Zillow Group Inc (Z) 2012 Q2 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Zillow's second quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time.

  • (Operator Instructions).

  • As a reminder, this conference may be recorded. And now it is my pleasure to turn the floor over to RJ Jones, Zillow's Investor Relations Officer. Sir, the floor is yours.

  • - IR

  • Good afternoon, everyone. This is RJ Jones, Zillow's Investor Relations Officer. Thank you for joining our conference call to discuss our financial results for second quarter of 2012. Presenting today are Spencer Rascoff, Zillow's Chief Executive Officer, and Chad Cohen, Zillow's Chief Financial Officer. As a reminder, today's discussions will include predictions, estimates, and other information that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements may include, but are not limited to Zillow's expected financial performance, as well as Zillow's strategic and operational plans, anticipated future products and services, and estimated market demand, along with additional examples and metrics that were contained in today's earnings release. These statements are subject to risks and certainties, and actual results could differ materially.

  • For a listings of these risk factors, please refer to our Form 10-K filed with the SEC. On our call today, the non-GAAP financial measure, adjusted EBITDA, will be referred to simply as EBITDA, which excludes share-based compensation. We have provided GAAP to non-GAAP reconciliations within today's earnings release, including EBITDA to net income, the most directly comparable GAAP financial measure. And now I would like to turn the call over to Spencer Rascoff, Zillow's Chief Executive Officer.

  • - CEO, Director

  • Welcome, and thank you all for joining us today. During the second quarter, Zillow once again posted excellent marks. We achieved record levels of revenue and usage across mobile and web, and we advanced the evolution of our marketplace for real estate professionals. Also, we completed the acquisition of RentJuice, and are now leaning forward in building our rentals marketplace for consumers and professionals, a large green field opportunity for us. We continue to see strong momentum in our business, and remain passionately focused on execution.

  • I will start the discussion today by briefly reviewing our results and business models, next I will highlight some recent initiatives to support our growth, first with consumers on mobile and web, then our product development efforts for local professional. I will also discuss our opportunity in the rentals marketplace, and how we continue to differentiate and extend our leading position as the largest and most vibrant real estate marketplace. Then I will turn the call over to Chad, who will go into some more detail on our financial results, and provide our outlook for the remainder of the year.

  • Turning now to our results in the second quarter, we once again set records in quarterly revenue and usage across mobile and web. Total revenue for the second quarter was $27.8 million, increasing 75% compared to the same period last year. Our marketplace revenue category, which includes our local subscription-based Premier Agent business, as well as Zillow mortgage marketplace, increased 102% versus last year to $19.6 million. Marketplace revenue now comprises 71% of total revenues, up from 61% in the same period last year, a desirable mix shift towards more endemic and useful advertising for our consumers.

  • Our display revenue category, which comes primarily from home-related national brand advertisers was $8.1 million in the quarter, 33% higher than last year. Both revenue categories attained record high performances during the quarter. In addition to revenues, usage at Zillow on mobile and desktop continues to increase significantly. During the month of July, 37 million unique users visited our Zillow, Inc. mobile apps and website which is an all-time record, and represented growth of 59% over July 2011.

  • By exceeding our outlook for revenue, our EBITDA benefited from the operating leverage in our model. Flow-through of higher than expected revenue led to EBITDA of $5.3 million in the quarter, representing a 19% EBITDA margin, and 6% point up side variance from our guidance. These results, once again, demonstrate the incremental margin potential in our model over the long-term.

  • For those newer to our story, the large, total addressable market opportunity for Zillow stems from our unique living database of over 100 million homes, which allows us to build market places around all stages of renting, home buying or selling, and homeownership. In the process, we connect consumers with local professionals who can help them. Currently, we monetize two marketplaces, residential real estate and mortgages, and we are now aggressively building out our third marketplace, in rentals.

  • Of the tens of billions of dollars spent by professionals in advertising and services in these marketplaces, we have less than a 1% revenue market share. We are still in the early stages of our growth potential as a technology-driven media Company in the real-estate category. Zillow was built on the ethos of empowering consumers with products and tools, to help them become smarter about real estate during all stages of buying, financing, renting or improving a home. In all these areas, consumers conduct an enormous amount of research to help fuel their decision, and they use Zillow for information not found anywhere else.

  • In addition to our proprietary resident home values, as well as market listings and fundamental data on homes, we have recently reached significant milestones in user-generated processing. One-third of the homes in our database, or more than 33 million US homes have now been edited by homeowners, and their agent representative to create more accurate home profiles. Additionally, more than 100 million photos of homes have been uploaded, enhancing the consumer search and home shopping experience. The strong empowerment we enable for consumers leads to usage of our platform, which continues to break records every month, and sets Zillow apart in the online real estate category.

  • According to comScore Media Metrix, in June 2012 Zillow.com was the most visited real estate website, 25% larger than the nearest competitor website. And the Yahoo! Zillow real estate network, which we sell across for our Premier Agents, is the largest real estate advertising network on the web, over 100% larger than the nearest competitor. Note that these traffic statistics are for desktop usage only, and do not include mobile, where Zillow operates the largest mobile platform in real estate.

  • Building on the success of this advertising network, we recently expanded our relationship with Yahoo! to become the exclusive provider of rental listings on Yahoo! homes. Zillow now powers all for sale and for rent listings across Yahoo! homes, and our Yahoo! Zillow real estate network sells advertising across those platforms. And while traffic across our platforms continues to grow substantially, mobile is leading the way as one of our fastest growing sources of traffic. Earlier this year, Zillow tipped toward mobile, and today more homes are viewed on Zillow via mobile devices, than on desktops.

