Zillow Group Inc (ZG) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Zillow fourth-quarter 2013 earnings call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the call over to Raymond Jones, Investor Relations Officer for Zillow.

Thank you. Good afternoon and welcome to Zillow's fourth-quarter and full-year 2013 earnings conference call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer; and Chad Cohen, Chief Financial Officer.

Before we get started, as a reminder, during the course of this call we will make forward-looking statements regarding the future events and 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 are more fully detailed under the caption Risk Factors in Zillow's quarterly report on form 10-Q for the quarterly period ended September 30, 2013 and in our other filings with the SEC.

In addition please note that the date of this conference call is February 12, 2014 and any forward-looking statements that we make today are based on the assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.

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

This call is being broadcast on the Internet and is available on the investor relations section of the Zillow website at 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 preferred remarks and an 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 asked via Twitter and Facebook in addition to questions from those dialed in to the call. Individuals may submit questions by tweeting @Zillow using the ZEarnings hashtag or to the official Zillow Facebook page.

After the call The Street will moderate of brief follow-up Q&A session with Spencer via Twitter with the same ZEarnings hashtag. I will now turn the call over to Spencer.

Thank you for joining us today to review Q4 and 2013. We finished 2013 in fantastic form, hitting new highs for quarterly and annual revenue and achieving strong quarterly profitability.

Zillow traffic continued to grow, accelerating our leadership position and category share. According to comScore we are now nearly twice the size of our two closest competitors on combined mobile and web traffic. And we are growing faster on desktop, comScore showed Zillow tripling our category lead in 2013.

We've always said that advertisers follow audience. And our revenue results in the fourth quarter prove it. Excellent execution by our marketplace and display sales teams resulted in Q4 revenue of more than $58 million, up 70% year-over-year. Fourth-quarter EBITDA was more than $15 million, 26% of revenue and higher than we planned.

Notably, our premier agent business reached an annual run rate of more than $150 million, compared to a $90 million run rate at this time last year. We ended 2013 with a premier agent count of one than 48,000 agents, as we added close to 19,000 net agents over the year. The strong finish in the fourth quarter took our 2013 full-year revenue to $197.5 million, growing 69% over full-year 2012. EBITDA for 2013 was almost $30 million and represented 15% of revenue.

Drilling down now on traffic, we widened our audience lead substantially this year. As a media model we believe that audience leadership determines the long-term winner. According to comScore, in December 42% of all mobile and web visitors to online real estate services went to Zillow, which is twice the share of the number two or number three brands, respectively. According to self-reporting of traffic from Google analytics, we finished the seasonally slow fourth quarter with more than 54 million average monthly unique users.

In January 2014, traffic accelerated substantially to nearly 70 million unique users, an addition of 24 million new users year-over-year. Our results in traffic and our record performance annual revenue and EBITDA demonstrate our continued category leadership and sustained business momentum. Without a doubt, 2013 was a breakaway year for Zillow.

As we turn our focus now to 2014, our strategic priorities remain consistent and they are: One, grow our audience and widen our category lead; Two, grow our premier agent business; And three, grow our advancing marketplaces.

Our first priority of growing our audience begins with our immersive products that empower consumers when they buy, sell, own, rent, finance and remodel homes. We're able to build products across this broad spectrum because of our living database of all homes, which continues to be a distinct competitive advantage and an asset which we continue to invest in.

Specifically on mobile, we continue to invest significant product resources in evolving our mobile web experience and to launching and improving our apps. We now have 27 mobile apps across every major platform. This broad and long-standing product investment in mobile has resulted in a growing category lead.

Experian now pegs our mobile web audience at 4 times the size of the number three player and 2.5 times the size of the number two player. We are deeply capturing this consumer shift to mobile as we now see approximately two-thirds of Zillow visits coming from a mobile device.

Other notable product advances during the quarter include the launch of a Zillow real estate app on Windows 8 for desktop, laptop and tablet, with features specifically designed to take advantage of the Windows environment. Also we just launched a unique content offering, our Cost of Home Ownership feature, where consumers looking at homes can see estimated month expenses such as cable and home security, in addition to estimated mortgage payments and property taxes.

Creating new products and features, adding rich content and providing deeper market context increasingly resonates with more and more consumers. And adding to our reach, we recently expanded our distribution network to include AOL Real Estate which joins our existing partners, Yahoo Homes and HGTV's FrontDoor.com. Zillow is now the exclusive provider of for-sale and for-rent listings to four of the top real estate websites in the country.

While product is the core driver of Zillow's growth, we will be increasing our investment in national advertising this year to accelerate that growth. I will get into more details of our 2014 plans in a moment, but the first I want to touch on the 2013 results that give us the confidence to invest even more here.

In May 2013 we launched our first-ever national TV campaign after two rounds of testing showed promise. After just six months of television advertising we were extremely encouraged by the strong signal and results. At the top of the funnel 2013 total traffic grew nearly 60% year-over-year. In turn, home shopper traffic grew 80%. And contacts to agents grew over 70%. This tells us that not only was our advertising successful in growing traffic, but it grew the intended traffic of transaction-ready buyers.

We also see the impact of our television advertising in increased brand awareness. You can see this nicely in Google Trends, viewable at trends.Google.com, which measures branded search queries and shows in January that searches for the term Zillow increased more than 40% over last January. Meanwhile, the real estate category was down and our closest competitor was essentially flat.

