental listings as possible to be managed using the Zillow RentJuice tool set.

On the consumer side, we continue to improve our comprehensive nationwide information and data on rental units. In addition to rent investments on 100 million homes, we seek to provide consumers with the most accurate up-to-date listings of available units on our map based mobile and desktop platform.

This initiative to maintain real time inventory of all rental units will eventually result in Zillow powering, the most efficient destination marketplace for rentals and strengthen our competitive advantage in the real estate category.

With that in mind, I want to take a moment here to explain some of the rental market fundamentals. We are providing a Technology Solution that addresses the inefficient and inconvenient state of the current marketplace represents a huge opportunity for Zillow.

First, in total there are approximately 43 million rental units in the United States with over half located in structures of four units or less such as single family homes or duplex. Our platform currently includes about 1 million units that are inventoried and are managed via RentJuice.

Next, with the vacancy in rentals near 9%, around 4 million units are potentially available at any point in time. Currently, we carry nearly 400,000 available rental listings on our platform. Currently, there are 93 million people living in rented units across the United States. Each year, around 70% of U.S. movers are renters. Rental units annually turnover an estimate of six times faster than homes for sale.

We are already one of the largest rental site on mobile and desktop where our 400,000 listings draw approximately 6 million renters to Zillow each month. The focus now is on the increasing usage of our professional tools for the rental industry in order to grow listings count and in turn grow the number of renters using Zillow, then we monetize.

Taking into consideration, this vast and extremely fragmented structure of the rentals market and the billions of dollars spent each year by rental brokers, leasing agents and property managers on marketing and administrative services.

Our upset potential in the rental marketplace is substantial.

Before concluding my remarks today I want to briefly discuss our influential research on the housing market that contributes significantly to Zillow’s authentic voice in real estate. Over the past few months our economic research team led by our Chief Economist Dr. Stan Humphrey published a substantial amount of innovative research on the housing recovering.

As evidenced by the critical reception and extensive reference has made to these studies, our research team continues to break new ground and solidify our thought leadership in housing. A highlight for us occurred recently, after years in analyzing housing data and pricing trends, Dr. Humphrey called the bottom to the US housing recession. Our study on negative equity indicate a saw tooth or stair-step pattern of home prices over time along the bottom, as negative equity gets released and more home owners become able to sell their homes.

I also want to express how honored we were by the indication to moderate the Google Plus Hangout hosted by the White House and Secretary of Housing and Urban Development, Shaun Donovan on the challenges consumers face in refinancing. The White House contacted and asked us to partner with them produce this live webcast event and to raise awareness for mortgage programs such as HAMP, which help homeowners in financial duress.

The live webcast had over 70,000 streams the second most success White House event of this kind, second only for the President’s webcast discussion following his State of the Union. The even inspired that they constantly remind ourselves of our purpose in empowering consumers, as we believe strongly the facilitating market transparency leaves to the best conditions for all consumers involved in the markets we serve.

Going forward, we can expect to see further signs of our strategic evolution and differentiation in the quarters ahead, as we work to extend our lead as a most trusted and vibrant home-related marketplace on mobile and web. You can expect to see us lengthen our stride, in our pursued at the substantial market opportunity in residential real estate. We continue to increase our relevant to a broader set of agents with our expanding suite of marketing and productivity services, our high ROI advertising programs and now, our Premier Agent website.

By addressing critical needs of real estate agents as they manage and grow their businesses, we continue to centralize our offering as the hub for agent’s everyday activities. You can expect us to consistently grow our share of the billions of dollars spent annually by real estate agents on advertising and services.

As consumers shift to mobile where we are well-positioned and monetize extremely effectively, with our acquisition of RentJuice we are advancing the construction of the most efficient rentals marketplace definition on mobile and web. We will continue to enhance the productivity of rental professionals by offering a suite of marketing relationship management and tenant on-boarding services. And we will work diligently to expand our monetization potential by empowering consumers with the most comprehensive access to update the rental market data.

Our capability to address the tremendous and fragmented market in rentals is significant and you can expect us to go after the opportunity both methodically aggressively over time. You can also expect we will continue to innovate and create new products and then from time to time opportunistically execute strategic acquisitions following the same template we have filed with diverse solutions in prospect and now with RentJuice that advanced our capabilities and enhances our portfolio of product and services.