  • Shopping for homes either for sale or rent is substantially enhanced on mobile, because of a location awareness. Home shoppers can view homes on our apps in real time, as they walk or drive through neighborhoods, or they can research and shop for a mortgage where and when they like. We foresaw this trend in mobile, and positioned ourselves to benefit directly from the explosive growth of smartphone and tablet usage. Today our mobile app lineup consists of 13 total apps, 10 for consumers, and 3 for professionals. This is up from 5 total apps, when we went public one year ago.

  • Across our mobile platform, 63 homes are viewed per second on a mobile device, up from 21 homes per second when we went public just over a year ago. As our mobile usage grows, our mobile revenues grows, because monetization of our platform works as well across mobile, as it does on the web. Each home viewed on Zillow Mobile presents consumers who are shopping for a home the opportunity to make connections with our local Premier Agents. As our mobile usage grows, our Premier Agents continue to get customer contacts through click-to-call, text, or e-mail, and the value of their advertising increases. In fact, our data shows a mobile user at Zillow is three times more likely to contact an agent than a desktop user. Mobile usage has also become a significant source of traffic and revenue for Zillow mortgage marketplace, and as with our Premier Agent business, monetizing here is platform agnostic. Approximately one quarter of our mortgage revenue in the second quarter can be attributed to mobile.

  • Drilling down on mortgages for a moment, as a reminder consumers can engage in Zillow Mortgage Marketplace by submitting a loan request anonymously. And this is markedly different from traditional on-line mortgage shopping services, which yielded generic unactionable rates, or sell your personal information multiple times to lenders, who then solicit you directly. Unlike those services, we let the consumer decide whom to contact, and when to contact them.

  • In the first two quarters of 2012 consumers submitted nearly 5.5 million loan requests on Zillow Mortgage Marketplace, which approaches the number of loan requests made during the full year 2011. And during the month of June, we topped 1 million loan requests per month for the first time. The majority of consumer loan requests are for purchase loans as opposed to refinance loans, which positions us well going into a likely higher mortgage rate environment and a healthier real estate market. On the product side, we have two stand-alone mobile mortgage apps on iOS and Android. During the quarter, we continued to integrate Zillow Mortgage Marketplace into our consumer mobile experience, adding it to our top-ranked real estate shopping app for Android.

  • Before we move on to the professional side of our marketplace, I would like to share a few insights on how we innovate in our consumer businesses. As we extend our lead on mobile and web going forward, continuously innovating remains vital to strengthening our competitive advantage. Our most recent product enhancement for consumers includes new search features on our Zillow rentals app for Android, continued investment in our custom search e-mail program, and the accelerated launch of our neighborhood compare feature. This feature actually originated as a hack from one of our most recent hack weeks during the quarter. During a hack week, we unleash the talents of our team to focus their creative forces on opportunities to improve features, or create new ones on mobile and web.

  • Previous hack weeks spanned many Zillow features such as Facebook integration, hand-drawn searches on our mobile and tablet apps, as well as many math interaction and layout enhancements. Important internal testing and development processes have naturally emerged from hack weeks as well, driving new efficiencies into our management and innovation. As a technology and software company at our core, our hack weeks are an expression of the drive to innovate that is imprinted in our DNA. Expect more to come from future hack weeks and other events that inspire us to create new and exciting products in the future.

  • Now let's turn to the professional side of our market place, starting with the Premier Agent business. The evolution of our Premier Agent business from strictly advertising, to a suite of marketing and productivity services continues to advance. For Premier Agent, Zillow provides an expanding mobile and web platform that offers contact generation and relationship management, as well as productivity tools and personal branding. Through our software-as-a-service and freemium approach, we continue to increase our relevance with a broader set of agents, by positioning Zillow as a central hub around which they can manage and market their businesses.

  • As part of our ongoing evolution, during the quarter we launched Premier Agent websites, a landmark product with a disruptive price point. Developed by combining forces with our recent acquisition of Diverse Solutions, Premier Agent websites empower agents in promoting their businesses on mobile and on the web. Many real estate agents consistently express to us that to be competitive in today's housing market, agents must have their own websites, one that features their personal brands and local property listings. For an agent to build his or her own website, however, the task is at best inconvenient, or at worse expensive and cumbersome, forcing many agents to outsource with designers, developers, and hosting service providers for hundreds or thousands of dollars.

  • Zillow's Premier Agent websites address their critical needs at an unprecedented price point of $10 per month, or free for Platinum and Gold Premier agents. Premier Agent websites are personally tailored and independently branded on mobile and web, easy to construct and maintain, and displaying an agent's local MLS listings. So far the service has been very well-received by the industry, and thousands of agents already have websites from Zillow. To give you a sense of their response, one industry media headline read, Zillow brings real estate websites out of the dark ages. Another prominent industry blogger posted, Zillow has thrown a harpoon into this hired lumbering mass known as the agent website business. And just last week, Premier Agents websites won the 2012 Innovator Award for Most Innovative New Technology at Inman Realty Connect, the leading real-estate industry conference.

  • Serving the needs of real estate agents in this way, we strengthen our competitive advantage by increasing our relevance with a broader set of agents, and further streamlining the everyday activities of agents as they build and manage their businesses. Fundamental to the professional side of our marketplaces is our relationship with the real estate industry. While Zillow provides compelling value to real estate agents and brokers by connecting them with consumers on mobile and web. In turn, those agents and brokers give consumer value in executing real estate transactions. As we have all, strengthening and expanding these relationships with industry professionals, will allow us to pursue common goals and marketplace opportunities together.

  • To this effect, we have recently launched zPro for brokers, and formed our Zillow Agent Advisory Board. Our zPro for brokers initiative enhances property listing accuracy, increases the visibility of listing agents, and provides brokers with reporting and contact management tools. Our initial beta test of the program was originally set up to include 10 brokers, but due to high interest in participating, we are pleased to start the program with 15 brokers in the beta launch. We also recently formed our Agent Advisory Board, comprised of agents around the country participating from a variety of viewpoints, business emphases, and experiences. Through this program, advisory agents provide feedback on the features of new and existing products and services, as well as help us better understand their local market needs. We are thrilled with the composition of the Board and the positive reception of the program by agents across the country.

