UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-35237
ZILLOW, INC.
(Exact name of registrant as specified in its charter)
Washington | 20-2000033 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
1301 Second Avenue, Floor 31, Seattle, Washington |
98101 | |
(Address of principal executive offices) | (Zip code) |
(206) 470-7000
https://twitter.com/zillow
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $0.0001 per share | The Nasdaq Global Market | |
(Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes þ No ¨
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | þ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ¨ No þ
As of June 30, 2013, the last business day of the Registrants most recently completed second fiscal quarter, the aggregate market value of the Registrants Class A common stock held by non-affiliates based upon the closing price of such shares on The Nasdaq Global Market on such date was $1,270,616,234.
As of February 11, 2014, 33,011,384 shares of the Registrants Class A common stock and 6,468,892 shares of the Registrants Class B common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated in this Report by reference to the Registrants definitive proxy statement relating to its 2014 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 2013 fiscal year.
ZILLOW, INC.
Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 2013
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PART I | ||||||
Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II | ||||||
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Item 6. |
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Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. |
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PART III | ||||||
Item 10. |
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Item 11. |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
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PART IV | ||||||
Item 15. |
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As used in this Annual Report on Form 10-K, the terms the Company, we, us and our refer to Zillow, Inc., unless the context indicates otherwise.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the sections entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk Factors and Business, contains forward-looking statements based on our managements beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as believe, may, will, estimate, continue, anticipate, intend, could, would, project, plan, expect or the negative or plural of these words or similar expressions.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A (Risk Factors) of this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
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Mission
Our mission is to build the largest, most trusted and vibrant home-related marketplace to empower consumers with information and tools to make smart decisions about homes.
Overview
Zillow operates the leading real estate and home-related information marketplaces on mobile and the Web, with a complementary portfolio of brands and products to help people find vital information about homes, and connect with local professionals. In addition to our living database of homes, accessible on Zillow.com, we also own and operate Zillow Mobile, our suite of home-related mobile applications, Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get competitive mortgage rates, Zillow Digs, our home improvement marketplace where consumers can find visual inspiration and local cost estimates, Zillow Rentals, a marketplace and suite of tools for rental professionals, Postlets, Diverse Solutions, Agentfolio, Mortech, HotPads and StreetEasy. Zillow was incorporated as a Washington corporation in December 2004, and we launched the initial version of our website, Zillow.com, in February 2006.
Zillow provides products and services to help consumers through every stage of homeownership buying, selling, renting, borrowing and remodeling. We are transforming the way people make home-related decisions, and enabling homeowners, buyers, sellers and renters to find and connect with local professionals best suited to meet their needs.
We maintain an unwavering commitment to providing consumers free access to as much useful information as possible. Our living database of more than 110 million U.S. homes includes homes for sale, homes for rent and homes not currently on the market, and attracts an active and vibrant community of users. Individuals and businesses that use Zillow have updated information on more than 45 million homes and have added more than 205 million home photos, creating exclusive home profiles not available anywhere else. These profiles include detailed information about homes, including property facts, listing information, and purchase and sale data. We provide this information to our users where, when and how they want it, through our industry-leading mobile applications that enable consumers to access our information when they are curbside, viewing homes, and through our websites.
Using complex, proprietary automated valuation models, we provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on more than 100 million U.S. homes. We present residential real estate data in novel ways that have revolutionized the way consumers search for, find and understand home-related information and make real estate decisions.
Consumers increasingly are turning to the Internet and mobile devices for real estate information. For the three months ended December 31, 2013, 54.4 million average monthly unique users visited Zillows mobile applications and websites, representing year-over-year growth of 57%. Sixty-five percent of our traffic now comes from a mobile device; on weekends its more than 70%. We operate the most popular suite of mobile real estate applications across all major mobile platforms. During December 2013, 275 million homes were viewed on Zillow on a mobile device, or 103 homes per second. We monetize our marketplace businesses on mobile in the same way we do on our web platform.
Real estate, rental, mortgage and home improvement professionals are a critical part of home-related marketplaces. We have created a trusted and transparent marketplace where consumers can search and read reviews on local real estate, rental, mortgage and home improvement professionals and contact those professionals on their own terms.
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Our home-related marketplaces benefit from network effects. As more consumers come to our mobile applications and websites to use our products and services, more real estate, rental, mortgage and home improvement professionals contribute content to distinguish themselves, thereby making our marketplaces more useful and attracting additional consumers.
We generate revenue from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals, rental professionals and brand advertisers. Our two revenue categories are marketplace revenue and display revenue. Our revenue has grown significantly since our initial website launch in 2006. For the year ended December 31, 2013, we generated revenue of $197.5 million, as compared to $116.9 million for the year ended December 31, 2012, an increase of 69%.