The Zillow brand is breaking away from the category in a meaningful way. Building on our success in 2013, this year we will go farther than before and take advantage of what we have learned. In 2013, we spent nearly $40 million in advertising across all channels. In 2014, we plan to increase our advertising investment to $65 million across all channels.

After intentionally advertising only lightly on TV during the seasonally slow fourth quarter, we were back on air as of a few weeks ago, and we will be launching new creative in the coming months. You can view our current TV spot at Zillow.com/TV. The bulk of our investment will take place leading up to and during the peak home shopping months. And, like 2013, we will lighten our spending during the fourth quarter off-season.

In our quest to become a household name, the time is right for us now to press our advantage and further elevate our brand and extend our category lead. As we have discussed before, in both international real estate models and comparable categories like search, the path to category leadership over the long-term runs through audience.

While we will forego some profitability in the near term to grow our audience market share, the long game is about capturing revenue share and expanding profit margins. First, we win audience. Then, we reap most of the revenue and the profits. We're in growth mode, early on in the midst of executing a multi-year brand-building effort to secure a strategic competitive advantage, and we couldn't be more excited about the massive opportunities in front of us.

Turning now to our second strategic priority of growing our premier agent business. We continue to fire on all cylinders here, with record revenue, agent count and ARPU. We're signing up more agents across the country who want to partner with us to grow their business.

Historically we have priced our premier agent subscriptions to drive adoption, with the average contract delivering an estimated 10X return on investment for agents. Premier agents who have been with us more than a year spend well above their initial contracted amount and significantly above overall ARPU. Our platform attracts many of the best agents in every market, which ultimately leads to superior consumer experience and makes Zillow more valuable to consumers and agents alike.

One way this value manifests itself is through agent reviews by consumers. We now have nearly 0.5 million reviews of agents on Zillow, which assists consumers in finding the right local agent for them.

To help our premier agents convert more of their contacts into sales, we provide agents with connectivity to CRM tools of their choice, something that no competitor in our category is capable of doing. We recently added nine more CRM providers to the Zillow Tech Connect program, including WiseAgent, Commissions Inc., planetRE, and ZipRealty.

Zillow Tech Connect now includes 11 different CRM providers. An agent using the system to process leads will be more successful than one who doesn't. Zillow Tech Connect offers a unique and rapidly-expanding open ecosystem for technology in the real estate industry. We seek to support the various technology platforms that many real estate brokers and agents invest heavily in to accelerate their businesses.

By allowing agents to work with the CRM system they prefer, Zillow is able to partner with and sell more advertising to an increasingly attractive segment of agents. In addition to connecting to a dozen other CRMs, we also provide our own free and lightweight software suite to agents, giving all premier agent access to a technology solution to convert leads into deals.

Now I'll turn to our third strategic priority of growing our advancing marketplaces, starting with mortgages. We crossed a milestone recently, surpassing 60,000 consumer reviews of lenders on Zillow. Another notable mile marker was the launch of an important new product, Pre-Approval. Now, consumers who want to verify how much they can afford and who want to demonstrate to agents and sellers that they're credible buyers, can get pre-approved by a lender on Zillow in just minutes. Through a safe and secure process, consumers can find a top-rated lender to pre-approve them and issue a principal and shareable pre-approval letter on the spot. We have received terrific consumer feedback on this product so far.

In our rentals marketplace we continue to experience strong growth, as our highly-engaged renter audience, the largest in the rental media category, continues to grow, our value to our rental advertisers only increases. We've been hard at work enhancing our rental offering, which features the largest, most diverse inventory of real rental listings available anywhere. And we have product investments queued up to deploy over the course of the year.

Our most recent product release was the relaunch of Postlets, a listing syndication tool that eases the pain of marketing rental properties for smaller landlords and property managers. Postlets is now mobile-optimized and we've just shipped Postlets mobile apps on iPad and iPhone. This enables landlords, property managers, owners and real estate agents to create, publish and manage their listings from anywhere.

We've also created meaningful merchandising opportunities for large apartment buildings, increasing the share of contacts that we drive to these types of properties. We also recently raised our monthly price per building to $120 per building, which is still a significant discount to competitors' pricing. At this time, we remain very early in the development of the destination marketplace for rentals and look forward to building on the foundation laid thus far in 2014.

Taking a closer look now at our New York City marketplace. I'm very excited about our New York property, StreetEasy. Today we announced a relaunch of StreetEasy, which includes two key elements. First, we are now providing consumers with free access to all of StreetEasy's local data and New York tailored shopping tools that were previously only available for paying users. Making valuable real estate data available to consumers for free aligns with the Zillow ethos of information transparency and empowering consumers.

Second, we also unveiled a brand-new site design. This year we are investing meaningful resources to enhance our product and our user experience and to expand our footprint within the largest and most important real estate market in the country, New York. Further, StreetEasy is also prioritizing efforts on mobile development, both improving our existing app experience and adding new platforms. The focus in 2014 for StreetEasy is on expanding and improving the product, especially on mobile, to address the substantial opportunity in front of us in New York.

