Zillow Group Inc (Z) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Zillow third-quarter 2013 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, RJ Jones, Investor Relations Officer. Please go ahead.

Thank you. Good afternoon, and welcome to Zillow's third-quarter 2013 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 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 of risk factors in our annual report on Form 10-K for the year ended December 31, 2012 and in our other filings with the SEC. I

n addition, please note that the date of this conference call is November 5, 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 financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings 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 www.investors.Zillow.com. A recording of this call will be available after 8:00 PM Eastern time today. Please note that the earnings press release is available on our website, and after the call, a copy of today's prepared remarks and a historical exhibit of our business metrics will also be available on our website.

After management remarks, we will host a live question-and-answer session. During the Q&A, we will entertain questions asked via Twitter and Facebook in addition to questions from those dialed into the call. Individuals may submit questions by tweeting at Zillow using the Z earnings hash tag or to the official Zillow Facebook page.

After the call, analysts from the Motley Fool will hold a brief follow-up Q&A session with Spencer via Twitter. I will now turn the call over to Spencer.

Thank you, everyone, for joining us today to discuss our third-quarter results. The third quarter was an extremely strong one for Zillow. We continued to set new records in our business metrics and operating results. We also gained increasing momentum as the definitive home shopping brand for consumers.

One indication of Zillow's clear category leadership was my August interview with President Obama. During that event, viewable on www.Zillow.com/WhiteHouse, President Obama answered housing questions directly from Zillow users. This first of its kind conversation with the President provided him with access to the largest consumer audience in online and mobile real estate.

During the quarter, Zillow's total traffic exceeded 61 million average, monthly unique users, peaking for the year at nearly 64 million unique users in August. Smashing records in both overall uniques and real estate shopper visits. We continue to substantially widen our traffic leadership in the category.

Total revenue for the quarter was just over $53 million, up 67% year-over-year, a quarterly record that exceeded our Outlook of $50 million at the midpoint. In Q3, premier agent net subscriber adds approached 6,000 for the first time. We now have nearly 45,000 subscribing real estate agent advertisers. This drove our marketplace revenue category to a new record of almost $41 million.

Our display revenue topped $12 million for the quarter and came in significantly ahead of expectations. Terrific execution by our display team, strong advertiser relationships, and our premium value proposition to advertisers drove these results, despite the challenging macro environment in display due to programmatic ad buying.

Our EBITDA for the quarter was $4.1 million and exceeded our Outlook of $1.75 million at the midpoint of the range. From top to bottom, we are very pleased with the results.

With another excellent quarter on the books, I'll now give you an update on our three strategic priorities for 2013. One, growing our audience, two, growing our premier agent business. And three, growing our emerging marketplaces.

Starting with our first priority, we are seeing tremendous audience growth driven by best-in-class product and advertising. Everything we do at Zillow begins with creating amazing and immersive products on mobile and web. With our product ship-cycle of two weeks or less, we are constantly launching, iterating, and improving our mobile apps and sites. In addition to major feature releases, we are constantly running dozens and sometimes hundreds of multi-variate tests on both mobile and desktop, which drive repeat usage and improved site conversion.

Notable in the quarter is that we were spotlighted by Apple on stage during its IOS 7 launch. Our developers and designers completely redesigned the Zillow real estate app for the iPhone and iPad, resulting in a spectacular and visual product that makes home shopping even more intuitive and fun. And, our thousands of growing reviews in the App Store tell the story. Our app was one of only four chosen by Apple to be demonstrated at its launch event for IOS 7 and was heavily featured in the App Store for weeks afterwards. This type of recognition by Apple significantly impacts our downloads and usage and widens our mobile lead in the category.

One of our advantages on mobile is that as a technology Company with a nationwide real estate footprint, we are uniquely able to take advantage of opportunities like this. Local real estate companies have not had the footprint nor the technology expertise to create and continually update apps with mass appeal.

Our category-leading audience growth on mobile and web originates from great product, which in turn gets amplified by focused marketing. We are very pleased with the investment we have made in advertising this year, and we are seeing extremely positive returns all the way down our shopping funnel from unique users, to unique home shoppers, to contacts, to premier agents.

We began this year as a category leader, and we've seen that lead widen substantially this year. First, on desktop. According to ComScore, Zillow's audience market share grew from nearly 27% of the category to nearly 34% of the category year-to-date. The number two and three brands in the category lost share during this same period.

Over the past 12 months, Zillow has more than doubled its market share lead over the second brand in the category. Additionally, Experian Hitwise measures our mobile web presence as nearly twice the size of the number two brand in our category and nearly 4 times the size of the number three brand. To put these stats into concrete numbers, at the quarter peak, we gained 27 million monthly total unique users year-over-year, which is the equivalent of adding almost an entire realtor.com or adding three-quarters of a Trulia. This is based on internal reporting from competitors' quarterly reports last week, including both mobile and web.

The growth in our traffic consists of serious home buyers and renters. Continuing the trend we saw last quarter, as our traffic grew 69% year-over-year this quarter, our growth in contacts to agents again exceeded 80% year-over-year. Another metric, views of for sale listings is up 80% year-over-year as well. And, we believe that Zillow is growing serious home shopper traffic faster than the category off a much larger base.

Advertising is working for us. And, because we are in high-growth investment mode, we expect that we will spend at least the same amount, if not more, in 2014. We will share more about our 2014 advertising plans when we report our full-year results in February.

Another investment that contributes to our priority of growing our audience is our August acquisition of StreetEasy, the number one online destination for real estate shoppers in New York City. StreetEasy draws more than 1 million monthly unique users and contains untapped potential to grow further as part of the Zillow family of brands. To understand what StreetEasy accomplished as a bootstrap to start-up pre-acquisition, requires a deeper dive into the New York Metro market.

There is no other real estate market like New York in the United States. New York is densely populated and expensive with neither a consolidated multiple listing service for Manhattan, nor one that spans the five boroughs. There are approximately $31 billion in resale transactions across the five boroughs annually, resulting in $1.9 billion in commissions earned by brokers in New York. This is about 60% of the commission amounts earned by agents in Australia, and about one-third of the commissions earned by agents in the UK.

