Zillow Group Inc (Z) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Zillow fourth quarter 2011 earnings conference call. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session and instructions for audio questions will be given at that time. (Operator Instructions) As a reminder, today's conference may be recorded. Now I would like to turn the conference over to today's host, Zillow's CFO, Chad Cohen.

Good afternoon, everyone. I would like to thank you for joining our conference call to discuss our financial results for the quarter and full-year ended December 31 2011. 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 strategic and operational plans, anticipated future products and services, and estimated market demand, along with additional examples 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 final prospectus filed with the SEC. Non-GAAP financial measures such as 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. Now I would like to turn the call over the Spencer Rascoff, Zillow's Chief Executive Officer.

Thank you all for joining Zillow's earnings call to discuss our 2011 fourth quarter and full-year results. Since our third quarter call, Chad and I have participated in a number of investor conferences, and it's been great to meet many of you in person. We appreciate your taking time to meet us and learn more about the Company. We hope to meet more of you personally in the months ahead. I'm going briefly review quarterly and full-year financial highlights and operating metrics, then update you on some of our strategic priorities and product initiatives. I will then turn the call over to Chad, who will discuss our financial results and metrics in more detail, along with our outlook for the first quarter of 2012, then we'll take your questions.

The fourth quarter was an excellent one for Zillow, capping off an outstanding year. During the quarter we delivered record performance across key operating and financial metrics that exceeded even our own expectations. In the fourth quarter, total revenue grew 108% year over year to a record $19.9 million, resulting in EBITDA in the quarter of $3.3l million, or 17% margin. For the full year of 2011, total revenue grew 117% year over year to a record $66.1 million, exceeding our outlook and resulting in record EBITDA of $11.9 million, or 18% margin for the full year. On a GAAP net income basis, we were profitable in the fourth quarter and for the full year 2011, marking our first full year of GAAP profitability. For the fourth quarter, we posted $900,000 in net income and delivered $1.1 million in net income for the full year.

For the quarter, Marketplace revenue increased 169% year over year to a record $13.7 million. Marketplace revenue is our largest and fastest growing revenue category, consisting primarily of our subscription-based advertising and services offering known as Premier Agent. For the full year, Marketplace revenue increased 219% from 2010 to $42.2 million. Display revenue for the quarter increased 38% year over year to $6.1 million, which was better than we predicted, outpacing growth in the first half of the year. For the full year, Display revenue was $23.9 million, also representing an increase of 38% year over year.

Chad will go into further detail on our financial results in a moment, but let me now update you on some of our recent milestones from the quarter and past year. At Zillow, creating an exceptional consumer experience is as the core of what we do. It all starts with our proprietary living database of more than 100 million homes that allows us to create home-related marketplaces across the entire home lifecycle. We layer in unique data attributes and listings on top of this database with help from our users, professionals, and partners that provide unprecedented and invaluable market context to consumers. This database is the foundation of the innovative Web and mobile products we deliver that attract buyers, sellers, renters, and borrowers to Zillow, and help them connect with professionals like real estate agents, lenders, and landlords. In January 2012, more than 31.7 million unique users visited Zillow website and mobile applications, up 102% year over year. Note that this does not include Yahoo Real Estate, which Zillow also powers.

Contributing to this growth is Zillow's category leadership on mobile, supported by our continuous product innovation across our entire mobile platform. In December, homes were viewed on Zillow Mobile nearly 100 million times,, which was an average of 36 homes per second. In January that rate grew to 53 homes per second, with up to 40% of our traffic on weekends coming from mobile. To put in this perspective, we're now getting more visits on mobile per day as the entire Zillow website received per day in April 2009, the month we introduced our first iPhone app.

Zillow operates the most popular platform of mobile real estate applications, now available on every major platform, including IOS with the iPhone and iPad, Android, Blackberry, and Windows Phone 7. In the fourth quarter, we introduced the Zillow Real Estate app on two new platforms, the Android tablet and the Kindle Fire. We also added new features that make Zillow even easier to use on the go. For example, you can now use your finger to set boundaries of your home search using our new draw feature on the iPhone and iPad to create a custom search.

Our continued growth and leadership in mobile is a major factor in our business and market opportunity, so I just want to take a moment to discuss the significance and three key areas that set Zillow apart. First, our database of all homes allows us to create a variety of useful products and tools that make our mobile experience more relevant to more people. So whether you're driving by a home and want to learn more, looking for rentals in a new neighborhood, shopping for mortgage rates, or browsing for your dream home, the Zillow app has something meaningful for you. Next, there's even less competition in mobile than on the Web due to the highly-fragmented nature of the real estate category online. So while we're the market share leader on the Web, we have significantly more market share on mobile. And finally, our monetization model works beautifully on mobile since buyers are apt to contact a real estate professional when they're shopping for homes. Our Premier Agents receive approximately one-third of their contacts from consumers using Zillow on a mobile device.