Taking it all in, 2013 was fantastic by all measures. We executed very well against our strategic priorities and 2014 has started out very strong already, with record traffic in January. For 2014, we expect full-year revenue of $288 million to $294 million, and EBITDA of approximately $38 million to $40 million. We are pushing ourselves harder than ever to take more market share in the category profitably, with our eyes on a long-term opportunity to win the category outright.

Before I conclude, I'd like to take a moment to acknowledge the groundbreaking efforts of our economic research team, led by our Chief Economist, Dr. Stan Humphries. We recently hosted a live Town Hall in our Seattle office with Secretary of Housing and Urban Development, Shaun Donovan, on the topic of equality in housing.

In addition to attendance by local and national press and live streaming on Zillow, representatives of the National Urban League were present to discuss the recent report from Zillow that highlighted data on minority access to housing. The events inspired important conversation nationally and allowed Zillow to amplify the voice of the consumer with government and industry.

In conclusion, 2013 was a breakaway year for Zillow. And the market opportunities in front of us remain large and virtually untapped which inspires us to move fast. As we look forward to 2014, we will continue to press our advantage and focus on executing against our priorities of growing audience, growing our premier agent business and growing our advancing marketplaces. And with that, I'll turn the call over to Chad and let me be the first on the call to wish Chad a very happy birthday. (laughter) Chad Cohen.

Thank you, Spencer. I don't feel a day over 30. (laughter)

I will quickly start off with the fantastic traffic growth in the fourth quarter and then move into operating results. We attracted 54.3 million average monthly unique users to visit Zillow's mobile applications and websites in the fourth quarter, growing 57% year-over-year. That is a 10 percentage point acceleration over last year's 47% growth rate on a much larger user base, and with seasonally light advertising support.

Now to our operating results. Total revenue for the fourth quarter increased 70% year over year to a record $58.3 million from $34.3 million in the same quarter last year. This growth represented a re-acceleration over the prior quarter.

Total revenue in the fourth quarter exceeded the midpoint of our guidance of $55.5 million by approximately $2.8 million, or 5%. We continue to see a favorable shift in our revenue mix as we ended the fourth quarter with 79% of our revenue coming from our marketplace category, while 21% came from display.

Taking a deeper dive into our primary revenue category, marketplace revenue grew 71% year over year to $45.9 million. We continue to see strong growth across both our real estate and mortgage sub-categories. Going a little further into our real estate sub-category, which accounts for our premier agent, diverse solutions, StreetEasy and rentals businesses, our revenue accelerated sequentially and grew 71% year over year to reach $40.5 million compared to $23.7 million last year.

Our premier agent business continues to execute nicely, and during the quarter we added 3,565 net new premier agents ending the period with 48,314 subscribers. The vast majority of additions were at our platinum level, continuing the trend we have seen throughout the year.

55% of new sales bookings in the fourth quarter went to existing agents buying more impressions across mobile and web, which is higher than recent trends and signifies strong underlying demand. Average monthly revenue per subscriber, or ARPU, among premier agent subscribers was $271 in the fourth quarter, which was 1% higher than the figure in the same period last year and 3% higher sequentially compared to our third quarter.

As a reminder, ARPU reflects what an average contract size looks like, and is a function of the amount of impressions an agent buys and current prices they are paying per impression, but does not indicate just the price that the agent pays for a subscription in a market. Pricing of our premier agent subscriptions vary by geographic market due to local home values, contact liquidity and demand for impressions in a zip code.

Moving from real estate to mortgages, which consists of Zillow Mortgage Marketplace and Mortech, revenue reached $5.3 million and grew 69% year over year. And benefits from a full quarter contribution of Mortech revenue compared to a partial period in the fourth quarter last year. Mortech contributed $1.5 million in the fourth quarter. In Zillow Mortgage Marketplace 4.4 million loan requests were submitted, growing 39% year over year. Home purchase requests continued to remain the prevailing inquiry by our consumers.

Looking at our display category, revenue in the fourth quarter grew 67% year over year to $12.5 million. This represented the fifth consecutive quarter of accelerated growth and reflects highly on our efforts of our display sales team, the strength of our model, and the value we provide to advertisers, especially home builders, banks and real estate brokerages.

Shifting now from revenue to our operating costs, total operating expenses were $55.6 million compared to $33.8 million during the fourth quarter 2012, improving by 3% of revenue versus last year. Working down the expense line items, comparing the fourth-quarter results this year to last year, first, our cost of revenue during the quarter was $5.3 million, or 9% of revenue compared to $3.8 million, or 11% of revenue last year. Favorable leverage resulted from our revenue-sharing arrangements due to higher growth from our owned and operated properties compared to our partners.

Next, sales and marketing expense was $25 million, or 43% of revenue versus $14.5 million last year at the same percentage of revenue. Total advertising spend in the fourth quarter was approximately $8 million, which was $4.5 million more than fourth quarter 2012 and devoted primarily to online channels.

Technology development costs in the fourth quarter were $14.6 million or 25% of revenue, compared to $9.1 million or 27% of revenue in the fourth quarter of 2012. The increase reflects higher depreciation and amortization costs and increased headcount-related expenses year over year, but at lower-than-planned levels.

G&A costs in the fourth quarter were $10.7 million or 19% of revenue, as compared to fourth quarter 2012 of $6.4 million at the same percentage of revenue. The primary increase in absolute dollars year over year is attributed to higher headcount and service costs, as well as higher facilities costs to support our growth.

