Move Q3 2006 Earnings Call Transcript

| About: Move, Inc. (MOVE)
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Move, Inc. (NASDAQ:MOVE)

Q3 2006 Earnings Call

November 2, 2006 5:00 pm ET

Executives

Mollie O'Brien - IR

Mike Long - CEO

Lew Belote - CFO

Analysts

Aaron Kessler - Piper Jaffray

Mark May - Needham & Company

Imran Khan - J.P. Morgan

Mark Argento - Craig-Hallum

Neil Doshi - ThinkEquity Partners

Operator

Good day, ladies and gentlemen and welcome to the Move, Inc. Third Quarter 2006 Earnings Call. My name is Maria, and I will be your audio coordinator for today. At this time, all participants are in listen-only mode and we will be facilitating a question-and-answer session towards the end of today's conference. (Operators Instructions).

At this time, I will now turn the presentation over to Mollie O'Brien with Investor Relations. Please proceed, ma'am.

Mollie O'Brien

Thank you, operator. Good afternoon and welcome to our call today. On the call 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 constitutes 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 November 02, 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'll now turn the call over to Mike Long.

Mike Long

Thank you, Mollie, and good afternoon, everyone, and welcome to our third quarter call today. During the quarter, we continued to make progress on your strategic initiatives. Our revenue growth of 14% over the third quarter of last year was driven by strong performances in our REALTOR.com and Top Producer businesses. Offset by expected year-over-year revenue declines in our rentals and new homes businesses, as we continued to make major business model and product transitions. EBITDA was $7.4 million or 10% of revenue.

Before Lew provides financial details on our quarterly performance, I would like to discuss several topics with you; a recent organizational change, the recently completed relocation of our data center and its effects on our operations, and the real estate market, our performance relative to the market opportunity, and our performance expectations for 2007 and 2008.

As you may have seen, we have promoted Allan Dalton, President of REALTOR.com to President of Move's Real Estate Division. REALTOR.com together with Top Producer has been the growth-engine striving the company's improving results for the past several quarters as we have continued investment in other areas of the company.

Under Allan's leadership, REALTOR.com has achieved remarkable support from the real estate community and strong brand awareness among millions of consumers as a best-in-class offering as well as strong revenue growth and profit growth. With this promotion, Allan can now leverage his experience and leadership abilities across the entire real estate market, including resale homes, new homes and rentals. Allan will lead an integrated cohesive team serving all of our real estate customers driving both revenue and cost synergies throughout the division.

The relocation of our data center operations from Southern California to Phoenix which reduces our future risk and operating costs and increases our processing capability has been a significant undertaking. It will cost approximately $6 million in operating expense this year and more than $10 million in capital expenditures. It has also consumed considerable internal resources and necessitated a software deployment coteries for a number of months. I'm very pleased to announce that our new Phoenix facility is fully online and is operating our websites.

We are now actively pushing a backlog of projects through the QA process. As a result, we will be launching a number of new products and features between now and early next year. These include improvements to the user experience for both REALTOR.com and move.com, incorporating better personalization, mapping and search interfaces, a cost-per-click auction engine supporting our featured listings product, and community pages.

There were some short-term adverse consequences related to the coteries during the data center relocation. One example relates to the transition of our new home and rental business models. While we are pleased with both consumer and customer adoption of the new site, the coteries delayed planned user interface enhancements and implementation of our auction pricing model. The net result is that we now expect the twelfth quarter in terms of year-over-year revenue comparison will be the fourth quarter rather than the third quarter. While we are disappointed with the delays in our business operations caused by this critical and challenging technology project, we are nonetheless pleased with its success and can move forward.

We define our target market in terms of three opportunities. First of all, serving consumers that are considering moving, in the process of moving, or have recently moved, to this large consumer audience of 100 million searching for real estate information, and the 30 million, who actually move each year, our services are generally free. The other markets we serve consist of two distinct categories of advertisers. Real estate professionals, who want to advertise their housing options and market expertise to our community of movers. And other advertisers such as home improvement companies, who want to get their marketing message to moving consumers.

