Zillow Group, Inc. Class C (Z) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Zillow Group First Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference maybe recorded. I would now like to introduce your host for today’s conference, RJ Jones, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good afternoon, and welcome to Zillow Group’s First Quarter 2015 Earnings Conference Call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer; and Chad Cohen, Chief Financial Officer. During the call, we will make forward-looking statements regarding future financial performance and events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can’t guarantee these results and actual results may differ materially. We caution you to consider the risk factors in our SEC filings which could cause actual results to differ materially from those in the forward-looking statements made in the press release and on this call. The date of this call is May 12, 2015, and forward-looking statements made today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will discuss GAAP and non-GAAP measures. We’ll also discuss results on a reported and pro forma basis. Reported results were prepared in accordance with GAAP. For competitive purposes, pro forma results assume the February 25 acquisition of Trulia occurred on January 01, 2014 and reflects certain adjustments and exclusions described in our filings. We encourage you to read our press release as they contain information about our reported and pro forma results, including reconciliation of non-GAAP financial measures. In our remarks, the non-GAAP financial measure adjusted EBITDA is referred to as EBITDA, which excludes other income depreciation and amortization expense, share based compensation expense, acquisition related costs, restructuring costs, interest expense and taxes. This call is being broadcast on the internet and it is available on the Investors Relations section of the Zillow Group website. A recording will be available after 8:00 p.m. Eastern Time today. Please note that the earnings press release is available on our website and after the call a copy of today’s remarks will also be available on our website. Today we will open the call with prepared remarks and then we will host a live question-and-answer session. During the Q&A, we will entertain questions asked via Twitter in addition to questions from those dialed into the call. Individuals may submit questions by twitting at Zillow group, using the #ZEarnings. I’ll now turn the call over to Spencer.

