Homestore, Inc. Q1 2006 Earnings Conference Call Transcript (HOMS, MOVE)

Homestore, Inc. (HOMS)
Q1 2006 Earnings Conference Call
May 2, 2006, 5:00 p.m. EST

Executives

Mollie O'Brien - IR
Mike Long - CEO
Lew Belote - CFO
Allan Merrill - EVP

Analysts

Aaron Kessler - Piper Jaffray
Stewart Barry - Think Equity
Mark Argento - Craig-Hallum
Jeetil Patel - Deutsche Bank Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Homestore/Move earnings conference call. (Operator Instructions). I now would like to turn the call over to your host for today, Ms. Mollie O'Brien. Please proceed.

Mollie O'Brien

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

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

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

All information discussed on this call is as of May 2nd, 2006 and Move undertakes no duty to update this information. Results projected on the call today may differ materially from actual results and should not be considered as a guarantee of future performance.

On this call, we will also be discussing some non-GAAP financial measures and talking about the Company's performance. Reconciliations of those measures to GAAP measures can be found in a table attached to our press release. I will now turn the call over to Mike Long.

Mike Long

Thanks Mollie. Good afternoon and thank you for joining us on the call today. Since I spoke with you last, we have accelerated the execution of the strategy we outlined to investors in February while delivering improved financial results during the first quarter.

Yesterday we launched the initial version of our new Move.com real estate search website. With this successful launch, Move.com now gives consumers access to the largest offering of resale, new home and apartment listings available anywhere on the Internet, in addition to innovative mapping and decision support tools to help consumers through the move process.

While we have many enhancements and additional features planned for the coming months, the launch of the first version of Move.com is an important step in our process of branding Move as an essential consumer resource and the premier venue for property owners and brokers to advertise. Move.com is now the exclusive search engine for Realtor.com, the Internet's most visited real estate website.

In coordination with the launch of the new site we are changing our stock ticker symbols to MOVE effective tomorrow morning, May 3rd.

Our financial performance continues to improve, in spite of the large investments in product and marketing we have underway, in addition to several substantial corporate infrastructure projects. We reported revenue growth of 22% over the first quarter of last year and EBITDA of $3.9 million, up from $2.4 million in the first quarter of last year. For the first time in many quarters we did not incur a legal settlement or advancement cost related to historical issues.

Excluding stock-based compensation expense, our net income was $1.3 million which compares with a net loss of $395,000 last year. The revenue increase was driven by continued strong results in our Realtor.com and TOP PRODUCER businesses, as well as notable improvements in our Welcome Wagon, new homes and rental businesses. This improving financial performance creates momentum for us, as we enter several quarters of transition in our new homes and rental business models.

Before turning the call over to Lew for a detailed discussion of our first quarter performance, I would like to give you a progress report on the many important initiatives we have committed to in support of our strategy of establishing Move as an essential consumer resource.

I would like to reiterate our simple business objective: to connect consumers at any point in their move cycle with the content, tools, services and professional connections they need to make the move successful. In February -- and again in our March update call -- we discussed the many ongoing initiatives we have to achieve this objective. These initiatives fall into three closely related categories:

1. Consumer content enhancements.
2. New, easily scalable business models.
3. Integrated brand marketing to extend our traffic advantage.

The first group of initiatives relates to creating the essential content experience for finding a home and having a successful move. In today's online environment, consumers want to see all of the available residential options before they begin the process of narrowing their choices. With Move.com, we are giving consumers access to the most comprehensive, easy-to-use, and rich real estate listings site ever assembled.

Move.com provides consumers the premier experience for viewing resale homes through the more than 3 million property listings available on Realtor.com. Move.com also offers a dramatically expanded listings experience for new homes and apartments with over 850,000 new home and rental listings; five times the number of listings previously available on our RENTNET and HomeBuilder.com sites.

These 850,000 listings are distinct home plans or apartment floor plans. They are not the total number of homes or apartment units in a subdivision or apartment complex which, if included, would number in the millions. Our view is that the aggregate number is less helpful to consumers than distinct housing options that are actually available.

Our previous sites for newly built homes and apartments, HomeBuilder.com and RENTNET, use the content strategy we refer to as paid inclusion. The listings database was composed entirely of listings that homebuilders or apartment managers paid to advertise. In contrast, the Move.com strategy aggregates as much free content as possible from all over the Internet to provide consumers with the most listings possible in one place. Furthermore, many of these listings are now at the unit level, meaning consumers can see individual home plans and apartments, not just subdivisions and apartment complexes.