We're also seeing favorable trends in our Zillow Mortgage Marketplace app, which was first introduced on iPhone in June 2011, then integrated into the Zillow Real Estate app in the fourth quarter. In January of this year, Mobile accounted for about 20% of Zillow Mortgage Marketplace loan requests. Just last week, we launched a dedicated Zillow Mortgage Marketplace app on Android, as well as a version optimized for mobile Web browsers.

In addition to the recent mobile developments, let me now touch briefly on the continued growth in the Zillow Mortgage Marketplace business. In 2011, consumers submitted 5.5 million loan requests through our Marketplace, up from 1.8 million in 2010. As a reminder, Zillow Mortgage Marketplace is unique from other mortgage services as we give consumers control by allowing them to submit loan requests anonymously. Then they can determine which lenders to contact after browsing customized loan quotes from verified lenders. On average, borrowers receive 18 loan quotes per request in a standardized form that requires all fees to be disclosed up-front. Borrowers can then compare quotes on an apples-to-apples basis, and then browse the more than 10,000 reviews of mortgage lenders to select the right professional.

Another key point of difference with Zillow Mortgage Marketplace is the benefit it receives from being tied to a real estate site and mobile platform. We merchandise Zillow Mortgage Marketplace across various Zillow pages to entice buyers and home owners to enter the marketplace and connect with thousands of qualified lending professionals and businesses. This creates a steady stream of home purchase loan requests that insulates our marketplace from wide swings in refinance demand that other independent lending sites can experience as interest rates fluctuate. This means while we benefit from a low interest rate environment like we are in now, we are not dependent on low rates to generate demand.

To date, Zillow Mortgage Marketplace has been primarily promoted to our existing users, but we're starting to expand our focus outside Zillow through mobile, PR, and partnerships. On our last call we discussed a new distribution agreement with AOL that was announced in October 2011. In December, less than two months after that announcement and ahead of schedule, we launched Zillow Mortgage Marketplace on AOL Real Estate and Daily Finance. As part of our Marketplace revenue category, Zillow Mortgage Marketplace is still a nascent revenue stream, especially when compared to the overall long-term opportunity here.

The total addressable market around home lending is even larger than residential real estate, as mortgage professional spend an estimated $10 billion each year in marketing. Further, this business is not easy to replicate, as other companies that have attempted to enter the market have learned. In fact, Google, which officially entered the mortgage comparison shopping arena in 2010 with a product that looked a lot like Zillow's recently notified advertisers they're exiting the business.

Focusing now on another point of differentiation for Zillow, one of the key characteristics of our database of more than 100 million homes is its living nature. In addition to the millions of data sources we aggregate, our users are constantly contributing to this database, dynamically enhancing Zillow's accuracy, relevance, and value. This includes updating home facts and information. To date, users and partners have updated information on more than 27 million homes, and added more than 65 million home-related photos. Our users are also sharing insights and opinions about professionals in our marketplace.

Zillow displays more than 120,000 ratings and reviews of real estate professionals and lenders in what we believe is the largest collection of user-generated reviews in our category. These reviews are not only valuable to consumers searching for professionals, but they're also important to participating professionals. Premier Agents with at least five reviews typically more than twice as many contact than agents without reviews. These contributions by our community create network effects that support the vibrancy of our database and marketplaces.

We were also introducing more ways for consumers to connect with each other and tap into the power of peer-to-peer networking that can be so valuable, especially when home shopping and evaluating new cities and neighborhoods. For example, last month Zillow introduced Neighborhood Advice to create a social home shopping experience by leveraging a user's Facebook friends. So if you happen to be shopping for a home in San Francisco's Noe Valley, you can now simply log in to Zillow using Facebook Connect, then Neighborhood Advice will identify your Facebook friends who either live in the area or frequently check in from that neighborhood. By integrating social media tools and friend networks into the core Zillow home shopping experience, we make it easier to access useful information that was previously hard to find.

Another key point of Zillow differentiation is the valuable data we can generate as a result of our living database of homes. Zillow housing market data continues to be frequently cited by national media outlets, congressional panels and government agencies. In December 201,1 we added another highly-credible data report to our roster of housing research. The quarterly Zillow home price expectation survey queries a panel of more than 100 leading economists and housing market analysts on their expectations for future home prices in the United States.

Having covered our core consumer-facing businesses and recent initiatives, I would like to spend a few minutes on our progress in creating value for the millions of professionals that utilize Zillow each month. In the fourth quarter, we continued to expand our Premier Agent program and increase the range of services we offer real estate professionals. We are in the midst of a calculated strategic expansion evolving our agent offering from a one-size-fits-all advertising program to become more of a central hub for a variety of marketing and business services. This involves leveraging Zillow's technology expertise, mobile leadership, sales channel, and strong brand to develop and bundle a variety of market services, which can be accessed through one familiar and tightly-integrated cloud-based portal.

