Zillow Group, Inc. Class A (ZG) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Zillow Fourth Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Raymond Jones, Investor Relations Officer for Zillow.

Thank you. Good afternoon, and welcome to Zillow's fourth quarter and full year 2013 earnings conference call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer; and Chad Cohen, Chief Financial Officer. Before we get started, as a reminder, during the course of this call, we will make forward-looking statements regarding the future events and the future financial performance of the company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements made in the press release and on this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in Zillow’s quarterly report on Form 10-Q for the quarterly period ended September 30, 2013, and in our other filings with the SEC. In addition, please note that the date of this conference call is February 12, 2014, and any forward-looking statements that we make today are based on the 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 present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. In our remarks, the non-GAAP financial measure adjusted EBITDA will be referred to simply as EBITDA, which excludes share-based compensation. This call is being broadcast on the Internet and is available on the Investor Relations section of the Zillow website at investors.zillow.com. A recording of this call will be available after 8 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 prepared remarks and a historical exhibit of our business metrics will also be available on our website. After management's remarks, we will host a live question-and-answer session. During the Q&A, we will entertain questions asked via Twitter and Facebook, in addition to questions from those dialed into the call. Individuals may submit questions by tweeting @Zillow using the #ZEarnings hashtag or to the official Zillow Facebook page. After the call, the Street will moderate a brief follow-up Q&A session with Spencer via Twitter with the #ZEarnings hashtag. I will now turn the call over to Spencer.