  • Next I will look at the progress we are making in our rentals marketplace. Nine weeks ago, we completed our acquisition of RentJuice, and laid the groundwork for significant development of our rentals marketplace. Combining Zillow's category-leading presence on mobile and web with RentJuice's technology suite for rental professionals creates a marketplace foundation unrivaled by any model in our competitive landscape. On this foundation, we are building listing's liquidity and visibility into the rentals marketplace, which will result in multiple paths to monetization. Today we lightly monetize the marketplace through the suite of tools RentJuice offers for professionals. The RentJuice offering, including their iPhone, iPad and Android apps for rentals professionals substantially simplifies the marketing of rental units, and the prospecting and on-boarding of potential tenants.

  • While not likely a 2012 or 2013 events, we foresee significant long-term revenue potential for rentals. Just like we have done previously in our developed marketplaces, we are creating supply and demand from the ground up. On the professional side, we are improving the RentJuice tool set, widening it's distribution and usage, and lowering it's price, all with an eye toward getting as many rental listings as possible to be managed using the Zillow RentJuice tool set.

  • On the consumer side, we continue to improve our comprehensive nationwide information and data on rental units. In addition, to rent investments on 100 million homes, we seek to provide consumers with the most accurate, up to date listings of available units on our map-based mobile and desktop platforms. This initiative to maintain real-time inventory of all rental units will eventually result in Zillow powering the most efficient destination marketplace for rentals, and strengthen our competitive advantage in the real estate category

  • With that in mind, I want to take a moment here to explain some of the rental market fundamentals, where providing a technology solution that addresses the inefficient and inconvenient state of the current marketplace, represents a huge opportunity for Zillow. First, in total, there are approximately 43 million rental units in the United States, with over half located in structures of 4 units or less, which is single-family homes or duplex's. Our platform currently includes about 1 million units, that are inventoried and are managed via RentJuice.

  • Next, with a vacancy rate in rentals near 9%, around 4 million units are potentially available at any point in time. Currently, we carry nearly 400,000 available rental listings on our platform. Finally, there are 93 million people living in rental units across the United States. Each year, around 70% of US movers are renters. Rental units annually turn over an estimated 6 times faster than homes for sale.

  • We are already one of the largest rental sites on mobile and desktop, where our 400,000 listings draw approximately 6 million renters to Zillow each month. The focus now is on increasing usage of our professionals tools for the rental industry, in order to grow listings count. And in turn, grow the number of renters using Zillow, then we monetize. Taking into consideration this vast and extremely fragmented structure of the rentals market, and the billions of dollars spent each year by rental brokers, leasing agents, and property managers on marketing and administrative services, our upset potential in the rental marketplace is substantial.

  • Before concluding my remarks today, I want to briefly discuss our influential research on the housing market that contributed significantly to Zillow's authentic voice in real estate. Over the past few months, our economic research team led by our Chief Economist, Dr. Stan Humphrey published a substantial amount of innovative research on the housing recovery. As evidenced by the critical reception and extensive references made to these studies, our research team continues to break new ground and solidify our thought leadership in housing. A highlight for us occurred recently. After years of analyzing housing data and pricing trends, Dr. Humphreys called the bottom of the US housing recession. Our study on negative equity indicates a sawtooth or stair-step pattern of home prices over time along the bottom, as negative equity gets released and more homeowners become able to sell their homes.

  • I also want to express how honored we were by the invitation to moderate the Google Plus Hangout hosted by the White House and Secretary of Housing and Urban Development, Shaun Donovan, on the challenges consumers face in refinancing. The White House contacted Zillow and asked us to partner with them to produce this live webcast event, and to raise awareness for mortgage programs such as HAMP, which help homeowners in financial duress. The live webcast had over 70,000 streams, the second most successful White House event of this kind, second only to the President's webcast discussion following his State of the Union. The event inspired us to constantly remind ourselves of our purpose in empowering consumers, as we believe strongly that facilitating market transparency leads for the best conditions for all consumers involved in the markets we serve.

  • Going forward, we can expect to see further signs of our strategic evolution and differentiation in the quarters ahead, as we work to extend our lead as the most trusted and vibrant home-related marketplace on mobile and web. You can expect to see us lengthen our stride, in our pursuit of the substantial market opportunity in residential real estate. We continue to increase our relevance through a broader set of agents, with our expanding suite of marketing and productivity services, our high ROI advertising program, and now, our Premier Agent websites. By addressing critical needs of real estate agents as they manage and grow their businesses, we continue to centralize our offering as the hub for agent's everyday activities. You can expect us to consistently grow our share of the billions of dollars spent annually by real estate agents on advertising and services, as more consumers shift to mobile where we are well-positioned to monetize extremely attractively.

  • With our acquisition of RentJuice, we are advancing the construction of the most efficient rentals marketplace definition on mobile and web. We will continue to enhance the productivity of rental professionals, by offering ä suite of marketing, relationship management and tenant on-boarding services. And we will work diligently to expand our monetization potential by empowering consumers with the most comprehensive access to updated rental market data. Our capability to address the tremendous and fragmented market in rentals is significant. And you can expect to us go after the opportunity, both methodically and aggressively over time. You can also expect we will continue to innovate and create new products, and from time to time opportunistically execute strategic acquisitions, following the same template we have applied with Diverse Solutions and Postlets and now with RentJuice that advances our capabilities and enhances our portfolio of product and services.

  • To summarize, I am extremely pleased with Zillow's excellent performance in the second quarter. I want to thank the entire Zillow team for their dedication and passion for innovation, as we strive to give our tens of millions of users an edge in real estate. Now Chad will take us through the financials.