As an example of such a software-as-a-service product, we are getting ready to roll out the first phase of a customer relationship management, or CRM, platform for agents. The new product will help agents better manage and organize the contacts they receive from Zillow via a mobile device or desktop. This product automatically saves the contacts agents receive through Zillow, including their recent search criteria, and allows agent to make individual notes and star high-priority contacts. As you can imagine, an agent's client and contact list is an extremely valuable and integral part of their business. The integration of a CRM into Zillow streamlines this important function, making it faster and easier for agents to manage their contacts and sort, search, and follow up. This is just the first step, and we plan to add more services and features to the CRM platform over time.

Another key milestone in this expanded vision was the acquisition of Diverse Solutions, which we announced on our third quarter call and closed during the fourth quarter. Diverse Solutions helps real estate agents market their businesses and improve their websites with MLS listings integration. We've already integrated portions of Diverse Solutions and their team into Zillow and we expect to roll out additional product and services for agents later this year. Diverse Solutions is a great compliment to Postlets, our first acquisition, which closed in the first quarter 2011. Postlets allows landlords and agents to distribute for-sale and rental listings through a variety of websites free of charge.

Another important step occurred in October when we expanded the Premier Agent program, adding two new pricing tiers to create three levels of participation, platinum, silver, and basic. By expanding from a single product offering, we now offer agents more flexibility to choose products best-suited for their particular needs. These additional SKUs help us monetize wait lists in high-demand zip codes, while also giving us more flexibility to test various pricing models and services across all three tiers, which we will continue to do to find the right balance and mix. It's only been a few months, but initial reaction to the new tiers has been positive and we're introducing more agents to the value of Zillow. As of the end of the fourth quarter, the number of participating Premier Agents was 15,799, nearly twice as many as the 8,102 who were enrolled at the end of 2010.

Before I go on, I just want to take a few moments to talk about this agent metric, because we get a lot of questions on it, so I want to be clear on how we view it internally. The raw number of participating Premier Agents is a noteworthy metric, but it only tells a part of the story behind our associated revenue. This is because nearly 40% of the inventory we sold in the past year was to existing advertisers buying more to increase their presence on Zillow. We believe this is a testament to how effective the Zillow platform is for our participating agents, that's also driven in part by the fact that our sales team in incented to sell, not to increase agent count. This is why our primary barometer to track sales progress is through revenue.

This is an important distinction, because while the number of Premier Agents nearly doubled year over year, 2011 Marketplace revenue, which is predominantly derived from our Premier Agent program, grew more than twice that rate, increasing 219% year over year. We are focused on the tremendous runway we have here in a large-market opportunity. Keep in mind we have only a small fraction of today's estimated 1.8 million real estate agents enrolled in our Premier Agent program, and an even a smaller share of the $6 billion these agent spend to market their services. To capture this opportunity, we must simultaneously attract new agents to Zillow, while also increasing the share of wallet our existing agents invest in our platform, which is exactly what we are doing. It's also important to note that by evolving Zillow's range of services beyond just advertising, we not only increase the value and touch points we offer agents, but we also increase our total addressable market beyond the $6 billion that relates to just advertising and marketing.

Zillow already has a solid foundation in creating this agent services hub with our multi-tiered Premier Agent advertising program, with Diverse Solutions, with our Postlets distribution arm, and now even more so with our soon-to-be-launched contact management system. You can expect to see more evidence of this strategic evolution in the quarters ahead as we continue to expand our CRM platform and other services. This will be demonstrated by new and relevant products, but may also include strategic acquisitions that fit nicely into our expanded portfolio of agent-focused tools, just as Diverse Solutions and Postlets has done to.

To summarize, I'm extremely pleased with Zillow's excellent Q4 performance that capped off an outstanding year. It was an exciting year to go public, and we're extremely satisfied with our continued growth, record performance, and increased profitability that exceeded even our earlier predictions. We're even more excited about the prospects and opportunities ahead as we invest in our growing businesses and product development to extend our lead as the most trusted and vibrant home-related marketplace. I want to thank the entire Zillow team for their laser focus on execution to create and deliver products that delight our tens of millions of users, and I also want to recognize our users and partners for their role and support in making Zillow what it is today and what it will be tomorrow. Now I will have Chad take you through more of the financials.

As Spencer mentioned, I'm going to run through our fourth quarter and full-year results in more detail, then I'll outline our outlook for the first quarter. I'll also spend a few minutes giving a little more color in how we're looking at the first quarter for 2012. As mentioned earlier, adjusted EBITDA, a non-GAAP financial measure, will be referred to simply as EBITDA, which excludes share-based compensation.

