Zillow Group Inc (ZG) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Zillow Group fourth quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to hand the floor over to RJ Jones, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Zillow Group's fourth quarter and year end 2016 earnings conference call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer, and Kathleen Philips, Chief Financial Officer.

During the call, we will make forward-looking statements regarding future financial performance and events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee these results. We caution you to consider the risk factors described in our SEC filings which could cause actual results to differ materially from those in the forward-looking statements made on this call.

The date of this call is February 7, 2017, and forward-looking statements made today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During the call, we will discuss GAAP and non-GAAP measures. We encourage you to read our earnings press release as it contains important information about our reported and non-GAAP results, including reconciliation of non-GAAP financial measures.

In our remarks, the non-GAAP financial measure adjusted EBITDA is referred to as EBITDA. Which excludes other income, depreciation, amortization expense, share-based compensation expense, acquisition-related costs, restructuring costs, the gain or loss on divestiture of businesses, the loss on debt extinguishment, interest expense, and income taxes.

This call is being broadcast on the internet, and is available on the Investor Relations section of the Zillow Group website. Along with our earnings press release, a copy of Management's prepared remarks has already been posted to the Quarterly Results section of our Investor Relations website.

A recording of the call will be available later today. Today, we will open the call with prepared remarks. We will follow prepared remarks with live Q&A.

In addition to taking questions from those dialed into the call, we will answer questions asked via Twitter. Individuals may submit questions by tweeting @zillowGroup using the z earnings hashtag. I will now turn the call over to Spencer.

Thank you for joining the call today. 2016 was an outstanding year of record revenue and accelerated innovation for Zillow Group. We ended the year strong with a stellar fourth quarter.

Revenue for the quarter came in at $228 million, up 34% year over year and nearly $7 million above the midpoint of the guidance range. Fourth-quarter GAAP net loss was approximately $23 million or 10% of revenue. EBITDA was $55 million or 24% of revenue, up 168% year over year and $6 million ahead of the midpoint of guidance.

On our last call, we indicated that there was risk to our fourth-quarter results associated with the transition to our new Premier Agent pricing model. But we successfully mitigated those risks and the transition has gone well.

For the full year 2016, revenue was a record $847 million, up 31% year over year. Our GAAP net loss was approximately $220 million in 2016 or 26% of revenue, which included the impact of a one-time $130 million litigation settlement.

EBITDA was nearly $15 million in 2016 or 2% of revenue, which also includes the one-time litigation settlement. EBITDA in 2016 would have been approximately $145 million or 17% of revenue, an increase of 65% year over year excluding the one time litigation settlement.

Our accomplishments in 2016 all tie to our long-term strategy. In fact, our strategic position today has been years in the making. Let me take you back for a moment to give you some perspective.

Four years ago, we launched impression-based advertising for Premier Agents, and completed changed our business model away from an approach driven by share of voice subscriptions. Three years ago, we began investing in advertising for the Zillow brand which massively accelerated our audience growth. Two years ago, we accelerated the consolidation of the online real estate media category by acquiring our closest competitor, Trulia, which significantly increased our audience and volume of leads delivered to agents.

About 18 months ago, we finished the integration of Trulia, unified our agent advertising products and released the most advanced business management platform in the real estate industry. At the end of 2016, we completed the rollout of our self serve auction based pricing platform for our Premier Agent advertisers, along with unprecedented ad products, including Premier Agent direct and seller boost, that help a agents extend their reach and build a stronger business. Each one of those accomplishments is a piece of our larger strategy, and laid the foundation for the strong position we are in today.

We continue to focus on extending our competitive advantages. On every fourth quarter earnings call since we became a public company five years ago, I've explained our strategic priorities for the upcoming year. The priorities we laid out for 2016 were the right ones.

They tie to our mission and position Zillow Group to grow into the massive potential ahead. We made enormous progress on them, and for 2017 we are mostly keeping our priorities unchanged.

Our 2017 priorities are, one, grow our audience, size, and consumer engagement. Two, grow our Premier Agent advertising business. Three, grow our emerging marketplaces, and four, maintain our extraordinary Company culture which attracts and retains incredible people and motivates them to do their best work.

As you've heard me say many times before, advertisers follow audience. Which is why our first priority remains growing audience size and engagement. Traffic to Zillow Group's brands mobile apps and websites reached more than 140 million average monthly unique users in the fourth quarter of 2016, and our annual seasonal peak was more than 171 million in May.

At the bottom of the funnel, year-over-year growth in leads sent to Premier Agent advertisers continues to outpace unique user growth. And leads to advertisers in our emerging marketplaces is growing even faster.

Our strategy for growing our audience starts with creating mobile and desktop experiences that increase engagement and loyalty with consumers, by providing products that span the home life cycle whether owning, renting, buying, selling or financing. Higher engagement leads to more of our audience contacting a professional when they are ready to take action. When agents receive more contacts from us, they spend more which increases our revenue.

We utilize free and paid channels to raise awareness and reach more consumers. The foundation of our traffic and growth continues to be from free channels, but the investment in advertising accelerates that growth.

As I mentioned earlier, we began advertising the Zillow brand in 2013. Three years later, in 2016, we spent more than $100 million advertising our portfolio of consumer brands. This has been a very effective strategy for us, and the strength of our consumer and business brands in our portfolio continues to grow.

Going forward, we'll continue to use advertising to drive growth and brand awareness for many of our brands. With that in mind, we plan to increase our advertising expense across our five consumer brands, our business brands, and our four marketplaces in 2017. But at a rate that is lower than revenue growth as we did last year. We are choosing to increase advertising investments this year to help us realize advantages of scale over the long term.