To summarize, I’m extremely pleased with Zillow’s excellent performance in the second quarter, I want to thank the entire Zillow team for their dedication and passion for innovation as we strived to give our tens of millions of users and edge in real estate.

Now, Chad will take us through the financials.

Chad Cohen

Thanks, Spencer. As Spencer mentioned, I’m going to run through our second quarter results in more detail, we’ll now discuss our outlooks for third quarter and cover a few items that will impact your major 2012.

Starting with traffic, average monthly unique users in the quarter grew 61% in the prior year to $33.5 million. Key traffic for the quarter was $34.6 million which set a new record.

Now looking at our top line results we had an excellent second quarter consuming record total revenues of $27.8 million represented an increase of $11.9 million or 75% year-over-year. Compared to our outlook, we exceeded the $26.5 million high-end of our range by 5%; the positive variance is primarily related to greater revenues in our marketplace category than we anticipated due to growth in our Premier Agent business.

During the quarter in June, we rounded into our first ever $10 million revenue month, now we have comparison revenue for June in 2011 was $5.7 million which was the month before in public, and looking further back in our financial history $10 million represented our entire top line in 2008.

Moving now to our largest revenue category marketplace. Revenues reached $19.6 million representing a 102% year-over-year growth and 71% of our total revenues. The increase in marketplace revenue was a function of the increase in the number of Premier Agent subscribers, existing agents extending their reach by purchasing more inventory, higher prices with second growth in our audience as well as the launch of new product tiers.

We added nearly 4,100 Premier Agents in the quarter, the most in any quarter thus far representing a net increase at over 9,300 Premier Agents from this time last year. Our agent count as of the end of the second quarter reached a record level of 22,696 Premier Agents. The majority of the increase was bigger is represented by Premier Agents purchasing our Platinum Product, as they look at attract shoppers, utilize our business tools, and build a professional brand across our platform.

Please note that while our agent count is an important metric to watch, this figure is not necessarily comparable over time as we have introduced new products into the marketplace, enhanced existing product sets and Premier Agents have changed their purchasing behavior resulting an increased up-sell to existing agents over the past year.

During the quarter we had a few key developments in the Premier Agent business that I’ll take a moment here to discuss. First, we changed our Premier Agent tiers to affect the continued evolution of the services we are delivering to agents. Our entry level price point is now Premier Silver, which includes our recently launched agent website service which integrates into our CRM system.

Our mid level price point is Premier Gold, which includes featured listings, and a personal photo in addition to Silver level benefits. Our flagship and most popular product continues to be our Premier Platinum subscription program sold on a six month contract, which includes an agent’s placement into the buyer agent list that consumer see when they view homes across our mobile and web platform.

As a reminder, pricing for the Premier Platinum level varies by geography which reflects local market dynamics. Next we began to monetize the third position in our buyer agent list, by converting the position from free to paid, we increased our platinum subscription inventory by 50% and intern provided an opportunity for more agents to participate in the program which contributed to the growth in the number of platinum subscribers during the quarter.

The addition of the third pay position was included in our operating considerations in the quarter, well because it occurred in the last month of the quarter the positive impact to revenue while meaningful will be weighted more in future periods.

Lastly, as a reminder, historically our Platinum Premier Agents have purchased advertising on a share of voice basis across our platform, meaning that as traffic grew agents benefited from increased eyeball from traffic volume without typically paying for that growth unless we raise prices at contract renewals. As we discussed on our first quarter call, earlier this year we began testing sales the platinum subscription contracts on a fixed number of impressions per month basis.

By selling them delivering to agents a fixed number of impressions each month we can as a publisher benefit from the growth and our consumer traffic more efficiently and remove our current theoretical limit of 12 agents advertising in a single zip code, as we’re no longer constrained by agents purchasing inventory in 25% increments.

