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Z > SEC Filings for Z > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for ZILLOW INC


8-May-2013

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," 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, 2012.

Overview

Zillow operates the leading real estate and home-related information marketplaces on mobile and the Web, with a complementary portfolio of brands and products to help people find vital information about homes, and connect with local professionals. In addition to our websites, including Zillow.com, we also own and operate Zillow Mobile, our suite of home-related mobile applications, Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get competitive mortgage rates, Zillow Digs, our home improvement marketplace where consumers can find visual inspiration and local cost estimates, Zillow Rentals, a marketplace and suite of tools for rental professionals, Postlets, Diverse Solutions, Buyfolio, Mortech and HotPads.

Zillow provides products and services to help consumers through every stage of homeownership - buying, selling, renting, borrowing and remodeling. We are transforming the way people make home-related decisions, and enabling homeowners, buyers, sellers and renters to find and connect with local 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 39 million homes and added more than 149 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 that enable consumers to access our information when they are curbside, viewing homes, and through our websites. 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, rental professionals, and brand advertisers. Our revenue includes marketplace revenue, consisting primarily of subscriptions sold to real estate agents based on the number of impressions delivered in zip codes purchased, and advertising sold on a cost per click, or CPC, basis to mortgage lenders, as well as display revenue, which consists of advertising placements sold primarily on a cost per thousand impressions, or CPM, basis.

During the three months ended March 31, 2013, we generated revenue of $39.0 million, as compared to $22.8 million in the three months ended March 31, 2012, an increase of 71%. This increase is primarily the result of an 83% increase in our Premier Agent subscribers to 34,030 as of March 31, 2013 from 18,616 as of March 31, 2012, as well as significant growth in traffic to our mobile applications and websites. There were approximately 46.7 million average monthly unique users of our mobile applications and websites for the three months ended March 31, 2013 compared to 31.8 million average monthly unique users for the three months ended March 31, 2012, representing year-over-year growth of 47%.

In addition, mortgages revenue increased $2.5 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, or 104%. Approximately $1.3 million of the increase was the result of our November 2012 acquisition of Mortech, Inc., a company that provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform. The remaining increase of $1.2 million was primarily a result of an increase in the number of loan requests submitted by consumers in Zillow Mortgage Marketplace. There were approximately 4.5 million mortgage loan requests submitted by consumers for the three months ended March 31, 2013 compared to 2.6 million mortgage loan requests submitted by consumers for the three months ended March 31, 2012, an increase of 74%.

In the year ended December 31, 2012, we completed four acquisitions that align with our growth strategies, including deepening, strengthening and expanding our marketplaces and, in particular, our emerging marketplaces of rentals and mortgages, focusing on consumers and optimizing opportunities for Premier Agent participation. These strategic acquisitions support the expansion of our platform through our suite of marketing and business technology products and services for real estate professionals. Each of the acquisitions occurred after the three months ended March 31, 2012. Thus, we have incurred incremental expenses related to each of these acquisitions in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.


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As of March 31, 2013, we had 636 full-time employees, compared to 560 full-time employees as of December 31, 2012.

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, rental 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. We measure unique users with Google Analytics. Beginning in June 2012, the reported monthly unique users reflect the effect of Zillow's May 31, 2012 acquisition of RentJuice Corporation. Beginning in December 2012, the reported monthly unique users reflect the effect of Zillow's December 14, 2012 acquisition of HotPads, Inc.

                               Average Monthly Unique
                                 Users for the Three
                               Months Ended March 31,        2012 to 2013
                                 2013             2012         % Change
                                   (in thousands)
              Unique Users         46,652         31,797                47 %


Premier Agent Subscribers

The number of Premier Agent subscribers is an important driver of revenue growth
because each subscribing agent pays us a 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 March 31,          2012 to 2013
                                         2013         2012         % Change
           Premier Agent Subscribers     34,030       18,616                83 %


Basis of Presentation

Revenue

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

Marketplace Revenue. Marketplace revenue consists of real estate revenue and mortgages revenue. Real estate revenue primarily includes subscriptions sold to real estate agents under our Premier Agent program, as well as revenue generated by Zillow Rentals. Mortgages revenue primarily includes CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders.

Zillow's Premier Agent program offers a suite of marketing and business technology solutions to help real estate agents grow their businesses and personal brands. The Premier Agent program allows agents to select products and services that they can tailor to meet their business and advertising needs. The program has three tiers of participation including Premier Platinum, our original flagship subscription product, as well as Premier Gold and Premier Silver, to meet different marketing and business needs of a broad range of agents. All tiers of Premier Agents receive access to a dashboard portal on our website that provides individualized program performance analytics, as well as our personalized website service, and our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent through our mobile and web platforms. Our Premier Gold product also includes featured listings whereby the agent's listings will appear at the top of search results on our mobile and web platforms. Our Premier Platinum product includes the dashboard portal on our website, our personalized website service, our CRM tool, featured listings, and inclusion on our buyer's agent list, whereby the agent appears as the agent to contact for listings in the purchased zip code.

We charge for our Platinum Premier Agent subscription product based on the number of impressions delivered on our buyer's agent list in zip codes purchased based on a contracted maximum cost per impression. Our Platinum Premier Agent subscription product includes multiple deliverables which are accounted for as a single unit of accounting, as the delivery or performance of the undelivered elements is based on traffic to our mobile applications and websites. We recognize revenue related to our impression-based


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Platinum Premier Agent subscription product based on the lesser of (i) the actual number of impressions delivered on our buyer's agent list during the period multiplied by the contracted maximum cost per impression, or (ii) the contractual maximum spend on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months or twelve months and then month-to-month thereafter.

