Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Raymond Jones – IR

Spencer Rascoff – CEO

Chad Cohen – CFO

Analysts

Heath Terry – Goldman Sachs

Aaron Kessler – Raymond James

Neil Doshi – Citi

Michael Graham – Canaccord

Mark May – Barclays

Chad Bartley – Pacific Crest

Brad Safalow – PAA Research

Don Destino – Harvest Cap

David Cohen – Bloom Tree Partners

Clint Coghill – Coghill Capital

Zillow, Inc. (Z) Q3 2012 Earnings Call November 6, 2012 5:00 AM ET

Operator

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

I would now like to turn the conference over to Mr. Raymond Jones, Zillow’s Investor Relations Officer. Sir, you may begin.

Raymond Jones

Thank you and 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 third quarter of 2012. Presenting today are Spencer Rascoff, Zillow’s Chief Executive Officer; and Chad Cohen, Zillow’s Chief Financial Officer.

As a reminder, today’s discussions will include predictions, estimates and other information that may be considered forward-looking statements under the Private Securities Litigation 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 were 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. We have provided GAAP to non-GAAP reconciliations within today’s earnings release, including EBITDA to 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

Thanks very much for joining us today to discuss our third quarter results. Zillow had another great quarter growing our usage significantly and further solidifying our position as the largest real estate network on mobile and the web. In addition to tipping earlier this year, where we have more homes viewed on a mobile device than on the desktop, we also reached a major mobile milestone in the quarter, with more than 1 billion home views on Zillow Mobile so far this year. Because home listings viewed on Zillow include local Premier Agent contact modules, this milestone is significant for revenue as well as consumer usage.

Additionally, during the quarter, we introduced a number of substantial product additions across all platforms that set Zillow apart from the competition. And since our last earnings call, we made enormous progress on the development of our professional marketplaces in real estate, mortgages and rental. To that effect, we announced two acquisitions, Mortech earlier today and Buyfolio last week, that allow us to provide more meaningful pools to local real estate and mortgage professionals.

In addition, we launched an expanded platform for rental professionals during the quarter. I’ll walk through these acquisitions and progress made in each marketplace in a few minutes. Then I’ll turn the call over to Chad to go through our financial and operating results, along with our recent capital raise and our outlook for the fourth quarter and year. We’ve have lot of ground to cover today, starting with our growth.

Zillow usage continued on a growth tear reaching 36 million average monthly unique users on the owned sites and apps during the quarter, nearly 12 million above the same period last year. Three-quarters of these users identify themselves as being in-market now or in the near future. Zillow is for serious home shoppers. Additionally, Zillow has a strong recognizable brand with our users, as approximately 90% of our traffic continues to be organic and free and more than half of our visits are brand direct.

Industry-leading brand awareness and strong direct traffic continue to be a competitive advantage for us, fueling our growth and widening our lead in the category on both mobile and web. According to comScore the Yahoo!/Zillow Real Estate Network across, which we sell advertising to our Premier Agents, is the largest real estate network on the web, twice the size of the nearest competing network or website. And since real estate is a local endeavor, it’s worth pointing out that the Yahoo!-Zillow Real Estate Network is the number-one real estate brand in all of the top-20 local markets in the United States.

We are a dominant national real estate brand, but also a dominant local real estate brand. And while our user based on mobile and web is large, these users are also very engaged both with our content and with each other. We haven’t spent much time in the past addressing user engagement, so I’d like to pause on this for a second.

To-date, more than 35 million homes have been claimed and edited by homeowners and their agents, that’s more than one-quarter of all homes that exists in the United States that have been updated by a user on Zillow, making our core content asset, the living database of all homes ever more unique and differentiated. Additionally, users are contributing daily and veraciously to Zillow Advice, our question-and-answer forum, and have submitted more than 200,000 reviews of local real estate and mortgage professionals.

In total, consumers and real estate professionals have manually contributed more than 22 million pieces of content to our platform and that is growing by more than 0.5 million contributions per month. This represents, by far, the highest level of user-generated content in our category.

Now, I’d like to cover a few significant consumer product developments during the quarter. First, two weeks ago, we introduced pre-market inventory to our home shopping search for the first time. Now, shoppers can find information on 1.2 million pre-foreclosures, which are homes where the owner has received a Notice of Default and foreclosed homes, in which the bank has ceased the homes, but it’s not yet on the market. Amassing this inventory nationwide, scrubbing and enhancing the data and offering it in a consumer intuitive mobile and web search took nearly a year of coordinated analytics, engineering and software development.

The result is the industry’s first free search of pre-market foreclosures, designed for the average buyer. We coupled this inventory with extensive analytics and content, helping buyers understand the foreclosure discount and we connect buyers to local foreclosure experts. The significance of this addition to our housing inventory is hard to overstate.

This is the first time on any website or mobile app that consumers have had access for free. So, more than 1 million homes that are soon to come on to the market, these homes are not listed on an MLS and they’re not listed on brokerage websites or other national real estate site. Historically, only savvy investors have known how to find these homes and via pouring through public records at the County Courthouse or paying subscription fees to foreclosure websites. We are disrupting this model by showing these listings to buyers for free.

Our recent research has shown that despite a housing bottom nationwide inventory has dropped by 20% over the past year, leading to tight inventory and bidding wars in many popular areas. Buyers want to buy, but there simply aren’t enough homes for sale. By adding these 1.2 million additional homes as well as posting non-traditional listings like for sale by owner and new construction homes, Zillow was, again, innovating on behalf of the consumer

In addition to significantly expanding our exclusive listings through this foreclosure initiative, we also had several notable product launches on mobile recently. We now offer 17 individual mobile apps across all platforms for consumers and professionals. This is up from seven apps at this time last year and includes top-ranked apps for real estate, rentals, mortgages and for rental – for real estate professionals.

During the quarter, we launched our first rental app for iOS, following rentals on Android earlier this year. This app goes beyond listings of homes and apartments for rent and includes advanced analytics to help renters understand fair market rent with the inclusion of our proprietary Rent Zestimates. The app was designed with the specific needs of renters in mind and includes an interface more suited for the types of amenities important to renters, such as filters for pets and other specific lease terms.

We also recently launched a dedicated Zillow Mortgage Marketplace iPad app. Like our other iPad apps, we completely redesigned the product to take advantage of the iPad’s large visual screen. The result is a graphic and interactive experience, where borrowers can understand what they can afford, research multiple customized loan products and, ultimately, find the right lender to help.

In addition to the iPad, Zillow Mortgage Marketplace also has iPhone and Android apps, as well as functionality within our real estate apps. Like our real estate apps, our revenue model for Zillow Mortgage Marketplace works beautifully across all platforms and we did not need to create a separate mobile revenue product. Today, over 20% of our Zillow Mortgage Marketplace revenue comes from mobile.

We’ve always believed that the best investment we can make in marketing is to launch great products that empower consumers and improve their home shopping experience, and that is why the vast majority of our traffic, more than 90%, comes to us free and organic. That said, we see tremendous opportunity in front of us to accelerate our growth and widen our leadership. Today, 36 million people visits Zillow each month, yet there are many more people who have not yet been introduced to the Zillow brand.

Thus, we spent much of this year testing advertising, including mobile, online and offline channels, to understand the various levers we can use to acquire new customers, both consumer and professional. We don’t imagine near future where a significant portion of our traffic is paid. However, we do believe certain channels can profitably drive customer acquisition. As a result of our tests this year, which include our first foray into TV advertising, we are in the midst of planning our advertising spend for 2013 and expect some continued level of spend across mobile, online and offline channels.

Moving forward, the opportunities for us to increase brand awareness and usage of the Zillow platform continue to expand, which can lead directly to increased revenue potential. We have seen several Internet brands in the U.S. and many online real estate brands internationally grow their awareness and usage profitably through offline and online advertising. We’re bringing the same kind of analytical rigor to our advertising testing that we apply to all areas of our business. And we view our significant lead in developing our core competency in measurable advertising across various channels to be yet another way that Zillow stands out from the competition.