Based on the response from our customers and from what we’ve learned in our initial tests, we anticipate moving forward from testing to fully converting our subscriber base to the fixed impression subscription model over the next six months. Also within our marketplace revenue category Zillow Mortgage Marketplace CPC revenues continue to grow nicely. Although we don’t break out these revenues separately, we can report that in the quarter approximately $2.9 million loan requests were submitted by our consumers across web and mobile, as compared to $1.2 million loan requests in the same quarter last year.

CPC pricing and convergent rates from loan request to contract has remained healthy and largely consistent in the prior periods, with loan request volumes, loan as a result of increased awareness across the platform. Looking now at our display revenue category revenues were $8.1 million increasing 33% year-over-year or representing 29% of our total revenues. Advertising placements with us by our industry endemic advertisers, primarily real estate brokers, home builders and many institutions continue to drive the growth in the category.

While display remains a smaller proportion of our revenues, the contribution margin from the category remains high, as this business has relatively small fixed cost and low variable cost.

Moving now to our expenses, total operating expenses were $26.5 million in the second quarter as compared to $14.3 million in the same quarter last year. Included in our expenses this quarter, as a partial period impacts in the integration of RentJuice, as previously mentioned and outlined in the 8-K Filed on June 13th, RentJuice does not contribute significantly to the top line, and for the three months ended March 31st, 2012 incurred GAAP losses of approximately $900,000 or $300,000 per month.

Now I will discuss each major expense line item starting with cost of revenues. For the second quarter our cost of revenues were $3.3 million or 12% of revenues compared to $2.7 million or 17% of revenue in the same period last year. With the higher revenues we experienced positive leverage on our fixed expenses relate to IT headcount and data center cost, while our variable expenses in credit card fees and revenue sharing cost increased as expected in relation to our marketplace revenue category growth.

Next, sales and marketing expenses were $12.2 million or 44% of revenues as compared to 36% of revenues or $5.6 million in the second quarter of 2011. We continue to expand testing and advertising beyond this mobile to other channels and new markets to support long-term growth initiatives. As what we laid out in our upcoming 10-Q Filing for the quarter, these tests resulted in approximately $3 million in incremental spent year-over-year and contributed to the majority of the dollar increase in this category but still represent a smaller proportion of our overall sales and marketing spend relative to headcount.

We continue to gain valuable insights through testing, which is been primarily focused on attracting home shoppers to our mobile and web platform.

Moving on to the next expense long item, technology and develop cost were $5.8 million or 21% of revenues versus $2.3 million or 21% of revenues compared to last year. The increased expense and absolute dollars during the quarter resulted from growth in our engineering headcount just for current and future product missioners as well as higher levels of amortization associated with capitalized software development activities, purchase intangibles and data licenses. These expenses were in line with our plant to increase our investment in our engineering platform experiencing outstanding products and services to market.

Lastly, G&A cost were $5.2 million on 19% of revenues as compared to the same period with prior year at $2.6 million or 17% of revenues. We acquired RentJuice on May 31st absorbing their headcount and infrastructure cost in June, and during the quarter incurred approximately $1 million in transaction and related cost as part of the acquisitions which is reflected in G&A. Excluding these costs as a percentage of revenue our G&A expenses were lower than last year, we continue to expect these cost to decrease as a percentage of revenue overtime.

Turning now to profitability, our EBITDA for the second quarter was $5.3 million representing 19% of revenues. This result exceeds the high-end of our guidance range for the quarter by $1.5 million and exceeded the margin on a percentage basis which we forecast we would produce in the quarter. The outperformance in the quarter can be attributed to a few factors first, revenue grew ahead of expectations in our marketplace category due to ongoing strength in our Premier Agent business, as well as the timing and partial period impact of opening up a third paid buyer agent position.

Second, our display revenue is high margin, so any below or beyond what was originally predicted in our guidance drives high incremental margins. Last, overall operating expenses were in line which led to revenue growth rate.

On a GAAP basis, net income for the quarter was $1.3 million representing $0.05 per basic EPS and $0.04 per diluted EPS on $28.9 million and $31.3 million weighted average basic and diluted shares outstanding receptively. Looking briefly at our cash flow from operations we generated $10.6 million in the second quarter versus $4.9 million in the same period last year, compared to prior year our operating cash flow increased to 118% demonstrating the correlation of our performance to cash generation in our model.