EBITDA for the quarter was $15.2 million, representing 26% of revenue which was up form $6.8 million, or 20% of revenue in the fourth quarter 2012. Along with our revenue upside flowing through to earnings, we had positive variances versus our plans throughout our cost structure related to headcount, capitalized website development expenses, as well as facilities improvements.

GAAP net income was $2.7 million in the fourth quarter, compared to $0.5 million in the fourth quarter 2012. Fourth quarter 2013 basic and diluted earnings per share were $0.07 and $0.06, respectively, based on 39 million and 42 million weighted average shares outstanding. On a non-GAAP basis, which excludes share-based compensation and non-recurring income tax items, basic and diluted earnings per share were $0.20 and $0.19, respectively.

Moving now to our full-year 2013 performance, total revenue increased 69% to $197.5 million, up from $116.9 million generated in 2012. Compared to our original outlook of $165 million to $170 million, our business accelerated ahead based on strong underlying fundamentals, along with a small contribution from our acquisition, StreetEasy.

In our revenue categories, marketplace revenue increased 78% year over year to $154.2 million, up from $86.7 million in 2012. Display revenue for 2013 was $43.3 million, increasing 44% from $30.2 million in 2012 and accelerating versus last year.

Our revenue mix for the year consisted of 78% of our revenue coming from our marketplace category, while 22% came from display, a 4 percentage point shift over 2012 results, marking the continued advancement of our marketplace categories. Real Estate revenue grew 74% year over year to $132.4 million, while our mortgage revenue grew 103% year over year to $21.8 million, which includes a full-year contribution by Mortech.

Looking at our sales and marketing expenses, we finished the year with $108.9 million. Our advertising expense in 2013 was $38.7 million compared to $11.1 million in 2012 and consistent with the plans that we laid out on the last call.

EBITDA for the full-year 2013 was $29.7 million, representing 15% of revenue and $4.6 million higher that 2012 full-year EBITDA of $25.2 million. GAAP net loss for 2013 was $12.5 million, which was $0.35 for both basic and diluted shares. On an adjusted non-GAAP basis, which excludes share-based compensation and non-recurring income tax items, basic and diluted earnings per share are $0.19 and $0.17, respectively.

Turning briefly to our balance sheet, we ended the year with approximately $438 million in cash, cash equivalents and investments and we had no debt. Zillow ended 2013 with more than 800 employees, up from more than 550 at the end of 2012 and we continue to grow in support of our strategic priorities, which are growing audience, increasing the size of our premier agent marketplace and developing our other advancing marketplaces.

Now turning to our outlook for the first quarter of 2014 and the full fiscal year. Our revenue for the first quarter of 2014 is expected to be in the range of $62 million to $63 million. This outlook represents 60% year-over-year growth at the midpoint.

We anticipate sales and marketing expenses for the first quarter to be in the range of $36 million to $37 million. For our first-quarter outlook on EBITDA, we expect a range of $4 million to $4.5 million. At the midpoint of our range, this represents an approximate 7% margin.

And for the quarter, we expect depreciation and amortization to be in the range of $8 million to $9 million. And share-based compensation to be in the range of $6 million to $7 million. Although we are not providing a GAAP EPS outlook for the quarter, we expect a basic and diluted weighted average share count of approximately 40 million and 43 million shares, respectively.

Recapping our 2014 guidance, we anticipate full-year revenue of approximately $288 million to $294 million. We project approximately $38 million to $40 million EBITDA.

As Spencer mentioned, we plan to invest approximately $65 million in advertising across multiple channels this year, as well as increase our investments in product development as we pursue our strategic priorities. For the full-year 2014 we anticipate sales and marketing expenses will reach approximately $158 million to $160 million.

Moving quickly to reconciling items to EBITDA for the year, we expect depreciation and amortization to be in the range of $38 million to $41 million, share-based compensation to be in the range of $28 million to $30 million and CapEx and capitalized purchased data content to be in the range of $17 million to $19 million. We expect full-year 2014 basic and diluted share counts to be approximately 41.5 million and 45.5 million weighted average shares outstanding, respectively.

To conclude, Zillow had a fantastic fourth quarter and a spectacular 2013. We remain determined to accelerate our growth and advance our home-related marketplaces and we are extremely excited about our potential in 2014 and beyond. With that, we'll open up the call to questions from those dialed in to the call and to questions submitted via Twitter and Facebook with a hashtag ZEarnings.

(Operator Instructions)

Mark Mahaney, RBC Capital Markets.

I'll start off by asking about those third area of growth priorities. And both on StreetEasy and on the rentals opportunity.

Could you help us think through, they're not going to be material near term, but how you think about the long-term revenue opportunity out of both of those? And I assume that the StreetEasy, the way you've set it up now, we'd just see that in a display advertising revenue bucket? Thanks a lot.

Sure, I'll take it and then, Chad, you can talk about how it shows in revenue. Thanks, Mark. StreetEasy, I think we've tried to draw some comparisons in the past, when we bought StreetEasy in August. For example, by comparing the size of the market and the size of the audience leadership with the market leader in Australia and the market leader in the UK and the total amount of transaction value those markets compared with New York.

If memory serves me, the New York real estate market was something like half the size of the UK and two-thirds the size of Australia, something like that. Of course, we have market leaders in those two countries with hundreds of millions of dollars of revenue.