In addition, New York rental transaction volumes eclipse for-sale transactions. To provide a comprehensive real estate site for consumers throughout the city, StreetEasy built a very specialized offering, leveraging data of particular interest to New Yorkers. Over the course of the Company's eight-year history, its offering beat out the competition, and StreetEasy became the clear leader in online New York real estate.

As a result of unique market circumstances and excellent execution, very powerful network effects reinforce StreetEasy's market position. We're thrilled to be combining forces to take the StreetEasy brand and product suite to the next level. As a small first step, next week, StreetEasy will be integrating Zillow Mortgage Marketplace on to its site. We have many more opportunities, especially on mobile, and together we are just getting started.

Now, we turn to our second strategic priority of growing our premier agent business which continues to outperform. I have met thousands of premier agents at local Zillow events over the last few months around the country, and their feedback has been both inspiring and validating. Our premier agent business continues to gain momentum with more and more agents finding success with us.

One way we are working to help more agents is through our just-announced, just-launched Zillow Tech connect program where leading CRM software providers can directly integrate with Zillow to help brokers and agents convert contacts they receive from Zillow into sales. Many of our successful premier agents leverages CRM. Whether it is from us, or one of our launch partners, Zurple or BoomTown, or one of the legacy industry providers.

Our open ecosystem approach for productivity will help more of our premier agents be successful in the system they choose and enable them to buy more advertising from us. Our strategy is to provide our own lightweight and free agent CRM, but to remain an open system that integrates with other more sophisticated enterprise class CRMs.

At the end of the third quarter, the annual run rate in the premier agent business was about $132 million compared to an $80 million run rate a year ago. September was a record month for premier agent revenue and almost for net additions of new premier agents. We are adding premier agent revenue at a faster pace than at any point in our Company's history.

To gauge our long-term potential in the premier agent business, international online real estate companies provide a template on how we might advance. Rightmove in the UK, REA in Australia, and [sovazhay] in France all lead in audience in their respective countries. These models show the possibilities for pricing, revenue, and margin structure for the leading company in a market over the long-term.

Today, we believe we connect consumers and agents in perhaps 2% of homes for sale transactions in the US. Because of the industry structure in the US, the path to realize the potential to lead the domestic market runs through audience leadership. Advertisers follow audience. Over the long-term, we anticipate the total addressable market for ad revenue from agents to evolve as the category winner extends its lead.

While we believe agents today spend 10% to 20% of their $60 billion in commissions on advertising, we believe ad dollars will shift to more of our revenue-generation practice, similar to search engine marketing where some advertisers spend nearly up to their marginal revenue. In other words, we think that agents will view online impression-based advertising in the same way they have traditionally viewed lead referral economics. Which is to say, that they're willing to pay up to 40% of their commission to the channel that provides them with a customer. Hence, it is possible that total online advertising pie in our category could grow from its current $10 billion range to something 2 to 3 times larger. And, this is consistent with international comps.

We're hearing stories from premier agents across the country that validate this. They start small, and they keep buying more impressions from us and hire more agents to work for them. They keep spending money on the margin because they're making money on the margin, and the TAM, the total addressable market, expands.

We believe that as the breakaway leader in mobile audience and the clear leader in desktop audience, we have a very exciting future in this one business line. There is plenty of juice left in this orange.

But, we have also planted other seeds that are starting to bear fruit. So, turning now to our emerging marketplaces. First, in our Mortgage Marketplace, we received another record level of loan requests in the quarter -- almost $6 million. And, mortgage revenue grew over 100% year-over-year for the fourth quarter in a row.

Still, consumer awareness and usage of Zillow Mortgage Marketplace represents a tremendous opportunity for us. This quarter, we increased our PR and marketing efforts for Zillow Mortgage Marketplace with a prime-time feature on ABC World News with Diane Sawyer, and early last month, we hosted a Google Plus hangout with the federal housing finance agency on the home affordable refinance program. Zillow Mortgage Marketplace also had favorable covers this quarter in the New York Times, the Wall Street Journal, Bloomberg, Forbes, and the Washington Post.

Additionally, we recently revamped our mobile web experience for mortgages, which is showing terrific usage stats similar to our standalone apps. And, during the quarter, we opened the new Lincoln, Nebraska office for the MorTech business, which was attended by local government and press. All in all, great strides are being taken with our Mortgage Marketplace.

In the Zillow's Rentals Marketplace, we're gaining traction in our initial monetization efforts via paid inclusion, which we started just a few months ago. Our value proposition to property managers competes extremely well on price and value versus competitors. When considering that we deliver more than twice as many rental contacts as for-sale contacts, albeit with a lower potential value per lead, our rentals business is a gusher that has not had a pipeline set up for it yet.

For perspective, our mortgage business took three years once we begin iterating our monetization to reach $10 million in annual revenue. Rentals can ramp faster because one, the Zillow, StreetEasy, and HotPads brands are widely known among rentals advertisers. Two, our experience with premier agent has educated us on how to build out this business. And three, we already have the renter audience.

In our nascent home-improvement marketplace, Zillow Digs, we continue to make progress in usage and engagement. Last month, we launched our first-ever Zillow Digs app for iPhone, which was heavily featured in Apple's App Store at launch.

Before concluding my remarks today, I want to take a moment to highlight the efforts of our housing research team led by our Chief Economist, Stan Humphries. Zillow's housing research team just hosted our fourth successful housing forum in Washington, DC, focused on solving the lingering issues of the housing recession. The event included keynotes by Carol Galante, the Federal Housing Administration Commissioner and Assistant Secretary for Housing, and Edward DeMarco, acting Director of the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac.