Thank you for joining us today to review Q4 and 2013. We finished 2013 in fantastic form, hitting new highs for quarterly and annual revenue and achieving strong quarterly profitability. Zillow traffic continued to grow, accelerating our leadership position and category share. According to comScore, we are now nearly twice the size of our two closest competitors on combined mobile and Web traffic. And, we’re growing faster – on desktop, comScore shows Zillow tripling our category lead in 2013. We have always said that advertisers follow audience, and our revenue results in the fourth quarter prove it. Excellent execution by our Marketplace and Display sales teams resulted in Q4 revenue of more than $58 million, up 70% year-over-year. Fourth quarter EBITDA was more than $15 million, 26% of revenue and higher than we planned. Notably, our Premier Agent business reached an annual run rate of more than $150 million, compared to a $90 million run-rate at this time last year. We ended 2013 with a Premier Agent count of more than 48,000 agents as we added close to 19,000 net agents over the year. The strong finish in the fourth quarter took our 2013 full-year revenue to $197.5 million, growing 69% over full-year 2012. EBITDA for 2013 was almost $30 million, and represented 15% of revenue. Drilling down now on traffic. We widened our audience lead substantially this year – as a media model we believe that audience leadership determines the long-term winner. According to comScore, in December 42% of all mobile and Web visitors to online real estate services went to Zillow, which is twice the share of the No. 2 and No. 3 brands, respectively. According to self-reporting of traffic from Google Analytics, we finished the seasonally slow fourth quarter with more than 54 million average monthly unique users. In January 2014, traffic accelerated substantially to nearly 70 million unique users, an addition of 24 million UUs year-over-year. Our results in traffic and our record performance in annual revenue and EBITDA demonstrate our continued category leadership and sustained business momentum. Without a doubt, 2013 was a breakaway year for Zillow. As we turn our focus now to 2014, our strategic priorities remain consistent, and they are: 1) grow our audience and widen our category lead, 2) grow our Premier Agent business, and 3) grow our advancing marketplaces. Our first priority of growing our audience begins with our immersive products that empower consumers when they buy, sell, own, rent, finance and remodel homes. We are able to build products across this broad spectrum because of our living database of all homes, which continues to be a distinct competitive advantage, and an asset which we continue to invest in. Specifically on mobile, we continue to invest significant product resources in evolving our mobile Web experience, and launching and improving our apps. We now have 27 mobile apps across every major platform. This broad and long-standing product investment in mobile has resulted in a growing category lead – Experian now pegs our mobile Web audience at four times the size of the No. 3 player, and two and a half times the size of the No. 2. We are deeply capturing the consumer shift to mobile, as we now see approximately two-thirds of Zillow visits coming from a mobile device. Other notable product advancements during the quarter included the launch of a Zillow Real Estate App on Windows 8 for desktop, laptop and tablet, with features specifically designed to take advantage of the Windows environment. Also, we just launched a new unique content offering - our cost of home ownership feature - where consumers looking at homes can see estimated monthly expenses, such as cable and home security, in addition to estimated mortgage payments and property taxes. Creating new products and features, adding richer content and providing deeper market context increasingly resonates with more and more consumers. And adding to our reach, we recently expanded our distribution network to include AOL Real Estate, which joins our existing partners Yahoo! Homes and HGTV’s FrontDoor.com. Zillow is now the exclusive provider of for-sale and for-rent listings to four of the top real estate websites in the country. While product is the core driver of Zillow’s growth, we will be increasing our investment in national advertising this year to accelerate that growth. I will get into more details of our 2014 plans in a moment, but first I want to touch on the 2013 results that give us the confidence to invest even more here. In May 2013, we launched our first-ever national TV campaign, after two rounds of testing showed promise. After just six months of television advertising, we were extremely encouraged by the strong signal and results. At the top of the funnel, 2013 total traffic grew nearly 60% year over year. In turn, home shopper traffic grew 80%, and contacts to agents grew over 70%. This tells us that not only was our advertising successful in growing traffic, but it grew the intended traffic of transaction-ready buyers. We also see the impact of our television advertising in increased brand awareness. You can see this nicely in Google Trends viewable at trends.google.com – which measures branded search queries and shows in January that searches for the term “Zillow” increased more than 40 percent over last January. Meanwhile the real estate category was down and our closest competitor was essentially flat. The Zillow brand is breaking away from the category in a meaningful way. Building on our success in 2013, this year we will go farther than before and take advantage of what we have learned. In 2013, we spent nearly $40 million in advertising across all channels. In 2014 we plan to increase our advertising investment to $65 million across all channels. After intentionally advertising lightly on TV in the seasonally-slow fourth quarter, we are back on-air as of a few weeks ago, and we will be launching new creative in the coming months. You can view our current TV spot at Zillow.com/TV. The bulk of our investment will take place leading up to, and during the peak home shopping months, and like 2013 we will lighten our spending during the fourth-quarter off-season. In our quest to become a household name, the time is right for us now to press our advantage and further elevate our brand, and extend our category lead. As we have discussed before, in both international real estate models and comparable categories like search, the path to category leadership over the long term runs through audience. While we will forego some profitability in the near term to grow our audience market share, the long game is about capturing revenue share and expanding profit margins – first, we win audience, then we reap most of the revenue and the profits. We are in growth mode, early on in the midst of executing a multi-year brand building effort to secure strategic competitive advantage, and we couldn’t