Zillow delivered record revenue growth, strong EBITDA margins, and marked our first year of GAAP profitability in 2011. For the quarter, more than 23.5 million average monthly unique users visited Zillow's website and mobile applications. That's up 86% from the same quarter last year. Total revenue for the quarter increased by 108% year over year to a record $19.9 million, up from $9.6 million in the same quarter last year. Total revenue in the fourth quarter exceeded the high-end of our outlook of $18 million by approximately 11%. This was largely due to better-than-expected performance in our Display revenue category, which is generally less predictable than Marketplace revenue, which I will expand on in a moment.

Breaking down our two revenue categories, Marketplace revenue grew 169% year over year to $13.7 million in the quarter. This was primarily driven by growth in our Premier Agent program, and also includes continued growth of our Zillow Mortgage Marketplace CPC products. Traffic growth across our platform helped increase contact volume to our platinum Premier Agents, which in turn contributed to an increase in the average price for new platinum Premier Agent contracts during the year, existing Premier Agents who are no longer in contract also starting to pay new and generally higher prices in order to renew their subscriptions for additional six-month terms. Most of these price increases impact Premier Agents who are current paying rates from 2009 and 2010, and are in the markets where we have healthy backlogs of prospective Premier Agents looking to join our platform. During the quarter, we increased pricing on only a subset of our existing Premier Agents whose contracts expired, so we continue to have considerable pricing power as below-market subscriptions come up for renewal. Note that Marketplace revenue in the fourth quarter included new revenue sources from the acquisition of Diverse Solutions, although these were not material to overall revenue results in the quarter.

Display revenue in the fourth quarter grew 38% year over year to $6.1 million, which is above our expectations, outperforming growth rates we saw in the Display business in the first half of the year. This follows a banner third quarter for Display, which grew 57% year over year. This higher-than-expected growth is attributed to increasing advertising spend by larger business and industry endemic advertisers, such as real estate brokers, builders, and lending institutions. Our strong performance in Display in the fourth quarter was the primary factor in beating our quarterly revenue outlook. As I mentioned, the nature of Display advertising tends to be less predictable than Marketplace due to shorter lead times by brand media buyers in placing insertion orders compared to the typical six-month contracts we receive from Premier Agents. The rising demand for Zillow Display placement is a testament to our leadership position on the Web and mobile, attractive user base, and the spoke ad targeting available across our database of all homes that allows us to command higher CPMs because of the significant ROI we deliver to these brand advertisers.

Turning to earnings, EBITDA for the quarter was $3.3 million, representing the 17% margin, which was up from $1.3 million, or 13% margin, in the same quarter last year. We were also profitable on a GAAP basis for the fourth quarter, delivering $900,000 in net income, compared to net loss of nearly $500,000 in the same quarter last year. Basic EPS was $0.03 per share and diluted EPS was also $0.03 per share, based on $27.7 million and $30.6 million weighted average shares outstanding, respectively. Total operating expenses were $19 million compared to $10.1 million during the fourth quarter last year. Our cost of revenue during the quarter was $3 million, or 15% of revenue, compared to $1.3 million, or 14% of revenue, in the fourth quarter 2010. Note that last year this expense category did not include revenue-sharing costs associated with our strategic relationship with Yahoo Real Estate, which was launched in February of 2011.

Fourth quarter sales and marketing expense was $7.6 million, or 38% of revenue, compared to 43% of revenue, or $4.1 million, in the fourth quarter of 2010. In the fourth quarter we continued to ramp investment in our sales platform by hiring several more classes of inside sales reps. We also continued to test targeted advertising campaigns across a number of channels that's helping to inform our 2012 marketing program. Technology development costs in the quarter were $4 million, or 20% of revenue, compared to 28% of revenue, or $2.7 million, in the fourth quarter 2010. In the quarter, we continued to hire software developers and will continue to do so throughout the year. G&A costs in Q4 were $4.5 million, or 22% of revenue, as compared to prior-year of $2 million, or 20% of revenue. The primary increase in absolute dollars year over year is attributed to costs related to becoming a public Company, as well as overall growth in the business.

Moving now to our full-year 2011 performance, total revenue increased 117% to $66.1 million, up from $30.5 million generated in 2010. Full-year revenue exceeded the midpoint of our outlook range of $63.5 million by 4%, and was primarily driven by our strong fourth quarter Display performance. For the full year, Marketplace revenue increased 219% year over year to $42.2 million, up from $13.2 million in 2010. Display revenue for 2011 was $22.9 million, increasing 38% from $17.2 million in 2010. We continue to see a shift in our revenue mix as we ended the fourth quarter with 69% of our revenue coming from Marketplace, while 31% came through Display. By way of comparison, in the fourth quarter of 2010, 53% of our revenue was generated from Marketplace and 47% from Display. This is an anticipated and desirable shift as we now intentionally dedicate more of our advertising placements on our search and maps and home details pages to our marketplace products, which provide our consumers with services that are more relevant and helpful to their home-related searches.

