Zillow Group Inc (Z) 2012 Q4 法說會逐字稿

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

( Operator Instructions )

As a reminder, today's conference may be recorded. It is now my pleasure to turn the floor over to Raymond Jones, Zillow's Investor Relations officer. Sir, the floor is yours.

Thank you. Good afternoon and welcome to Zillow's fourth quarter and full year 2012 earnings conference call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer, and Chad Cohen, Chief Financial Officer.

Before we get started, as a reminder, during the course of this call we will make forward-looking statements regarding the future events and the future financial performance of the Company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements made in the press release and on this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in our quarterly report on Form 10-K filed with the SEC on March 2, 2012. In addition, please note that the date of this conference call is at February 13 In addition, please note that the date of this conference call is at February 13, 2013 and any forward-looking statements that we make today are based on the assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP the financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's press release. In our remarks, the non-GAAP financial measure adjusted EBITDA will be referred to simply as EBITDA, which excludes share-based compensation.

This call is being broadcast on the Internet and is available on the Investor Relations section of the Zillow website, at investors.zillow.com. A recording of this call will be available after 8.00 PM Eastern time today. The earnings press release is available on our website; and after the call, a copy of today's prepared remarks will also be available on our website. After management's remarks, we will host a Q&A session. I will now turn the call over to Spencer.

Thank you all for joining the call today to discuss our 2012 fourth quarter and full-year results. I'll start by reviewing some quarterly and full year financial highlights, and then I will outline our strategic priorities for 2013. Next, Chad will discuss our 2012 results in more detail, as well as our outlook for the first quarter and full year 2013. Then we will open up the call for questions.

The fourth quarter turned out better than we expected. We achieved record revenue, while executing a pricing model transition in our Premier Agent business, all during what is typically the seasonally slowest period of the year in housing. Solid execution on the part of both our Premier Agent sales team and our display sales teams resulted in Q4 revenue of $34.3 million, up 73% year-over-year. We also successfully closed three acquisitions, Mortech, which provides a CRM and pricing engine for the mortgage industry, HotPads, a consumer rental shopping site and suite of mobile apps, and Buyfolio, a collaborative shopping tool that enhances our Premier Agent offering. These acquisitions each accelerate development of our mortgage, rental, and real estate marketplaces.

We ended 2012 on a strong note from Q4 and brought our full year revenue to nearly $117 million, growing 77% over full year 2011. Marketplace revenue reached almost $87 million, up105%, and grew from about 15,800 Premier Agents at the end of 2011 to almost 29,500 Premier Agents at the end of 2012. Full year display revenue grew 26% and exceeded $30 million for the year. EBITDA for 2012 was $25 million, up 112% year-over-year, and represented 22% of revenue. We also showed significant earnings growth, with $5.9 million in net income, up from $1.1 million in 2011. In addition to record revenue and profit, in 2012 we extended our usage lead as the largest real estate website and mobile platform. During year, we hit a high of 37 million monthly unique visitors. We also tipped to mobile, with more monthly visits now coming from Zillow Mobile then on the web.

While we are pleased with our fourth quarter and full year 2012 results, we now turn the page to 2013 and the tremendous market opportunities that lie ahead. In 2013, we have three priorities for the year. First, to continue to the rapid expansion of our user base on mobile and desktop. Second, to substantially grow our Premier Agent business. And third, to accelerate development of our emerging marketplaces in mortgages, rentals and home improvement. I will now spend some time discussing each priority.

Our first priority is to grow our user base and extend our leadership position across mobile and web. We are off to a good start, as January traffic reached nearly 46 million unique users for the first time, with just over half of our visits on a mobile device. Or to put it another way, mobile traffic in January was larger than all of our traffic for Zillow just three years ago, in January, 2010. We now have 23 distinct mobile apps for consumers and professionals across all platforms, and we had significant resources in 2013 devoted to improving our existing mobile experience and launching new apps. In addition to mobile, our product development efforts this year are focused on expanding and improving our buyer experience, which ultimately creates more leads for Zillow Premier Agents. We recently added more than1 million pre-market and foreclosure listings for free on Zillow. This is unique inventory that is typically not available on other sites or in MLS. We are also in the midst of substantially improving our map-based home and neighborhood search experience and redesigning major portions of our site to better serve the needs of buyers. We are testing new versions of our home page and our listing detail pages, and we are improving the timeliness of our listings and user save search and notifications capabilities.

In support of our first priority of growing usage, following highly measured testing in 2012, we are now stepping on the gas in 2013 in several advertising channels that showed promise last year. We are focusing our advertising spend on home buyers who are likely to contact our Premier Agents. For competitive reasons, we will not get into specifics about our media plans; but overall, we expect that our 2013 sales and marketing spend will be up about 70% year-over-year. With most of our current traffic coming to us for free, and in a category without a recognized incumbent brand leader, we have a tremendous opportunity to use advertising to grow our brand, usage and leadership position over the long term. Our proven Premier Agent model gives us great monetization, and our confidence in the size of the total addressable market gives us the confidence to increase our advertising investment in 2013 in order to extend our leadership and drive long-term revenue growth.