be more excited about the massive opportunities in front of us. Turning now to our second strategic priority of growing our Premier Agent business. We continue to fire on all cylinders here, with record revenue, agent count and ARPU. We are signing up more agents across the country who want to partner with us to grow their business. Historically, we have priced our Premier Agent subscriptions to drive adoption, with the average contract delivering an estimated 10x return on investment for agents. Premier Agents who have been with us more than a year spend well above their initial contracted amount, and significantly above overall ARPU. Our platform attracts many of the best agents in every market, which ultimately leads to a superior consumer experience and makes Zillow more valuable to consumers and agents alike. One way this value manifests itself is through agent reviews by consumers – we now have nearly half a million reviews of agents on Zillow, which assist consumers in finding the right local agent for them. To help our Premier Agents convert more of their contacts into sales, we provide agents with connectivity to CRM tools of their choice – something that no competitor in our category is capable of doing. We recently added nine more CRM providers to the Zillow Tech Connect program, including, Wise Agent, Commissions Inc., planetRE and ZipRealty. Zillow Tech Connect now includes 11 different CRM providers. An agent using a system to process leads will be more successful than one who doesn’t. Zillow Tech Connect offers a unique and rapidly expanding open ecosystem for technology in the real estate industry. We seek to support the various technology platforms that many real estate brokers and agents invest heavily in to accelerate their businesses. By allowing agents to work with the CRM system they prefer, Zillow is able to partner with and sell more advertising to an increasingly attractive segment of agents. In addition to connecting to a dozen other CRMs, we provide our own FREE and lightweight software suite to agents, giving all Premier Agents access to a technology solution to convert leads into deals. Now I’ll turn to our third strategic priority of growing our advancing marketplaces, starting with mortgages. We crossed a milestone recently, surpassing 60,000 consumer reviews of lenders on Zillow. Another notable mile marker was the launch of an important new product: Pre-approval. Now, consumers who want to verify how much they can afford and who want to demonstrate to agents and sellers that they’re credible buyers, can get pre-approved by a lender on Zillow in just minutes. Through a safe and secure process, consumers can find a top-rated lender to pre-approve them and issue a printable and shareable pre-approval letter on the spot. We have received terrific consumer feedback on this product so far. In our rentals marketplace, we continue to experience strong growth. As our highly-engaged renter audience – the largest in the rental media category – continues to grow, our value to our rental advertisers only increases. We have been hard at work enhancing our rental offering, which features the largest, most diverse inventory of real rental listings available anywhere, and we have product investments queued up to deploy over the course of the year. Our most recent product release was the re-launch of Postlets, a listing syndication tool that eases the pains of marketing rental properties for smaller landlords and property managers. Postlets is now mobile-optimized, and we’ve just shipped Postlets mobile apps on iPad and iPhone; this enables landlords, property managers, owners and real estate agents to create, publish and manage their listings from anywhere. We have also created meaningful merchandising opportunities for large apartment buildings, increasing the share of contacts that we drive to these properties. We also recently raised our monthly price per building to $120 per building, which is still a significant discount to competitors’ pricing. At this time we remain very early in the development of the destination marketplace for rentals, and look forward to building on the foundation laid thus far in 2014. Taking a closer look now at our New York City marketplace, I am very excited about our New York property StreetEasy. Today, we announced a relaunch of StreetEasy, which includes two key elements. First, we are now providing consumers with free access to all of StreetEasy’s local data and New York-tailored shopping tools that were previously only available for paying users. Making valuable real estate data available to consumers for free aligns with the Zillow ethos of information transparency and empowering consumers. Second, we also unveiled a brand-new site design. This year we are investing meaningful resources to enhance our product and our user experience and expand our footprint within the largest and most important real estate market in the country – New York. Further, StreetEasy is also prioritizing efforts on mobile development, both improving our existing app experience and adding new platforms. The focus in 2014 for StreetEasy is on expanding and improving the product, especially on mobile, to address the substantial opportunity in front of us in New York. Taking it all in, 2013 was fantastic by all measures. We executed very well against our strategic priorities, and 2014 has started off strong already, with record traffic in January. For 2014, we expect full year revenue of $288 million to $294 million, and EBITDA of approximately $38 million to $40 million. We are pushing ourselves harder than ever to take more market share of the category profitably, with our eyes on the long-term opportunity to win the category outright. Before I conclude, I would like to take a moment to acknowledge the groundbreaking efforts of our economic research team led by our Chief Economist Dr. Stan Humphries. We recently hosted a live town hall in our Seattle office with Secretary of Housing and Urban Development Shaun Donovan on the topic of equality in housing. In addition to attendance by local and national press, and live streaming on Zillow, representatives of the National Urban League were present to discuss the recent report from Zillow that highlighted data on minority access to housing. The event inspired important conversation nationally, and allowed Zillow to amplify the voice of the consumer with government and industry. In conclusion, 2013 was a breakaway year for Zillow. The market opportunities in front of us remain large and virtually untapped which inspires us to move fast. As we look forward to 2014 we will continue to press our advantage and focus on executing against our strategic priorities of growing our audience, growing our Premier Agent business, and growing our advancing marketplaces. And with that, I will hand the call over to Chad and let me be the first on the call to wish Chad a very happy birthday to Chad Cohen.