We estimate the combined opportunity to be more than $20 billion annually with the vast majority of those dollars being spent offline today. The turnaround in restructuring of Move allowed us to completely rethink the opportunity in the real estate market. Accordingly, we adopted a strategic view that the most durable business model for the company would generate revenue and profit from a diversified base of customers, product offerings, and sales channels, and would serve the largest possible audience of consumers buying, selling or renting real estate.

The residential real estate industry has a long history of cycles influenced by job growth, interest rates, supply and demand of inventory, global events and buyer and seller psychology. We believe that any resilient business model serving this market recognizes their opportunities created in both strong and weak market conditions. We believe that our commitment to serve home sellers, home buyers, and renters, to serve real estate professional advertisers as well as local and national merchant advertisers, to serve realtors, home builders, and apartment owners with a bias towards the most successful professional practitioners, to provide advertising choices for our customers whether it be brand building, display advertising, or cost-per-click solutions, and to provide decision support tools to both consumers and professionals, provides us with the flexibility to address the needs of our customers, regardless of market conditions.

This flexibility, along with the fact that we are still at the beginning of the adoption curve for online advertising, makes us cautiously optimistic about our prospects in current market conditions and quite optimistic about our longer-term future. There's been a lot of speculation about the near-term effects of a real estate market slow down including the impact on our business. Our thesis has long been that a slowing market, rather than being harmful to our business, would prove to be a positive catalyst as agents and brokers and home builders seek more efficient ways to reach consumers. Our REALTOR business in particular continues to perform well. We are growing our REALTOR customer count both in individual agents purchasing products and broker offices, stepping-up to advertise on REALTOR.com.

In our new homes business, the impact of a slowing market is not as apparent due to our business model transition, but builders in many areas of the country are seeking our help in reaching consumers, when only 12 months ago, they did not need to advertise to sell homes. We continue to believe that the combination of new marketing systems for our customers that we are bringing to market, together with the acute need for builders to reduce a large inventory of homes; we will drive increased revenue and profits in this segment in 2007.

Our Move Related Services segment, which addresses the needs of local and national merchants is growing, but not at the rate and profitability that we believe is possible. We believe the opportunities for improvements in this segment will be driven by better product offerings, and better management execution. While macro issues can effect this segment, we feel internal factors are more responsible for current and near-term performance. We expect our plan changes over the next few months; we will get this important segment more in line with our expectations.

With the right product set, we can offer advertisers a unique opportunity to reach this large valuable Move audience directly, enabling them to influence consumers purchasing decisions at just the right time. Even though the macro market is changing, we feel confident about our market position and our ability to grow through evolving market conditions in 2007 and beyond.

In past calls, we've stated our long-term financial targets as revenue growth of 20% or more, and EBITDA margins of 20%. While many of our investors have applauded this long-term goal, they have consistently asked when? Based on our current view of the development of our business model, and market trends, we believe this goal is achievable in 2008. For 2007, we expect our revenue growth to approach 20%, and we expect to improve profitability in 2007 resulting in a materially higher EBITDA margin than 2006. Although, we don't expect to reach our long-term target of 20% margins until 2008.

I'd like to now turn the call over to Lew for details on the quarter. Lew.

Lew Belote

Thanks, Mike. Revenue for the quarter was $75.7 million, which represents 14% growth over the third quarter of last year. Our EBITDA, as we define it in our supplementary schedules was $7.4 million or 10% of revenue, compared to $2.9 million last year. Last year's EBITDA included $5.5 million for former officer's legal defense. This quarter's results includes an increase in bad debt expense of $600,000 related to one retail advertising customer in the mortgage industry. While online mortgage advertising has softened this year, we don't foresee a trend likely to result in additional charge-offs. Without that increase in expense, EBITDA would have been $8 million for the quarter.

