Zillow Group Inc (ZG) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Zillow Group Q2 2015 earnings call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the call over to RJ Jones, Vice President of Investor Relations. Sir, the floor is yours.

Thank you. Good afternoon and welcome to Zillow Group's second quarter 2015 earnings conference call. Joining me today to talk about a results is Spencer Rascoff, Chief Executive Officer and Kathleen Philips, Zillow Group's new Chief Financial Officer. During the call, we will make forward-looking statements regarding future financial performance and events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can't guarantee these results and actual results may differ materially. We caution you to consider the risk factors in our SEC filings which could cause actual results to differ materially from those in the forward-looking statements made in the press release and on this call. The date of this call is August 4, 2015 and forward-looking statements made today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During this call, we will disclose GAAP and non-GAAP measures. We will also discuss results on both a reported and pro forma basis. Reported results were prepared in accordance with GAAP. For comparative purposes, pro forma results assume the February 2015 acquisition of Trulia occurred on January 1, 2014 and reflect certain adjustments and exclusions described in our filings. We encourage you to read our press release as it contains information about our reported and pro forma results, including reconciliation of non-GAAP financial measures. In our remarks, the non-GAAP financial measure, adjusted EBITDA, is referred to as EBITDA, which excludes other income, depreciation, and amortization expense, share-based compensation expense, acquisition-related costs, restructuring costs, and interest expense.

This call is being broadcast on the Internet and is available on the investor relation section of the Zillow Group website. A recording 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 will also be available on our website. Today, we will open the call with prepared remarks, followed by our standard live question and answer session. During the Q&A, we will answer questions asked via Twitter and take questions from those dialed into the call. Individuals may submit questions by tweeting @ZillowGroup using the #ZEarnings hashtag. I will now turn the call over to Spencer.

Thank you for joining us today to discuss our second quarter results. I want to start by thanking our outgoing CFO, Chad Cohen, for his nine years of contributions to Zillow and I wish him all the best in his new role as CFO at a life sciences biotech company. Chad's going to have the opportunity to build out the financial function again from the ground up, where his passion lies. I have no doubt he'll be as successful at his new company as he was with Zillow.

With me on the call today is Kathleen Philips, our newly appointed CFO. Most of you already know Kathleen. She's been with Zillow for five years; first, as our General Counsel and for the last two years, as our Chief Operating Officer. Kathleen has been a critical part of our executive team for years and played a pivotal role in all of our key corporate finance initiatives, including our IPO four years ago, our two follow-on equity offerings, and all 10 acquisitions; the largest of which was Trulia. Kathleen oversaw the entire Trulia acquisition process, FTC review, and subsequent integration. During her time as COO, she was already running M&A, corporate development, human resources, legal, and customer support. Before Zillow, I worked closely with Kathleen for five years at Hotwire, where she was our General Counsel and on our senior leadership team. After evaluating many excellent external CFO candidates, we're confident that Kathleen is perfectly positioned to be Zillow Group's new CFO and I'm very excited to work with her in her new role.

Kathleen inherits an incredible finance organization, including Jennifer Holstein, Vice President of Financial Reporting and Compliance, and Jessica Lee, Vice President and Corporate Controller; both of whom have long-standing tenure at the helm of Zillow's finance function. Our finance team is in great hands.

As Kathleen moves into the CFO role, I'm also pleased to announce Amy Bohutinsky as our new Chief Operating Officer of Zillow Group. my has been with Zillow for 10 years and was most recently our Chief Marketing Officer, where her team helped grow Zillow's brand from almost nothing to the powerhouse it is today. The quality, tenure, stability, and camaraderie of our Management team continues to be a key strength of ours and a differentiator and I'm very pleased that we're able to make these important organizational changes without missing a beat.

Turning now to the second quarter, first, I'll start with the operating results; next, I'll provide an update on our business, touching on our four priorities, which are: bringing Trulia into Zillow Group, growing our collective Zillow Group audience, growing our agent advertising business, and growing our emerging marketplaces. Next, Kathleen will run through our financials and then we'll open up the call for questions. As usual, we'll take questions from the conference call and from Twitter using the hashtag, #Zearnings. After the call, I'll take further follow-up questions on Twitter, as well.

So starting with our results, Zillow Group had a strong second quarter, as we exceeded our expectations. Our revenue grew 20% year over year on a pro forma basis to over $171 million in Q2 which is about $2 million higher than the outlook we gave on our May 12 call. Continued strength in our marketplace categories, which include real estate and mortgages, along with substantial audience growth, drove these results. Across our Zillow Group portfolio, we averaged 141 million monthly unique users during the quarter. Within Zillow Group, our flagship Zillow brand continues to lead the category in traffic across mobile and web, growing 22% year over year per Google analytics and according to comScore, receiving nearly 50% of all category visitors. Second quarter EBITDA was about $21 million, which far exceeded our outlook of around $4 million. There were a few causes of this EBITDA beat. I'll tick through them in order from largest impact to smallest. First, within marketing, we intentionally shifted some ad expenses to Q3 because we achieved our audience goals with a lower and more efficient ad spend in Q2. Second, we saved a few million in combined Company expenses from reduced sales team expense and other synergies in the quarter. Third, Q2 was the first quarter post-closing and our forecast for Q2 expenses reflected the uncertainties of the transition as we brought these two companies together. Finally, the revenue beat flowed through to EBITDA.

