Zillow Group, Inc. Class A (ZG) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Trulia's First Quarter 2013 Earnings Conference Call. At this time participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to hand the call over to Mr. Ian Lee, Trulia’s Head of Investor Relations. Please proceed sir.

Thank you, operator. Good afternoon, and welcome to Trulia's first quarter 2013 earnings call. Joining me today are Pete Flint, Trulia's Chief Executive Officer, and Sean Aggarwal, our Chief Financial Officer. Before we start this call, I want to remind all of you that this presentation contains forward-looking statements within the meaning of the federal securities laws. Forward looking statements generally relate to future events or our future financial or operating performance. Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance and expectations for future periods, our expectations regarding our continued focus and our current strategy, our expectations regarding macro trends in the market, and our expectations on our products. Our expectations and beliefs regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release that we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law. We also remind you that this call will include a discussion of GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings press release that is included on our website. This conference call is also being webcast and is available through the investor relations section on Trulia's website. And now I'll turn the call over to Pete.

Thanks, Ian. Welcome and thank for joining our Q1 2013 earnings call. I’m pleased to report another record quarter for Trulia driven by industry leading innovation across our web and mobile platforms. In the same way that we have seen intuitive technology and personalization tools transform internet sectors and online travel to e-commerce. Trulia is at the forefront of building these type of transform to tools in the real estate sector at massive scale. At D&A is a technology and engineering company puts us in a strongest position deliver on a promise for real estate and we continue to invest in technology innovation, our platform and the expertise were need to achieve our strategic goals and accomplish our vision. We had a fabulous start to 2013. Revenue for the first quarter 2013 was $24 million and increase of 97% over the first quarter 2012. Adjusted EBITDA was positive $1.2 million of 5% in revenue compared with minus $2.5 million in the same period a year ago. We believe we are the best in our industry and delivering new and unique insights to consumers looking to purchase at home driven by industry leading technology and analytics. Our focus on these experience in content and our large transaction-ready audience. By consistently improving our user experience and products we’ve attracted series homebuyers and sellers that in turn have allowed us to become an indispensable marketing tool for real estate professionals. In 2013 we remained focused on our five core strategies. One, attracting our transaction-ready audience through product innovation. Two, driving our user-generated content. Three, scaling and monetizing mobile. Four, building our business zip code by zip code and Five expanding into adjacent markets by utilizing our assets. While the short-term emphasis may shift between these trustees from quarter to quarter. These will remain our guide post for how we continue to evolve grow and evolve Trulia over the course of the year. We will execute on these core strategies by building our business organically and way make sense through potential partnerships or acquisitions. In the first quarter 2013 our focus was on product innovation on both the consumer and agent sides of our Marketplace. And then preparation for the seasonally busy spring and summer house-hunting seasons we introduced a host of new tools to enhance the Trulia experience and make it even easier to find the right home and for agents connect with motivated buyers and sellers. Now our path is often influenced by looking to transform and radically improve already familiar offline behaviors. One example of this in Q1 was the better launch of our Trulia Suggests feature. When an agent and buyer connect in the offline world the agent begins learning the buyer style these are our preferences and can begin to lead out or prioritize houses based on understanding what homes they like and what homes they don’t. Trulia Suggests does this by delivering an algorithm powerful experience online. We are taking consumers beyond the traditional search box by providing persona as recommendations based on homes you like, homes you hide and the overall search behavior. Without the inventory tight in many areas our proprietary algorithm builds a Trulia Suggests is opening up new desires to homes and neighbors they might not have explored in the past. We are able to do this because of our engineering strength and they took lean from the tens of millions of monthly open shoppers on Trulia. We’ve had a great reception of Trulia Suggests since its launch. Earlier results indicate the consumers that you suggest spend approximate three times the amount of time on our sight compared with average users and since the launch of Trulia Suggests we’ve had almost two million likes or heights on properties in our database. To - few of the continued growth of our mobile consumer audience we’ve introduced a number of enhancements to our mobile apps as well. Among the most importance of these was the redesign of our top-rated iPhone app enabling easy access to crime and local amenities data providing many of the same deep insights about our neighborhood that are offered on our website. We also added a find an agent function to our iPhone and Android apps which enables users to quickly find an agent in the search area. These enhancements build upon Trulia’s continued ability to bring functionality that is central to real estate transactions using closer to the people and places where there is transactions happened in neighborhoods their open homes and on the going. Mobile continues to be the main entrees some of the most engaged consumers in the market and remains the fastest growing area of our audience with almost $11.4 million mobile monthly visitors each month in Q1 up 122% year-over-year. During Q1 and 90 of the top 100 metro areas across the country more than half of the e-mail is generated with mobile. This is up from 82 of the top 100 metros in Q4 2012 and of the peers and we can especially when people are looking at open homes over half of our traffic is by our mobile devices. On the web we