We reported GAAP net income of $1.3 million, excluding the effects of stock-based compensation under FAS 123R which we began recognizing this year, net income for the quarter would have been $5.4 million, compared to $1.9 million last year. In the real estate segment, which includes REALTOR.com, Top Producer, new homes and rentals, we reported revenue of 53.4, an increase of 13% over the third quarter of last year. The operating margin was 26%, compared to 34% last year. Excluding stock-based compensation, the margin would have been 29% for the quarter. The decrease in margin is mostly the result of the expanded product development of our move.com, website, other product development in the segment and the impact of the transition in our business model for new homes and rentals.

REALTOR.com revenue was up 19% over the third quarter of last year. During the quarter, we experienced strong revenue growth from enhanced listings, display advertising products, and our Featured CMA product. This revenue growth was offset by expected softness in revenue from templated and custom websites, and then our virtual tour revenue; the decline in virtual tour revenue was attributable to the $1.3 million in [conceding] non-recurring revenue in 2005. And our decision to offer virtual tour postings for free, for all of our enhanced listing customers earlier this year.

Analyzing our product offerings; REALTOR.com revenue growth excluding websites and virtual tour product lines exceed 30% for the quarter. Supporting our thesis, that a slowing market may accelerate a shift to online advertising. We continue to see solid growth in individual agent customer account. At September 30th, we had approximately 20% more individual agent customers than at September 30th, 2005. We also had strong sales in the quarter of company showcase, our listing enhancement product purchased by brokers on behalf of their agents. In the first nine months of the year, we have added over 600 broker customers.

Our company showcase product now represents more than 130,000 agents, including those employed by NRT. Our Top Producer software business reported revenue growth of 26% over the third quarter of last year. We have continued an active product development schedule in this business. Over the next several months, we will be releasing new features for our 7I product and in early 2007; we'll release a new version of the product. We have also extended the reach of market snapshot, the new top marketed feature, we announced last quarter, from 2 markets to approximately 120 markets.

Market snapshot allows consumers to see real time MLS data about homes on the market, including time on market trends and list-to-sale-price ratios. As anticipated, revenue from our new homes and rentals businesses, declined from the third quarter of last year. On a combined basis, revenue was down 10%. We feel that we have largely completed the process of educating our customers and transitioning them to the new product set. However, as Mike mentioned earlier, we still have work to do improving the site and product performance.

Through the third quarter, we are experiencing higher showcase listing customer counts than we projected, and the overall traffic is in line with our expectations. The click-through rate of our traffic to featured listings, however, has not risen to the level we expected. We have enhancements to the site plan that we believe will increase the performance. Also the auction pricing platform, we are building will be introduced early next year. These improvements won't benefit us in the fourth quarter, which is also typically our lowest traffic quarter of the year. While the delay in the financial improvement is disappointing, we still expect to see revenue growth in both new homes and rentals next year.

Our Move Related Services segment reported revenue of $22.3 million representing 16% growth over the third quarter of last year. However, this segment was not profitable this quarter, due to lower than expected revenue in Welcome Wagon and Home Plans and the bad debt expense in retail advertising.

Welcome Wagon's revenue for the quarter was 10% higher than the third quarter of 2005. We continue to believe that Welcome Wagon has the potential to deliver much greater revenue growth and profitability, and we are working on the right combination of products and services to unlock the significant potential of this brand. We expect to launch a new Welcome Wagon website in early 2007 as well as improved direct marketing products later next year. We have also analyzed our cost structure and have identified operating synergies in the business that can be realized over the next year. Given the significant number of changes we are making from the business right now, it is difficult to forecast the precise level of revenue growth for Welcome Wagon, though it is somewhat lower than we expected earlier this year. Nonetheless, we remained optimistic about Welcome Wagon's future contribution to our performance.

Our retail advertising business generated revenue growth of 4% over the third quarter of last year. Due to the expected decline in inventory associated with the launch of move.com, we expected a reduction in the growth rate of our display advertising revenue. Softness in revenue from our lender directory is also contributing to the slower growth. Because of normal seasonality trends, which result in lower traffic and fewer moves in the fourth quarter, we expect retail advertising and Welcome Wagon revenue will decline slightly next quarter as they have in the fourth quarter of prior years.

Revenue from our home plans business continues to decline, and contributed to a drag on segment profitability. This business is directly impacted by lower demand for new homes as consumer -- consumers postpone purchasing blueprints and designs.