Now, I’m going to shift our discussion to the professional side of our marketplaces. In Q3, our revenue grew to nearly $32 million, up 67% year-over-year. The primary driver continues to be growth in our Marketplace category, which includes Premier Agent and Zillow Mortgage Marketplace. This revenue category reached almost $24 million during the quarter and grew 99% year-over-year.

I’ll talk first about our Premier Agent business. A week ago, we took another major step forward in the evolution of our platform for Premier Agent with our acquisition of Buyfolio, a dynamic home shopping collaboration tool for consumers and real estate agents. Buyfolio’s mobile apps and websites allow a buyer to collaboratively and socially shop for a home with a spouse, friend or group of friends and with their real estate agent.

A buyer can triage new listings, compare notes on favorite homes, schedule appointments to see houses and operate in a shared collaborative workspace during the home search. Buyfolio is a rare B2C2B service that enhances both the consumer experience and the agent value proposition. This tool increases conversion for agents and in turn will improve an agent’s return on investment with Zillow.

Zillow’s Premier Agent value proposition has evolved over the last 18 months from merely lead generation to also software tools and business services. We now provide software to Premier Agent’s for free listing syndication, a free CRM, a free standalone real-estate agent website and soon a free collaborative shopping tool. All of this software improves the value proposition to our Premier Agents and improve their conversion funnel, which has direct flow-through to advertiser ROI. In addition to bundling software with lead generation, we also believe that Premier Agents appreciate not being forced to choose between advertising on mobile versus desktop or having to pay for each individually.

Turning to the ways in which we attract new Premier Agent revenue. We feel strongly that our sales team, including its strong culture, strong management, best-in-class processes and the technology we’ve applied to it, set Zillow apart from the competition and lower our selling costs, such that our sales people are profitable even while they are still ramping toward their full quota. We now have about 150 talented sales professionals in our Seattle and Irvine offices. They spend much of their time working with our 27,000 current Premier Agents rather than cold calling new potential advertisers. Case in point, approximately one-third of our new bookings come from existing Platinum Premier Agents, increasing their spend with us.

The next third comes from in-bounds and referrals, and the final third comes from outbound calls made by our sales team. The importance of having a highly-productive sales team is directly linked to how we are evolving our inventory model. As a reminder, we began selling our Platinum Premier Agent contracts on a fixed-impression basis starting in Q1. Previously, contracts were sold on a percentage of use basis, in a ZIP code, with the lowest increment being 25% of the views. In these all percentage-based contracts, as traffic increased, so did an agent’s exposure, but with no associated increase in cost.

Changing the selling contracts on a fixed-impression basis, as an example, 1,000 view per month, aligns our inventory model with both the deployment of our sales force and our future traffic growth. It’s a virtuous cycle, and over time, as we increase usage, we create more impressions that can be sold by our sales force. We’re now in the process of completely converting our existing Platinum Premier subscriptions from percentage share of voice to fixed-impression-based contracts.

I’d like to take a moment to describe how this is happening. Since January, we’ve been reporting to Platinum Premier Agents their delivered impressions compared to their contracted levels to give them visibility into their performance. Many of our Platinum Premier Agents have experienced significant over-delivery versus their original contracted levels in the share of voice basis, some as high as eight-times or more for many months.

We’re working with each of our subscribing agents experiencing over-delivery in their percentage contracts to give them the opportunity to lock in their current level of bonus impressions, if they would like to keep them and pay for the additional amount. Our approach to these discussions are deliberate and staggered market-by-market. The dialog is individualized and multi-step, not a flip of the switch.

From home view impressions on mobile and web, consumers contact Platinum Premier Agents through our Buyer’s Agent List. While we have discussed the likely 3% average conversion rate for our Platinum Premier Agents on these contacts, we see our top-performing Premier Agents with conversion rates in the 10% to 40% range, because they’re systematic in responding to these leads, including the use of the CRM technology. Therefore, we continue to add functionality into our CRM to help an agent convert more contacts to commissions. We have seen that with increase adoption of our CRM tool by our Premier Agents comes higher retention and increased investment on our platform, as an agent becomes more efficient in responding to a higher volume of contact.

Adding new functionality to our CRM, such as e-mail campaigns and importing capability across advertising platforms, would increase conversion. We regularly meet with both our Agent Advisory Board and our Brokerage Advisory Board to gain their input on product development initiatives and overall strategy. Recent discussions have been particularly helpful in building out our roadmap for the CRM, for our free agent websites and for our M&A strategy.

Turning now to our Mortgage Marketplace business, let me start by saying that Zillow Mortgage Marketplace has been our gem for a few years. We haven’t touted its success apps in terms of consumer usage, partner satisfaction, revenue growth or profitability, and this has allowed us to develop a four-year head start on the competition.

Over the last 18 months, several of you have asked why we don’t disclose ARPU in our Premier Agent business. By disclosing Premier Agent ARPU, something we will do beginning today, we allow investors and competitors to break out our mortgages revenue from our Marketplace category. So, now it’s more clear to all Zillow Mortgage Marketplace is working.

Zillow Mortgage Marketplace is growing very rapidly and consumer loan requests in 2012 are on track to more than double the 5.5 million loan requests from 2011. More consumer usage bodes well for the professional side of our Marketplace, which got a big boost today from our announcement that we’ve acquired Mortech, a leading developer of essential SaaS tools for the mortgage industry.

Total consideration for this acquisition was $18 million in cash and stock and we expect to close in the fourth quarter. Mortgage lenders use Mortech’s product and pricing engine and lead management software to efficiently manage their borrower pipeline. Mortech’s suite of services empower mortgage professionals by helping them quickly match the right products to the needs of a borrower at the best prices, keep consumers engaged through their shopping processes and, ultimately, convert more borrower contacts to funded loans.

Specifically, we’re buying Mortech for three reasons. One, they are the most important of the technology connections to our lender customers, and owning the pipe that connects us to them gives us significant product advantages going forward. Two, Mortech’s long relationships with lenders nationwide will accelerate our efforts to increase lender coverage in Zillow Mortgage Marketplace. Three, Mortech’s CRM helps lenders convert Zillow clicks into contacts and then into funded loans, which improves their ROI on their Zillow ad spent. This is strategically identical to why we built a home-grown real estate CRM and now our Premier Agents have stronger ROI as a result.

Now, looking at our Rentals business, during the quarter, we made substantial progress towards the development of our Rentals marketplace with the incorporation of the RentJuice product suite into Zillow Rentals. Fueled by our acquisition of RentJuice earlier this year, Zillow now offers a highly robust set of marketing and productivity tools to rental professionals for free, while lightly monetizing enhanced levels of functionality for larger-scale property managers.

The response from professionals so far has been very positive. On the day that we announced the product integration we have thousands of landlords and property managers contact us to start using our services. By offering professionals substantial capabilities in our rental tools for free, we seek to grow the number and accuracy of rental listings. Our listings count reached a 440,000 during the quarter, compared to 281,000 a year ago. We remain intently focused on first achieving marketplace liquidity and scale, and then we will focus on monetization.

Before concluding my remarks today, I want to briefly discuss our ongoing research and our recent housing forum. During the quarter, our research and economics team led by our Chief Economist Dr. Stan Humphries, once again, added breadth and depth to our distinguished thought leadership in real estate data and analytics. The team’s most recently-published analysis focuses on the inventory shortage of houses across many major markets in the United States. After hitting the bottom in the housing recession, many markets are now experiencing home value appreciation sparked by high demand, but a low supply of homes. Our team’s research on these conditions has been widely acclaimed and sourced and set another example for excellence in the real estate data analysis.

In mid-October, we hosted our housing forum this time with the USC Lusk Center, which focused on navigating the bottom of the housing market, as well as assessing the impact of the housing inventory shortage. The successful of that included a keynote presentation by FHA Commissioner, Carol Galante, who began her speech by pulling out her iPhone and remarking that the Zillow app is her favorite app on her phone. This was our second event of its kind, which was very well received by both the industry and the economics community. In the future, we can continue – you can continue to expect research excellence and timely reports and events from our analytics team.