Rather than going after monetization right out of the gate, the strategy with StreetEasy is to try to dramatically expand its audience, particularly on mobile. As you know, Zillow gets about two-thirds of its usage from mobile. StreetEasy gets much less of its usage from mobile. So we think there's a huge opportunity to grow StreetEasy's usage by expanding to new mobile platforms and improving its overall mobile experience.

And then, of course, the history of content on the web is that whenever you put it behind a pay wall, the addressable market for that content is dramatically reduced. So setting StreetEasy free we think will allow it to have a larger audience than it currently has.

So that's the StreetEasy opportunity and the plan in 2014 is definitely about audience growth, not about monetization. In terms of how it's current revenue shows up in the financials, Chad, you can comment on it.

Yes, the pro product, which is for agents, will sit in their marketplace category and the display lines are organically sit in our display businesses. And the product that was $10 a month that consumers paid, which is now free, that used to show up in the marketplace. But that will not exist anymore, obviously.

Shifting to rentals, the long-term opportunity for rentals, we look at competitors in the rental space, pure play, what they call ILSs, or Internet Listing Sites, or Internet Listing Services. And we see a couple of companies with between $100 million and $200 million, and in some cases more than $200 million, of rentals revenue with web and mobile experiences that are much less consumer-friendly, less useful to the consumer and much less useful to the industry.

That is the near-term number that we are chasing for rentals off what is admittedly a tiny bit. It's growing very quickly but it's still very, very early days for us in rentals.

The total rental TAM is, I think, in the $4 billion to $6 billion range. The near-term competitors in the $200 million rental revenue category.

Ron Josey JMP Securities.

Happy Birthday, Chad. Real quick on premier agents. Grew 64% year over year, which is good, but net additions were down 40% quarter to quarter. I'm wondering if you think that is due just typical seasonality.

Or maybe, Spencer, what you talked about on the last call around maybe we are seeing the impact of more agent teams and agents building their practice on Zillow.

Similarly a question with ARPU up sequentially. Could it be because newer agents in 2014 are buying more impressions here? Or was the co-marketing program with lenders, did that help as well? Thank you.

Ron, I will start and then hand it over to Spencer. Thanks for the happy birthday comments. What we're seeing is the trend that we have seen over the past few quarters, which is existing agents continuing to purchase more of our inventory on an ongoing basis.

So as they see value delivered to them through the media that the buy from us, and they're able to translate those impressions into meaningful leads and contacts and close transactions, the percentage of those bookings attributable to existing agents who are buying more continue to grow. It used to be 40% to 50%, now it's creeping north of 55%-ish and that trend is obviously impacting ARPU and bringing that number up.

We don't manage the business to that number, but we like the trends that we are seeing. We are primarily, as you know, focused on growing monthly recurring revenue.

As we have a subscription-based business here, we find that our sales team continues to be more and more efficient in their sales practices, and reaching back in their book of business to help grow those monthly recurring revenues. So that is impacting both agent count and ARPU. ARPU is the positive but puts a little bit of pressure on agent count.

Next question? Oh, Ron also asked about the premier agent lender sponsorship. So for those that are less familiar, this is part of the premier agent program where we allow part of the premier agent spend to be paid for by a mortgage lender.

So that form of co-marketing provides benefit to the premier agent, obviously, because it has a smaller out-of-pocket spend to Zillow and there's nothing to the mortgage lender, because of additional exposure on Zillow. We don't break out what percent of our premier agent revenue is subsidized by lenders, or how many of our 48-odd thousand premier agents have a lender sponsor. But that is what the premier agent lender sponsorship program is.

Operator I think will take one more question from the call then we'll move to twitter and then probably back to the call. Next question please.

Rodney Hull, SunTrust.

Hi, it's Bob Peck and Rodney here. Spencer, I just wanted to talk a little bit about the marketing dollars. How should we think about that going forward?

This $65 million number, about a 50% increase year over year. How do we think about that as we model out longer term? Is that a good absolute value going forward? Or are you thinking about it more as a percent of revenues?

How can you help us to quantify a little bit on the ROI side of that? Thanks so much.

Sure. On the ROI side, we analyze the efficacy of our advertising a lot of different ways. More than you can possibly imagine.

We share couple of stats to try to give investors some comfort that our decision to use advertising is guided by (inaudible) and not just by gut. So for example, as I referenced in 2013, unique users were up 60%, but home shoppers were up 80% and contacts to agents were up 70%. We are clearly growing the right type of audience, not just a hollow audience.

In terms of how to think about advertising going forward, I'm not going to be much help there, because of course we don't give guidance after the one year. Our business is growing so quickly and things are evolving so quickly, that it's very hard for me to use a crystal ball to think further out than that.

What I do know is that we did in 2013 worked. It worked incredibly well and so we're going to increase the size of the investment in 2014.

And our best guess at this point is $65 in advertising for the full year. We're constantly analyzing, constantly updating our thinking on it. We'll keep you posted throughout the year. As we get towards later in the year, we'll probably start talking about 2015. But for now that's all we have.

Thanks, Spencer. Happy birthday, Chad.

Thank you. (laughter)

First question from social media from Chris Stucchio of the Street. He writes, how is Zillow Digs performing? So it is very early for Zillow Digs.

