Zillow Group Inc (ZG) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Zillow first quarter 2013 earning conference call. All this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's conference may be recorded.

Now my pleasure to turn the floor over to RJ Jones. Sir, the floor is yours.

Thank you.

Good afternoon, and welcome to Zillow's first-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 future events, and the future financial performance of the Company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements made in the press release and on this conference call.

These risk factors are described in our press release, and are more fully detailed under the caption risk factors in our annual report on Form 10-K, for the year ended December 31, 2012, and in our other filings with the SEC. In addition, please note that the date of this conference call is May 7, 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 the 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 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 investors.zillow.com. A recording of this call will be available after 8 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 new historical exhibit of our business metrics will also be available on our website.

After management's remarks, we will host a live question-and-answer session. During the Q&A, we will entertain questions via Twitter and Facebook, in addition to questions from those dialed into the call. Individuals may submit questions via Twitter using the hash tag ZEarnings to the @Zillow Twitter handle, or to the official Zillow Facebook page.

I will now turn the call over to Spencer.

Welcome.

Today, we will be discussing our first quarter 2013 performance. I would also like to extend our thanks to those of you who joined our first-ever investor day in March. We were grateful for the opportunity to speak at length with you about Zillow's strategy and results. To start off, I will briefly cover a few highlights from the quarter. Next, I'll give an update on our priorities for 2013, which consist of, 1 -- growing our audience, 2 -- growing our Premier Agent business, and 3 -- growing our emerging marketplaces. Then, Chad will provide more detail on financial results, as well as give our guidance for the second quarter and full year.

The first quarter of 2013 was a break-out one for Zillow with record results in traffic, revenue and growth in our Premier Agent and Mortgage businesses, as well as the launch of our Home Improvement business, Zillow Digs. During the quarter, we attracted more than 50 million monthly unique users for the first time, widening Zillow's category leadership, and marking a significant milestone. Traffic growth accelerated even more in April, hitting more than 52 million unique users, and year-over-year growth at 63%.

Total revenue for the first quarter reached $39 million, up 71% year-over-year, and ahead of our outlook by $2.5 million, driven primarily by the record addition of 4,557 Premier Agents in the quarter. This was the largest ever net quarterly adds for our Premier Agent business. As a result of strong sales, EBITDA reached $5.1 million, as most of the revenue upside flows through to our bottom line. We are pleased with our fast start to the year.

I'll turn now to our priorities for 2013, starting with growing our audience. As I mentioned, we reached a significant landmark in March and April, as we exceeded 50 million monthly unique users across Mobile and Web. For perspective, it took us four years from our initial launch to get to 10 million monthly unique users. Now, just three years later we've surpassed 50 million.

The emergence of mobile as the medium of choice for real estate consumers continues to catalyze our Business. We invested in mobile ahead of the curve. As a result we have meaningful market leadership. Today 55% of visits to Zillow occur on mobile devices, which jumps to over 60% on weekends. In April alone, more than 241 million homes were viewed on Zillow mobile, or 93 homes per second. According to Experian, which measures mobile web traffic for the category, Zillow's mobile web audience is more than twice the size of the nearest competitor, and more than 4 times the size of the third-place competitor. And on the desktop, we continue to widen our lead as the largest real estate website with accelerated growth in the first quarter.

According to comScore, Zillow's unique users grew substantially during the quarter, while the nearest website competitors stayed, essentially, flat. What ultimately attracts such a large audience and drives our growth is a maniacal focus on consumer products, starting with our living database of more than 110 million homes. We've made significant strides in the past year, to strengthen this database, with more than 1 million listings that often can't be found in MLS or on other real estate websites. For example, buyers on Zillow can search and find homes for sale by owner, foreclosed homes and pre-foreclosures, and make me move listings.

Access to more potential homes for sale is incredibly important to buyers in this inventory-constrained housing market. We have also made significant improvements in the timeliness and accuracy of traditional listings inventory, including updating hundreds of MLS feeds multiple times each day, and adding dozens of new brokerage partners to our Zillow Pro for Brokers platform, which improves listings accuracy.

Additionally on the product side, we recently upgraded and relaunched our mobile apps, on IOS and Android, with substantial enhancements to the user experience, including a complete redesign on IOS, and a 3-D map shopping experience on Android. Across seven mobile platforms, we now have 24 apps for consumers and professionals that address all points in the life cycle of homes, and span our family of home-related brands.

In addition to great product, distribution partnerships are important to growing our audience, and solidifying Zillow as the destination for home shopping, and a testament to our value proposition as new partners continue to seek us out. Recently we launched three new distribution partnerships. First, we launched with HGTV's FrontDoor.com, whereby we powered their real restate search. Second, we were selected by Google to be a launch partner, and are currently their only real estate partner for their new predictive search experience on Android phones called Google Now. and most recently, Zillow began powering real estate information and search on AOL's Patch, a network of over 900 community news and information sites visited by 13 million unique users each month.