In addition to product development and advertising, both of which grow usage at Zillow, we were pleased last week to announce a new partnership with HGTV's FrontDoor.com. Similar to our Yahoo partnership, Zillow will now be the exclusive provider of all real estate listings for HDTV's FrontDoor.com, and Zillow Premier Agents will also receive exposure on FrontDoor.

Our second priority for 2013 is growing our Premier Agents business. While we are growing rapidly on an absolute basis, off a much larger base than our competitors, we do not believe that the online real estate advertising category is mature enough to consider it a zero sum market. Our most recent results show that our Premier Agent business is at about a $90 million run rate, which we estimate is less than 2% of the total spent on advertising by agents each year. We are lightly penetrating a huge addressable market that derives from the estimated $50 billion to $60 billion in commissions generated each year by real estate agents. In terms of number of agents, today we have about 29,500 Premier Agent subscribers, a small fraction of the hundreds of thousands of active, practicing agents nationwide. We are growing this business very quickly. Premier Agent revenue and subscribers were both up around 90% year-over-year in the quarter, but we still have a lot of running room in front of us.

Having recently transitioned our pricing and inventory model, the opportunity in the near term is to bring more agents onto our platform, as our impression inventory grows with traffic. We have built a highly capable, professional sales force that we can leverage efficiently as we grow. Our pricing can now adjust more dynamically, as our subscriptions continue to increase in value. Agents working with Zillow view success in terms of increased sales and commissions compared to dollars spent. Thus, the more we can do to help agents gain clients from Zillow Mobile and Zillow.com and increase their conversion through software tools, the more valuable a subscription with us becomes.

Further, as agents utilize more of our services, like our CRM and Premier Agent websites, the more agents we retain for the long term. In 2013, we will continue to enhance our Premier Agent offer, including adding new features to our CRM and rolling out our Buyfolio service nationwide, as well as launching new software features. Supporting our growth plans, we will continue to expand our sales force, build new relationships with brokerages on a national and local basis through our Z-Pro program, and establish other partnerships that benefit both professionals and consumers.

Our third priority in 2013 is to continue building out and growing our emerging marketplaces. We often talk about the Premier Agent business in depth, because it is the bulk of our revenue today. But our market opportunity is much larger than residential real estate advertising. It includes tens of billions of dollars spent by professionals in mortgage, rentals and home improvement on advertising and software.

Just last week, we launched Zillow Digs, which marked the debut of our fourth marketplace, home improvement. Digs is a beautiful new product, one that is particularly well-suited for the form factor of the iPad, which we launched simultaneously with the desktop. Zillow Digs provides consumers with a compelling and immersive searchable experience in home improvement, one that reinforces the value of Zillow to homeowners. The launch includes a revolutionary new tool for consumers found only on Zillow, Digs Estimates, a first of its kind remodeling cost estimate algorithm created by Zillow's industry-leading team of economists and data analysts. The patent pending technology in Digs Estimates helps home shoppers and homeowners understand what it might actually cost to re-create the looks they see in the thousands of photos of real bathrooms and kitchens on Zillow Digs. The early response to Zillow Digs has been extremely favorable, including strong reviews and featuring in the Apple apps store, and favorable media coverage in social media commentary.

Consistent with Zillow's proven formula for creating marketplaces, we are focused first on building a product that consumers love that is mobile-centric and that leads to traffic growth. The Zillow strategy for creating marketplaces is to initially allow professionals to connect with consumers for free, then look to monetize when we reach sufficient scale. Later we will seek to add software tools to the professional offering and refine our monetization approach. In 2013, our focus for Digs will be on creating a great consumer experience. Just as we did with Zillow Rentals, starting three years ago, and with Zillow Mortgage Marketplace, starting five years ago, we are planting seeds with the launch of Zillow Digs. We are already seeing good revenue and profit contribution from Mortgages and we expect Rentals, and eventually Digs, to pay off, as well.

Continuing on the topic of our emerging marketplaces, I will now turn to our mortgage marketplace, where consumer usage and monetization continues to grow and we remain busy integrating the operations of recently acquired Mortech. Consumer loan requests in the marketplace reached almost 12 million in 2012, more than doubling our 2011 query level of 5.5 million, resulting in revenue nearly doubling, as well. Mobile continues to be a strong contributor to our mortgages business, accounting for about 25% of our searches and revenue. With more home buyers getting off the sidelines in this persistent low mortgage rate environment, we remain well-positioned to benefit from the improving housing market. In 2013, we will continue to add vendors to our platform and expand our suite of services we offer to mortgage professionals that go beyond advertising.

Finally, in our Rental marketplace, we continue to build out both the consumer and professional side of the market. Currently we are assimilating our first consumer-facing acquisition of HotPads into the operation of Zillow Rentals. Along with a talented and very experienced product development team, HotPads brings a complementary and highly engaged audience to the Zillow rental network, in addition to the more than 6 million current renters that come to Zillow each month. Also, we are growing our listings count, which now exceeds 600,000, with more direct relationships coming aboard daily.