enhanced a design of the property description pages now featuring bigger, order photos and cleaner interface and pages that loads faster. We redesigned our search results page as well to make it easier for visitors to scan results and find the right property quickly. For our ongoing process results and commitment to product innovation we continue to track more and more at the valuable transaction-ready consumers for the price by real estate professionals. Consumer traffic was up 52% year-over-year to average monthly and visitors of 31 million in Q1. We illustrated our relentless commitment to innovation on the agent side of our business as well in Q1. Many of our one of our goals is to enable agents to both closer relationships with perspective to customers. Ultimately providing them with an opportunity to close deals and grow their business. For our new feature we launched in Q1 agents confirmed the both of their online reputations by showcasing homes they’ve successfully sold on their Trulia profiles. When agents add the transaction history to the agent profile they are able to attract both perspective homebuyers and sellers well examples of the local expertise and past experience. This also helps consumers more easily find agents with the right specialties and learn more about their backgrounds. In addition these features have increased agent engagement and attracted new agents of both profiles. Another to introduce for agents with Who’s Viewed Your Profile to allow agents to not only see their profiles say that their profiles have been viewed recently but also provide some insights into who he is actually viewing their profiles. Such as if the viewer was a perspective buyer he is pre-qualified for learn as well as consumer decides search engine and price range. In response to significant amounts for agents we started to expand the inventory available to paying subscribers during the quarter. These product changes will increase the amount of available inventory we are able to sell to agents enabling Trulia to connect a greater number of agents to our rapidly growing consumer audience. Among the core changes we are making is that we use to sell placements for one agent per page. His photo and contact information will be displayed when a consumers search of homes on our site or mobile apps. We will now sell placements to two or potentially more agents and have also made it easier for consumers to connect – contact agents by optimizing our page design. In this way we will be able to sell placements to more agents especially markets where all of our web-based inventory is sold out. This will expand the number of agents by whom we can provide visibility as well as supporting incremental increase in the number of lease we generate for agents. Consumers will benefit from the changes as it will now be easier for them to reach out to multiple agents at once when they see a home that interest them. This facilitates a quick response time to fill out home inquiry. And by liberating inventory and sold out ZIP codes will help drive the continued growth of our agent business. We are already underway and implemented the changes and are rolling out the inventory expansion program gradually across our subscriber base and we expect this to continue throughout the year. As a whole our product and sales force efforts achieved strong results in our Marketplace business. By the end of the quarter we had approximately 28,000 subscribers up 3500 sequentially the most subscribers we’ve ever added in a single quarter. And ARPU growth also continued in Q1 to $187 up from $172 in Q4, 2012, demonstrating the strong return of investment generated by our products. Overall growth in our Marketplace business accelerated sequentially achieving an annual revenue increase of 100%. Touching on our Media business, we continue to see sustained interest from brand advertisers in Trulia’s platform and ability to reach our large base of transaction-ready consumers. We saw strength across verticals including areas such as homebuilders, mortgage and credit. As the real estate market continues it’s recovery we expect this trend to continue. Revenue in our Media business for Q1 was $6.6 million up 91% year-over-year. Our Rental business has seen tremendous progress with rapid growth in traffic and expansion of our listing database. In Q1 monthly rental visitors were up more than 100% year-over-year with mobile visitors almost tripling year-over-year. Email leads sent for Trulia also almost tripled year-over-year in Q1 with the majority coming from mobile devices. This scale of our rental audience and engagement is becoming meaningful. Since we announced our PRIMEDIA partnership in Q4 the team is been extremely busy integrating photos and floor plans for more than 20,000 multi-family apartment communities and approximately 5 million units from apartmentguide.com. This integration was completed in Q1. We are connecting our transaction-ready audience and generated new leads for communities all across the country. Run Apartment communities sold more than seven leads on average every day from Trulia in March alone. We’ve also increased our coverage in a number of cities across the U.S. such as Houston, Phoenix, Dallas and San Diego as a result of this partnership. Our rapid growth in this sector is because we are delivering consumers hyper-local insights and always expanding database of rentals and an incredible mobile experience. This is key in the fast moving rental market and is a natural strength for us. Our commitment to innovation and both in the leading products and user experience for consumers and the industry is a driving force behind our strong start to 2013. So as we continue to see size of improvement in the real estate industry we remain tremendously excited about our business of last year’s and the Greenfield opportunity we have ahead of us. We believe the housing market is in the early stages of a multi-year recovery. And as the industry return to normal we believe it will provide an incremental tailwind to our overall business over the next several years. In summary 2013 is off to a strong start with much more in the horizon. I’m passing the call on to Sean to discuss our financial performance in more detail. I’d like to close by leaving you with a quick reminder of how we are measuring ourselves this year. One, attracting transaction-ready audience, two, driving user-generated content, three, scaling and monetizing mobile, four, building our business ZIP code by ZIP code and five, expanding into adjacent markets. Thanks again for joining us today. With that I’ll pass the call to Sean.