Our second priority is to grow our Premier Agent advertising business. In 2016, Premier Agent revenue grew 35% year over year to a record $604 million and exceeded our outlook.

During the fourth quarter, we delivered nearly 4 million leads to Premier Agent advertisers across our mobile apps and websites. This was up almost 33% year over year. We expect to be able to continue to grow leads faster than unique users, as our product innovations continue to drive increased engagement.

During the fourth quarter of 2016, we completed the rollout of our dynamic self-serve account interface to Premier Agents nationally. The new account management tools enable all our advertisers to independently control their budgets and ad impressions through an auction-based system. Premier Agent advertisers can now see how they measure up against all market participants in a given zip code, along with estimated ROIs for advertising in that area.

With this new model, each agent pays the same price for an impression based on what all agents are willing to spend in a market. This transparent system benefits the best Premier Agent advertisers, and is consistent with our strategy of focusing on elite agents who excel at lead conversion and provide great service to our home shoppers. We continue to he see the nation's best real estate agents, those who convert leads at high rates, gain transaction share in their respective markets as a result of advertising with Zillow Group.

In 2016, around $87 billion in total real estate agent commissions were paid in the US, which increased almost 9% over 2005 based on our estimates. We earned $604 million in Premier Agent revenue last year, and we delivered nearly 17 million leads to Premier Agents.

We estimate that from those leads agents earned roughly $4.4 billion in commissions. We estimate this represents about 5% of all commissions in the US. That's still a small percentage of the total, but an increase from the previous year when approximately 12 million leads from Zillow Group drove about 3.2 billion or about 3.9% of all commissions. The opportunity in front of us remains massive.

Our next priority is to grow our emerging marketplaces, which consists of mortgages, rentals, New York City and new construction. Revenue in each of these marketplaces is growing faster than our Premier Agent revenue.

Zillow Group's Mortgages Marketplace continues to experience significant growth in usage, leads and revenue. Revenue was $71 million and grew 61% year over year in 2016.

We exceeded 300,000 lender reviews by consumers, which makes us the category leader in consumer generated reviews of lenders. Looking ahead, we are well positioned to continue to grow mortgages revenue faster than the industry and competition. Even in a rising interest rate environment, as our mortgage shopping usage is predominantly for home purchase loans.

Next, our Rentals Marketplace continues to experience rapid growth. Revenue was up 124% in 2016. Our advertising products for rental professionals continue to gain popularity in the industry.

We now operate the top-two rental brands and attract 30 million average monthly rental shoppers. According to comScore, our audience is nearly twice the size of our nearest rental competitor. We remain focused on creating more products and services that enable rental professionals from multi-family managers to single-family property owners to be more efficient in their work flow and lower the time on market for their rental units.

Our New York City Marketplace continues to grow and evolve. Revenue for StreetEasy and Naked Apartments grew 80% year over year in 2016. And since our 2013 acquisition of StreetEasy, revenues has quadrupled.

We recently added another small but strategic acquisition by acquiring Hampton's Real Estate online or HREO.com. A Hampton's focused real estate portal. HREO's hyper local focus complements StreetEasy and Naked Apartments strength in the city.

In New York City, the most valuable real estate market in the world, we have assembled a portfolio of brands, StreetEasy, Zillow, Trulia, Naked Apartments, Hot Pads, HREO. That puts us in an exciting position in a market with billions in residential commissions and fees.

We recently announced our latest emerging marketplace, New Construction. With the launch of several exciting new features, home builders can now participate in the Zillow Group promoted communities program. Builders can display real-time lot availability on search results and maps, allowing them to easily showcase the breadth of their available inventory to home shoppers.

Builders who participate in this program receive insights on consumer behavior through the new Zillow Group builder insights platform. Enabling them to assess local market conditions and determine consumer preferences, helping them make decisions regarding their product positioning, land acquisition and marketing. The reception of these programs has been positive, and we're excited about the opportunity for this emerging marketplace which has a $1 billion advertising TAM.

Finally, our fourth strategic priority which is crucial to the success of everything we do here at Zillow Group is attracting and retaining the best talent while maintaining our unique Company culture focused on innovation. Our people and culture are key competitive advantages. I cannot say it enough, great people build great products which in turn attract audiences.

We dedicate substantial energy toward creating an environment at Zillow Group in which our nearly 2,800 employees can excel. I'm proud to report Zillow Group was named one of Glassdoor's 2017 best places to work in the US for the fourth year in a row. Also, Fortune ranked Zillow Group number four on its best places to work in technology list, and we were included on their list of best workplaces for parents.

These accolades result from the high level of engagement and passion of our employees, and reflect their commitment to our core values. Our leadership team here has been incredibly stable and long tenured, and helps create our culture that has been so important to our success. I'd like to extend my sincere thanks to all of Zillow Group's hard working and enthusiastic employees for our ongoing success.

Now turning to our outlook for the year. We're excited that in 2017 we expect our full-year revenue to exceed $1 billion. When we went public in 2011 and with annual revenue then of $66 million, few expected us to reach this milestone by 2017.

But Zillow Group has grown at a pace that has surprised even our most optimistic leaders, investors and analysts. While that is incredibly exciting, even more exciting is the potential for growth still in front of us.

If 2017, we expect full-year revenue in the range of $1.03 billion to $1.05 billion, and EBITDA of $190 million to $210 million. We anticipate EBITDA as a percentage of revenue to be 19% at the midpoint of guidance, greater than 17% in 2016 and consistent with our strategy for steady margin expansion on our way to an eventual 40% EBITDA margin at scale.