Yesterday's launch represents the first phase of Move.com. We will continue to roll out new features and functionality over the next couple of months, including personalization features and self-service postings. In addition to the Move.com real estate search site, we outlined in February other products which will contribute to the improved content experience. These will be coming to the market later this quarter.

For example, we will be introducing featured CMA, or Comparative Market Analysis, which enables realtors to provide consumers with home valuation and other important advice. This solution will enable us to fully leverage our Realtor.com traffic in answering the consumer question, "What's my home worth?"

We will be launching new community pages on Realtor.com. These community pages will be forums for exploring the qualities of a community and will include interactive maps with data overlays of important resources, local history, detailed school and city reports, and local demographic data. The pages will also include user-generated content supplied by local realtors and members of the community.

We will be rolling out the Welcome Wagon local business directory, a key component of the Welcome Wagon online experience, that will be integrated with the detailed community pages on Realtor.com. The local business directory is the combination of a merchant directory with dynamic mapping and keyword search features, as well as special offers and coupons from local businesses. The local business directory will also incorporate user-generated content in the form of personal reviews of local businesses. An early version of the product is already accessible from the new Move.com website.

The second group of initiatives is designed to offer our customers opportunities for more targeted and flexible marketing. To enable different marketing solutions for different market conditions, we will offer our customers both subscription-based and performance-based marketing solutions including cost-per-click, cost-per-lead and CPM-based opportunities. Incorporating performance-based business models into our revenue mix also provides us the ability to scale revenue with our traffic levels, so that we are able to better monetize increases in our traffic.

During the first quarter, we launched our Top Marketer pay-per-lead product for real estate agents. Top Marketer provides consumers with information regarding recent residential real estate sales and connects these consumers with a participating realtor who can provide them with a much more detailed report about their specific home. These consumer leads are being offered to agents on a price-per-lead basis, depending upon the geographic region.

With the launch of Move.com, we are now offering new products that provide flexibility and increased exposure for our new homes and apartments' customers. Similar to the Realtor.com listings products, Move.com displays basic property listings for free and offers a showcase listing product for customers who want to enhance their properties. These showcase listings are sold on a monthly subscription basis.

In addition, homebuilders and rental owners have the opportunity to purchase prioritized featured listings as well as traditional text advertisements on a cost-per-click basis. Initially the cost-per-click is based on fixed pricing. Later this year we will transition to variable auction-based pricing. We will also be incorporating priority cost-per-click listings to our property search results on Realtor.com.

Last week, we introduced a new website product developed by our TOP PRODUCER team. TOP PRODUCER Websites is a new, innovative service that allows realtors to tightly integrate customized content-rich personal websites with their contact management systems. The website service is sold on an annual subscription basis, providing monthly recurring revenue.

The final group of initiatives relates to introducing Move as an essential resource for connecting consumers with the solutions they need before, during and after a move. We are now engaged in branding the Company to better fit our mission and market opportunities.

Today, we are the number one online consumer destination in the real estate category. To address expanding consumer needs and changes in the competitive landscape, we intend to increase consumer awareness of our new brand and our websites. Yesterday we integrated Move.com with our existing traffic partners including AOL, MSN and Yahoo!. We will be targeting new traffic sources for integration of our listings experience as well; and with our new scalable revenue models, we should find many interested traffic partners.

We also remained committed to ensuring that Move.com and all of our destination sites have strong positioning within the search engines.

Move.com will also be promoted offline. We will start testing consumer marketing and branding programs in selected markets later this quarter. These tests are designed to let us determine which media combinations most directly impact traffic levels, revenue per visit, customer awareness and customer counts. We will remain very cautious in our approach to consumer marketing.

In summary, we are well positioned to continue our leadership position in the online real estate category. We have a large traffic lead, healthy relationships with the real estate industry, well over 100,000 customer relationships, and a compelling and improving content experience for consumers.

We have made a lot of improvements to our products and services so far this year and we are planning much more for the remainder of the year. We look forward to updating you on our progress. I will now turn the call over to Lew Belote, our CFO, for a review of the first quarter results.