Overall, we continue to execute well across our portfolio of brands during this transition year and we remain intensely focused on the top priority, which is fully integrating agent ad sales between Zillow and Trulia. What remains clear to us is that this multi-brand portfolio strategy is the right one. Consumers value choices in how and where they can search for their next home and connect with the best local professionals. By operating multiple brands, our audience grows as consumers increasingly engage with our various brands. An example of this is on mobile where, according to comScore, Zillow Group brands now account for 72% of all mobile only real estate category visitors. This is extraordinary and represents a tremendous opportunity for our advertisers, as well as validating our acquisition of Trulia. But perhaps the most tangible benefit from our massive scale so far was our seamless transition to direct listing feeds in April. MLSs, brokerages, and agents understood that Zillow Group offers access to the largest consumer home shopping audience and they signed up to add listings at an unprecedented rate. We now received significantly more high-quality listings directly from MLSs than we did when a third-party vendor provided us with MLS listings. And we now have more than 300 MLSs sending us data directly, having added 81 new MLS partnerships in just the last three months alone. Other benefits of combined scale with Trulia and Zillow include the continuing trend of our most tech-centric and marketing-savvy advertisers increasing their buying with us. This comes through in our data on the growth rate among our largest agent advertisers. For example, at the end of Q2, the number of agents spending more than $5,000 per month grew 48% year over year. Agents spending over $2,500 per month grew 44% year over year. And the number of agents spending over $1,000 per month grew 34% year-over-year. The churn rate among these cohorts is very low, validating our strategy of focusing on high-performing agents.

Already, we've fully integrated our rentals, mortgages, display, and back of the house operations with Trulia. In fact, we've now moved up the timeline to integrate our agent advertising business by several months; expected to complete this by the end of the third quarter. We'll be slowly rolling out the cross brand premier agent ad product that combines both mobile and web presence for our agents over the next several weeks. As we've done before when Zillow made major changes to our ad products, the rollout will be staged incrementally so that we can iterate on successes and minimize potential disruption. Our sales force has been preparing for months to execute this launch successfully. Account transitions for our customers, sales reps, and account managers are mapped out and ready to go. Once the product is launched, the revenue from our agent advertisers will be Zillow Group and we'll no longer separate Zillow and Trulia revenue streams. Agents will buy advertising from Zillow Group and their ads will be served across all platforms, including mobile apps, mobile web, and desktop web, and across all of our owned and operated national consumer brands including Zillow, Trulia, HotPads, Yahoo, MSN, AOL, HGTV, and Leju in China. We're excited about the significant progress we've made to this point and look forward to gaining further speed as this Trulia integration reaches its final stages.

Meanwhile, the impact on Trulia users and advertisers is consistent with what we laid out in the operational update call on April 14 and in our first call on May 12. We made significant changes to the Trulia agent ad product in the second quarter that are impacting the business as we expected. Changing the Trulia agent advertiser list from four default checks to one default check, which is the Zillow standard and we believe to be a more consumer-friendly model, has resulted in agent cancellations from lower ARPA agents and that's okay. This change positions Trulia for the ad product integration with Zillow and benefits high ARPA agents and consumers alike. Additionally, we've sunsetted promotional discount pricing on Trulia, which has resulted in lower advertising net ads. This, too, is desired, as those impressions are now going to better agents who value their leads more and provide better service to consumers. These Trulia agents who departed over the past few months were low ARPA and low producing. The agents who remain are higher converting and higher ARPA.

As we integrate Trulia's agent business, we're also very focused on growing the Trulia consumer brand and product. Over the past year, Trulia's top line audience growth has stalled. Together, our Zillow and Trulia product and marketing teams are working to reinvigorate growth. We're sharing best practices across the brands and there are a number of areas where our experience with Zillow can help Trulia. Soon, when the Zillow and Trulia ad products will be merged, the combined audience scale of Zillow plus Trulia becomes much more relevant than traffic on one brand or the other. However, Trulia traffic growth is a priority and we're putting significant resources and effort behind it and we will turn around its traffic trend. It is worth mentioning that this relates to top line audience and the impact is much less severe for bottom of the funnel contact volumes.

In the midst of this flurry of integration, the fundamentals on our flagship Zillow brand are the strongest that they've ever been. Our Zillow audience continues to grow and our advertising is working. Not only did the Zillow brand alone represent nearly half of the real estate category in market share of visitors, but Zillow Group now represents the 32nd largest web property in America. We've maintained our market share of traffic, nearly double that of our nearest competitors, and the majority of our growth is coming from organic or free traffic channels. Mobile continues to be a strong driver of growth with over 70% of weekend visits to Zillow coming from a mobile device. Lastly, revenue growth in Zillow's Premier Agent program was 48% year over year, reflecting continued increased spending by our most prolific agent advertisers. All-in, these are stellar numbers for Zillow core, reflecting years of product innovation and brand building.

A recent development which enables us to add depth to our industry value proposition is our pending acquisition of DotLoop. DotLoop simplifies the transaction process that consumers and agents go through when buying and selling homes by making it paperless. DotLoop brings the transaction online from the creation of a listing agreement to the submission of offers to the actual closing, driving speed and efficiency into the process. Brokerages and agents have been adopting paperless transaction services rapidly, as they eliminate many inconveniences for themselves and their clients. We're excited about the potential that DotLoop offers our 10,000 brokerage partners and their agents to increase their conversion of consumer contacts into sales. Today, real estate agents create more than 300,000 loops and nearly 500,000 people sign real estate documents in DotLoop each month. We look forward to combining our scale with DotLoop services, enhancing its product and expanding its network effects. The consideration for DotLoop was substantially in cash. The decision to use cash with retention incentives and stock reflects Management and the Board's confidence in the long-term opportunity for Zillow Group and our overall sensitivity to dilution.