The further we go down this path, it has become clear to us that the size of the prize is even bigger than we thought. To fully grow into our opportunity, we're going to invest today to benefit tomorrow.

We have learned from our successful investments in the past that marked the path to $1 billion in annual revenue, including our investment in growing our brands and investing in our emerging marketplaces. I'll now turn the call over to Kathleen.

Thank you, Spencer, and hello to everyone joining us on today's call. Let's dive into our financial results.

Total revenue for the fourth quarter increased 34% year over year to a record $227.6 million, from $169.4 million in the same period last year. Looking at our primary revenue category, Marketplace revenue was $210.6 million for the fourth quarter, an increase of 42% year over year. The Marketplace revenue now accounts for 93% of our total revenue, as compared to 88% during the same period last year. As a reminder, our Marketplace category includes Premier Agent, other real estate and mortgages revenue.

Zillow Group Premier Agent revenue increased 32% year over year to $164.3 million in the fourth quarter. The annualized run rate for our Premier Agent advertising marketplace reached $638.4 million at the end of the quarter, compared to $485.5 million at the same time last year.

We ended 2016 with 84,151 agent advertisers. Average revenue per advertiser, or ARPA, was $632 for the fourth quarter, increasing 44% year over year. The decline in agent advertiser count was an expected result of our new auction-based pricing model, and our continued strategy of focusing on top performing agents and teams that spend more over time with us as they realize the benefits of advertising on our platform.

For further context, revenue from same agent advertisers, or those who have been on our platform for more than one year, grew by more than 58% compared to the prior year. New sales to existing advertisers made up 63% of total bookings in the fourth quarter.

Year-over-year growth of the agent advertiser cohort that spends more than $5,000 per month was 95% on a total dollar basis and 100% in advertiser count. Churn in this cohort continues to be minimal.

As a reminder, this is the last time we will report on the number of agent advertisers and ARPA. We are in the final stages of confirming which replacement metric most closely aligns with our new auction-based pricing model and Premier Agent business for purposes of measuring business performance. We expect to begin reporting on the new metric with our first quarter 2017 earnings conference call, and will provide two years worth of historical data on that metric.

Fourth-quarter revenue for our other real estate subcategory grew 145% year over year to $29.8 million. Other real estate revenue includes agent services, Dotloop, StreetEasy, Naked Apartments, Rentals, and other offerings to our endemic advertisers that are not traditional display advertising including new construction, as Spencer discussed earlier.

Moving now to our Mortgages Marketplace. Our revenue reached $16.5 million in the fourth quarter, which represents a 41% increase year over year. Average revenue per loan information request increased 116% year over year.

As we have discussed, our strategic decision in early 2016 to improve the quality of loan information requests by asking consumers to provide more details before a request is sent to a lender, resulted in a 35% decrease of such requests year over year. We view this as a favorable trend.

In our display category, revenue was $17 million, a decrease of approximately 20% over the same period last year and within our expectations. Shifting now from revenue to our expenses, total operating expenses were $224.9 million in the fourth quarter. Our cost of revenue during the quarter was $19.7 million or 9% of revenue.

Sales and marketing expense was $90.1 million or 40% of revenue. We continue to make strategic and opportunistic investments in advertising which support the expansion of our audience leadership in the online real estate category.

Technology and development costs in the fourth quarter were $72.1 million or 32% of revenue. General and administrative costs in the fourth quarter were $42.5 million or 19% of revenue, and lower than we had planned.

Moving on to our bottom line. GAAP net loss for the fourth quarter was $23.5 million or 10% of revenue. Our GAAP net loss for the quarter included a $22.8 million loss on debt extinguishment related to the December 2016 repurchase of nearly all of the convertible debt we assumed in connection with our February 2015 acquisition of Trulia. It is important to note that the debt repurchase resulted in avoiding the future possible issuance of more than 9 million shares of Zillow Group Class A shares for settlement.

Our EBITDA for the quarter was $54.7 million or 24% of revenue, and exceeded the high end of our guidance range. Due to strong revenue contributions from all Marketplaces, as well as from operating expense savings throughout the Company.

Zillow Group ended the year with nearly 2,800 employees, and approximately $506.4 million in cash and investments.

For a review of our full-year 2016 results, I encourage you to review our press release that was issued this afternoon. The press release also contains our detailed first-quarter and full-year 2017 guidance.

You'll notice that for the first time, we've provided quarterly and annual outlooks for our Mortgages and other real estate revenue category. The press release is available on our Investor Relations website, and includes detailed guidance and related GAAP reconciliations.

To conclude, 2016 was a great year for Zillow Group. We delivered on all of our strategic priorities and strengthened our leadership position in the online real estate category.

Just a month into 2017, we're off to a great start and are excited about what's in store for Zillow Group this year and even more so over the long term. With that, we will now open up the call for questions.

Thank you.

(Operator Instructions)

And our first question from the phones comes from the line of Michael Graham from Canaccord.

Hello, thank you. Congrats on the good performance.

I just wanted to ask about the self-service auction-based platform. Could you share any early learnings there? Is it helping pricing or is it too early to say?

And then as you think about the revenue funnel for 2017 and users and conversion and ad pricing, how much of a factor was expected improvements in ad pricing from the self-service platform? How much of a factor was that into your guidance? Thanks so much.

Sure. Hello, Michael. So we completed the rollout of the new platform, the you new auction-based system, about a month, month and-a-half ago through the rest of the country.

As you recall, we had some markets that we had switched over to this system almost a year ago. What we've learned is that it takes time for marketplace dynamics to take hold. The good news is that this new business model, this new pricing model, aligns our revenue with agent's success and it allows agents to spend up to their own ROI.