Thank you and welcome to our first quarter 2015 earnings call, and our first ever earnings call as Zillow Group. It’s been four weeks since our operational update call during which I discussed the progress we have made since closing the Trulia acquisition, and gave our full year pro forma expectations. At that time, we were still preparing our financial results for Zillow Group’s first quarter, which we are reporting today. Our first quarter financial results on a pro forma basis show revenue of nearly $163 million and adjusted EBITDA of almost $25 million. We are right on track to reach our stated pro forma operating goals for full year 2015 of $690 million in revenue and $80 million to $85 million in EBITDA. While we have accomplished an enormous amount in the short time since the Trulia acquisition closed, we still have a lot of work ahead in this transition year. By the start of 2016, we will be very well positioned to capture an increasing amount of the $13 billion real estate advertising opportunity, as dollars continue to shift to online and mobile media brands with the largest audience. Today I will start with a brief discussion of our strategy, and then Chad will walk you through our first quarter financial results. We will then take questions on this call, also through Twitter. This year we are focusing Zillow Group on four priorities: First, extracting significant benefits from bringing Trulia into Zillow Group; Second, growing our combined consumer audience; Third, growing our agent advertising business; and Fourth, growing our emerging marketplaces. I will discuss each in more detail. First, our top strategic priority for 2015 is successfully integrating Trulia and maximizing the potential of our increased scale. We have significant momentum, and are making great progress here. As we discussed in our operational update call, the protracted FTC review process last year negatively impacted the Trulia agent advertising business by creating advertiser uncertainty, which drove lower agent additions and retention. We have already rectified the key issues which were impacting Trulia’s agent ad business. Now with our rentals and mortgages integration complete, we are focused on combining the Zillow and Trulia agent advertising products, which will be done by the end of the year. Changes will include converting agent advertising inventory on Trulia from share of voice to an impression basis, and unifying all SKUs to be sold as combined mobile and web advertising. As you know, we are conducting a strategic review of Market Leader’s operations and evaluating its place within Zillow Group’s overall strategy. While we continue to support the CRM product for agents and enterprise partners, we are not actively selling those products to new clients. We continue to expect Market Leader related revenue for full year 2015 to be approximately $40 million on a pro forma basis. Moving now to our second strategic priority, growing our audience. As I have said many times before, in a media model, we believe that advertisers follow audience. Our four leading consumer brands represent by far, the largest audience in real estate, rentals and mortgages, both on mobile and web. And still an enormous opportunity remains to grow our collective footprint. Everything in our strategy begins with creating products that empower consumers to make the smartest decisions when it comes to their homes. The most recent product innovations for both Zillow and Trulia brands were our Apple Watch apps. In these apps consumers can receive notifications about new properties that come on market, scroll through photos, see local info, and examine property data. Both apps seamlessly extend Zillow and Trulia home shopping from the iPhone to the user’s wrist. Other product innovations include the recently-launched “Ok Google” voice search functionality on both Zillow and Trulia, and the launch of Trulia’s Boards, a highly engaging collaborative shopping feature. Our efforts in product innovation, and amplification with impactful marketing and national advertising, drive our growth strategy and result in tremendous scale that benefits our advertisers. In 2015, Zillow Group is investing more than $100 million in advertising our consumer brands, or approximately 15% of revenue. Looking at traffic across our portfolio, nearly 140 million unique users visited Zillow Group brands on mobile and web in March. Mobile continues to be strong across our brand portfolio – for example, nearly two-thirds of the Zillow brand’s usage comes from mobile devices, and more than 70% on weekends. Our category leadership is even more pronounced on mobile where consumers tend to use fewer sites and apps. This brings us to our third strategic priority of growing our real estate agent advertising businesses. As we have discussed, there is a ton of great work either recently completed or currently underway to enhance the Trulia agent business in the near-term. As for Zillow Premier Agent, we continue to see significant growth in agent advertisers and revenue. Same agent sales remain robust, with over 50% ARPA growth for advertisers that were with us a year ago and the bulk of that gain coming from buying more impressions. Also more than 60% of bookings are to existing advertisers buying more impressions. We are looking forward to when our newly combined sales force will be able to sell one product to agent advertisers that will place them in ad units across Zillow Group brands. We are now receiving direct listings feeds every few minutes from 235 MLSs, and more are joining daily with 105 new MLSs joining in just the past six weeks. Our coverage of active for sale by agent listings is the strongest we’ve seen in our history, and continues to grow. These direct feeds improve our listings quality which contribute to our audience growth, and also provide us with more ad impressions. By receiving 100% of our listings directly rather than through third-party intermediaries, we provide the most accurate and timely listings to millions of consumers who visit Zillow Group brands each month. Furthering our commitment to be the best industry partner to MLSs and brokerages who send their listings to Zillow Group, we recently announced the Zillow Group Data Connect program, which gives MLSs extensive public data on homes, with broad usage rights, free of charge. This is data that MLSs normally spend hundreds of thousands of dollars annually to buy or license with periodic updates. MLSs use this data to help their members create listings, research their market, speed up listing input and enhance prospecting and business development. This new source of dynamic data, combined with the software from our acquisition of Retsly last year, will give MLSs the freedom to innovate and build products and services for their members, help MLSs save a significant expense, and strengthen the bonds we are building with the industry for the long term. Turning now to our fourth strategic priority of growing our emerging marketplaces, consisting of mortgages, New York City and rentals. Zillow Group Mortgages continues to advance rapidly, with excellent traffic growth, loan requests, contacts and revenue during the quarter. Growth in contacts year over year exceeded 60%, which is well ahead of industry trends. Most notably, during the quarter we successfully completed the integration and launch of our mortgages experience on Trulia desktop and mobile web. Now the millions of consumers visiting all Zillow Group brands can anonymously shop for custom loan quotes and access more than 130,000 reviews of mortgage lenders. For borrowers, connecting with reputable lenders is now easier than ever. In addition to providing borrowers with a comprehensive comparison shopping experience, we now also offer a way for consumers to be matched with local lenders through our newly launched Long Form product. This intuitive step-by-step Long Form offering evolved from our Pre-Approval product, and so far is showing great results for borrowers and our lender partners. The mortgages team continues to set the pace of innovation in its category, creating products that resonate with consumers and transforming the industry. Now turning to StreetEasy, the leading New York real estate marketplace. During the quarter StreetEasy launched its first ever advertising campaign, “Live as You Please.” The campaign cleverly addresses some of New York’s nuanced real estate challenges with humorous headline-driven outdoor advertisings. Many of you may have noticed the ads throughout the City. Initial results from the campaign indicate traffic lifts across mobile and web, as well as amplification through social media. All of our usage metrics at StreetEasy – from traffic to page views to leads are growing at over 50% year-over-year, extending StreetEasy’s already significant leadership position in New York. Also during the quarter, StreetEasy launched Buildings Experts, a new advertising program that enables New York real estate agents to market their buying and selling expertise in a specific building. Home shoppers on StreetEasy can now view agents’ successful deals in a building and contact them with one click. Up to three agents can be displayed on a StreetEasy building page as Building Experts. Based on the positive reception and traction we have experienced with the pilot program, we will be expanding the sale of the Building Experts ad product across StreetEasy over the course of the year. We continue to be very excited about StreetEasy’s future. Now turning to our final emerging marketplace, Zillow Group Rentals continues to gain momentum. When speaking with investors about our expected revenue ramp for rentals, I said that I expected to get to $10 million in annualized revenue, faster in rentals than our mortgages marketplace ramped. As a reminder, it took Mortgages four years to get to $10 million, and Mortgages is now around $40 million annualized. I’m pleased to say that we have significantly exceeded that revenue ramp goal, and at its current growth rate and its enormous TAM, rentals revenue is on pace to pass mortgages’ total revenue within the next few years. We also continue to grow our rental listings inventory. The Zillow Group Rental Network added more multifamily partners over the past year than ever before, increasing new partnerships 84% year-over-year in the quarter. Today nearly 90% of the National Multifamily Housing Council’s 50 largest apartment managers are Zillow Group Rentals customers. To support the growth of our relationships, we have expanded our in-market sales team. The industry is embracing our performance-based model that drives high value one-to-one contacts, especially on mobile. Almost three quarters of the new contacts property managers received from us in March 2015 came through mobile. Although there is a lot of competitive bluster in the rentals space, we have not seen any impact on the growth of our rentals business due to competitor moves. All in, Zillow Group Rentals continues to advance and gain traction on every front. Across our organization, the excitement for what’s ahead of us is contagious and inspiring. Our teams are collaborating, and taking to heart our core value of “Move Fast, Think Big.” We’re 12 weeks post-closing, and I’m very pleased with what we’ve accomplished and the schedule ahead. As I look at our small share of the $13 billion market opportunity in residential real estate and rental advertising, I’m very excited about what we can accomplish. I’ll turn it over to Chad for a more copious exposition of our financial results.

Thanks, Spencer. Before I begin, I want to outline the format of our financial results discussion. First, I will discuss Q1 2015 GAAP results and first quarter metrics, which incorporate the partial period where Trulia’s results are included after February 17 to the end of the first quarter. Then for comparative purposes, I will discuss Q1 2015 pro forma results compared to Q1 2014 pro forma results. Our pro forma results assume the acquisition of Trulia occurred on January 1, 2014, and do not include acquisition and restructuring-related expenses, and reflect certain other adjustments discussed in our press release. And finally, I will close with an outlook for Q2 and pro forma full year 2015. I realize the financials for this year are complicated and want to provide ample opportunity for questions today. With that said, let’s dive into Zillow Group’s first quarter financial results. Traffic growth in the first quarter was excellent as we maintained strong momentum built upon new product releases and ongoing investments in growing our audience. In March 2015, we attracted nearly 140 million monthly unique users to Zillow Group’s mobile applications and websites, which reflects traffic across all four of our consumer facing brands: Zillow, Trulia, HotPads and StreetEasy. Moving to our financials and starting off with our GAAP operating results, total revenue for the first quarter was $127.3 million, reflecting the partial period where Trulia contributed to Zillow Group’s performance in the second half of the quarter. We continue to see the desired shift in our revenue mix as we ended the first quarter with 86% of our revenue coming from our Marketplace category, while 14% came from Display. Looking at our core revenue driver, Marketplace Revenue was $108.9 million, which includes $6.1 million of Market Leader revenue, reflecting robust growth across our Real Estate and Mortgage revenue sub-categories. Taking a deeper look at our Real Estate subcategory, which includes our Agent Advertising, Diverse Solutions, StreetEasy, and Rentals advertising revenue, our Real Estate revenue reached $93.3 million. Based on our internal March results, we currently derive an Agent Advertiser revenue run rate of $444 million for 2015. The inclusion of Trulia Agent Advertisers during the quarter contributed to the significant growth of total Agent Advertisers, bringing the total to over 103,000 by the end of the first quarter. This Agent Advertiser number represents the de-duplicated, combined advertiser count from both Zillow and Trulia, which does not include the roughly 27,500 Market Leader only advertisers. This advertiser count will serve as the foundation for Zillow Group’s agent advertiser base going forward. The combination of increased impression inventory and de-duplicated Agent Advertiser count, of which we estimate there was approximately a 20% overlap between Zillow and Trulia advertisers, resulted in average revenue per advertiser, or ARPA, of $354 during the first quarter of 2015. Transitioning to Zillow Mortgages, revenue reached $9.6 million, and 13 million loan requests were submitted during the first quarter, up 122% from the same period last year. In our Display category, revenue was $18.3 million. This result remains aligned with our strategy of reducing our display placements to enhance the consumer experience across both Zillow and Trulia. Shifting now from revenue and turning our attention to our operating costs, total operating expenses were $185.2 million during the first quarter of 2015, with the most significant increases coming from acquisition-related and restructuring costs, followed by headcount-related expenses which include share-based compensation, and finally professional services fees. Breaking out our operating expenses by line item, please note that in almost every case year-over-year increases in expenses are primarily related to the inclusion of Trulia expenses for a portion of the quarter: Our cost of revenue during the quarter was $13.0 million or 10% of revenue, which was in-line with Q1 2014 levels on a percentage of revenue basis. Next, sales and marketing expense was $59.3 million, or 47% of revenue, which was 6% lower as a percentage of revenue than the same period last year, but higher on an absolute dollar basis. In addition to the increased headcount-related expenses attributed to the Trulia acquisition, we continued to invest in marketing and advertising during the quarter. Technology and Development costs in the first quarter were $37.3 million, or 29% of revenue, and 4% higher as a percentage of revenue than Q1 2014 levels. The increase was primarily due to headcount-related expenses and increased amortization of acquired intangible assets primarily related to the Trulia acquisition. G&A costs in the first quarter were $38.0 million, or 30% of revenue, which was about 8% higher as a percentage of revenue than the same period last year. The majority of the increase was due to headcount-related expenses and includes $5.0 million of accelerated, double-trigger, share-based compensation for certain Trulia executives, followed by professional service fees which include legal and accounting costs. Reported as separate expenses, we incurred $12.5 million in costs related to our acquisition and integration of Trulia and an additional $25.1 million related to restructuring costs including severance, related equity accelerations, and facilities contract termination costs. Adjusted EBITDA for the quarter was $16.7 million, representing 13% of revenue, which was in-line with first quarter 2014 levels on a percentage of revenue basis. The acquisition-related and restructuring charges of nearly $38 million impacted our bottom line, resulting in a GAAP net loss of $58.4 million in the first quarter. First quarter 2015 basic and diluted loss per share was $1.19, based on 49.1 million basic and diluted weighted average shares outstanding. On a non-GAAP basis, which excludes share-based compensation and acquisition-related and restructuring costs, basic and diluted non-GAAP earnings per share was $0.04 and $0.05, respectively. Zillow Group ended the first quarter of 2015 with more than 2,000 employees, up from approximately 1,200 for Zillow standalone at the end of 2014. Our headcount growth is expected to be tempered in 2015 as we focus on the Trulia integration. During this time of transition, we want to emphasize the ongoing health and continued strength of our Zillow agent business as we see positive trends which are consistent with historical results. ARPA for Premier Agent advertisers who advertised with us in the same period last year was 54% higher year-over-year. As Spencer mentioned, this result is primarily driven by agent advertisers buying more impressions to expand their presence on our platform. Approximately 63% of our new sales bookings in the first quarter went to existing Premier Agent advertisers buying more impressions across mobile and web in their sales areas, continuing recent trends and signifying strong underlying demand. For purposes of year-over-year comparability, I’m now going to now discuss our first quarter results on a pro forma basis. Note that our summarized pro forma view comparisons have been included in our first quarter 2015 financial results press release, which includes important information about how the pro formas were prepared. Total revenue for the first quarter increased 35% year-over-year to $162.5 million from $120.7 million in the same period last year. Pro forma revenue, excluding Market Leader, increased 41% year-over-year to $148.8 million from $105.5 million in the first quarter of 2014. Looking at our core revenue driver, Marketplace Revenue was $136.9 million, which includes $13.6 million of Market Leader revenue, and grew 42% year-over-year. Excluding Market Leader, Marketplace Revenue would have grown 52% year-over-year. Our Real Estate subcategory revenue reached $113.4 million in Q1 2015 and grew 54% year-over-year. Moving to Zillow Mortgages, revenue reached $10.0 million, which represents a 33% increase year-over-year. And in our Display category, revenue was $25.6 million, growing 5% over the same period last year. Net loss was $17.9 million in the first quarter, compared to net loss of $23.8 million in the first quarter of 2014. First quarter 2015 basic and diluted loss per share was $0.31, based on 58.1 million basic and diluted weighted-average shares outstanding. Adjusted EBITDA was $24.5 million, or 15% of revenue, and 5% higher as a percentage of revenue than Q1 2014. Now turning to our Zillow Group Outlook for Q2 and Full Year 2015. Second quarter 2015 revenue is expected to be in the range of $168 million to $169 million. Excluding anticipated Market Leader revenue of approximately $11 million, the year-over-year growth rate of second quarter revenue is expected to be approximately 24%. Display revenue is expected to be in-line with our pro forma Q1 2015 results. Our EBITDA for the second quarter is expected to be in the range of $3.5 million to $4.5 million, due to a doubling of our adverting spend over Q1. As a reminder, the majority of our advertising spend has historically occurred during the second and third quarters of the year, and this year is no different. For Q2 2015, our basic weighted-average shares outstanding is expected to be approximately 58.5 million to 59.5 million and our diluted weighted-average shares outstanding is expected to be in the range of 64.5 million to 65.5 million. We are reaffirming our full year pro forma 2015 revenue guidance of $690 million, which includes Market Leader revenue of $40 million. Our Market Leader outlook reflects a 35% decline in revenue from full year 2014 revenues of $62 million. We reiterate our full year pro forma EBITDA guidance in the range of $80 million to $85 million. Our pro forma, full year 2015 guidance reflects continued aggressive investments in brand building and in our living database of homes, as well as increased professional services that are non-structural in nature, and non-recurring increases to share-based compensation related to the Trulia acquisition. For the full year, we expect pro forma share-based compensation, excluding acquisition-related and restructuring costs, to be approximately $90 million with a run rate of approximately $23 million per quarter. We expect full year, pro forma depreciation and amortization to be approximately $90 million as well. To help you better model our full year outlook on a GAAP basis, we expect basic weighted-average shares to be approximately 56.5 million to 57.5 million and our diluted weighted-average shares outstanding to be in the range of 62.5 million to 63.5 million. Also in 2015, inclusive of the first quarter GAAP results, we expect acquisition-related expenses to be approximately $20 million and restructuring-related costs to be in the range of $31 million to $33 million. The vast majority of these costs will be recognized in the first half of 2015. To conclude, Zillow Group is off to a successful start. We are heads down in our integration efforts and are committed to finalizing all integration activity by the end of 2015, while accelerating our growth of audience and advancing our emerging home-related marketplaces. We remain on track to realize $100 million in cost synergies in 2016. And I would be putting it mildly by saying that we are excited about our long-term potential. With that we’ll open it up for questions from those dialed into the call, and to questions submitted via Twitter with the #ZEarnings