I, for one, love using the product especially on iPhone. Just to give you some numbers, we had 1.8 million digs in Q4. That is when a user indicates that they dig a photo. That's up from 1.4 million in Q3.

When we launched the service, we had about 20,000 photos. Today we have 250,000 photos, so a much larger catalog. And in January were 345,000 boards created, whereas in all of Q3 there were only 161,000 boards created.

So usage is growing nicely, but I would describe the product as still in the very early stages. It's far too early to really draw conclusions about it. So that's the quick Digs update.

Let's go back to the conference call please, operator, and we'll take the next question there.

Neil Doshi, CRT Capital.

You're getting a lot more mobile traffic these days. Any thoughts on how you can better monetize this actively? Especially leads that are coming to agents from consumers who are interested?

And then on the mortgage side, looks like loan requests were down sequentially and growth slowed a little bit. Any thoughts on how we should think? And thoughts of what caused that sequential decline [in the class] and how should we think about the mortgage business? Thanks.

Thank you. I'll take the mobile and premier agent question and then Chad will take the mortgage question. We have a philosophy of, when value is increased to premier agents, whether it be through product development initiatives, or macro housing trend initiatives, or as our consumer usage shifts from desktop to mobile, or whatever the case may be, we have historically not priced those improvements separately.

We have historically bundled in the additional value and let the price adjust over time to approximate a particular ROI that we are shooting for. So for example, when we rolled out AOL and now premier agents show up on AOL, we didn't change the pricing structure to them or sell it separately.

When we launch a new mobile app and all of a sudden those agents are now appearing on some new app on some new platform, we don't price that separately. We think that is something that is generally resented by advertisers.

So as more leads shift to mobile, which are arguably more qualified leads because they're perhaps in the deeper state of the funnel in the home shopping purchase. The way that would flow through to revenue would be through reduced churn, through increased up-sell from existing premier agents and through higher lead flow. Which would then get priced back into our models and affect the CPM that we charge for impressions in that zip code once agents are off contract.

So if does flow through back in to monetization, but it does take some time as agents have to roll off contract off their subscriptions for it to make its way back into the monetization on a per-zip-code basis. Chad, GMM, I think your question was around loan requests?

Yes, we generated 4.4 million loan requests in the quarter, Neil, as you probably know. That was up 38% year over year.

I think what you are seeing is a pretty tough comp in Q4 last year, where we had record low interest rates that were driving refi volume through the roof. Because the interest rates have moderated off those lows quite a bit in the current quarter, we are seeing that being a much tougher comp, in terms of a lot of that refi volume.

As you know, and we have said before, primarily most of our loan requests are actually purchase loans, originations, because we are primarily a shopping destination site. So I think that bodes really well, regardless of what the interest rate environment is for the long-term.

Next question please.

Lloyd Walmsley, Deutsche Bank.

Thinking about the TV ad spending ramp, curious if you can just frame up how you are thinking about the notion that you have 70 million unique users on the site in January, which really dwarfs certainly the home selling market at 5 million transactions a year, 10 million transactions sites a year. Do you think you're not really getting everybody in the market shopping for a house? Is that part of the objective? You're not there yet, you want to get all of them?

And then to the extent that it is aimed at some of the ancillary businesses, how do you guys think about the ability of the Company to hop from one use case to another? And what challenges you may face and how you plan to attack that?

The unique user counts are obviously a tricky thing, because of multiple devices and difficulty in counting things. I certainly do not think that Zillow or any single real estate service is used in the preponderance of real estate transactions yet. The data that we have gathered and the research that we have done makes us think that we still have huge growth potential in terms of making Zillow a deeper part of more real estate transactions.

It would be a weak analysis to think that 70 million users is x percent of the total number of Americans or adult Americans, et cetera, therefore they're fully penetrated. I don't think that is the right way to think about it.

To give you some math, we have always said that agents, the premier agents for example, get between 10 and 20 leads a month from us. And so at around 50,000 premier agents, you can do math around about how many leads we're driving. And we have also given our best guess on conversion rates of how many of those leads convert into transactions.

You can get to the bottom of the funnel pretty quickly and compare that with the total number of transactions that are actually a size, of commission size, which is about $9 million a year and see that we're probably only in the midst of a couple percentage points of real estate transactions every year. Probably sub 5%.

When I look at that, I say, wow, 95% of the time, maybe 97% or 98% of the time that a home shopper buys a house, they found that house and the seller found that buyer from someplace other than Zillow. We have a long way to go. So I think that, to me, is the better way to look at a better penetration rate.

In terms of how brand awareness translates into other categories, Zillow Mortgage Marketplace is clearly the beneficiary of the increase in a home shopper traffic. As those home buyers become mortgage shoppers within Zillow.

Our display advertising is clearly a beneficiary of it. One of the major reasons why we've been able to grow display revenue as quickly as we have is that we are now the category leader and so we're (technical difficulty) advertisers.

The rentals audience also gains from growth in awareness as does Digs and home improvement. The different ancillary businesses benefit as well from the coattails of advertising.

Let's take the next question from social media. Ben Ellard, R3volutianBen, asks do believe we are in a housing bubble? The data from 2013, according to Zillow, were that home values were up 6.4% year over year last year, and we are forecasting 4.8% appreciation in 2014.