EBITDA for the full year 2011 was $11.9 million, representing an 18% margin, and was up significantly from essentially a break-even business in 2010. On a GAAP basis, net income for 2011 was $1.1 million, or $0 per basic and diluted share, as under GAAP for purposes of calculating EPS, all income for the full year 2011 must first be ascribed to preferred shareholders. Therefore, there is no income attributed to common shareholders for the full year. All of the outstanding shares of our convertible preferred stock automatically converted into class A common stock upon the effectiveness of the Company's registration statement on July 19, 2011. On a pro forma, or non-GAAP, basis, assuming that the convertible preferred stock converted into the common stock at the beginning of 2011, full-year 2011 non-GAAP basic and diluted earnings per share would be $0.04. This compares to a GAAP net loss of $6.8 million, or negative-$0.53 per basic and diluted share in 2010.

Turning to our balance sheet, we ended the year with approximately $90 million in cash, cash equivalents and investments, and we had no debt. Zillow is also generating significant, positive and fast catch flow cycles. In 2011, operating cash flows were 22% of revenue, giving us the flexibility to invest that cash opportunistically in our engineering and sales efforts and evaluate other potential acquisitions to fuel our long-term growth.

Now let me provide a few comments on our outlook for the first quarter 2012. Our revenue outlook for the first quarter of 2012 is expected to be in the range of $20.5 million to $21.5 million. This outlook represents 87% year over year growth at the midpoint of the range. For our first quarter outlook on EBITDA, we are expecting to be in the range of $3 million to $3.5 million. At the midpoint of our range, this represents approximately a 15% margin, which is more than a 200% increase from $1.1 million, which represented a 9% margin in the first quarter 2011.

We continue to make significant strides towards achieving our target business EBITDA margins we've outlined since our roadshow. We expect to see 30% to 35% margins when we receive $200 million to $250 million of revenues. It's important to note that we see this target as simply a mile-marker and not an end game, as we believe our long-term market opportunity and our cost structure provide us with significantly more leverage across our business than these near-term targets suggest. Although we are not providing a GAAP EPS outlook for the first quarter, as a matter of housekeeping, we expect a diluted weighted average share count of approximately 32 million shares for the first quarter. Zillow ended 2011 with over 330 employees, up from approximately 220 at the end of 2010, and we continue to grow.

Before opening for questions, let me take a few minutes to give you an idea of how we're thinking about 2012. In 2012, we will continue to invest heavily across our engineering and sales functions, building on our proven track record of product innovation across our Web and mobile platform and generating ROI from our sales activity. We'll also continue to build-out and augment meant existing marketplaces, including expanding our Premier Agent program, and evolving our offerings from primarily advertising products to encompass a range of important services that Spencer outlined to help our participating agents manage and market their day-to-day businesses. We will also continue to invest in Zillow Mortgage Marketplace, working to increase reach and brand awareness outside of Zillow, and build on new marketplaces such as rentals.

Our rentals footprint continues to grow, attracting more renters and landlords on both sides of the marketplace, and is already generating very healthy levels of engagement between the two constituents. We do not expect to monetize this marketplace in 2012, as we are focused on building liquidity and adding valuable content and functionality. Rentals represents approximately a $2 billion market opportunity, and we feel we are very well-positioned to monetize our rentals marketplace in future years when we achieve additional scale and vibrancy, which is consistent with our monetization approach we've taken in real estate and mortgages.

With the sustained investment in our Marketplace businesses, we expect our revenue mix to continue to shift towards our Marketplace category, which now comprises roughly two-thirds of our business. We are very pleased with this shift, as our Marketplace businesses provide a more predictable source of revenue than our Display business, given that it is primarily supported by our subscription-based Platinum Premiere Agent product. This shift, in turn, improves our overall experience, as our users benefit greatly from the presence of our marketplace professionals, who do a fantastic job of servicing our consumers' real-estate- and mortgage-related needs. That said, we do expect our Display category to contribute nicely to the top line as we continue to lead the category in traffic and mobile engagement.

To assist with modeling our EBITDA margins, earnings per share and cash flows, I'll give you some additional financial color on a few significant 2012 line items. We currently expect depreciation and amortization for the full year 2012 to be in the range of $12 million to $14 million, share-based compensation to be in the range of $4 million to $6 million, and CapEx and capitalized data content to be in the range of $8 million to $9 million. We expect fourth quarter 2012 basic and diluted share counts to be in the range of 30 million to 32 million and 32 million to 34 million weighted average shares, respectively.

In closing, let me reiterate that Zillow had an excellent fourth quarter, rounding out an overall tremendous year. We had a successful IPO and have smoothly transitioned to operating as a public Company. We are extremely pleased with our growth, momentum, and profitability, and even more excited about and confident in our opportunities in 2012 and beyond. Operator, we would now like to open up the call for questions.