We charge a fixed subscription fee for our Premier Gold and Premier Silver subscription products. Subscription advertising revenue for our Premier Gold and Premier Silver subscription products is recognized on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months and then month-to-month thereafter.

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. We recognize revenue when a user clicks on a mortgage advertisement or on a link to obtain additional information about a mortgage loan quote.

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.

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 costs 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, cash equivalents and investments.

Income Taxes

We are subject to federal and state income taxes in the United States. During the three months ended March 31, 2013 and 2012, we did not have reportable taxable income, and we are not projecting reportable taxable income for the year ending December 31, 2013. We have provided a full valuation allowance against our net deferred tax assets as of March 31, 2013 and December 31, 2012 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 $115.7 million as of December 31, 2012, which are available to reduce future taxable income.


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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
                                                                       March 31,
                                                              2013                     2012
                                                            (in thousands, except per share
                                                                    data, unaudited)
Statements of Operations Data:
Revenue                                                 $         38,966          $       22,833
Costs and expenses:
Cost of revenue (exclusive of amortization) (1) (2)                4,130                   3,350
Sales and marketing (1)                                           19,794                   8,315
Technology and development (1)                                    10,611                   5,030
General and administrative (1)                                     8,233                   4,445

Total costs and expenses                                          42,768                  21,140

Income (loss) from operations                                     (3,802 )                 1,693
Other income                                                          55                      31

Net income (loss)                                       $         (3,747 )        $        1,724

Net income (loss) per share - basic and diluted         $          (0.11 )        $         0.06
Weighted-average shares outstanding - basic                       33,770                  28,348
Weighted-average shares outstanding - diluted                     33,770                  30,994
Other Financial Data:
Adjusted EBITDA (3)                                     $          5,123          $        5,447

                                                                Three Months Ended
                                                                    March 31,
                                                            2013                   2012
                                                            (in thousands, unaudited)
(1)  Includes share-based compensation as
follows:
Cost of revenue                                       $             163        $          85
Sales and marketing                                               1,227                  190
Technology and development                                        1,034                  310
General and administrative                                        1,722                  833

Total                                                 $           4,146        $       1,418

(2)  Amortization of website development costs
and intangible assets included in technology and
development                                           $           4,208        $       2,004

(3) 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.


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                                                        Three Months Ended
                                                             March 31,
                                                        2013            2012
                                                            (unaudited)
        Percentage of Revenue:
        Revenue                                            100 %          100 %
        Costs and expenses:
        Cost of revenue (exclusive of amortization)         11             15
        Sales and marketing                                 51             36
        Technology and development                          27             22
        General and administrative                          21             19

        Total costs and expenses                           110             92

        Income (loss) from operations                      (10 )            8
        Other income                                         0              0

        Net income (loss)                                  (10 %)           8 %

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; 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
                                                                       March 31,
                                                                 2013                2012
                                                               (in thousands, unaudited)
Reconciliation of Adjusted EBITDA to Net Income (Loss):
Net income (loss)                                           $       (3,747 )       $  1,724
Other income                                                           (55 )            (31 )
Depreciation and amortization expense                                4,779            2,336
Share-based compensation expense                                     4,146            1,418

Adjusted EBITDA                                             $        5,123         $  5,447


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Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue



                                        Three Months Ended
                                            March 31,                2012 to 2013
                                       2013              2012          % Change
                                    (in thousands, unaudited)
      Revenue:
      Marketplace revenue:
      Real estate                 $       26,109       $  14,185                84 %
      Mortgages                            4,909           2,408               104 %

      Total Marketplace revenue           31,018          16,593                87 %
      Display revenue                      7,948           6,240                27 %

      Total revenue               $       38,966       $  22,833                71 %

                                                Three Months Ended
                                                     March 31,
                                                2013            2012
               Percentage of Total Revenue:
               Marketplace revenue:
               Real estate                          67 %           62 %
               Mortgages                            13 %           11 %

               Total Marketplace revenue            80 %           73 %
               Display revenue                      20 %           27 %

               Total revenue                       100 %          100 %

Overall revenue increased by $16.1 million, or 71%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Marketplace revenue increased by 87%, and display revenue increased by 27%.

Marketplace revenue grew to $31.0 million for the three months ended March 31, 2013 from $16.6 million for the three months ended March 31, 2012, an increase of $14.4 million. Marketplace revenue represented 80% of total revenue for the three months ended March 31, 2013 compared to 73% of total revenue for the three months ended March 31, 2012. The increase in marketplace revenue was primarily attributable to the $11.9 million increase in real estate revenue, which was primarily a result of growth in the number of subscribers in our Premier Agent program to 34,030 as of March 31, 2013 from 18,616 as of March 31, 2012, representing growth of 83%, partially offset by a 2% decrease in average monthly revenue per subscriber. Average monthly revenue per subscriber decreased to $259 for the three months ended March 31, 2013 from $263 for the three months ended March 31, 2012. We believe the decrease in average monthly revenue per subscriber was primarily a result of accelerated growth in the number of Premier Agent subscribers in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, as new Premier Agent subscribers typically buy additional inventory over time and impression-based pricing now allows new Premier Agents to purchase smaller allocations of inventory than under the historical pricing model whereby we charged based upon a percentage of the total Platinum Premier Agent views in the zip code. 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 . . .

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