So it clearly is slowing housing market still above median or close to historical or close to slightly above historical average in terms of appreciation rates. But it certainly is slowing housing market as compared with 2012, 2013.

We view that as a good thing. It actually makes for a more sustainable recovery instead of the rocket ship recovery that we were looking at 18 months or so ago.

And the reason the housing recovery is slowing little bit is because listing inventory is increasing as more homeowners are being freed from negative equity. And mortgage rates are increasing which makes it harder for buyers. Investor demand is decreasing. So these are what are slowing down the housing recovery.

But clearly it has not had an impact on our business. On the contrary, as you have seen, we have been doing very well and that's because homes are still selling very rapidly. Agents are earning commissions. Agents are confident and they're reinvesting in their business.

So those are my brief thoughts on what is happening in the housing market. Let's go back to the conference call please, operator, for the next question.

Dan Kurnos, Benchmark Company.

Spencer, sticking with the marketing theme here, now that you've got a full year of aggressive marketing behind you. Any thoughts on changes to channel spend or any targeting practices that might be different this year versus last year.

And Chad, you're sitting on a lot of money. You got $200 million. Just remind us, uses of cash and how should we think about organic product development versus perhaps acquiring to fill in some of the gaps in your platform. Thanks.

So 2013 we invested our ad budget across online advertising, online display, online search, mobile advertising, some social advertising, TV. We tested some radio and outdoor. We did a variety of different things.

The big dollars going to the categories that we have discussed. In 2014, we'll probably also be testing other types of other channels, other types of advertising. For competitive reasons, we're not going to breakdown where the lion's share of the ad spend is going. But clearly TV and online are the two biggest categories. Chad, use of cash?

Yes, so, Dan, we have about $440 million as of the end of the year. It is a lot of cash. We feel comfortable with this sort of capital structure, given the opportunities that we still frequently see in the marketplace.

That said, you have to look, I think, at the bigger picture in terms of what we are going to do with it in 2014. We have got a business that can sustain a significant amount of investment backing the technology and development. And the plan for 2014 is to continue to press our advantage, not only in growing audience, but to introduce products into the marketplace for both consumers and our customers.

So both in terms of absolute dollars, you're going to see our investment organically in tech and dev increase. And in terms, as a percentage of revenue, you're not going to see much leverage there. It's going to be fairly flat 2013 over 2014.

Great thanks for the color. The least you could do is buy yourself a small birthday present. (laughter)

Thanks Dan.

A handshake, which is free, that's what I give him. (laughter)

Thank you, Spencer.

Next question.

Mark May, Citigroup.

Thanks. Since Dan, I think, technically did not say happy birthday, let me be the third to wish Chad a happy birthday. (laughter)

I'm blushing here, thank you.

I think I'm basically asking a earlier question a little bit differently. It would seem like there is as much, if not more, opportunity from growing your agent base than from growing the buyer audience, given Zillow's current market share in each of these two segments of your marketplace.

The question basically is in terms of investment in the inside sales team, can you give us a sense of how much you invested last year? And how much in terms of your guidance do you expect that to grow this year? Thanks.

I will try to give you some color there. We added a significant number of inside sales reps last year. And in terms of the incentive compensation structure of the team, we aren't really pointing the team to either grow agents, or not, really. We're just telling the team to go out there and grow your book of business. And whatever happens organically happens.

I think what we're seeing back to my earlier point, is that the sales team is becoming more and more efficient. And so in terms of what our expectations are, this year with respect to the premier agent business, we are planning on increase monthly recurring revenues significantly more on a more efficient base of inside sales reps.

We are getting better at selling the product and we don't plan on growing the sales team quite as fast as we grew it, say, in 2013. It's because we do have a subscription-based business here and we find that there is a lot of demand from existing agents to continue to buy more as they execute really well on the media that we are selling to them. So hopefully that is some good color for you.

Yes. Is there an opportunity given the amount of recurring business, to introduce some sort of evergreen or self-service-type model into the business?

There may be and we have experimented with different variations of that in the past. What I would also say is if you take out of the sales and marketing 2014 guidance, you take out the ad spend from that. And you look at that on a margin basis compared to 2013, you would find a flattish, basically flattish sales team size. The marketing team is in there too.

What you would miss from that analysis would be the growth of the rental sales team, which is happening off of a very small base, but also growing pretty quickly. You can try to get to that in that way, I guess. Did you have anything else to add to that?

No, I think that said it well.

The next question come from Twitter from Brian Boland from Zacks Investment Research at BBoland1. He writes, are people using Z exclusively for the foreclosure data more now than last year at this time? Any other trends of note?

Foreclosures is an interesting one. As those that have been paying attention for a while, will remember about, oh gosh, probably two years ago, I think? Or 1.5 years ago, we made a pretty big decision, a big bet, which was to terminate our partnership with a foreclosure company wherein we were sending traffic to them. And then consumers would have to buy, on a subscription basis, data to get more listing information.

And instead we spent millions of dollars to acquire that data ourselves and we made it free on Zillow. This was a bet on growing the size of our audience.

Pretty similar, frankly, to the bet that we're making today about making StreetEasy free and not charging consumers for access to StreetEasy information. Hoping that the size of the audience will grow and then we can make up the revenue shortfalls from lost subscription consumer revenue by selling more advertising.