Lew Belote

Thanks, Mike. Before I discuss our results, I would like to note a change in our financial reporting. This quarter we adopted Statement of Financial Accounting Standard 123R and are reflecting the estimated compensation expense on our financial statements for stock options granted to employees and other equity awards. As a result, we have recorded expense of $3.37 million this quarter.

There have been no significant options grants since March of last year, yet we anticipate there will be additional grants this year, but cannot quantify the impact on our results until the amount and timing of those grants are determined. Prior to the impact of any future grants, we expect our quarterly expense from FAS123R to decline to $2 million to $2.3 million in each of our remaining three quarters.

The financial highlights of the first quarter include revenue of $69 million, which represents 22% growth over the first quarter of last year and almost 4% growth from last quarter. Income from operations, excluding restructuring charges and certain other non-cash and nonrecurring items, principally stock-based charges, depreciation, and amortization or EBITDA of $3.9 million which is in line with what we expected, given our point in the investment cycle and product launch strategy. And, a GAAP net loss of $2 million. Excluding the effects of FAS-123R, net income for the quarter would have been $1.3 million.

Last quarter we realigned our financial reporting to better reflect the way we manage and evaluate our business. We now have two business segments based on customer type. As a reminder, the real estate services segment includes Realtor.com, TOP PRODUCER and Move.com, which incorporates what was formally HomeBuilder.com and RENTNET. The Move-related services segment includes Welcome Wagon, retail advertising, Moving.com, and our home plans business.

The real estate services segment revenue for the quarter was $49.2 million, an increase of 24% from the first quarter of 2005. The segment operating income was $11.6 million or 23.5% operating margin, which is consistent with the operating margin reported in the first quarter of last year. Excluding $1.3 million in stock-based compensation expense for this segment, our operating margin increased slightly to 26%. This level reflects significant spending related to the launch of Move.com and other initiatives Mike discussed, as well as slightly higher traffic expense.

Compared to recent quarters, the operating income was lower due to both the ramping up of our investments and the fact that the last three quarters included a non-recurring and non-cash [ascendant] revenue of $1.3 million per quarter which had little cost associated with it.

The Realtor.com revenue, which makes up the largest component of the segment, was up 31% over the first quarter of 2005. We continue to experience upward momentum with our Showcase enhanced listings and featured home products. In March 2006 NRT extended its relationship with us for two years for a total of $25 million. We view NRT's commitment as a strong validation of the value of our products and also of NRT's dedication to Internet marketing. I do want to point out that next quarter our year-over-year revenue growth will be lower due to the fact that Q2 of 2005 also includes the impact of the NRT relationship that began in April of last year.

Turning to our software business, TOP PRODUCER's revenue was up 32% over the first quarter of 2005 due to the continued strong sales of Product 7i. As Mike said earlier, we launched Top Marketer during the quarter and have seen strong conversions to paying customers from the pilot group. We are offering the product to the balance of the TOP PRODUCER customer base and a phase rollout program over the next several quarters.

Top Marketer did not contribute to Q1's revenue, as we only started charging for the product in March. As we explained in February, the Top Marketer pay-per-lead product will not be exposed to our Realtor.com traffic. The comparable product on Realtor.com will be the subscription-based featured CMA.

There are other product initiatives within TOP PRODUCER causing products development expense to remain high and keeping margins from expanding as rapidly as they otherwise might. Along with continued R&D for the flagship CRM product, we will be launching other features and services such as the website service Mike described earlier.

This is the last earnings call in which we will be referring to our businesses under the brands HomeBuilder.com and RENTNET. After today, we will refer to them as Move's New Homes and Move's Rentals businesses. Due to the sales and marketing initiatives we implemented last year, these businesses combined generated 5% revenue growth over the first quarter of last year, driven by increased customer counts and listings.

With the improved financial performance and the early indications of support from our new business model, we are entering the transition of these businesses with strong momentum. As we said last quarter, the conversion of our existing customers to an entirely new product set may be disruptive to near-term financial results. We expect this risk to be concentrated in the second and third quarters and hope to exit the year with quarterly revenue growth in both of these businesses.

In our Move-related services segment, revenue was $19.7 million, an increase of 18% over the first quarter of 2005. As a result of the ongoing investment in Welcome Wagon, this segment reported an operating loss for the quarter of $1.6 million compared to income of $437,000 for the same period the year before.