Thank you, Spencer. I don’t feel [indiscernible]. I’ll quickly start off with the fantastic traffic growth in the fourth quarter and then move into operating results. We attracted 54.3 million average monthly unique users to visit Zillow's mobile applications and websites in the fourth quarter, growing 57% year over year. That’s a 10 percentage point acceleration over last year’s 47% growth rate – on a much larger user base – and with seasonally light advertising support. Now to our operating results. Total revenue for the fourth quarter increased 70% year-over-year to a record $58.3 million from $34.3 million in the same quarter last year. This growth represented a re-acceleration over the prior quarter. Total revenue in the fourth quarter exceeded the midpoint of our guidance of $55.5 million by approximately $2.8 million or 5%. We continue to see a favorable shift in our revenue mix as we ended the fourth quarter with 79% of our revenue coming from our Marketplace category, while 21% came from Display. Taking a deeper dive into our primary revenue category, Marketplace revenue grew 71% year-over-year to $45.9 million. We continued to see strong growth across both our Real Estate and Mortgage subcategories. Going a little further into our Real Estate subcategory, which accounts for our Premier Agent, Diverse Solutions, StreetEasy and Rentals businesses, our revenue accelerated sequentially and grew 71% year over year to reach $40.5 million compared to $23.7 million last year. Our Premier Agent business continues to execute nicely, and during the quarter we added 3,565 net new Premier Agents, ending the period with 48,314 subscribers. The vast majority of additions were at the platinum level, continuing the trend we’ve seen throughout the year. 55% of new sales bookings in the fourth quarter went to existing agents buying more impressions across mobile and Web, which is higher than recent trends and signifies strong underlying demand. Average monthly revenue per subscriber, or ARPU, among Premier Agent subscribers was $271 in the fourth quarter, which was 1% higher than the figure in the same period last year, and 3% higher sequentially compared to our third quarter. As a reminder, ARPU reflects what an average contract size looks like, and is a function of the amount of impressions an agent buys and the current prices they are paying per impression but does not indicate just the price that an agent pays for a subscription in a market. Pricing of our Platinum Premier Agent subscriptions varies by geographic market due to local home values, contact liquidity and demand for impressions in a ZIP code. Moving from real estate to mortgages, which consists of Zillow Mortgage Marketplace and Mortech, revenue reached $5.3 million and grew 69% year over year and benefits from a full quarter contribution of Mortech revenue, compared to a partial period in the fourth quarter last year. Mortech contributed $1.5 million in the fourth quarter this year. In Zillow Mortgage Marketplace, 4.4 million loan requests were submitted, growing 39% year over year. Home purchase requests continued to remain the prevailing inquiry by consumers. Looking at our Display category, revenue in the fourth quarter grew 67% year over year to $12.5 million. This represented the fifth consecutive quarter of accelerated growth, and reflects highly on our efforts of our display sales team, the strength of our model and the value we provide to advertisers, especially home builders, banks and real estate brokerages. Shifting now from revenue to our operating costs, total operating expenses were $55.6 million compared to $33.8 million during the fourth quarter 2012, improving by 3% of revenue versus last year. Working down the expense line items, comparing the fourth quarter results this year to last year: First, our cost of revenue during the quarter was $5.3 million, or 9% of revenue, compared to $3.8 million, or 11% of revenue last year. Favorable leverage resulted from our revenue sharing arrangements due to higher growth from our owned and operated properties compared to our partners. Next, sales and marketing expense was $25 million, or 43% of revenue, versus $14.5 million last year, at the same percentage of revenue. Total advertising spend in the fourth quarter was approximately $8 million, which was $4.5 million more than in the fourth quarter of 2012, and devoted primarily to online channels. Technology and development costs in the quarter were $14.6 million, or 25% of revenue, compared to $9.1 million, or 27% of revenue, in the fourth quarter 2012. The increase reflects higher depreciation and amortization costs and increased headcount-related expenses year over year, but at lower than planned levels. G&A costs in the fourth quarter were $10.7 million, or 19% of revenue, as compared to fourth quarter 2012 of $6.4 million, at the same percentage of revenue. The primary increase in absolute dollars year over year is attributed to higher headcount and services costs, as well as higher facilities costs to support our growth. EBITDA for the quarter was $15.2 million, representing 26% of revenue, which was up from $6.8 million, or 20% of revenue in the fourth quarter 2012. Along with our revenue upside flowing through to earnings, we had positive variances versus our plans throughout our cost structure related to headcount, capitalized website development expenses, as well as facilities improvements. GAAP net income was $2.7 million in the fourth quarter, compared to $0.5 million in the fourth quarter 2012. Fourth quarter 2013 basic and diluted earnings per share were $0.07 and $0.06, respectively, based on 39 million and 42 million weighted average shares outstanding. On a non-GAAP basis, which excludes share based compensation and non-recurring income tax items, basic and diluted earnings per share were $0.20 and $0.19, respectively. Moving now to our full-year 2013 performance. Total revenue increased 69% to $197.5 million, up from $116.9 million generated in 2012. Compared to our original outlook of $165 million to $170 million, our business accelerated ahead based on strong underlying fundamentals, along with a small contribution from our acquisition of StreetEasy. In our revenue categories, Marketplace revenue increased 78% year over year to $154.2 million, up from $86.7 million in 2012. Display revenue for 2013 was $43.3 million, increasing 44% from $30.2 million in 2012, and accelerating versus last year. Our revenue mix for the year consisted of 78% of our revenue coming from our Marketplace category, while 22% came from Display – a 4 percentage point shift over 2012 results, marking the continued advancement of our Marketplace categories. Real Estate revenue grew 74% year over year to $132.4 million, while our mortgage revenue grew 103% year over year to $21.8 million, which includes a full year contribution by Mortech. Looking at our sales and marketing expenses, we finished the year with $108.9 million. Our advertising expense in 2013 was $38.7 million compared to $11.1 million in 2012 and consistent with our plans we laid out on the last call. EBITDA for the full year 2013 was $29.7 million, representing 15% of revenue, and $4.6 million higher than 2012 full year EBITDA of $25.2 million. GAAP net loss for 2013 was $12.5 million, which was $0.35 for both basic and diluted share. On an adjusted non-GAAP basis, which excludes share based compensation and the non-recurring income tax items, basic and diluted earnings per share were $0.19 and $0.17, respectively. Turning briefly to our balance sheet, we ended the year with approximately $438 million in cash, cash equivalents and investments, and we had no debt. Zillow ended 2013 with more than 800 employees, up from more than 550 at the end of 2012, and we continue to grow in support of our strategic priorities which are: growing audience, increasing the size of our Premier Agent marketplace, and developing our other advancing marketplaces. Now turning to our outlook for the first quarter 2014 and the full fiscal year. Our revenue for the first quarter of 2014 is expected to be in the range of $62 million to $63 million. This outlook represents 60% year over year growth at the midpoint. We anticipate sales and marketing expenses for the first quarter to be in the range of $36 million to $37 million. For our first quarter outlook on EBITDA, we expect a range of $4 million to $4.5 million. At the midpoint of our range, this represents approximately a 7% margin. And for the quarter we expect depreciation and amortization to be in the range of $8 million to $9 million, and share-based compensation to be in the range of $6 million to $7 million. Although we are not providing a GAAP EPS outlook for the first quarter, we expect a basic and diluted weighted average share count of approximately 40 million and 43 million shares, respectively. Recapping our 2014 guidance, we anticipate full-year revenue of approximately $288 million to $294 million, and we project approximately $38 million to $40 million in EBITDA. As Spencer mentioned, we plan to invest approximately $65 million in advertising across multiple channels this year, as well as increase our investments in product development as we pursue our strategic priorities. For the full year 2014 we anticipate sales and marketing expenses will reach approximately $158 million to $160 million. Moving quickly to reconciling items to EBITDA for the year, we expect depreciation and amortization to be in the range of $38 million to $41 million, share-based compensation to be in the range of $28 million to $30 million, and CapEx and capitalized purchased data content to be in the range of $17 million to $19 million. We expect full year 2014 basic and diluted share counts to be approximately 41.5 million and 45.5 million weighted average shares outstanding, respectively. To conclude, Zillow had a fantastic fourth quarter and a spectacular 2013. We remain determined to accelerate our growth and advance our home-related marketplaces, and we are extremely excited about our potential in 2014 and beyond. With that we’ll open the call to questions from those dialed into the call, and to questions submitted via Twitter and Facebook with the hashtag #ZEarnings.

(Operator Instructions) The first phone question comes from Mark Mahaney from RBC Capital Markets. Mark Mahaney – RBC Capital Markets: I’ll start off by asking about that third – your third area of growth priorities in both StreetEasy and on the rental opportunity, could you help us think through – they’re not going to be material in near term but how you think about the long term revenue opportunity out of both of those and I assume that the StreetEasy, the way you’ve set it up now we just see that in the display advertising revenue bucket?

I will take it, then Chad, if you could in the revenue. So StreetEasy – I think we’ve tried to draw some comparison in the past – for example, by comparing the size of the market and the size of this audience leadership with the market leader in Australia and the market leader in the UK, kind of the total amount of transaction value of these markets compared with New York. And if memory serves me, the New York real estate market is coming like half size of the UK and two-thirds of size of Australia, something like that. And of course, we are market leaders in those two countries with hundreds of millions of dollars of revenue. Rather than going after monetization right out of the gate, the strategy with StreetEasy is to try to dramatically expand its audience, particularly on mobile. So as you know, Zillow gets about two-thirds of its usage for mobile, StreetEasy gets much less of its usage for mobile. So we think there is a huge opportunity to grow StreetEasy’s usage by expanding to mobile platforms and improving its overall mobile experience. And then of course the history of content on the web is that whenever you put it behind a pay wall the addressable market for that content is dramatically reduced. And so settings StreetEasy free we think will allow it to have a larger audience than it currently has. So that's the StreetEasy opportunity and the plan in 2014 is definitely audience growth, not about monetization. In terms of how its current revenue shows up in the financials, Chad, you can comment that --

Yes, the Pro product which is for agents will sit in their marketplace category and display -- the display line organically sit in our display businesses.

The product that was $10 a month the consumers paid which is now free, that used to show up in the marketplace but that will not –

So shifting to rentals – lots of opportunity for rentals, we look at competitors in the rental space kind of pure play what they call ILS or internet listing sites, internet listing services and we see a couple of companies with between 100 million and 200 million, some case it’s more than 200 million of rentals revenue with web and mobile experiences that are much less consumer friendly, less useful to the consumer and much less useful to the industry. And so that’s a near term number that we’re chasing for rentals op what is admittedly a tiny base. It’s growing very quickly but it’s still very, very early days for us in rental. The total rental TAM [ph] is think in the $4 billion to $6 billion range but the near term competitors are in the couple of hundred million rental revenue category. Mark Mahaney – RBC Capital Markets: Thanks Spencer, thanks Chad.

The next question comes from Ron Josey from JMP Securities. Ron Josey – JMP Securities: Real quick on premier agents grew 64% year over year which is good but net additions were down 40% quarter to quarter. I am wondering if you think that's due to typical seasonality or maybe Spencer, what you talked on the last call around they were seeing the impact of more agent teams and agents building their practice on Zillow. And then similarly a question with ARPU up sequentially, could it be because newer agents in 2014 are buying more impressions here or was it co-marketing program with lenders, did that sort of help as well?

Hey Ron, I will start and then hand it over to Spencer. Thanks for the happy birthday comment. What we are seeing is the trend that we have seen over the past few quarters which is existing agents continuing to purchase more of an inventory on an ongoing basis. So as they see value delivered to them through the media that they buy for us from us, and they are able to translate those impressions into meaningful leads and contacts include transaction. The percentage of those bookings attributable to existing agents who are buying more continue to grow. So it used to be 40% to 50%, now it’s creeping north of 55-ish% and that trend is obviously impacting ARPU and bringing that number up. We don't manage the business to that number but we like the trends that we’re seeing. We are primarily as you know focused on growing monthly recurring revenue and as we have a subscription-based business here we find that our sales team continues be more and more efficient in their sales practices and reaching back in their book of business to help grow those monthly recurring revenues. And so that's impacting both agent count and ARPU, ARPU is a positive but has some – put a little bit of pressure on agent count.

Ron also asked about American [ph] lender sponsorship – so for those that are less familiar, this is a part of the premier agent program where we allow part of the premier agent spend to be paid for by mortgage lender. And so that form of co-marketing provides benefits to the premier agent obviously because they have a smaller out of pocket spend as Zillow and that benefits the mortgage lender because of additional exposure on Zillow. We don't breakout what percent of our premier agent revenue is subsidized by lenders or how many of those 40,000 odd premier agents how the lender sponsor but that’s what premier agent lender sponsorship program is.

The next question comes from Rodney Hull from SunTrust.

Yes, it’s Bob Pick [ph] and Rodney here. Spencer, I just wanted to talk a little bit about the marketing dollars. How should we think about going forward, so this $65 million number, about a 50% increase year-over-year – how do we think about that as we model out longer-term? Is that a absolute value going forward, are you thinking about it more as a percent of revenues? Can you help us quantify a little bit on the ROI side of that?