(Operator Instructions) Mark Mahaney Citi.

I would like to start with two questions, please. Could you provide, Spencer, maybe a little bit more color on the reaction to the pricing changes that you've seen to date? When you've had Premier Agents come up for renewals, is there a typical response that they've had? Have they normally traded up, held where they are, any more color on that? Then secondly, I think in the past you had talked about considering tweaking or maybe materially changing your advertising and marketing campaign or spend. It sounds like you may have studied that and decided that it wasn't necessary, but any more color on that?

So first on Premier Agent pricing, what you are referring to, of course, is when agents come off contract. Because we sell a fixed price over a period of time, as traffic grows and as contact volume grows and as the benefits that we deliver to the Premier Agent grow, the ROI increases and the value increases, but their price stays flat. So at the end of contract, we have an opportunity to call them and do one of three things. We can either tell them that if they want to maintain their share of the percent exposure that they've purchased then their price will go up. We can tell them they can keep the same out-of-pocket and be shown less of the time, or we can instead sell the inventory to somebody on the wait list at the higher price point. To be clear, we have done this with a very, very small portion of our total 16,000-odd Premier Agents. The vast majority of our Premier Agents are still on the historical pricing that they were sold at the point in time they signed up to become a Premier Agent.

When an agent is contacted, though, and says, look, you were paying $100 a month six months ago when you signed up, and the zip code that you purchased was getting this amount of exposure, this amount of views, and this many contacts, and now six months later here we are, our traffic is doubled, so on and so forth, the price is $200, what would you like to do, the reaction is mixed. Sometimes they pay the new price and maintain their exposure. The ability to trade down to -- or I should say keep the same out-of-pocket but have less exposure is also a really appreciated alternative, because sometimes agents have a particular dollar figure that they're trying to allocate to this particular marketing channel. So I would say it's mixed. It depends on the individual agent's ROI from the program and the single biggest determinant of that is how quickly the agent follows up on these contacts, basically how Internet-savvy the agent was in the first place. When agents are Internet-savvy and they do a good job with Zillow contacts, then they're highly likely to want to pay the higher price and maintain the same amount of exposure that they had previously purchased.

On the second question, ad spend, what we discussed in Q4 was that -- or on the last call, was that in Q4 we would be doing some advertising testing online to test and learn and inform our future advertising plans. It's important to remember that about 90% of our traffic is free and organic, so to date we have not been a significant advertiser. In Q1, I would characterize our ad spend strategy as the same as it was in Q4, which is to say we're still in a test-and-learn phase. The guidance that we've given for Q1 contemplates continued testing and learning, and on the next call we'll update you if that's likely to change. But for now, that's how I would describe our advertising. Therefore, the bulk of the sales and marketing line item is still our sales team, not any advertising spend, which is a very insignificant portion of our total expense line.

Thank you, Spencer.

Robert Coolbirth, ThinkEquity.

Congratulations on the quarter. First off another good quarter in Display, could you give us some additional color on what you're seeing there, volume versus yield as drivers, relative strength in endemic versus non-endemic categories, and also how material is mobile becoming to the Display business and how does that play into volume versus yield, et cetera? Then I have one follow-up.

This is Chad. So in terms of Display, we achieved premium CPMs because we have the ability to target advertisers across our database of all homes. So as a result we can achieve very, very nice CPMs. In terms of what we saw with Display for the quarter is that we generally don't have much visibility into the number relative to our Marketplace business. So what we saw in the quarter was 38% growth year over year, $6.1 million, which was actually an acceleration from what we delivered in the fourth quarter of 2010, 36% growth year over year. So we're going to continue to invest in Display, but we haven't seen, from a mobile perspective that our Display advertisers are quite on board yet. But certainly a lot of opportunity there in Display.

From a monetization perspective with Mobile, we have a really nice business in our Premier Agent business that scales very nicely from our Web over to mobile given that we deliver a significant amount of contacts from our mobile consumers. So we're really pleased with the results that we saw for the quarter, as released at this point. Great.

Just to expand on the Mobile/Display point, we do serve geo-targeted mobile display ads on iPad and other tablet and other smartphones, but we prefer, because there's so much relevance to the user, we prefer to monetize mobile usage through the Premier Agent product. So when you are looking at a listing, for example, on Zillow on a smartphone, you'll see Premier Agents that you can click to contact, and one-third of all the contacts that are going to our Premier Agents are coming from Zillow users using smartphones. So that's the primary monetization scheme for Mobile. It's a gorgeous and beautiful monetization scheme obviously, because it works very, very well for the user we well for the advertiser. So that's how we choose monetize display on Mobile for the most part, or I should say that's how we choose to monetize Mobile for the most part via Marketplace revenue rather than Display revenue.