  • - CFO, PAO, Treasurer

  • Thanks, Spencer. As Spencer mentioned, I am going to run through our second quarter results in more detail. Then I will discuss our outlook for third quarter, and cover a few items that will impact the remainder of 2012. Starting with traffic, average monthly unique users in the quarter grew 61% from the prior year to 33.5 million. Peak traffic for the quarter was 34.6 million (inaudible) which set a new record. While looking at our top-line results, we had an excellent second quarter, posting record total revenues of $27.8 million representing an increase of $11.9 million or 75% year-over-year.

  • Compared to our outlook, we exceeded the $26.5 million high end of our range by 5%. The positive variance is primarily related to greater revenues in our marketplace category than we anticipated, due to growth in our Premier Agent business.

  • During the quarter in June, we rounded into our first ever $10 million revenue month. By way of comparison, revenue for June in 2011 was $5.7 million, which was the month before we went public, and looking further back in our financial history, $10 million represented our entire top line in 2008.

  • Moving now to our largest revenue category, marketplace. Revenues reached $19.6 million, representing 102% year-over-year growth and 71% of our total revenue. The increase in marketplace revenue was a function of the increase in the number of Premier Agent subscribers, existing agents extending their reach by purchasing more inventory, higher prices reflecting growth in our audience, as well as the launch of new product tiers. We added nearly 4,100 Premier Agents in the quarter, the most in any quarter thus far, representing a net increase of over 9,300 Premier Agents from this time last year. Our agent count as of the end of the second quarter reached a record level of the 22,696 Premier Agents.

  • The majority of increase in this figure is represented by Premier Agents purchasing our Platinum product, as they look to attract shoppers, utilize our business tools, and grow their professional brand across our platform. Please note that while our agent count is an important metric to watch, this figure is not necessarily comparable over time as we have introduced new products into the marketplace, enhanced existing product sets, and Premier Agents have changed their purchasing behavior, resulting in increased upsell to existing agents over the past year.

  • During the quarter, we had a few key developments in the Premier Agent business that I will take a moment here to discuss. First, we changed our Premier Agent product tiers to reflect the continued evolution of the services we are offering to agents Our entry level price point is now Premier Silver, which includes our recently launched agent website service, which integrates into our CRM system. Our mid-level price point is Premier Gold, which includes featured listings, and a personal photo in addition to Silver level benefits. Our flagship and most popular product continues to be our Premier Platinum subscription program sold on a six month contract, which includes an agent's placement into the buyer agent list, that consumers see when they view homes across our mobile and web platform. As a reminder, pricing for the premier Platinum level varies by geography, which reflects local market dynamics.

  • Next we began to monetize the third position in our buyers agent list. By converting the position from free to paid, we increased our Platinum subscription inventory by 50%. And in turn, provided an opportunity for more agents to participate in the program which contributed to the growth in the number of Platinum subscribers during the quarter. The addition of the third paid position was included in our operating considerations for the quarter. Yet because it occurred in the last month of the quarter, the positive impact to revenue while meaningful, will be weighted more in future periods.

  • Lastly, as a reminder, historically our Platinum Premier Agents have purchased advertising on a share of (inaudible) basis across our platform, meaning that as traffic grew agents benefited from increased eyeballs in traffic volume, without typically paying for that growth unless we raised prices at contract renewal. As we discussed on our first quarter call, earlier this year we began testing sales of Platinum subscription contracts on a fixed number of impressions per month basis. By selling and delivering to agents a fixed number of impressions each month, we can as a publisher benefit from the growth in our consumer traffic more efficiently, and remove our current theoretical limit of 12 agents advertising in a single zip code, as we are no longer constrained by agents purchasing inventory in 25% increments. Based on the response from our customers, and from what we have learned in our initial test, we anticipate moving forward with -- moving forward from testing to fully converting our subscriber base to the fixed impression subscription model over the next six months.

  • Also in our marketplace revenue category, Zillow Mortgage Marketplace CPC revenues continue to grow nicely. Although we don't break out these revenues separately, we can report that within the quarter approximately 2.9 million loan requests were submitted by our consumers across web and mobile, as compared to 1.2 million loan requests in the same quarter last year. CPC pricing and conversion rates from loan request to contact have remained healthy, and largely consistent with prior periods, with loan request volume growing as a result of increased awareness across the platform.

  • Looking now at our display revenue category, revenues were $8.1 million, increasing 33% year-over-year, while representing 29% of our total revenues. Advertising placements with us by our industry endemic advertisers, primarily real estate brokers, home builders, and lending institutions continue to drive the growth in the category. While display remains a smaller proportion of our revenues, the contribution margin from the category remains high, as this business has relatively small fixed costs and low variable costs.

  • Moving now to our expenses, total operating expenses were $26.5 million in the second quarter, as compared to $14.3 million in the same quarter last year. Included in our expenses this quarter is a partial period impact from the integration of RentJuice. As previously mentioned, and outlined in the 8-K/A filed on June 13, RentJuice does not contribute significantly to the top line, and for the three months ending March 31, 2012, incurred GAAP losses of approximately $900,000 or $300,000 per month.

  • Now I will discuss each major expense line item, starting with cost of revenues. For the second quarter, our cost of revenues were $3.3 million or 12% of revenues, compared to $2.7 million or 17% of revenues in the same period last year. Due to higher revenues, we experienced positive leverage on our fixed expenses related to IT headcount and data center costs, while our variable expenses and credit card fees and revenue-sharing costs increased as expected, in relation to marketplace revenue category growth.

  • Next, sales and marketing expenses were $12.2 million or 44% of revenues, as compared to 36% of revenues or $5.6 million in the second quarter of 2011. We continue to expand testing and advertising beyond just mobile to other channels and new markets to support long-term growth initiatives. As what we laid out in our upcoming 10-Q filing for the quarter, these tests resulted in approximately $3 million in incremental spend year-over-year, and contributed to the majority of the dollar increase in this category, but still represent a smaller proportion of our overall sales and marketing spend, relative to head count. We continue to gain valuable insights through testing, which has been primarily focused on attracting home shoppers to our mobile and web platform.