Recently, we expanded our suite of services for pro's to include free websites for property managers. Our projected timeline for monetizing the Rentals marketplace ha accelerated into late 2013, with increased traffic across our network facilitating the growth of our listings count driving increased consumer usage and adoption by professionals.

So to summarize our top three parties for 2013 are, one, increase our audience on desktop and mobile; two, grow our Premier Agent business; and three, build our emerging marketplaces of rentals, mortgages and home improvement.

Before I conclude, let me discuss our 2013 outlook. We expect full year 2013 revenue to be in the range of $165 million to $170 million. As I've outlined, a core 2013 priority for us is to grow our user base; and with this, we have decided to meaningfully increase our advertising this year. We plan to strategically increase our sales and marketing spend in 2013 by about 70% year-over-year. Due to this increased advertising investment, we expect our EBITDA margin percentage will be flat to slightly down compared to 2012. Investing in our brands today is the right thing for our business over the long term, because of the huge brand white space in this category. We remain excited about our tremendous leadership potential as we further advance our home related marketplaces in the coming year and beyond.

To conclude, I would like to sincerely thank all of our employees, partners, Premier Agents and shareholders, as we work hard to give both consumers and real estate professionals an edge in real estate. And now, I'll turn the call over to our CFO, Chad Cohen.

Thanks, Spencer. First, I'm going to run through the details of our fourth quarter and full-year financial results, and then I'll share our outlook for the first quarter for 2013. I'll also spend a few minutes giving some more perspective on the coming year.

Starting with our traffic in the fourth quarter, more than 34.5 million average monthly unique users visited Zillow's mobile applications and websites. That 's up 47% from the same quarter last year. Total revenue for the fourth quarter increased 73% year-over-year, to a record $34.3 million, up from $19.9 million in the same quarter last year. Total revenue in the fourth quarter exceeded the midpoint of our guidance of $30.5 million by approximately 12%. We continue to see a favorable shift in our revenue mix, as we ended the fourth quarter with 78% of our revenue coming from our Marketplace categories, while 22% came from display. Partial period revenue contributions from our acquisitions of Mortech and HotPads were immaterial, due to the timing of the completed transactions landing late in the quarter, which was consistent with our expectations.

Taking a deeper dive into our primary revenue category, Marketplace revenue grew 95% year-over-year, to $26.8 million. We continue to see strong growth rates across our Premier Agent, mortgage and diverse solutions businesses. Drilling down further in the Marketplace category, we are almost finished with the transition of our subscriber base from a percentage share invoice to fixed impression-based subscription terms. Moving through this transition in the methodical way that we planned, our sales team connected superbly with our customers and helped them navigate the changes with ease. Over the course of the fourth quarter, approximately two-thirds of the agents that converted to impression-based contracts kept their spending levels the same with us, while one-third increased their spend. Very few agents decided not to renew their subscriptions, which is a testament to the strong Premier Agent volume proposition. In addition, as new inventory became available, we brought three times as many new Premier Agents onto our platform as we did a year ago. By the end of this week, we will be completely through our transition to impression-based pricing and the subscriber base will be fully converted, which sets us up nicely for continued growth in 2013.

Back to our results, during the quarter we added 2,770 net new Premier Agents, and ended the period with 29,473 subscribers. The vast majority of additions were at the Platinum level, reflecting an even healthier mix of new agents buying Platinum than in the third quarter, continuing the trend we've seen throughout the year. Average monthly revenue per user, or ARPU, was $267 in the fourth quarter. And while 3% higher than the figure in the same period last year, sequentially ARPU was essentially flat compared to our third quarter.

Looking at our bookings, over 40% of our new sales were to existing agents buying more exposure across mobile and web in their sales territories, which was slightly higher than in the third quarter. As a reminder, pricing of our Platinum Premier Agent subscriptions varies by market, reflecting local home values, as well as contact liquidity and demand for impressions in a zip code.

Looking at our other revenue category, Display revenue in the fourth quarter grew 22% year-over-year, to $7.5 million. This represented approximately a 10% sequential seasonal decrease from the third quarter. As a reminder, Display average volume is less predictable than Marketplace, due to shorter lead times and its non-subscription nature.

Shifting now from revenue to our operating costs, total operating expenses were $33.8 million, compared to $19 million during the fourth quarter of 2011. Our acquisition of [Rents Use] earlier in the year resulted in non-comparable increases in our operating expenses during the quarter compared to 2011, with the bulk of them primarily related to headcount, recurring sales and marketing, as well as the technology and development lines. And as mentioned earlier, the acquisition of Mortech and HotPads had minimal impacted, due to the timing of the close of these transactions. Our cost of revenue during the quarter was $3.8 million, or 11% of revenue, compared to $3 million, or 15% of revenue in the fourth quarter of 2011. We continue to see favorable leverage with our revenue sharing agreements, due to higher growth from our owned and operated properties rolled into those of our partners.