These new partnerships, along with the Yahoo-Zillow real estate network, provide unparalleled reach for our advertisers and Premier Agents. Note that the 50 million unique user stat does not include the full reach provided by those partnerships, as we do not include Yahoo or other non-Zillow owned sites in that metric. With continued product improvement and broadening distribution, we've been able to continue our substantial audience growth and widen our category leadership. However, as we explained in our investor day, we see a significant opportunity in front of us to grow brand awareness and traffic.

While we are the largest web and mobile player in our category, our unaided brand awareness still is only about 12%. Put another way, 88% of Americans can't come up with Zillow when asked to name a real estate related website. And 27% of Americans cannot name any brand at all, not one. This brand white space is unmatched in just about any other internet or mobile category. Seizing this opportunity, we began our first limited test of brand advertising late last year, specifically television advertising, to understand what impact this could have on our Business. The initial test showed promising results, so we ran a larger, more involved test in the first quarter of this year, increasing the scope and scale of TV, and testing other complimentary brand advertising channels.

We measured this test with the same analytical rigor we use on all areas of our business, and saw statistically significant increases in high value traffic, and home shopper engagement, all the way down our measurement funnel, including a halo affect of making all our other unpaid and paid marketing activities perform even better. Based on our Q1 results, we believe convincingly that advertising is working for Zillow. It is driving increased brand awareness, which creates long-term benefits, and it is increasing the quality and quantity of leads we provide to our advertisers, which yields near-term benefits.

The test's results, in addition to our strong organic momentum and business optimism, give us the confidence to step on the gas to go after that brand white space. Therefore, we have made the decision that starting in the second quarter and through the remainder of the year, we are almost doubling our planned advertising spend across a number of channels, increasing it by an additional $10 million to $15 million this year. We will also be taking up our full-year revenue guidance from a mid point of $167.5 million to a midpoint of $180 million. While this increased investment directly impacts our EBITDA levels in the near term, we believe firmly that advertising will allow us to achieve a greater revenue scale more rapidly.

Now on to our second priority for 2013, growing our Premier Agent business. We made excellent headway during the quarter, adding nearly 4,600 new Premier Agents, for a total of more than 34,000 subscribers. Also, we completed the transaction of selling a fixed number of impressions. Our team executed this transition to align our inventory with our traffic growth. So, now when traffic increases we have more impressions available to sell. Next, to further benefit our Premier Agents, we just released two frequently requested enhancements to the free CRM we provide to Premier Agents.

First, with our new lead forwarding rules, agents can set up automated responses and e-mail rules to better manage their leads. Next, with our new e-mail functionality, Premier Agents can keep their clients and potential clients informed with market updates, and save search notifications that automatically send new listings as they hit the market. These enhancements to our CRM, and the individualized websites we provide for free to Premier Agents were made possible by our acquisition of Diverse Solutions, which now connects to over 390 MLSs, up from about 130 MLSs at the time of our acquisition 18 months ago.

Looking now at our third priority this year, growing our emerging marketplaces, we continue to gain meaningful traction in our Mortgage and Rentals businesses. In Zillow Mortgage Marketplace, we have made exciting progress for both consumers and mortgage providers. This quarter, we integrated Zillow Mortgage Marketplace into all of our Zillow mainline mobile real estate apps. Mobile now accounts for 31% of Zillow Mortgage Marketplace revenue. We now also offer mortgage quoting for underwater borrowers seeking refinancing. This new feature is unique to Zillow, and especially valuable to the large number of homeowners with negative equity, which Zillow economists estimate to be 27% of homeowners with a mortgage.

Zillow is now the only destination for those consumers to find refi quotes for underwater borrowers, which is beneficial to both our consumer and professional audiences. Next, in our Rentals Marketplace, during the quarter, we launched new rentals apps on Android and iPad that were both featured in their respective app stores, with the new Android app supporting Spanish language. Rental shopping skews heavily toward mobile, and our investment there is paying off. On listings count, the majority of our more than 600,000 rental listings are now sourced via direct relationships with property managers and landlords, which differentiates us from competitors.

We remain on track for great focus on monetization in our rentals marketplace, late this year and into 2014. We anticipate a hybrid approach, tailored to the different segments of the rental market, that both encompasses the sale of advertising, as well as software as a service technology tools. Finally, the entry into our newest marketplace of home improvement has gone well so far. After it's launch in January, during which Apple featured the Zillow Digs app, we have seen terrific uptake in user generated content, with more than 76,000 photos added by our community of users, and 80,000 content boards created. Notably, the Zillow Digs iPad app experiences 10 times the page views per session versus the desktop, a strong validation of our mobile-first strategy. We are diligently working to grow usage of Zillow Digs, and will focus on monetization down the road.

In each of our four distinct, yet interconnected marketplaces, real estate, mortgages, rentals and home improvement, Zillow is making significant investments now, which plant seeds for the future. We are digging our own wells here, rather than outsourcing these additional verticals to third parties, and going for short-term profit. We are playing the long game. Similar to our increased commitment to advertising, we're making investments in each of these four marketplaces which delay short-term margin in favor of long-term value creation.