Now, with the addition of pre-market foreclosure inventory to our platform, you can expect even more in-depth analysis on new and pertinent real estate information that empowers consumers. We’ve accomplished a ton this quarter in terms of product development, traffic growth, expanding our mobile leadership, expanding our professional tools, improving our capital structure and adding Buyfolio on Mortech to Zillow. I continue to be as excited as ever about our potential.

I will now turn the call over to Chad to discuss our financials.

Chad Cohen

Thanks, Spencer. As Spencer mentioned, I’m going to run through our third quarter results in more detail, then I’ll discuss our outlook for the fourth quarter and full-year 2012. Starting with traffic, we added 12 million average monthly unique users, year-over-year, reaching 36 million average monthly unique users in the third quarter. For perspective, it took us approximately five years from our launch to reach our first 12 million unique users in a month.

Switching to our top-line results, we had a great third quarter. Posting record total revenues of $31.9 million represented an increase of $12.8 million or 67% year-over-year. Compared to our outlook, we exceeded the $31 million high end of our range by 3%. The positive variance was due to greater revenue in our Marketplace category than we projected, primarily from growth in our Premier Agent business.

Taking a closer look at our largest revenue category, Marketplace revenues reached $23.6 million for the quarter, representing 99% year-over-year growth. At 74% of our total revenue, the desirable mix shift to Marketplace has reached its highest proportion to-date.

The increase in Marketplace revenue resulted from superb execution in our Premier Agent business and was driven by the Increase in a number of Premier Agent subscribers as well as existing agents expanding their presence by purchasing more impressions from our inventory, combined with higher prices compared to last year.

Because we made some significant changes in our Premier Agent product line up at the end of the second quarter, I’m now going to take a moment here to remind our listeners of the current structure of our Premier Agent business. In our Premier Agent business, our entry-level price point is Premier Silver, which includes our 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 – Silver level benefits.

Our flagship and most-popular product continues to be our Premier Platinum subscription program that includes an agent’s placement into the buyer’s agent list that consumers see when they view homes across our mobile and web platforms. Platinum Premier Agents subscriptions are sold on a six-month fixed-impression contract that converts to month-to-month at the end of the initial period. The Silver and Gold products are sold through our self-service channel on our website, while Platinum is sold through our inside sales channel with commissions on those sales paid upfront based on the six-month value of the initial contract.

Near the end of the second quarter, we increased our Platinum subscription inventory by 50% when we turned a previously free placement in the buyer’s agent list to paid, which increased the number of paid placements in the list from two to three. This change was made across all home detail pages on mobile and web. This provided an opportunity for more paying agents to participate in the program and contributed to the growth in the number of Platinum subscribers during the current quarter.

We added over 4,000 Premier Agents in the quarter, representing a net increase of 11,000 – over 11,800 Premier Agents from this time last year, which is our largest year-over-year absolute increase in subscribing agents ever. Our agent count as of the end of the third quarter reached a record 26,703 Premier Agents. The majority of the increase is represented by Premier Agents purchasing our flagship Platinum subscription, as they look to attract buyers, leverage our productivity tools and manage their professional brands across our mobile and web platform.

Note that while our agent count is an important metric to watch, the figure is not necessarily comparable over time, as we have introduced new products into the marketplace and enhanced existing product sets.

A new metric that we are sharing beginning this quarter is average monthly revenue per subscriber for our Premier Agent business, which reached $270 this quarter compared to $242 last year. This metric is often referred to as average revenue per user, or ARPU for short. The metric is calculated by taking all revenue recognized from Silver, Gold and Platinum tiers in the period, divided by the average total Premier Agents in the quarter, divided again by the number of months in the period.

In our earnings release and upcoming 10-Q, we’ve prepared an exhibit of historical results for this metric. While ARPU provides an additional layer of transparency into our results, keeping ARPU in proper perspective is important, because we do not manage our business to growing ARPU. We manage to growing total Premier Agent revenue. We expect ARPU to vary from quarter to quarter as our subscriber base grows and as we continue to refine and evolve the mix of products we sell to our Premier Agents.

And as you know, we’re currently shifting our Platinum subscription product away from a share of voice model for a fixed-impression model based pricing model, where Platinum Premier Agents can purchase a discrete number of impressions they want delivered in their contract each month.

Another metric we’re often asked about is churn. Over time, our churn has been stable and predictable as well as healthy and appropriate in relation to our operating history. The layers of variables, which comprise the metric, have many useful permutations, such as by customer segment, contract size, or cohort. We’ve chosen not to disclose our churn due to its complex nature and for competitive reasons. But let me give you a little more insight into this metric.

Agents who cancel their subscription were receiving, on average, about 15 leads per month at an approximate $17 cost per lead. This is similar to the number of leads and the cost per lead of agents who don’t churn. The number-one reason agents say for canceling is that they had little ROI on the program. In other words, they didn’t convert enough of their annualized 180 leads per year into transactions.

Our mobile apps and websites are delivering buyers to these agents. They’re just not converting them into commissions. This is a solvable opportunity. By using software, such as a CRM and now Buyfolio’s co-shopping tool and by doing a better job of helping train these agents to convert Internet leads, more of these Premier Agents can be successful in the program.

Turning now to Zillow Mortgage Marketplace, CPC revenues continue to grow nicely. In the quarter, approximately 3.2 million loan requests were submitted by our consumers across mobile and web, as compared to 1.7 million loan requests in the same quarter last year. CPC pricing and conversion rates from loan request to click have remained healthy and largely consistent with prior periods, with loan request volume growing as a result of increased awareness across the platform.

Purchases continue to comprise the majority of the request mix, which implies that our Marketplace can be successful in a higher-rate environment and is in stark contrast to other mortgage sites, where refinance loans comprise the majority of loan request volume. While we do not separate out the impact of our mortgage products in Marketplace revenue, the disclosure of Premier Agent ARPU now enable some directional visibility into Mortgage Marketplace revenue, which along with our other Marketplace revenue from Diverse Solutions and RentJuice grew to over 3 million in the quarter, representing an increase of approximately 130% year-over-year.

Looking now at our Display revenue category, revenue was $8.3 million, increasing 15% year-over-year, while representing 26% of our total revenue. Note that Display revenue growth in the third quarter was on a 27 point tougher comparison than prior quarter. Display continues to become a smaller proportion of our revenue by design, as we shift more territory on the page to supporting growth in our marketplaces. The contribution margin from Display is strong due to relatively small fixed cost and low variable cost in the business. Advertising campaigns with us by our industry endemic advertisers, mainly real estate brokers, home builders and lending institutions continue to drive the performance of the category.

Moving now to our expenses, total operating expenses were $29.6 million in the third quarter as compared to $19.7 million in the same quarter last year. Included in our expenses this quarter is a full period impact from the integration of our acquisition of RentJuice earlier this year. Now, I’ll discuss each major expense line item, starting with cost of revenue.

For the third quarter, our cost of revenue was $3.6 million or 11% of revenue compared to $3.1 million or 16% of revenue in the same period last year. Margin expansion resulted primarily from fixed cost in this expense category, not growing as fast as revenue. These fixed costs relate primarily to IT head count and operation of our mobile products and website. In addition, we experienced a decrease in variable revenue sharing costs.

Next, sales and marketing expenses were $14.1 million or 44% of revenue as compared to $7 million or 30% – or 37% of revenue in the third quarter of 2011. During the quarter, we further expanded our online testing and advertising to launching our first TV commercial, which began airing in mid-September. We continue to gain valuable insights from our testing across online and often channels and markets for which the focus has been on attracting home shoppers to our mobile and web platform in support of our long-term growth initiatives.

Understanding the cost of acquiring shoppers through different channels and in different markets will help inform us of our advertising spending levels in 2013. This test is all the more useful as our Platinum Premier Agent product transitions from a share of voice model to fixed impression packages.