Other speakers included Senator Mark Warner, Democrat from Virginia, who is the co-sponsor of the leading Senate Bill on mortgage finance reform, and Congressman Randy Neugebauer, Republican from Texas, who is a co-sponsor of the leading House bill on mortgage finance reform, Richard Smith, the CEO of Relegy, was also a featured speaker, in addition to speakers from CNBC, the Wall Street Journal, and the Washington Post. The forum generated extensive media coverage when DeMarco of the FH/FA announced a highly anticipated decision to maintain higher conforming loan limits for another several quarters. Events like these highlight Zillow's data and our unbiased objective voice for the consumer in Washington and nationwide, as well as our real estate and mortgage industry leadership.

In conclusion, Zillow's growing separation and usage on mobile and web against the other category participants clearly indicates we are executing our strategy effectively. Whoever wins with consumers will likely end up taking most of the revenue and profits in the category. With that, I will turn the call over to Chad.

Thanks, Spencer. As Spencer mentioned, this was an extremely strong quarter with traffic growing 69% year-over-year to 61.1 million average, monthly unique users. Cresting in August with approximately 64 million. To put this in perspective at our seasonal peak in August, we added 27 million monthly unique users from the same period in 2012. You should take note that it took us nearly 6 years to attract our first 27 million monthly unique users.

Turning to our financial performance, third quarter revenue totaled a record $53.3 million, up 67% year-over-year. Compared to our outlook, we exceeded the $50 million midpoint of our range by $3.3 million, primarily due to outperformance in our display revenue category with a very small contribution from StreetEasy as the result of their operations were only included in one month of the quarter. Marketplace revenue reached $41 million representing 73% year-over-year growth and 77% of total revenue.

Taking a closer look at our real estate marketplace revenue subcategories, which is made up of our premier agent, diverse solutions, rentals, and now StreetEasy product lines, revenue was $35.1 million in the quarter and grew 67% year-over-year. The primary driver of growth was our premier agent business where we added a record 5,942 premier agents in the quarter with a net increase of 18,046 premier agents from this time last year. Average monthly revenue per user, or ARPU, was $264 in the quarter for the premier agent business and represented a 2% decrease from last year and a 1% decrease sequentially from the prior quarter. The decrease in ARPU is a function of timing of new agent additions, as well as more agents becoming platinum subscribers at initial impression levels that are lower than the average.

[Of] sales to existing agents who purchased additional impressions represent about 50% of our new bookings during the quarter and naturally counterbalance against new subscribers who initially come on-board at lower levels of spending. This dynamic reflects agents over time proving out the ROI from the sales and wanting to increase their marketing activity with us. These trends have been consistent since launching impression-based pricing last year.

As a reminder, the ARPU figure is an output that is neither a proxy for pricing nor a metric we use to run the business. Our inventory model allows agents to purchase available impressions at prices that are determined by local market conditions.

Turning from real estate to our mortgage business, which consists of our Zillow Mortgage Marketplace and our Mortech software businesses, revenue reached $5.7 million and grew 120% year-over-year. During the third quarter, 5.9 million loan requests were submitted to Zillow Mortgage Marketplace, growing 88% over last year. In one quarter, we now receive more loan request that we did in the entire 2011 year. The vast majority of these loan requests submitted continue to be for purchase loans as opposed to refis.

Looking at our display category, revenues were $12.4 million and increased 50% year-over-year, which is the fourth consecutive quarter of accelerated growth. We experienced significant growth across most of our primary display verticals, including builders, banking, and brokerages. Our display business represented 23% of total revenues for the quarter and continued to deliver strong contribution margins.

Moving now from revenue to our expenses, total operating expenses were $58.8 million in the third quarter, as compared to $29.6 million in the same quarter last year. The $29.2 million increase in expenses versus last year was primarily due to two factors. First, increased headcount-related expenses reflecting growth from nearly 500 employees to more than 780 employees with approximately 70 of those 280 employees coming via acquisition. And, second, increased advertising investments to grow our audience. Our operating expense increase year-over-year would have been closer to 65%, or $19.1 million, if we were to exclude the investments we're making to grow audience.

Now, I will go into a few details briefly on each major expense line item starting with cost of revenues. In the third quarter, our cost of revenue is $5.1 million, or 10% of revenue, as compared to $3.6 million, or 11% of revenues, in the same period last year. Higher levels of engagement with Zillow-owned and operated properties versus our revenue sharing partners drove cost leverage. Absolute dollars grew as a function of higher revenue levels and data center cost to support both product investments and audience growth across our platform.

Next, sales and marketing expenses, which include our premier agent sales team, marketing team, and advertising activity were $31.2 million, or 59% of revenue as compared to $14.1 million, or 44% of revenue in the same period last year. The variance from last year resulted primarily from our increased investments across advertising channels to support our long-term growth objectives. Compared to last year, advertising expenses increased $10.1 million. Excluding the investment increase, sales and marketing expenses increased approximately 50% year-over-year and represented 40% of revenues.

Technology and development costs were $12.2 million, or 23% of revenues as compared to $6.7 million, or 21% of revenues last year. Consistent with prior quarters, the increase in expenses was primarily driven by the growth of our engineering team, both organically and through acquisition to support product initiatives as well as higher amortization of intangibles year-over-year related to acquisitions. On an absolute basis and as a percentage of our revenue, we continue to invest more in technology than any other public real estate media company, which helps us extend both our audience lead and increase our overall value to our real estate advertisers.

Lastly, G&A costs were $10.4 million, or 19% of revenue as compared to the same period in the prior year at $5.2 million, or 16% of revenue. This increase was driven by higher headcount-related costs combined with increased professional services and facilities' costs to support our growth.

Turning now to profitability, our EBITDA for the quarter was $4.1 million representing 8% of revenues. This result exceeds our guidance midpoint by $2.4 million, primarily due to the higher revenue than we projected flowing through to the bottom line. On a GAAP basis, net loss for the quarter was $1.2 million, representing a GAAP loss per share of $0.03 for basic and fully diluted shares of [36.7] million. We recognized a one-time tax benefit of $4.3 million in relation to the acquisition of StreetEasy.