First, investing in software tools for our core Premier Agent marketplace, makes us more valuable to our premier agents, increases advertiser retention, and allows us to achieve a larger portion of the almost $10 billion a year agents spend to market themselves. Second, investing in our emerging marketplaces takes our addressable market from around $10 billion from agents to $35 billion, including mortgages, rentals and home improvement. Third, investing in advertising helps us achieve greater traffic and mind-share leadership for consumers and advertisers. When you look across other online media companies, category leaders are able to achieve significant revenue leadership because they become a must-buy for advertisers.

Q1 was a break-out quarter for Zillow, as we reached new heights in our audience and revenue, and continued to extend our lead on mobile and web. We remain focused on our three strategic priorities this year of growing our audience, growing our Premier Agent business and growing our emerging marketplaces. We are very pleased with our progress, but are still very early with much to do.

With that, I'll turn the call over to Chad.

Thank you, Spencer.

First quarter traffic grew 47% year-over-year to 46.7 million average monthly unique users, and peaked in March at 50 million. As Spencer mentioned, traffic continued to grow even more into April, with year-over-year growth accelerating to 63% during that month. We posted Q1 total revenue of $39 million, a record, and up 71% year-over-year. One modeling note, remember that growth in our audience does not immediately translate to new Premier Agent revenue, rather it works gradually into our results.

As traffic grows, and becomes sustained, new impression inventory is created. New inventory can then be sold in subscriptions to existing or new Premier Agents, which then becomes recognized, and impressions are delivered over the life of the contract and beyond. Compared to our outlook, we exceeded the $36.5 million midpoint of our range by $2.5 million, driven primarily by out performance in our marketplace category. Marketplace revenue reached $31 million, representing 87% year-over-year growth, and 80% of total revenue. To provide increased transparency, and for a better understanding of our Business, in our SEC filings, starting with this reporting period, we are now presenting two sub categories within the marketplace revenue category. This will be real estate and mortgages.

Taking a deeper dive into our real estate marketplace revenue, made up of Premier Agent, Diverse Solutions and our Rental businesses, revenue was $26.1 million in the quarter and grew 84% year-over-year. The primary driver of growth was our Premier Agent business, where we added 4,557 Premier Agents in the quarter, with a net increase of 15,414 Premier Agents from this time last year. Average monthly revenue per subscriber, or ARPU, was $259 in the quarter, and represented a 2% decrease from last year, and a 3% decrease sequentially from the prior quarter. The slight ARPU decline is primarily related to a record number of new ads, as new Premier Agents typically start their subscription levels lower than our average, as well as timing of many net new ads later in the quarter.

As a reminder, the ARPU metric is an output, and not something by which we run the Business as our inventory model allows agents to purchase impressions at an amount based on their budget and at prices that are determined based on local market dynamics. Moving now from Real Estate to our Mortgages marketplace, which consists of our B-Z Zillow Marketplace and our B-B Mortech business, revenue reached $4.9 million and grew 104% year-over-year. During the quarter, 4.5 million loan requests were submitted to Zillow Mortgage Marketplace, growing 74% over last year's figure. The vast majority of the loan requests submitted were for purchase loans, as opposed to refinancing.

Looking now at display revenue, revenues were $7.9 million, up 27% year-over-year representing 20% of our total revenue. Our Display business continues to complement our marketplace strategy, and delivers a strong contribution margin. Moving on to our expenses, total operating expenses were $42.8 million in the first quarter, as compared to $21.1 million in the same quarter last year. The increase in expenses versus last year is primarily due to, 1 -- growth and headcount related expenses reflecting an increase from 380 employees to over 600 employees in the quarter, and 2 -- increased advertising investments. Our OpEx increase year-over-year would have been closer to 80%, excluding the advertising increase.

Now, I'll touch briefly on each major expense line item starting with cost of revenues. For the first quarter, our cost of revenues were $4.1 million or 11% of revenues, as compared to $3.4 million, or 15% of revenue in the same period last year. The leverage reflects higher levels of engagement of Zillow owned and operated properties versus our partners, which is accounted for in our revenue sharing agreements, and that is combined with a fixed cost of operating our platform. Next, sales and marketing expenses, which include our Premier Agent sales team, marketing team and advertising activity were $19.8 million, or 51% of revenue, as compared to $8.3 million, or 36% of revenue, in the same period last year.

A large part of the variance from last year resulted from our increased investments across advertising channels to support our long-term objectives, which resulted in a broadly positive signal related to the growth in our audience, greater shopper engagement, and increased buyer activity. Technology and development costs were $10.6 million, or 27% of revenue, compared to $5 million, or 22% of revenue, last year. The increase in expenses was driven by the increase in our engineering team headcount, and ongoing product initiatives in both our organic and acquired operations.