This year’s advertising – this quarter’s advertising test resulted in approximately $3 million incremental spend year-over-year. Even with expanding these tests to offline channels, advertising spend still represents less than half of our operating expenses in our sales and marketing expense category.

Moving on to the next expense line item, technology and development costs were $6.7 million or 21% of revenue versus $3.8 million or 20% of revenue compared to last year. The increased expenses in absolute dollars during the quarter resulted from growth in our engineering head count to support current and future product initiatives, 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 plans to increase our investment in our engineering platform to bring outstanding products and services to market.

Lastly, G&A costs were $5.2 million or 16% of revenue as compared to the same period in the prior year at $5.7 million or 30% of revenue. Excluding the $1.7 million facilities exit charge we took last year, last year’s G&A costs were approximately $4 million or 21% of revenue. We continue to expect these costs to decrease as a percentage of revenue over time.

Turning now to profitability, our EBITDA for the quarter was $7.6 million, representing 24% of revenue, which was up from 19% this time last year. This result exceeds the high end of our guidance range for the quarter by $2.3 million. The out-performance in this quarter can be attributed to a few factors.

First, revenue grew ahead of expectations in our Marketplace category due to continued strength in our Premier Agent business. Next, operating expense categories were either in line or favorable versus our plans, which led to flow-through of revenue. At a more detailed level on the expense side, we had favorable revenue sharing variances due to higher relative consumer engagement on our platform than our partners as well as higher levels of capitalized labor cost than planned from increased product development activity. And finally, our overall cost basis was more efficient than our plans indicated earlier in the quarter.

On a GAAP basis, net income for the quarter was $2.3 million, which set a new record, representing $0.08 per basic EPS and $0.07 per diluted EPS on 30 million and 32.2 million weighted average basic and diluted shares outstanding respectively. Looking briefly at our cash flow from operations, we generated $5.4 million in the quarter versus $5.7 million in the same period last year.

Quickly turning to our balance sheet, we ended the quarter with approximately $229 million in cash, cash equivalents and investments, and no debt. In September, we executed a follow-on public offering in which we sold 3.8 million primary shares and raised approximately $157 million net of issuance costs. We believe we are now appropriately capitalized relative to our substantial market opportunity and our strong balance sheet provides us with competitively advantaged flexibility as evidenced by our recent acquisitions of Buyfolio and Mortech.

Now turning to our outlook for the fourth quarter, revenue is expected to be in the range of $30 million to $31 million and represents 53% year-over-year growth at the midpoint of the range. Though we do not break out our revenue outlook for each category, we believe some color will be helpful in modeling our quarter-over-quarter top-line trends.

In our Marketplace category, we expect increased subscription bookings in our Premier Agent business and continued strength in our Mortgage Marketplace. In our Display category, we anticipate sequential softness for a couple of reasons. First, there is a seasonal slowdown in our Display category every fourth quarter. Second, we recently launched our groundbreaking foreclosure product that Spencer discussed earlier.

Prior to this product, we received all of our listings via an advertising relationship with Foreclosure.com. We no longer receive this revenue now that we’ve launched this competitive product ourselves, which we believe is a far superior consumer experience. However, because this relationship has ended, we will experience a near-term revenue impact.

Looking at EBITDA, we expect it to be in the range of $3 million to $3.5 million. At the midpoint of the range, this represents an approximate 11% margin. It’s worthwhile to note that the midpoint of our EBITDA outlook taken in conjunction with our third quarter EBITDA performance represents an approximate $10.9 million in second half 2012 EBITDA, which is consistent with the margin outlook we had previously provided.

While we are not providing the GAAP EPS outlook, as a matter of maintenance, we expect a diluted weighted average share count of approximately 36 million to 37 million shares for the fourth quarter. Also, partial period operating impacts related to our acquisitions of Buyfolio and Mortech are included in our outlook.

Now, looking closer at our expected expenses in the fourth quarter. First, our technology and development expenditures will be higher year-over-year on an absolute basis, reflecting the additions to our engineering staff in Seattle, San Francisco in Orange County. Second, we expect that our expenses related to expanding testing with targeted advertising across multiple channels will be significantly higher year-over-year, but relatively flat quarter-to-quarter.

As we have mentioned previously, these tests are helping us learn what channels might be most effective to – most effective for us in the future to acquire traffic profitably. Third, we have continued to hire inside sales people for the Premier Agent business in Orange County office and expect our head count-related sales costs to grow only marginally in the fourth quarter. As a reminder, inside sales representatives selling subscriptions nationwide take three to four months to ramp to full quota and, therefore, we do not expect to see revenue contribution from the most recent classes until early 2013.

Last, with the acquisition Buyfolio and Mortech, we expect higher professional service costs, some integration costs as well as higher overall G&A and facilities expenses associated with our growing head count.

Now, looking at the full year 2012, we are updating our outlook regarding a few items. Depreciation and amortization for the year is expected to be in the range of $12 million to $13 million and share-based compensation is expected to be in the range of $7 million to $8 million. We expect CapEx and capitalized data content to be in the range of $8 million to $9 million, of which the IT CapEx portion is approximately $2 million to $3 million.

Adding the midpoint of the fourth quarter revenue outlook to our year-to-date results, we expect revenue growth of approximately 71% year-over-year for full-year 2012. Also, at the midpoint, we expect full year EBITDA margins at 19%, which is essentially in line with the 18% margins we delivered in 2011 and consistent with our previous outlook.

As we conclude today’s prepared remarks, we continue our march towards reaching our near-term target model of 30% to 35% EBITDA margin at $200 million to $250 million in revenue. This was another fantastic quarter for Zillow, one that exemplifies the high degree of operating leverage that we have in this model.

We continue to gain momentum as we enhance our foundation for long-term growth and launch new products and content, which strengthens our competitive advantage and extends our market leadership by empowering more consumers and mobile and on the web in residential real estate, mortgage, rental and other home-related marketplaces.

Before concluding, I like to invite you to join us for our first-ever Investor Day on the morning of January 17 at NASDAQ MarketSite in Times Square. We’ll follow up with more details, but please mark your calendars accordingly.

With that, I will now open up the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Heath Terry from Goldman Sachs.

Heath Terry – Goldman Sachs

I was wondering if you could give us a sense of whether or not you’re seeing and whether or not your guidance for Q4, in particular, implies any impact from the weather event in the – on the East Coast.

Chad Cohen

Hi, Heath. This is Chad. No, our guidance doesn’t contemplate anything with relation to Hurricane Sandy. It does not.

Heath Terry – Goldman Sachs

Okay. And then, I guess, if we look at the guidance for Q4, are there any other – outside of the foreclosure issue, are there any other kind of one-offs that you would point to what’s driving – admittedly modest, but what’s driving the deceleration in growth into the quarter?

Chad Cohen

Yeah. The way I would sort of characterize it is we have two categories of revenue here; Marketplace and Display. In our Marketplace business, we continue to see very healthy bookings production by our inside sales reps into the fourth quarter, which will flow through in terms of revenue into 2013 and beyond, as well as just continued success and good conversion with Zillow Mortgage Marketplace. As you pointed out, with Display, we do have something that’s very unique that’s going on right now with respect to foreclosure in that we launched our own foreclosure product, and previously we received listings from an advertiser, namely Foreclosure.com.

So, this will, at the end of the day, create a far more compelling consumer experience than that of our partner and longer term will have a really nice financial benefit for launching this. But in the short term, you’ll see a stepdown in revenue as it relates to terminating this relationship. I’d say the second point is that every year and you saw this in 2009, 2010 and 2011, every year we see a sequential seasonal stepdown in display advertising in the fourth quarter and that’s not unique to this year.

Heath Terry – Goldman Sachs

Okay. Great. Thank you.

Chad Cohen

Yeah.

Operator

Thank you. And our next question comes from Aaron Kessler from Raymond James.

Aaron Kessler – Raymond James

Yes. Hi, guys. Couple of questions. First, if you can give us any sense for the impact on revenues either in Q2 or on the Q4 guidance from the new third ad slot or as well as the impression-based pricing? And just on the churn that you talked about a little, any sense just maybe directionally what direction churn is headed or has it been relatively stable? And as you’ve added new products, what is the impact that those additional Premier Agent products had on churn as well? Thank you.