The investment consisted of launching our new national book, the development of the Welcome Wagon website and local business directories, improvement in our sales collateral and training, and new incentives to improve retention of our sales professionals. Also contributing to the operating loss was $6000,000 in stock-based compensation expense. We expect the Move-related services segment margins to improve throughout 2006 as overall revenue increases in each of these businesses.

Welcome Wagon, which comprises the largest revenue stream in the segment, delivered revenue growth of 19% over the first quarter of 2005. The strong performance in our Welcome Wagon business was a result of increased revenue from our existing local merchants' new mover gift book and Pinpoint Solo mail product as well as revenue from our newly added national advertisers.

Our retail advertising business also delivered a strong quarter, with revenue up 23% from the first quarter of last year. The revenue growth is due to higher sell-through of available impressions compared to the same quarter last year. As we said in March, with the launch of Move.com, graphical ad inventory on the rental and new home search result pages will be replaced with cost-per-click text links. Because the revenue for these text links will appear in the Real Estate Services segment we do not expect the revenue in our retail advertising unit to sustain 20% growth for the full year.

The first quarter also included one month of Moving.com's financial results. We acquired Moving.com in late February, and will be integrating the business over the next couple quarters. Moving.com's customers have reacted well to the transaction and we have been able to improve the monetization of their lease through more effective sales and marketing plans.

Our Homeplans business reported a decline in revenue of more than 10% from the same period last year. This is the result of steps we have taken to improve profitability by reducing magazine distribution and to some extent, reduced consumer demand for Homeplans. The softness in customer demand for Homeplans has historically been a leading indicator of slowing housing demand in the economy.

Our unallocated or corporate expense for the first quarter was $12.9 million, an increase of $2.5 million from the same period last year. This increase is due to the cost associated with our data center move and ERP implementation as well as $1.5 million in stock-based compensation expense. Excluding those three items, our unallocated costs declined slightly from last year.

Looking at our consolidated results, our gross margin in the first quarter of 76% was slightly below the 77% gross margin in the same period a year ago. This is primarily a result of lower margins associated with the new national Mover Gift Books in our Welcome Wagon business. We still expect our gross margins for the full year to be close to the 2005 total of 78%.

Taking our expenses line by line, sales and marketing expense in the first quarter of $25.3 million was $3 million higher than the first quarter of 2005, reflecting the impact of our investment plan and increased distribution costs as well as $490,000 in stock-based compensation expense.

We continue to expect sales and marketing expense as a percentage of revenue to increase during 2006, as we introduce and promote our consumer brands.

Product development expense continued to ramp as we execute on our product strategy. Product development expense during the first quarter of $8.4 million compares to $4.4 million in the first quarter of 2005. Due to a heavy schedule we have for new product launches this year, our product development expense will likely exceed our 10% target level for the next few quarters.

General and administrative expense of $21 million for the first quarter was $4.6 million higher than the year before, because of higher consulting fees associated with our data center move and our ERP implementation. In addition to $2.3 million in stock compensation expense.

Our cash and short-term investments at March 31st were $142.7 million, a decrease of $9.6 million from the end of last year. Our sources of cash during the quarter were as follows: $3.9 million in EBITDA, $2.4 million from the exercise of stock options, a $5.2 million increase in working capital and $1.6 million in interest income. These were offset by $2.5 million in capital expenditures, $7.5 million in payments for the settlement of former officer legal fees, $9.6 million for the acquisition of Moving.com, a $1.8 million litigation settlement, $900,000 in payment of restructuring charges and $450,000 in payment on capital leases.

Our CapEx for the full year will likely exceed $15 million, contributing to a slight decline in our mid-year cash level. By the end of the year, however, we expect our cash balance will be relatively close to the balance at the end of last year of $152 million. At this point I would like to turn the call back over to Mike for final comments.

Mike Long

Thanks, Lew. We are pleased with the progress that we've made this quarter, both operationally and financially and at this point we see no reason to modify our expectations for full year financial performance of better than 15% revenue growth and modestly improved EBITDA margins. We are very interested in your questions, so operator, please open the phone lines for those questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question is from Aaron Kessler - Piper Jaffray.

Aaron Kessler - Piper Jaffray

Hi guys, A couple of questions. First on the real estate market, can you comment a little on what you are hearing from your agent, based in terms of whether they are increasing their spending online or shipping that spend faster? Then a couple of follow-up questions.