Now, to our emerging marketplaces. Our New York City brand, StreetEasy, continues to excel on all fronts. This year, we began advertising StreetEasy in Manhattan for the first time and we're extremely pleased with the results on audience growth in revenue. In particular, the StreetEasy team's hard work on product and organic growth has paid off. StreetEasy's audience is now 90% larger today than when we acquired it two years ago.

In Zillow Mortgages, we recently changed our pricing model from cost-per-click to cost-per-lead. The transition was seamless and welcomed by our mortgage advertisers. With our mortgage revenue up 44% in the quarter, traffic, loan requests, contact volumes, and revenue all continue to grow ahead of mortgage industry trends. In Zillow Rentals, we continue to gain traction. Our total rentals audience remains massive; by far, number one in the category, according to comScore, despite competitors' ad spend. During the quarter, we launched a new ad product called Boost, which is selling well. We now provide property managers the opportunity to purchase prime advertising space at the top of renters search results. Our new premium advertising product helps multi-family rental professionals shine a spotlight on property promotions and specific units. We continue to evolve our nascent sales team to support our revenue growth into the large advertising opportunity in rentals.

Last week, we announced that we'll execute a change in our capital structure related to our long-term focus. Later this month, we will issue a class of non-voting, Class C stock that our shareholders approved last December. Each Zillow Group holder of Class A or Class B shares will receive two Class C shares; basically a three-way stock split. C shares will trade under the symbol, Z, and A shares will trade under the symbol, ZG. For Zillow Group, extending our dual class structure through the issuance of C shares allows us to continue our focus on long-term growth and innovation. We're focused on making the right decisions for the business today that can lead to outsized total shareholder returns over the course of years. This structure ensures that we can continue to take big swings and set our sights on the long-term.

To conclude, we've been very focused operationally on the integration of Trulia and made great progress on a number of fronts. As with most mergers of any scale, it's required a great deal of time, attention, and energy. I'm very pleased that we will have successfully combined all advertising products by the end of the third quarter; well ahead of the timetable we shared on our May 12 conference call. Most importantly, the strategic rationale for the combination remains extremely strong and we're already seeing benefits of our combined scale in many parts of the business. Where as fired up as ever to power through this time of transition and be well set up for a great 2016. I'll now turn the call over to Kathleen to review the financial results in more detail.

Thank you, Spencer. Hello to shareholders, employees, analysts, and media on today's earnings call. I'm excited and honored to begin my new role as CFO of Zillow Group. Over the last few years as COO, I've spent a lot of time with many investors and analysts and I look forward to increasing that dialogue in my new role. Today, I will discuss our second quarter 2015 financial results on a pro forma basis for comparative purposes. Next, I will provide our outlook for Q3 and full-year 2015. Then we will open up the call for questions. As we get started, I'd like to remind everyone that our pro forma results assume the acquisition of Trulia occurred on January 1, 2014 and do not include the impact of acquisition-related costs and restructuring costs. Note that our GAAP and pro forma financial results, along with our pro forma comparisons, have been included in our second quarter 2015 financial results press release, which contains important information about how the pro formas were prepared. Unlike our first quarter 2015 results, second quarter financial results reflect a full quarter contribution from Trulia. Thus, our GAAP and pro forma financial results are similar with the exception of net loss, which includes acquisition-related costs, one-time share-based compensation expense, and restructuring costs on a GAAP basis and excludes them on a pro forma basis.

Now let's dive into our results, starting with traffic. Traffic growth continued to be solid through the second quarter, even as we made substantial progress on the Trulia integration. In the second quarter of 2015, we attracted 141 million average monthly unique users to Zillow Group's mobile applications and websites. On a pro forma basis, this was an increase of nearly 15 million users from the same period last year, about as large as the fourth or fifth largest site in our category. As a reminder, our unique user metric is a combined measure reflecting traffic across all four of our consumer facing brands: Zillow, Trulia, HotPads, and StreetEasy, and excludes Market Leader. We report it this way, as it's a measure of the scale we offer to our advertisers. We will continue reporting our traffic on a quarterly basis, consistent with the industry and aligned with how we report our other metrics.

Our Zillow Group agent business continued to be strong and experienced robust growth during the quarter. The annualized run rate for our agent advertising business reached nearly $456 million at the end of the quarter compared to $349 million at this time last year, which is a 30 plus percent increase. This still represents a very small portion of the approximately $10 billion spent by real estate advertisers per year. As Spencer alluded to, this result is driven by a combination of our highest spending agent advertisers buying more impressions to expand their presence on our platform. During the quarter, ARPA was $375 per agent advertisers, increasing 18% year over year on a pro forma basis, and our ending agent advertiser count of 101,297 increased 11% over last year on a pro forma basis. Consistent with how we report our traffic, we will continue to report these output figures on a quarterly basis. Note that the agent advertiser count represents a sum total of paying accounts, not just individual real estate agents. As Spencer noted, increasingly we are benefiting from agent teams and independent broker agents represented by one account that by advertising at much higher levels than the average. There are a lot of moving pieces in our agent ad business, from the changes we made to the Trulia ad product, which lay the groundwork for integration with Zillow to the integration of the ad platforms, which is ahead of schedule, to the changing industry dynamics where as more higher ARPA agents are buying even more advertising from Zillow Group. Each of these moving parts affects our near-term results differently. While each element involves independently, in combination, they establish a solid launching pad for our business in 2016 and beyond.