  • Moving on to the next expense line item, technology and development costs were $5.8 million or 21% of revenues, versus $2.3 million or 21% of revenues compared to last year. The increased expenses in absolute dollars during the quarter resulted from growth in our engineering headcount to support current and future product initiatives, as well as higher levels of amortization associated with capitalized software development activities, purchased intangibles, and data licenses. These expenses were in line with our plan to increase our investment in our engineering platform, to bring outstanding products and services to market.

  • Lastly, G&A costs were $5.2 million or 19% of revenues, as compared to the same period in the prior year at $2.6 million or 17% of revenues. We acquired RentJuice on May 31, absorbing their headcount and infrastructure costs in June. And during the quarter, incurred approximately $1 million in transaction and related costs as part of the acquisition, which is reflected in G&A. Excluding these costs, as a percentage of revenue, our G&A expenses were lower than last year. We continue to expect these costs to decrease as a percentage of revenue over time.

  • Turning now to profitability, our EBITDA for the second quarter was $5.3 million, representing 19% of revenues. This result exceeds the high end of our guidance range for the quarter by $1.5 million, and exceeded the margin on a percentage basis, which we forecast we would produce in the quarter. The outperformance in the quarter can be attribute to a few factors. First, revenue grew ahead of expectations in our marketplace category, due to the ongoing strength in our Premier Agent business, as well as the timing and partial period impact of opening up our third paid buyer agent position. Second, our display revenue is high margin, so any delivery beyond what was originally predicted in our guidance, drives high incremental margins. Last, overall operating expenses were in line with our plans, which led to revenue flow-through.

  • On a GAAP basis, net income for the quarter was $1.3 million, representing $0.05 per basic EPS, and $0.04 per diluted EPS on 28.9 million and 31.3 million weighted average basic and diluted shares outstanding, respectively. Looking briefly at our cash flow from operations, we generated $10.6 million in the second quarter, versus $4.9 million in the same period last year. Compared to prior year, our operating cash flow increased 118%, demonstrating the correlation of our performance to cash generation in our model.

  • Quickly turning to our balance sheet, we ended the quarter with approximately $70 million in cash and cash equivalents, as well as short-term investments. Our $25 million revolving credit facility remains untapped. On August 1, we became S-3 eligible, and today filed a shelf with the SEC as a matter of good housekeeping, and to provide ourselves with flexibility in our capital structure in order to remain prepared for future considerations of both our operational needs and potential strategic opportunities in the marketplace.

  • Now I will provide a few comments on our outlook for the third quarter of 2012. First, revenue is expected to be in the range of $30 million to $31 million. This outlook represents a 60% year-over-year growth at the midpoint of the range. Next, EBITDA is expected to be in the range of $4.75 million to $5.25 million. At the midpoint of our range, this represents approximately a 16% margin.

  • Our outlook reflects increased subscription bookings from our Premier Agent business, as well as higher operating expenses related to executing our growth investment plan for the remainder of the year, which I will discuss momentarily. While we are not providing a GAAP EPS outlook, as a matter of maintenance we expect a diluted weighted average share count of approximately 32 million to 33 million shares for the third quarter, and we expect the same range for the fourth quarter.

  • Now looking at the full-year 2012, starting with a few line items that aid in modeling our future business results. We are updating our outlook for depreciation and amortization for the year to be in the range of $13 million to $14 million, and updating our outlook for share-based compensation which will now be in the range of $7 million to $8 million. We still expect CapEx and capitalized data content to be in the range of $8 million to $10 million, of which IT CapEx portion is approximately $2 million to $3 million. Looking at the remainder of 2012, we will continue to execute planned investments in our foundation for growth that we expect will bring our full-year 2012 EBITDA margin in line with 2011 level of approximately 18%.

  • These strategic investments include the following. First, our technology development outlays will continue to increase year-over-year on an absolute dollar basis through additions to our engineering staff in Seattle, San Francisco, and Orange County to support our growth and product efforts. Second, we expect that our expanded testing with targeted advertising across multiple channels will be significant higher year-over-year, with the largest absolute increase occurring in the third quarter.

  • As we have mentioned previously, while we do not anticipate substantial near-term returns in this increased spending, we expect lasting long-term positive impacts realized through increased awareness of Zillow, both in traffic on our mobile web platform, and ultimately increased sales. Third, we continue to ramp up hiring of inside sales people for the Premier Agent business in Orange County. As a reminder, because of typical ramp time for an inside sales representative selling subscriptions nationwide is three to four months, we do not expect to see significant revenue contributions from these classes until the fourth quarter or early 2013.

  • Last, with the operations of RentJuice being integrated into Zillow for remainder 2012, we will absorb incremental operating costs consistent with RentJuice's historical trends, and ongoing investment in our rentals marketplace. Collectively, these investments enhance our foundation for long-term growth, strengthen our competitive advantage, and enable us to extend our market leadership with consumers on mobiles and on the web, in residential real estate, mortgage, rental, and other home-related marketplaces.

  • As we conclude today's prepared remarks, taking a look back at our brief history as a public Company, it has been quite a year. We are making steady progress towards reaching our midterm target model of $200 million to $250 million in revenue, with a 30% to 35% EBITDA margin. Comparing this most recent quarter, to last year's second quarter, which was right before our IPO, our quarterly sales revenue grew from $15.9 million to $27.8 million. Our monthly unique users grew from 20.9 million to 34.6 million. Our headcount increased from approximately 260 to 440 employees. Our Premier Agent count went from near 13,400 to 22,700.