Also wanted to ask if you could give us a little more detail or color on the planned CRM products, and also additionally on some of the incremental marketing services or business services opportunities you might pursue, just in terms of monetization model, pricing, and just generally how you think about this from a strategy perspective. Is your goal as you enter new opportunities going to be to maximize revenue from those ancillary revenue opportunities, or more to drive deeper engagement among agents with the marketplace products?

It's certainly the second more so than the first. In other words, the strategy here is to have many hundreds of thousands of real-estate agents using our suite of mostly free productivity tools. And then a smaller portion of them will actually be paying for services in a premium model. And so the strategy is all about shifting from a seller of advertising, which is very finite and monolithic, to a provider of a SAS-based suite of productivity tools, of which ads, or lead-gen, is part of it, but CRM, listings distribution, technology for agent websites, training, and other things that agents need to make the most of the Internet and of this technology revolution, that's the direction that we're moving. What we've talked about was the first version of CRM that we'll be rolling out in the coming days, and that will help dimensionalize this a little bit because it's quite concrete for an investor or an agent to understand. But that's the strategy, that's how we're approaching it.

Thank you.

Aaron Kessler, Raymond James.

First you talked a little bit on the call about the trade-off between the number of agents and revenue per agent. How do you view that number longer term though? I assume you're trying to get much more agents into the fold. And what's your view on increasing the ad spots there, at what time do you think that happens?

So this is a bit of an extension of the prior question in a way. Let me describe the strategy, then try to tie it back to the answer. We see agents in the United States collecting about $60 billion in commissions and turning around and spending 10% of that, or $6 billion or so, advertising themselves in their listings. Much of that $6 billion spend is still offline. What we're doing is, through the Premier Agent program, we're going after that $6 billion TAM, but then they actually spend a bunch of other money on other services such as CRM and agent websites and a number of other technology things. By moving in a direction of providing a full suite of services to these agents, we're trying to become more relevant to those agents and therefore garner a greater portion of that $6 billion TAM, of which today we have a less than 1% wallet share. It's a little bit mind boggling, if you think about it. As the largest real estate Company on the Web, we have less than 1% wallet share of what all agents spend on advertising. It's a bit of an embarrassment, quite frankly. Despite, our massive revenue growth, we've just scratched the surface of the opportunity in terms of how big this market is.

Now, to your question, might we add other ad units or how might we monetize Premier Agent in the future, wherever we approach these things, we do it first from the consumer standpoint. So we think it's important, for example, to provide the consumer with choice, whether it's on mobile or on the Web, so they can choose among different Premier Agents as well as among other agents who aren't paying us anything, and then they can read over 120,000 user-generated reviews of real estate and lending professionals to choose from to contact. So that's how we design our products, is by to focusing on the consumer first, and frankly we believe that over the long-term that will build greater shareholder value than trying to over-monetize in the near-term.

Any more color on the traction with Basic and Silver, realizing it was a relatively early product? One, how are you marketing those, and, two, are you looking to sell those more to brokers versus maybe agents, get more bang for the buck there, more efficiency?

All three price tiers, Platinum, Silver, and Basic are targeted to agents, not brokerages. To be clear, in many areas, including New York City, agents are referred to as brokers. So all I'm saying, they're really sold to the individual, not to the corporation. Whether the individual is called an agent or a broker depends on each individual city. In terms of traction on Silver and Basic, it is early. So far we've been quite pleased with the uptake, but as I described in the prepared remarks, we view it much more as foundational than anything else. What you see here is us moving towards this SAS productivity suite, and if we are going to provide a basket of 5 to 20 services to real estate agents, we need to have more flexible pricing structure and more SKUs in order for the agent to choose what's right for them. So that's why we rolled out the different SKUs in the fourth quarter, and so far it's been successful, but as I said, the importance of these multiple SKUs will become apparent as we continue to grow out as more and more services to agents.

Great, thank you.

Michael Graham, Canaccord.

Just a couple of questions. First, there was a huge jump in traffic in the month of January, and can you just talk about where that is coming from? Is it driven by the mobile app downloads, or just how can you explain that? Then second thing is, as we look out over 2012, in your different expense lines, can you just talk at a very high level about which ones you expect to see the most leverage in, and also your philosophy about bringing margins up towards that mid-term goal? Do you expect to have it be a steady ramp, or could you foresee having to spend on things to perhaps go backwards at times, or do you expect it to be a steady ramp-up?

I will take the traffic question, then Chad can talk about the margin ramp. So you're right, we have seen quite a huge traffic growth over even just the last couple months. January, over 30 million unique user growth of over 100% year over year. Some of that is seasonal, to be clear, so buyers come back in January. Of course, the year over year adjusts for that, and over a doubling of year over year traffic controls for seasonal growth. Mobile is definitely a significant driver of our traffic growth, so in January, we're 53 homes viewed per second, and a very significant source of traffic. But all other sources of traffic are growing rapidly, as well. Direct traffic, traffic through partnership, traffic through email, traffic through [SCO], et cetera, you name it, they're all growing quite rapidly.