Quickly turning to our balance sheet, we ended the quarter with approximately $70 million in cash and cash equivalents as well as short-term investments. A $25 million revolving credit facility untapped, on August 1st, we became S-3 eligible, and today filed a shelf with the SEC as a matter of good housekeeping and to provide ourselves a flexibility in our capital structure in order to remain prepared for future considerations of both their operational needs and potential strategic opportunities in the marketplace.

Now I’ll provide a few comments in our outlook for the third quarter of 2012. First, revenue is expected be in the range of $30 to $31 million. This outlook represents 60% year-over-year growth at the midpoint of the range. Next, EBITDA is expected to be in the range of $4.75 million to $5.25 million. At the midpoint of our range this represents approximately a 16% margin. Our outlook reflects increased subscription book from our Premier Agent business as well as higher operating expenses relating to executing our growth investment plans for the reminder of the year which I’ll discuss momentarily.

Well we are not providing the GAAP EPS outlook as a matter of maintenance we expected diluted weighted average share count of approximately $32 to $33 million share to the third quarter and we expect the same range for the fourth quarter.

Now looking at the full year 2012, starting with a few line items that aid in modeling in our future business results, we are updating our outlook for depreciation and amortization for the year to be in the range of $13 to $14 million, and updating on our outlook for share based compensation which will now be in the range of $7 to $8. We still expect CapEx and capitalized data content to be in the range of $8 to $10 million of which IT CapEx portion of approximately $2 to $3 million.

Looking at the reminder of 2012 we will continue to execute planned investments in our foundation for growth that we set for bringing our full year 2012 EBITDA margins in line with the 2011 level of approximately 18%. These strategic investments include the following, first, our technology development outlines will continue to year-over-year on an absolute dollar basis in additions to our engineering staff in Seattle, San Francisco and Orange County to support our growth and product efforts.

Second, we expect that our expanded testing of targeted advertising across multiple channels will be significantly higher in the year-over-year with a largest absolute increase occurred in the third quarter. As we have mentioned previously what we do not anticipate substantial near term utterance in this increase spending we expect lastly long-term positive impacts realized through increased awareness of Zillow, relative traffic on a mobile web platform and ultimately increase sale.

Third, we continue to ramp up firing of inside sales people for the Premier Agent Business in Orange County. As a reminder, because of difficult ramp time for an inside sales representative, selling subscriptions national wide at three to four months we do not expect to see significant revenue contribution from these classes until the fourth quarter of 2013.

Last, with the operations of RentJuice being integrated and developed for the remainder of 2012 we will observe incremental operating cost consisting with RentJuice and historical trends and ongoing investments in our rentals marketplace. Collectively these investments enhance our foundation for long-term growth, strengthen our competitive advantage and enable us to extend our market leadership with consumers on mobile and on the web and residential real estate, mortgage, rental and other home-related market places.

As we conclude today’s prepared remarks, taking a look back in our brief history as a public company, it has been quite a year. We are making steady progress towards reaching our midterm target model of $252 million in revenue with a 30% to 35% EBITDA margin.

Comparing this most recent quarter to last year second quarter, which is right before IPO, our quarterly sales revenue grew from $15.9 million to $27.8 million. Our monthly unique users grew from $20.9 million to $34.6 million. Our headcount increased from approximately 260 to 440 employees, our Premier Agent count went from near 13,400 to 22,700.

We tip to mobile with more homes viewed on mobiles than on desktop and our mobile app line up increase from 5 to 13 applications and we acquired two companies and expanded our footprint by two more office locations. Our laser like focus on execution continued as we deliver great products to market and building marketplaces. We remain extremely excited as we continue to gain momentum in the pursuit of our Zillow market opportunities.

With that, we’d like to open up the call to questions.

Question-And-Answer Session


Thank you, sir. (Operator Instructions) Our first question in queue comes from Ron Josey with ThinkEquity. Please go ahead. Your line is open.