  • We tipped to mobile, with more homes viewed on mobile than on desktop, and our mobile app line up increased from 5 to 13 applications. We acquired two companies, extended our footprint by two more office locations. Our laser-like focus on execution continues, as we deliver great products to market, and build new marketplaces. We remain extremely excited, as we continue to gain momentum in the pursuit of our sizable market opportunities. With that, we would like to open up the call to questions.

  • Operator

  • Thank you, sir. (Operator Instructions).

  • Our first question in queue comes from Ron Josey with ThinkEquity. Please go ahead, your line is open.

  • - Analyst

  • Great. Thanks, and great quarter. So two quick questions. One on pricing, the other on the S-3 that was just filed. And on pricing and product, Chad, I think you mentioned the majority of Premier Agent growth came from Platinum agent. But based on our math, it feels like ARPU was actually down sequentially. So wondering if you can-- if that's more due to the Mortgage Marketplace, or potentially more Premier Agents coming on line at the Silver and Gold level? And just on the S-3 that was just filed, any additional information there would be helpful. Thank you.

  • - CFO, PAO, Treasurer

  • Yes. Hi, Ron, this is Chad. Thanks for your question. So if you do the brute force math on the ARPU, looking at our total marketplace revenues, yes, I can see that ARPU is down. But it's really a function of growing the number of Premier Agents that we had in the quarter. We were moving beyond just advertising services for Premier Agents, to offering a whole suite of business services, including Premier Agent websites. So with the growth of those other two tiers, Gold and Silver, that had the effect of bringing the ARPU down, if you just look at that math. Loan requests and Zillow Mortgage Marketplace grew at a very nice and healthy pace in the quarter, so it was really not a function of that.

  • - Analyst

  • Okay.

  • - CEO, Director

  • I can say -- hi, Ron, this is Spencer, I can take the shelf offering. So basically, the -- our perspective is that after a year after being public, as a matter of good housekeeping we filed the shelf, which is pretty customary for companies at this stage. We haven't made any decisions about a follow-on at this time. So just to be clear, for those on the call, who maybe don't know there has been a shelf and follow-on, what we filed today is not a follow-on offering. It's a shelf statement with the SEC, which says -- it basically registers shares. So if we decide to do a follow-on later, then the shares can be sold more rapidly. Basically, we can complete a follow-on more expeditiously.

  • We are always thinking about the optimal capital structure for the Company, and the shelf gives us more flexibility. The size of the shelf, we registered 150 million shares, and the way shelf offerings work is they expire after three years, and you're supposed to register kind of what you think is reasonable to sell over a two-year period potentially. And so, that explains why we chose 150 million. Again, it's a pretty customary thing for a Company on the one-year anniversary post-IPO to do this, just so you can do a follow-on if you choose, more expeditiously. We have not decided whether, or not to do a follow-on.

  • - Analyst

  • Just one point of clarification, that's a $150 million, not 150 million shares.

  • - CEO, Director

  • Sorry, $150 million, correct. Thank you.

  • - Analyst

  • Thanks. Much appreciated.

  • - CEO, Director

  • Okay.

  • Operator

  • Thank you, sir. Our next questioner in queue is Michael Graham with Canaccord. Please go ahead. Your line is now open.

  • - Analyst

  • Thanks a lot. Just actually one clarification. I thought that, Chad, you mentioned in your prepared remarks that the optical reduction in ARPU was related to the notion that some of the pricing initiatives brought on a lot of non-linear subs towards the end of the quarter. And so they weren't in the revenue base for the whole quarter, but yet they're in sort of the average PA sub number. So I wanted to see if that's accurate? Then can you comment on the subs you did bring in towards the end of the quarter, where were they in pricing, relative to the existing base? And then just like a follow-on question to that is, talk about the conversations you are having with the introduction of CPM-based pricing, and how that's been going, and what the reaction has been from your customers? Thanks.

  • - CFO, PAO, Treasurer

  • Thanks for your question. So, yes, there are a couple of moving parts in the quarter. We did open up our inventory to a third buyer's agent list position in the quarter, but that was really towards the end of the quarter. And you are correct, in that the growth in the subs is partially a function of opening up that third buyer's agent list, as well as starting to sell our Premier Agent websites during the last part of the quarter as well. So that had the impact you mentioned.

  • In terms of where we are in terms of moving to an impression-based model, we started testing sales of an impression basis. We had previously done on a share of voice basis, so started testing in that the first quarter to new agents. And started selling those packages, still on a six-month subscription basis to new agents, as well as to existing agents looking to expand their profile across our platform. So everything is going as planned. Agents are happy with the switch that we have made, and obviously this allows us to benefit from our traffic growth that we have brought to the platform. So the plan is to keep marching down that path, and to complete that switch over the next six months.

  • - Analyst

  • Okay. Thank you.

  • Operator

  • Thank you, sir. Our next questioner in queue is Aaron Kessler with Raymond James. Please go ahead, your line is open.

  • - Analyst

  • Great, thanks. A couple questions. First on the agent website product. Do you think the bigger opportunity there is to agent that don't currently have a website, or maybe agents that are looking to save money, going with a lower priced solution? Also, I'm not sure if I missed it, but the RentJuice revenues and uniques, do you have those, or can you give those? And third, just on the COGS and cost of revenues, it looked like you got some good leverage there in the quarter. Can you give us a little more background behind that? Thanks.

  • - CEO, Director

  • Hold on. We are jotting down the questions here. Okay. So, thanks, Aaron. So on agent websites, there are a couple of different sort of use cases among agents. I would say the most common one so far has been agent who has a website, that they don't really pay that much attention to. Maybe it is -- maybe it was created a couple years ago. Maybe it sort of hangs off their broker's website, so sort of broker.com/SpencerRascoff, and so it's nominally that agent's website, but they don't really think of it that way. And they have viewed the creation of a WordPress MLS-sourced website from Zillow as a way to have another website to get into Google search results, with kind of a second URL than perhaps they already have.