I think what is happening is something of a tipping point on a local basis, we are now on a local basis, in all 20 of the top 20 cities in the United States, for example, Zillow operates the number one or number two local real estate website. So not only are we the national leader, but we're also the leader in really every major city in the country, and I think that's what rolls up to see these huge traffic growth numbers on a year over year basis. Chad can talk to the margin growth.

In terms of in 2012, as we build-out and invest in new marketplaces and grow our top line, I think we've got a lot of leverage really across our P&L. Starting with sales and marketing, most of those costs are payroll-related from quota-carrying reps in our inside sales team and our Display sales team, and the subscription nature of the products that we sell in our Marketplace category, Premier Agent products, I think give us a lot of leverage there. From an engineering perspective, and technology development line, that's mostly payroll costs. Then the data contracts that we have that support the databases of all homes are generally fixed in nature, fixed-cost in nature, so we have a lot of leverage from that line item as well, and you will see some leverage there in 2012. G&A costs are pretty flat. We've been building out some of the public Company things we need to do, but we feel that we've got a lot of leverage there, as those are mostly payroll- and professional-service-related. So overall, we've got leverage across the P&L, and I think you will see some of that in 2012.

In terms of how we're thinking about the target model, what we outlined on the roadshow was getting to a target model of 30% to 35% margins at revenue base of $200 million to $250 million. What we see us doing there is essential stair-stepping up to those margins over a period of a number of years, but that you'll see some compression and some expansion of those margins as we make investments in the business, either in the sales platform or engineering platform, and as we build-out some of these marketplaces. So we don't really manage the margins on a quarter over quarter basis, but think of them more on an annual basis. Hope that answers your question.

Thanks a lot, guys.

James Dawson, Benchmark.

I had a couple of questions about the Mortgage Marketplace. First, is there a limit of the number of quotes per request? 18, it sounds great, that's a lot, but could that be somewhat overwhelming to consumers? And what exactly is that product monetized?

This is Chad. So there is no limit on quotes per request, and the consumer has the ability to filter and sort out those loan quotes, according to his or her needs. So there is no limit right now, so we are seeing 18 quotes per request. In terms of how we monetize it, it's on a CPC basis, and the cost per click is really determined based on the quality of the loan request that's put into the system. For example, a loan request that has a high self-stated FICO, a low loan-to-value and high income will be priced a little more dearly than one that has a lower FICO, higher LTV. So it's in the range anywhere from $0 up to $8 to $10, but on average we're seeing CPCs in the low-single-digits.

Great. Is there any specific partnership with any lenders that you have currently with that product, and is there anything that you're maybe looking to do?

We just announced a distribution agreement with AOL, and we're providing a white label service for AOL consumers in which we're powering AOL Mortgage and Daily Finance.

If your question is about particular relationships with lenders, we have many hundreds if not thousands of lenders in Zillow Mortgage Marketplace, both individuals mortgage brokers, as well as you'll see corporate lenders like ING and Wells Fargo and Bank of America in Zillow Mortgage Marketplace as well. The way that the borrowers shop and determine which lender to select is probably first and foremost based on rate, but also based on tens to thousands of reviews that have been left on these particular lenders as well. So we don't preference particular lenders over one another, that's up to the quality of the loan quote that they return, as well as the ratings and reviews on each particular lender.

Okay, great, thank you.

(Operator Instructions) Brian Bolan, Brian Bolan Research.

I was wondering if you could give us a little bit more color about to deal with Howard Hanna. I think I see two things where the data integrity gets better, and also lead-gen. Could you just give us a little more color on how that's going to help you and who else has been knocking on your door after that announcement?

So we're very pleased with the Howard Hanna partnership, Howard Hanna is the fourth largest real estate brokerage in the country, and just the other day we announced a partnership with them where they will be featuring our listings, and (inaudible) direct fees and we'll be doing a number of other things together. There are many dozens of other brokerages that have similar relationships with us, and many hundred of brokerages that have some type of relationship, really every major, national and local brokerage in the country has some type of partnership with us, REMAX, Century 21, Keller Williams, Coldwell Banker, Prudential, you name it, we have strong relationships with all of them. But obviously we're very excited to have announced the Howard Hanna one just the other day, as such a large and prominent brokerage. They're also considered a technology leader, so their endorsement is Zillow and the marketing platform that we can bring to their agents and sellers would certainly appreciate it as well.

(Operator Instructions) There appears to be no additional questioners in the queue. I would like to turn the program back over to Spencer Rascoff for any additional or closing remarks.

Thanks very much. I want to thank you all for joining today's fourth quarter earnings call. We certainly appreciate your interest in Zillow and look forward to speaking with you again soon.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.