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Z > SEC Filings for Z > Form 10-Q on 4-Nov-2011All Recent SEC Filings

Show all filings for ZILLOW INC

Form 10-Q for ZILLOW INC


4-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Risk Factors."

Overview

We are the leading real estate information marketplace. We provide vital information about homes, real estate listings and mortgages through our websites and mobile applications, enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals best suited to meet their needs. We are transforming the way consumers make home-related decisions.

Our living database of more than 100 million U.S. homes - homes for sale, homes for rent and homes not currently on the market - attracts an active and vibrant community of users. Individuals and businesses that use Zillow have updated information on more than 25 million homes and added approximately 65 million home photos, creating exclusive home profiles available nowhere else. These profiles include rich detailed information about homes, including property facts, listing information and purchase and sale data. We provide this information to our users where, when and how they want it, both through our websites and through our industry-leading mobile applications that enable consumers to access our information when they are curbside, viewing homes. Using industry-leading automated valuation models, we provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on approximately 100 million U.S. homes. Our products and services present residential real estate data in novel ways that have revolutionized the way consumers search for, find and understand home-related information and make real estate decisions.

We generate revenues from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals and brand advertisers. Our revenues include marketplace revenues, consisting of subscriptions sold to real estate agents and advertising sold on a cost per click, or CPC, basis to mortgage lenders, and display revenues consisting of advertising placements sold primarily on a cost per thousand impressions, or CPM, basis.

During the three months ended September 30, 2011, we generated revenues of $19.1 million, as compared to $8.2 million in the three months ended September 30, 2010, an increase of 132%. The increase in revenues is primarily attributable to the increase in our marketplace revenues, which increased $8.2 million, or 226%, to $11.8 million during the three months ended September 30, 2011 from $3.6 million during the three months ended September 30, 2010, as a result of growth in our Premier Agent program. There was a 131% increase in our Premier Agent Subscribers to 14,876 as of September 30, 2011 from 6,448 as of September 30, 2010. We also experienced significant growth in traffic to our websites and mobile applications. There were approximately 24.2 million average monthly unique users of our websites and mobile applications for the three months ended September 30, 2011 compared to 12.1 million average monthly unique users for the three months ended September 30, 2010, representing year-over-year growth of 101%.

We moved into our current headquarters in Seattle, Washington in August 2011. The operating lease for our headquarters prior to August 2011 expires in February 2013. As a result of vacating the office space, we recorded a facility exit charge for $1.7 million related to costs that will continue to be incurred under the operating lease for the remaining term. As of September 30, 2011, we had 268 full-time employees, compared to 216 full-time employees as of December 31, 2010, an increase of 24%.

Key Growth Drivers

To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we frequently review the following key growth drivers:

Unique Users

Measuring unique users is important to us because our marketplace revenues depend in part on our ability to enable our users to connect with real estate and mortgage professionals, and our display revenues depend in part on the number of impressions delivered. Furthermore, our community of users improves the quality of our living database of homes with their contributions. We measure unique users with Omniture analytical tools. Zillow counts a unique user the first time an individual accesses either Zillow.com or Postlets.com using a web browser during a calendar month, and the first time an individual accesses Zillow's mobile applications using a mobile device during a calendar month. If an individual accesses Zillow's websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses both Zillow.com and Postlets.com in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain. If an individual accesses Zillow's mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user.


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                               Average Monthly Unique
                                 Users for the Three
                             Months Ended September 30,         2010 to 2011
                              2011                2010            % Change
                                   (in thousands)
           Unique Users          24,238              12,061               101 %


Premier Agent Subscribers

The number of Premier Agent subscribers is an important driver of revenue growth
because each subscribing agent pays us a monthly fee to participate in the
program. We define a Premier Agent subscriber as an agent with a paid
subscription at the end of a period.



                                         At September 30,        2010 to 2011
                                         2011         2010         % Change
           Premier Agent Subscribers      14,876       6,448               131 %


Basis of Presentation

Revenues

We generate revenues from the sale of advertising services to businesses and professionals primarily associated with the real estate and mortgage industries. These professionals include local real estate professionals, primarily on an individual subscription basis, and mortgage professionals and brand advertisers. Our revenues include marketplace revenues and display revenues.

Marketplace Revenues. Marketplace revenues consist of subscriptions sold to real estate agents under our Premier Agent program and CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders and financial institutions.

Our Premier Agent program allows local real estate agents to establish a persistent online and mobile presence on Zillow in the zip codes they serve. We present contact information for each Premier Agent alongside home profiles and home listings within the agent's zip code, assisting consumers in evaluating and selecting the real estate agent best suited for them. Pricing for our Premier Agent subscriptions varies by zip code. Subscription advertising revenues are recognized on a straight-line basis during the contractual period over which the advertising is delivered. Typical terms of our Premier Agent subscription contracts are six months. Growth in our subscription advertising product is based on our ability to continue to attract agent subscribers and drive consumer traffic to those agents on our websites and through our mobile applications.