We've seen in the older markets that have been flipped over to this pricing model about a year ago that they do show marketplace dynamics. What happens is agents tend to change their business model, their team structure. They adapt to our business model, to our sales model.

Our salespeople adapt how they communicate to Premier Agents and how they sell. So in the older markets, we do see, as I said, these marketplace dynamics.

But it takes time, it's not an instant -- it doesn't happen overnight. So the 2017 guidance that we've given for the full year and for Premier Agent obviously reflect our best guess at this point in time of what 2017 will look like based on everything we know about the Premier Agent model.

Next question, please, operator.

Our next question comes from the line of Mark Mahaney from RBC Capital Markets.

I guess I'll just ask, please, a direct question on the EBITDA guidance and on the 19% margin. And I get that it's above the 17% last year, there were obviously some legal expenses. And in your prepared comments, you talked about I think getting some leverage in advertising expense.

So I'm almost puzzled why the margins aren't a little bit higher than 19% in 2017. So any more color there? Is there a real ramp-up in R&D spend?

What's behind that? Why isn't it higher? Thanks a lot.

Sure. Hey, Mark. So we've always made decisions that we think maximize long-term value creation. Management is a significant shareholder, and so we try to make the decisions that we think will pay off down the road.

We have a good track record of making these investment decisions which hurt near term profitability, but end up paying off. And just to give you two quick examples, and then I'll try to answer your question directly on what types of investments we're making now.

When we started advertising a couple of years ago, we had a lot of shareholders who said why are you hurting near-term profitability by advertising on TV. We'd like to see more margin expansion.

We felt strongly that that would create audience separation, audience growth and we were right. The reason that we're able to achieve greater than $1 billion of revenue is because of our audience leadership.

A couple years ago when we started building out our mortgages, we had a lot of shareholders say you should be expanding margin today and basically selling off your mortgages vertical like most of your competitors do. Why are you growing headcount and building out a mortgages business? And again, that was the right decision that we made a couple years ago.

It hurt near-term profitability, but today we have a terrific large growing and highly profitable mortgage business as a result. So just to give you an example of some investments that we're making now.

We have around 250 people that build software tools for real estate agents to improve agent lead conversion that build transaction management tools for Dotloop to help agents automate transactions electronically, and help build software tools for listings input for Retsly and Bridge. So what we're trying to do is weave together these different pieces of software tools for real estate agent productivity such that they can improve their lead conversion, they can manage listings through software applications that we provide.

That is not cheap. That's $25 million to $50 million a year of investment that we are making today on an annual basis that have the effect of taking a couple points of EBITDA margin. And more than explain -- just that one investment that I'm citing more than explain any delta between our 19% EBITDA margin and whatever investors might expect.

But we think that's the type of investment that pays off down the road. So that's why we're making it.

The other thing I would just say is that the further along we get on this whole path of creating Zillow Group, the larger the TAM becomes and the bigger the size of the prize turns out to be. So that's why we're making these investments and we feel great about them. Next question, operator, please.

Our next question comes from the line of Nat Schindele from Bank of America-Merrill Lynch.

Hello, thank you for taking my questions. A couple things.

One, on a very tactical basis, where in your guidance will the sell-side product appear in the breakdown of revenue? And can you give any update on the sell-side product and your expectations for that going into the year? And then I had another question on leads, and how it's changing afterwards, if possible.

Right, okay. So as for the seller products, that will be included in Premier Agent revenue. We won't be breaking that out separately.

Okay.

And you know the basic idea with that product is generating listing leads. We've just really started to roll that out more broadly, but you'll see that included in Premier Agent revenue.

Okay. And then on the second question if I may, how is the self-serve product going to integrate with your longer-term contracts that you're working with your bigger customers? And will that over time will you eliminate bonuses that you provide for impressions for longer-term contracts and it will be just a sale of a lead?

I think you're referring to what we've talked about before, that some customers prefer to be under a contract. Is that what you're referring to?

Yes. Will that go away over time and evolve into a pure lead-based sale, or will it stay on the longer-term basis where you can get a bonus for being in longer?

At this point, we don't know. We were a bit surprised as we tested and learned with the rollout that there are a lot of agents who really wanted to manage their spend to a specific dollar amount, and be under a contract for a term, a period of time. So it really depends on how the self-service marketplace evolves under time.

The bonus that the agents get is pretty modest in that program. The real flexibility there is for those who are more sensitive about their spend, they can transfer those dollars into different zip codes. And whether we continue to allow that long term, I think we just don't know yet.

Next question, please, operator.

Our next question comes from the line of Ron Josey from JMP Securities.

Thanks for taking the questions. Two follow ups, actually. Spencer, I wanted to ask on your comments on marketplaces and self service and older markets, if you could just give us some more insight on how long it took for older markets to achieve some of these marketplace dynamic benefits?

And on the incremental, I think you said $25 million to $50 million on productivity tool investments. I know, awfully early. But if you can talk about just if there are early signs that led you to believe that this is the right investment that you saw in 2016? Maybe it was the growth in Premier Agent revenue, the $5,000 -- the number of agents growing who spend more than $5,000 accounts or whatever, that would be helpful.

Then I'm getting a lot of questions, so I thought I'd just ask it. You talked it you've talked about in the past of just growth plus EBITDA margin. How does that factor in and how did that factor into your guidance this year? Thank you.

Sure. So length of time on markets, it's really varied. What needs to happen is the -- you need 5 to 20 marketplace participants to adapt their business model to our new pricing model. And so there are some markets that happens very quickly, there are other markets it takes a couple months, there are other markets where it probably takes a couple quarters, and it's even zip code by zip code based. So I don't think there's a simple answer to that one.