On the ROI side we analyze the efficacy of our advertising a lot of different ways more than you can possibly imagine. We share a couple stats to try to give investors some comfort that – our decision to use advertising is guided by data, not just by gut. So as I referenced in 2013, unique users were up 60% but home shoppers were up 80% and contact to agents were up 70%. So we are clearly growing the right size of audience, not just the hollow audience. In terms of how to think about advertising going forward, I am not going to be much help there because of course we don’t give guidance of the one year, our business is growing so quickly, and the things are evolving so quickly, that it's very hard for me to use a crystal ball to think further out than that. What I do know is what we did in 2013 worked, it worked incredibly well and so we’re going to increase the size of the investment in 2014. And our best guess at this point of 65 in advertising for the full year. We are constantly analysing, constantly updating our thinking on it. We will keep you posted throughout the year and I guess as we get towards later in the year, we will probably start talking about 2015. But for now that’s how we are. First question from social media is from Chris Sutia [ph] on the street, he writes how is Zillow digs performing? So it’s very early for Zillow dig. I for one love news in the product, especially on the iPhone, just to give you some numbers. We had 1.8 million digs in Q4, that’s when a user kind of indicates that they dig a photo. That’s up from 1.1 million in Q3. When we launched the service we had about 20,000 photos, today we have 250,000 photos, so it’s much larger catalog. And in January there were 345,000 boards created whereas in all of Q3 there were only 161,000 boards created. So usage is growing nicely but I would describe the product in a very early stages and so it’s far too early to to draw conclusions about it. So that’s quick dig update. Let’s go back to the conference call, please operator and we will take the next question there.

The next question comes from Neil Doshi from CRT Capital. Neil Doshi – CRT Capital: You must be getting a lot more mobile traffic – any thoughts on how you can better monetize effectively, especially leads that are coming to agents [indiscernible]. And then on the mortgage side, loan requests were down sequentially and growth was a little – any thoughts to how we should think – any thoughts of what kind of caused that sequential decline in – how we should think about the mortgage business?

I will take the mobile and premier agent question and Chad, can take the mortgage question. We have a philosophy of when – value is increased to premier agent whether it be through product development initiatives or macro housing trend initiatives, or our consumer usage shifts from desktop to mobile, or whatever the case may be, we have historically not placed those improvements separately. We've historically bundled any additional value and let the price adjust over time to approximate particular ROI that we are shooting for. So for example, when we rolled AOL, and now premier agents show up on AOL, we didn’t think pricing structure to them or sell it separately. When we launch a new mobile app and all of a sudden those agents are now appearing on some new app on some new platform. We don’t price that separately. We think that’s something that’s generally resented by advertisers. So as more leads shift to mobile which are arguably more qualified leads because they are perhaps in a deeper state of the funnel in the home shopping purchase. The way that would flow through to revenue would be through reduced churns, their increased upsells from existing premier agents and through higher leader flow which would then get priced back into our models and the fact that EPM that we charge for impressions in that zip code once agents all contract. So it does flow through back into monetization but it does take some time as agents have to roll off contract of their subscription for it to make its way back into the monetization on a particular base.

So we generated 4.4 million loan requests in the quarter, Neil as you probably know, that was up 38% year-over-year. I think what you’re seeing a pretty tough comp in Q4 last year where we had record low interest rates that were driving refi volume through the roof and we just -- because the interest rates have moderated off those lows quite a bit in the current quarter we’re seeing just that a much tougher comp in terms a lot of that refi volume. As you know and we have said before primarily most of our loan requests are actually purchase loans origination because we’re primarily a shopping destination site. And so I think that bodes really well regardless of what the interest-rate environment is for the long-term.

The next question comes from Lloyd Walmsley from Deutsche Bank. Lloyd Walmsley – Deutsche Bank : Just thinking about the TV outstanding ramp, curious if you can just frame up how you’re thinking about the notion that you have 70 million unique users on the site in January which really dwarfs certainly the home selling market at 5 million transactions a year, 10 million transactions side of the year. So that you think you're not really getting everybody in the market shopping for house, is that part of the objective you're not there yet, you want to get all of them and then to the extent that it's aimed at some of the ancillary businesses how do you guys think about the ability of the company to kind of hop from the one use case to another – and what challenges you may face and how you are kind of trying to attack that?