Ronald Josey – ThinkEquity

Great, thank guys and great quarter. So two questions, one on pricing the other on the S-3 that was just filed. And on pricing and product, Chad, I think you mentioned the majority of Premier Agents growth came from Platinum Agents, but based on our math, it feels like ARPU is actually down sequentially. So wondering if you can, if that’s more due to Mortgage Marketplace or potentially more Premier Agents coming online at the Silver and Gold level?

And just tell me S-3 that was just filed, any additional information there would be helpful. Thank you.

Chad Cohen

Yeah. Hi, Ron. This is Chad. Thanks for your question. So if you do the brute force math on the ARPU, looking at our total marketplace revenues, yeah I can see that ARPU is down, but it’s really a function of growing the number of Premier Agents that we had in the quarter. We’re moving beyond just advertising services for Premier Agents to offering a whole suite of business services including Premier Agent websites. So with the growth of those other two tiers, Gold and Silver, to have the impact of bringing the ARPU down if you just look at that math.

Loan requests and Zillow Mortgage Marketplace grew at a very nice and healthy pace in the quarter. So it was really not a function of that.

Ronald Josey – ThinkEquity


Spencer Rascoff

I can take this. Hey Ron, this is Spencer. I can take the shelf offering. So basically our perspective is, after a year after being public as a matter of good housekeeping, we filed the shelf which is pretty customary for companies at this stage. We haven’t made any decisions about a follow-on at the time. So just to be clear for those on the call who maybe don’t know that we’re using a shelf in the follow-on. What we filed today is not a follow-on offering. It’s a shelf statement with the SEC, which says it basically registers shares. So if we decide to do a follow-on later, then the shares can be sold more rapidly basically we can complete a follow-on more expeditiously.

We’re always speaking about the optimal capital structure for the company and the shelf gives us more flexibility. The size of the shelf, we registered 150 million shares and the way shelf offerings work is they expire after three years and you’re supposed to register kind of what you think is reasonable to sell over a two-year period potentially. And so that explains why we chose 150 million. Again it’s a pre-customary thing for company on the one-year anniversary post-IPO to do this so you can do a follow-on if you choose more expeditiously and we have not decided whether or not to do a follow-on.

Chad Cohen

Just one point of clarification, that’s $150 million and not 150 million shares.

Spencer Rascoff

Sorry $150 million. Correct thank you.

Ronald Josey – ThinkEquity

All right, thanks guys. Much appreciated.

Chad Cohen



Thank you, sir. Our next questionnaire in queue is Michael Graham with Canaccord. Please go ahead. Your line is now open.

Michael Graham – Canaccord Genuity

Hi, thanks a lot. If you just, actually one clarification I found that, Chad, you mentioned in your prepared remarks that the sort of optical reduction in ARPU was related to the notion that some of the pricing initiatives brought on a lot of non-linear subs towards the end of the quarter and so they weren’t in the revenue base for the whole quarter, but yet they’re in the sort of the average PA sub-number.

And I wanted to seized that to accurate and then can you comment on the subs that you did bring in towards the end of the quarter, where were they in pricing relative to the existing base. And then just like a follow-on question to that is, talk about the conversations you’re having with the introduction of CPM based pricing and how that’s been going and what the reaction has been from your customers. Thanks.

Chad Cohen

Thanks for question. So, yes, there are a couple of moving parts in the quarter. We did open up our inventory to a third buyer’s agent less position in the quarter, but that was really towards the end of the quarter and you’re correct in that. The growth in the subs is partially a function of opening up that third buyer’s agent list as well as starting to sell our Premier Agent websites during the last part of the quarter as well. So that had had the impact as you mentioned.

In terms of where we are in terms of moving to an impression-based model, we started detecting sales of an impression basis. We have previously bound on a share of voice basis and sort of testing that in the first quarter to new agents and started filling those packages, still on the six-month subscription basis to new agents as well as two existing agents looking to expand their profile across our platform. So everything is going as planned. Agents are happy with the switch that we’ve made and obviously this allows us to benefit from our traffic growth that we’ve brought to the platform. So the plan is to keep marching down that path and to complete that switch over the next six months.

Michael Graham – Canaccord Genuity

Okay, thank you.


Thank you, sir. Our next questionnaire in queue is Aaron Kessler with Raymond James. Please go ahead. Your line is open.