Sales and marketing expense was $14.5 million, or 42% of revenue, compared to 38% of revenue, or $7.6 million, in the fourth quarter 2011. In the fourth quarter, we continue to expand our targeted advertising testing across a number of mobile, online and off-line channels. Total advertising and marketing spend in the fourth quarter was approximately $4 million, which was nearly $2 million more than in the fourth quarter of 2011. Technology development costs in the quarter were $9.1 million, or 26% of revenue, compared to $4 million, or 20% of revenue, in the fourth quarter of 2011. The increase reflects higher depreciation and amortization costs and increased headcount-related expenses, mostly non-comparable year-over-year, related to our acquisitions.

G&A costs in the fourth quarter were $6.4 million, or 19% of revenue, as compared to fourth quarter 2011 of $4.5 million, or 22% of revenue. The primary increase in absolute dollars year-over-year is attributed to the transaction- related and integration costs, as well as higher facilities expenses. EBITDA for the quarter was $6.8 million, representing a 20% margin, which was up from $3.3 million, or 17% margin in the fourth quarter 2011. As our expense structure came in mostly on plan, a significant portion of the revenue upside flowed through to earnings. Net income was $549,000 in the fourth quarter, compared to $922,000 in the fourth quarter of 2011. Fourth quarter 2012 basic and diluted earnings per share were $0.02, based on 33.4 million and 36.3 million weighted average shares outstanding, respectively.

Now moving to our full year 2012 performance. Total revenue increased 77%, to $116.9 million, up from $66.1 million generated in 2011. In our revenue categories, Marketplace revenue increased 105% year-over-year, to $86.7 million, up from $42.2 million in 2011. Display revenue for 2012 was $30.2 million, increasing 26% from $23.9 million in 2011. Our revenue mix for the year consisted of 74% of our revenue coming from our Marketplace category, while 26% came from Display, a 10% point favorable shift over 2011 results, reflecting the healthy advance of our Marketplace businesses. EBITDA for the full year 2012 was $25.2 million, representing 22% of sales, and was 112% higher than our 2011 full-year EBITDA of $11.9 million. Net income for 2012 was $5.9 million, which was $0.20 per basic share and $0.18 per diluted share. And in 2011, net income was $1.1 million, or $0.00 per basic and diluted share, under GAAP].

Turning briefly to our balance sheet, we ended the year with approximately $204 million in cash, cash equivalents and investments, and we had no debt. Zillow continues to generate positive and fast cash flow cycles. In 2012, operating cash flow totaled $32.3 million, or 28% of revenue, enabling significant flexibility in our capital structure to support operational and strategic initiatives in pursuit of our long-term growth opportunities. Zillow ended 2012 with just over 550 employees, up from approximately 330 at the end of 2011, and we continue to grow in support our strategic priorities, which are our growing traffic, increasing the size of our Premier Agent business, and developing our three emerging marketplaces.

Now let me provide a few comments on our outlook for the first quarter of 2013. Our revenue for the first quarter of 2013 is expected to be in the range of $36 million to $37 million. This outlook represents 60% year-over-year growth at the midpoint of the range. For our first quarter outlook on EBITDA, we expect a range of $3 million to $3.5 million, and at the midpoint of the range, this represents approximately a 9% margin. Although we are not providing a GAAP EPS outlook for the quarter, we expect a basic and diluted average weighted share count of approximately 34 million and 35 million shares for the first quarter, respectively.

Looking now at the full year 2013, as Spencer mentioned, we expect full year revenue of between $165 million and $170 million. And we expect EBITDA margin percentage to be flat to slightly down year-over-year. Supporting our priorities to grow usage, to grow our Premier gent business, and to grow our emerging marketplaces, we will be expanding investments in product development and advertising across various channels over the course of the year. These are very early days for us, and the investments we are making support our efforts to gain market share and extend our leadership in the real estate category. While we have successfully demonstrated throughout 2012 that our model has high operating leverage, we are prioritizing building competitive advantages and deepening our competitive [motes] for the long term, rather than focusing on near-term profit maximization.

To assist in modeling of full year 2013, we expect depreciation and amortization to be in the range of $24 million to $26 million, share-based compensation to be in the range of $14 million to $17 million, and CapEx and capitalized data com to be in the range of $10 million to $13 million. We expect full year 2013 basic and diluted share counts to be approximately 36 million and 39 million weighted average shares, respectively.

Zillow had an outstanding fourth quarter, capping off an exceptional year. We are extremely pleased with our growth and the advancement of our home-related marketplaces, and even more excited about our potential in 2013 and beyond. In parting, and to accommodate investor schedules, we are adjusting the date and location of our Investor Day to Wednesday, March 27 in San Francisco. We will be following up with details in the weeks ahead, and we look forward to seeing you at our event. We'd now like to open up the call for questions.

Thank you, sir.

(Operator Instructions )

Neil Doshi, Citigroup.

Great. Thanks, guys. A few quick questions. Spencer, and Chad, on the revenue guidance, how much of that is organic versus revenue coming from HotPads and Mortech and some of the other acquisitions? And then also, on Q4, were all those subscribers organic, or were some of them coming from some of the other acquisitions that you had? And then I have a follow-up.