Lastly, G&A costs were $8.2 million, or 21% of revenue, as compared to the same period in the prior year at $4.4 million, or 19% of revenue. This is driven by incremental headcount, professional services and facilities to support our growth. Turning now to profitability. Our EBITDA for the quarter was $5.1 million, representing 13% of revenue. This result exceeds our guidance midpoint by $1.9 million due to the beat on revenue. On a GAAP basis, net loss for the quarter was $3.7 million, representing a GAAP loss per share of $0.11 for basic shares of 34 million. We ended the quarter with approximately $204 million in cash, cash equivalents, as all short term and long term investments. We currently have no debt and our credit lines remain untapped.

Now, we will discuss our outlook starting with the second quarter of 2013. In the second quarter, as a result of our successful transition to fixed impression-based contracts and projected growth in our mortgage and display businesses, our revenue is expected to be in the range of $43.5 million to $44.5 million, representing 58% year-over-year growth at the midpoint of the range. Our EBITDA for the second quarter is expected to be approximately $750,000 to $1.25 million. During the second quarter, we anticipate an incremental investment in advertising of $4 million to $5 million above our previously planned levels of around $5 million, which directly impacts our EBITDA versus our prior plan.

Looking closely at the sales and marketing item in the second quarter, which encompasses all of our sales, marketing and advertising activity, we anticipate recording total expenses of $34 million to $35 million for the period. Included in this line will be a one-time non-recurring stock-based compensation charge of approximately $7 million, due to an accelerated provision related to a prior acquisition. While this non-cash expense does not impact our projected EBITDA results, it does affect the amount of sales and marketing expense recorded in our income statement. Looking at the projected reconciling figures to EBITDA, total stock-based compensation in the second quarter is expected to be in the range of $10 million to $10.5 million, and depreciation and amortization expenses are expected to be in the range of $5 million to $5.5 million. Although we do not provide a GAAP EPS outlook, we expect a basic weighted average share count of approximately 35 million shares for the quarter.

For full-year 2013, we anticipate total depreciation and amortization expenses to be in the range of $23 million to $24 million. Share based compensation to be in the range of $22 million to $24 million, and CapEx and capitalized data content to be in the range of $10 million to $13 million. We expect fourth-quarter 2013 basic and diluted share counts to be 36 million and 39 million weighted average shares respectively. Moving to sales and marketing, we are projecting approximately $96 million to $98 million in total expenses for the year, which includes approximately $3 million to $4 million of stock-based compensation, but excludes the one-time stock charge.

Previously we provided an outlook of 70% year-over-year growth in this expense line, which translated into a mid-$80 million range for these expenses, inclusive of the stock-based compensation. The increase from a mid-$80 million range to an upper-$90 million range is the incremental ad spend we've already discussed. Based on our performance in the first quarter, in addition to our Q2 guidance, we are raising our full-year revenue guidance, which we now expect to be in the range of $178 million to $182 million, representing 54% year-over-year growth at the midpoint of the range. Consistent with recent results, we expect a favorable mix shift from display to marketplace revenue of a few percentage points to continue year-over-year.

As a result of our strategic decisions on how we will run the business, we now expect approximately $20 million in full year EBITDA. Looking back to February, when we first provided our outlook for 2013, we projected that EBITDA, as a percent of sales, would be flat to down compared to last year. From our previous revenue guidance, this translated into low to mid-$30 million range for EBITDA. Most of the reduction in the full-year 2013 EBITDA comes from the decision to increase advertising by $10 million to $15 million.

In conclusion, we are quite pleased with our first quarter numbers. We achieved record results in traffic and revenues, widened our traffic lead versus our competitors, and began to step up our strategic investments in the long-term. We are still in the very early days, as we pursue the massive market opportunity in front of us and we remain focused on growing our audience, growing our Premier Agent business, and growing our emergent marketplaces on the mobile and on the web. Thank you for your time.

With that, we would like to open up the call for questions. I'd also like to remind you that for the first time, we will be considering questions submitted via Twitter with the hash tag ZEarnings.

(Operator Instructions)

And it looks like our first question will come from the line of Heath Terry with Goldman Sachs.

Great, thanks. I appreciate taking the question. I was wondering if you could give us a sense of what you are seeing? How much of the traffic acceleration you feel like you are seeing is from the increase in marketing spend? Obviously with the plan to step things up further from here, would suggest that it is a significant contributor. And, as you think about the sustainability of, or where you want margins to go longer term, whether you expect this to be a permanent shift in what you see the target model for Zillow being, or is this an investment phase that has more of a limited time horizon to it?

So, we've been testing advertising now for two quarters, and I can say, unequivocally, it has near-term advantages and long-term advances. So, the near-term advantages are we've proven in statistically significant way, to our satisfaction, that it grows audience, it grows shoppers, so a specific type of audience. It actually grows the lead volumes to Premier Agents and it increases the affinity that Premier Agents have for Zillow because these agents can't afford TV advertising on their own and so they view Zillow's ad spend as a way for them to get leverage from their own marketing investment and ops. The longer-term advantages, we believe, are brand awareness, which will drive revenue growth acceleration and margin expansion down the road.