Aaron Kessler – Raymond James

Great, thank guys. Couple of questions. First on the agent website product, given the bigger opportunity there as to agents and they don’t currently have a website or maybe agents are looking to stay and it might go into little lower price solution. Also, I’m not sure if I missed it, but the RentJuice revenues and unique you have those if you’d or can you give those?

And third some, in COGS, the cost of revenues it looks like you got some good leverage there in the quarter. So you can give us a little more background behind that. Thanks.

Spencer Rascoff

Yeah, hold on, we’re just jotting down the questions here. Okay, so thanks Aaron. So agent websites, there are a couple of sort of used cases among agents. I would say the most common one so far has been agent who has a website that, they don’t really pay that of much attention to, maybe it is – maybe it was credited a couple of years ago, maybe it sort of hangs off their broker’s website. So sort of broker.com/spencerrascoff and so it sort of nominally that agents website, but they don’t like think of it think that way.

And they view of creation of a WordPress MLS-sourced website from Zillow as a way to have another website to get into Google search results with kind of a secondary – a second URL than perhaps they already have. And so, I would say, this is kind of anecdotal that more of the new agent, their news dealer websites are the creation of a second website rather than creation of a first website for that real estate agent.

The general reaction so far has been excellent. The only stat we’ve released so far is thousands of them are live so far. I can tell you it has changed the nature of the conversation between us and a lot of our Premier Agents already. They quickly go from viewing U.S. in advertising medium to more of a business partner who wants to hire in their website. So we’ve been pleased with this strategic move.

On RentJuice unique we don’t, I guess, well we do total them as part of, as kind of when we talk about Zillow, Inc. websites, but RentJuice.com is a very, very small website in terms of traffic, is not a consumer facing website, it’s basically a private portal that they’re paying client’s log-in to in order to manage their listings so it’s not a consumer facing website as very well traffic. And the revenue is immaterial as well and as we’ve talked – as we said in the script, their revenue is currently immaterial and we’re looking in the near term and taking it even more immaterial as we actually take down pricing on RentJuices’ tools in order to increase adoption.

And then, Chad on COGS…

Chad Cohen

Yeah, COGS, within the COGS line, we do have fixed costs with respect to employee COGS, salaries and benefits related to our IT headcounts and supports operating our platform. So those are fairly fixed and stable. We also have data center costs related to the colo that we operate up here in Washington. So we have some fixed there, we’re gaining some leverage from. And also over time, you’ll be able to see that we will get some scale with our variable costs, as we continue to grow revenues. So you’ll see that year-over-year, the costs are up, but we do have some leverage there but sequentially they’re essentially flat.

Aaron Kessler – Raymond James

Great. Thank you.


Thank you, sir. Our next questionnaire in queue is Mark Mahaney with Citigroup. Please go ahead.

Mark Mahaney – Citigroup

Hi, two questions please about the Premier Agents. One, could you talk about the sources of the new Premier Agents you do have that proved pretty big increase sequentially, their new geographies, new types of subscribers in addition to just people signing for the website product.

And then, is there a way to think about kind of same-store sales growth for Premier Agents and in terms of the ARPU. So there is a lot of mix factors in there, but if we – if you leave aside, if you look at Premier Agents who have been with you for more than a year or who have been had significant tenure with you. Can you talk about what kind of like, wallet share your, if there’s any increase in wallet share amongst those real estate agents? Thank you.

Chad Cohen

Hi Mark, this is Chad. I’ll just start-off with, in terms of the sources of new PAs, as I mentioned, we did open up two tiers in the quarter that we started selling those two tiers later on in the quarter, but the primary driver of the growth in the quarter has to do with still our Platinum product that we sell on a six-month subscription basis. So that’s how we drove the majority of the growth in the quarter and got us to approximately 22,700 agents.

In terms of same-store sales, I mean, some of the things that we’re seeing is, just increase up sell of 15 agents that are looking to expand their presence on our platform. We used to talk about sort of 30% to 40% up-sells, but now we’re seeing number of that’s closer to sort of 50% up-sells as agents start buying more inventory to represent their actually their real sales territory that they are actually working on the street. So I don’t know if that’s actually answers.