Moving now to the financials, for year-over-year comparative purposes, I will discuss our second quarter 2015 financial results on a pro forma basis. Total revenue for the second quarter increased 20% year over year to $171.3 million from $142.8 million in the same period last year. Total revenue, excluding Market Leader, increased 25% year over year to $158.7 million from $126.8 million in the second quarter of 2014. Looking at our primary revenue category, marketplace revenue was $145.5 million, which includes $12.5 million of Market Leader revenue, and grew 29% year-over-year. Excluding Market Leader, marketplace revenue would have grown 38% year over year. Marketplace revenue now accounts for 85% of Zillow Group total revenue. Taking a closer look into our real estate sub-category, which includes our agent advertising, Diverse Solutions, StreetEasy, and rentals advertising revenue, our second quarter real estate revenue reached $122.6 million and grew 37% year over year.

Moving now to mortgages, our revenue reached $10.4 million, which represents a 44% increase year over year. Loan requests grew 151% to more than 13 million submitted during the second quarter. In our display category, revenue was $25.8 million, down 15% over the same period last year and in line with our expectations. This decline was intentional. We removed some intrusive display ad units from our Trulia brand in order to improve the user experience. Display now accounts for 15% of total revenue, continuing our favorable long-term mix shift towards our marketplace revenues.

Now, let's take a deeper look at our operating expenses by line item. Note that this is the first full quarter of contribution from Trulia. Our cost of revenue during the quarter was $17 million or 10% of revenue. Next, sales and marketing expense was $87.9 million or 51% of revenue, which was lower than internal forecasts, due to lower than expected advertising expenses to achieve our audience growth goals, as well as lower than anticipated sales costs resulting from sales team efficiencies. Headcount-related expenses attributed to the Trulia acquisition also were lower than we forecasted. Zillow Group has not seen any slowdown in our ability to recruit terrific salespeople in our Seattle, Denver, and Irvine sales offices and our hiring standards have only grown more stringent. Technology and development costs in the second quarter were $51.7 million or 30% of revenue and lower than our outlook. A majority of the technology and development cost variance was due to headcount-related expenses, along with reduced capitalized wages and lower than anticipated investment levels in property data and technology for operations. G&A costs in the second quarter were $43.8 million or 26% of revenue, which was slightly higher than our outlook, due to professional service fees which include legal and accounting costs, with the majority of G&A expenses due to headcount-related expenditures.

Our pro forma net loss was $26.7 million in the second quarter compared to a pro forma net loss of $29.7 million in the second quarter of 2014. Pro forma second quarter 2015 basic and diluted loss per share was $0.46 based upon 58.7 million basic and diluted weighted average shares outstanding. The acquisition-related costs and restructuring costs totaling $8.3 million resulted in a GAAP net loss of $38.7 million. Second quarter 2015 basic and diluted loss per share was $0.66. On a non-GAAP basis, which excludes share-based compensation and acquisition-related costs and restructuring costs, basic and diluted non-GAAP loss per share was $0.01. As Spencer reported, adjusted EBITDA was $21 million or 12% of revenue, $17 million higher than the second quarter 2015 outlook we provided on May 12. Zillow Group ended the second quarter of 2015 with a little more than 2,000 employees. The pending acquisition of DotLoop will increase our number of employees by about 100.

Now, turning to our Zillow Group outlook for Q3 and full year 2015. Third quarter 2015 revenue is expected to be in the range of $175 million to $177 million, which includes Market Leader. Excluding anticipated Market Leader revenue of approximately $10 million, the year-over-year growth rate of third quarter revenue is expected to be approximately 18%. Real estate revenue is anticipated to grow 25% year over year. Display revenue on a dollar basis is expected to be in line with our Q2 2015 results. Our EBITDA for the third quarter is expected to be in the range of $18 million to $19 million. Due to the impact of our upcoming Class C share issuance and the effective three for one share split, our Q3 2015 basic weighted average shares outstanding is expected to be approximately 176.5 million to 178.5 million and our diluted weighted average shares outstanding is expected to be in the range of 193 million to 195 million.

Now turning to our 2015 full year outlook. We are reaffirming our full-year pro forma 2015 revenue guidance of $690 million. This includes Market Leader revenue of $40 million for the year. As of the end of Q2, the estimated net carrying value of the assets and liabilities of Market Leader is approximately $35 million. We are raising our full-year pro forma EBITDA outlook to the range of $85 million to $90 million, which includes Market Leader. Thus, we now expect the fourth quarter EBITDA margin to be approximately 14%. We expect full-year pro forma depreciation and amortization to be approximately $90 million. Due to the impact of our new Class C shares, our full-year 2015 basic weighted average shares outstanding is expected to be approximately 169 million to 171 million and our diluted weighted average shares outstanding is expected to be in the range of 185.5 million to 187.5 million. For GAAP modeling purposes only, we now expect full year 2015 acquisition-related costs to be approximately $18 million and restructuring-related costs to be in the range of $31 million to $33 million. Note that the vast majority of these costs have been recognized during the first half of 2015.

I would like to take a moment to address Zillow Group's near and long-term risk profile. In the near-term, as we enter into the most intense phase of our integration, we believe that the financial outlook we have provided is appropriately adjusted to balance the uncertainties, risks, and opportunities that may arise during this time of transition. The most significant of these risks relates to the upcoming migration of over 100,000 agent advertiser accounts to our combined agent advertising platform. Our outlook contemplates and incorporates possible sales challenges relating to this transition. The good news is that we're getting all of this behind us sooner than we expected. We will enter 2016 with the foundation complete to support our future growth into the massive market opportunity. Our long-term orientation has always been an advantage of ours. We have significantly de-risked our business over the past six months from the successful transition to direct listings releasing us from dependence on a third-party listings aggregator and resulting in significantly more listings with better quality to consolidating the category upon the completion of the Trulia acquisition to the integration of the ad platforms which is ahead of schedule, to focusing on increasing higher ARPA agents to growing brand awareness where we are now the category leader.