Our unallocated or corporate expense for the third quarter was $13 million, an increase of $2.5 million from-- a decrease, excuse me, of $2.5 million from the same period last year. Excluding the effect of stock-based compensation of $2.4 million in the quarter as well as the legal expense related to the defense of former officers of $5.5 million in the third quarter of last year, corporate expense increased by a net of $600,000. This increase is mainly due to costs associated with our data center move, which was approximately $1.9 million in the third quarter, offset by other cost savings. We expect this expense to decline slightly in the fourth quarter.

Looking at our consolidated results, our gross margin in the third quarter was 78%, was slightly below the 79% gross margin in the same period a year-ago and consistent with our expectations of 78% for the full year.

Taking expenses line by line, sales and marketing expense in the third quarter of $28.9 million was $6.5 million higher than the third quarter of 2005, reflecting the effect of revenue growth, promotion of our Move brand, increased distribution cost, as well as $286,000 in stock-based compensation expense.

Product development expense in the third quarter of $8.4 million was $2.6 million higher than last year, due to the increased development cost related to the new move.com website and content aggregation capability as well as the ongoing development in realtor, Top Producer and Welcome Wagon. We expect product development expense to remain approximately 11% of revenue for the rest of 2006.

General and administrative expense of $21 million for the third quarter was $1.2 million lower than last year, the decrease was primarily attributable to the $5.5 million decrease in legal cost relating to the defense of former officers, partially offset by $3.6 million in stock compensation expense and an increase in consulting costs associated with the data center.

Our cash and short-term investments, as of September 30, were $151.1 million, an increase of $6.3 million from last quarter.

Our sources of cash during the quarter were as follows; $7.4 million in EBITDA, $400,000 from the exercise of stock options, $1.9 million in interest income and $600,000 increase in working capital. These increases were offset by $1.8 million in capital expenditures, $1.5 million in the payment of restructuring charges, and $700,000 in payment on capital leases.

We expect our capital expenditures to be approximately $16 million for the full year, capital expenditures were $14.7 million through September 30, but $6.1 million of that amount were capital lease arrangements, so they are not reflected in our statement of cash flows. We estimate cash and short-term investment balances to increase in the fourth quarter to at least $154 million at the end of the year.

Looking at our fourth quarter, we expect revenue to decline slightly compared to this quarter. Because of the issues I noted in new homes and rentals, Welcome Wagon and retail advertising, but still demonstrate double-digit growth compared to the fourth quarter of 2005. We also expect EBITDA will increase in the fourth quarter, compared to the $7.4 million we reported this quarter. As a result, our expectations for better than 15% revenue growth and slightly improved EBITDA margin for the full year are unchanged.

At this point, I'll turn the call back over to Mike.

Mike Long

Thank you, Lew. Given the wholesale changes to important parts of our business, we are pleased with this performance. We're interested in your questions. Operator, please open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Aaron Kessler with Piper Jaffray. Please proceed.

Aaron Kessler - Piper Jaffray

Great. Thanks, guys. Good quarter. Couple of questions for you. First, can you give us an update on the CMA product or the Top Marketer? And second, any experience in what we should expect in kind of a second year of the housing slow down? I mean, clearly are getting a benefit in year one from agency need to spend more in advertising? What should we expect to see from year two? And then I have one follow-up question.

Mike Long

Yes, Aaron. This is Mike. The -- our Top Marketer and Feature CMA, I mean as you know, our approach is different than some of the other offerings in the marketplace that -- in this category of providing home valuation information to consumers. Our strategy, as you know is to -- we believe that adding real value to our customer's businesses is to offer consumers, first of all a great experience online by providing them with a lot of content, such as with our market snapshot which is now in 130 markets. We're providing real market data to consumers about sold information in that particular market, and then, by educating the consumer, encouraging them to then contact a professional. As opposed to just arbitraging leads and -- which we believe is really not compatible with a professional experience for both the real estate professional or the consumer. So, overall, we're pleased with the roll out of the Top Marketer, Featured CMA and now we have supplemented it with market snapshot which is a great consumer content experience, and we believe that the -- that those offerings will contribute to growth in 2007.

