This article was originally posted on elcapitalmanagement.com.
Days ago, we looked at Zillow from its financial statement point of view. It has positioned itself, as of March 31, 2013, with 58% of total assets in cash, cash equivalent and short term investment combined with a series of acquisitions made in 2012 in order to boost up the numbers of its monthly unique users and fee-paying subscribers.
Well, now Trulia, Inc. has made its first big-ticket acquisition as a public company and it has seized an opportunity that could thrust itself to be a leader in real estate information industry. This deal came in on May 8th, 2013, that Trulia, Inc., a Delaware corporation ("Trulia"), entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among Trulia, Market Leader, Inc., a Washington corporation ("Market Leader"), and Mariner Acquisition Corp., a Washington corporation and a wholly owned subsidiary of Trulia ("Merger Sub"). Pursuant to the terms, and subject to the conditions, of the Merger Agreement, at the closing of the proposed transactions contemplated by the Merger Agreement, Merger Sub will be merged with and into Market Leader (the "Merger"), and Market Leader will continue as the surviving corporation of the Merger and as a wholly owned subsidiary of Trulia., according to Trulia's Form 8-K. The total consideration is around $355 million, according to Trulia's own press release, so Trulia's total assets would swell from $236 million, as of March 31, 2013, to almost $591 million when the total purchase price is fully recorded on Trulia's balance sheet.
It is a risky yet bold move for Trulia. How so? We first pulled up Market Leader, Inc.'s financial statement to explain further.
We can see that Market Leader, Inc. (LEDR) has the following historical balance sheet and income statement. Before financial crisis 2008-2009, Market leader, Inc. had more than $60 million in revenue annually. It was affected deeply by financial crisis, starting from year 2009, when the annual revenue dropped to $24 million. This was only 40% of what it used to reap in before financial crisis 2008-2009. In 2012, Market Leader, Inc. brought in $45 million in revenue, which was close to 80% of the level in 2007. Also, since 2007, Market Leader, Inc. had reported net loss every year, this would form a pressure on Trulia to shed off some cost structure inherited from Market Leader, Inc in order to enhance profitability.
Additionally, Market Leader, Inc. has total assets in book value, $39 million, as of December 31, 2012, which was less than 50% of that in 2007 in terms of book value. More than 50% of total assets, i.e. 22 million, are in cash equivalent and short term investment position. So if we assume that the book value of non-current assets on Market Leader, Inc's balance sheet are very close to its fair market value, then we can assume that Market Leader, Inc.'s fair market value is $40 million. Compared to the price tag paid by Trulia, $355 million, there is a multiplier of nine between the price tag and Market Leader, Inc.'s fair market value. This deal would force Trulia to record a large amount of goodwill, which is subject to impairment test annually.
So it is indeed a risky yet bold move from Trulia. However, we can also see the strategic side of this deal. As announced in Trulia's own pres release, combined companies will have approximately 46,000 premium subscribers, whereas Trulia alone had 27,900 paying subscribers, as of March 31, 2013. It is a 40% increase in total number of subscribers. This also reveals one of main objectives for both Trulia and Zillow is to find more paying subscribers and the race is on for both.
So we can now look at Trulia, Inc.'s own financial statement to see how it had fared before this deal. As of March 31, 2013, Trulia had more than 90% of total assets in cash and cash equivalents. Since the third quarter of year 2012, it has more than 80% of total assets in cash and cash equivalents, which implies that it has been seeking ways to put these cash into good use, i.e. acquisitions. After the Market Leader, Inc. deal, Trulia probably has only $52 million in cash and cash equivalents, which is around 10% of total assets after the Market Leader, Inc. deal.
On the revenue side, Trulia, Inc. has been aggressively engaging in SGA&E, which is more than 70% of total revenue, as of March 31, 2013. Since the second quarter of year 2012, Trulia has consistently reported net loss every quarter. For the remaining quarters of year 2013, one of good signals for Trulia's investors and shareholders would be to see it turn profitable the first time.
However, as we have pointed out one of the key growth indicator for Zillow is the growth rate of paying subscribers. The same indicator would be true for Trulia, Inc. as well. Even though it might turn profit for the first time since its IPO, the organic growth is what differentiate who is running ahead between the two companies.
Bottom Line: Keep an eye on Trulia, Inc. as it has embarked a significant asset/journey to gain more paying subscribers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.