Chad Cohen

Hi, Aaron. This is Chad. So, nothing specific. Obviously, the third, as far as agent position added 50% more inventory, but we haven’t broken that out in terms of what percentage of revenue that contributed in the quarter. With respect to churn, I mean, what we’ve seen historically is low, stable and predictable churn and it’s something that an isolation is very hard to give more meaningful discussion on a phone call like this. It’s really down in the details. I think there’s a lot of insights that can be provided, if you were to look at it across customers segment or cohort. But that would be all very competitively revealing. So, we’re choosing not to do that right now.

What we do know is, with respect to churn, that agents that do decide to cancel their Premier Agent packages are seeing the same number of opportunities that those that decide to stay on the program. Specifically, agents that churn get approximately 15 contacts per month at an annualized rate of about 180 contacts per year, at about the same CPL, or cost per lead, of about $17 to $18 per contact of those that stay on the program or those that actually increase the amount of inventory that they’re buying for us. So, we’re providing essentially the same opportunity to those agents that are being successful, but they’re just not following up on that contact and able to convert those into commission checks.

Spencer Rascoff

Just…

Aaron Kessler – Raymond James

Great.

Spencer Rascoff

This is Spencer. Just to tie that into our product development and M&A strategy, we have seen greater retention rates and greater upsell rates and greater ARPU from those agents that use more of our software tools. So, for – and this is, of course, why we built out our own CRM for real estate. This is why we acquired business Postlets for listing syndication and Diverse Solutions for Agent Website.

And to tie it to the Mortech announcement, this is of course why we’re moving now into the mortgage technology business, because we think that providing not just lead generation, but also software tools to these real-estate practitioners can make the most of the leads that we provide to them, we think the combination of those two things is what’s so powerful. So, yes, it’s early, for example, on the Agent Website business, but as more of our Premier Agents roll out their own websites from Diverse Solutions, via company that we acquired, we are seeing lower churn from those agents.

Aaron Kessler – Raymond James

Great. And finally, just on the EBITDA guidance that you provided, I think the revenues were slightly below the Street’s just in terms of the revenue guide, but it looked like the EBITDA had a wider variances. Is there any one specific expense item or is it the ad campaign that is going to lift the operating expenses more than last quarter that we should be pay attention to?

Chad Cohen

So, what you’re seeing with EBITDA guidance is the drop down of the – say, the down guidance on revenue from $31.9 million in the quarter to essentially $30.5 million at the midpoint. So, you have to take that in consideration when look at the fourth quarter. I think the other thing to sort of consider is if you sort of take third quarter expenses and drag those to the right, what you do have to do is layer on top of those expenses and we’re at about $29 million to $30 million in operating expenses in the third quarter, you have to layer on top of that transaction costs related to the two acquisitions that we announced as well as integration costs and just overall growth in costs and facilities expenses related to normal sort of growth in our head count, and that’s what’s contributing to EBITDA being in the range of sort of $3 million to $3.5 million.

Aaron Kessler – Raymond James

Great. Thank you.

Chad Cohen

Yeah.

Operator

Thank you. Our next question comes from Neil Doshi from Citi.

Neil Doshi – Citi

Can you just talk a little bit more about the proposed ad spend that you plan to do exactly? What does the tests – initial tests have shown? Why do you feel that now is the time to make those investments? And then, Spencer, it looks like the pace of acquisitions have really picked up. Do you feel like you have most of the right pieces in places right now or are there still small areas where you feel that you can acquire to build out the product portfolio? Thanks.

Spencer Rascoff

Thanks, Neil. So, firstly, on advertising, we spent much of 2012 testing different types of advertising, SEM, display advertising, some business development partnerships, TV advertising, mobile advertising and there are a lot of flavors of mobile advertising. We think that the year or so that we spent evaluating these different types of ad channels, building the internal processes, establishing the partners with particular media vendors, et cetera, we think this is an important advantage and competitive differentiator as we look to 2013.

As I said in prepared remarks, I don’t foresee a world in which the majority of our traffic will ever come from paid sources. But we do absolutely think that there are arbitrage opportunities on the traffic acquisition, especially now that we have a revenue model in our Marketplace business, which is so directly tied to traffic. We sell apps now in our Marketplace business on a per-impression basis. And so, it is more feasible to actually acquire traffic accretively.

In addition, our brand awareness is still so low relative to the size of the opportunity that we do think it can be profitable and strategic to become a larger advertiser. As you know, we only give revenue and expense guidance one quarter out. So, we can’t give you to read through on to 2013 ad spend, but we’ve laid a lot of groundwork in 2012 and I feel like we’re incredibly smart going into that decision about what type of advertising and what amounts and through what mediums we’ll be doing it in 2013.

For M&A, the nice thing about this category for us is it is really wide open and has been bereft of an acquirer with the resources or the strategic gumption to actually make acquisitions over the last 10 to 15 years. So, this is all virgin snow that we’re skiing down. And so, we spent the last year surveying the landscape, looking at more than 100 companies, saying no a lot more often than we said yes. We’ve a very high bar, which continues to get higher.

We’ve acquired five very relatively small companies now, all in the software tools for real estate practitioners sub-part of our industry. And all of them have been very strategic and accelerated our product development pipeline and are all geared towards either improving our strategic position, for example, in the case of RentJuice, where we think offering rental software will result in us being the rental marketplace with the most accurate listings, or impacting our retention rate of our real estate advertisers, for example, Buyfolio, Diverse Solutions and Postlets, all of which are software tools, which we provide to real estate agents, which help improve their ROI and their ad spend.

The one acquisition I’d point to that’s probably the most fully baked in terms of having enough time to really marinate and start showing out – showing up in some of our internal metrics is Diverse Solutions, a company we bought about a year ago. When we bought Diverse Solutions, they provided the back-end connectivity for real estate agents websites to connect to their MLS. We acquired the company and we built out the front-end website and mobile website capability with them. And then, we rolled it into Premier Agent program for free and we created a lower-priced SKU for website only. And it is having an impact on our Premier Agent business now as more and more agents have websites from us.

It changes their retention rate. It changes – potentially, in all likelihood, changes their ARPU, but it also changes the conversation between us and the real estate agents. So, we’re no longer a place for them to advertise or sort of attack, if you will, like the newspaper used to be. We’re now a marketing partner for them, because we’re actually running their website for them. So, that’s – the philosophy on M&A has been acquired companies that accelerate our product development pipeline and are on strategy. And thus far, I’ve been very pleased with our M&A track record.

Neil Doshi – Citi

Great. Thank you, Spencer.

Operator

Thank you. And our next question comes from Michael Graham from Canaccord.

Michael Graham – Canaccord

Hey, guys. Just wanted to ask one more about the revenue guidance and, I guess, more explicitly about Display, because your Marketplace’s business seems to be going really well, and you mentioned that you expected it to grow sequentially. So, it seems like Display is going to really take it on the chin in Q4 on the top line.

So, is there any way you can put a little more color around quantifying the impact of the lost revenue from Foreclosure.com and did that creep into Q3 at all? Could you comment on are you seeing, in addition to the seasonality is the usage shift towards mobile impacting Display for you guys? And then, just as an unrelated, but just a quick follow-up question, can you put any more color around of your 4,000 PA sub-adds? You said a majority were Platinum. Can you put any more color around that? Thank you.

Spencer Rascoff

Hey, Michael. It’s Spencer. Let me take the Display question kind of philosophically and then Chad can chime in, if you want to add something. We make choices every day here for the user. We don’t manage the business quarter-to-quarter. We manage the company for the long term. And so, the foreclosure decision, for example, is a perfect example, where we forgo near-term revenue, by being the only real estate site to offer foreclosure inventory for free on the web and mobile.