Hello, Neil. This is Chad. I'll take those. We aren't providing any guidance with respect to the acquisitions that we made. I think the best way to think about their contributions from a top line perspective is to just understand the size of the companies. Mortech is about 40 employees, and were operating at a cash profitable basis when we acquired them, and HotPads is about 20 employees and were operating at about a -- on a neutral basis, in terms of profitability for the year. So we're not providing any specific items there, but the vast majority of that growth is coming from our organic business lines.

In terms of Q4 subscriber growth, all of that is reflected by our Premier Agents, and that's all organic.

Okay. Great. And then, could you talk a little bit about mobile? I think in the past, you guys have noted that mobile leads are about three times more valuable to agents versus desktop leads. Would you -- how far along are we in terms of doing variable pricing at some point, where you can actually charge different for a mobile lead versus a desktop lead? And it seems like this could potentially extend even into the Zillow Digs, as well, if you were to extend this model to provide leads for contractors and plumbers, et cetera. Any insight in that would be helpful. Thanks

I think the stat that you're referring to is we've said in the past that a home shopper using Zillow on mobile is three times more likely to become a lead, three times more likely to contact an agent, a Premier Agent, than a home shopper using Zillow on a desktop. We don't price our product separately between mobile and desktop. And we view that as strategic advantage. We can say to a real estate agent, if you spend money with the Zillow, you're covered on the Internet, in terms of desktop or mobile, as well as on the partner sites, Yahoo, HotPads, which of course is owner operated, HGTV's FrontDoor. You get a free CRM, you get a free website that includes listings from your own MLS, and soon you will get a collaborative shopping tool from Buyfolio. That kind of one stop shop for both desktop and mobile lead generation plus software tools is part of the value proposition that we provide to real estate agents.

Likewise, on our mortgage business, we price it -- on a CPC basis, we price it the same between desktop and mobile, and we think that simplicity is valuable to our lenders, as well. Mobile has been a huge accelerant to our business, in terms of usage and monetization, but we are not charging different CPMs or CPLs based on desktop versus mobile.

Great. Thanks, guys.

James Cakmak, Telsey Advisory Group.

Hello. Thanks for taking my question. Can you talk about what type of assumptions you are making on ARPU as you look at your 2013 guidance? You talked about being able to incorporate price increases, or increased spending from about a third of the subscribers during the pricing transition. How should we think about ARPU in 2013?

And then secondly, any more detail you can provide around the sales and marketing spend? Is this primarily geared towards off-line, online or -- and how is that area planning on targeting the consumers?

Hello, James, this is Chad. I will take the first question and hand over the next one to Spencer. In terms of ARPU, it's -- I know it's an important metric for the folks on the phone and for the investor community, but that's not really how we manage the business. We're not providing any color with respect to guidance on ARPU. For us, it's an output that reflects pricing of our Premier Agent products at the local level, and the market dynamics, and the level of contact liquidity that contracts those prices, and also the number of agents and the mix of agents that we bring on, and the timing of those agents through the year. So I think that's important to keep in mind. What we do manage to is net new revenue. And as you can see in the fourth quarter, our Premier Agent numbers were up about 90% year-over-year and agent counts up about 87% year-over-year. We're really pleased with those numbers. I think looking ahead to 2013, we continue to see expected growth across all our business lines. But I don't have anything further to really share with you in terms of how we view ARPU metric for 2013.

James, I can take the advertising question. So when I talk about brand white space, what I really mean is that even though is Zillow is the most visited real estate website in the category, and even though most of our traffic comes to us organically and for free, we still have a relatively unknown brand. So we've actually done extensive consumer research in the US, and if you ask Americans to name an online real estate website, more people say I don't know or I can't name one, than say Zillow. And we're the number one site in the category. And more people say Amazon, who doesn't even have a real estate section of their website, than say the company that's number two in the category. So just to try to paint the picture to you, by what I mean by brand white space, we believe that by advertising and by continuing to invest in product development, we have an opportunity to create a massive, enduring brand from which significant shareholder value creation and margin expansion comes.

But in the near term, we're going to continue to focus on brand growth, traffic growth, and revenue growth at the expense of margin maximization. We've been driving this Ferrari around the suburban neighborhood. And after extensive testing and learning in 2012, it's time to take it on the open road and see what it can do. That's the way we're looking at 2013. We control our margin in 2013. And the guidance that we've given to you today is flat to slightly down, full year EBITDA margin, because we think there is so much brand white space in front of us.

Okay. Thank you.

Michael Graham, Canaccord.

Thanks, guys. Two questions. One is, can you talk about what you expect to see for the ramp of margins throughout the year? You've got flat to down for the year, you guys said 9% for Q1. So should we expect to be exiting the year at a materially higher than where we were for the year 2012, and how you see the ramp progressing?

The second thing is -- it's a little bit of an ARPU-related question that was asked a minute ago. But the agents that are coming in that are new in the ZIP codes or in the areas that are full, and they are the add-on agents that are coming in, can you comment, are they coming in at much lower prices than the average for some of your high rent ZIP codes, or have you already generated enough impressions that they can come in at a level that's close to the average in some of those high rent ZIP codes? I just noticed that your Premier Agent ARPU was down a little bit sequentially, and just trying to get a feel for where that's coming from. Thanks a lot.