We've significantly enhanced the foundation of our business. Today, Zillow Group is more valuable, more stable, and better positioned to capture the huge real estate advertising TAM. To conclude, we continue to accelerate our growth of audience and advance our emerging home-related marketplace, while moving rapidly through the Trulia integration. We have accelerated the timeline of our ad sales platform integration and we're now more confident about finalizing all integration activity by the end of 2015. Looking out further, we remain on track to realize $100 million in cost synergies and avoidances in 2016. With that, Spencer and I will open it up for questions from those who've dialed into the call and to questions submitted via Twitter with the hashtag #ZEarnings.

(Operator Instructions)

Dean Prissman with Morgan Stanley.

Thanks for taking my questions. So when looking at the ratio of unique visitors that come to Zillow.com relative to the proportion of these users that generate a lead, over the past couple of years, what is the trend being and to what degree is this a growth lever going forward versus it being naturally constrained?

I'll take that one. So our lead volumes at the bottom of the funnel have consistently grown faster than our unique users of the top of the funnel or our visits sort of just below that top of the funnel and that reflects a number of things. It reflects a change in the composition of our traffic towards more serious home shoppers, it reflects a lot of product changes that we've worked hard at, it reflects a shift towards more mobile users who are deeper funnel and more likely to contact. So bottom of the funnel's growing faster than the top. Even at Trulia, as I mentioned, we're challenged at the top of the funnel, but the bottom of the funnel for Trulia looks a lot better than the top of the funnel. So I hope that answers your question.

Thanks and just a separate question. As it relates to your relationship with various high-profile brokers, such as Douglas Elliman where you're providing them with exclusive advertising rights on their listings in exchange for direct feeds, can you discuss the cost/benefit trade-off of such relationships? Any color on what percentage of overall listings supply they represent?

Sure. A small portion of our total listings and listing pages are ones in which brokerages pay us to advertise on their own listings and in those cases, we remove premier agent ads from those listings. That small percentage has been declining over time. We tend to price those featured listing ad deals with our brokerages in a manner such that we're relatively indifferent between selling a featured listing to a brokerage or not selling a featured listing to a brokerage and instead monetizing those impressions by having premier agent advertising. But as I say, the percent -- the already small percent of our listing page views fit this description is small and historically declining.

Great. Thanks, Spencer.

Mark Mahaney with RBC Capital Markets.

Two questions, please. One small one, Spencer, you mentioned I think 48% growth in Zillow Premier Agent revenue, can you just give us a little bit of context around that? What was the growth like in prior quarters or in the prior quarter?

Then broadly, more broad as a question, your efficiency in terms of getting agents to sign up for the different programs, any trends you're seeing there in that efficiency? Is there anything maybe competitively impacting that or do you feel like you're going further down the learning curve and becoming more efficient at getting agents? I know you wanted to winnow down some of the less well-performing agents, but in terms of the agency want to get, those that are high-performing, do you find that you're getting more efficient or less or about the same?

So our sales efficiency -- I don't have data to cite on that, Mark. I guess I'd say, certainly, as compared with a couple years where we had such low brand awareness, we've obviously overcome the awareness when we call an agent, they've certainly heard of us, and as our audience size has increased, it's a lot easier to close impression sales. The other important driver of sales efficiency is what percentage of our bookings go to existing agents buying more and this past quarter, 65% of our bookings went to existing agents buying more impressions. I believe that's slightly higher than in past quarters, but it's in the ballpark of where it's been over the last couple of quarters. And you're right to reference that we have a clear strategy of focusing more of our sales efforts and more of our available impressions towards existing high ARPA agents that value the impressions and value the leads more greatly and convert the leads at a higher rate. That is a strategic focus of ours.

The premier agent revenue growth stat that we gave -- it was 48% year-over-year revenue growth for PA and for Zillow PA in Q2 and I think it was 65% year-over-year in Q1 and I don't have data at my fingertips going further back than that. Do we have Q2 2014 year over year? Hold on. That may take a minute to get, Mark, so we can follow up.

That's all right. Thank you Spencer and congratulations again.

Jason Helfstein with Oppenheimer.

Two questions, the first, just given the agent number is, as you say, a combination of individuals buying or individual agents and then essentially groups or brokerage firms, how do you think about the ultimate -- what the TAM is? If it's 100,000 today, what's the maximum number? Secondly, can you talk about the competitive environment? What are you seeing particularly from realtor given that Newscorp seems to be particularly aggressive, pushing traffic to their site on its own properties? Thanks.

Sure. Thanks Jason. So you're right to describe the number of advertisers as a metric that -- it's really unique credit cards more than anything else is how we increasingly think about it. If you look at it, for example, the data that I gave on the number of agents or I should say the number of advertisers spending $5,000 or more a month, that's growing 48% year over year. If you just do some napkin math on someone spending $5,000 a month, they're probably -- they're spending $60,000 a year. They're probably generating $600,000 a year in commissions from us, they're probably doing about 100 [sides] a year. So that's not an individual agent. That's probably one agent's credit card standing in front of four or five other agents on that agent's team, maybe as many as five or 10. So it's very hard for us to know what the right TAM is of the total number of agent advertisers and quite frankly, we don't really care all that much. What we do know is that we're at $456 million annualized of premier agent revenue and a year ago, we were at $349 million of premier agent revenue annualized.