It hurts in the near term in terms of revenue, but it’s great – it’ll be great in the long term, because it provides more proprietary content exclusive to Zillow, which drives traffic growth, which over the long term is more important than any near-term revenue. We make decisions that you guys don’t see every day around the UI of the website, for example, what type of ad placements should we allocate towards Display revenue instead of Marketplace.

And I’d say what you’re seeing is really the continuation of probably three-year old trend within Zillow, where we continue to reduce the prominence of placement for Display advertising in the interest of having ads from our Marketplace segment, which are more valuable to the user.

We are constantly running dozens and sometimes hundreds of different UI tests on the website, comparing things like, if we have a particularly display ad unit in a particular place, what does that do to contact rates to our Premier Agent, and we make these decisions around these trade-offs constantly, which drive more ad placements to Marketplace at the expense of Display. The foreclosure one is an obvious one and kind of a big one, but it’s part of a more important holistic strategy that we have here around putting the user first, and that means more Marketplace revenue at the expense of Display. Chad?

Chad Cohen

Yeah. I guess I would say, if you’re trying to quantify foreclosure. I’d say, directionally, the seasonality that we typically see every fourth quarter is the biggest impact in the quarter. This time last year you saw, sequentially, I believe, it was about a 15% stepdown, so we’re looking at something a little steeper than that going into the fourth quarter. So – but the next sort of component of that stepdown is Foreclosure.com and losing that revenue partnership.

In terms of mobile, is that hurting Display, well, we’ve just seen small dollars come on to mobile thus far in terms of CPM-based advertising. We don’t have enough data points there to say that’s going to be huge contributor in the fourth quarter or coming quarters.

But what we have seen that’s interesting is we’re seeing CPMs that mimic those or, in some cases, are better than those that we see on desktops. So, that’s nice to see. In terms of growth of the 4,000 Premier Agents in the quarter, I guess, the color I can add is that in the third quarter, we added more Platinum Premier Agents than we added in the second quarter. So, directionally, it’s going up and still remains a preponderance of the number of agents that we added in the quarter.

Spencer Rascoff

And just one follow-on on the mobile display point. So, there is another really good example where we used something that’s right for the user, which benefits Marketplace and hurts Display. We have very few display ad units on mobile. For example, we keep a very high CPM bar and if we haven’t sold it direct, we don’t show backfill ad network inventory on our mobile apps, because we know that will hurt the contact rates to our Premier Agents.

And likewise, in our dedicated mobile apps – I’m sorry, in our dedicated mortgage apps, we typically only have integrated display ads, but we monetize our mobile apps through the cost per contact – sorry, cost per click model that Zillow Mortgage Marketplace has. So, I guess, if your question is, does the shift to mobile hurt our Display revenue, well, yes, but that’s just fine by us. In fact, we welcome that. The fact that more than half of our usage is now in mobile, half of our homes viewer are on mobile is great from our standpoint because Marketplace monetizes so well on mobile.

I guess the only other point I’ll make on Q4 as it rolls forward to 2013 is nothing has changed about our 2013 perspective as we laid it out to investors several times now in terms of our mid-term margin of 30% to 35% EBITDA at a $200 million to $250 million revenue run rate. We still believe we’re tracking towards that. And the full – at the midpoint of our guidance for the full year of 2012, we’ll be at a 19% EBITDA margin, up year-over-year and kind of consistent with our 30% to 35% mid-term target model at $200 million to $250 million of revenue.

Michael Graham – Canaccord

Good. Thank you.

Operator

Thank you. Our next question comes from Mark May from Barclays.

Mark May – Barclays

Hi. Thanks for taking my questions. First one, just another digging into the outlook for Q4, if we do use, say, 20%, 25% down sequentially on Display, it still implies flattish or sequential growth in Marketplace that is deceleration from the recent pace. And just trying to dig into some of the reasons why that might be happening, does that have something to do with this transition period moving to impression-based pricing? Is it the timing of hiring and ramp of sales? I’m sorry if I missed this, but if you could just help me think through that a bit. And then, secondly, can you give us a sense of the contribution from the Buyfolio and Mortech acquisitions in your Q4 outlook? Thanks.

Chad Cohen

Hi, Mark. It’s Chad. So, it’s really coming down to Display that’s driving the down guidance quarter-over-quarter. And Marketplace, again, I mentioned earlier, was still healthy contributions from our inside sales team, good production downstairs and in Orange County as well as continued conversion and growing awareness of Zillow Mortgage Marketplace.

So, it really is Display and the impact of losing our foreclosure partner. I think the second question you had related to the contribution of Buyfolio or Mortech, Buyfolio really doesn’t have much of a P&L. We are essentially acquiring some great technology in this case. And in terms of Mortech, we don’t believe there is going to be any contribution or limited contribution in the fourth quarter as we haven’t closed yet, and that should be really close to the end of the year.

Mark May – Barclays

And what about from a bottom-line perspective, those two technologies or two acquisitions in terms of possible near-term negative impact on EBITDA?

Chad Cohen

So, that’s all taken into consideration with our guidance for the fourth quarter. Again, we don’t see any fourth quarter – real fourth quarter pick up with respect to Mortech in the guidance. Anything that we do pick up will be north of the guidance that we projected. And in earnings, they are profitable on a cash basis, but we’re still in the process of translating that to GAAP-based financials.

Mark May – Barclays

Okay. Great. Thanks.

Operator

Thank you. Our next question comes from Chad Bartley from Pacific Crest.

Chad Bartley – Pacific Crest

Hi. Thanks. Wanted to follow-up on the shift over to impression-based selling and can you give us anymore color, based on your conversations with subscribers, what you expect them to do in terms of their impression commitments? Are they going to hold those and pay more or not? And then, maybe asking slightly different way, I mean, what should we expect the impact to be on ARPU? Once you guys make this move, should that go up or down? Thanks.

Chad Cohen

So, moving to an impression-based – this is Chad, by the way. Moving to an impression-based pricing system will allow agents to come in at more discrete levels than they have in the past. And it’s hard to know at this point whether there is a pattern there. I guess, in terms of ARPU, there is going to be variability. It’s not a metric that we manage to here. You’ve seen ARPU grow to $270 per month in the current quarter, up from $242 this time last year.

And it’s hard to say what the impact of switching to impression-based pricing model will do because in addition to that shift you also have to look at the new products that we’ve entered into the marketplace with silver and gold at much lower price points. So, in the short term, there could be some variability there. But we did – we just don’t have enough data points to suggest there’s going to be a pattern.

I think more importantly, what we managed to hear as a company is net new recurring revenue in terms of our total Premier Agent business, which is the result of not only looking at ARPU, but looking in the growth of the number of subscribers that we add in any particular quarter. And that’s what we have our sights set on as we look to the fourth quarter in 2013.

Spencer Rascoff

Chad, it’s Spencer. Remember that since January, our new contracts have already been sold on a fixed number of impression basis. So already going into this “transition”, at least half of our Premier Agents have already been sold on this “new system” that we’re switching the old legacy contracts over to. The conversations that we have and Chad talked about this a little bit in his script, the conversation that we have is we’ll call an agent up and say, hey, you bought the 25% share of voice, and that was supposed to be around 2000 impressions a month. You’ve been getting 8,000 impressions a month. You want to pay four times as much to get 8,000 impressions a month or do you want to keep paying what you’re paying and you go back to your own share of 2,000 times a month and then it’ll free up the extra 6000.

The – we don’t – we’re not sharing for competitive reasons exactly what the data shows around what the outcome of those conversations is, did they typically pay up, in that example, four times as much or did they stay flat to free up extra inventory or at the extreme I suppose did they cancel because they’re ticked off by the conversation at all. But I’m – I think, it’s fair to say that we’re both very pleased with how those conversations are going so far. There’s nothing at all alarming in those conversations.

Now, Chad is right though, in terms of how that rolls through the ARPU is – that one is a little bit harder to predict frankly, to predict. From our standpoint, either of those outcomes are okay. If that agent’s ARPU dramatically increases because he pays up for the extra impressions or if his dollar ARPU stays flat, but his impressions get cut back free of extra inventory, in one scenario, ARPU increases and in the other scenario a lot of impressions get freed up to sell to somebody else and Premier Agent count can grow. So and as Chad points out, we aren’t really managing the business to either one of those metrics, ARPU or Premier Agents account, we manage it to total revenue.