Hello, Michael. I'll try to answer it. We're not really providing -- this is Chad speaking -- we're not really providing any guidance with respect to the ramping of the margins throughout the year. I think typically the way we traditionally plan the year is we make a lot of our investments up front. I think that's no different this year, in terms of thinking about how the margin ramps.

With respect to the ARPU question, I think it's more mechanical than anything, in terms of slightly down, $267 versus the $270 last quarter. We were in the midst of a transition. There's some noise in that number, but mechanically it's revenue down slightly -- or up slightly less than the number of average new Premier Agents that we brought on in the quarter. That's bringing the number down from $270 to $267. I would say the model that we've moved to in terms of fixed impression-based pricing allows us to bring new agents on at more discrete levels, where they can buy and test smaller amounts of our Premier Agent Platinum product. And then to the extent that they see value delivered, and you've seen that in the current quarter, with 40% of our sales coming from existing agents buying more, then they can bring those spending levels up to higher amounts down the road. Okay. Thanks a lot, Chad.

Mark May, Barclays.

Thanks for taking my questions. On the guidance on sales and marketing spend this year, now with the impression-based revenue model pretty much fully intact, how does that change, if at all, the way that you think about your marketing spend? Is that really what's driving your planned increased here? And as you -- and talk to us how this might change the way that you manage your marketing on a month-to-month quarterly basis, might you be more tactical if you're seeing it actually working and the sales process for the freed up inventory selling well, might you even step on the accelerator even more so than what you're planning right now?

Thanks, Mark. I'd say it is not a coincidence that we're choosing to start advertising more extensively now that we're fully transitioned to a pricing model where we make more revenue when we have more traffic. But the primary reason that we're advertising is because we think there's an opportunity to create a much more well-known brand, which then drives greater revenue growth down the road. Yes, if we grow -- if we double traffic in a given ZIP code, for example, we now have a model where we can actually make a lot more revenue from those extra impressions, where the old model didn't have that opportunity. I would call that an important coincidence. But the primary impetus for advertising is this brand white space. And we've seen this play out in other categories in consumer Internet view apps, where early leaders who build brands through PR and word-of-mouth and SEO, then get in a privileged position in terms of profitability, where they, unlike our competitors, can invest extensively in product development and in advertising, in order to extend their lead. We've also seen that play out in international real estate, in the market leaders in respective countries in Europe and in Asia and in Australia. So we are following those recipes that we've seen other companies blaze that trail in the past.

Okay. That makes a ton of sense. And if I could ask a follow up. I know you're not giving specific guidance on ARPU, but given that you are still very early on in terms of penetrating the active agents in the markets, when we look back in 2012, I think you were averaging over 3,000 net adds a quarter, obviously with some seasonal variation. And your net adds, I think, have increased every year for the last few years. Should we expect that that kind of rate continues into '13, and if not, why? Then, last question is a follow-up to Neil's earlier. The three acquisitions that you completed in Q4, can you give us a ballpark for -- they may not have been that material in Q4, but the rough contribution in Q1 and for full year '13 would be helpful.

I'll take the ARPU sub count question; and then, Chad, you can talk about the M&A. There is a trade-off between ARPU and sub count. And again, focusing on the fact that we control our own destiny on a lot of these business levers. We control our own destiny on what EBITDA margin we want to take for the full year. We control our own destiny on how quickly we want Display revenue to grow, for example, based on how much screen real estate, how much ad inventory we devote to Display, as compared with Marketplace. And we control our own destiny on the ARPU sub count trade-off. Because when our sales team -- our sales team can either focus on growing sub count, where new subs come in at a lower ARPU, or they can focus on growing ARPU by upselling existing customers, which raises ARPU and either keeps flat sub count or potentially lower sub count.

And we have a strategic bias toward growing sub count, because we think the next great crop of Premier Agents perhaps just entered the business. There are always new folks becoming real estate agents or starting to use Internet marketing as part of their business plan. And so we believe it's important to continue to grow subscriber count. But it is a trade-off between ARPU and sub count. We don't manage the business to either of those two metrics. We manage the business to total revenue, from the Premier Agent segment. And ARPU and sub count are outputs, not really inputs, in terms of how we manage the business. If we come up to the basis on the topic of ARPU sub count modeling, it's that we don't give that guidance because the way we manage the business is to total revenue, not to either of those inputs to that number.

Okay. Thanks.

Mark, this is Chad. Just to give you a little more color, one of the strategic priorities that Spencer outlined was growing these emerging marketplaces, and many of the acquisitions that we made in the year are in support of that. I think the way to think about it, again, is what I said to Neil, which is, Mortech and HotPads, which closed in the prior quarter -- Mortech has 40 employees in Nebraska. So obviously, different levels of overhead and employee costs than you would see typically in San Francisco. I would say the mix of those employees are very similar to the mix of employees at Zillow, focused in technology development, and sales and marketing. And HotPads, 20 employees here in San Francisco, slightly higher costs of headcount, slightly higher overhead, relative to where they are compared to Nebraska. And again, the same relative mix in terms of sales and marketing versus technology development head. Buyfolio is two employees based in New York. We're not providing any more specific color in terms of their operating expense base or their revenue contributions, but hopefully that helps you with the modeling of these expenses in 2013.

