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Z > SEC Filings for Z > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for ZILLOW INC


6-Nov-2012

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, including in the section titled "Note Regarding Forward-Looking Statements," those items listed in Part II, Item 1A (Risk Factors) in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, and also those items listed in Part 1, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

We are the leading real estate information marketplace. In addition to Zillow.com, we also operate Zillow Mobile, our suite of mobile real estate applications, Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get the competitive mortgage rates, and Zillow Rentals, a marketplace and suite of tools for rental professionals.

Zillow provides information about homes, real estate listings and mortgages through our mobile applications and websites, enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals best suited to meet their needs.

Our living database of more than 110 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 35 million homes and added more than 115 million home photos, creating exclusive home profiles available nowhere else. These profiles include 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 through our industry-leading mobile applications and websites 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.

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

During the three months ended September 30, 2012, we generated revenue of $31.9 million, as compared to $19.1 million in the three months ended September 30, 2011, an increase of 67%. This increase is primarily the result of an 80% increase in our Premier Agent subscribers to 26,703 as of September 30, 2012 from 14,876 as of September 30, 2011, as well as significant growth in traffic to our mobile applications and websites. There were approximately 36.1 million average monthly unique users of our mobile applications and websites for the three months ended September 30, 2012 compared to 24.2 million average monthly unique users for the three months ended September 30, 2011, representing year-over-year growth of 49%.

As of September 30, 2012, we had 508 full-time employees, compared to 329 full-time employees as of December 31, 2011.

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 revenue depends in part on our ability to enable our users to connect with real estate and mortgage professionals, and our display revenue depends 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 count a unique user the first time an individual accesses our mobile applications using a mobile device during a calendar month and the first time an individual accesses one of our websites using a web browser during a calendar month. If an individual accesses our 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. If an individual accesses our 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 more than one of our websites 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. Beginning in October 2011, we measure unique users with Google Analytics. Prior to October 2011, we measured monthly unique user metrics with Omniture analytical tools. We believe Google Analytics and Omniture result in materially consistent measurements of our monthly unique users.

Average Monthly Unique Users for the Three Months Ended September 30, 2011 to 2012 2012 2011 % Change

(in thousands)

Unique Users 36,096 24,238 49 %


Table of Contents

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,        2011 to 2012
                                         2012         2011         % Change
           Premier Agent Subscribers     26,703       14,876                80 %


Basis of Presentation

Revenue

We generate revenue from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals and brand advertisers. Our revenue includes marketplace revenue and display revenue.

Marketplace Revenue. Marketplace revenue primarily consists 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.

Our Premier Agent program allows local real estate agents to establish a persistent mobile and online 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 and the tier level of participation, Platinum Premier, Gold Premier and Silver Premier. Subscription advertising revenue is 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 through our mobile applications and our websites.

Since the launch of our Premier Agent subscription product, we have historically charged for this product based upon a percentage of the total Platinum Premier Agent views in the zip code rather than the number of impressions actually delivered. In the first three quarters of 2012, we began testing sales of our Platinum Premier Agent subscription product based upon charging for the number of impressions delivered in zip codes purchased. We began testing this impression-based sales model for our Platinum Premier Agent product to better align our revenue opportunities with increasing traffic levels to our mobile and web platforms and increasing demand by real estate agents for access to our home shoppers. We continue to evaluate the method of charging based upon impressions purchased and delivered, up to a maximum number per month, and expect to apply this method more broadly to our existing subscriber base in the fourth quarter of 2012. In our history of building our real estate and other marketplaces and product offerings, we have continually evaluated and utilized various pricing and value delivery strategies in order to increase access to our inventory and align our revenue opportunities with the growth in usage of our mobile and web platforms.

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 Revenue. Display revenue primarily consists of graphical mobile and web 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 display revenue as impressions are delivered to users interacting with our mobile applications or websites. Growth in display revenue depends on continuing growth in traffic to our mobile applications and websites and migration of advertising spend online from traditional broadcast and print media.

Costs and Expenses

Cost of Revenue. Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries and benefits and share-based compensation expense and bonuses. Cost of revenue 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.


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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 advertising and 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 mobile applications and websites, 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, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our mobile applications and websites, and amortization of intangible assets recorded in connection with acquisitions.

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 expense and facilities costs allocated on a headcount basis.

Other Income

Other income consists primarily of interest income earned on our cash and cash equivalents and investments.

Income Taxes

We are subject to federal and state income taxes in the United States. During the nine months ended September 30, 2012 and 2011, we did not have taxable income, and we are not projecting taxable income for the year ending December 31, 2012. We have provided a full valuation allowance against our net deferred tax assets as of September 30, 2012 and December 31, 2011 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax asset will not be realized. Therefore, no tax liability or expense has been recorded in the financial statements. We have accumulated federal tax losses of approximately $68.6 million as of December 31, 2011, which are available to reduce future taxable income.


Table of Contents

Results of Operations

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



                                                   Three Months Ended                 Nine Months Ended
                                                     September 30,                      September 30,
                                                2012                2011              2012          2011
                                                   (in thousands, except per share data, unaudited)
Statements of Operations Data:
Revenue                                     $      31,915       $     19,057        $  82,513     $ 46,162
Costs and expenses:
Cost of revenue (exclusive of
amortization) (1) (2)                               3,623              3,084           10,237        7,614
Sales and marketing (1)                            14,118              7,035           34,586       18,150
Technology and development (1)                      6,687              3,849           17,535       10,148
General and administrative (1) (3)                  5,192              5,695           14,869       10,151

Total costs and expenses                           29,620             19,663           77,227       46,063

Income (loss) from operations                       2,295               (606 )          5,286           99
Other income                                           39                 36              104           79

Net income (loss)                           $       2,334       $       (570 )      $   5,390     $    178

Net income (loss) attributable to common
shareholders                                $       2,334       $       (570 )      $   5,390     $     -

Net income per share attributable to
common shareholders - basic                 $        0.08       $      (0.02 )      $    0.19     $     -
Net income per share attributable to
common shareholders - diluted               $        0.07       $      (0.02 )      $    0.17     $     -
Weighted-average shares outstanding -
basic                                              30,040             24,020           29,115       17,141
Weighted-average shares outstanding -
diluted                                            32,230             24,020           31,493       20,220
Other Financial Data:
Adjusted EBITDA (4)                         $       7,624       $      3,654        $  18,343     $  8,556




                                                      Three Months Ended            Nine Months Ended
                                                        September 30,                 September 30,
                                                      2012           2011           2012          2011
                                                                 (in thousands, unaudited)
(1)  Includes share-based compensation as
follows:
Cost of revenue                                    $       94       $    48      $      271      $   134
Sales and marketing                                       870            85           1,349          259
Technology and development                                374           135           1,182          311
General and administrative                                374           220           1,553          587

Total                                              $    1,712       $   488      $    4,355      $ 1,291

(2)  Amortization of website development costs
and intangible assets included in technology
and development is as follows:                     $    3,198       $ 1,461      $    7,576      $ 3,918

(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.


Table of Contents
                                                   Three Months Ended               Nine Months Ended
                                                     September 30,                    September 30,
                                                  2012             2011            2012            2011
                                                                      (unaudited)
Percentage of Revenue:
Revenue                                              100 %           100 %            100 %          100 %
Costs and expenses:
Cost of revenue (exclusive of amortization)           11              16               12             16
Sales and marketing                                   44              37               42             39
Technology and development                            21              20               21             22
General and administrative                            16              30               18             22

Total costs and expenses                              93             103               94            100

Income (loss) from operations                          7              (3 )              6              0
Other income                                           0               0                0              0

Net income (loss)                                      7 %            (3 )%             6 %            0 %

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;

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;

Adjusted EBITDA does not reflect certain facility exit charges; and

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

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (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,
                                                   2012            2011           2012           2011
                                                               (in thousands, unaudited)
Reconciliation of Adjusted EBITDA to Net
Income (Loss):
Net income (loss)                                $   2,334        $  (570 )     $   5,390       $   178
Other income                                           (39 )          (36 )          (104 )         (79 )
Depreciation and amortization expense                3,617          2,035           8,702         5,429
Share-based compensation expense                     1,712            488           4,355         1,291
Facility exit charge                                    -           1,737              -          1,737

Adjusted EBITDA                                  $   7,624        $ 3,654       $  18,343       $ 8,556


Table of Contents

Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011

Revenue



                                     Three Months Ended
                                       September 30,              2011 to 2012
                                    2012              2011          % Change
                                 (in thousands, unaudited)
         Revenue:
         Marketplace revenue   $       23,616       $  11,840                99 %
         Display revenue                8,299           7,217                15 %

         Total                 $       31,915       $  19,057                67 %

                                             Three Months Ended
                                                September 30,
                                             2012            2011
                  Percentage of Revenue:
                  Marketplace revenue            74 %           62 %
                  Display revenue                26 %           38 %

                  Total                         100 %          100 %

Overall revenue increased by $12.9 million, or 67%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Marketplace revenue increased by 99%, and display revenue increased by 15%. Marketplace revenue grew to $23.6 million for the three months ended September 30, 2012 from $11.8 million for the three months ended September 30, 2011, an increase of $11.8 million. Marketplace revenue represented 74% of total revenue for the three months ended September 30, 2012 compared to 62% of total revenue for the three months ended September 30, 2011. The increase in marketplace revenue was primarily attributable to growth in the number of subscribers in our Premier Agent program to 26,703 as of September 30, 2012 from 14,876 as of September 30, 2011, representing growth of 80%. The increase in marketplace revenue was also partially attributable to an 11% increase in the average monthly revenue per subscriber to $270 for the three months ended September 30, 2012 from $242 for the three months ended September 30, 2011. We calculate our average monthly revenue per subscriber by dividing the revenue generated by our Premier Agent subscription products in the period by the average number of Premier Agent subscribers in the period, divided again by the number of months in the period. The average number of Premier Agent subscribers is derived by calculating the average of the beginning and ending number of Premier Agent subscribers for the period. The increase in average monthly revenue per subscriber was primarily driven by price increases supported by growth in our audience across our mobile and desktop platforms, as well as increased sales to existing Premier Agent subscribers looking to expand their presence on our platform.

The following table presents our average monthly revenue per subscriber for each of the periods presented (unaudited):

                                                                                     Three Months Ended
                                 September 30,        June 30,         March 31,        December 31,         September 30,        June 30,         March 31,
                                     2012               2012             2012               2011                 2011               2011             2011
Average Monthly Revenue per
Subscriber                      $           270       $     263       $       263       $         258       $           242       $     233       $       206

The average monthly revenue per subscriber increased sequentially during each of the quarters presented above, with the exception of the three months ended June 30, 2012 compared to the three months ended March 31, 2012. The quarterly increases in average monthly revenue per subscriber have primarily been driven by price increases supported by growth in our audience across our mobile and desktop platforms demonstrated by increases in our average monthly unique users, as well as increased sales to existing Premier Agent subscribers looking to expand their presence on our platform. The average monthly revenue per subscriber remained unchanged for the three months ended June 30, 2012 compared to the three months ended March 31, 2012, primarily because we began to monetize the third position in our buyer's agent list in June 2012, resulting in an increase in the number of subscribers to our premier agent program as of June 30, 2012 compared to March 31, 2012, but for which the related increase in revenue is weighted more heavily to future periods.

Display revenue was $8.3 million for the three months ended September 30, 2012 compared to $7.2 million for the three months ended September 30, 2011, an increase of $1.1 million. Display revenue represented 26% of total revenue for the three months ended September 30, 2012 compared to 38% of total revenue for the three months ended September 30, 2011. The increase in display revenue was primarily the result of an increase in the number of unique users to our mobile . . .

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