So the unique user count are obviously a tricky thing because of mobile devices and difficulty in counting things. I certainly do not think that we're – Zillow or any real single real estate service is used in the preponderance of real estate transaction yet – data we’ve gathered and the research we’ve done makes us think that we still have huge growth potential in terms of making Zillow a deeper part of more real estate transaction. It would be a weak analysis – to think 70 million you use is x percent of the total number of Americans et cetera, and therefore they are fully penetrated – that’s not – I don’t think that’s the right way to think about it. To give you some matt, we’ve always said the premier agent for example get between 20 and 10 leads a month from us and so at around 50,000 premier agent you can do math around about how many leaders we’re driving and we’ve also giving you our best guess on conversion rate that how many of those leads convert into transactions. And so you can get to the bottom of the funnel pretty quickly and compare that with the total number of transactions or the commission size, which is about 9 million a year and see that we are probably only in the midst of a couple percentage points of real estate transaction every year, probably 75%. So when I look at that, I say well 95% of the time, maybe 97, 98% of time that a home shopper buy the house they found that house and the seller found that buyer from some place other than Zillow we have a long way to go. And so I think that to me is a better way to look at things – about the penetration rate. In terms of how brand awareness translates into other categories Zillow mortgage marketplace is clearly beneficiary in the increase in home shopper traffic as those homebuyers become mortgage shoppers within Zillow, our display advertising is clearly beneficiary of it -- the reason, one of the major reasons why we’ve been able to grow despite revenue as quick as you have is that we are now the category leader and so [indiscernible] buy for endemic advertisers. From the rental audience also get from growth in awareness as those get in home improvement. So a different ancillary businesses benefit as well from the total of advertising. Let’s take the next question from social media, so Ben Alert R3 [ph], Ben asked are we – do you believe we are in a housing bubble? So data for 2013 according to Zillow home values were up 6.4% year over year last year and we’re forecasting 4.8% appreciation in 2014; so clearly slowing housing market, still above median or close to historical – close to maybe slightly above historical average in terms of depreciation rate but certainly slowing housing market as compared with 2012 and 2013. And we view that as a good thing, it actually makes for more sustainable recovery instead of the rocket trip recovery that we were looking 18 months or so ago. The reason the housing recovery is slowing a little bit is because listing inventory is increasing as more homeowners are being free from negative equity and mortgage rates are increasing which makes it harder for buyers and investor demand is decreasing. So these things are what is slowing down housing recovery. But there hasn’t had an impact on our business on the contrary as you have seen, we've been doing very well, that’s because home just are selling very rapidly, agents are earning commissions, agents are confident and they are reinvesting in their business. Let’s go back to the conference call please operator for the next question.

The next question comes from Dan Kurnos from Benchmark Company. Daniel L. Kurnos – The Benchmark Company: Spencer, sticking with the marketing theme here now that you’ve got sort of a full year of aggressive marketing behind you, just any thoughts on changes to channel spend or any targeting practices that might be different this year versus last year and Chad, you’re sitting on a lot of money, you got $200 million. Just remind us uses of cash and how should we think about organic product development versus perhaps acquiring to fill in some of the gaps in your platform?

2013 we invested our budget across online advertising, online display, online search, mobile advertising, some social advertising, TV. We had some radio, outdoor, we did a variety different things with – the big dollars go into the categories that we discussed. In 2014 we will probably also testing other types – other channels that are essentially advertising, for competitive reasons I cannot breakdown kind of where the lion share of the ad spend is going. But clearly TV and online are the two biggest categories.

So Dan, we have about $440 million at the end of the year, it is a lot of it cash and we feel comfortable with this capital structure just given the opportunity that we still frequently see in the marketplace. That said you have to look at the bigger picture in terms of what we are going to do with it in 2014. We got a business that can sustain a significant amount of investment back in the technology and development and the plan for 2014 is to continue to press our advantage not only in growing audience but to introduce products into the marketplace for both consumers and our customers. So both in terms of absolute dollars you are going to see our investment organically intact and that increase and as a percentage of revenue you're not going to see much leverage there, fairly flat 2013 over to 2014.

The next question comes from Mark May from Citigroup. Mark May – Citigroup: I think I am basically asking earlier question a little bit differently but it would seem like there is as much if not more opportunity from growing your agent base, from growing the buyer audience given Zillow’s current market share in each of these two segments of your marketplace. So the question basically is in terms of investment and inside sales team can you give us a sense of how much you invested last year and how much in terms of your guidance do you expect that to grow this year?

I will try to give you some color there. We added a significant number of inside sales reps last year and in terms of the incentive compensation structure of the team we aren’t really pointing the team to either grow agents or not – we are really just telling the team to go out there and grow your book of business and whatever sort of happens organically happens. I think what we are just seeing just back to my earlier point is that the sales team is becoming more and more efficient and so in terms of what our expectations are this year with respect to the premier agent business, we're planning on increasing monthly recurring revenues significantly more on a more efficient base of inside sales reps. So we are getting better at selling the product and we don't plan on growing sales team quite as fast as we grew let’s say in 2013 is because we do have a subscription based business here and we find that there is a lot of demand from existing agents to continue to buy more as they execute really well on the media that we’re selling to them. Mark May – Citigroup: Is there an opportunity given the amount of recurring business to introduce some sort of evergreen or self-service type model into the business?

There may be and we have experimented with different variations of that in the past. What I would also say is if you took out – if you take out of the sales and marketing 2014 guidance you take out the ad side from that and you look at that on a margin basis compared with 2013, you would find kind of flattish – basically flattish sales team size and the marketing team in it – and what you would sort miss from that analysis would be the growth of the renal sales team which is happening off the small base but also growing basically. I mean you can try to get to that in that way I guess. The next question comes from Twitter from Brian Bolan from Zack Investment Research at Bolan1. He writes are people using the exclusively for the foreclosure data more now than last year at this time, any other trends of note? So foreclosure is an interesting one. As those that have been seeing results [ph] for a while will remember about gosh, probably about 2 years ago now, I think a year and half ago, we made a pretty big decision, a big bet which was to terminate our partnership with a foreclosure company wherein we are sending traffic to them and that consumers really have to buy on a subscription basis data to get more listing information, instead we spent a million dollars to acquire that ourselves and we made it free on Zillow. And this was a bet on growing the size of our audience. Pretty similar frankly to the bet we are making today, about making StreetEasy free and that’s consumers [ph] practice, StreetEasy information and helping the size of the audience to grow and then we can make the revenue shortfall from lost subscription revenue by selling more advertising. And so it's very hard to seize out of course, how big of an impact having been the only real estate side on the web that lists foreclosures and pre-foreclosures for free, I think an impact that has on our traffic, on our audience growth. But I think it is a very important part of the overall value proposition that we provide to home shoppers which is Zillow is the place to go to get the widest amount of information on all homes in a given community not just the 3% of homes that are for sale in MLS at any point in time. So yes Brian, foreclosures are an important strategic point in our differentiation.