Chad Bartley – Pacific Crest

Okay. That’s helpful. And a quick question on seasonality related to your subscriber additions, should we expect to see a sequential decline in this year as we did last year in Q4, in terms of net – in terms of net adds? Excuse me.

Chad Cohen

Yeah, it’s really hard to say. We’ve got two quarters now in which we’ve added more than 4,000 subscribers in a quarter, that’s north of what you typically seen of 1500 to 2000 to 3,000 agents in a particular quarter. I’m not sure there is enough data points yet here to suggest that’s a trend. And we’re not providing really any specific guidance on the outlook for fourth quarter add, So, we’ll just have to wait and see.

Chad Bartley – Pacific Crest

Thanks guys.

Spencer Rascoff

Thank you.

Operator

Thank you. Our next question comes from Brad Safalow from PAA Research.

Brad Safalow – PAA Research

Questions. Just a pure numbers question. You mentioned transaction and integration costs in the quarter for this two acquisitions would be some – would have some impact on EBITDA. What numbers are you expecting for that?

Chad Cohen

We haven’t said specifically, but, I would say it’s – it’s fair to say that it will be easily north of $1 million but we’re not really providing any additional color beyond that, I mean their accounting costs, legal fees, valuation firm cost and a number of other integration costs as you bring the teams together to discuss how we’re going to integrate all these platforms into the core Zillow experienced.

Brad Safalow – PAA Research

And then just, we’re backing into the implied – all right, let me say, other Marketplace revenues. Just to be clear, I mean, what percentage of those non, kind of, Premier Agent revenues does mortgage represent, rough numbers?

Chad Cohen

Yeah. You could get into sort of the – you could look at the implied Zillow Mortgage Marketplace numbers, given the ARPU and the number of subscribers we’ve given in the quarter.

Brad Safalow – PAA Research

I have that number. I was just saying, there is nothing – I guess the question is, is there anything else in that kind of number you can back into, that is material outside of Mortgage Legion?

Chad Cohen

No. I mean the contribution from Diverse Solutions, and RentJuice are pretty minimal in any respective quarter. Zillow Mortgage Marketplace is definitely the second largest component outside of Premier Agent.

Spencer Rascoff

Diverse Solutions’ legacy business was selling wholesale to web developers with wholesale productivity to MLS vendors and we still have that business, that’s a tiny portion of other. And RentJuice has a premium model where super power users of RentJuice also pay a fee. But both of those are immaterials. So, if you just did the math the number you’d end up on for ZMM would be very close.

Brad Safalow – PAA Research

Okay. And then just on the ARPU numbers you’ve disclosed, obviously, there’s a lot of cross currents in those numbers, the shift to the CPM, I think, had whole another wrinkle, but, is it fair to say that your Platinum Premier Agent ARPU is growing appreciably faster than the overall average?

Chad Cohen

Yeah, I think the best way to think about Platinum ARPU or pricing, pricing is largely reflected by growth in traffic and growth in conversion rates. It’s really hard to say what that’s going to look like in future quarters, but you know, our overall ARPU is much more impacted by Platinum than any of the other two tiers because they just represents such a much smaller portion – proportion of overall Premier Agent revenues.

Brad Safalow – PAA Research

Okay. And when we think about trend in ARPU, I mean, at least so I think about it, I guess so you’ll have it but there seems to be both your seasonality probably will increase over time because you’re moving to the CPM model, is that fair?

Chad Cohen

I think that’s fair to the extent that we’re sold through or getting close to sold through but seasonality doesn’t really come into play unless we’re running out of inventory, which we’re not. We’ve just opened up a third by the buyer’s agent position at the end of the second quarter and we still have a lot of headroom in many, many...

Spencer Rascoff

They are all switched to fixed number of impressions, I mean that example I described, frees up a ton of inventory as well. So yeah, in theory if we’re 100% sold through in a given area then we’d be seasonal, but that’s not – in practice, that’s not happening.

Brad Safalow – PAA Research

Okay. That kind of dovetails into my next question which was in terms of trends in ARPU, I would assume that the agents you have on board now will probably be at a higher price point or higher average ARPU than what you might add incrementally, you say okay, hey guys, in say sales force, we have this much excess inventory left in this particular market, you’re going to call that agent who previously couldn’t spend, let’s just say, the $270 per month on average but they might spend $100. How do we think about that in terms of directionally modeling our ARPU, I mean obviously offsetting that would be an increase in Premier Agent subs. How do you think about that?

Chad Cohen

I mean, that’s not really how we think about running the business. We manage our sales team to a bookings number every month and that’s the quota that they drive to and whoever they sort of get through that by selling low volume zip codes or higher value zip codes that are just more precious because they’re in – zip codes that have higher home values, that’s up to the respective sales reps to determine in order to meet their bookings quota.

Spencer Rascoff

You’re right, you are right, though, that a new – a brand new Premier Agent signing on, they are going to be initially usually below ARPU number right out of the gate. And then as they have success in the program, they get leads, they start having transactions, they kind of gain more belief in the program, et cetera than they tend to buy up more.

Brad Safalow – PAA Research

Okay. Last question. In the markets in which you’re seeing home price appreciation, what do you see in ARPU, generally speaking, relative to your overall average?

Spencer Rascoff

So the way we calculate our – I mean there’s an effective CPM for every zip codes in the country, right. We don’t – we don’t quote it that way to a Premier Agent or to somebody who are – a new Premier Agent or existing Premier Agent, but there is an effect with CPM everywhere. And the components of the CPM are the median home value in that area, the lead volume that we have, the amount of traffic that we have, the number of agents that want to advertise there, mobile traffic in that area, et cetera, whole host of different metrics.

So, yes were home values are flat or appreciating as compared with declining and where contract volumes are picking up because more buyers are getting up fence, that is a great a CPM tailwind for our business. There is no question that this macro environment, a flat to increasing home value and a significantly increasing transaction volume environment, is a significant tailwind. We don’t hi-fi each other all that much about it, because it’s out of our control and so I don’t think we really talk about that macro tailwind very much with investors, but it is there absolutely.

Brad Safalow – PAA Research

Okay. Thank you. I’ll turn it over.

Operator

Thank you. Our next question comes from Don Destino from Harvest Cap.

Don Destino – Harvest Cap

First, hey guys, just a couple of quick ones. I’m sorry, I missed it. Can you just tell us what the run rate foreclosure revenue was, so we can figure out how important this is?

Chad Cohen

We haven’t disclosed that and I don’t think we’re prepared to do that right now. I would say directionally though the impact when we’re looking at the fourth quarter display the stepdown, first seasonality that we typically see every fourth quarter then the impact of terminating the relationship with foreclosure.com.

Don Destino – Harvest Cap

Okay. I mean, it’s – can you – I’ll try one more time, can you ballpark it, I mean is $1 million, or is it $5 million, I mean, it seems like that it’s just hard to figure out whether that’s the source of their disappointment or not?

Chad Cohen

As I said, it’s first, the seasonal step-down that we see every fourth quarter. And then secondly, in order of magnitude the lots of foreclosure.com.

Don Destino – Harvest Cap

Can you – when did you decide that you’re going to do this, bring this in-house as opposed to outsource it?

Spencer Rascoff

Well, as I said in the script that that the entire product development initiative took a couple of quarters, because there are much confidential contracts both with advertisers and data providers and I’m not comfortable than that giving more specifics, but we view this is absolutely the right long-term thing for our users. We have incredible proprietary content now that you can’t find on the other websites and foreclosures are a huge part of the market, about a quarter of all homes it sell in the U.S. are foreclosure now. And Zillow is the only real estate site, where you can find foreclosure listings for free, that’s huge.

Don Destino – Harvest Cap

I definitely see the value. What’s the – what’s – and I’m sorry if I missed this, I was on one of your competitors calls at the beginning of your call. What – what’s the source of your data there?