On a non-GAAP basis, which excludes share-based compensation as well as the one-time tax benefit, the adjusted loss per share was $0.05 for basic and fully diluted shares. Post our capital raise, we ended the quarter with approximately $425 million in cash, cash equivalents and investments, and remain debt-free.

Now, I will discuss our outlook for the rest of 2013. As we close out the year, we expect to see continued strong momentum in our Marketplace businesses and a sequential decrease in display revenues, which followed typical seasonal patterns that impacted traffic results. For the fourth quarter, our revenue is expected to be the range of $55 million to $56 million, representing 62% year-over-year at the midpoint of the range.

Looking at the sales and marketing line item in the fourth quarter, we anticipate recording total expenses of $25.5 million to $26 million for the period, a planned decrease from the third quarter as we pull back our media spending in the seasonally slower home shopping period.

Our EBITDA for the fourth quarter is expected to be approximately $8.5 million to $9 million. Looking at the projected reconciling figures to EBITDA, total share-based competition in the fourth quarter is expected to be in the range of $4.5 million to $5 million, and depreciation and amortization expenses are expected to be in the range of $6.5 million to $7 million. Although we do not provide a GAAP EPS Outlook, we expect a basic and fully diluted weighted average share count of approximate 40 million shares for the quarter.

Now, looking at full-year 2013, we are raising our revenue guidance from the prior range of $186 million to $188 million to a range of $194 million to $195 million for the year, representing 67% year-over-year growth at the midpoint of the range. Just to give some perspective on the momentum through the year, when we started into 2013, we projected revenue between $165 million and $170 million for the year. We're closing up strong with a projected annual revenue growth rate that is 23 percentage points higher than what we anticipated at the beginning of the year.

Regarding full-year sales and marketing expenses, we now project nearly $110 million in total expenses for the year in the P&L. This figure includes approximately $3 million to $4 million of share-based compensation and a one-time, $7 million, accelerated share-based charge we recorded earlier in the year.

Due to revenue outperformance in the third quarter, we now expect approximately $23 million in full-year EBITDA, which is $3 million above our previous Outlook. Looking at the reconciling figures, we anticipate total depreciation and amortization expenses for the year to be in the range of $22.5 million to $23 million and share-based comp to be in the range of $22 million to $23 million.

Total CapEx and capitalized data content, we expect to be in the range of $12 million to $13 million for the year. We also project full-year 2013 basic and diluted share counts to be 35.5 million and 39 million weighted average shares, respectively, though we are not predicting positive net income for the year so only basic shares would apply.

In conclusion, we continue to gain traction against our long-term objective of becoming an enduring household brand. We achieved record results in traffic and revenues in the third quarter, continue to separate ourselves from the competitors in terms of audience, and remain focused on our priorities of growing our audience, growing our premier agent business, and growing our emerging marketplaces on mobile and on the web. And, we remain tremendously excited about executing against our massive market opportunities in the life cycle of homes.

Thanks for your time today. With that, we will open up the call to questions. We will remind you that we will be considering questions submitted via Twitter and Facebook with the hash tag Z earnings.

(Operator Instructions)

Ron Josey, JMP Securities.

(technical difficulties) drill a little more into your comments around the potential for premier agents to shift to more of a legion model. This question in terms of timing, and more importantly, what do you think needs to happen for this to be a reality in terms of is the tech platform ready to go? What needs to be done there? And, importantly, are you getting requests for things like this already? Thank you.

Hey Ron. Thanks for the question, and let me clarify what I'm referring to. I'm not saying that we are going to change our business model to shift to charge on a success-based referral basis. Not at all. That is not our intention. We do not plan to do that.

The comments were really with respect to TAM. We frequently get asked by investors, okay, you have almost 50,000 premier agents. How many can you have? How big can this business get? The point that I'm trying to make is that the current ad spend of $6 billion to $10 billion a year that agents spend on advertising, we are a tiny fraction of that around $130 million revenue run rate, which is a tiny fraction of what they currently spend.

But, what they currently spend on advertising is not the right way to look at it. That would be like asking three years ago what do e-tailers currently spend in online advertising. The e-tailers keep buying more and more ad words from Google because it is profitable for them on the margin. And so, the TAM expands as long as there is still ROI there. That's what we hear from agents over and over and over again.

If I ask agents who are spending $50,000 a year with us -- where were you spending $50,000 a year last year, they look at me like I'm crazy. I wasn't spending $50,000 a year anywhere last year, what are you talking about? But, the reason I spent $50,000 with you is I make a lot more than $50,000 on the margin. So, it's really a TAM expansion point. It's not a business model point.

So, to answer your question specifically, all the pieces are in place, and we have an impression-based selling model. We have a great sales team. We have great relationships with advertisers. And, I do think that the way agents are starting to think about buying online advertising is already starting to change. Is this profitable for me on the margin? Rather than I'm going to remove budget from the newspaper and bring it on to the Internet, so I have a finite amount of money to spend. That is not the agent spend mentality anymore.

That's great. Thanks, Spencer. Appreciate it.

Thank you. Neil Doshi, CRT Capital.

Spencer, could you talk a little bit about the opportunity that you have especially as agents are looking for better ROI, and how you can help them achieve that on the premier agent side. And then, also, if there's any way we can get a sense of what the contribution was from rentals in the quarter? And, how are you attracting along the rental side of the business in terms of monetization from StreetEasy as well as from iPads of some of the other businesses that you have acquired? That would be great.

Sure. So, on agent ROI, what I mentioned about Tech Connect I think is important. And, let me just clarify and expand on my comments. Agents buy media from us, and we want them to use some sort of a system. We want them to use the system to convert those leads into transactions. And, we don't much care which system they use.

If they want to use a pen and paper, God bless. If they want to keep it in Excel, that's fine. If they want to use Outlook, if they want to use salesforce.com. If they want to use Zurple or BoomTown. If they want to use their broker's CRM, or their MLS' CRM -- they want to use something that we provide. We are relatively indifferent. What we care about is that they convert these leads into deals. That they make money from their ad spend.