Thanks, Pete. We continue to experience tremendous momentum in our business in the first quarter. Our focus on building the best products in our industry enabled us to grow consumer traffic while achieving strong results in adding new subscribers and growing ARPU. These factors led to another quarter of record revenues and adjusted EBITDA profitability. Today I will cover three items, an overview of key metrics, review of first quarter results and guidance for the second quarter. My prepared remarks are accompanied by a financial presentation which is viewable on this webcast and also available on Trulia’s Investor Relations website. I’ll start with key metrics. We focus on three key consumer metrics, total visitors, mobile visitors, and amount of user-generated content. The first quarter is a seasonally busy period for the real estate industry compared with the fourth quarter. Consumers increased their home search activity after the winter months, more homes come on the market and agents become busier. We had an average of 31.4 million monthly unique visitors during the quarter, an increase of 52% year-over-year. Mobile traffic remains exceptionally strong with mobile monthly unique visitors of 11.4 million for the quarter, an increase of 122% year-over-year. A quick note that we reclassified our mobile visitor data to include visitors that access Trulia via the mobile web on their tablets or mobile phones. Previously those visitors were classified as web-based visitors. There is no change to overall visitor traffic as a result of this reclassification. And consistent with our strategy last year we spend virtually no discretionary marketing dollars. The traffic to our web and mobile sites is almost 100% organic and free. Another key consumer metric is new contributions of user-generated content. During the quarter our users made 1.1 million new contributions to our site, a 69% increase over the first quarter of 2012. This is the first time we have achieved a million contributions in a single quarter. We finished the quarter with a cumulative total of over 8 million user-generated contributions in our database up from approximately 5 million a year earlier. We believe this is the single largest database of real estate user-generated content on the web creating a significant long-term competitive note around our business. On the agent side of our marketplace we focus on two key metrics, number of subscribers and average revenue per user or ARPU. At the end of Q1 there were approximately 390,000 agents that were active on our site. This large pool of active agents is a primary target for our marketplace sales force. We added approximately 3,500 net new subscribers to our platform ending the quarter with approximately 28,000 paying subscribers, a 42% year-over-year increase. As Pete mentioned this is the largest number of subscribers we have added in any single quarter in our history. At the same time our Marketplace team continued their success with regards to selling our mobile subscription product to a greater and greater number of existing subscribers. All of the total 28,000 subscribers approximately 6,600 or 24% have now purchased a subscription to the mobile product up from 19% in Q4. As you know the mobile subscription product is priced at a 15% to 20% premium to the web subscription product. Not only that we increased subscribers by a record number in Q1 but we also achieved a record level of ARPU. ARPU in the first quarter averaged $187 up 46% year-over-year. We have now achieved consecutive quarterly increases in ARPU for over three years on both the year-over-year and sequential basis. Having covered key metrics I’ll turn next to a review of first quarter financial results. Revenue for the quarter was $24 million, an increase of 97% over the first quarter of last year. Total revenue further breaks down into two categories, Marketplace and Media. Marketplace revenue which is comprised primarily of revenue from our subscription products sold to real estate professionals were $17.4 million for the quarter a 100% increase year-over-year. This was a sequential acceleration versus the Marketplace growth in Q4 of 2012. This was driven by overall subscriber growth, price increases and increasing penetration of our mobile subscription product. The subscription based business accounted for 72% of our total revenues. Media which includes sales of display ads to national advertisers also performed strongly with revenue of $6.6 million up 91% year-over-year. As a reminder in Q1 of 2012 we had a large advertiser declare bankruptcy leading to a loss of revenues from that customer. Our Media revenues in that quarter were approximately $900,000 lower than they would have been otherwise. Therefore on a normalized basis year-over-year growth in the Media category was approximately 52%. Our Media business continues to be driven by solid execution and rapid growth in our unique visitors. As the real estate market makes a recovery back to normal levels we are well positioned to benefit from the uptake in marketing spend. I will next discuss earnings and then walk down the P&L commenting briefly on each P&L line item. Adjusted EBITDA was $1.2 million or 5% of revenue compared with minus $2.5 million in the year ago period. The top line strength in our Marketplace and Media categories enabled us to drive significant operating leverage. Cost of revenue for the quarter were $3.2 million with 13% of revenue compared with $2.2 million or 18% in the first quarter last year. COGs as a percent of revenue was inline with a 13% recorded in Q4 of 2012. Sales and marketing expenses were $12.3 million in the first quarter or 51% of revenue compared with $6.1 million or 50% revenue in the prior year period. The increase in sales and marketing dollars was mainly driven by increased compensation for our inside sales team contributed to our record Marketplace revenue quarter. As you recall we pay out full commissions on bookings to our sales people when contracts are signed while recognizing the revenue over the life of the contract. First quarter research and development costs were $4.9 million or 20% of revenue compared with $4.6 or 38% of revenue in the same period last year. G&A expenses were $5.2 million in the first quarter or 22% of revenue compared with $3 million or 24% of revenue in the prior year period. This was a sequential increase form the 19% of revenue in Q4 of 2012 driven primarily by expenses associated with our successful follow-on offering that we completed in March of this year. Let me turn next to the balance sheet. We finished the quarter with approximately $214 million of cash in equivalence. We received approximately $113 million of net proceeds from the follow-on offering. Deferred revenue stood at $14.8 million compared with $7 million in the year ago period and total debt existing quarter was just under $10 million. I’ll now close by covering guidance for Q2. We expect the strong momentum in our business to continue into the second quarter. Our Q2 guidance reflects the record levels of consumer and agent engagement we have seen at the start of the year. Based on these strong trends we now expect Q2 to be yet another quarter for our company. Therefore we anticipate revenues to be in the range of $27.3 to $27.7 million. This represents a 62% to 65% year-over-year increase. For modeling purposes we expect Marketplace revenue to be approximately 70% of total revenue in Q2. We expect adjusted EBITDA to be in the range of $2.5 to $2.9 million or approximately 9% to 10% of revenue. I’ll now pass the call back to the operator for Q&A.

Thank you. (Operator Instructions) your first question is from the line of Lloyd Walmsley from Deutsche Bank. Please proceed.

Thanks for taking the question I’ve had a couple if I may. I was wondering if you can give us an update on how much of the ARPU growth came from desktop versus mobile and then within desktop what percent maybe was impacted by the new impressions at the bottom of the pages. And then as we look forward what should we expect in terms of price hikes specifically on TMA as you wrapped the first anniversary is that going to be competition driven like the desk top pricing or will there be explicit pricing hikes there that we should expect?

Lloyd a few thoughts on those so first components of ARPU, so ARPU in Q1 was up $15 sequentially and I’ll break that down for you. So, all that $15 roughly $5 or about a third was driven by the mix of TMA the fact that penetration of our mobile subscription product increased from 19% in Q4 to 24% in Q1 TMA continues to be priced at about a 15% to 20% premium. And then the balance $10 increase to about two thirds came from pure price increase from our web products. So, that's the break down that we’re seeing. On your question around price increases, pricing related to TMA and so on couple of comments to make. I think first as you’ll recall we launched the mobile subscription product in May of last year and sold it as a premium product that was available only in 12 month contracts and so on and so most of those contracts are yet to come due. We did later on in the year start making it available more broadly and selling six months contracts most of those contracts are yet to come up for renewal. So, we’ll watch those trends and over the course of this summer we’ll make our next move with regards to pricing specifically with the mobile subscription products. Here is what we did see with as we gradually have started to roll out this inventory expansion initiative that we touched on. We are now making available additional placements for agents in particularly in sold out zip codes. And we've been able to command a premium pricing for those second placements and are charging higher prices for our web products in making those second placements available because there is a tremendous amount of pent up demand amongst the agent base and they continue to receive a very strong ROI from us. So, that's what we’re seeing on pricing trends.

Can you remind us when those additional placements started rolling out kind of the cadence of how we should expect this to roll across the (sell base)?

Yeah we launched towards the end of the quarter we’ve made those changes and this is a gradual roll out. So, we started making those changes at the end of the quarter it's probably early days we see this as a 2013 initiative and this is as this natural on these inventory changes and product changes we will roll that gradually and it's an experiment. But so far the feedback from agents and consumers has been positive so agents have been able to get access to inventory that was unavailable to them before also we made the optimization on the pages stuff that we improved visibility for their brand and (lead booms) and as well as for consumers it makes that more easy for them to identify near by agents and contact those easy, so it's - more easily so it's been a it's only a net positive for our constituents.

Thanks a lot guys. Great quarter.

Thank you. The next question is from the line of Mark Mahaney from RBC Capital Markets. Please go ahead.

Thanks. I want to ask a question about guidance. It, that, the numbers kind of imply a deflection point in March quarter in terms of that – the revenue growth reacceleration both in the Marketplace and in the Media business. The growth the implied growth for next quarter kind of implies back to the kind of deceleration we were seeing was a very modest deceleration we were seeing prior to that. I don’t think there is anything one-time issue would call out in the March quarter is this just the case of being thoughtful about seasonality being thoughtful in conservative with guidance. Are there particular factors that we should be vary of in terms of what could slowdown the growth rate?

Mark as we thought about the Q2 guidance the factors that have gone into putting that together are one, we’re seeing some really strong trends in our Marketplace business overall and we expect those to continue. We do have the anniversary of our TMA launch coming up in Q2 and it was a very strong launch for us last year and we’ll be comping that on a year-over-year basis in Q2 so that's sort of factored into the guidance as well. And then the third thing I’d say is the inventory expansion initiative that we talked about it's a gradual roll out over the course of this year and based on sort of variety of factors we will judge how quickly we move in rolling that out across the country and some of that is factored into our guidance as well. So, those are some of the factors that went into putting together the guidance that we've shared on the call.

Thanks and one follow-up please. When you think about where the long term call it two or three year penetration of TMA could be are there any guide posts you are seeing are there particular markets where you’re seeing much higher levels of penetration in the overall penetration that you just reported. Anyway you think about internally how high that penetration could rise? Thank you.

That's the analysis that we shared about high demand zip codes is exclusively for the web based product but we’re seeing very, very similar levels of activity and behavior on mobile as well so. We currently have the penetration 24% given a rapid growth in mobile 122% we would expect this to be a must buy product for all our subscribers at some point in the future.

Thanks Pete, thanks Sean.

Thank you. The next question is from the line of Ralph Schackart from William Blair. Please proceed.

Good afternoon. First question is on the inventory that you’ve opened up. Just curious Pete have you doubled the inventory in all your zips today? And then second is there any opportunity in your most extremely sold out high demand zips to potentially triple the inventory in some of those locations?

Yes so we've made we haven’t doubled it everywhere so there is, we’re rolling out these changes and the starting point is to and obviously you say as we shared in the prepared remarks this could be two or more slot. So this is a 2013 initiative very gradual I think we are watching a little of the metrics on the, and the feedback from our customers and like I said we've been very happy with it but, we think this is a really – beneficial initiative for agents and our business and we’re going to take a cautious and gradual approach of the rollout in 2013 but exactly as you say there is many opportunities there for us for the business.

Great. And maybe house keeping question for Sean, Sean would you be willing to give us the mix would appreciate the mobile only subs but give us a sense of how many are overlapped on mobile as well as desktop and perhaps desktop only at this point?

Sure Ralph I’ll share some numbers lets see if this gets to what you’re thinking of. So at the end of Q1 or as I mentioned of the 28,000 subscribers approximately 24% or 6,600 have also taken a mobile, have a mobile subscription product and all of those people all of the 6,600 subscribers with the mobile product 70% also have a web product subscription and 30% therefore are mobile-only subscribers.

That's helpful, thanks. And one more if I could. So couple, a quarter two or ago you talked about changing the incentives for the sales force to really push mobile aggressively, can you give us an update on the incentive system today has that changed and sort of what are the benefits that you’re seeing?

I think probably the key thing on the sale force so we shared last quarter that we’re focused on segment in the sales force focus on particularly customer segments and I think we've seen from the (indiscernible) and ARPU growth that we've been very successful in improving productivity and operating leverage on the sales force. So we are really delighted with that. When it comes to sort of different incentive structures as natural with our sales force we focus on different things in different quarters as we focus our strategy on particular initiative. So as you might expect over the course of the year in various periods we will focus on one initiative versus another. So it’s kind of hard to give two much in terms of what the specific focus is will be other than we’re seeing across the board increases in productivity within the sales force.

Great. Thanks, Pete. I appreciate it.

Okay. Thank you. The next question is from the line of Kerry Rice from Needham. Please go ahead.

Thank you. Most of my questions have been answered but I just had a quick question on when you talk about the additional inventory maybe unrelated or maybe it’s related but if I look on the website and I look at particular listings. I’ve noticed that some are only have listings of the listing agent or advertisements of the listing agent. Is there some limitation regarding value or what can the agent do that other than buying the whole zip code which it doesn’t look like the case is that they are the only agent that shows up on that listing. Is there any particular reason for that occurring?

Yeah so there we’re probably seeing a couple of things one is the gradual rollout of what we are doing here. Two is either agent or broker feature listing. So within one of our products could Trulia approve there is a feature listing component and then we also sell this at a larger volume to brokers which will buyout relatively, exclusively and be the only agent on that. So that’s a product we’ve had some time and that’s probably what you’ll see in there and part of that, that the reason that brokers and agents buy that is to be the only agent on their listing.

Got you. And then as you talk about the more inventory that you then are opening up does that end up on is that on the search results kind of page or is it as you go into each individual listings or is that across the board where is this actual inventory additional inventory showing up.

Yeah so it’s on the property details page.

Okay.

For web and mobile apps.

Okay. That’s helpful. And then one last question and Sean you answered most of it. You said 70% of the mobile subscribers are also have the web product. Can you tell us what of the new or how many subscribers were added in Q2 for mobile that will also had web, is it that same 70% or can you give us an exact number or?

Yeah it’s a I’ll break that down for you Kerry. So end of Q4 we had 4600 subscribers to the mobile product and that grew to 6600 by the end of Q1 so we added approximately 2000 subscribers.

Right, right.

Over the course of Q1 of those approximately 800 had only a mobile subscription product and the remaining 1200 had mobile plus a web product.

Okay. That’s very helpful. Thank you so much. Great quarter.

Thank you.

Thank you. The next question comes from the line of Douglas Anmuth from JPMorgan. Please go ahead.

Great. Thanks for taking the question. I just want to ask two things it’s great to be inventory increase and getting more agents into the high demand zip codes. Does it impact your view at all on how ARPU can increase going forward and then secondly Sean I was hoping you could just give us a little bit more color on the sales and marketing line and in particular I guess would you attribute the higher sales and marketing number really fully to the commission structure are there any other sort of incremental costs that are going in there? Thanks.

So, Doug let me I’ll just ask question about pricing and ARPU. So the changes that we made two things the one is we open up this inventory we are - we are learning from the auction based pricing for the previous inventory and selling at a similar rate. So it is opening up this in high demand zip codes we are able to maintain premium pricing or higher pricing as Sean said in his prepared remarks. So we are really maintaining the competition that exist within the high demand zip codes and using that in the pricing algorithm. And then overall in terms of ARPU what you are seeing is that real estate professionals are buying inventory that previously unavailable and having great success for the platform and that buy more and while these changes are being load are gradually throughout the year and we put them at the end of the quarter we expect is to have a incremental positive on our overall ARPU metrics is agent spend more of their marketing dollars with us.

And Doug I’ll comment on the sales and marketing question. So sales and marketing in Q1 was $12.3 million or 51% of revenue up from $10.1 million or 49% of revenue in Q4. And as you know what goes into our sales and marketing is essentially people it’s the approximately 200 employees that we have on our insight sales team and their associated expenses and we are doing virtually no discretionary marketing. So what’s not in this line is there is no sort of Google ads or TV, Radio, Print or any of that. The reason for the increase and as a percentage of revenue Q4 to Q1 was primarily driven by what I mentioned that we had a very successful Marketplace quarter in Q1 or inside sales team sold a lot of new business booked a lot of new business typically six month contracts that’s the average life and as they sell that contract we pay out the entire commissions that are due to them like when they sell the contracts. So all of that expense hits the P&L and hit the P&L in Q1 but the revenue that was booked we don’t recognize for the next six months. So that tends to create additional expenses upfront as you are seeing in Q1 while the revenue comes in over the next couple of quarters. So that’s primarily what you are seeing and what’s the drivers for the modest de-leverage in sales and marketing Q4 to Q1.

Okay. Great. Thank you.

Than you. The next question is from Debra Schwartz from Goldman Sachs. Please go ahead.

Great. Thanks. Two questions. First with respect to your coming on guidance about recognizing a lot of commissions for sales upfront when we think about the revenue out performance for this quarter and the strong guidance for the next quarter. Can you help us understand why you are not expecting more EBITDA leverage for Q2?

Debra, so our long-term vision is clear and I’ll sort of comment on Q2 here specifically but just to start with the long-term as our long-term vision is to create not just a large top-line business but a very profitable one and the long-term target is 45% to 50% EBITDA margins. And you will see us march our way up into that number and post milestones along the way. In the near to medium term our approach is and it has been for the last couple of quarters that to the extent we see revenue upside during the quarter we will invest that back into the business into innovative actions new products and features driving greater mobile penetration adding and signing up more subscribers. While at the same time ensuring that we are meeting the guidance that we are providing. So that’s what you saw play out in Q1 and that’s the approach we are taking to a EBITDA guidance over the next few quarters.

Great. That’s helpful. And then also just in terms of thinking about product adoption for new versus existing agents. Can you help us understand for the 3.5 thousand new agency that in the quarter which products they are buying or essentially how many products they are buying?

So one way to think about that Debra is that of the 3,500 subscribers that we added approximately 2000 of them also purchased a mobile subscription product. Right that was the number I sort of mentioned previously. And so a great number of them are electing to purchase the mobile subscription product and the reasons are pretty clear they see it right that the consumer traffic is off the charts with mobile and it’s a very compelling product. And then typically they are buying that product the mobile subscription product in addition to a web product typically are either our Pro or our TLA product. So that sort of the behavior we are seeing that people are continuing to buy our web product but a greater and greater number of them are electing to also purchase the mobile product in addition.

Great, thank you.

Thank you. (Operator Instructions). Thank you. And the next question comes from the line of James Cakmak from Telsey Advisory. Please go ahead.

Hi thanks. Shifting gears a bit to your adjacent offering, when you look at the rentals, can you just provide a little bit more detail as to what’s happening there, anything you could provide on traffic or leads that are being generated to agents. It sounds like from your commentary that you are making a very good progress on that front. Has this timetable shifted a bit earlier as to the monetization potential of that unit, just help us understand on where things are on that? And then secondly on the capital allocation seems to be a little bit more vocal on potential acquisition opportunities, just how we should think about on what’s out there and what are the voice are in the business that you can boost and how much scale you think you could potentially add? Thank you.

Yeah, so I will touch on the Rental business. So it’s a organically we build this enormous audience and incredible products which is starting to have meaningful scale now and how we’ve done that is by leveraging the investments we’ve made on the sell-side in terms of building a large comprehensive database of listings and then complemented now with a great user experience and unique information. And the – what we’ve seen on that is that the experience is principally on mobile experience, engagement is principally mobile. And that’s growing at a tremendous rate organically and our expectation is to continue to grow that. And it’s been a relatively modest investment for us as we’re able to leverage what we built in - for the core business. And as we think about kind of monetization and timeframe we see a tremendous opportunity in the long-term in the category building a marketplace at scale. And we’re fortunate to have the opportunity with the for-sale business to continue to grow and invest and be thoughtful about monetization. And so it is our expectation to experiment towards the end of this year on monetization but really it’s not a (long-term) priority to maximize the revenue in this business but to maximize the long-term opportunity within this category. So that’s the focus for us within the rental business and we’re tremendously excited about it.

And James I will give you an update on our M&A strategy, I’ll touch on two things quickly one the areas we’re focused on with regards to M&A and then second our guiding principles if you will around M&A. So areas are focused first. They are very consistent with the areas of growth and expansion you’ve heard us talk about starting with our IPO Road Show. And those areas of expansion that we are targeting are rentals, mortgage, agent tools, and in the medium term home improvement and international. And as we think about these areas we are thoughtfully thinking through the build versus buy versus partner options, turns out in most of the cases the answer will be build. We are an engineering-driven company, we build great product for the most part we will build. However in a few select cases the answer will be buy and that’s where we’re focused on M&A. And then by way of guiding principles a few things to share there one, we’re focused on assets where there is very good strategic fit goes without saying those assets have to fit in very tightly with one of those areas of expansion that I just mentioned. Second, in terms of size we’re less focused on tuck-ins, less focused on assets where there is no revenue or handful of employees, we’re more focused on assets where there is a existing and proven revenue stream, there is a existing profit pool and we can multiply that. Third, synergies very focused on ensuring that this is not just the case of one plus one equals two but a case where two assets coming together lead to the creation of incremental revenue streams that would not be possible if the two assets were separate. And then lastly on valuation we’re data-driven and very thoughtful about this and while you see us be very aggressive for the right asset we will not overpay. So that’s how we’re thinking about our M&A strategy.

Perfect. Thank you.

Thank you.

Thank you. Ladies and gentlemen that concludes your conference call for today. Thank you for joining. You may now disconnect and have a very good day.