Spencer Rascoff

For – because – for contractual reasons we don’t disclose the sources, but ultimately – the ultimate source is county records. I mean this is information that is of public record, it just is not readily available on the web. Several investors have gone and found it in county records, but this has never been available on the web before, but ultimately it’s coming from county.

Don Destino – Harvest Cap

So these are actual foreclosures that are on the bank’s balance sheet as REO, it’s the clear closed record, not just severely delinquent or anything like that?

Spencer Rascoff

There are two types, so there are 1.2 million of these pre-market listings it includes pre-foreclosures and foreclosures. Foreclosures are where the bank has taken the property over, but has not yet listed it for sale with an agent, and – but it’s common. Pre-foreclosures are where a notice of default has been issued to the homeowner, but the bank hasn’t taken the property over yet. So that’s a leading indicator of a foreclosure, which is a leading indicator of the listing. They’re both valuable to buyers, I’d say, of more value to the buyers is a true foreclosure, which is closer in that pipeline to actually being a true listing.

Don Destino – Harvest Cap

If you bear with me, just two quick questions about that. What percentage of the 1.2 million are foreclosures versus notice of default.

Chad Cohen

It’s vast majority of pre-foreclosure.

Spencer Rascoff

I don’t know. I’m pretty sure we broke it out in the press release two weeks ago when we launched the product but...

Don Destino – Harvest Cap

I guess the question is, is there any risk and would you have any liability or anything, it’s all of the sudden, people are like knocking on the doors of people who are still in home?

Spencer Rascoff

So the answer is about 250,000 of them are foreclosures and about 1 million of them are pre-foreclosures. No, we don’t believe we’d be – we’d have a risk. We view that – we view this information as incredibly powerful to the Marketplace itself. It’s – when we first launched Zillow in 2006, a lot of people said, oh my god, I can’t believe it.

Now you can see, what everyone’s house is worth and what everyone is paid for their house and what everyone’s tax assessment is and there were certainly people who said, wow, that’s alarming; that level of information transparency. And here we are six years later, and of course, that information is readily available on Zillow and some of it’s available on other website. So we continue to push the envelope in terms of providing access to information. And we think this is no different. It’s information that was available to savvy real estate investors behind a paywall, it’s just never been made available for free to the average home shopper.

Don Destino – Harvest Cap

Got it. Okay. Thank you very much.

Spencer Rascoff

Sure. Thank you.

Operator

Thank you. Our next question comes from David Cohen from Bloom Tree Partners.

David Cohen – Bloom Tree Partners

Hey. Good afternoon and thanks for taking my question. I know you guys don’t disclose churn and said that it was low, but I wanted to get just a little bit more clarity on that, so I think it’s been a concern for some investors I mean, could you potentially confirm or comment on whether or not it would be below like 4% per month for the past few months?

Chad Cohen

That’s not something that – this is Chad. That’s not something we’re prepared to comment on. I would say that it represents in our view a best of class rate but it’s been low and stable relative to the rest of our operating history and nothing has changed in the past few quarters that would signal you know – nothing – nothing has changed in the past few quarters that would signal otherwise.

David Cohen – Bloom Tree Partners

Okay. Is there any way to benchmark it potentially against other models out there, I mean it sounds like best-in-class versus other sort of real estate sites but is there any way to benchmark it against something else?

Chad Cohen

What we’ve done is – we’ve heard from investors, they want more clarity churn. We’ve certainly heard that, they want more clarity on ARPU, which we’ve now given ARPU. And they want more clarity on churn and what we’ve done this quarter for the first time ever was broken out some information about the agents’ future, 15 contact a month $17 CPL, I think those are, those are, at least for me those are very interesting statistics.

They show that the ad product is actually working. It’s just that the – these real estate agency are the ones who churn aren’t able to transact. I mean they’re getting 180 contacts a year at a very reasonable annual spend, and yet, they’re just not converting those contacts into commissions. Now, that’s solvable through training and software and we’re not just throwing our hands up and saying, hey, these agents, they don’t get it. It’s their problem. No, it’s also something that we can work on with them and this is why we’re so focused on improving our CRM building out websites for these real estate agents adding Buyfolio as way for them to co-shop with their clients, et cetera. So I think at least for this quarter anyway that’s the incremental disclosure that we’ve made on churn and we’ll leave it at that for now.

David Cohen – Bloom Tree Partners

Okay, great. Thanks.

Chad Cohen

Thank you.

Operator

Thank you. Our next question comes from Clint Coghill from Coghill Capital.

Clint Coghill – Coghill Capital

Questions, first one just has to do with cash flow, can you share what the free cash flow was for the quarter, not the cash flow from operations but the free cash flow overall, so I’d like to get a feel for what the CapEx was and how much of that was technology CapEx?

Chad Cohen

I’m looking at number that appears that it was about $1.7 million. I have to confirm that but $1.7 million of free flow for the quarter.

Clint Coghill – Coghill Capital

And what was your technology CapEx spend?

Chad Cohen

If you’re talking about just pure IT CapEx or you referring to...

Clint Coghill – Coghill Capital

Yeah, (inaudible) technology.

Chad Cohen

Overall, our CapEx for the year is about $2 million to $3 million in pure IT CapEx. These are debt side equipment, servers, networking equipment. And so that’s in general spread pretty evenly quarter-to-quarter.

Clint Coghill – Coghill Capital

Is that your overall technology CapEx or I mean, it’s not just the – sort of like the development site for the development expense for the site as well.

Chad Cohen

That’s computers – it’s actually computer equipment to power the site. It’s about $2 million to $3 million a year, right now.

Clint Coghill – Coghill Capital

Got it. Okay. I’ll maybe ask you offline. And the next question just is, I guess, it’s kind of following on the last one a little bit, which is you’ve talked about having a subscriber business model, but you don’t share much on churn statistics. And I guess the question is how sales intensive in this business because a lot of time the subscriber business model will be, you have a customer, and you end up having them for seven years or a long period of time and there is other business models where to take a differ end of the spectrum where it’s coupon where they kind of have to go out and do a lot of sales and marketing effort that goes to getting and also retaining their customers. And so I wanted to try to get a feel for, in your view how sales intensive this business really is?

Spencer Rascoff

Clint, this is Spencer. So, I would say our sales reps spend most of their time working with our – their existing Premier Agents and so by that measure, I wouldn’t even think of it as sales as much as account management. Around a third of our bookings are up-sells, our existing Premier Agent is buying more inventory, another third are inbounds and referrals, where people are calling us saying, hey, I want to become a Premier Agent. And about a third of our bookings are outbound cold calls, where we’re calling an agent and saying, hey, would you like to become a Premier Agent.

We report on ARPU now at $270 for the quarter, but our top agents have ARPU’s at 10 to 20 times that per month with much, much lower cancel rates than an average Premier Agent. So and those are the agents that are using our software as well. So with higher, with greater adoption of our software tools and higher ARPU, improves conversion for that agent and also increases their overall spend with us.

Let’s see how else can I answer that question. Yeah. I mean, I think, we’re going to endeavor to do for the January Analyst and Investors Day is to provide more color around this, so that you can – we can sort of stimulate the experience of walking the sales tour here in Seattle where you can actually stand over our folks’ shoulder and actually hear them and talking to Premier Agent and get a better understanding of what that’s all about.

I think that’s probably the best way that one can get some color on how we work with Premier Agents. Investors who have done that and analyst who have done that have walked away clearly feeling that it is not a boiler room kind of sale, that’s actually something quite different and that’s given a lot of comfort to the long-term viability of the model and the long-term partnership between us and Premier Agent.

Clint Coghill – Coghill Capital

Okay, thanks.

Spencer Rascoff

All right. With that I don’t think we’ve anymore questions. From my perspective, another great quarter, record mobile usage, record web usage, two acquisitions, a lot to be excited and proud of. I’m very much looking forward to our Investor Day in January, look forward to seeing you there and thank you very much for your interest in Zillow. We’ll talk to you soon.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Zillow's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts