Zillow Group Inc (ZG) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Zillow Group third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder today's conference may be recorded.

I would like to introduce your host for today's conference, Mr. Raymond Jones. Please go ahead.

Thank you, good afternoon and welcome to Zillow Group's third-quarter 2015 earnings conference call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer, and Kathleen Philips Chief Financial Officer. During the call we will make forward-looking statements regarding future financial performance and events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can't guarantee these results and actual results may differ materially.

We caution you to consider the risk factors in our SEC filings which would cause actual results to differ materially from those forward-looking statements made in the press release and on this call. The date of this call is November 3, 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 discuss GAAP and non-GAAP measures. We will also discuss results on both the reported and pro forma basis. The reported results were prepared in accordance with GAAP. For comparative purposes, pro forma results assume that February 2015 acquisition of Trulia occurred on January 1, 2014 and reflects certain adjustments and exclusions described in our SEC filings.

We encourage you to read our press release, as it contains pro forma results including reconciliations 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 amortization expense, acquisition-related costs, restructuring costs, loss on divestiture of business, interest expense and income tax benefit.

This call is being broadcast on the Internet and is available on the Investor Relations 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 remarks will also be available on our website.

Today, we will open the call with prepared remarks and all year-over-year comparisons are pro forma unless otherwise noted for the context otherwise requires. We will follow the prepared remarks with 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.

I will now turn the call over to Spencer.

Thank you for joining us today on our Q3 call. I will start with some highlights from the quarter and then talk about our long-term strategy. Then Kathleen will take us through a deeper dive on our financials. We will then open the call up for questions.

The third quarter was a remarkable one for Zillow Group. In August, we completed our most ambitious undertaking to date. We finished the final phase of our Trulia integration four months ahead of schedule and launched our unified premier agent advertising platform. More on that in a moment.

Even as we transitioned our agent ad platform during the quarter our financial results were solid. Revenue for the third quarter was nearly $177 million and at the high end of our outlook. Our premier agent revenue grew 25% year-over-year, in line with our outlook, and our mortgages, rentals, and New York City marketplaces all grew revenue even faster.

Looking at the top of the funnel traffic across our portfolio, our seasonal traffic peak hit nearly 150 million unique users in the month of July. We now have around 60% market share of unique users across mobile and web in the category according to the comScore. More importantly on mobile, Zillow Group brands get about 70% of all mobile exclusive users in the category.

Moreover, our two largest brands, Zillow and Trulia, each grew leased agents faster than their top of the funnel traffic staff. And Zillow Group combined grew leased to premier agents 36% year-over-year in Q3. We're also off to a strong start in Q4 with October leads to premier agents up 37% year-over-year and Trulia leads to premier agents particularly strong over the last few weeks.

On the last earnings call I said there was uncertainty going into the ad product integration, but that we were well-prepared. We also baked that into our outlook for Q3 and I'm pleased report that our preparation and execution mitigated those potential risks. As a result we recorded a significant beat on EBITDA, which Kathleen will elaborate on shortly.

As a result of the strong Q3 results, we're updating our full-year 2015 estimates. We now expect $675 million to $680 million in revenue, which is in line with last quarter's guidance, excluding market leader in the fourth quarter, and $95 million to $100 million in EBITDA, which is an increase over last quarter's guidance of $85 million to $90 million. Revenue is tracking right where we expected it to be, and we're ahead on EBITDA. These numbers include our estimates of DotLoop's revenue from the date of the acquisition's closing on August 20 to the end of 2015, and now exclude Market Leader's fourth-quarter revenue, since it sold on September 30. It also includes Trulia for the full year of 2015.

Turning to our premier agent business; we had a very successful annual event, with 1,000 of our top premier agent advertisers in Las Vegas, where we announced a brand-new free premier agent mobile app to a very warm reception. The new app will help agents convert their Zillow Group leads into transactions more efficiently. This premier agent branded, CRM, is in addition to more than 50 CRM partners who participate in our Zillow Tech Connect program, which sends Zillow Group leads directly into agents CRM of choice.

The premier agent form was energizing and inspiring as was clear on social media from the many posts by premier agents on Twitter, Instagram, and Facebook. It was similar to last year's successful event, but there was one big difference.

The number of high-performing agents who have built big businesses on top of the Zillow Group platform has grown immensely. These agents understand and embrace technology, lead conversion, reputation management, and online marketing and they have put Zillow Group in the center of their business plans for local market leadership.

We're continuing to focus on growing revenue from these high producing agents and not from increasing the overall number of advertisers. These higher spending agents typically deliver better service to consumers and we prioritize the sale of ad impressions to them. We anticipate these highly productive agents will continue to increase their spend with us, to grow their business and grow their market share in their respective cities.

In line with this, we'll continue to encourage lower performing agents to leave and resell their inventory to agents with higher ROI. This will reduce our number of advertisers and connect more home shoppers with better agents. And we expect this will reduce our sales and support costs over time, as well. As I've said many times, we do not manage our business to the metric of advertiser count. We manage our business to total premier agent revenue, which has grown 25% year-over-year.

We're in the midst now of our 2016 planning process, and although its early, we are targeting a higher total revenue growth rate in 2016 than the expected 2015 revenue growth rate of 18%, including Market Leader, or 24% excluding Market Leader. We are also prioritizing revenue growth over margin expansion, given the huge TAM in agent advertising, rentals, mortgages and New York City.

Our largest business, agent advertising, is still a very small fraction of what agents spend on total advertising. And we are investing very heavily in its growth. We will also be continuing investing in product development and advertising for our consumer brands in 2016, along with growing awareness of our mortgages and rentals products.

Over the past 4 years as a public company we have evolved into the definitive category leader. By consolidating and rationalizing the categories through the Trulia acquisition and completed the integration quickly, we have entered the next phase of our evolution in a position of strength. We further enabled our team to focus on innovating and accelerating our growth, now untethered from factors that previously held us back. From accessing direct listing feeds with more than 350 MLS partners to establishing the foundation for our brand portfolio strategy through our unified advertising platform, to focusing on attracting highly productive advertisers across our marketplaces and providing them with products to help drive increased conversion, we are more in control of our destiny now than ever before.

Moving beyond integration, our strategic priorities remain the same; broader audience, because advertisers follow audience, grow our real estate agent marketplace, and grow our emerging marketplaces in mortgages, rentals, and New York through our portfolio of brands. We are finishing this year of transition in great shape. I said a few times during 2015 that 2016 can't come soon enough and now that we're through this integration, I'm incredibly excited for the accelerating growth ahead in 2016 and beyond.

Now Kathleen, will walk you through the financials in more detail.

Thank you, Spencer, and hello to those of you who have joined us on today's earnings call. For comparative purposes I will discuss year-over-year comparisons of our third-quarter financial results on a pro forma basis unless otherwise noted or the context otherwise required. Next I will provide our outlook for Q4 and for the full year 2015 and recap our 2016 preview. Finally we will open up the call for questions.

As we get started, I would like to remind everyone that our pro forma results assume the close of Trulia occurred on January 1, 2014, and do not include the impact of acquisition-related costs and restructuring costs, in addition to certain other adjustments. Note that our GAAP and certain pro forma financial results, along with our pro forma comparisons have been included in our third-quarter 2015 financial results press release, which contains important information about how the pro formas were prepared. For the third quarter our GAAP and pro forma financial results are similar with the exception of net loss, which includes acquisition-related costs 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. In the third quarter of 2015, as we completed the most challenging portion of the Trulia integration, we attracted over 142 million average monthly unique users to Zillow Group's mobile applications and websites, achieving a peak of nearly 150 million unique users in July. 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. Our Zillow Group agent advertiser business performed remarkably well, while undergoing a substantial change as we combined the Zillow and Trulia sales teams and ad platforms.

We close the third quarter with 96,965 advertisers, a decrease of 2% over the same period last year, but the associated revenue, our real estate revenue, rose 27% in the quarter to $129 million. And the annualized run rate for agent advertising business reached $468 million at the end of the quarter, compared to $397 million at this time last year. This desirable result is driven by our highest spending advertisers buying more impressions to expand their presence on our platform and as the result of our intense focus on increasing advertiser spend by our high-performing agents.

When we reached out to our nearly 100,000 advertisers during the integration of our ad platform, the response was overwhelmingly positive. Most advertisers kept their spending levels the same and the cancellation rate was below our normal level. In fact, new sales to existing advertisers made up 69% of total bookings in Q3, the highest it has ever been.

For the third quarter, average revenue per advertiser, or ARPA, was $402, increasing 20% year-over-year on a pro forma basis and same agent advertiser sales grew over 50% higher than last year. For this purpose, the same agent is an existing agent who has been on our platform for more than one year.

Consistent with previously discussed trends, increasingly we are benefiting from agent teams and independent broker agents represented by one account that buy advertising at much higher levels than the average. It is clear now more than ever before, that our strategy of working with higher ARPA advertisers is paying off.

Growth of the advertiser cohort that spends more than $5000 per month was 57% on a total dollar basis and 45% in advertiser count, year-over-year. And churn in this cohort continues to be minimal. Conversely, it was our lowest spending advertisers who had the highest rate of churn. Specifically, during the third quarter the average spend of agents who stopped advertising with us was $270, roughly half of the ARPA of agents who remain on the platform.

We intend to actively grow high spending agents and teams on our platform and at the same time encourage lower ARPA, lower producer agents not to renew. This approach drives revenue growth by placing impressions in the hands of industrious, high ARPA advertisers. Our strategy accelerates the larger trend across the real estate industry of high producing agents crowding out those who are less competitive.

Moving now to our financial results. Total revenue for the third quarter increased 13% year-over-year, to $176.8 million from $155.8 million in the same period last year. If we exclude Market Leader for both years, total revenue increased 18% year-over-year to $165.8 million, from $140.3 million in the same period.

Looking at our primary revenue category, market place revenue was $153.2 million, representing an increase of 22% year-over-year. Excluding Market Leader, market place revenue would have grown 29% year-over-year. Markets place revenue now accounts for 87% of total revenue as compared to 80%, during the same period last year. Taking a closer look into our real estate subcategory, which includes our agent advertising, agent services, StreetEasy, and rentals advertising revenue, our third-quarter real estate revenue reached $129.7 million and grew 27% year-over-year.

Moving now to mortgages, our revenue reached $12.6 million, which represents a 60% increase year-over-year. Loan requests grew 61% on an as reported basis to more than 11 million submitted during the 3rd quarter. In our display category, revenue was $23.5 million, down 23% over the same period last year and in line with our expectations. This downward trend continues and is intentional as we move away from display revenue and focus on the consumer experience and much more valuable content-based advertising. Display now accounts for 13% of total revenue, as compared to 20% during the same period last year.

Before discussing our operating expenses in detail and like to go over three main factors that contributed to our third-quarter EBITDA result of $29.5 million, which was significantly ahead of our prior outlook. The largest impact to EBITDA came from our combination with Trulia and was primarily related to headcount efficiencies across sales and marketing and technology and development. Adding to this was continued effectiveness of advertising spend on our brand portfolio. Similar to what we experienced in the second quarter, we met our near and long-term audience growth and awareness goals on Zillow at lower than planned advertising spend levels.

Lastly, the downside risks in areas that were baked into our Q3 outlook did not materialize during the transition of our agent advertising platform. In short, not only did the Trulia integration go faster than it expected, it went much more smoothly than we anticipated. With that, let's take a deeper look at our operating expenses by line item.

Our cost of revenue during the quarter was $16.5 million, or 9% of revenue. Next, sales and marketing expense was $82 million, or 46% of revenue, which was lower than the internal forecasts, reflecting cost savings related to headcount efficiencies as we unified the Zillow and Trulia sales team. Additionally, as in the second quarter, we experienced cost savings and brand advertising spend due to greater campaign effectiveness at meeting our long and short-term audience goals for the Zillow brand. Technology and development costs in the third quarter were $53.7 million, or 30% of revenue, which was lower than internal forecasts due to cost savings related to headcount efficiencies, higher capitalized wages, due to the speed of integration, and contingency-related expenses not being utilized.

G&A costs in the third quarter were $42.7 million, or 24% of revenue, which was slightly lower than our internal forecast. The majority of G&A expenses were lower due to headcount related efficiencies stemming from the integration.

Pro forma net loss was $21.4 million in the third quarter, compared to a pro forma net loss of $18.6 million in the third quarter of 2014. Pro forma third-quarter 2015 basic and diluted net loss per share was $0.12, based upon $177.1 million basic and diluted weighted average shares outstanding.

The acquisition costs and restructuring costs totaling $5.4 million resulted in a GAAP net loss of $26 million. GAAP third quarter 2015 basic and diluted loss per share was $0.15. On a non-GAAP basis, which excludes share-based compensation, loss on sale of a business, and acquisition-related costs and restructuring costs, basic and diluted non-GAAP net earnings per share was $0.07.

As I mentioned before, our adjusted EBITDA for the quarter was $29.5 million, or 17% of revenue. Zillow Group ended the third quarter of 2015 with over 2100 employees, this includes our DotLoop acquisition and the sale of Market Leader.

Now, turning to our Zillow Group outlook for Q4, full-year 2015 and 2016, fourth-quarter 2015 revenue is expected to be in the range of $165 million to $170 million. Our EBITDA offer the 4th quarter is expected to be in the range of $20 million to $25 million, which results in a 13% EBITDA margin at the midpoint of the range. Due to the impact of our new Class C shares, our fourth-quarter 2015 basic weighted average shares outstanding is expected to be approximately $178 million to $180 million, and our diluted weighted average shares outstanding is expected to be in the range of $194 million to $196 million.

Turning to our full-year 2015 outlook, we now expect our full-year pro forma 2015 revenue to be approximately $675 million to $680 million. We are raising our full-year pro forma EBITDA and expect it to be in the range of $95 million to $100 million, due to a portion of the cost savings realized in the third quarter. We now expect full-year pro forma depreciation and amortization to be approximately $82 million versus our prior outlook of $90 million. The reduction was largely driven by lower amortization of web development costs.

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 $186 million to $188 million.

For GAAP modeling purposes only, as we approach the end of the Trulia integration, we can reconcile outstanding one-time items definitively. Thus, we now expect full-year 2015 acquisition-related costs to be approximately $16 million to $18 million and restructuring related costs to be approximately $35 million to $36 million, versus our prior outlook $20 million and $31 million to $33 million, respectively.

Finally, I will recap our preliminary full-year 2016 outlook. Building upon our combined scale, we are targeting a higher total revenue growth rate in 2016 than the 2015 revenue growth rate, which we expect to be 18% year-over-year, with Market Leader and 24% year-over-year, without Market Leader. We are prioritizing revenue growth over EBITDA expansion as we invest in our growth to capture our large opportunity ahead.

In summary, our third quarter was strong, even as we balanced execution with the transition of our agent platform. We are proud of our teams execution during this year transition and we are pleased that the flux associated with integration will be isolated to 2015. Now that the integration has been successfully completed, we are excited about the opportunities for audience engagement, product innovation, transaction innovation and revenue growth in 2016.

With that, we will open the call for questions.

(Operator Instructions)

Dean Prissman, Morgan Stanley.

Thank you for taking my questions. I was wondering if you could comment on Trulia ad spend, more specifically have you been reworking the platform and user experience, how would you prioritize spend on the brand and how are you thinking about this going forward? And separately, I know a meaningful portion of the sales and marketing line relates to your sales force. Since agent count is less of a driver going forward, how should we think about operating leverage increasing sales productivity going forward?

Thanks, Dean. On the Trulia ad spend, firstly, let me just remind everyone that we sell Zillow Group combined. So when a real estate agent or a mortgage lender or a homebuilder or a rental property manager buys advertising, you can't buy Zillow or Trulia. You're buying Zillow Group and the combination of that audience scale was 60% to 70% share of the category is huge. So that have been said, Trulia growth at the bottom of the funnel, lease to real estate agents is very strong, 30% plus year over year. The top of the funnel is not growing as fast as we'd like and we're working very hard on improving that and I'm sure we will get it moving in the right direction.

We are spending money right now advertising Trulia brand online. We don't breakout how much online advertising we do or offline advertising we do for that matter, across brands. But we are advertising the Trulia brand right now. For us it does start with product. There's a lot of hard work being done by the Trulia product teams to improve the user experience and reduce the ad load, which directly speaks to usability and to consumer satisfaction. So it starts with product, gets amplified through PR emails and social, and SCO, and then advertising is an important part of it as well.

On your second question around sales team productivity, let me try to understand the question. I think you're saying, now that you've integrated the ad products and integrated the sales team and you got a couple of weeks under your belt, do you have a better sense of what the right size for the premier agent sales team, rental sales team, mortgage sales team should be across the Zillow Group, now that it is representing both brands? The answer there if that was a question, it's a little early to tell. We've only been selling on a joint basis for a handful of weeks now, so I don't have a good sense yet of what sort of a steady-state sales team should be for any of our business lines now that we are selling on a combined basis.

It does feel like -- we're already experiencing some of the synergies that we talked about from the merger and from the combined sales team. And so we are still growing the sales teams across the different business lines, but much more slowly than we would have individually. And remember, we did reduce the size of the sales team by over 100 people at the time of the closing of the acquisition a couple months ago. I'll probably have a better read on sales force productivity and right size, sales force efficiencies when we get full of 2016 numbers in the new year.

Thanks.

Ron Josey, JMP Securities.

Thanks for taking the questions too, two please. So first on just 2016 [expense] Kathleen, you talked about accelerating revenue growth. I am wondering what gives you confidence there, is it newer ad products, greater share of wallet from top producing agents like your seeing today? That would be helpful. And clearly, we're looking at new products that you've launched, like Premier Agent Assist, how does that factor in? Secondly, with your comments on focusing on growth, not necessarily margin expansion, I wanted to understand a little more on your overall advertising spend, which maybe Dean was talking about before? You know, 3Q was another quarter where you diverted spin out of 3Q into the quarter going forward. So I'm wondering, you have great traffic, you have a very strong brand, understanding you have to continue to spend brand marketing, some dollars on brand marketing, what do you think is the optimal spend going forward for advertising, overall? Maybe this year's $100 million budget is going to be a little too much. Thank you.

Thank you Ron. For 2016 revenue growth, you are correct in pointing out that one of the major reasons we have confidence in re-acceleration of our growth is through the continued growth of our high spending agents and we're very focused on that. We believe that trend will continue. We're investing a lot in products and tools to make those agents even more effective and efficient and to create greater value in the advertising they've purchased. Similarly, as we've said we continue to see the trend of departing low ARPA agents spending less and being replaced by these higher spending agents. Further to that, is that much of the distraction of the integration that had our focus through Q2 and Q3 has now disappeared and we can we refocus our energy on the overall revenue growth of the business. And we feel that will be able to achieve significant efficiencies. We already have demonstrated that we've done that, obviously given these current results that we feel good about 2016 in that regard.

As for overall ad spend, it's hard to predict what the optimal number would be. Obviously, we love our category growth and that also gives us confidence for 2016 revenue growth. But the way we look at ad spend and the reason that ad spend came in lower in both Q2 and Q3, than we expected, is we're making an investment in both short and long-term growth of our audience. We set our growth goals and then moderate our advertising to make sure that we're realizing the benefits of both types of spend. There's not an immediate return on the spend, but we also don't want to invest in long-term in a way that doesn't make sense when we look at ROI. As for what next year will look like, stay tuned, we will give our thoughts on that in the new year. But in the near-term I hope that's helpful of how we think about it.

Great, thank you.

Ron, because it is so important to the conversation, let me give a little more color on 2016 revenue growth. Rentals, mortgages, and StreetEasy are growing revenue quite a bit faster than we're talking about in the mid-20s. And we've divested Market Leader, which was shrinking and display is intentionally declining year over year because we keep diverting ad units away from display and more towards marketplace. But total market place revenue is now almost 90% of revenue. So then that leaves you with the big piece, which is of course premier agent. There something happening in the industry right now, which we could feel it happening a year ago but it feels like it is happening even more so now than ever before.

It's pretty hard to communicate through numbers, but one stat was the $5000 a month agent spends about $60,000 a year, that those type of agents are spending that, up 57% year over year. These are people putting $60K a year on their credit cards. So they're not really individual agents, they are forming teams, they are building businesses on Zillow Group and it was very clear from our Las Vegas event that there are just many more of those people than ever before. When you look at our strategy of doing more agent training, focusing on selling impressions, basically churning low performing agents to [trap] impressions for these top performing agents, building out our CRM, connecting to other CRM's, all of these pieces are falling into place where we're helping these top agents be even more successful. Its a combination of all of those things, the high growth rate of our emerging businesses, divesting of Market Leader and growing premier agent, that gives us confidence. Thanks, Ron.

Robert Peck, SunTrust.

Hi, just a few quick questions here. I wanted to about talk about leads going on around 36% and growing 37% in October. Can you give us how the cave to that has been and where you expect that to go? And then tied with that, could you give us an update on conversion rates and how that's been trending? And then just one follow-up.

It's really hard to know where that metric goes because there are so many things that go into it. It starts with traffic than we do so many different things on the site to try to improve that metric. I guess the way I look at it, Bob, part of the conversation is half the [tide at hand] and let me combine your two questions. If you take a 3% to 5% conversion rate on those leads, we're probably responsible for less than 5% of all the commission checks being earned in the US. So said another way; all the homes that sold yesterday, we were probably responsible for 3% to 5% of those agents finding those clients. In other words, I think that lead number can continue to grow a lot over the next 5 or 10 years. I'm not going to give guidance on the particular metrics, but it still feels very early relative to where it can get to.

On conversion rate, we've historically told investors that although we don't know for sure what the conversion rate is from a lead to a commission check, we thought it was around 3%, I now think it's higher than that, probably closer to 5%. But again, we don't know for sure. The reasons that I think it is increasing are several-fold. Firstly, the overall level of agent education on Internet lead conversion continues to increase as less tech savvy agents leave the industry and the types of agents that don't do a good job following up internet leads, leaves share. Secondly, we've made a very conservative effort to make sure that our impressions and therefore, leads get filtered in favor of the agents with high conversion rate. Third, more and more agents are using some sort of a CRM through our tech connect program and leads that go into a CRM are more likely to convert to a higher rate for the growth and agent teams allows for faster follow-up on the leads and better lead incubation. If an agent follows up on a consumer right away and the consumer is not available, the combination of software and the team approach helps turn that dead lead into an actively lead down the road. And that's more likely to become a commission check as well. There are a lot of tailwinds on driving that lead conversion rate, although it is hard to know exactly what it is, what the metric is.

And Spencer, if you could just give us an update on the 100 million synergies given that you are moving faster and integrating quicker than previously expected. Is there an update on the $100 million number for 2016?

Yes, the update on it is that we believe we have achieved what we set out to achieve with the synergies. To put into perspective, where there's cost avoidances and cost savings came from, they are primarily driven by the cost we would have incurred in running two separate brands. Trulia would have spent quite a lot of money on off-line advertising and Zillow would have spent much more than we did. Similarly, we both would have spent a lot more on headcount. The way think about the $100 million in cost synergies, its behind us. We've achieved the savings that we want to and now as we think about 2016, we're thinking about a clean slate with revenue growth faster than 2015, that we will continue to prioritize revenue over EBITDA margin expansion.

Thanks so much.

I am going to take a couple of questions from Twitter, one is from @sedquist who asks, how do these super agents feel about the accelerating 2016 price increases and hazy earnings? What happened to same agent ARPA growth? And @c.43 says, good profitability but ending agents down year-over-year. How long can you grow by charging the same agents more dough?

All good questions. Let me try to talk about our premier agent business and adjust these different questions together. Firstly, you should realize that most of the ARPA growth, the growth in how much agents are spending on Zillow Group, is not driven by price increases, it's driven by individual agents buying more impressions. As traffickers, as lead volumes grow, we have more impressions than we are able to sell. We are more focused on selling through our inventory than increasing price. We are constantly repricing zip codes and repricing our impressions, but most of the growth is coming from agents buying more inventory.

To the question about number of agents being down year-over-year, I've said that what we are focused on is total revenue growth which was growing 25% year over year. And the decline in the number of agents, say quarter-over-quarter for example, is intentional. We are trying to serve a smaller number of agents that are higher-performing and spend more on advertising to produce better service for consumers, rather than have a very large number of agents that spend very little. I think in Kathleen's prepared remarks, she shared that agents that left the program spent around $270 a month, I think it was, which is about half of the average revenue per agent for ARPA of agents that continue to spend with us. That's intentional and desired. We will go back to the call now for a couple more questions.

John Campbell, Stephens.

It sounds like a lot of the profit beat this quarter, came from structural cost accounts and not necessarily tapering ad spends, is that fair to say?

Yes.

And then, with regard to the role off the Market Leader rev, how should we think about the impact to total company gross margin? Is that going to move the needle there?

The guidance that we've provided is still accurate, which for Q4 as your thinking about the model, was about $10 million in revenue. If that helps you.

Yes, that's helpful, thank you.

Mark Mahoney, RBC Capital Markets.

First, Spencer, how long do you think this transition will take, toward the higher quality, higher spend advertisers? Secondly, Kathleen in terms of your margin comments for next year, mid-20s revenue growth, you could do a lot with margins and I understand a lot of that is elective. Could you put any more fine color that you've done around the revenue about what margins, do you want to run margins kind of flattish, 15 to 16? And then finally, just a square one point up, if the leads are going 37% year over year, really robust growth but real estate revenue is robust, but they're only 27%, what is the give in between those two numbers? Why aren't those two numbers more similar? I'm trying to square that one, sorry.

Sure, good questions Mark. I will take the first one, Kathleen will take the second and I'll probably take the third. Transition to hire ARPA agents is underway. You can see it in the ARPA growth year over year. You see it even more in the metrics around the top ARPA agents, the $5000 a month cohort of 57% year-over-year. If you are in the field talking with our top-performing agents as I am constantly, you feel it even more. One of the single biggest leverage opportunities for us, as it relates to our revenue growth and to that extent our EBITDA our growth as well, is cultivating more of these agents. We have many leads and we need them to go to great agents that will convert them into a commission check at a 5%, 10%, 20% conversion rate.

I guess I will hit your third question at the same point, which is basically the answer comes out of my statement here. You're saying, if leads are up 37% and premier revenue is up 25% to 27%, what's the delta? And the answer is, obviously, cost per lead is decline because what we're doing is we're focused on sell through and focused on increasing the number of leads that are going to top-performing agents rather than increasing price. So if you just do the math around the implied cost per lead and then you improve the conversions just ever so slightly, you can see that the ROI for a typical premier agent, mathematically has to be increasing. That is very deliberate. We are not taking price here, we are growing revenue share. We are growing wallet share. We are focused on creating these super agents and growing their business rather than reducing their ROI. We think it is much more important for us to build up these super agents and raise ARPA than reduce ROI for them, at this stage. Kathleen, do you want to talk about his second question?

Sure. Going back to the 2016 outlook, its still early, Dave, in our planning process and as I'm sure you can imagine, we've just reached the end of this pretty massive integration and transition, so we're really just turning in [earnest] for 2016 planning right now. As we said, revenue growth we expect will be faster than 2015. In terms of prioritizing EBITDA margin -- I mean revenue growth over EBITDA margin, now more than ever we take a very long term view of this business. We've consolidated the category and we feel like next year will be a terrific year for us to continue to build that foundation with higher revenue growth but also continued investments that will pay dividends in the future. Beyond that we don't have anything to share. But I will reiterate, that we are taking a long-term view of eventually 40% EBITDA margins as we've cited before.

Heath Terry, Goldman Sachs.

Spencer, just want to get a better sense as we you look out to next year, the plans for traffic growth versus pricing that's embedded in that guidance for better revenue growth next year versus what we've seen this year, can you give us a sense of how that breaks down? I know you've touched on some of the other products that are being developed, how much is reliant on success in those products versus the core agent lead generation product?

Our statement that we think we can we re-accelerate revenue growth above the 18% to 24% that we achieved in 2015, 18% including Market Leader, 24% excluding Market Leader. It doesn't require the creation of any brand new, from scratch ad products, in our premier agent business or any other business. We do have a number of things that are in different stages of development but it does not require any dramatic reinvention of the business model or creation of ad units. It's improving the revenue growth rate year-over-year. Its pretty simple math, its about divesting Market Leader, devoting more to display inventory, which revenue is declining year-over-year, devoting spend toward market place, growing StreetEasy rentals and mortgages faster than the average and on premier agent, trying to create these top-performing agents and sell more impressions over to them because those impressions convert to higher rates. It's a strategy I feel confident in and I think its a question of execution and I like our chances when it comes to execution.

Mark May, Citi.

Thanks. Most of mine have been answered, but going back on the high-performing agent topic, can you give us a sense of the total premier agents that you report? What portion of those fit the definition of this high-performing agent that you're talking about? For that group, I think some of them are spending as much as $60,000 a year, I believe you said. Can you give us a sense for that typical high spending agent, about how many closed leads in a given year that they may be getting through Zillow today?

Sure. We don't break out the cohorts of agents specifically, what we share about that is that they are growing nicely. In terms of agent numbers it's 45% year over year and total spend is 57% year over year. In terms of size and closed transactions, we can only extrapolate that agents are behaving rationally and we look at the spend of the cohort of the 5000 plus agents, those agents likely are closing about 100 deals a year. And so we think that there is still significant upside as they close more transactions they'll continue to spend more, which is why we are also investing in tools to make that happen.

DotLoop would be an example of that. I had one of our, a $10,000 a month spend agent, I think he was from Kansas City. He told me at the Las Vegas Summit, two weeks ago; he said a good year for me is to have 5 sides a year. This year I'm on track to do 50 sides a year, [50] sides in 2015. The only reason I'm able to do 50 sides this year is because of the lead volumes from Zillow and Trulia and because I use DotLoop. As so as I stand here today in Las Vegas I closed five deals yesterday from my iPhone using DotLoop, which in the past I never could have done remotely. I would have had to be back in the office in order to close those deals.

When I hear stories like that I think, copy and paste. How do we extrapolate somebody like that so there are dozens of them in every major city in the country? Mark, I don't have an update on how many agents I would put into that category, but certainly 50, 100 plus sides a year is pretty common for top performing, premier agents like that. Remember also, these agents are not sole practitioners, they are typically, they have admin, a transaction coordinator maybe 3 to 10 buyers agents, sometimes they have a listing agent or two and they're really small business owners that sit on top of the larger agent team. And if there spending $50,000 to $100,000 a year with us with us on spend and they're business owners that have other expenses. That's how to think of them, not really as individual agents anymore.

And likewise, because they have these teams built-up, they can continue to grow those teams. As they are successful they will grow their teams and will spend more because they are realizing the ROI on their investment with us.

Thanks, Mark. I will turn it back to Twitter, there's a question from @11banthony, who asks, what is happening in the housing sector? Housing sector is having quarter-over-quarter gains. Prices are rising so what impact does that have on your business? Trulia economists and Zillow economist estimate that home values are increasing about 4% year-over-year nation-wide. There are certain parts of the country like San Francisco and Dallas, where home values are increasing double digits because a very strong job growth and other parts of the country, like Baltimore and Philadelphia, where home values are not increasing at all because of weaker job growth.

The real story in housing right now is rent affordability, where the average American is spending 30% of their income on rent and the historical average is 24%. The reason for that is 10 million Americans during the downturn stopped being owners and started being renters and there was not enough rental inventory available to meet that increased demand, so rent has spiked way up. In LA, the average renter is now spending more than 50% of their monthly income on rent and in San Francisco I believe it is 47%. Those are unsustainably high portions of income that goes toward rent. It has to come out of other discretionary purchases or out of saving or out of somewhere. That is what is happening in housing now is the multi-family industry scrambling to bring rental inventory online and renters grappling with high rents. The impact for us, we don't have a direct read through from macro housing to Zillow Group results. We do well when agents make money and earn commissions, but frankly agents are earn commission during upturns and during downturns. So I would not read too much short term macro housing trends and their impact on our results.