We are following Google's strategy. Google offers Google Analytics for free, and they do it because they think that if people who run websites are able to track what is happening on their websites, then they will want to drive more traffic to the websites. How do they drive more traffic? They are going to buy more media from Google. So, Google offers Google Analytics for free, but Google ad words also integrates with more expensive enterprise level site analytics software that bigger companies are going to use to keep track of their websites. So, Google has an open architecture where what they really care about is selling more media impressions, not making money from the sale of web analytics software.

So, that is Zillow strategy. It is quite different from our two main competitors who have pent hundreds of millions of dollars acquiring and investing in enterprise-level, expensive CRMs that they're trying to force their advertisers into. Zillow has a very different strategy here.

So, your question, Neil, was specifically about agent ROI. We think the typical agent has around a 3% conversion rate of leads that they end up with Zillow into a transaction, which equates to about a 10X ROI. As I mentioned, we think that that ROI could come down quite a bit, and agents would still be very pleased with their ROI from Zillow. Most forms of advertising have a 1X to 2X ROI, and some types of online advertising like search advertising have a 1X ROI, typically.

Your second question was about rentals and revenue contribution. We only started monetizing rentals in earnest in July with the paid inclusion model across Zillow and HotPads. We -- according to ComScore we are the largest rental site on the web. There is a $7 billion TAM here. We have 11 million monthly renter shoppers, and we have twice as many rental leads as for-sale leads. So, we feel like we have all the building blocks in place to turn this into a very big business, but it has only been a couple of months.

We have been asked by investors to try to benchmark this relative to our Zillow Mortgage Marketplace ramp. So, I have tried to do that by going back in time and seeing that we spent two or three years on ZMM before we started charging anything. And then, once we fired the starting gun on monetization, it took about three years to get mortgages to $10 million in annual revenue. I fully expect that the ramp in rentals will be faster than that, and I listed some of the reasons why in the prepared remarks. But, it is not material to the quarter's results, which I think was part of what your question was getting at.

Thank you, Spencer.

We're going to do a question from social media. First question comes from at the Motley Fool. And, the question is, premier agent subs were up 68% in Q3 with almost 6,000 in the quarter and 45,000 overall. What do you believe the market opportunity is for that? How high can that number go? Also, your ARPU in Q3 came it at $264. That is down slightly from a year ago from the previous quarter. What are the main reasons for that?

I'll take the first part, and then I'll let Chad talk about ARPU. The premier agent sub count at around 45,000. As I mentioned, the way I benchmark the health of the premier agent business relative to the opportunity is on a dollar basis. Where we're kind of $120 million, $130 million annual run rate relative to the $6 billion to $10 billion that agents spend on advertising. And, as I said, I think that will actually increase and become a bigger amount as agents start to change the way they think about online advertising. So, on a dollar basis, we are dramatically underpenetrated relative to the size of ad spend among agents. And, on ARPU, Chad?

Yes, I think consistent with what we have said in the past is ARPU is not a metric that we manage to or how we run the business. And, definitely not a proxy for pricing. Pricing effectively is based on the value of homes in the ZIP codes in which agents advertise. So, you saw in the quarter, we are rapidly bringing on new agents. Nearly 6,000 in the quarter, which is a record for us. We are bringing those new agents on at lower impression levels at lower budget levels than the average ARPU.

Agents are testing. They're learning, and what we're seeing, which is a trend that is consistent also with the past, is that existing agents are buying more. So, when we look at the composition of the bookings in the quarter, about 50% of our bookings in the quarter came from existing agents buying more. These are agents that were present as of the end of the prior quarter, and also agents that came in in the quarter and started to buy more. And so, we are quickly demonstrating value to these new agents as well. And, we are happy with those trends and look forward to continue to see those trends in the future.

Next question from Twitter was from Colin Sebastian, Internet Analyst from RW Baird. He asks, how is Zillow managing the high cost of engineering talent? Can you shift more to cloud services such as AWS? We do use AWS. We have been a customer of AWS for five years. I was on stage at the Web 2.0 conference, I think, five or six years ago as a referenceable client for AWS that Amazon asked me to go up there and talk about how great it was long before it was the bee's knees. We have been there for a long time.

The question about engineering talent is a real one. And, for those that follow me on Twitter, you know that I spend a lot of time on this issue trying to recruit and retain fantastic developers and engineers. And, it is difficult. We have engineering centers in Seattle, San Francisco, Orange County, Lincoln, and New York and we also have partner development shops in Europe and in India that help us supplement our talent. But, it is a real problem, and it is certainly a challenge. I think we benefit, frankly, from being a small fish in a medium-sized -- I'm sorry, a big fish in a medium-size pond here in Seattle where the lion's share of our developers are. Because within the Seattle tech community is always a very highly desirable place to work, so generally speaking, we have an easier time recruiting and retaining people than other companies like Zillow.

One more question from Twitter, then we will go back to Paul. Mike Graham, Internet analyst from Canaccord Genuity asks, please comment on the mix of sources for new PA subs. High versus low-end markets? New to Zillow versus agents with existing profiles?

So, let's see. The typical PA comes in at a sub-median ARPU. We haven't said exactly what that number is. But, it's -- typically they spend -- actually I don't have it off the tip of my tongue exactly what the number is. But, something a lot lower than an average typical ARPU. But, that does not necessarily mean they are in lower-end markets, it just means that they are dipping their toe in the water in terms of the number of impressions that they are buying right out of the gate.

And, we see this time and time again. Where they -- because the ad product does not have a prescribed number of leads associated with their ad buy, they dip their toe in the water with a small spend. Because they're not able to get a straight answer from us as to how many leads they will get for their $100 or $200 spend because we don't know. It depends whether the consumers choose to select that agent or not. And, so coming upon the new premier agent to go and get reviews. Or, to improve their profile page, for example, in order to get a lot of leads. So, they dip their toe in the water, and then their ARPU grows relatively quickly as they start to have success as they get leads and as they get transactions.

So, an important misunderstanding about Zillow is I think a lot of people tend to think that Zillow only works for agents in higher-end zip codes, and/or in the coastal markets. And, that is not true at all. We price each ZIP code individually based on local market dynamics. And so, Zillow works very well in small towns where perhaps they're at the lower CPM and works very well in large cities where perhaps there is a higher CPM. One of our highest ARPU agents is somebody I just met at one of our local events. He's from Idaho and spends probably $20,000 or $30,000 a month across 80 zip codes in Idaho. He basically buys the whole state. And, he is serving an incredibly rural population at relatively low home values and having incredible success with the program. We'll go to the next question from the call.

Mark Mahaney, RBC Capital Markets.

Great, thanks. Chad, just any color on the contribution of StreetEasy to the Q4 guidance? And then, Spencer, broad question. You started something at the beginning of this year that made your brand campaign that, given the results of the last two quarters, seems to have been relatively successful. This fourth-quarter guidance kind of implies that you're toning down the sales and marketing spend versus revenue at least versus the last two quarters.

Is there a learning in there for you? Do you feel like -- is that just a seasonal shift, and you just downplay brand campaign during the fourth quarter? Or, do you feel like you've accomplished what you wanted to do with that brand campaign? Or, do we expect to see it ramp up again next year? Thanks a lot.

Hey Mark, I will take the question on StreetEasy. So, we released the K today, which shows the 2012 results for StreetEasy, as well as the [stub] period for the first half of the year. And so, if you take a look at that, you will see the top line for the first half of this year about $3.5 million was the contribution from StreetEasy. Again, those results to not end up in our results. We had StreetEasy results for only one month of the quarter, which if you run rate the $3.5 million for the full year out, it's about $7 million representing about $600,000 a month.

So, we're not providing any discrete guidance going forward. With respect to StreetEasy's contribution, they have been ingested into our revenue lines -- our discrete revenue lines. But, you can take that $7 million and the $600,000 per quarter and sort of take a roundabout guess in terms of how those revenues will bleed into the fourth quarter.

And, just to elaborate on that before I answer your question about advertising, the priority for StreetEasy going into 2014 is audience growth. It is not revenue maximization. Revenue is important to StreetEasy, and we think there's a lot of potential there even in 2014. But, the focus will be on expanding, improving the product offering, growing audience especially on mobile, and becoming even more relevant to New York home shoppers.

TV -- we always expected -- we always planned on ramping down ad spend in Q4. Seasonally, there is not much home shopper activity between Thanksgiving and Christmas. So, even six months ago or however long ago it was when we started our TV campaign, we always budgeted for and anticipated ramping down spend in Q4. You shouldn't draw any conclusions based on that ramp down. In fact, as I mentioned, 2014 will be the same or higher total ad spend. Was there another question from the call before we go back to Twitter?

Thank you. Dan Kurnos, The Benchmark Company.

Great, thanks. Spencer just maybe one high-level question. We have seen some movement in the Zillow pro-for-brokers program. We have seen a couple of MLS listings come on, and we know how you source listings and data accuracy has always been a question that you guys get addressed with. So, I'm curious how that blend evolves over time. And, which aspects you see yourselves pushing to make sure that you are on a level playing field.

You're right. Data accuracy is very important to us. We invest very heavily in it. And frankly, our listings accuracy and listings breadth is significantly greater today than at any point in the Company's history. I think what you sometimes hear is you hear about outliers -- small brokerages that with great fanfare decide not to put listings on websites for one reason or another. Those are outliers. That is not the bulk of the industry.

The real industry is Century 21, RE/MAX, Keller Williams, Long & Foster, Howard Hanna, Douglas Element, et cetera. They all understand the value proposition of having listings on the biggest real estate site in every city in the country and the biggest one overall. And, that's a pretty clear value proposition for a broker, especially as compared with where it used to be. 10 years ago, they used to have to pay their local newspapers millions of dollars a year to put their listings on the biggest platform in their local community. Today, they get that for free. They put their listings on Zillow and other sites like Zillow, and it is free to have their listing in front of the most buyers in their local community.

So, it is certainly something we work very hard on. But, don't over-extrapolate from outliers that bloggers and people that sell tickets to conferences like to put on pedestals. That is not where the real industry is at.

Great. Thanks very much.

So, we will go back to Twitter now. A question from Brian [Bolan] from [Zacks]. He writes looking for an update on Zillow Digs. What has the growth been like there?

So, as I mentioned, we launched Digs on iPhone, which has given me a whole new pastime. It's incredibly fun to use Digs on iPhone. If you haven't, I encourage you to. We have had 1.1 million cumulative Digs so far, and 161,000 boards created since we launched the product and iPhone just started -- probably three or four weeks ago. So, now we are on three platforms -- iPhone, iPad, and desktop. The team is focused on improving virality of the product, especially on mobile. And, we'll have an update in further quarters.

It is still a very new area of investment for us. And so, honestly there's no revenue associated with that, and it is not material to our business results. It is still in experimentation mode.

Next question from Connor of the Atlantic. At Connor [Send] (inaudible). Connor asks, can you guide when sales and marketing as a percent of revenue will start to decline? And then, he writes -- to elaborate, I have confidence that you control the leverage on how profitable you are, and I know that brand-building has led to a spike in advertising as you have laid out. Just wondering how long you expect that to continue?

So, it will continue as long as we think there is a significant brand white space in front of us. And, as long as we feel like we are still in the hyper-growth revenue mode. So, there will come a time for margin maximization. And, to harvest the fruit that we've planted -- the seeds that we've planted. That time is not now. And, it is not 2014.

I don't know -- I can't answer the question specifically because I don't know when it will be. But, I know it is not now. I know this is the time to lean forward into this opportunity across each of our marketplaces. Agents, rentals, mortgages, and home improvement.

Next question comes from Robert Drummer at RQD. How do you differentiate between the 63.7 million unique users and unique IP addresses, which is correct?

So, the unique user accounts -- we put this in our 10-K. The unique user accounts are from Google Analytics. And, it is counting a unique IP address. So that's how we measure unique audience.

Next question from the call?

Mark May, Citigroup.