The investment productivity tools, I'm using this as an example, the about 250 people that work on all this software tools. Because it's the perfect example that helps explain this investment margin, how long are we going to invest and not maximize margin because that doesn't drive near-term revenue. There's some revenue from Dotloop of course, but the real reason that we're investing very heavily in software tools for real estate agents is to improve lead conversion.

And I think, frankly, the most interesting paragraph in the prepared remarks was the section where I talked about the number of leads that we think we drove or we know we drove in 2016 and how much commission that created. And that helps explain just how important a driver of lead conversion is to the economics and pricing model of our Premier Agent business.

So to answer your question, the reason that we're making this investment is to improve lead conversion. We have tons of internal data that shows that when agents use software tools, whether it's ours or others, they buy more impressions. They convert leads at a higher rate, they hire more agents on their team, they might buy more impressions.

So I think we've given some data on usage of our CRM. I think at our Vegas Premier Agent event, we said how many daily actives and monthly actives we had, and it was tens of thousands of Premier Agents that were use using our software tools every month. And we haven't given data on Dotloop usage, but it's significant among our Premier Agents. So that's why we make those investments.

And then finally, the discussion of revenue growth and EBITDA. I explained that on a couple of calls ago because for us it's a helpful framework. I want investors and analysts to understand how we think about these two tradeoffs, and they are closely related.

We're trying to make bets that down the road, we'll end up having a higher dollar margin down the road. And we can have a 25% EBITDA margin today if we wanted to, but that would surely result in lower revenue down the road and lower EBITDA dollars down the road because we wouldn't be making these investments that pay off a couple years later. Operator, next question, please.

And our next question comes from the line of Tom White from Macquarie.

Great, thanks for my question. Just on the seller leads product, I know it's early, but any more color, Spencer, you can give us there? Just curious on maybe early differences in the value of a seller lead versus a buyer lead, how maybe you expect the mix of those to look over time?

And then just lastly on seller leads, any signs that it's attracting new advertisers to the platform? This is the last quarter where we're going to get the paying advertiser metric. Just curious how we should be thinking about that over the next year or two? Thanks.

So what we did with the seller biz product was we bundled it with the core Premier Agent. So the way that you qualify to receive seller leads in your market is to buy more of the traditional Premier Agent product. And it's been -- it's proven to be an effective way to sell incremental traditional Premier Agent impressions.

Listing leads are typically much more valuable than buyer leads, especially in inventory constrained markets. In inventory constrained markets like Boston or Seattle or San Francisco, it can take 5, 10 or 20 offers for a buyer to be able to close a deal because there are multiple offers on a given listing. And so a buyer lead is less valuable than a listing lead because it's a lot more work for a real estate agent to close a buyer lead into a commission than a seller lead into a commission, or sorry, to close a buyer into a commission than a listing ito a commission.

So listing leads tend to be worth more in this type of real estate market. In a very slow real estate market, buyer leads tend to be worth more.

And then in terms of -- I guess the other thing I would say is the sur products and the other product that we launched in Q4 was Premier Agent Direct, which is this branding product which helps agents grow their sphere of influence. So we call it Direct as really a nod to direct mail, and the strategy here is to have an ad product that helps agents grow their brand awareness on Zillow, on Trulia, on Facebook, through us. And that's a great complement to the lead generation ad product that traditional Premier Agent has provided, initially on buyer leads and now through Seller Boost on seller leads.

So the three of them are slightly different products. Premier Agent, traditional and Premier Agent Seller Boost are bundled together and then Premier Agent Direct is sold separately. Operator, next question, please.

Our next question comes from the line of Kerry Rice from Needham & Company.

Thanks a lot. Again, going back to the self service and talking about some of the older markets that have been around for a year. It's my assumption that agents can still either buy impressions over the phone or self service. So as you look at those older markets, can you give us any insight on percentage that are using the self service versus phoning it in?

And then the second part of that question is, if there's a big conversion to self service, if you want to sell the Premier Agent Direct or any of the other maybe features that you provide or services, does a big transition over to self service impact the ability to upsell other services? Thanks.

There's been a lot of self-serve usage. Yes, there's been a lot of self-serve usage. We're still growing the sales team, the Premier Agent sales team modestly.

So efficiencies that are gathered from increased self serve are really absorbed by having our sales team sell more of the other products over the phone, or do more in-market visits or more agent support and agent training calls. And so far, I've been very pleased with the self-service element of it. But that wasn't -- that's not the only impactful fact about the new product, the new pricing model.

I'd say the fact that an agent can buy it on their own without talking to one of our reps is a feature. It's not the fundamental change. The fundamental change is that all agents in the market pay the same CPM rather than a different CPM based on when they purchased.

So that's the more important point about the change. Operator, next question, please.

Our next question comes from the line of Heath Terry from Goldman Sachs.

Great, thanks. Wondering just on the dynamic pricing model, if you can give us a sense of how much of an impact -- how that -- you went from 25% to 100% over the course of the quarter. How steady that progression was?

And then as you think about the seasonality in the business that you've seen thus far, how does dynamic pricing potentially amplify seasonality over the course of the year? How are you thinking about the way or how would you have people modeling your business think about the way that revenues are going to flow this year as you operate under this new model?

Yes, thanks, Heath. So the rollout was very large. So I would say it felt like we did it really quickly, but given the number of customers that we had very quickly was a matter of four, six, eight weeks. And you can't -- we can't turn everybody on at exactly the same time because the agents need to be trained.

So everybody is now on the new platform, but in terms of the maturity of each of the zip codes and the dynamic of the sales taking hold in each zip code it's all over the map pretty much. As Spencer said before, it's going to take time before the marketplaces mature enough so that we see the market dynamics that we're expecting in all of them.