The way I look at it is we have 72% share of mobile-only visitors and agents spend $456 million a year advertising in front of the Company that has 72% mobile share. That says to me that we are dramatically underpenetrated from a monetization standpoint relative to our potential. So what will a steady-state number of agent credit cards, also known as agent advertisers, look like? I have no idea, but I can assure you it will be a lot more than $456 million of annualized revenue.

In terms of competitive developments, we've seen no impacts on our business or revenue results or traffic results from competitor advertising in either rentals or real estate. So no impact on our results that we've seen from others advertising. If anything, there's a slight halo effect when competitors advertise and raise awareness that they should shop for rentals online or they should shop for real estate or shop for real estate online. That tends to benefit category leaders which our brands are, so no competitive impact.

Thank you.

Ron Josey with JMP Securities.

Thanks for taking the question. So good to hear integration is set to be complete in 3Q, particularly with sales. I'm wondering -- I think guidance also includes some risk around that integration, so, Spencer, have you all started testing at all Trulia inventory on an impressions basis or selling on a unified web mobile ad product? If so, any lessons learned to maybe avoid any pitfalls? And then you mentioned 2016 quite a bit in prepared remarks. Knowing integration will be behind you, can you talk specifically just about what gets you so excited for 2016?

We have not tested -- so we've tested certain elements of where we're going. We haven't tested the elements that you described. So for example, no, we have not tested selling Trulia advertising integrated between display and mobile and no, we have not tested selling Trulia brand advertising integrated with Zillow. But we have tested a lot of the internal sales tools that salespeople are going to be using to complete these bookings and do these pitches and we tested different ways that we'll be organizing the sales team as we move through this migration. So it's impossible to test everything, but we've tested everything that we feel that we can and we've done those tests across all three of our sales offices in Denver, Irvine, and Seattle. But all that having been said, I think Kathleen characterized it correctly in the remarks and what's informing our guidance for Q3 is a recognition that this is complicated. It's never been done before at this scale and I'm thrilled to be doing it earlier than we expected, but there are some unknowns associated with it.

In terms of how that takes us into 2016, what I'm really excited about is being able to have our hundreds of salespeople in Denver, Irvine, and Seattle call real estate agents and say hey, with one ad buy, you can appear in front of 72% of mobile-only visitors across mobile devices. They've never been able to reach that type of audience scale before. Their newspaper used to call them in the local market and say hey, if you advertise in the newspaper, you can reach a lot of people looking for real estate. But this is totally different from a scale, a measurement, a efficacy, an integration standpoint in terms of this ad product sending leads directly into an online CRM where they electronically follow-up on the leads. They've never be able to buy audience at this scale with this type of measurement and efficiency before. That will be a glorious day. That day is going to be upon us very, very soon. We're weeks away from the integration with Trulia and then once we get through that, 2016 will be here before you know it. So that's what I'm excited about. Meanwhile, Mortgages is growing to 44% year-over-year, StreetEasy is cranking and we continue to be building out a solid rentals business.

Great. Thank you.

Heath Terry with Goldman Sachs.

Spencer, kind of curious if you could give us a little bit more detail on the traffic side given how important it is to maintain that 72% top of funnel chair that you've got. The relatively flat sequential user number is pretty counter to what you normally see seasonally. Kind of curious if it looks that way on both brands or if that's just really more a function of some of the changes at Trulia what the -- what either sequential year-over-year growth within Zillow specifically looks like? Then from a be bigger picture strategic, as you go back to or have gone back to spending more on television advertising, if you could give us a sense of the efficacy of the advertising that you're doing now compared to what you were doing when you launched the campaign or deeper into the campaign a year ago and how that's affecting the way you're thinking about growing audience as a combined Company?

Sure, so we gave so many different traffic stats, it's hard to keep them all straight. So let me try to parse this for you a little bit. The Zillow Group brands, in total, were 141 million [UUs] in the quarter. The Zillow audience is growing quickly, 22% year over year, and the Trulia audience is not growing quickly enough. The combination of Zillow and Trulia is growing very, very well. And I think what Kathleen remarked on in her section was something to the effect of the number of unique users that we added year over year was something on the order of 15 million, which is basically number four or number five in the category. So we effectively added a number four or a number five in terms of traffic year over year.

As we look to 2016 ad spend, as you saw in Q2, we were able to acquire audience more profitably or with less ad spend than we forecast, which explains part of the Q2 beat. We haven't yet built out our 2016 models yet, so I can't give any -- I can't set any expectations about what our total ad spend might be in 2016. What we've done historically, as you've seen now for a couple years, Heath, is we've started with what profitability do we want to deliver on the full-year basis, usually by looking at what our ending, what our prior-year full-year margin was and deciding whether to keep it flat in order to grow audience share significantly with increased investment or whether to increase profitability a couple points year over year. And then once we've decided on what margin will be for the full year, we've determined how much of that incremental spend should be focused on headcount growth versus advertising expense. This year, we'll have the added complexity of determining how to allocate that ad expense and the product development headcount expense across our four consumer brands and that's something that we'll be having that discussion over the next couple of months. I suspect you'll end up seeing us advertising across all four brands in 2016, but we'll get more insight as we end 2015 in terms of total amount and how we'll be spending it across different brands.