Thank you for taking my questions. Because it is hard to get a sense of how the spend is trending for an average agent because of the addition of -- obviously, the rapid addition of new agents that come in initially with lower spend levels. Is there any way that you can give us a sense of what the year-on-year change is in the average spend for a PA that was with Zillow a year ago? And, what it looked like in the Q3 quarter?

And then, question on sales productivity. Can you give us a sense of how in the last few quarters, productivity has trended for the mature sales team in terms of new sales per mature salesperson. Thanks.

Mark, this is Chad. As you saw at investor day back in March, we showed a chart which basically proved out that agents as they start to systemize their approach to our platform tend to spend more. And so, when you look at cohorts over time, over the course of 6 months, 12 months and 2 years, you see that those agents continue to spend more and more. So, I don't have any specific information with respect to a cohort from last year that I could give over the call today. But, what we are seeing is agents in many cases doubling and tripling their spend as they continue to work the contacts, respond to the speed of the consumer inquiries, and leverage the media spend and the software tools that we provide them. And so, those are the trends that we are seeing in the quarter.

Specifically, as I mentioned, 50% of our bookings are going to existing agents who buy more. And, that is up from what we saw this time last year at about 40% and about 30% a couple of years ago. So, those are the trends that we are seeing there.

In terms of productivity of the sales force, as our sales reps continue to build their book of business -- this is a subscription-based business. They continue to be able to reach in to their book, which contributes to that dynamic of existing agents who want to buy more. There are seeing very quickly value delivered from that spend. And, are doubling down in their own zip codes and in adjacent zip codes to enhance their overall reach with our platinum products. So, those are some of the trends that we are seeing.

Thank you. Chris Merwin, Barclays.

Thank you for taking my question. So, we continued to see some very healthy traffic growth, and as you add that traffic, you mentioned that new uniques are obviously serious home buyers. But, is there any difference in terms of the newly acquired traffic and the organic traffic as it relates to conversion? And, as you expand into other categories like rentals, does the new traffic you gain actually have to be in the market to buy a home? It just now seems like you can keep users engaged no matter where they are in terms of the life cycle of homeownership. Thanks.

Thanks, Chris. On new traffic, the new traffic that we're acquiring through advertising acts like serious home shopper traffic. Similar to the serious home shopper traffic that we achieved through other organic channels, whether it be through SEO or PR. So, for example, we measure the number of page views per visit from this type of audience growth. We measure the leads -- the propensity to contact an agent on first visit or on future visits. And, this type of traffic -- this incremental traffic looks and feels a lot like serious home shopper traffic. That is a testament to the media working well for us that the advertising -- the ads themselves -- the creative working well for us and driving the right type of traffic.

Your question on rentals. Rentals no doubt benefits from our advertising as well as does mortgages. Even though the key points of our advertising, which you can see the TV spots at www.zillow.com/TV for example. The key points -- the key creative points in the advertising are home shopping for for-sale homes. But, rentals undoubtedly benefits from the incremental traffic as well. We already have a very significant rentals audience on Zillow and HotPads and now on StreetEasy.

So, while we are certainly endeavoring to grow rentals' audience core there and grow rental lead volumes further, our ability to turn -- to create a significant rentals revenue line item is not dependent on any type of dramatic increase in the size of our rental audience. We can still have a very big business just from the size of our current audience today. Frankly, there are several competitors -- typically privately held competitors with over $100 million in rental advertising revenue with less traffic then Zillow and HotPads and less lead volumes -- lower lead volumes. So, we already have the audience in terms of rentals.

We'll do another question from Twitter. This one comes from -- two questions on mortgage rates. One from [Athel Captain] from Sweden and the other from Pat Hodges, Bradbury, in Atlanta. And, they write, what impact will increasing mortgage rates have on the Company's results and website visits?

So, mortgage rate has ticked up to about 4.5%, and then came back down to around 4%. But, they're still up 50-ish basis points from where they were. It has not impacted our business. The reason is, for better or for worse, serious home shoppers are much more focused on home prices and inventory than on changes in mortgage rates. They have been sitting on the sidelines for two or three or four years waiting for home values to bottom, and now that they feel that home values have bottomed and are appreciating rapidly, they're trying to move quickly independent of what is happening to mortgage rates. So, it hasn't affected -- we don't think it has affected our shopper volumes.

And, on the Zillow Mortgage Marketplace side of our business, most of our mortgage shopping behavior is from purchase loans not from refinance loans. So, we also haven't been affected very much by the increase in mortgage rates over there either.

Is there another question from the conference call, Operator?

Yes. Heath Terry, Goldman Sachs.

Great, thanks. Spencer, now that we are a little over a year away from your first television ad campaign, are you starting to get any real data behind what the absolute conversion rate -- people who are actually buying a home? And, that audience of television-related traffic looks like relative to your other traffic? I know you have said before that things like engagements have been very similar. But, just curious how that now hopefully you have gotten some closing data, how that compares?

Sure. Measuring the efficacy of TV advertising is always difficult for any Company. It's even more difficult for a Company like Zillow to completely close the loop as you are asking, which is from somebody seeing a TV spot to visiting Zillow to contacting an agent actually buying a house and paying an agent a commission. That last step of closing the loop is very elusive for us and made even more complex by trying to tie it back to how the original user was acquired in the first place, whether it be through TV advertising or some other advertising. So, I don't think that we have a good read on that front, frankly. What we do have a good read on is the propensity of a TV ad and other types of advertising to drive a new user -- to drive that new user to visit page views of listings of homes for sale, to contact an agent, and to do other behaviors on the website or mobile apps like save a home to favorite, sign up to receive e-mail from us. And, do other user actions that tie to our business results.

We do, as it relates to agent ROI though, I will say, we believe that we get a Halo effect from our premier agent advertisers thanks to our ad spend. Whereas they feel that their investment in Zillow is being leveraged. They're riding our coat tails via our media spend. And so, we definitely benefit from that as well in terms of our advertising.