Aaron Kessler - Piper Jaffray

Great. And are you still pushing the home incite product there or have you -- that came from that bottle?

Mike Long

Home incite product is just a-- it's the place holding website for consumers to get to the market snapshot information. It's not a brand.

Aaron Kessler - Piper Jaffray

Right. Okay.

Mike Long

Right.

Aaron Kessler - Piper Jaffray

And then my next question in terms of what should we expect from a second year of a housing slow down? Would you expect more of the same as mortgages going online and you need to advertise more?

Mike Long

Well, we have adapted our marketing systems approach, particularly as introduced particularly by Allan Dalton in REALTOR.com that talking up holistic approach, he was essentially organizing products that inside of a marketing system that recognizing -- recognizes and adapts those products to consumer behavior, whether it's a home seller or a home buyer. We think -- and we think we can now extend, particularly with Allan taking over responsibility for our new homes category and rentals category that we can extend that same marketing systems concept into those segments. And that means that we have got -- that we're pretty comfortable whether the market overall and real estate is considered strong or weak. So, we're prepared for either scenario. I mean, for the first time -- I mean, I just saw the first article in the Wall Street Journal earlier this week, suggesting that the real estate market may have bottomed out. I mean, nobody knows. So, we're preparing for either scenario. A recovery in 2007, or continued weakness.

Aaron Kessler - Piper Jaffray

Great. Thank you.

Operator

Your next question comes from the line of Mark May with Needham & Company. Please proceed.

Mark May - Needham & Company

Hi. Thanks for taking my questions. The first question has to do with REALTOR.com. Interesting statistics that you gave regarding excluding some of the areas that are somewhat weak for you; that -- I think you said 30% year-over-year growth. Is that the type of growth that we should expect next year as some of these issues are anniversaried? The second question, you mentioned a number of new projects or products that you expect to launch over the next few months. Could you just highlight one or two of those that you think might have the most immediate impact in terms of revenue or margin improvement, and maybe if you even want to quantify them, that would be great? And I had one quick follow-up.

Mike Long

Yeah. Thanks, Mark. Lew, do you want to comment?

Lew Belote

Yes. Mark, as you know, we have been kind of cautious on giving guidance on individual business units, but we have said all along, investments that we made in REALTOR.com starting three years ago, really paid off. We expect that to continue to provide a leadership in growth in the company. And it's what helps give us the confidence and the numbers that Mike covered that we expect for 2007 and 2008.

Mike Long

Mark as an example of a new product offering that's going to have a material effect on your business, let's just take one out of the new homes category, and that's our auction engine, and -- which is our cost-per-click auction engine. As you know, we had hoped to have that in the market before now, but we have had this almost three months hiatus for introducing new capabilities because of the data center move. We're now introducing the auction engine, actually this month, and then the self-service auction engine. We'll follow that up early in the year, and that's going to -- I mean, that is a new day for that business line to have a self-serviced auction engine on a cost-per-click pay basis for our featured listings product. So, right now, we're in no-man's land, we are not a fish nor fowl, we've got a lot more content on the site but we don't have a real effective way to monetize it without that auction engine. So, that's one of the best examples.

Mark May - Needham & Company

And if I could ask one follow up on Welcome Wagon you said you've identified some cost synergies that you'll take advantage of next year. Maybe if you could talk -- describe those -- the nature of the cost synergies, maybe the timing of recognizing those, and what sort of impact might they have on the profitability of Welcome Wagon?

Mike Long

Yes, one of the most, I think material cost synergy is a better understanding of where we're providing advertising product and Welcome Wagon books, for example, into markets that are experiencing a decline in new movers, and therefore, we've wind-up incurring the cost of preparing the book and then shipping it into those markets, and it's not a good advertising experience because of the -- if there's fewer movers in that market than we anticipated, and therefore we get high cancellations and likely so, because it's not a good result for our customers. So, I think we're going to be, I think much more sophisticated with some of the tools that we've now got in place in Welcome Wagon and making those decisions, and I think you'll see increased margin relatively soon as we make other changes in the model.