  • And so, I would say -- this is kind of anecdotal that more of the new agent -- the new Zillow websites are the creation of a second website, rather than the creation of a first website for that real estate agent. The general reaction so far has been excellent. The only stat we have released so far is thousands of them are live. So far, I can tell you it has changed the nature of the conversation between us, and a lot of our Premier Agents already. They quickly go from viewing you as an advertising medium, to more of a business partner once your are powering their website. So we have been pleased with this strategic move.

  • On RentJuice uniques, we don't -- I guess, well we do total them, as part of kind of when we talk about Zillow, Inc websites, but RentJuice.com is a very, very small website in terms of traffic. It's not a consumer-facing website. It's basically a private portal that there paying clients log into, in order to manage their listings, so it is not --it is not a consumer-facing website, it has very little traffic. And their revenue is immaterial as well. And as we have talked -- as we said in the script, their revenue is currently immaterial, and we are looking in the near term I think, of making it even more immaterial, as we actually take down pricing on RentJuices' tools in order to increase it's adoption. And Chad, on COGS?

  • - CFO, PAO, Treasurer

  • Yes, on COGS, Within the COGS line, we do have fixed costs with respect to employee costs, salaries and benefits related to our IT headcount that supports operating our platform. So those are fairly fixed and stable. We also have data center costs related to the colo that we operate up here in Washington. So we have some fixed costs there that we are gaining some leverage from. And also over time, you will be able to see that we will get some scale with our variable costs, as we continue to grow revenues. So you will see that-- year-over-year, the costs are up but we do have some leverage there, but sequentially they are essentially flat.

  • - Analyst

  • Great, thank you.

  • Operator

  • Thank you, sir. Our next questioner in queue is Mark Mahaney with Citigroup. Please go ahead.

  • - Analyst

  • Hi, two questions please, about the Premier Agents. One, could you talk about the sources of the new Premier Agents? You did have that, pretty big increase sequentially there, new geographies, new types of subscribers, in addition to just people signing is up for the website product? Then, is there a way to think about kind of same-store sales growth for Premier Agents, in terms of the ARPU? So there's a lot of mix factors in there, but if we -- but if you leave aside -- if you look at Premier Agents who have been with you for more than a year, or who have been -- who have had significant tenure with you, can you talk about what kind of wallet share you are -- if there's any increase in wallet share amongst those real-estate agents? Thank you.

  • - CFO, PAO, Treasurer

  • Hi, Mark, this is Chad. I will just start off with -- in terms of the sources of new PAs, as I mentioned, we did open up two new tiers in the quarter, that we started selling those two new tiers later on in the quarter. But the primary driver of the growth in the quarter has to do with still our Platinum product that we sell on a six-month subscription basis. So that is what drove the majority of the growth in the quarter, and got us to approximately 22,700 agents. In terms of same-store sales, I meaN some of the things we are seeing is just increased upsell of existing agents that are looking to expand their presence on our platform. We used to talk about sort of 30% to 40% upsells. But now we are seeing a number that is closer to sort of 50% upsells, as agents start buying more inventory to represent their actually, their real sales territory that they are actually working on the street. So I don't know Spencer, if you want to add --

  • - CEO, Director

  • Yes, I mean, the only other way I would think about it is, the website business, we talk about this disruptive price point. So typically a real-estate agent, if they have their own website would probably be spending $100 to $200 a month, and maybe kind of $400 to maybe $1,000 fixed fee to develop it. And that's bundled now, in the Premier product. So in terms of wallet share, we are definitely -- we are definitely take more share in that part of the business, where the website vendors that are typically priced a lot higher, and are not able to bundle with it the Premier program are losing share to our website business.

  • - Analyst

  • Thank you, Spencer. Thank you, Chad.

  • Operator

  • Thank you, sir. Our next questioner in queue is Chad Bartley with Pacific Crest. Please go ahead, your line is open.

  • - Analyst

  • Hi, thanks. Just a quick follow-up question to the last questioner on subscribers and the different sources. So I understand this quarter, the majority of new adds came from top tier Platinum plan. Was that the case in Q1? I thought that you had indicated in Q1, it was actually the lower price tiers that drove the majority of sub adds?

  • - CFO, PAO, Treasurer

  • I am getting that number right now. Hold on one second. Yes, in Q1 the majority of those adds came from our Platinum PAs.

  • - Analyst

  • Okay. Thanks for clarifying that. Appreciate it.

  • Operator

  • Thank you. Our next questioner in queue is from Brad Safalow with PAA Research. Please go ahead, your line is open.

  • - Analyst

  • Thanks for taking my questions. Just a housekeeping question, for going forward. As you add agents on the RentJuice platform, are they going to be captured in your overall Premier Agent count, or they will be totally separate, not disclosed?

  • - CFO, PAO, Treasurer

  • They are not going to be disclosed, at least at this time. Though they would be a separate number, if we decide to disclose them.

  • - Analyst

  • Okay, great. Just going back to the nature of the agent subscriber at the Silver level now, the website product, is this a different type of agent, either from the markets in which they are operating, their transaction velocity? Anything you can describe, in terms of their profile from a pure business perspective?

  • - CEO, Director

  • Sure. This is Spencer. As we said a couple times, Platinum is definitely the focus, and the -- in terms of the preponderance of the new subscription, where subscription growth is coming from, it's coming from Platinum which includes a website in it, at no additional charge. The Silver tier is $10 a month just for a website. And that person is basically saying, I want a website, but I'm not interested in lead generation from Zillow. I'm not interested in attracting buyers, by participating on the buyer's agent list, for example, and I don't have a lot of listings, or else I would be interested in the Gold and Platinum tiers which have featured listing benefits. So it's very much an entry level price point, kind of a way to just develop -- start developing a relationship with the advertiser, with the real-estate agent. It's not -- as you can tell by the low price point, it's not a significant -- it's not a significant focus of ours, from a revenue generation standpoint. It's much more a way to initiate a relationship with the agent, then likely upsell them in Platinum or Gold down the road.