Okay. And they were all roughly, it sounds like, pre-revenue companies, I guess?

As I mentioned, Mortech was operating on a cash profitable basis when we acquired them. And HotPads was running about breakeven.

Okay. That's helpful. Thanks a lot.

Brad Safalow, PAA Research.

Thank you for taking my questions. Just first question, factual -- do you have the mortgage request number for the quarter?

I do, and I'm looking for that right now. Go ahead with your next question. I'll get you that number.

Sure. In terms of your full year guidance, can you give us a sense for your expected contribution, from a revenue perspective, for Rentals? Either material or not material.

This is Spencer. I guess the full year is 165 to 170. It's probably not material for the full year. But what we have that as we approach the end of the year, it will become more important on a quarterly basis.

Brad, that's about 3 million loan requests in the fourth quarter.

3 million? Okay. It seems like, based on my math, that your revenue yield on those requests then increased significantly, year-over-year. Is that fair to say?

Our what increased year-over-year significantly?

Your revenue, whatever you want to call it, CPC increased significantly year-over-year. Is that fair to say?

Yes.

And where do you stand in terms of your progress in terms of cross selling your [Vors Legions] platform to existing large lenders who use the Mortech technology for their mortgage pricing, where do you guys stand on getting into some other institutions?

It's still very early. The acquisition has been closed for less than a quarter. Our sales team in Seattle -- our Zillow Mortgage Marketplace sales team in Seattle and the Mortech sales team in Lincoln are working very closely together. But it's still very early. It's been just a couple of months.

Okay. So that's on the rise. Can you comment at all what the ARPU trends, the correlation in ARPU trends in markets where you're seeing significant home price appreciation, versus those where you're seeing modest or things are still flattish to down?

We don't have anything specific there. But as you know, the way we price our product is market-based. And we take into consideration what's happening with both local home values, compact liquidity, to what extent that traffic converting into new compacts for our Premier Agents, as well as demand in those ZIP codes. But I don't have anything specific I can share with you right now, Brad.

Okay. I don't know if you can disaggregate this for us, at least maybe qualitatively, but how much of your agent growth in the quarter came as a function of, hey, we have this, now we have all this excess inventory that we previously had not monetized, versus hey, we were underpenetrated just overall relative to the 12 slots model in a number of markets and we got a lot of agents in that manner? It's a same market growth in agent count versus maybe not a new market, but an underpenetrated market growth question.

Again, that's a hard one for me to answer. What I can say is that we moved to a model that allows us to effectively grow the number of impressions we can serve to our agents, as traffic grows. And that gives us a lot of headroom in this business and sets us up very nicely for continued growth into a lot of value out of that Premier Agent business going forward. But I don't have any specifics to share with you right now, Brad.

Okay. And then just the last question on the advertising. I don't know exactly where that spend was concentrated, but what was the actual experience in terms of -- was there an immediate impact to traffic? And now that you're -- I assume you tested in markets in which you have the CPM model in place, how much of a lag is there between when you can actually capture revenues without increasing traffic?

This is Spencer. In Q3 and Q4, we tested CB, SEM, online display, mobile and other forms of advertising. What we learned with our test spend last year, all which were relatively small, so you wouldn't really expect them to have revenue numbers coming out the other end that were significant. But they were very instructive to help us plan our 2013 numbers. What we are doing in 2013 is spending on TV and radio and those other forms of online advertising that I mentioned, as well as some other things this year.

As I said, although it is nice that we now have a revenue model where when traffic grows, revenue increases, because impressions grow, that's not the primary determinant, that's not the primary reason we're advertising. The primary reason we're advertising is to grow traffic and grow brand awareness, which we believe that creates a company that's more valuable down the road, because there's more opportunities to have real estate advertising for Premier Agents and other marketplace participants. I guess the point being, it's not direct response advertising, the way you might in other categories, where one might try to arbitrage, for example, Google SEM and online beam generation. So buying particular keywords and then they sell on a cost per lead basis to local advertisers. That's not really our advertising strategy at this stage. Our advertising strategy at this stage is grow awareness from home buyers in the United States that Zillow is a great place to come and shop for a home.

Got it. Thanks. I'll turn it over.

Chad Bartley, Pacific Crest.

Hello. Thank you. The breakdown in agents maintaining their spend versus increasing their spend after the model transition is helpful. Curious if that was better than expected, after the somewhat cautious Q4 guidance. And then as it relates to this transition, any other metrics or comments that you can share in terms of how it went, how it might impact subscriber growth and their spending, et cetera, going forward? That would be helpful.

Here's the only thing that I would add to that is, as I mentioned earlier, is we're no longer stuck in this construct of agents buying in 25% share voice allotments. Agents can come in with much smaller, more discrete levels of spend through a six-month contract, see how they are able to use the product and the platform that we provide to them. And hopefully, they see value delivered in the forms of contacts, and those contacts turn into commission checks, and they get an opportunity to, once they see value delivered, to increase that spend in future quarters, or when their contract expires. The trend that we're seeing is agents can come in with much more discrete levels of spend, and test out the product and see if it works for them.