Spencer Rascoff

Yeah, I mean the only other way I would think about it is, the website business, we talk about this disruptive price points. It typically a real estate agent, if they have their own website that they were investing in would probably be spending $100 to $200 a month and maybe kind of afford $400 to maybe $1,000 fixed fee to develop it. And that’s bundled now in the Premier product.

So in terms of wallet share, we’re definitely taking more share in that part of the business where the website vendors that are typically priced a lot higher, and are not able to bundle it with the Premier program are losing share to our website business.

Mark Mahaney – Citigroup

Thank you, Spencer. Thank you, Chad.


Thank you, sir. Our next questionnaire in queue is Chad Bartley with Pacific Crest. Please go ahead. Your line is open.

Chad Bartley – Pacific Crest Securities

Hi, thanks. Just a quick follow-up question to the last question around subscribers and the different sources. So I understand this quarter the majority of new ads came from that that top tier Platinum plan. Was that the case in Q1? I thought that you indicated in Q1 is actually the lower price tiers that drove the majority of sub-ads.

Chad Cohen

I’m getting that number right now, hold on one second.

Chad Bartley – Pacific Crest Securities


Chad Cohen

Yes, in Q1 the majority of those ads came from our Platinum Pas.

Chad Bartley – Pacific Crest Securities

Okay. All right, thanks for clarifying that. I appreciate it.


Thank you. Our next questionnaire in queue is from Brad Safalow with PAA Research. Please go ahead. Your line is open.

Brad Safalow – PAA Research

Thanks for taking my questions. Just help to give me a question for going forward. As you add agents on the RentJuice platform, are they going to be captured in your overall Premier Agent count or are they totally separated not disclosed?

Chad Cohen

They’re not going to be disclosed at least at this time, there will be a separate number if we decided to close them.

Brad Safalow – PAA Research

Okay, great. And then just going back to the nature of the agent subscriber at the Silver level analysis of the website product, is it a different type of agent either from the markets in which they’re operating, their transaction velocity, anything you can describe it in terms of their profile from a pure business perspective.

Spencer Rascoff

Sure, this is Spencer. As we said a couple of times, part of this is definitely the focus and in terms of the preponderance of the subscription, where subscription growth is coming from Platinum which includes a website in it for no additional charge.

As the Silver here is $10 a month just for website. And that person is basically saying, hey I want a website, but I’m not interested in lead generations from Zillow. I’m not interested in attracting buyers by participating on the buyer’s agents that’s for example, and I don’t have a lot of listings or else I would be interested in the Gold and Platinum tiers which are featured listings benefits. So it’s very much a entry level price point kind of way to just develop – start developing a relationship with the advertiser, with the real estate agent. If not, you can tell by the low price point, if not a significant, it’s not a significant focus of ours from a revenue generation standpoint, it’s much more of a way they would initiate a relationship with the agent and then likely up-sell them into Platinum or Gold down the road.

Brad Safalow – PAA Research

Okay. And then, is it fair to say that your ARPU trends would have been the same as what we’ve seen let’s say in the first quarter of this year, fourth quarter last year excluding the impact of the timing of kind of third slot as well as the website’s business?

Chad Cohen

Yeah, this is Chad. I think that’s fair to say, I mean the best proxy for that is probably just looking at traffic growth, but yeah I think that’s fair to say.

Brad Safalow – PAA Research

Okay. And then the last question, just in terms of zip code coverage or monetization. What can you say about your progress there? I know you obviously do very well in some of the codes that you’ve been in for very long time, but in terms of expanding your geographic reach and your monetization in some of the areas where you haven’t been in strong historically.

Chad Cohen

Well, as a reminder, we must – we sell our Platinum subscription product on a market-by-market basis meaning that we look at the various sort of economic for each of the geographies to determine price point in those and we look to liquidity levels, contract volume, and a number of different variable determined price. We haven’t disclosed before what our percentage of sell-through is on a geographic basis.

Spencer Rascoff

Yeah, I mean, I guess the only, this is Spencer, the only way I would probably look at it is we, the product reverse just as well for an agent in Syracuse, as in San Francisco. They’re going to be paying a lower CPM or lower monthly subscription rate in Syracuse than San Francisco, because home values are lower. We probably have left few contacts as well and there probably are fewer agents that are anxious to buy that inventory. So we have less demand therefore we priced it lower. But the product works very well there.