Mike Long

The conversations that we are having is to a large degree what we forecasted would likely happen and that is that they are looking much more closely, particularly the large brokers, at their marketing spend and looking for ways to get more benefit out of that, more value out of that marketing spend.

As we have suggested for some time that when the market started to slow, that it would make online advertising much more attractive because of the efficacy of it versus the offline spend. So I think things are evolving pretty much along the lines that we anticipated. We remain optimistic that some slowing in the market will actually be a catalyst for a faster adoption of the online advertising model in the real estate category.

Aaron Kessler - Piper Jaffray

Great. Then in the apartments and new homes categories, what is your timetable for getting much higher penetration levels or getting a critical mass of either apartments or new homes on the site? Then one follow-up after that. Thanks.

Mike Long

As of today, from Friday versus Monday, we just went up by a factor of five times, Aaron, with the content on the site. I encourage everyone on the call to go to Move.com and experience the step function increase in content that is now on the site. We are very excited about that. So that was the key objective of Move.com in creating what we think is the industry's leading real estate search engine and switching from a paid inclusion model to a free inclusion model with the opportunity for customers to selectively enhance those free listings. We couldn't be more pleased with the successful launch yesterday.

Aaron Kessler - Piper Jaffray

Are you seeing anything different in the competitive landscape or is it status quo from last quarter?

Mike Long

As far as at the grassroots, the blocking and tackling competition, there's not been a significant change or market change from last quarter. There have been, obviously, there's some new offerings out there. When it comes down to actually competing for revenue dollars, we have not yet noticed a change. It's something that we, of course, are looking at very closely.

Aaron Kessler - Piper Jaffray

Thank you and good quarter.

Mike Long

Thanks, Aaron.

Operator

Our next question comes from Stewart Barry - Think Equity.

Stewart Barry - Think Equity

Thank you. To what degree would you characterize your investments or expenses in product development sales and marketing this year as non-recurring? That will be my first question.

Mike Long

I will ask Lew to comment, but as we've shared with investors particularly over the last year, that 2006 was going to be a major investment year for us in launching Move.com, replacing the business models for HomeBuilder.com and RENTNET, and of course, strengthening and extending the product and content advantages that Realtor.com enjoys. So introducing all of these performance-based marketing options for our customers, whereas a year ago, up until the release of Move.com, we'd exclusively been offering just one-dimensional marketing solutions built around subscriptions.

This is all requiring substantial investment for 2006. We are, as Lew suggested in his comments, we do expect product development to be a little higher than the 10% that we planned probably in the 12% range.

As far as the non-recurring aspects of it, our product development will be driven by our budget goals and our capital plans and our profit targets, but also what our competition does and what our customers need. We are very, very customer-driven and this is an opportunity for us to, we think, expand our leadership as opposed to just defend it.

In the non-recurring category we do have some large infrastructure projects that are having a significant impact on our margins in 2006. Our ERP project, our Enterprise Resource Planning project which is companywide was delayed from last year. We had hoped to get more done last year on that but because of Sarbanes-Oxley compliance and these new product initiatives, we are now incurring the cost of that in 2006.

As we've shared with you, we are doing a massive relocation of our data center operations from California to Arizona, to the Phoenix area. We have one of the more sophisticated server farms in the Web market. That has to be successful and is very expensive. So those have characteristics of being non-recurring.

Lew Belote

Stewart, I would just make one other comment. As we said earlier, we expect as the Company grows we will continue to invest in new products. So 10% range out in the future would not be unusual. There is cost being incurred in the G&A line to support some of these old products as we are making the transition. That's our internal resources that are basically keeping those products up and running. So as we phase those out, you'll see some of those costs go away but it would be really difficult to quantify the amounts at this point.

Stewart Barry - Think Equity

One further question. As you test and introduce your new advertising products and pricing model among your advertising base, are you more encouraged, less encouraged than you were a couple of months ago about their adoption? Or are you just facing some new unexpected challenges?

Mike Long

We're more encouraged by it. In anticipation of the launch of Move.com in these performance-based products, our sales forces have had almost six months to go work with our customers to educate them. Because in many cases it's the first time that they have purchased performance-based advertising products online. So there has been an education curve and the adoption, we think, will be higher than our internal expectation.