The next question comes from Chris Merwin from Barclays. Christopher Merwin – Barclays Capital: So you continue to build out a network of partners AOL, Yahoo! What type of contribution this partnership is making to traffic today? Longer-term can you see in the partners, or even network effects replacing to the dollars that you are spending on marketing and maybe to drive organic increase in market share, I am just trying to think about where on your mind you think you need to be whether it's in audience metrics or revenue metrics to sort of ease off the gas in terms of marketing?

I think of it a little differently, Chris, than that because for me it’s more about the sort of fair comply [ph] among the real estate agents, wow, Zillow is now AOL, Zillow has got it. You’ve got another feather in their cap in terms of -- they really are everywhere and man, I better start advertising. So they drive a small amount of traffic but a larger amount of mine share.

The next question comes from Chad Bartley [ph] from Pacific Crest.

I am hoping you guys could talk a little bit more about your philosophy and strategy for pricing around the premier agent subscription as well as click pricing on mortgages, also more specifically does guidance contemplate any sort of underlying change or increase in pricing in any of those areas?

Yes, our guidance does take into effect or take into account all the pricing changes that we know of, that may happen throughout the year. So in terms of PA pricing we made a very diligent shift into impression based pricing back in February last year after doing a ton of testing and moving off of the share voice based price model to better align the opportunities as a media business with the growth in traffic. And so that's gone very very well as you know and premier agents continue to buy up more and more inventory and the pricing in premier agent product reflects what happens generally overall the real estate trends in the marketplace. In terms of our mortgage business on a cost per click basis, we have slowly been taking up pricing but we're not expecting anything dramatic in 2014, those things sort of happen organically and we are priced very very competitively in the market relative to what we see our competitors doing.

Just as a quick follow-up. Maybe asking slightly different I think, you’ve talked about maybe the 10x ROI over time getting closer to three. I am just curious if the pace that you might get there might change it all in 2014, i.e. more aggressive pricing or increases or anything like that on the PA side?

There is not a dramatic reduction in ROI contemplated in the new revenue guidance.

The next question comes from James Cakmak from Telsey Advisory Group. James Cakmak – Telsey Advisory: I wanted to touch on the lead management for your premier agent. Now you are certainly seeing impressive user growth in exchange volume marketing efforts as evidenced by the performance in recent months. As we look forward agents are going to be getting more and more leads and will need to manage them. And Spencer, you did touch on this with your ROI commentary with respect to pricing. But in the past you described yourself to a suite of more about light version [ph]. So just wanted to get your update on your thoughts on your agent tools. Do you feel that the tools that you have in all of the human [ph] consistent with your strategy at this time, but could it especially be a major area of investment?

So our strategy is quite different from our competitors in this regard. The easiest way and I would tie it back to our investment in audience and advertising as the way to juxtapose, we are making a $65 million bet in 2014 and a $40 bet in 2013 that growing audience is what is going to result in us spending up with most of the ad dollars in our category and other companies are making much different types of bets that operating enterprise-level CRM is the past of being in the media winner in the category. So the Zillow Tech Connect program what it does is it says hey premier agents whatever CRM you want we are going to spend, yours lead into that CRM. And new bet system to follow up with these leads. Now if you don't have a CRM or if you have a CRM that you're paying for is too expensive we will offer you a free one, so we acquired the company and then made it free, our own CRM (which I would describe as pretty lightweight in terms of the functionality, so it does not have a lot of the bells and whistles that enterprise-level more expensive CRM has but it has a key attribute that agents need. So we offer a free one, but we also connect to 11 through the Zillow Tech Connect program. And when you ask our premier agents, if you ask them what CRM do you use, you will get a very wide diversity of answers. And if you go to conferences you will see [indiscernible], not a dozen. And so you can't buy them all and you can't force sell your agents, you use yours, we think it’s a better strategy to connect many of them and then offer kind of as back stop reverse.

I am showing no further questions.

So I will do one more from Twitter, so @michael tricker from Connecticut Rice. Consumers would prefer to go to one site for their real estate needs, do you see any future consolidation in the space? So I guess I would answer that by saying that there is consolidation happening in the space, not M&A consolidation but audience consolidation, and you see that by our audience separation from the competition. And we certainly hope that our investments in 2014 will accelerate that audience consolidation even further. Okay. So with that, thank you for your questions. I am going to now host a discussion on Twitter with Chris of Street.com to continue answering questions. If there are questions that haven’t been answered, please join us there and use hashtag #ZEarnings on Twitter and thank you very much for your time. Talk to you next quarter.