Deep Dive Into Zillow's Top Line

| About: Zillow Group, (Z)

By Brian Bolan

In the past, I wrote equity research on Zillow (NASDAQ:Z) and seeing as the hurricane is slowing the markets, I got a chance to re-visit my model. I updated my estimates for 3Q12 and saw that my charts are really telling the story of what is going on at Zillow.

For the most part, I believe that Zillow is a revenue story more than anything else. The key to understanding Zillow is knowing how it generates revenue, so let's take a deep look at how each segment has trended over the last few quarters.

From the top down, let’s look at the two major components of revenue. The bigger of the two buckets that collect revenue for Zillow is the Marketplace segment. It is comprised of mostly of premier agent subscriptions, but also contains revenue from the acquired Diverse Solutions (agent websites), Rent Juice (rentals) and the revenue that is generated from mortgages.

Here is the graph for how marketplace revenues have trended over the last several quarters:

(click images to enlarge)

A further breakdown of the largest component of marketplace revenues is the number of premier agent subscribers. Zillow publishes this number every quarter.

Having this number allows investors to break out an average revenue per user, but this includes the other items that were mentioned above, so it’s not a 100% accurate number. It’s more about the trend, and this quarter we will see Zillow give a cleaner number for this metric. The SEC asked for this further breakdown, and Zillow agreed to provide it. So this graph should just be looked at for the trend and not the actual numbers, as it will change:

The second bucket of revenue comes from advertising on Zillow. This type of advertising is called display advertising, and is common among most Internet sites. Here is a graph of the trend of display advertising revenues:

We get more detail from that line item as well, as the company reports the number of unique users that visit the site on a monthly and quarter basis. Here is the graph that speaks to that trend:

A deeper dive into that segment would be to take the display revenue and then divide that by unique users to get a revenue per unique user number. Again, it’s best to look at this as just a trending number to look at:

When we look at total revenue, we see the a breakdown in the chart below. It shows how premier agent subscriptions have grown -- not only in absolute numbers -- but how it has affected revenue mix. Over time, it would not be surprising to see the subscription numbers increase meaningfully, while display revenues should only grow modestly.

Now that you have a better handle on how Zillow generates and reports its revenue, it's time to chime in with a guess as to where you expect the revenue to come in at. Here are my estimates for the key metrics. Ccomment on where you think the numbers will come in when Zillow reports on November 5, 2012.

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