So, we'll go back to Twitter for a question. This one is from at Mike [Zengarus], a blogger with Motley Fool. He writes, while mobile business has doubled year-to-date, what is being done to take advantage of this trend as opposed to simply letting it play out?

So, just some mobile stats for a second. So, we're at about 120 or so homes viewed every second on mobile. And, on our IPO road show --

20 to 30 range.

July of 2011, I think we were at about 20 homes viewed per second on mobile. So, up 6X approximately from the IPO road show in December of 2011 in terms of mobile page views per second. And, 60% of our usage during the week is on mobile, and 70% of our usage during the weekends is on mobile.

The way we take advantage of that mobile migration is, we sell our premier agent subscription product in an integrated fashion between desktop and mobile. And, Google has switched their system to this as well. So, now advertisers that buy SEM from Google buy it in an integrated way between desktop and mobile. We view that as a significant advantage of our model relative to competitors because it is much simpler for an agent to understand when they're talking over the phone to one of our representatives that they're going to be buying impressions across Zillow.com and Zillow mobile. And then, the impressions that they purchase get consumed across the different platforms.

Because so many of our impressions now are on mobile, a very significant portion of our revenue comes from mobile. We don't break out exactly what percent of our revenue comes from mobile other than to say that 60% to 70% of our visits are on mobile. So, we're definitely beneficiaries of the mobile trend.

And, just one other kind of interesting strategic point that I mentioned in the prepared remarks. Here, as a nationwide technology Company, we are significantly advantaged relative to the competition because we have a nationwide footprint. And so, we can do things on mobile which attract interest from our partners that Apple and Samsung and Google and other mobile companies, which is very difficult for local real estate companies to do. Because their mobile service would only apply to one or two cities where that company is based. Is there a next question from the call?

Yes. James Cakmak, Telsey Advisory Group.

I just wanted to follow up on your mobile comments. Can you provide detail on the behavior of mobile users versus desktop? For instance, are they driving a proportionate amount of leads to the growth in traffic? Any insight on mobile versus desktop behavior would be helpful. And then, real quick on mortgage CPCs. Is that still around $3? Thanks.

So, in past quarters we have mentioned that somebody looking at a mobile listing on Zillow is three times more likely to contact an agent than someone looking at the same listing on desktop. Now, a mobile user also views more listings per session because it is fun and easy to flip through multiple homes in a single session on mobile. But, on a per person basis, the contact rates are quite a bit higher on mobile.

In terms of other behaviors, for competitive reasons we don't share other information such as saving favorites or registering for e-mail or other user activities that we encourage our users to create. The other part of the question was mortgage CPC, Chad?

Yes. So, mortgage CPCs, as you know, James, range from about zero dollars -- they are free in some cases up to low double digits. On average, we have seen average CPCs move up from last year, which were about $2 to $3 to $3 to $4 range with many price points in between. But, we typically see that refinanced pricing for CPCs are significantly higher than purchase loans. But, on average, they are about $3 to $4, and you should put that in your model.

Next question from Twitter, and then we'll go back to the call. At [cash rules tin apps], how much market penetration do you need to have in the US before you start thinking about international?

We don't have anything specific to announce right now about international. Certainly, the international TAM is quite interesting to us. We feel like there is a lot of market cap potential and revenue potential and brand expansion potential here in the US in each of the businesses that we are currently in. And so, that is our primary focus at this point, and we have nothing specific to announce about that right now. Next question from the call?

Lloyd Walmsley, Deutsche Bank.

Thanks. One for Chad and one for Spencer, if I may. So, just Chad, on the StreetEasy revenue contribution, how did that fall between the real estate segment as well as the display segment? And, I just asked because I'm trying to get to a real estate ex- premier for rental and if it is all in the real estate segment, it would imply the kind of other actually declined sequentially despite the launch of rental monetization? But, I figure some of it may be in display, and then there may be some deferred that you can't recognize. Would love your reaction there.

And then, just Spencer, philosophically, you have kind of described StreetEasy as structurally kind of in a better place than the rest of the US and the New York market. I was just wondering how you can kind of square that with the revenue. The revenue in the first half was like $3.5 million. It pales in comparison to the REA group metaphor.

I'll let Chad do the first one --.

Yes, Lloyd, we're not providing the discrete breakdown in terms of their revenue lines for StreetEasy. So much of this may change over the course of the next 6,12, 18 months as we look to amplify certain revenue lines. I will say that they have got three primary lines of revenue. They have a product called Insider, which is a subscription-based model. They have a featured listing model for pros as well as display. So, there is a contribution in display, but I'm not going to assign a certain percentage to it because it is certainly nothing that we have broken out in the past and was not in the K today.

In terms of the deferred revenue piece of it, there is about $250,000 to $300,000, I would say in deferred revenue that was on the books of StreetEasy at the time of the acquisition that we were not able to recognize per purchase accounting rules. I'll turn the other question over to Spencer.

Yes, so you hit the nail on the head, Lloyd. Which is, StreetEasy is -- there is a huge disconnect between the power of the Street Easy brand, the strength of its product, and its revenue and profitability. This is an incredibly under-monetized asset relative to the size of the opportunity. And, the reason that I drew some comparisons in terms of broker commissions and ad revenue and transaction volumes in New York versus other countries is to paint the picture of, frankly, what our investment thesis was when we chose to pay $50 million to acquire StreetEasy. It's that we see a very significant revenue opportunity from New York. It will take a couple of years to play out. And as I say, our near-term priority for StreetEasy is actually not to start over-monetizing. It's to grow its audience even further by improving its product and expanding it on mobile.

But, this was a bootstraps startup that accomplished an extraordinary amount in a relatively short period of time. But, has not yet been fully monetized. And, down the road you can be sure that we will monetize it. I think one more question from the caller? Or, should we wrap up?

So, thank you very much for joining us today. We are very excited about the opportunities ahead. I will continue to answer a few more questions on Twitter via the Z earnings hashtag from both investors and individuals and analysts and Motley Fool who will be moderating that Q&A on Twitter. I thank you very much for your time, and we will speak with you next quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.