The question of why do it now, why double down now, why step on the gas now, is clearly because of the brand white space. Because there is just this huge amount of running room in front of us, and we think that there is an opportunity now to chase it quickly. We also feel that we have the P&L to support it. We are taking profit, and reinvesting in order to push out margin expansion. So, even with this stepping on the gas, we're still looking at around $20 million in full-year EBITDA, still quite profitable. But in the near term, we have a P&L to support this type of investment.

The second part of your question is how much of the near-term traffic acceleration is from advertising versus something else in the business. I'll give you four numbers here. Year-over-year unique user growth, January it was 45%, February was 40%, March was 55%, April was 63%. So there is clearly something going on in the business here, where traffic is growing quite rapidly. Part of that is driven by advertising, part of it is product development, part of it is growing brand awareness and PR, part of it is surely macro housing. It's a combination of different things, but advertising is definitely part of that.

The last part of your question is about how does this tie back to a long-term model, and is this a near-term investment or should we expect this odd ad infinitum. I'd say, we control the leverage of the business. So, just to take this driving metaphor one step too far, I guess. If we are stepping on the gas, we have two hands on the steering wheel, we have a third hand on the emergency brake, and we're steering intently at the road in front of us. So we are choosing what margin to have in Q2 and for full-year 2013 because of what we've seen with advertising over the last two quarters, and the size of the white space in front of us.

I can't give 2014 numbers right now. But I'll say, it is up to us. And we will keep making that decision on a quarter by quarter basis, and keep investors updated. I still think that the target model that we've laid out, dating all the way back to the IPO, and again, at the Investor Day a couple of weeks ago, is the right margin framework for the business, that there is, at $500 million in revenue we should have EBITDA margins in the 40% to 50% range. And we may choose to do that, we may choose to have higher margins than that, we may choose to have lower margins than that at that point. Depending on what we see in front of us on revenue growth rate, but it will be our choice at that point in time.

Great. Thanks, Spencer.

Mark Mahaney with RBC

Hey, thanks, I wanted to ask three questions, please. First, how much of the growth do you think is there a way to attribute to the recovering housing market, in other words, can you see in those geographic areas where housing prices seem to be building up, if you are seeing greater traffic growth? Second, how much of your increase spend this year is due to a sales force build-out, or is it really all primarily driven by an advertising ramp-up? And then third, any new thoughts on your ability or willingness to charge a premium for mobile solutions for real estate professionals? Thanks a lot.

Thanks, Mark. I'll take macro housing and Chad will take the second two. I think of macro housing as nice gravy for us. It is a tail wind. So we grew incredibly quickly through the downturn, we're growing incredibly quickly through the upturn. And we're benefiting from it, because agents are feeling more bullish about their prospects and choosing to invest more in advertising, but I don't think it is what is driving the business. I think it is gravy is the way I would describe it. Chad, on sales headcount and marketplace revenue?

Yes, so if you back out the assumptions that we gave you on our prepared remarks, with respect to the investments we're making in advertising, we're continuing to also step on the gas in terms of building out the sales platform, adding sales heads, sales support, account management across both of our teams here in Seattle, and in Orange County as well. So there is a significant number of sales heads that we will continue to add through the year, in the third and fourth quarter. So, we are in no means stepping off our investments there.

And then with respect to your last question in terms of charging premium for mobile. Well, I think that's really already baked into the pricing that we charge for our Premier Agent subscriptions. We take into consideration the housing values, local market dynamics, contact rates, submissions and everything we know about mobile in our pricing. And all our agents, in fact, are part of our mobile platform. So, we're the one platform out there where we can say 100% of our agents are mobile.

So we will take two questions from Twitter now. First one from Michael Graham at Canaccord Genuity which is @CG_internet. Michael asked in our mortgage business with 4.5 million loan requests and $4.9 million in revenue, can you comment on lender quote density and CPC pricing. So on mortgage, loan requests in April were 1.64 million, which was up 78% year-over-year, that was an acceleration from March, which was up 75% year-over-year. So huge borrower growth, up mid-70s year-over-year. And loan quotes continues to grow incredibly rapidly also. So in March, borrowers were seeing around 30 loan quotes per loan request. So for a typical borrower that is used to online mortgage shopping, where if they go to a retail bank for example, they'll essentially see one quote from that bank on the bank's website, or if they go to a traditional mortgage shopping site on the web, they might see three or four, we were showing over 30 in March. So Zillow Mortgage Marketplace is a dramatically better way to shop for a mortgage than other websites or offline mortgage shopping experiences.

On the CPC part of it, average CPC is in the $3 to $4 range. I would say at a high level, strategically, we're still not in CPC maximization mode. If you think of each of our four marketplaces, real estate, mortgage, rentals and home improvement on a spectrum in terms of -- at one end of the spectrum in full monetization mode and the other end of the spectrum Zillow Digs, not at all in monetization mode, mortgages is still in still in the mid-game, I would say, in terms of maximizing monetization. For us, building marketplace liquidity, growing borrower awareness, building out software tools for mortgage lenders through our Mortech acquisition, those are as important or more important strategically than milking the mortgage marketplace for every piece of monetization.