Lew Belote

But, keep in mind, Mark that, that business is somewhat seasonal so, the real margin contribution probably won't show-up until the second quarter of next year.

Mark May - Needham & Company

Okay. Thank you.

Operator

Your next question comes from the line of Imran Khan with J.P. Morgan, please proceed.

Imran Khan - J.P. Morgan

Yes, hi. Thank you very much. Couple of questions, in the last quarter you talked about the traffic was essentially flat, and you talked about just because of the site representing, I was wondering if you can give some color, what kind of traffic growth you were seeing? And then secondly, if I look at real estate services margins were at 26.3%, how should I think about the margins for that segment in fourth quarter? Thanks.

Mike Long

Okay. I'll take the first part of that question Imran on traffic. The real estate traffic category is pretty broad, it includes a lot of decision support, home improvement sites and we tend to focus on -- so overall it looks like the traffic in the real estate category is growing faster than our traffic base, and we're clearly the leader, first of all I want to remind everyone on the call, that we're the clear leader in consumer traffic by significant margin, and we are committed to maintaining that leadership but just you have to peel the onion back in and in the listing category -- on those websites that have listings -- home listings, which are more direct competitors of ours, because there if the consumer goes and finds what they want on that listing site, they are less likely to use a similar site, and that -- in that category of listing sites, traffic has been flat, and overall -- and therefore, our traffic has approximated that, and that's because the number of buyers in the market is less now than it was at this time last year.

On the other hand, there has been traffic growth in these decision support sites that tend to be tool sites or one-off very specialized sites and those sites -- the consumer that go to through those sites also go through the listing sites. So, our evaluation of traffic suggests that those sites are not taking traffic away from our listing sites. Now, our strategic approach, and why we're building out the move.com offering, is to be a much more comprehensive site providing both listings as well as consumer decision support in all categories of the moving cycle. And therefore as we build that site out, we should attract more traffic, by having a broader consumer offering; and then that will also make us more competitive with these non-listing sites.

Imran Khan - J.P. Morgan

Got it, very helpful. And on the second question?

Lew Belote

Yes. So, Imran all the margins on the real estate segment, at 26% right now, if you remember it, it was 34 last year. We added significant product development costs to come up with, the move.com website and the crawling capability that is going to make that successful and at the same time revenue for new homes and rentals came down, there is, really a fixed cost component of our website businesses, and while, we'll have those development resources working on other products, we think as we grow revenues, especially in REALTOR, new homes and rental's next year you'll see a substantial increase in margin there.

Imran Khan - J.P. Morgan

And for fourth quarter, should it think flat as 26?

Lew Belote

We're just -- we haven't been given specific guidance. So, overall, we think the EBITDA is going to increase, so given that the seasonality that you get in the other segment of Move-Related Services, then by definition we'll have to have some improvement in from that source.

Imran Khan - J.P. Morgan

Thank you. That's helpful.

Operator

Your next question comes from the line of Mark Argento with Craig-Hallum. Please proceed.

Mark Argento - Craig-Hallum

Hi. Good afternoon.

Lew Belote

Hi Mark.

Mike Long

Hi Mark.

Mark Argento - Craig-Hallum

Couple of quick questions for you. Could you talk a little bit about renewal rates, I know now that, a lot of your real estate products are sold under subscription, 6, 12 months, depending upon the products. Can you talk a little bit about the pricing environment and I know in particular the enhanced listing, the way you guys price that is looking at kind of a historical number of listings an agent has and then using your rate cards the market that they are in and I'm just trying to understand a little better as we start to anniversary some of these contracts, let's say listings have clearly come down, what does that mean for the business, I know you are not going to be able to offset some of that potentially with some price increases?