[Operator Instructions]. Our first question comes from Michael Graham with Canaccord. Your line is now open.

Just a little housekeeping one and then the bigger one, just, Chad on the de-duplicated agent count and ARPA, can you possibly provide that for the four quarters of 2014? I know it was in for Q1 at least the agent count and then, in the press release, and then the second one for Spencer is just when you think about the 100 million in advertizing or 15% of revenue however you want to think about it. Can you just talk about the right structural level for ad spend, given that you’re basically in an industry that’s now a duopoly and you’ve got a big lead over the number two and just why what you’re spending is the right amount? Thanks.

On the agent count for 2014, we’re not going backwards in time on this call. So, we’re here to talk about Q1 2015 results. Maybe RJ can provide that after the call but right now we’re focused on providing you with an update on the first quarter.

On ad spend Mike, we’ve seen some leverage in advertising and I do expect that over time you’ll see quite a bit more as we head towards our target model of 45% EBITDA margins when we’re at more of a steady state. The way we arrive at ad expense every year is by -- is really a top-down and a bottoms-up approach. We think about what type of margin we want to have for the full year and then we think about what kind of headcount we’re going to have for the full year and then we sort of see what’s available to us from an ad expense standpoint, and then from a bottoms-up standpoint, we look at the ROI that we think we’re getting across each of our advertising channels and we evaluate where we feel like we can profitably spend incremental advertising. Now of course it’s a more complicated exercise because we have four different consumer oriented brands that we have the opportunity to advertise. But to try and bring it all together for 2015, around a 100 million is where we ended up by combining those two different analyses. In terms of where it’ll go in the future, we haven’t given obviously 2016 or beyond guidance except to say that over time you’ll certainly see margin leverage in that line item as well as overall, but we haven’t even started our 2016 planning process yet. So it’ll be a little bit early for me to give any input on what 2016 might look like.

Our next question comes from Chris Merwin with Barclays. Your line is now open.

So, just in terms of the unique user number I think of a 140 million, is there any way you can just help us think about the year-on-year growth there. And then if not, Spencer you talked about growing on audience as a priority. How do you think about the audience tend and also the opportunity to grow the number of qualified leads within the audience that you already have. And then one last one, if you wouldn’t mind just updating us on the longer term plans for the Trulia brand, I think you shared some statistics about mobile now being well over two thirds of traffic and as more of that mobile traffic comes through the app how do you think about the value of maintaining two distinct brands over time? Thank you.

At a 140 million in use we’ve probably already past the point where it makes sense to think about that number as a real metric, in a sense that it’s such an abstract number, we all know people have multiple devices; we know that people use multiple brands. And so it’s quite abstract. We use it as a benchmark to show the size of our audience and our huge scale which really dwarfs any other competitor in the category. But the way I think about it is what percent of total revenue do we have relative to the TAM because that’s really the equalizer of all things, traffic, leads, contacts, agent ROI, et cetera. If you get right down to the bottom of our funnel, we have less than $500 million in agent advertising a year and agent spend over $10 billion a year in advertising. So, Zillow Group has probably about 5% wallet share of what agents spend on advertising. So to answer your question, I don’t know what theoretical TAM is, but I know that our actual share of agent spend is around 5%. So that ought to be able -- we ought to be able to increase that quite significantly over the next couple of years. In terms of the plans for the Trulia brand, we’re investing very heavily in it, in terms of product development and advertising in 2015 and beyond. We are big believers at having multiple brands. We want to give consumers choice and we want multiple brands to be part of the Zillow Group family of brands. And we believe there are significant benefits of having multiple brands in different places, the consumers search for real estate information and then we believe that are big benefits to integrating sales and industry relations and support and certain another back and business to business elements of operations. So, I’m totally convinced that we have the right strategy in terms of operating multiple brands and as result of that we’re going to continue to invest quite heavily in the truly a brand as well as Zillow.

Our next question comes from John Campbell with Stephens, Inc. Your line is now open.

So, I see you guys are sticking by the Market Leader guidance of I think you said 400 million or excuse me, 40 million by the end of the year. You did I think 13 million or 14 million in the quarter. So it’s about a third of the full year expectations. So, just curious about the pace of decline or we should maybe think about the phasing for the remainder of the year?

We’re not selling the Market Leader services anymore. We don’t have sales team for Market Leader. As a result, the business is not growing, subscription, software and media service and if you don’t have sales team, revenue is going to shrink. What we are doing with it is we’re working with our existing partners to evaluate how they want their surpluses to be supported going forward and we’re working on rolling the current Market Leader media business into Zillow Group media business. And that is the strategy that Trulia was essentially already pursuing prior to the Zillow acquisition of Trulia. So, we are really continuing that process that was already begun before our acquisition.

Okay, got it.

Thanks John. We’ll take the next question from Twitter. What plans is all have to diversify ad revenue away from agency brokers and so home improvement professional and general contractors? We monetize the home improvement category today mostly through display advertising. We have companies as diverse as Lowes and Home Depot and Sherwin-Williams paint and other companies that sell in around the home and display media from us. And today that’s been how we’ve monetized that. Clearly the proponents or revenue comes from individual real estate agent advertising. And we think that that total addressable market really towards the addressable market for home improvement, although it is something that we have through display today. I guess the next question I’ll take from Twitter from Cansis Capital. [Ph] Why not push the envelope and capture a higher percentage of commissions through better comparison tools and scheduled inspections et cetera? So I guess the I would answer that question from Twitter is we passion ourselves at Zillow Group as a media business, we sell ads not houses. We’re all about providing consumers with access to information and then connecting them with local professionals. And we do a great job of giving those local professional high qualified lad, they’ll covert those leads to very rate and then want more media impression from us. So we’re not actually in the transaction, we’re in the media business. And we provide media advertising as well software tools to help those agents transact rather than being in the transaction ourselves. I think operator, we will take the next question from the call please.

Our next question comes from Ron Josey with JMP Securities. Your line is now open.

Hopefully you can help us here. I’m trying to understand to reconcile agent bookings and ARPA maybe on core Zillow. Just agents grew 95%, 60% plus of bookings in the quarter came from existing agents along with greater impressions and nature of ARPA to 354. So on core Zillow, is it right to think of -- I’m trying to figure out what may the split would be and if there is any guidance there. I think last year you ended the year with about 65 or so thousand agents and wondering is that split still make sense. And in ARPA, I think you mentioned increased impressions inventory; is that some traffic or are you opening up more inventory to sell? Thank a lot.

So, in terms of core Zillow, we gave out some same-store sales metrics. We continue to see obviously very strong growth across the platform in terms of traffic and audience which gives us the ability to continue to open up inventory as we have had in the past. So, those trends are very consistent with the historical numbers. Obviously, moving into the acquisition ARPAs on a standalone basis for Trulia and for Zillow were quite different with Zillow is being significantly higher. What you’re seeing in terms of the GAAP results and the GAAP ARPA of $254 that represents a bit of blend between, both Trulia and Zillow and it is sort of a funky number for the quarter. But you would expect that on a standalone basis, Zillow’s would be higher and Trulia’s would be lower. We expect obviously to finalize our sales integration plans by the end of the year. And so you’ll have all agents basically by January 1, 2016 buying a combined agent product from a combined sales force. And so, those numbers should be higher than historical Trulia ARPA numbers, if you just look at the trends. The second part of your question was about historical agent counter…

Just wondering if the mix between -- we have clearly agents from Zillow as of 4Q and wondering if that 65,000 agents taking a ratio of the whatever was 95 or 100,000 agents that were reported this quarter is that the right way to think about Zillow versus Trulia?

So, on a go forward basis, we’re really not going be providing a standalone Zillow agent count number or Trulia agent count number. In terms of how you’re thinking about it might be right. But the way to think about it right now is that for the quarter, we have taken out 27,500 agents as they related to market leader only advertisers. And then what we did was we de-duplicated agents that were buying across both platforms. So approximately 20% of our agents were buying both and so those only shop as one in our numbers and that’s how you get to 103,000.

I’ll take next couple from twitter, Danbury Equity [ph] asked with the continued success with MLS partner additions, are you seeing the more upside to the direct model? Yes, we’ve added 105 MLS feeds in last six weeks, 47 MLS feeds just in last four weeks, so really almost every day now we’re launching new direct MLS feeds, we’ve reached tipping point where most MLSs in the country now realize the benefits of providing listings to Zillow Group with our huge audience. And with the launch of our data program where we are saving MLSs significant amount of money. We’ve really taking aim at one of their largest parts of their expense structure and are giving them data for free which is quite significant and strategic. So, this has dramatically improved versus the quality at Zillow and also Trulia. Next question from Twitter, from Brian Bolland or B Bolland1. [ph] Do you see a similar building products for StreetEasy being applied a specific neighborhood on Zillow? It’s not clear if people at the neighborhood level are ready to contact an agent, Brian. So, I am not sure, may be something that which is the test, it certainly works. We believe that will work quite well in New York. Given the way the market works there. But at the neighborhood level for Zillow, I’m not sure. And then let’s see MPG 2020 [ph] on twitter asks can you provide -- can you update current agent ROI, target ROI and the time it takes to get there? Good question that gets at the core of our agent advertising business. We’ve already told investors that we think most agents are converting our leads probably at around 3%. And that would arrive at probably at 10x or so ROI. We think that a lot of our top agents are now converting leads at much higher rate as result of better training, as a result of work that we have done, as a result of work that they’ve done, as a result of changes to go to the entire structure of the real estate industry where more and more agents are becoming professionalized and our using software and teams and as a results of our Tech Connect program, where now leads are going to 47 different CRMs including of course market leader as well as other leading CRMs. As a result of that higher lead conversion rate, even though we raise price, we can keep ROI constant because the leads are converting at a higher rate. So it’s very hard for us to know precisely what the ROI is but even with price increases, ROI can stay flat or perhaps even increase as lead conversion has increased and as you believe that lead conversion has increased quite a bit especially at the -- among top agents that are the highest ARPA advertisers. And then last one from Twitter and then we’ll go back to the call. Cquest [Ph] asks on twitter what’s the churn rate at Trulia post the entire sales team getting fired? So point of clarification, the Trulia sales team did not get fired. One of the sales centers in San Francisco, sales center for Trulia we closed. But the Denver sales center which is couple of 100 people strong is still absolutely very much going through the advertising. And as a result of the changes that we made to the Trulia agent add processes over the last couple of weeks, we’re actually reducing the churn rate on increasing the retention rate among Trulia advertisers through some of the changes that we’ve made. Operator, we’ll go back to the call please. for the next couple.

Our next question comes from Mark Mahaney with RBC Capital Markets. Your line is now open.

Can I ask you to go back and talk little bit more about the rentals market and may be some of the product initiatives and the sales and marketing initiatives you have behind that rentals opportunity over the next year or too?

So, product initiatives, we have -- that’s a long conversation. I mean we have a very large product development team in San Francisco that works on Trulia Rentals and a very large platform team Seattle works on Zillow Rentals, on both desktop and mobile. And then we have a team in San Francisco that works on industry facing software for the rental industry. And we’ve made several acquisitions across each of those different product teams including of course HotPads which is our standalone rentals brand. And just to pick off a couple of examples, the things that we shipped recently. We have more sophisticated and advance building pages now which are really important for our multi-family partners that help drive an increase of our multifamily properties by 84% year-over-year. Our netted rental apps are quite a bit better than they were even six or twelve months ago. We’ve done a better job of discovery on rentals inventory on quarterly and core Zillow. I believe we’re merchandising it better in email as well as on desktop and mobile across those brands. HotPads has shipped a number of pretty exciting initiatives as well as it has improved organic HotPads audience. So, the product initiatives are really varied. In terms of sales initiatives, we have a fully built out inside sales team and field sales team, something that we’ve been building over the last year and is now effectively fully staffed and they are completely integrated across our brand. So they carry business cards from Zillow Group, representing Zillow, Trulia, HotPads as well my new place, real pages that we power. And that is a very significant calling card, the audience that they represent is quite enormous and it is what they are -- it’s that exposure that they selling to our multifamily industry partners.

Our next question comes from Lloyd Walmsley with Deutsche Bank. Your line is now open.

So, you guys have talked about being constrained and what you could do on the pricing side, while the Trulia a deal is under review. Can you just talk a bit about you’re doing on the pricing side now that the deal’s behind us, specifically on agent side as well as kind of on the broker exclusive side that I think falls into display revenue; what are you doing on the pricing there?

So to start with we’ve completely integrated pricing. So now the same team is -- even Trulia and Zillow are still sold separately, or at least till the end of the year the pricing is done in integrated fashion. So that’s a significant change that went into effect just a couple of weeks ago. Every couple of weeks we reprice every zip code in the country, sometimes we increase price; sometimes we decrease price. We do it based on local market dynamics and by looking at a lot of data. And as a I say now, we’re doing it in an integrated fashion between our two brands. In terms of our national or regional deals. Those tend to be done as parts of typically annual negotiations. It’s a pretty small portion of our revenue as evidenced by the fact that it’s only a small portion of display revenue and display revenue as a percent of total revenue continues to decline whereas marketplace revenue continues to increase as a percent of total revenue. So while we do monetize a small portion of our impressions through national or regional deals, the vast preponderance of our revenue comes from selling local advertising to individual real estate agents. And then, I guess the other component of it is Premier Agents on the Zillow brand do get a couple of their listings featured which is to say they appear as the only agent on a portion of their own listings. And as the size of our audience has grown, the value that an agent would get from that attribute of their Premier Agent advertising product would have increased or if it not for us reducing the number of listings associated with that feature. And so, we have reduced the number of featured listings for platinum Premier Agents because our audience has grown so much that we can provide them with the same value by featuring a smaller number of their listings.

And then I guess you referenced the traffic number of 140 million as a bit abstract. And I think the industry data selling like $10 billion of agent advertising generally seems to be treated with a heavy dose of skepticism from people on the industry. And then the agent metrics of that historical data aren’t very helpful. Can you give us another bottoms-up piece of data like contact requests, something that helps us understand I guess core organic trends across the brands and then like, how might you be changing the metrics you give going forward given you’ve been deemphasizing the agent numbers generally?

So, I mean, you’re right in my characterization of audience as something abstract and hard to wrap your mind around. The total dollars of agent advertising of between $10 billion and $13 billion, is a number that I feel pretty good about because it -- I feel excellent about the 60 billion to 70 billion in total commission number. That estimate I think is fairly solid and well accepted and it’s pretty well accepted rule of thumb that agents spend between 10% and 20% of their commissions on advertising. So, I do believe that agents probably spend about $10 billion a year on advertising. And so, I feel solid in that TAM. In terms of metrics, I’m laughing because this is something that we’ve spent a lot of time internally trying to bid debate and trying to figure out how best to provide investors with transparency and an ability to model. As you point out ARPA sub-count has always been bit of a challenging to metric because they only tell part of the story. At different points in time, we give lead numbers, if I tell you how many leads we send per agent and you can look by the number of agents that we have. I don’t think we’d really found the right -- the sort of perfect metrics which give investors transparency but don’t give competitors too much information and that helps outsiders understand the health of the business. Perhaps the best metric that I think helps outsiders understand the business is that is, when we say 50% to 60% of our bookings are going to existing agents ,I think that helps investors understand that the [indiscernible] is clearly working for a lot of agents or else they wouldn’t be buying more impression. And so, whatever you may hear from agents that you interview or other feedback in the marketplace, at the end of the day a lot of agents are making a lot of moneys from their ads on Zillow Group; if they weren’t, they wouldn’t be buying more ads from us. So I think that’s pretty good metric to get at the health of the business.

Our next question comes from Robert Obarski with Sterne Agee. [Ph] Your line is now open.

My first question is just on EBITDA phasing, since like a percentage of full year EBITDA is higher in 1Q, lower in 2Q than last year despite the restructuring in the quarter. Just wondering if you could comment, if there are different cadence to your ad spend or maybe it’s just the revenue trends that you at Trulia agent quarter in 1Q, maybe you give some more color there. Also Spencer, I know you mentioned some of the competitive bluster in the rental space. Just wondering in response to some of the massive marketing investment that’s going on there, if we could expect that you will be highlighting your rentals product and superiority especially in the long tail of listing this year to give that little bit higher profile in your marketing efforts?

I’ll take your first question and then I’ll pass it on to Spencer to talk about the competitive landscape. So in terms of just the ramp from where we’re today in Q1 to the end of the year where we had said that, we’re going to get to about 20% margins for the fourth quarter. I think getting there is going to be a combination of both robust revenue growth as we move through the year but also expense leverage. And so when you look at where we’re spending, where we’re investing to move from Q1 to Q2 to understand how we’re going from our margins today to 4ish million margins in Q2. You have to look at the fact that we’re doubling our ad spend quarter over quarter. So advertising is really working for us. We’re heading into a peak seasonal shopping season. This is no different than how we spent last year, we have a heavier weight in Q2 I think, relative to what you’ve seen in the past. And so, much of it in Q2. Q3, we’re going to modulate that a little bit and then Q4, we led up on a quite a bit just given what’s happening with the shopping season in the fourth quarter. I guess, in addition, the other things you should have in mind as you’re modeling out the year and we’re also investing is we’re continuing to invest very heavily in data, both on a consumer side with more accurate data and the greater set of data from more breath for the consumer and to improve the core shopping experience. And we’re giving that data also way to the industry, as an industry benefit through our Zillow Group data Connect platform. In addition, we also are spending more money this year on professional services fees, which are increasing in the near term. These are renewal fees, accounting fees and consulting fees and some of that will taper off also in the fourth quarter. We don’t think that these are long-term in nature but really centered around activities in 2015. So, hopefully there is some good color there that will help you sort of season out EBITDA and profitability for the full year.

And on rental advertising, I’m not going to go into advertising tactics other than just to say that we are advertising all brands and all products in different channels. We do have a pretty significant advantage on this topic and that our ancillary marketplace is like rentals and mortgages and or even core real estate. They all benefit whenever we advertise any of our various products. So, there is no question for example that rentals has benefited even from an ad about buying a house on Zillow for example. We see benefits to our rentals business when rentals is core part of the ad. But other than that for competitive reasons I’m not going to get into which channels and which brands and which tactics we’re pursuing for advertising.

Our next question comes from Brad Safalow with PAA Research. Your line is now open.

I just wanted to go back to the TAM, now as research suggest that only 10% of agents spend more than $5,000 a year on marketing, if I said those 10% are spending $25,000 a year that would imply a TAM of $2.5 billion, given way your ARPA is today. You’re trading towards a $5,000 annual and to participate on the Zillow platform help us reconcile that versus your $10 billion TAM spend estimate?

Brad, I guess I would reconcile it by saying that the way most agents are work -- make their investment decisions is on marginal ROI. So, if you try to evaluate in the year 2000, how much revenue Google would have in a given vertical, you would probably looked at yellow page advertising and reached exactly the wrong conclusion. And when Google advertiser thinks about their standards and making money on the margin. So, as long as we provide any positive ROI, the TAM is infinite in theory, because the agents continue to buy money. And the agent that is a Zillow advertiser is a professional business person that has a team and uses a software and investing in our business and spending money to make money. I don’t know, what do TAM [ph] member of -- no, I don’t know, how they think about their spend. The agent from North Dakota that was visiting yesterday, the I spent time talking to was not in the business four years ago, didn’t even exist. Today spending probably $20,000 a month with Zillow Group, buying impressions, has nine agents working for him, uses software and it’s completely killing in North Dakota, feeling share hand over fist from the traditional agencies to spend money on trends in direct mail. And that agent in business in three years. So as long as we provide any ROI to that agent, he is going keep sending money on behalf of his team on Zillow. So I don’t know what the TAM data says from NAR or wherever else, but I know that they’re ROI positive and that’s why agents keep spending.

And my second question was on you referenced it earlier. I know that you guys have reduced the number of feature listing for platinum premier agents from 10 to 5. I think you’ve established $250 minimum ARPA on Zillow at least. Recently at least the agents I’ve talked to, don’t want to use too much from anecdotes but obviously featured listing is the highest source in terms of volume and quality in terms of leads. Can you talk about what you’re expectations is in terms of response to the agent community whether it’s an uptick in churn and what this suggests about the agents your targeting?

It’s a pretty complicated topic, so let me try to find it again. So when we had a particular amount of traffic, if you had 8 listings that were featured, you would get a particular number of leads off your own listings. As now that we have a lot more traffic, you can get that same number at least with say four of your listing feature. So, we it is true that we have fewer feature listing for platinum premier agents and we have a higher minimum spend in order to get featured listings. But that’s because we have so much more traffic to that. As long as we’re driving good ROI between the impressions that you get on other people listings and the leads that you get from your listings, then our retention will be high and we’ll able to keep selling more. Our overall Zillow agent retention is at record levels and we haven’t seen an impact on churn of the reduction in a number of featured listings. And that’s why 60% of our bookings are going to existing agents. And agents who were with us a year ago are now spending 50% more than we have had 50% same store ARPA growth year-over-year in spite of the featured listing change that you talked about.

The next question comes from Tom Champion Cowen & Company. Your line is open.

In the past, there has been a fairly dramatic seasonal uptick between Q1 and Q2 from a revenue perspective. And it seems like based on where you’re guiding that’s a little muted this year. I’m just curious if you could maybe talk through what’s different now and perhaps how we should think about linearity throughout the year leading up to that 690 guide for ‘15?

So, I’d point two things to start which are display revenue softening year-over-year. We’re making very strategic decisions with respect to the consumer experience and deliberately reducing in our display ad placements which means we’re integrating more marketplace advertising into the consumer experience. So year-over-year basis, we expect display revenue will be a lot more in line with prior year and those are numbers that we gave out during the script. There are some challenges with display obviously from programmatic adverting. But kudos to the display team for really incubating a lot of that revenue as we’re transitioning to other types of ad placements. So I’d point out display. Then I point out Market Leader that business is down 11% year-over-year and will continue to be sort off of its 2014 numbers. So those are the primary drivers of I’d say the softening in revenues and contributing to slower than expected ramp in your model from Q1 to Q2. We’re also in the midst of integration exercise where we’ve effectively displaced the affiliates for mortgages and rental with our own platform. And so as we move through that we feel really good about what’s going to happen in Q3. So, if you model this out, I’d expect a much higher uptake in revenue walking affiliate who was through -- what’s happening with EBITDA as we march through the quarters. The lift from Q2 to Q3 will be much more significant in terms of how these numbers flow through down the EBITDA. And so that’s what I would model out in terms of the top-line.

I’m showing no further questions. I would like to turn the call back to Spencer Rascoff, Chief Executive Officer for closing remarks.

Thanks everyone for your time today on the first quarter earnings call. I will now take this conversation over to Twitter and answer the remaining questions using the #ZEarnings. I look forward to speaking with you all again soon. Thanks a lot. Bye, bye.