The next question from Twitter, and then we will go back to the call. From Brian Bolan with Zacks. The under water mortgage quotes, are they priced higher or lower than regular mortgage quotes? So, we price the CPCs for mortgage quotes realtime based on the borrower's circumstance. So, for example, if it is a refi where the borrower has a ton of equity and a great credit score, we're going to price that at a very high CPC because if we price it at a low CPC, we would have hundreds of lenders quoting back. And if it is a purchase loan with very little money down and a low credit score, we will price it at a very low CPC, perhaps a zero dollar CPC, in order to entice as many lenders as possible to return quotes to that borrower. In the case of underwater, I'd say in general, the CPCs are going to be lower because we are trying to entice lenders to quote, and those are generally more complicated loans to close. So we will have a lower CPC than at the extreme, a refi with a lot of equity in the home. Operator, we will go back to the call now, and then we will go back to Twitter a bit later.

Dan Kurnos with Benchmark Company.

Good afternoon. A point of clarification. Does the guidance that you've now provided include all of the benefits of that increase in spend, and if so, it seems to imply a declining ROI, at least initially, on your marketing spend since you seem to get some pretty good operating efficiencies in Q1. So maybe your thoughts there? And then secondly, is there any concern that as you continue to add all this traffic that conversion rates might decline, and that might ultimately put pressure on pricing? Thanks.

I'll take the first one, and then I may need a clarification on the second one. So, the short answer is yes, the updated revenue guidance of $180 million at the midpoint assumes our increase in advertising. It is important to understand that this is not an eCommerce funnel, in terms of advertising. If an eCommerce company spends on advertising and grows traffic, and then their transactions at the bottom of the funnel, and they have some profit from it. For us, when we advertise, we get more impressions in a given zip code. Well now there is more inventory to sell. The sales team has to go sell those impressions either to new Premier Agents or existing Premier Agents, and that is on a six-month contract, and then the revenue flows through on a subscription basis.

So it is not quite as dramatic a flow-through, or not as immediate a flow-through, I'd say. The primary reason that we are advertising is to grow brand awareness for the Company over the medium term and the long term. And we think that will make Zillow a must-buy for real estate agents and mortgage lenders one, two, three, ten years from now. So it is terrific to have near-term benefits from increased audience, increased shoppers, increased contact volumes and better affinity between advertisers and Zillow, but it is really more about the medium term and long term, and that's why it is not a dollar for dollar increase between ad spend and revenue, for example. On the second question, Chad did you -- ?

Yes, I think what you are trying to get at is what we see, is there going to be any compression in terms of conversion rates. I would just say that conversion is really a function of how well these Premier Agents work the contacts that we send them. It's about developing a systemized approach to the platform that we give them in terms of their subscription. What they do with their Premier Agent website, how they use the CRM features. And, we're continuing to invest very heavily in pro tools and Spencer outlined some of those investments and features that we laid out and released in the quarter, to help Premier Agents do a better job in converting those contacts to closed transactions. So no, we do not expect that conversion rates will decline as a function of increased advertising.

James Cakmak with Telsey Advisory Group.

Thanks. Could you comment on the broader strategy on the advertising, in terms of the markets that you want to target? Is this across the board essentially, in every market, or are you trying to raise awareness in certain strategic geographic areas where relative traffic may be lower? And then, perhaps if you can comment on the quality of that traffic? Are you seeing the engagement rates equal or higher than the traffic that you were getting before the campaign began?

Thanks, James. It is national advertising. And it is because there is this huge opportunity to raise brand awareness. Yes, we are measuring, and pleased, very pleased, with not just traffic that advertising is driving to us, but the type of traffic. Home buyer traffic likely to contact agents, home shoppers, people in the purchase path, people that want to talk to Premier Agents to help them buy or sell a home, and so, yes, yes.

We will do one question from Twitter from @Wally at Seeking Alpha asked about the total addressable market for agent advertising. So, we talked about this a little bit at Investor Day. We look at TAM for agents three ways. We look at it in terms of the number of agents in the industry, and what our penetration is among Premier Agents. We look at it in terms of what the number of sides are of homes that sell every year, and what percent of those Zillow is responsible for connecting buyer or seller with agent. And then we look at it from a dollar standpoint, which is how much do agents spend on advertising and what is our share of that. By all three of those measures, Zillow is in the 1% to 2%, maybe 3% range, depending upon turn assumptions around the map and the size of those markets. Having spent a lot of time thinking about it, I think the best way to look at it is on a dollar basis.

And just to give you the highlights of that funnel, real estate agents in the US help consumers sell about $1.2 trillion in residential real estate. They collect $50 billion to $60 billion in commissions each year, and they spend $6 billion to $10 billion, or 10% to15%, of that advertising themselves, and advertising their listings. That is the market that Zillow goes after, and our Premier Agent business, in the $100 million annualized range, is a very, very small portion of that $6 billion to $10 billion in total spend.