So we're going to go to Twitter now. Two questions about DotLoop, one for J1584 and one from KMS capital. What's the long-term motivation behind the DotLoop acquisition? From KMS capital, love the direction you're going with DotLoop. When fully integrated, how will you monetize and will you expand the offering?

DotLoop is very exciting for us. There's no question that real estate transactions are moving online. Any of you who have bought a home know that signing hundreds of pages of documentation is a burden and that the day of the paperless transaction is here now. DotLoop is the clear leader in the category. We think that we can expand DotLoop's market share by applying Zillow Group resources to it and by partnering with the 10,000 brokerages that partner with Zillow Group and the many tens of thousands, around 100,000 premier agents. The deal hasn't closed yet. It's still pending. It'll close in the next couple of weeks and then we'll probably announce more complete plans of how we're going to expand DotLoop's market share. The way I would characterize this acquisition is we've spent the last 10 years innovating on the search process, helping consumers select what home they want to go see and then maybe buy. We intend to apply as much innovation to the transaction itself, which is still a largely an offline experience. It applies much innovation to the second part of the transaction process, as we have to the search process.

Another question from Twitter from [HBurkvist], more color on the status of the Trulia integration, how it's going. I probably elaborated on this enough. The only thing I'd add to it is, we have already, behind the scenes, merged accounts and merged the reputation system and the review system. This is something that's very important to agents. We see, among our agents, especially the higher ARPA agents, that they're increasingly building their business on the backs of Zillow Group. They are managing their online reputation, their ratings and reviews on Zillow. They're investing heavily in their ratings and reviews. It's becoming an important part of their online reputation and their business model. They're investing in software systems that connect with Zillow Group and integrating the review systems and the repetition and the profile pages was an important milestone and that's -- that will be rolling out over the next coming weeks, along with the integration of the ad products.

Robert Peck with SunTrust.

Hey, Spencer, want to dig a little bit into the agent-base there. You broke out the agents as far as growth rates and those buckets of spending more than $5,000, more than $1,000, et cetera. Are you able to parse the base for us? What percent of agents are in the $5,000 bucket, what percent in the $1,000? Maybe give a little more granularity there and then just a quick follow-up.

Bob, give an inch and they take a mile. (laughter) This is more disclosure than you've ever gotten about churn by cohort, upsell by cohort. Yes, obviously, we have all that data. We look at it carefully. No, we're not going to disclose it in more detail, for competitive reasons. Suffice it to say the number is growing very quickly and it constitutes a significant portion of revenue and it further articulates why, I think, it's odd that people invest so much time and energy and money in scraping data to try to triangulate on our number of unique credit cards. It's an irrelevant metric and we've been saying that for four years. We don't manage our business to agent count, we manage it to net revenue. So anyway, that's all I can elaborate on the spend by --

And then just a follow-up question, could you talk to us about what's happening with conversion rates and talk a little bit about what the agents are seeing as far as ROIs? How's that trend moving?

Yes. This is -- I wish that I had a better insight into this part of the funnel, what percent of our leads convert. You've heard us say historically that we think system-wide, around 3% of our leads probably convert into a transaction. You've heard me say that we know many agents convert 10% to 20% of our leads into transaction and you've probably heard me say that I think probably system-wide, we're up around 5% of leads converting into a transaction. And that's the combination of two things; that's a combination of more of our impressions and therefore leads going to agents that have higher lead conversion rates and it's partly because we're doing a better job of qualifying the lead for the agent ahead of time. But it's very, very hard to know. Certainly, the data that we -- what little data we can get, much of which is anecdotal or survey-based, shows that the highest ARPA agents convert the leads at the highest rates. And in terms of how that flows through to ROI, we've typically said that we think system-wide, agents are generating 5 to 10x ROI. Again, I wish had more visibility. A good way -- if you took a giant step back from our business for a moment, our premier agent revenue is $456 million annualized. If you assumed 10x ROI, that means that all the agents that spend the $450 million with us generate $4.5 billion in commissions out of the $60 billion in total commissions. So it's very hard for me to know if that 10x ROI is right because I don't know the lead conversion rate, but I don't know that's the big picture that helps explain our business.

Thank you, Spencer.

Mark May with Citi.

I think at the end of your prepared remarks when you were talking about guidance, you referenced some unknowns about the transition with agent advertising that's coming up and some risk related. I was hoping you could add -- just provide a little more color to maybe some examples of what you're maybe anticipating that might be some of the risks or unknowns. Then sorry if I missed this, but can you provide the number of quota carrying salespeople and what it grew out on a pro forma basis year on year in the quarter and kind of what you're expecting for Q3 in the second half on that metric, as well?

Mark, are you trying to ask if we're going to yelp you? So we don't give year-over-year sales headcount data. So I can tell you we're up over 600 people total of sales and sales support, but we're not going to give the year-over-year number. The risks that we face as we go into this migration are significant. We have to make 100,000 phone calls and those phone calls have to tell agents that the rules of their ad buy are changing. Some of them were just serving on Trulia before and now they're going to serve on Zillow. Some of them -- the ones that were just serving on Trulia before had bought on a share of voice basis, they're now going to be shifted to a fixed impression basis. The agents that were just serving on Zillow before are now going to be served on Trulia. The agents that were served on both are now going to have the number of impressions unified and the sales team's going to be reorganized to support a single point of contact for each of those advertiser accounts. We take very seriously the level of complexity and risk associated with that. We've had months to plan for it and we're very focused on making sure that we do it right, but it is not without significant risk. It is with that level of risk consciousness that we approach our guidance for the rest of the year. Was there a second part of the question?