Next question is from @jwan584 says that Zillow Group, could you address the prior question regarding long term opportunity, given the focus on high spend agents only? I'll probably address that. I guess I would just say, there is a significant change underway in the real estate industry which Zillow Group is accelerating and that is this shift away from the part-time agents who dabbles and is a hobbyist to the professional real estate team leader who is a business owner and uses software and embraces technology. That trend, we are in the middle of that trend, we are helping catalyze that trend and we are the beneficiary of that trend. Eventually most of the $60 billion in commissions will go to agents like that and agents like that tend to spend a lot of money advertising on Zillow Group.

I will do one more Twitter and then back to the call. @bdaws asks; how would DotLoop improve your analytics on agent productivity conversion rates, etc? It is true that DotLoop has productivity data inside the software because it shows whether a lead becomes a transaction. That's not really why we acquired DotLoop, although that it is interesting data to be sure. The real reason we acquired DotLoop is to improve agent efficiency and improve brokerage's ability to track the success of their agents. So just as the story I shared already of an agent being able to be much more productive than he ever could in the past, that is created and empowered by DotLoop and that is what it's all about. We'll go back to the call. Are there any questions?

Lloyd Walmsley, Deutsche Bank.

Thanks. It doesn't look like MAU is growing that fast on a year-over-year basis, but your obviously driving more leads, can you give us a sense for what you're doing for the end consumer level to get more leads out of per MAU. Particularly at Trulia, where you are no longer sending the same lead to multiple agents? And second question, if I can, can you give us a sense for how much the mortgage co-advertising is contributing to agent revenue? And where penetration is, where you think it can go? And is the RESPA or CFPB investigations into this, is this something that should be a concern or something you think is not really an issue?

I'll take the first one on basically leads per visitor. There are a lot of things going on under the hood that drive a higher rate of leads per active user. There are a million little things on the site that you might or might not never notice and on mobile apps, part of it is certainly the shift of our users more towards mobile. They are more transaction ready. Part of it is that our listing quality is dramatically better than a year ago, as we now have many cities around the country with full beautiful, clean crisp, timely MLS, quality data and that makes our emails and [push notification] presentations more accurate and improves the home shopper experience and makes us more useful for the home shopper and that generates more serious home shopper traffic, which generates more leads per user. Part of it is the constant AB testing we're doing across different brands. We have brands of four brands, four great test beds for innovation, where we can take the learning of something we try in one brand and see what it does to traffic conversion statistics. And then take it across multiple brands. On the Trulia brand in particular, the team has been focused on features like collaboration, which help a home shopper her spouse or friend or partner or parent or real estate agent collaborate while shopping. And that's the type of power user feature that's terrific which drives a higher rate of leads per unique user. There's a lot of different things driving these stats that I've been sharing.

On your questions about co-marketing, co-marketing with lenders and agents is a very small part of our business. A small contributor to our PA revenue. Importantly though, we are not seeing lenders depart from this program, notwithstanding all of the discussions in the marketplace about the CFPB and the CFPB's recent pronouncement and actions.

I can assure you that we work diligently to comply with all of the rules put forth by government agencies. And we monitor the CFPB and the things that they are saying and doing to make sure that we remain in compliance and to make sure that we understand how their activities relate to our business.

Operator, we could probably go back to caller. We probably have one more question for us.

Michael Graham, Canaccord.

First on the super agents, do they tend to work for major brokers or independent brokers or for themselves, and does that impact your relationship with the major brokers? And I just wanted to get an update on your revenue or activity focused on buy side agents versus sell side agents and some of the things you may be doing to accelerate the sell side.

There's no clear pattern on these top performing agents and in some cases they're with branded brokerages and other cases they're with independent brokerage and still in other cases they're, their own broker. There is no clear pattern. Regarding buy side and sell side, we have ad product called Trulia Seller Ads, which sells listing leads. It sells very well. It's still sold as a separate independent ad product, not integrated with Zillow Group premier agent ad impressions. All three of our sales centers in Seattle, Denver, and Irvine sell Trulia Seller Ads. We've made a number of changes to that ad product to make it better for the consumer and better for the agent. For example, the consumer lead on a sell side inquiry; what is my house worth, type of lead, only goes to one agent now instead of multiple agents and we think that beneficial for the consumer and for the real estate agent buying that potential listing lead. We have still more improvements to make to that product, nothing to announce at this time, but it is certainly an important business for us.

I think that's it, RJ. I will wrap up by saying, we said this would be a risky quarter because of the ad product and team integrations. We did it. The results were better than expected and we are reaping the benefits of combination of Zillow and Trulia. And you see that in the $30 million EBITDA versus $20 million in expectations. And we couldn't be more excited as we approach 2016 and expanding our revenue growth rate in 2016.

Thank you for your questions and for those that have other questions on Twitter, I will now take the rest of the call over to Twitter where we will respond to other questions that were submitted there. Thanks very much, everybody.

Thank you for participating in today's conference, this does conclude the program and you may all disconnect. Everyone have a great day.