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Z > SEC Filings for Z > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Form 10-Q for ZILLOW INC


6-Nov-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 sections titled "Note Regarding Forward-Looking Statements" and "Risk Factors."

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, Agentfolio, Mortech, HotPads and StreetEasy.

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 43 million homes and added more than 184 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 more than 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 September 30, 2013, we generated revenue of $53.3 million, as compared to $31.9 million in the three months ended September 30, 2012, an increase of 67%. This increase is primarily the result of a 68% increase in our Premier Agent subscribers to 44,749 as of September 30, 2013 from 26,703 as of September 30, 2012, as well as significant growth in traffic to our mobile applications and websites. There were approximately 61.1 million average monthly unique users of our mobile applications and websites for the three months ended September 30, 2013 compared to 36.1 million average monthly unique users for the three months ended September 30, 2012, representing year-over-year growth of 69%.

In August 2013, we completed the acquisition of StreetEasy, Inc., formerly known as NMD Interactive, Inc., d/b/a StreetEasy, ("StreetEasy"), which provides for-sale and for-rent listings and information about condos, co-ops, new developments and luxury real estate, primarily in the New York region. The acquisition aligns with our growth strategies, including focusing on consumers and deepening, strengthening, and expanding our marketplaces. With the addition of StreetEasy, Zillow expanded its audience and brand awareness by leveraging StreetEasy's leadership among both consumers and professionals in the New York region and, in particular, the New York rentals market. The total purchase price for the acquisition of StreetEasy is approximately $48.0 million. Based on the allocation of the purchase price in connection with our acquisition of StreetEasy, a substantial majority of the purchase price has been allocated to goodwill and intangible assets.

As of September 30, 2013, we had 787 full-time employees, compared to 560 full-time employees as of December 31, 2012.


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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 December 2012, the reported monthly unique users reflect the effect of Zillow's December 14, 2012 acquisition of HotPads, Inc. Beginning in September 2013, the reported monthly unique users reflect the effect of Zillow's August 26, 2013 acquisition of StreetEasy, Inc.

                               Average Monthly Unique
                                 Users for the Three
                             Months Ended September 30,         2012 to 2013
                              2013                2012            % Change
                                   (in thousands)
           Unique Users          61,118              36,096                69 %


Premier Agent Subscribers

The number of Premier Agent subscribers is an important driver of revenue growth
because each subscribing agent pays us a subscription 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,        2012 to 2013
                                         2013         2012         % Change
           Premier Agent Subscribers     44,749       26,703                68 %


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, as well as revenue generated by Mortech, Inc., a company we acquired in November 2012 that provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.

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


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undelivered elements is based on traffic to our mobile applications and websites. We recognize revenue related to our impression-based 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 and nine month periods ended September 30, 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 September 30, 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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We recorded an income tax benefit of $4.3 million for the three and nine month periods ended September 30, 2013 due to the use of the deferred tax liability generated in connection with Zillow's August 26, 2013 acquisition of StreetEasy that can be used to realize certain deferred tax assets for which we had previously provided a full allowance.

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,
                                                  2013               2012             2013           2012
                                                    (in thousands, except per share data, unaudited)
Statements of Operations Data:
Revenue                                       $     53,311        $    31,915       $ 139,197      $ 82,513
Costs and expenses:
Cost of revenue (exclusive of amortization)
(1) (2)                                              5,116              3,623          13,540        10,237
Sales and marketing (1)                             31,195             14,118          83,913        34,586
Technology and development (1)                      12,167              6,687          33,849        17,535
General and administrative (1)                      10,357              5,192          27,568        14,869

Total costs and expenses                            58,835             29,620         158,870        77,227

Income (loss) from operations                       (5,524 )            2,295         (19,673 )       5,286
Other income                                            70                 39             240           104

Income (loss) before income taxes                   (5,454 )            2,334         (19,433 )       5,390
Income tax benefit                                   4,265                 -            4,265            -

Net income (loss)                             $     (1,189 )      $     2,334       $ (15,168 )    $  5,390

Net income (loss) per share - basic           $      (0.03 )      $      0.08       $   (0.43 )    $   0.19
Net income (loss) per share - diluted         $      (0.03 )      $      0.07       $   (0.43 )    $   0.17
Weighted-average shares outstanding - basic         36,667             30,040          35,011        29,115
Weighted-average shares outstanding -
diluted                                             36,667             32,230          35,011        31,493
Other Financial Data:
Adjusted EBITDA (3)                           $      4,121        $     7,624       $  14,519      $ 18,343




                                                     Three Months Ended          Nine Months Ended
                                                        September 30,              September 30,
                                                      2013          2012          2013         2012
                                                               (in thousands, unaudited)
(1)  Includes share-based compensation as
follows:
Cost of revenue                                    $      185      $    94     $      524     $   271
Sales and marketing                                       871          870          9,875       1,349
Technology and development                                985          374          3,053       1,182
General and administrative                              1,727          374          4,929       1,553

Total                                              $    3,768      $ 1,712     $   18,381     $ 4,355

(2)  Amortization of website development costs
and intangible assets included in technology and
development                                        $    5,092      $ 3,198     $   13,792     $ 7,576

(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              Nine Months Ended
                                                     September 30,                   September 30,
                                                  2013             2012           2013             2012
                                                                      (unaudited)
Percentage of Revenue:
Revenue                                              100 %           100 %           100 %           100 %
Costs and expenses:
Cost of revenue (exclusive of amortization)           10              11              10              12
Sales and marketing                                   59              44              60              42
Technology and development                            23              21              24              21
General and administrative                            19              16              20              18

Total costs and expenses                             110              93             114              94

Income (loss) from operations                        (10 )             7             (14 )             6
Other income                                           0               0               0               0

Income (loss) before income taxes                    (10 )             7             (14 )             6
Income tax benefit                                     8               0               3               0

Net income (loss)                                     (2 )%            7 %           (11 )%            6 %

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.


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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,
                                                  2013           2012           2013            2012
                                                              (in thousands, unaudited)
Reconciliation of Adjusted EBITDA to Net
Income (Loss):
Net income (loss)                              $   (1,189 )     $ 2,334       $ (15,168 )     $  5,390
Other income                                          (70 )         (39 )          (240 )         (104 )
Depreciation and amortization expense               5,877         3,617          15,811          8,702
Share-based compensation expense                    3,768         1,712          18,381          4,355
Income tax benefit                                 (4,265 )          -           (4,265 )           -

Adjusted EBITDA                                $    4,121       $ 7,624       $  14,519       $ 18,343

Three Months Ended September 30, 2013 Compared to Three Months Ended
September 30, 2012

Revenue



                                        Three Months Ended
                                          September 30,              2012 to 2013
                                       2013              2012          % Change
                                    (in thousands, unaudited)
      Revenue:
      Marketplace revenue:
      Real estate                 $       35,136       $  21,002                67 %
      Mortgages                            5,742           2,614               120 %

      Total Marketplace revenue           40,878          23,616                73 %
      Display revenue                     12,433           8,299                50 %

      Total revenue               $       53,311       $  31,915                67 %

                                                Three Months Ended
                                                   September 30,
                                                2013            2012
               Percentage of Total Revenue:
               Marketplace revenue:
               Real estate                          66 %           66 %
               Mortgages                            11 %            8 %

               Total Marketplace revenue            77 %           74 %
               Display revenue                      23 %           26 %

               Total revenue                       100 %          100 %

Overall revenue increased by $21.4 million, or 67%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Marketplace revenue increased by 73%, and display revenue increased by 50%.

Marketplace revenue grew to $40.9 million for the three months ended September 30, 2013 from $23.6 million for the three months ended September 30, 2012, an increase of $17.3 million. Marketplace revenue represented 77% of total revenue for the three months ended September 30, 2013 compared to 74% of total revenue for the three months ended September 30, 2012. The increase in marketplace revenue was primarily attributable to the $14.1 million increase in real estate revenue, which was primarily a result of growth in the number of subscribers in our Premier Agent program to 44,749 as of September 30, 2013 from . . .

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