  • - Analyst

  • Okay. And then it is fair to say that your ARPU trends would have been the same, as what we have seen, let's say, in the first quarter of this year, fourth quarter of last year, excluding the impact of the timing of the kind of third slot, as well as the website's business?

  • - CFO, PAO, Treasurer

  • Yes, I -- this is Chad, I think that's fair to say. The best proxy for that is probably just looking at traffic growth, but I think that is fair to say.

  • - Analyst

  • Okay. Then the last question, just in terms of zip code coverage or monetization, what can you say about your progress there? I know you obviously do very well in some zip codes that you have been in for a very long time, but in terms of expanding your geographic reach and your monetization in some of the areas where you haven't been as strong historically?

  • - CFO, PAO, Treasurer

  • Well, as a reminder, we sell our Platinum subscription product on market by market basis, meaning that we look at the various sort of economics in each of the geographies to determine price point. And we look to liquidity levels, contact volume, and a number of different variables to determine price. We haven't disclosed before, what our percentage of sell-through is on a geographic basis.

  • - CEO, Director

  • Yes, I mean, I guess the only -- this is Spencer. The only other way I would probably look at it is, we -- the product works just as well for agent in Syracuse, as in San Francisco. They are going to be paying a lower CPM or lower monthly subscription rate in Syracuse, than San Francisco, because home values are lower. We probably have less -- fewer contacts as well, and there probably are fewer agents that are anxious to buy that inventory. So we have less demand, therefore we price it lower. But the product works very well there. One of the nice things about this switch to an impression-based pricing model is as traffic grows in Syracuse or San Francisco, there is more inventory available to sell to another agent. That combined with the fact, that now we have three spots on the buyers agent list available for sale, means there is inventory to be sold in San Francisco or Syracuse in that example.

  • - Analyst

  • Okay, thanks.

  • Operator

  • Thank you. And our next question comes from James Dobson with Benchmark. Please go ahead, your line is open.

  • - Analyst

  • Great, thank you. Can you just confirm that regarding the impression-based model for Premier Agents, that you have not yet begun switching existing agents, it's only been with new agents coming on? And then regarding sort of Premier Agent websites, does that include a mobile website? Has there been any thoughts about including sort of Premier Agent mobile app going forward? And then the third question is, what's your thoughts, or I guess strategy regarding sort of incremental investment in RentJuice?

  • - CFO, PAO, Treasurer

  • Just getting down your questions. So this is Chad. Hi, James. So in terms of existing agents, to the extent that existing agents are buying more inventory, now purchase more inventory since the first quarter when we started testing this impression-based sales model, yes, they would be on an impression basis right now. So their impressions will be capped each month. To the extent that there are existing agents that haven't purchased inventory and are out of contract, they are still paying us on a share of voice basis. So it really depends whether you purchase more inventory or not. In terms of -- (Multiple Speakers).

  • - CEO, Director

  • So just to put a finer point on the first point, every new -- every contract that has been sold, either to an old agent or to a new agent since first quarter has been on this impression based model. So and -- as Chad said, it's because a lot of our new sales are to existing Premier Agents. Those old Premier Agents in many cases, in most cases have already bought on this impression model. And those that haven't, have now had several months of data where we have been reporting to them, how -- what their impressions have been. So even if they bought, say two years, where they bought -- I want to show up 50% of the time in a given zip code, well, for the last six odd months we have been showing them how many times they have been displayed. So we have been training them to start thinking about impressions, and therefore when we switch --when we roll them over late this year, it will be a quite smooth transition at that point.

  • Agent websites, yes, it does. The website product, either the $10 Silver website or the website that comes with Platinum or Gold, in either case it does include a mobile optimized website. So you can have on your own URL, on SpencerRascoffRealEstateAgent.com will look great on a smartphone, an iPad, or other smart -- mobile tablet, as well as on a website. It is not an app, it's a mobile website, but it is mobile-optimized and looks fantastic on mobile.

  • In terms of incremental investments in RentJuice, we are very focused on growing the rentals business. We are prepared to make this investment through 2012 and 2013, and we don't expect near-term significant monetization from rentals. But we think that the market opportunity here is very significant, about $4.5 billion is spent every year marking rentals and buying software tools to manage and market rentals. And we think there is an opportunity, given our huge consumer traffic, there is an opportunity to come in with a suite of very inexpensive or perhaps free tools to the rental industry, and a way to create the marketplace for rentals.

  • Just in the script we talked a lot about some of the market dynamics in rentals, but one thing we didn't hit on is the absence of an MLS in the case of rentals. So what I mean by that, is in the case of for sales homes, there are central databases on a local basis, that have basically all the homes for sale in each local MLS. Nothing similar exists in the case of rentals. You can't readily find all the rentals in a given market, anywhere in particular. The closest thing to something like that would be Craigslist. We think there's an opportunity to become the definitive database of rental inventory, through this strategy of offering tools to the rental industry. And then, of course, matching them with many millions of rental home shoppers on the consumer side of the marketplace. So, we're very prepared to invest in it, and we think the payoff down the road will be significant.

  • - Analyst

  • Great. Thank you.

  • Operator

  • Thank you. (Operator Instructions).

  • Presenters, at this time I am showing no additional questioners on the phone line. I would like to turn the program back over to Mr. Rascoff for any additional or closing remarks.

  • - CEO, Director

  • Thank you. Thanks to all, for joining today's second quarter earnings call. We appreciate your interest in Zillow, and look forward to talking to you again soon. Thank you.

  • Operator

  • Thank you. Again, 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.