No, that's it. I hope you Amazon, Netflix, and Facebook me, though, rather than yelp me. Good luck in this position. Thanks.

Okay, so one other point on sales force size, when we merged the companies five or six months ago, we closed the Trulia sales center in San Francisco with about 50 inside salespeople and the Bellevue Trulia sales center, we also laid off about 100 people that were selling Trulia and now Bellevue's only focused on Market Leader. We rightsized the combined sales team six months or so ago when we did the integration.

I'm going to go to Twitter for a moment. What are Zillow plans for the Market Leader CRM product? I'll let Kathleen talk about Market Leader for a moment.

As we've said, we are continuing to evaluate our strategic opportunities for Market Leader. We're very mindful of the fact that the Market Leader clients are also important partners of ours, so we're focused on making sure that we make a decision that is right for our business, but also serves the interest of those clients and our partner as well.

Another question from Twitter, [TMCmill81], how big do you see mortgage revenue getting? It's going to be a substantial percentage of revenue and the mortgage TAM is massive. We're a tiny little raindrop in a giant bucket of mortgage advertising revenue. It's about $7 billion in total mortgage add TAM. I'm thrilled with our mortgage revenue growth rate, but we're still very small relative to the size of the opportunity. Mortgages is growing quickly, but of course, we're now a big Company in terms of total revenue, so it's harder for mortgages to become a significant part. I continue to think that mortgages could become a couple hundred million dollar revenue opportunity within the next couple of years, but we have a lot of work to do to achieve that. Most importantly, we have to raise awareness of the fact that you can get a mortgage, you can shop for mortgage on Zillow or Trulia. So that's the focus of the mortgage team and the product team as well as brand team.

Aaron Kessler with Raymond James.

Couple questions, first, do you have the pro forma ARPA number for Q1? I believe that was a combined number. Second, I think there's been a lot of confusion just on maybe the $100 million in 2016. I believe that obviously includes 2015 as well. Any sense of just maybe what incrementally we should expect in 2016 versus what we're going to see in 2015? Obviously 2016 EBITDA number's all over the place. And then I may have missed this, the mortgage loan requests, did you give that number on the call?

Mortgage loan requests were 13 million in the quarter growing 151%.

And then $100 million in cost savings avoidances is how much in 2015 versus 2016?

So you're right to point out that it's complicated because we're conflating cost avoidances with cost savings. Cost avoidances are what might Trulia be spending on advertising in 2016, were it a standalone company and what might Zillow be spending on advertising and headcount were it a standalone company in 2016. Obviously, it's hard to know what those numbers might've been, so I think that explains part of the confusion. We're still confident in a long-term 40%-plus EBITDA margin when we're at revenue scale, which still feels a ways away, but we still feel that it's totally attainable. You can see in Q2, just how inherently profitable and high margin incremental revenue is. It's really a question of when we choose to start focusing more on margin expansion rather than revenue growth and obviously, today is not the time and 2015 is not the time to do that just yet. And there was another question in there.

Do have the pro forma ARPA for Q1? I know you gave that on the website, do you have the Q1 number 2015?

Yes, it was 354.

That was pro forma.

Compared to 375.

Got it. Just finally, on the display business, back to yelp, they cited some display headwinds, I think LinkedIn, as well. Are you guys seeing similar headwinds that some of these other companies are seeing in terms of programmatic?

Sort of. We're creating our own headwinds in display by removing ad units. We're not taking the approach of removing all display from the site because remember, a lot of display we view to be additive to the user experience, so builders, for example, our display advertising category, which is terrific for a home shopper. So yes, programmatic advertising creates a CPM anchor on display, it has been that way for three years and we've been saying that for three years and we've been intentionally trying to shift more of our ad units away from display and more towards marketplace revenue.

Mortgage is another perfect example. If you looked three years ago at our mortgage advertising, a lot of it was focused on display, where we had big banks buying display ads from Zillow. Today, much of that mortgage display ad revenue has moved into our marketplace segment, as those big banks are now participating and quoting in Zillow Mortgage Marketplace and participating in the Zillow mortgage long form product. So, they're paying us on a cost per lead basis and advertising in a way that is additive to the user experience, rather than distracting from the user experience.

Great, thank you.

We're going to wrap the call up. We'll do more a couple more questions on Twitter if there are any. I just want to close by saying, obviously, 2015 is a transition year and its a year of a lot of integration. And I believe that we've significantly improved the foundation and derisked the business such that we're better positioned for 2016 than ever before.

Just to tick off some of the accomplishments over the last six months, we rationalized the market by closing the Trulia acquisition and consolidated the market with around 60% audience share; twice the size of our nearest competitor. We fully integrated rentals, mortgage, display, and back of house operations and we're on the eve of the ad product, the agent ad product integration. Zillow Group brands are now 72% market share of all mobile-only visitors in the category. Our brand awareness is significantly greater than it was two years ago. We now have listings independence, so we're no longer reliant on a third-party vendor for listings from MLSs. The focus on high producing agents is obviously paying off. We acquired DotLoop, which positions us to be at the forefront of this revolution of online paperless transactions. We amended the capital structure to create a stock dividend in the form of Class C stock, which allows us to keep focusing on the long-term. Rentals is much further along than it was a year ago. StreetEasy is much further along than a year ago. Mortgage is further along than a year ago. Then this week, we announced major Management changes which draw from our existing talent pool of executives without missing a beat.

So it's been a great first half of 2015. I'm very excited, though, for 2016 and with that, I'll thank you all for your time and we'll speak with you again soon in future quarters. Thank you.

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