Mike Long

Yeah, Mark, actually on the listing side as far as total listing inventory, it's actually gone up fairly dramatically as you would expect from number of homes on the market has increased, which basically gives rise to a larger advertising opportunity for us. In area of renewals back to your original question, we have combination of strong sales and strong renewals that has allowed us to increase our agent count by 20% year-over-year, and that's the strongest performance ever in the -- certainly in the 5 years since we have been -- this management team has been in place. And also the introduction of the company's show case product by service -- marketing system by Allan Dalton and his team, this year growing from a very small base of brokers to over 600, just in the first nine months of this year, has increased agent coverage there, an additional -- over 100,000, almost 120,000 - 130,000 in addition to those agents who buy direct. So, that business continues to perform, I think remarkably well, so therefore the number of enhancements because of the company show case, that's where the broker steps up and enhances all the listings for all the agents that are in his brokerage, we are experiencing fairly significant growth in the number of listings that are enhanced on the site.

Mark Argento - Craig-Hallum

So you -- basically, just if I understand your right. Even now, the number of new listings might come down the length of time, some of this is up on the site has going longer that creates a longer -- a bigger opportunity for you in other ways? And then the enterprise enhancement is going -- is starting to come on stronger, is that a fair pricing?

Mike Long

I think that's right the combination of the enterprise enhancements, and if you looked at our -- say, our yield per enhanced listing, it might come down a bit as the enterprise grows, because there is a -- in total a volume discount, but the effect of large volume sales through company show case is worth it.

Mark Argento - Craig-Hallum

Okay. Last question, in terms of -- you use the verbiage "a trough quarter", referring to -- I believe it was the rent and new homes business. Is that -- is that right? And if that -- can you just explain to me what that means? Is that on like a percentage year-over-year decline or an absolute dollars or what do you mean by that?

Lew Belote

Yeah, Mark, we had said earlier that we thought second and third quarter would be the dips something that we would start to see turn around in the fourth quarter in year-over-year

Mike Long

For new homes and rental

Lew Belote

For new homes and rentals probably and we now, because of the data center move, we were unable to introduce some of the enhancements to that site as we expected, so we think -- it's going to stretch and I will forward before it starts to turnaround first quarter.

Mike Long

And Mark, the two major reasons for that is -- because we -- two features that we wanted to get into our rentals and new homes offering, but have been unable to do so because of the elongation of this data center transformation project, has been an improved user interface which would improve the click-throughs on the -- our customers advertisements, as well as the auction engine that I referred earlier. And the good news is we're now installing those in production now, but the economic effect of that won't be felt until 2007, first quarter.

Mark Argento - Craig-Hallum

Thanks, Mike. Thanks, Lew.

Mike Long

Thanks, Mark.

Operator

(Operators Instructions). Your next question comes from the line of Stewart Barry with ThinkEquity Partners. Please proceed.

Neil Doshi - ThinkEquity Partners

Hi, guys. This is actually Neil Doshi on behalf of Stewart Barry. Couple of questions for lead generation, what percent of revenue is it for you guys right now? And what sort of pricing trends are you seeing on the lead generation side?

Lew Belote

It's a very small amount of our revenue. The Top Marketer product is being offered, and our Top Producer is generating some, but it's -- as we continue to emphasize most of our revenue at this point is recurring through subscription models, as we offer the Featured CMA which is accoutered to Top Producer to REALTOR.com. So we're not relying on lead generation to drive this business.

Neil Doshi - ThinkEquity Partners

Okay. And then secondly, with the number of housing listings up, as you look into '07, are you seeing an increase in demand by advertisers for listing units on REALTOR.com?

Lew Belote

The answer to that is yes, because REALTOR.com is our fastest growing business. And it's the largest segment of the residential real estate market for home sales for resale category. So the answer is yes.

Neil Doshi - ThinkEquity Partners

Great. Thank you.

Operator

And at this time, there are no more questions. I will now turn the call over to Mike Long.

Mike Long

Yes, we appreciate your attendance on the call this afternoon. And we are -- I trust you are as interested and excited about our quarterly results as we are, but we're more excited about our future, and we look forward to discussing that with you in our next call, 90 days from now. So, thank you very much.

Operator

Thank you for your participation in today's conference, ladies and gentlemen. All parties may now disconnect. Enjoy your day.

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