It's also much simpler. I think to a real estate agent, talking to them on the phone and saying, for X dollars a month, you will show up Y times in the ZIP code across Zillow.com, Zillow Mobile, HotPads.com, HotPads Mobile, Yahoo Real Estate, HGTV FrontDoor, and you get a free website that connects to your [RNLF], and you get a CRM. They don't have to think through the pricing of desktop versus a mobile. They just know that for a particular out-of-pocket, they will show up a particular number of times. That makes sense. So if you told, oh, for a particular out of pocket, you'll show up a percentage of the time, which used to be the old model. And they will say, well, how often is that? And we would say, well, we don't know. It depends how many total users we have. But it's X percent of something. That was very abstract. I am very glad -- and I know the sales team is very glad that, as of this week, we will be fully transitioned to this fixed impression model. And I think it sets itself up -- sets us up very nicely for a much cleaner, simpler sell throughout 2013.

Okay. And one quick follow up. On the last quarter call, we talked a lot about the display ad business and some of the issues around foreclosures and all of that. I'm just curious if that transition is behind us, there is no other issues to think about, whether it's Q1 or some time in 2013, in terms of that Display line?

We mentioned on the call that we're taking a different strategic path in terms of the content that we're providing to our consumers, specifically foreclosure content, and changed how we powered that part of our marketplace. And it's been beautiful, in terms of being able to provide an additional 1 million to 1.2 million new foreclosure listings that previously our consumers didn't have access to. But nothing further there with respect to Display. We typically see fourth quarter as seasonally slow, and in the past we've seen it down, let's call it, 15% to 20% sequentially quarter-over-quarter. And based on the superb execution of the sales team in the fourth quarter, we were only down seasonally 10% in the fourth quarter. But mind you, that is a seasonal business, when advertisers -- our core advertisers, builders, brokerages and financial institutions tend to spend more chasing home shoppers during the second and third quarter. And we've seen that trend year-over-year for the past few years.

Got it. Thank you, Chad.

(Operator Instructions ) Mitch Bartlett, Craig Hallum.

Thank you. Spencer, maybe you could remind us on the importance, or where you're at, on agent productivity tools, the CRM, whether that can be extended, whether there's a lot of other tools that can be developed either in-house or they're out there in the marketplace to be purchased. What does that look like?

Sure. Thanks, Mitch. So the suite of tools that we provide to real estate agents is still in its early days. The Premier Agent website that we provide for free to Platinum Premier Agents came to us through an acquisition of a company called Diverse Solutions. And we believe it is a best-in-breed IDX website, which means it pulls listings from an agent's MLS. We've been rolling that out to Platinum Premier Agents for a couple of quarters now. We're very pleased with how it's going and with the impact that it's having on the value proposition that we provide to Premier Agents.

The second type of tool that we provide to real estate agents is a CRM. And there I would describe our current CRM as still very much a work in progress. Over the course of 2013, we'll be adding core features to it which agents have come to expect from real estate CRMs, which they typically pay a couple hundred dollars a month for. We're offering this CRM integrated into their My Zillow section of the Zillow website for free. But we have some work to do in terms of improving its functionality, so that more real estate agents will use it.

The third software tool is Buyfolio, which we acquired. It was a year-old product only live in New York City. About 10% of all the transactions that occur in New York City are done using the Buyfolio desktop or mobile app, which allows a real estate broker in New York and a home shopper in New York to interact with one another and collaboratively shop. We are in the process of rolling that out nationwide, and that will take at least a couple of quarters to expand the Buyfolio service. We have high hopes for what impact that might have on the value proposition that we are able to provide to Premier Agents, because we've seen what an impact it can have in New York, where it was a paid service, and yet it still had high adoption and very high retention rates among its paid subscribers.

So those are the core pieces of functionality that we offer the real estate agents. It is absolutely an important part of our strategy to marry lead generation with software tools. And for the most part, to provide those software tools for free and monetize those software tools by charging more on an effective CPM basis for the ad product that we're selling them. And we're following that strategy also in the rental space, and in the mortgages space. So in the case of rentals, of course, the Renters acquisition allowed us to start providing more software tools to property managers and landlords. And in the case of mortgages, the Mortech acquisition allows us to do something similar with mortgage lenders.

Got it. Thank you.

Thank you. And it appears that does conclude our time for questions. I'd like to turn the call back over to Mr. Cohen for any additional remarks, and over to Mr. Rascoff for any closing remarks.

Hello. This is Chad. I just have one point of clarification. For basic and diluted weighted average share count for the first quarter, we are expecting between 34 million and 37 million shares, not 34 and 35. I'll turn it back to Spencer now.

So thanks very much for joining our call today to discuss 2012 and 2013 strategic priorities. The priorities for the year, just to remind you, are increasing our audience, growing our Premier Agent business, and building out our emerging marketplaces. And we look forward to speaking with you all again soon. Thanks very much.

Thank you, gentlemen. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.