Seasonality is an excellent question. The answer right now is we have some expectations about how Q4 seasonality in particular is going to be impacted by dynamic pricing, and the ability of agents to come on and off the platform more easily.

But we haven't gotten there yet with the full complement of agents, so we don't know exactly how it will play out. But you're right to flag that as an issue, and I think we'll have a better read on it with a few more months data under our belts in terms of you how the zip codes are maturing. But it's something we're definitely keeping our eye on because the dynamic will be quite different.

Next question, operator.

Our next question comes from the line of Lloyd Walmsley from Deutsche Bank.

Thanks, guys. A couple questions if I can.

On Seller Boost going back to that, can you give us a sense for what percent approximately of the home shopper traffic is seller related or homeowner related? And how is that trending given some of your product development work to try to engage more home sellers to claim their home?

And I guess a follow up on the monetization. When Trulia rolled out their seller ads three years ago, I think they were monetizing seller impressions at 5X buyer traffic. Is this still the right way to think about the premium price as you scale out the seller product, or is it a different lead you're selling and is there a better way we should think about it? Thanks.

I think around 5X is a pretty good swag of the value. But remember, they're not buying it discreetly.

We're not selling a specific seller lead, so it's all bundled into their ROI on market-based pricing on the Premier Agent auction system. But yes, if an agent is paying around $30 to $40 for a buyer lead, I think around five times that is a decent estimate of what they might pay for a seller lead or how they might value that seller lead.

Historically, if you asked Premier Agents of the leads that they were getting from us before, which included leads on not for sale placements, you'd probably hear around 5% or so of our leads were seller leads or listing leads or leads on not for sale homes as compared with leads on active listings. We think that we can increase that substantially as we focus more and as we have focused more on how to drive more seller leads.

But that's a decent baseline of where we were at historically. Operator, next question, please.

Our next question comes from the line of Brian Nowak from Morgan Stanley.

Thanks for taking my question. I have two.

Just the first one, to go back to the implied incremental margins and the guide excluding the legal charges, can you help us out a little bit? If we look at the sales and marketing in 2016, about $360 million-ish. You have advertising in there, you have your Premier Agent salesforce in there.

It always seems like there's another big bucket of $150 million-ish of spend in there. What else is in there? Is that a source of investment that we should think about? I'm just trying to figure out how you -- where you're going to be investing and spending the money this year.

Then secondly, Spencer, some of the leaders in the group have really started talking about how stock-based comp should be viewed as real expense, and putting in methods to manage stock-based comp over time. I guess I'd be curious to hear your thoughts about stock-based comp and how you think about managing that over time. Thanks.

Okay. Kathleen can answer the first question then I'll talk about SBC.

Great. So on the margin expansion, the way that we thought about it when we started budgeting for 2017 is we really looked at this as a clean slate. You were right to identify that we had substantial legal expenses in 2015 and 2016, but we really went back to square one and tried to budget every dollar to where we believed we would get maximum long-term return.

When we looked back at 2015 and 2016 and had the significant legal expenses as well as the potential overhang of a large verdict and damages award, we were looking at the risk profile of our business quite differently then than we are now. So that was driving different decisions.

But as we thought about this year, we were able to, as Spencer was just talking about, identify a number of areas where we thought incremental investment was warranted. Given where things stand with our business now, and given our outlook for the year of really extraordinary revenue.

So that's how we thought about it. In terms of what else fits in the sales and marketing line, it is a combination of the salesforce and sales support as well as advertising and that all rolled up into that line.

Stock-based compensation is absolutely something that we look at very closely. And frankly, I think investors should look at stock as an important metric. I just personally think that the dollar calculation of stock-based compensation is an odd way to look at it, because that is outside of the control of the Company.

So the way we look at SBC internally, and we look at it very closely, is we look at it on a dilution percentage. And the equity grants that we make to all employees, which help create a culture of ownership which we think is very important, don't exceed more than 5% dilution. So we aim for less than 5% annual dilution from our employee option grants each year.

And I just -- I think looking at SBC as a percent of revenue is an odd way to look at it. Looking at SBC on a dollar basis is an odd way to look at it. Because the stock that you grant to your employees at the beginning of the year or whenever, an annual review season, that could end up costing the Company a lot if the stock does one thing and a little if the stock does another. And so the dollar value of SBC I think is a weird accounting quirk.

So we look at dilution. We look at it very, very closely. Every share that we grant for an acquisition, every share that we grant to an employee dilutes management, dilutes shareholders, dilutes our employees, and so that's how we think about stock compensation and we look at it closely. Next question, operator, please.

Our next question comes from the line of John Campbell from Stephens.

Hey, guys. Just two quick questions here.

First, on the Agent Concierge, could you guys maybe give us a brief update there? I think you've got it rolled out across the board now, and maybe if that's driving a little of the incremental cost.

Then secondly, before we get -- say good-bye to the agent count metric, just curious, Spencer, if you had to pencil it out. How many agents would you say or actually agent teams or maybe what percent roughly out of that number?

We honestly don't know. I guess a decent rule of thumb -- if I were to try to answer that question, what I would do is I would look at lead volumes internally by agent count.

So you have a decent -- you know our cost per lead. You can take our Premier Agent revenue and look at our total number of leads, so you know our cost per lead.

If you had a distribution of how much different Premier Agents are spending, a typical agent can probably respond to like, I don't know, maybe a lead every day, a lead every other day. So somewhere in the 15 to 30 leads a month from us. If they're getting more than that, then the leads are probably going to multiple agents within that advertiser's team.