Next question was from Shawn Rassouli, Internet Analyst with Needham via Twitter. He writes consensus revenue estimates for marketplace imply 9% quarter-over-quarter growth. Traffic is up 17% quarter to date, any reason why under new impression-based model revenue marketplace revenue growth shouldn't keep pace with traffic growth?

Yes, I think I'll take that one, Spencer. So, as I mentioned in my prepared remarks, increased traffic from the investments that we're making, from organic investments that we are making in the product, increase our impression inventory. It increases our capacity. We then have to go out and actually sell that inventory to existing or new Premier Agents. So the revenue recognized, as a result of growing our traffic, you won't see until outer quarters. So in the near term, in the short-term, you will potentially see growth in traffic, as we continue to grow our feature set, grow out our emerging marketplaces, invest in our audience, outpace near term revenue growth. But, as we continue to grow out the Premier Agent platform, as we start to monetize some of these emerging marketplaces further out, you will definitely see monetization start to keep pace with or outpace traffic growth over the long-term.

Next question, operator, from the phone, please.

Ron Josey with JMP Securities.

Great, thanks for taking my questions. I wanted to ask a little bit about ARPU, which at $259, as you pointed out was slightly lower year-over-year. I understand it's an output, and newer Premier Agents typically start at lower impressions, and more agents were actually added later in the quarter. So, I'm wondering if this lower ARPU is a direct result of a shift in impressions as we trade off market share gains with pricing, and, as newer agents come on, maybe there might not be sufficient impressions for specific zip codes? The question is, wondering if this is a new level set for pricing? Then, just a second one on 2Q. Wondering if there historically is any one month that is stronger than the other in terms of net adds? And wonder if we see a similar pattern here as we did in 1Q? Thank you.

So Ron, this is Chad. We've got plenty of inventory. Moving to the impression-based pricing model lifted the ceiling over our head quite a bit with being able to realign our capacity with our traffic growth. So, it is definitely not a function of that. And ARPU, to us, is not a proxy for a pricing. Pricing is set at the local market level, it's based on local market dynamics, and really it was simply a function of adding a lot more Premier Agents towards the end of the quarter. Where you had those agents in the denominator for the quarter, but the revenue related to those agents, you aren't going to see until you get further into the contract in the second and third quarters.

And in Q2, is it linear, if there has been enough history to know that?

Yes, there is not enough history to know that at this stage, and we're not providing any sort of guidance with respect to ARPU for Q2.

Great. Thank you.

Chad Bartley with Pacific Crest.

Hi, thanks, Just a follow-up to the previous questions. So I know you do not focus on ARPU, but given the strength in the market, the successful model transition, accelerating user growth, and obviously strong impressions, how do you think about pricing power and managing pricing and potentially raising those prices during future renewal periods? How should we think about that longer term?

I would say, so we price all newly sold impressions at what we believe market price to be. When agents come off contract, we don't necessarily move them to the new pricing right away. And you've seen that in past quarters, because the team's focus is on selling new impressions, either to new PAs or to existing PAs. But, so I would say, now that we are on a fixed impression model, we won't end up again with the huge disconnect that we once had, where the ROI that someone is getting six months later, six months after buying the initial package of inventory, is dramatically different than the way we had priced it initially because traffic keeps growing.

But I'd say, your question was where is the strategy at with respect to price changes. And, I would say if faced with a strategic choice between selling new impressions to a new PA, and letting an existing PA glide by on historical pricing on a CPM basis, I would accept that trade off, for sure. Said another way, we walked through ROI at Investor Day, and we showed that we believe that most PAs who convert our leads are getting around a 10x ROI. And I said that I think long term that could probably be in the 1x to 2x ROI, i.e., there is huge pricing power over the long term. But, that is not a priority. Closing that ROI gap, if you will, increasing pricing on an individual PA basis in order to lower the ROI, that is not the priority. The priority is growing the Premiers account, and selling more impressions, rather than dramatically changing the ROI.

Okay. That's very helpful. And just a quick follow-up. Are you still offering the, I think $50, the gold plan? Is that also in there and skewing the reported ARPU?

Yes, we are. The mix of the Premier Agents in terms of the silver, gold and platinum levels, still represent they are roughly comparable to prior quarters. So, we haven't seen any huge mix changes there in terms of what we are selling. The sales team is still very focused on selling the premium platinum product from which they -- which is our subscription product, which has the most benefits. So no real changes there.

Got it. Thank you.

We will do one or two quick Twitter questions. [Connor Sen] asks with the revenue beat and guide up but an increase in spending, is it fair to say that you are pushing out your steady state EBITDA date? So, we've never said what the steady-state EBITDA date might be, so it is hard to say whether we are pushing out or not. What I'd say is we are absolutely in high growth mode, where we are choosing revenue growth and market share leadership over margin maximization. It won't be like that forever. But we are in investment mode now, where we are focused on high growth rather than margin maximization.