It's very hard to tease out, of course, how big an impact having, being the only real estate site on the web to list foreclosures and pre-foreclosures for free. How big an impact that has on our traffic, on our audience growth.

But I think it is a very important part of the overall value proposition that we provide to home shoppers. Which is Zillow is the place to go to get the widest amount of information on all homes in a given community. Not just the 3% of homes that are for sale on MLS at any point in time.

So yes, Brian, foreclosures are an important strategic point in our differentiation. Next question, operator, please, from the call.

Chris Merwin, Barclays.

You continue to build out a network of partners, AOL, Yahoo. What type of contribution are these partnerships making to traffic today? Longer-term, can you see the partners, or even network effects replacing some of the dollars that you're spending on marketing? And maybe to drive more organic increases in market share?

I'm trying to think about where, in your mind, you think you need to be, whether it's in audience metrics or revenue metrics, to ease off the gas in terms of marketing.

I think of it a little differently, Chris, than that. Because, for me it's more about the fait accompli among the real estate of wow, Zillow is now AOL, Zillow is Yahoo.

Yet another feather in their cap in terms of they really are everywhere, man, I better start advertising. So they drive a small amount of traffic, but a larger amount of mindshare.

Thank you.

Next question, operator.

Chad Bartley, Pacific Crest

Hoping you guys could talk a little bit more about your philosophy and strategy for pricing around the premier agent subscriptions, as well as quick pricing on mortgages. Also more specifically, does guidance contemplate any sort of underlying change or increase in pricing in any of those areas? Thanks.

Hi, Chad, this is Chad. Yes, our guidance does take into effect, or take into account, all the pricing changes that we know of that may happen throughout the year. So in terms of PA pricing, we made a very diligent shift into impression-based pricing back in February of last year. After doing a ton of testing and moving off of the share of voice-based prising model to better align the opportunities as a media business with a growth in traffic.

And so that has gone very, very well, as you know, and premier agents continue to buy up more and more inventory. And the pricing in the premier agent product reflects what happens with generally the overall real estate trends in the marketplace.

In terms of our mortgage business. On a cost-per-click basis, we have slowly been taking up pricing, but we are not expecting anything dramatic in 2014. Those things happen organically. We're priced very, very competitively in the market relative to what we our competitors doing.

Just as a quick follow-up, asking slightly differently, I think, for at least the last year, you've talked about a 10X ROI and over time getting closer to a 3X. I'm curious if the pace that you might get there might change ar all in 2014, i.e., more aggressive pricing or increases or anything like that on the PA side?

There is not a dramatic reduction in ROI contemplated in the new revenue guidance.

Okay, thanks guys.

Next question, operator.

James [Cakmak], Telsey Advisory Group.

I wanted to touch on the lead management for you premier agents. You're certainly seeing impressive user growth in exchange for all your marketing efforts, as evidenced by the performance in the recent months.

As we look forward, agents are going to be getting more and more leads and will need to manage them. Spencer, you did touch on this with your ROI commentary with respect to pricing.

In the past, you've described your software suite as more of a light version. So I just wanted to get your update on your thoughts on your agent tools.

Do you feel that the tools that you have and all the updates that you're making to them are consistent with your strategy at the time? Or could this essentially be a potential area of investment?

So our strategy is quite different from our competitors in this regard. The easiest way, and I would tie it back to our investment in audience and advertising as a way to juxtapose this.

That we're making a $65 million bet in 2014 and $40 million bet in 2013 that growing audience is what's going to result in us ending up with most of the ad dollars in our category. And other companies are making much different types of bets that operating enterprise-level CRM is the past, being the media winner in the category.

So the Zillow Tech Connect program, what it does, is it says, premier agents, whatever CRM you want, we're going to send your Zillow lead into that CRM. Use that system to follow-up with these leads.

Now if you don't have a CRM or if the CRM that you're paying for is too expensive, we will offer you a free one. We acquired a company and then made it free, our own CRM, which I would describe as pretty lightweight in terms of the functionality.

It doesn't have a lot of the bells and whistles that enterprise-level, more expensive CRMs have. But if has the key attributes that agents need. So we offer our free one, but we also connect to 11 through the Zillow Tech Connect program.

And when you ask our premier agents, if you ask them what CRM do you use, you'll get a very wide diversity of answers. And if you go to conferences, you will see real estate CRMs are a dime a dozen.

So you can't buy them all and you can't force all your agents to use yours. We think it is a better strategy to connect to many of them and offer, as a backstop, a free version.

Thanks, James. The next question, operator, from the call and we probably only have time for couple of more, because we're almost at the end of the hour. Is there another question?

I'm showing no further questions.

(Operator instructions)

I'll do one more from Twitter. At [MichaelTricka] from Connecticut writes, consumers would prefer to go to one site for their real estate needs. Do you see any future consolidation in the space?

I guess I would answer that by saying there is consolidation happening in the space. Not M&A consolidation, but audience consolidation. And you see that by our audience separation from the competition. We certainly hope that our investment in 2014 will accelerate that audience consolidation even further.

Are there any other questions, Zillow team here, that I should answer on social media? No? Okay.

So with that, thank you for your questions. I am going to now host a discussion on Twitter with Chris at theStreet.com to continue answering questions. So if there are questions that have not been answered, please join us there and use the hashtag ZEarnings on Twitter. Thank you very much for your time. We'll talk to you next quarter.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.