And so that's how we would look at it if we were trying to answer that question. But we actually don't know.

So Premier Agent Concierge is a service where if agents spend at a particular spend level or we do other ways to entice people into Premier Agent Concierge. But it's a program where we respond to the leads on behalf of the agent, and then when we reach the consumer we transfer the consumer over to the agent. It is a significant cost for us.

I don't believe that we've said for competitive reasons how much we're spending or how much of our revenue goes through Premier Agent Concierge. But it's a good example of the type of investment that we make that hurts near term profitability today, but we believe improves total margin and total revenue down the road.

So for competitive reasons, we don't give more insight into Premier Agent Concierge. Operator, next question, please.

Our next question comes from the line of Neil Doshi from Mizuho.

Great, thanks for taking my questions. Spencer, if I could ask a couple. One, can you give me an update on the Direct program for promoting agents on Facebook, how that's been trending and whether you're looking at other social sites for promoting agents?

And then secondly on the guidance for mortgages, it seems to imply a pretty steep deceleration. Is that just based on the higher interest rate environment and maybe a slowdown in terms of lead volume on the mortgage side? Thanks.

Sure, I'll take for Agent Direct and Kathleen can take mortgage. So the idea behind Premier Agent Direct is to provide this product that helps agents brand themselves. So it's not a lead generation ad product, it's a branded ad product.

It extends on Zillow, Trulia and Facebook. It may at some point extend to other places on the web, but for now it's those three sites.

We think that it's an effective way for agents to improve their sphere of influence, their branding. We do think it helps improve their lead generation. Because when a buyer sees the ad on Zillow or Trulia or Facebook for that agent, they're more likely to click on the agent when they're looking at an active listing or trying to create a seller lead to figure out what their own home is worth.

But it's not designed to be a lead-generation product. So to answer your question, for now it's just Zillow, Trulia and Facebook. Kathleen, on mortgage?

Great. So on mortgage, we have been and we expect in 2017 to continue to be growing faster than our competitors and the industry overall. Obviously, 2017 is looking like it's going to be a harder year in the mortgage industry, and we're a anticipating a decrease of -- by as much as 50% of total originations.

So that is going to impact our business. But as compared to other competitors, we're pretty well insulated from the re-fi slowdown because we are focused on purchased loans as compared to most sites that are out there focused more on re-fi which is where the real harm is going to happen in the industry. Next question, please.

Our next question comes from the line of Rodney Hull from SunTrust.

Thanks for taking the question. Two if I could. First, in the past you've discussed the impact of inventory versus pricing on your revenue growth and inventory being obviously the predominant driver.

As we think about the transition through the self-serve platform and the learnings we've had so far, can you maybe talk about the impact there and maybe whether or not price is having a greater impact or if you expect it to have a greater impact going forward through 2017? Then second, if you could discuss any early impact of the Premier Brokerage Direct product, whether or not that's impacting self serve or any early indications there? Thanks.

Sure. The philosophy behind the market-based pricing system is to -- is basically not to constrain inventory. So in theory to have inventory always be available such that an agent, Premier Agent or a Premier Broker could always buy incremental impressions and gain market share if they're willing to pay a higher CPM.

Not unlike Google AdWords that doesn't have any inventory constraints, it always allows somebody to outbid other market participants in their auction. So to answer your question, pricing is more important than inventory in the new model.

Premier Broker is a -- it's not really an ad product as much as it is a selling tactic, wherein we sell -- we essentially sell Premier Agent to brokerages and brokerages in Premier Broker act like teams. Where i.e. they generate leads and then they pass those leads to their agents and they charge agents a referral fee. In the same manner as a team lead buys impressions from us, generates leads and pass those leads to individual agents and charge them a referral fee or a split for generating that commission.

We have had good uptake in Premier Broker, and it's early but I'm optimistic about it. Operator, next question, please.

Our next question comes from the line of Chris Merwin from Barclays.

All right, thank you. So for other real estate revenue you guided to another year of healthy growth there in 2017. So could you talk about which of those businesses will be the bigger drivers of that growth? And is it also fair to say that this segment is in investment mode in 2017, and therefore maybe another source of near-term drag to margins?

And then secondly, in 2016, it looks like price per lead declined a bit. But now with self serve, obviously it has the potential to be a much bigger driver of growth in the future.

So for that metric in particular, I guess you've got extra services like seller leads and also higher CPMs for buyers leads that are both drivers. Can you help us think about which of those levers might be a bigger driver in the future? Thank you.

Sure thing. So in the other real estate category, we talk a fair amount about rentals, and we expect the rapid growth that we've seen in rentals to really drive other -- the other real estate category pretty effectively. We've made a ton of progress in rentals, there's still a ton of progress to be made. But we think there's high potential in that business as part of the other revenue category.

In addition, you're correct that the other businesses tend to be in investment mode, as you called it. I think we think about it more just in terms of them being earlier in their life cycle, which of course means that we are still investing. But high potential there, and we like the direction that all of those businesses together are taking and each of them is growing at a pretty impressive rate.

Some are further along than others. As Spencer noted, we just announced the new construction business so that one is in earlier stages.

In terms of price per lead as a driver of growth, it's a mix of things that will continue to help us in that area. You pointed out different products driving that, that is true. But the self-serve model you itself will be really helpful there because it enables us, as Spencer noted before, to really align our own revenue with the agent's success and enable the agents who value the leads more highly to spend up to their own ROI.

Next question, please.

Our next question comes from the line of George Askew from Stifel.