One of the nice things about the switch to an impression based pricing model is, as traffic grows in Syracuse or San Francisco, there is more inventory available to sell to another agent that combined with the fact that now we have three stops on the buyer’s agent that’s available for sale. I mean there is inventory to be sold in San Francisco or Syracuse in that example.

Brad Safalow – PAA Research

Okay. Thanks.


Thank you. And our next question comes from James Dobson with Benchmark. Please go ahead. Your line is open.

James Dobson – The Benchmark Company

Great, thank you. Can you just confirm that regarding the impression based models for Premier Agents that you have not yet begun switching existing agents it’s only been with new agents coming on? And then regarding sort of Premier Agent websites, does that include a mobile website and so any thoughts about including sort of a Premier Agent mobile app going forward.

And then the third question is, what’s your thought or I guess the strategy regarding sort of incremental investment in RentJuice? Thank you.

Chad Cohen

Just getting down your questions. So, this is Chad, hi James. So in terms of existing agents, to the extent that existing agents are buying more inventory and they purchase more inventory since the first quarter when we started testing this impression-based sales model, yes, they would be on an impression basis right now. So their impressions would be tapped each month.

To the extent that their existing agents, they haven’t purchased inventory and are out of contract there’s still paying us on a share of voice basis. So it really depends whether you purchase more inventory or not.

In terms of the agent, so just clarifying on the first point, every contract that has been sold either to an old agent or to a new agent since the first quarter has been on this impression-based model. And so, as Chad said, because a lot of new inventory – a lot of our new sales are to existing Premier Agents. Those old Premier Agents in many cases and most cases have already bought on this impression model. And those that have it, has now have several months of data where we’ve been reporting to them on what their impressions have been.

So even if they bought say two years ago where they bought, I want to show up 50% of the time and even if this goes well. For the last six odd months, we’ve been showing them how many times they’ve been displaced. So we’ve been training them to start thinking about impression and therefore when we switch – when we roll them over later this year it’ll be a quite smooth transition at that point.

Agent website, yes it does, the website product, either the $10 Silver website or the website that comes with Platinum or Gold in either case, it does include a mobile optimized website. So you can have on your own URL and on spencerrascoffrealestateagent.com will look great on a smartphone, an iPad or other smart – other mobile, tablet as well as on a website. It’s not an app, it’s a mobile website, but its mobile optimized and looks fantastic on mobile.

In terms of incremental investments in RentJuice, we’re very focused on growing the rentals business. We are prepared to make this investment through 2012 and 2013 and we don’t expect near-term significant monetization from rentals, but we think that the market opportunity here is very significant. About $4.5 billion is spent every year, marketing rentals and buying software tools to manage the market rentals. And we think there’s an opportunity given our huge consumer traffic, there is an opportunity to come in with a suite of very inexpensive or perhaps free tools to the rental industry in a way to create the marketplace for rentals.

Just, in the script, we talked a lot about some of the market dynamics in rentals, but one thing we didn’t hit on is the absence of an MLS in the case of rentals. So what I mean by that is in the case of four sale homes, there are central data basis on a local basis that have basically all the homes for sale in each local MLS. Nothing similar exists in the case of rentals. You can’t readily find all the rentals in the given market anywhere in particular, the closest thing to something like that would be price list.

We think there is an opportunity to become the definitive database of rental inventory through this strategy of offering tools to the rental industry and then of course matching them with many millions of rental home shoppers on the consumer side of the marketplace. So we’re very prepared to invest in it and we think to pay-off down the road will be significant.

James Dobson – The Benchmark Company

Great, thank you.


Thank you. (Operator Instructions) Presenters, at this time, I’m showing no additional questionnaires on the phone line. And I’d like to turn the program back to Mr. Rascoff for any additional or closing remarks.

Spencer Rascoff

Thank you. Thanks to all for joining today’s second quarter earnings call. We appreciate your interest in Zillow and look forward to talking to you again soon. Thank you.


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

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