So we are more enthused by it. It is the absolute right thing to do. It draws a stronger connection between the traffic we generate and our ability to monetize it. It is the right thing for our customers because many of them wish to buy performance-based products; but still many of them still wish to use online advertising to build and strengthen their brand. So we are going to maintain both kinds of offerings.

Stewart Barry - Think Equity

Thank you very much.

Operator

Our next question comes from Mark Argento - Craig-Hallum.

Mark Argento - Craig-Hallum

Thank you. Good afternoon. A couple of questions around the Move.com website. In particular relating to the content with the big increase in the number of offerings that you have out there the number of listings that you are showing. Can you give me a little bit of color what or who you have or what companies are out there, in terms of the different websites you are crawling what sites -- I know CraigsList, I think, is one that's not letting you crawl looking for additional content. How willing have other people been to let you crawl their website and how receptive have they been is the first question?

Mike Long

Yes, Mark, I just asked Allan Merrill, our Executive Vice President, to join us for this Q&A session and Allan personally has been managing the relationships with those various websites and their willingness to work with us. So, Allan, would you comment?
Allan Merrill

Sure. Mark, I break it into two categories. On the content owner side, which I would include the apartment owners and the homebuilders, there has been incredible enthusiasm to get us to content and they've figured out pretty quickly that this is a way to promote individual units and to send us vacancies and harder to sell. We've seen really exceptional support for that. Frankly, getting the site up has stimulated even more of those calls in the last 24 hours.

The second category I'll call kind of mid-level aggregators - people like CraigsList or companies or sites that would have been competitive to our paid inclusion model. It's a mixed bag there. Without naming names, I think you'll see on the site that some of the folks that we would have historically characterized as competitors are both providing content to us on a datafeed basis, and you will see buying CPC advertising on the site.

There are others, and CraigsList is one that was mentioned yesterday in the article in the paper. They are taking a cautious kind of a wait and see perspective to see how our business model unfolds to determine whether that is in their interest. At this point they've asked us not to.

I would say in general, we are getting pretty good support and especially from those that have revenue models associated with their listings businesses.

Mark Argento - Craig-Hallum

Subsequent to that, what has been the reaction from your existing customers that you had in the paid inclusion model? I see a lot of those same customers look like they are up on the site right now. Does that mean they are paying you for the new enhancement model? Or is that just kind of a carryover when you migrated the customer list?

Allan Merrill

Yes I mean, it's actually both of those things. We had to have an affirmative agreement with them on the basis under which we would transition them. So no one has been default transitioned and is being billed for something that they don't understand. The point of the February 22 call was to allow us to mobilize our army of sales folks and customer care people to talk to our customers, to receive their permission to transition their paid inclusion revenue to both showcase listing or showcase enhancement revenue and some amount of a budget for featured listings.

So to the extent that you see what would've been historical customers in those positions it is because they've agreed to be in those positions on a fixed basis, relative to Showcase; and on a variable basis, based on clicks in the Featured Listings area. As Mike said, we have not introduced bidding in the Featured Listings and I don't expect that we will until sometime in the third quarter.

Mark Argento - Craig-Hallum

One last question. If I'm not mistaken, I believe it's March or maybe April that is typically your heavier season in terms of when your realtors come to renew or you try to renew your realtors for their annual contracts on the Realtor.com site. How has that gone, given the market environment? What is the anecdotal churn level that you are seeing or any kind of metrics that you can provide around the churn on the products? Also, could you talk a little bit about what kind of price increase you're pushing through for the year?

Lew Belote

February and March used to be big spikes in terms of renewals, primarily because of those transitioning customers from old-standing agreements. That was back when we used to sell websites and then when we converged it to the original media product. Since we have rolled out featured homes, featured communities et cetera and gone and marketed directly to realtors over the past few years, there's not quite the spike in February and March that we used to see.

That said, there's still a lot of renewals which is one of the reasons why you see the increase in deferred revenue when you look at our balance sheet compared to December 31st. As we've always said, we don't quote renewal rates because, in many cases, they could be misleading. We have been very encouraged by not only renewals of existing customers but also new customers we are signing up.

Some of those new customers are coming through the real estate marketing expos we've been talking about, as well as just direct marketing through some of the mid-sized brokers.