Hey, there, thanks for taking my question. My question is fairly basic I think regarding the mechanics of the new Premier Agent auction-based pricing system and centers on pricing. When I hear the word auction, I think bidding. However, it's not clear to me what the agent is actively bidding on if each agent pays the same price for an impression based on what all agents are willing to spend in a market.

It seems that the agent is bidding for a share of the impressions in a zip code, but the agent does not control the price he pays for each of those impressions. And it begs the question, how is the pricing determined and can Zillow manipulate or have a wholesale pricing change overnight?

How do you influence the pricing? I just want to understand that part of the model. Thank you.

Thanks, George. I think you understand it better than you're giving yourself credit for. You described it perfectly, actually.

They are essentially bidding for a share of the impressions. So if there are -- if Kathleen and I are the only two agents in a zip and we each want to pay $100 in that zip code, we're going to each get half of the impressions. And now along comes RJ and he puts $100 into the pool, and he gets a third of the impressions and I get a third and Kathleen gets a third.

Now Kathleen says, hey my ROI here is great, I want to up my spend from $100 to $200. Well now she gets two-fourths of the impressions, and RJ and I were just diluted. And now I come along and put $10,000 into that zip code, and now I'm getting 90% odd of the impressions in that zip and everybody's CPM just went up, and my share went way up and Kathleen's and RJ's just got diluted.

And now my ROI is too low and I pull my spend back, everybody gets undiluted, et cetera, et cetera. So that's how it works.

And to answer your question, can we put our finger on the scale I guess is your question. And the answer is yes we can, there are some ways to do that. And we of course test lots of different things, but in general it describes the way -- it works the way I described it. Operator, next question, please.

Our next question comes from the line of Mark May from Citi.

Thanks a lot. Thanks for taking my questions. I think I had two as well.

The first one, and I'm sorry if you addressed this already. When thinking about your revenue outlook for the year, is the way to think about your underlying views around lead growth is that it will -- that it's -- that your revenue growth outlook is a good proxy for that?

And then another question has to do with the dynamic between existing and new agents. Follow me along please, but I think in Q3 your lead growth was 40%. It slowed to 33% in Q4. I noticed total sales to existing agents, the growth there remained relatively stable.

So trying to understand the dynamic there. Is that because the share from -- the share of leads from existing agents increased sequentially and that's what drove that? Because I noticed also that didn't seem to make a lot of sense to me because the bookings percentage from existing actually fell sequentially.

So I was a little -- trying to make sense of how the revenue from existing agents growth could remain relatively stable sequentially? Yet these other dynamics, both percent of bookings and lead growth were decelerating? Sorry for the long-winded question.

So on the second one, let us have RJ just follow up with you offline so that we have all the numbers at our finger tips and we can try to walk you through it. You cut out for a second on the first one, I think you were asking about the revenue growth, EBITDA margin tradeoff. But I couldn't quite hear the question.

Yes, sorry. Just simply, is the way to think about your outlook for lead growth, is it roughly a proxy, is revenue growth roughly a proxy for how you're thinking about your lead growth this year?

Okay. Yes, so, well, I guess I'd say at a minimum. If you look at -- if you just take our 2015 PA revenue and our 2015 leads which we've given you and our 2016 PA revenue and our 2016 leads, you'd see that our cost per lead went down a little bit year over year. So obviously, we would like over the long term we believe as we can improve lead conversion, people ought to pay more on a per lead basis because it's more likely to generate a commission.

So over the long term, I would expect to see cost per lead to go up as each lead becomes more valuable. And further to the discussion about seller leads to I think it was Lloyd's question, as we drive a larger portion of our total leads our seller leads then that also should be an accelerator to the cost per lead number. So anyway, so yes, that's how I think about cost per lead and lead growth relative to Premier Agent revenue.

I think is there another one -- operator, there's one more question, please. Mark, we'll follow up with you on our second point. Sorry, go ahead, operator.

Our final question for today comes from the line of Jason Helfstein from Oppenheimer.

Thanks, I'll just ask one. Going back to the investment in R&D, how do you think a product functionality differs as you're dealing with either different transaction sizes or different volumes of business on a given agent? So meaning there's obviously different levels of agents and brokers in the business, and you've obviously been really trying to focus on the best producing.

But just talk about the dynamic. Did you need different products to serve different levels of the market? Thanks.

Thanks, Jason. Yes, it's a good question.

For example, in November at our client -- our Premier Agent client event, we rolled out a set of new features which made our Premier Agent app much more valuable to teams than it was before. It had better lead routing, better team rules, it had a team leader functionality that was different from team members. And there's still a lot more to come in that regard.

So yes, absolutely, different user personas have different needs. And likewise in the case of the Dotloop functionality, it has different feature sets for different users.

The Premier Agent app today is the most widely used real estate CRM in the industry, or we believe it to be the most widely used real estate CRM in the industry. It's free. It's free for Premier Agents and for non-Premier Agents, and it provides a great way for agents to receive leads and to try to turn them into commissions, into business.

But it will get better. There is a lot of functionality that we're going to be building in 2017 that will make the Premier Agent app even better. And we think as we continue to improve on that and it becomes more and more central to the ecosystem in the real estate industry, that will be a boone to our Premier Agent business down the road.

Kathleen had a point of clarification on a stat from earlier. Go ahead, Kathleen.

Thank you, Spencer. When I was discussing mortgages earlier, I believe that I said there would be 50% overall decline in loan originations. That's re-fi originations.

So thank you for joining. There I guess were no questions on our earnings call from Twitter. So I don't know if that provides a read through for you on Twitter's upcoming results or their audience or engagement.

Next quarter, we'll probably take questions from Snapchat. But thank you for joining the call and we will talk to you again next quarter. Thanks, everyone.

Thank you all.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.