If we wanted to run the business at 50%-plus EBITDA margins, we could do it right away. We could stop investing in our three emerging marketplaces, we could stop investing in professional schools for real estate agents, we could stop advertising, and, boom, we'd be at 50%-plus EBITDA margins overnight. I do not think that is the right decision for the long-term value creation here, and so we are investing right now, and we're choosing the margin that we are at.

We will do one more from Twitter and then go back to the call. Brian Bolan, or BBolan and one, as the year progresses, will we see an increase in marketing for Digs? So Digs is still in product development mode, not advertising mode. So no, you are not going to see us advertising Zillow Digs. It obviously benefits from overall Zillow advertising. And we mentioned at Investor Day that, and I alluded to it on the call, that we believe TV advertising produces a halo effect for other advertising and other types of marketing, including SEO. So Zillow Digs benefits from that. But, no, in the near term anyway, you won't see Zillow Digs advertising on TV, for example. Operator, we will do a question from the line, please.

(Operator Instructions)

Brad Safalow with PAA Research.

Thank you for taking my question. I just want to walk through the calculus again on the marketing spend side. Chad, I think you said that 80%, or excuse me, without the marketing increase, OpEx would have been up 80% year-over-year. Is that cash OpEx or total?

That is total OpEx.

Okay. And then, from that spend you are talking another $5 million-plus per quarter throughout the year?

Well. Not exactly. We haven't really given you the seasoning of that spend. But, the strategy is generally to spend when shoppers are more engaged. So you should have that baked into your model. And typically we see the shopping season peak between the second and third quarters.

Okay. In terms of the creative, is it going to be solely focused on the purchase market?

Yes.

Okay. And what is the reaction from the brokerage community? I'm not talking about agents, the brokers?

I think the reaction from the brokerage community has been -- I don't know. I'm not sure there has been much reaction from the real estate industry, from the real estate brokerage community. I think individual agents love it. I don't think there has been much.

Okay. I don't know how you guys think about this, but I'm curious as to your thoughts because you are spending quite a bit of money to drive traffic growth. Given the velocity of home sales in the country, and you have 52 million uniques, I don't know how many actual individuals that is. But what is the upward bound, in your view, on traffic, and how do you think about it in terms of that upward bound, what your peers might be getting in terms of their own uniques, and how you think about your ad spend?

I don't know what the upward bound is, to be perfectly candid. There are three ways I try to answer that. One, I look internationally at countries with much smaller populations. If you population adjust then you end up at significantly more than 50 million, north of 100 million, potential users in the US. A second way to look at it is brand awareness. Nine out of ten Americans don't know Zillow. So, that doesn't mean that we can grow audience ten fold, obviously, but it does mean that there is a lot of upside from where we are. Those are at least two ways to look at it. So, the third, I do look at other companies like Yelp, for example, at over 100 million uniques. Now, they've got, I think, 10 million or so international, but there are other companies that are in adjacent spaces with 2x to 3x the traffic. So, I think we still have a lot of potential to grow audience here.

Okay, so your thought process is not around, okay, here is the adjustable market audience, it is more I'm pushing on the spend and I'm getting a favorable ROI and until that changes, you'll continue to increase marketing?

Yes, I would mostly agree with that. Let me just make one clarifying point, which is we control this on a near weekly basis. I think sometimes there is an impression that when you do TV advertising, for example, it is this lump sum that you spend on January 1, and you cannot change anything during the course of the year. So, yes, I agree with the way you just characterized it, but it is much more in our near-term control. We're looking at metrics constantly, both metrics that are near term as well as metrics that we think are leading indicators to longer-term results. And we will increase, decrease or stay the same as we go.

Thank you for the color. I'll turn it over.

Okay, so let's see. We will do a quick Twitter call from @classified tiger looking for more details on AOL Patch. So, we're excited about this. Partly because we've had a Zillow Mortgage Marketplace partnership with AOL, but AOL historically has worked with another Company for real estate, and so we are very excited to be powering Patch from a real estate shopping standpoint. If you go to Patch now, you see Zillow listings, you see Zillow real estate search experience. AOL is investing heavily in Patch, and so we are excited to power their real estate search there. The next question from the call, please.

(Operator Instructions)

Presenters at this time, I'm slowing no additional phone line questions. I would like to turn the program back over to Spencer Rascoff.

Okay. I'll end with the last question from Twitter which is a good way to sum it from @intangible value. With a crowded field in your market how do you intend to differentiate yourself long-term? So the Zillow strategy is all about focusing on all homes, creating a living database of all homes that grows audience. We then create these marketplaces. We provide software tools in each of these marketplaces, we monetize, we iterate on monetization, and then we take profits from the marketplace, and we invest in product and people and advertising to grow audience at the top of the funnel. So, we're following the strategy across each of the four marketplaces. It is a differentiated strategy from the competition, both in breadth and depth relative to others.

I would like to thank you all for owning and supporting Zillow as we accelerate our drive to create an ubiquitous brand and a highly profitable business, long term, in this marketplace of real estate. The further we get in the Zillow adventure, the larger the opportunity seems and the better position we are to capture it. Thank you very much for speaking with us today, and we will talk to you all soon.

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