Mike Long

To answer your question about the price increases. For many of our products we pass through about a 10% price increase for Showcase listings, for example, and display advertising. But also in other situations, such as Featured Homes, we increase the amount of inventory available in markets where that we had an inventory shortage. We were able to basically create more inventory and more product for our salespeople to sell, without necessarily increasing the price per Featured Home to a brokerage or realtor. So but I would say use a 10% as a standard.

Mark Argento - Craig-Hallum

Thank you.

Operator

Our next question comes from Jeetil Patel - Deutsche Bank Securities.

Mike Long

Hi, Jeetil.

Jeetil Patel - Deutsche Bank Securities

How are you guys?

Mike Long

Doing great.

Jeetil Patel - Deutsche Bank Securities

Sorry about the noise in the background. I have two questions. At the margin it looks like what should be the new home and the rental business appears to be doing better than expected. I know it's probably hard to do, but can you give us a sense of, maybe, what kind of the modest improvement even at this early stage? How much can you attribute to the weakness in the market and the homebuilders and the rental managers stepping up to market their inventory more aggressively versus the initial response as you've rolled out Move.com?

Second question is, I guess we're at Phase I right now and it's, I know early days, but I guess as you look out over the next six months, what are the phases or milestones we should look to visibly on the website that will give us an idea that you're progressing forward on the different phases of scaling this model up? Thanks.

Mike Long

As far as a market reaction at HomeBuilder and RENTNET, there's been lots of published reports about softening and new home starts. But we have seen an increase as a function, really, more of our effective marketing. We've spent a lot of time starting late last summer pursuing some of the major players who are not advertising with us. We did some special marketing programs for them and the continued focus on the larger builders as well as the announcement of the new move strategy I think has helped increase on the move side.

The rental side, we've had new leadership there for the last 18 months and a concentrated sales effort and it's just helped the overall market. Now on the a rental side we are seeing the customer fully understanding the new product, the new Showcase product. But in many cases, as Allan mentioned, a lot of our customers haven't bought a performance-based product before, so we are still working with the customers to understand that and to subscribe to it.

Mike Long

This is Mike, Jeetil. To maybe finish your question, the milestones for you to look for, I mean we have forecasted that. We shared with you that the second and third quarter were going to be critical as far as the speed with which the new Move.com performance-based marketing product will be embraced and how quickly our customers could get comfortable with those offerings and purchasing from us.

So obviously a milestone will be our next conference call because we will have two months of experience that we will be able to speak in detail with you about, since we just launched May 1st. However as far as new products and activity on the site, you are going to see Featured CMA launched on Realtor.com and we are quite encouraged and optimistic about how that product will be received. With the be amount of traffic that we have on Realtor.com it has a lot of potential.

The integration of the Welcome Wagon local business directory more completely and seamlessly throughout our network is very important to start getting some synergies between our Real Estate advertising segment and our Move-Related advertising segment.

The community pages. We are, as we have shared previously, is very critical to not only helping increase our traffic and consumer loyalty to the site as well as customer and realty loyalty to the site but it will give us differentiated content that we think will be unique in this space. We are going to roll those community pages out this quarter. That is a very important milestone for us.

The activity around those communities, I think those looking at the site will be able to observe how quickly consumers and professionals are using those community services. So those are some things I would point you to.

Obviously introducing our bidding, our auction bidding will occur in the third quarter on Move.com and that's very important for us as well, so we can let the market pick what the real value of the advertising is as opposed to us attempting to establish that through fixed pricing. So those are a few things I encourage you to look at.

Jeetil Patel - Deutsche Bank Securities

So it sounds like you are actually doing a lot of the product and features early on, to make sure you get some pretty good traction as you kind of scale up on the Move.com area.

Mike Long

The product area of this is ahead of plan. They have done more than frankly we've planned or thought was possible. Now we have a lot of momentum as we suggested in our comments, so we are just going to push forward. It's one of the reasons that we are forecasting our product development expenses to be higher than 10%, is that our team is highly motivated, very productive and rather than scaling back to a lower level now that we just launched Move.com, we are just going to press forward and get these new features and functions out even sooner than we planned.

Jeetil Patel - Deutsche Bank Securities

Thank you.

Operator

(Operator Instructions) At this time, there are no questions in queue.

Mike Long

Operator and folks, investors, we would like to thank you very much for your kind attention to our call today. We are very excited where we are with the transitioning of our Company and creating, I think, an exciting future for our customers and our investors. So thank you very much. Look forward to talking with you next quarter. Goodbye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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