In Zillow Mortgage Marketplace, participating qualified mortgage lenders make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Consumers who request rates for mortgage loans in Zillow Mortgage Marketplace are presented with personalized lender quotes from participating lenders. We only charge mortgage lenders a fee when users click on their links for more information regarding a mortgage loan quote. Mortgage lenders who exhaust their initial prepayment can then prepay additional funds to continue to participate in the marketplace.

Display Revenues. Display revenues primarily consist of graphical web and mobile advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers. Our advertising customers also include telecommunications, automotive, insurance and consumer products companies. We recognize these revenues as impressions are delivered to users interacting with our websites or mobile applications. Growth in display revenues depends on continuing growth in traffic to our websites and mobile applications, migration of advertising spend online from traditional broadcast and print media and our development of new advertising products.

Costs and Expenses

Cost of Revenues. Our cost of revenues consists of expenses related to operating our websites and mobile applications, including associated headcount expenses, such as salaries and benefits and share-based compensation and bonuses. Cost of revenues also includes credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships and facilities costs allocated on a headcount basis.

Sales and Marketing. Sales and marketing expenses consist of headcount expenses, including salaries, commissions, benefits, share-based compensation expense and bonuses for sales, sales support, customer support, marketing and public relations employees. Sales and marketing expenses also include other sales expenses related to promotional and marketing activities and facilities costs allocated on a headcount basis.

Technology and Development.Technology and development expenses consist of headcount expenses, including salaries and benefits, share-based compensation expense and bonuses for salaried employees and contractors engaged in the design, development and testing of our websites. Technology and development expenses also include equipment and maintenance costs and facilities costs allocated on a headcount basis. Technology and development expenses also include amortization costs related to capitalized website and development activities and amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our websites.


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General and Administrative. General and administrative expenses consist of headcount expenses, including salaries, benefits, share-based compensation expense and bonuses for executive, finance, accounting, legal, human resources, recruiting and administrative support. General and administrative expenses also include legal, accounting and other third-party professional service fees, bad debt and facilities costs allocated on a headcount basis.

Other Income. Other income consists of interest income earned on our cash and cash equivalents and short-term investments.

Income Taxes

We are subject to U.S. federal income taxes. As of December 31, 2010 we did not have taxable income, and as of September 30, 2011, we do not have any projected taxable income and, therefore, no tax liability or expense has been recorded in the financial statements. We have provided a full valuation allowance against our net deferred tax assets as of December 31, 2010 and September 30, 2011, because there is significant uncertainty around our ability to realize the deferred tax assets in the future. We have accumulated tax losses of approximately $64.0 million as of December 31, 2010, which are available to reduce current future taxable income.

Results of Operations

The following tables present our results of operations for the periods indicated
and as a percentage of total revenues.



                                                 Three Months Ended                  Nine Months Ended
                                                    September 30,                      September 30,
                                               2011               2010               2011           2010
                                                  (in thousands, except per share data, unaudited)
Statements of Operations Data:
Revenues                                   $     19,057        $     8,229        $    46,162     $ 20,894
Costs and expenses:
Cost of revenues (exclusive of
amortization) (1) (2)                             3,084              1,263              7,614        3,647
Sales and marketing (1)                           7,035              4,060             18,150       10,925
Technology and development (1)                    3,849              2,528             10,148        7,940
General and administrative (1) (3)                5,695              1,902             10,151        4,726

Total costs and expenses                         19,663              9,753             46,063       27,238

Income (loss) from operations                      (606 )           (1,524 )               99       (6,344 )
Other income                                         36                 14                 79           56
Net income (loss)                          $       (570 )      $    (1,510 )      $       178     $ (6,288 )

Net income (loss) attributable to common
shareholders                               $       (570 )      $    (1,510 )      $       178     $ (6,228 )
Net income (loss) per share attributable
to common shareholders - basic             $      (0.02 )      $     (0.12 )      $      0.01     $  (0.50 )
Net income (loss) per share attributable
to common shareholders - diluted           $      (0.02 )      $     (0.12 )      $      0.01     $  (0.50 )
Weighted-average shares outstanding -
basic                                            24,020             12,803             17,141       12,702
Weighted-average shares outstanding -
diluted                                          24,020             12,803             20,220       12,702
Other Financial Data:
Adjusted EBITDA (4)                        $      3,654        $       246        $     8,556     $ (1,139 )


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                                                          Three Months Ended                       Nine Months Ended
                                                            September 30,                            September 30,
                                                      2011                    2010                 2011              2010
                                                                         (in thousands, unaudited)
(1)  Includes share-based compensation as
follows:
Cost of revenues                                $              48         $         61       $             134      $   168
Sales and marketing                                            85                  117                     259          332
Technology and development                                    135                  102                     311          303
General and administrative                                    220                  188                     587          506

Total                                           $             488         $        468       $           1,291      $ 1,309

(2)  Amortization of website development
costs and intangible assets included in
technology and development is as follows:       $           1,461         $      1,030       $           3,918      $ 3,107
(3)  General and administrative includes a
facility exit charge as follows:                $           1,737         $         -        $           1,737      $    -

(4) See "Adjusted EBITDA" below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

                                                    Three Months Ended               Nine Months Ended
                                                      September 30,                    September 30,
                                                   2011             2010            2011            2010
                                                                       (unaudited)
Percentage of Revenues:
Revenues                                              100 %           100 %            100 %          100 %
Costs and expenses:
Cost of revenues (exclusive of amortization)           16              15               16             17
Sales and marketing                                    37              49               39             52
Technology and development                             20              31               22             38
General and administrative                             30              23               22             23

Total costs and expenses                              103             119              100            130

Income (loss) from operations                          (3 )           (19 )              0            (30 )
Other income                                            0               0                0              0
Net income (loss)                                      (3 %)          (18 %)             0 %          (30 %)

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA within this Quarterly Report on Form 10-Q, a non-GAAP financial measure. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key metric used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;


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Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and

Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Adjusted EBITDA does not reflect certain facility exit charges.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to net income
(loss) for each of the periods presented.

                                                   Three Months Ended             Nine Months Ended
                                                     September 30,                  September 30,
                                                  2011            2010           2011           2010
                                                              (in thousands, unaudited)
Reconciliation of Adjusted EBITDA to Net
Income (Loss):
Net income (loss)                               $    (570 )     $ (1,510 )     $    178       $ (6,288 )
Income tax expense (benefit)                           -              -              -              -
Other income                                          (36 )          (14 )          (79 )          (56 )
Depreciation and amortization expense               2,035          1,302          5,429          3,896
Share-based compensation expense                      488            468          1,291          1,309
Facility exit charge                                1,737             -           1,737             -

Adjusted EBITDA                                 $   3,654       $    246       $  8,556       $ (1,139 )

Three Months Ended September 30, 2011 and 2010

Revenues



                                      Three Months Ended
                                        September 30,              2010 to 2011
                                      2011              2010         % Change
                                  (in thousands, unaudited)
         Revenues:
         Marketplace revenues   $         11,840       $ 3,628               226 %
         Display revenues                  7,217         4,601                57 %

         Total                  $         19,057       $ 8,229               132 %

                                              Three Months Ended
                                                 September 30,
                                              2011            2010
                  Percentage of Revenues:
                  Marketplace revenues            62 %           44 %
                  Display revenues                38 %           56 %

                  Total                          100 %          100 %

Overall revenues increased by $10.8 million, or 132%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Marketplace revenues increased by 226%, and display revenues increased by 57%.

Marketplace revenues grew to $11.8 million for the three months ended September 30, 2011, from $3.6 million for the three months ended September 30, 2010, an increase of $8.2 million. Marketplace revenues represented 62% of total revenues for the three months ended September 30, 2011 compared to 44% of total revenues for the three months ended September 30, 2010. The increase in marketplace revenues was primarily attributable to growth in the number of subscribers in our Premier Agent program to 14,876 as of September 30, 2011 from 6,448 as of September 30, 2010, representing growth of 131%, and was also the result of existing Premier Agent subscribers purchasing additional inventory.

Display revenues increased to $7.2 million for the three months ended September 30, 2011, from $4.6 million for the three months ended September 30, 2010, primarily as a result of increased interest in our advertising platform from endemic advertisers including builders, real estate brokers and lending institutions. Display revenues were also positively impacted by an increase in our unique users, which grew to 24.2 million average monthly unique users for the three months ended September 30, 2011 from 12.1 million average monthly unique users for the three months ended September 30, 2010, representing year-over-year growth of 101%.


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Cost of Revenues



                                    Three Months Ended
                                      September 30,              2010 to 2011
                                   2011               2010         % Change
                                (in thousands, unaudited)
           Cost of revenues   $        3,084        $  1,263               144 %

Cost of revenues increased by $1.8 million, or 144%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The increase in cost of revenues is primarily attributable to revenue sharing costs related to the strategic relationship with Yahoo! Real Estate, which launched in February 2011, as well as increases in credit card fees and other costs related to revenue growth, primarily in our marketplace revenues category.

We expect that our cost of revenues will increase in total in future years as we continue to incur more expenses associated with growth in revenues.

Sales and Marketing



                                     Three Months Ended
                                       September 30,              2010 to 2011
                                    2011               2010         % Change
                                 (in thousands, unaudited)
         Sales and marketing   $        7,035        $  4,060                73 %

Sales and marketing expenses increased by $3.0 million, or 73%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Approximately $1.6 million of the increase is the result of adverting costs, tradeshows and related travel expenses incurred to promote our brand. There was also an increase in headcount expenses of $1.0 million, primarily related to increases in the size of our sales team to promote our marketplace business. The remaining increase of $0.4 million is primarily the result of consulting costs and additional depreciation expense.

We expect our sales and marketing expenses will increase in future years as we continue to invest more resources in growing our sales team and invest in marketing and advertising. Although these expenses may increase as a percentage of revenues in the near term, we expect these expenses will decrease as a percentage of revenues in the long term.

Technology and Development



                                         Three Months Ended
                                           September 30,              2010 to 2011
                                        2011               2010         % Change
                                     (in thousands, unaudited)
      Technology and development   $        3,849        $  2,528                52 %

Technology and development expenses, which include research and development costs, increased by $1.3 million, or 52%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Approximately $0.5 million of the increase is the result of growth in headcount . . .

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