Industry Dynamics
The Importance of Homes
Homes are the center of peoples lives, the focus of some of their most important decisions and often their most valuable assets. In addition to whether to buy, sell or rent, consumers make many other important home-related decisions throughout their lifetimes, including decisions relating to refinancing or home equity loans, home maintenance and home improvement. Residential real estate is one of the largest sectors of the U.S. economy and supports millions of professionals that provide services related to home purchases and sales, rentals, home financings, and home maintenance and improvement.
Large Market Opportunities
Based on external and internal assessments, we believe our current addressable markets include the following:
Purchase and SaleSales of approximately 4.7 million existing and 368 thousand new homes in the United States in 2012 had an aggregate transaction value of approximately $1.2 trillion, according to data published in 2013 by the U.S. Census Bureau and the National Association of REALTORS®. There are approximately 2.1 million licensed real estate professionals in the United States, according to data published in 2012 by the Association of Real Estate License Law Officials. In an effort to acquire new client relationships and sell homes, U.S. real estate agents and brokers spent an estimated $7.8 billion on residential advertising in 2013, according to a forecast from Borrell Associates released in 2013. In addition, U.S. real estate developers spent an estimated $1.3 billion on residential advertising in 2013, also according to a forecast from Borrell Associates released in 2013. In the United States, there are 205 million people residing in owner-occupied housing, according to data published by the U.S. Census Bureau in December 2012. Approximately 27% of movers in 2012, or 9.7 million people, were homeowners, according to the U.S. Census Bureau migration data published in December 2012.
RentalsIn the fourth quarter of 2013, there were approximately 43.6 million rental housing units in the United States, with a national vacancy rate of 8.2%, according to data published by the U.S. Census Bureau in January 2014. According to data published by the U.S. Census Bureau from the American Housing Survey and the Current Population Survey/Housing Vacancy Survey, approximately 42% of rental units (18.3 million) are located in large multi-family structures of 5+ units; approximately 19% of rental units (8.5 million) are located in small multi-family structures of 2-4 units; and approximately 39% of rental units (16.9 million) are 1-unit structures. In 2011, U.S. large multi-family rental property managers and landlords experienced annual unit turnover of approximately 51%, and spent an estimated $160 per unit on advertising and approximately $395 per unit in lease concessions, according to data presented in the National Apartment Associations 2012 Survey of Operating Income & Expenses in Rental Communities. Based on this data, we estimate that these rental professionals spend approximately $6.6 billion per year to attract and retain renters. In the United States, there are 100 million people residing in rental housing units, according to data published by the U.S. Census Bureau in 2012. Approximately 73% of movers in 2012, or 26.8 million people, were renters, according to the U.S. Census Bureau migration data published in December 2012.
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Home FinancingAccording to the Mortgage Bankers Association, approximately $1.8 trillion in U.S. residential mortgage originations occurred in 2012. U.S. residential mortgage providers spent approximately $11.1 billion in 2012 marketing their services and loan products to mortgage borrowers, according to data presented in industry research reports from IBISWorld Inc. released in 2012 and 2013.
Home Maintenance and ImprovementSpending on home improvements and repairs totaled $275 billion in 2011, according to the Joint Center for Housing Studies of Harvard University in a January 2013 report. As noted in the report, 82% of home improvement and repair spending was on owner-occupied homes, with the remainder on rental units. Spending on advertising by the home improvement industry was approximately $11.3 billion in 2012, according to data presented in industry research reports from IBISWorld Inc. released in 2012 and 2013. Additionally, more than 650,000 businesses served the remodeling market in 2007, according to the January 2013 report from the Joint Center for Housing Studies of Harvard University.
Display AdvertisingWe estimate that companies external to the real estate, mortgage and home improvement industries seeking to reach consumers like those who visit Zillow spent approximately $3.6 billion in 2012 on Web display and mobile advertising, based on data published by the Interactive Advertising Bureau in 2013.
Highly Fragmented, Local and Complex Market
The market for residential real estate transactions and home-related services is highly fragmented, local and complex. Each home has unique characteristics, including location, value, size, style, age and condition. Each consumer approaches home-related transactions with a personal set of objectives, priorities and values. Real estate agents generally operate in local markets as independent contractors with different experiences and skills. These conditions create challenges for consumers and real estate, rental, mortgage and home improvement professionals alike. Consumers are challenged to find information about homes and to find real estate, rental, mortgage and home improvement professionals who fit their individual needs. Real estate, rental, mortgage and home improvement professionals are challenged to efficiently advertise their services and identify new clients, and to measure the effectiveness of their marketing efforts.
Absence of Consumer Orientation
Historically, consumers had minimal access to comprehensive and objective residential real estate data, even though many home-related decisions are extraordinarily information-intensive. While real estate, rental, mortgage and home improvement professionals had some data, consumers did not have free, independent and easy access to it. Even when accessible, the data was difficult to interpret and analyze.
Increasing Role of Mobile Technologies and the Internet
Consumers are increasingly turning to mobile devices and the Internet to access real estate information. With the widespread adoption of mobile and location-based technologies, consumers increasingly expect home-related information to be available on their mobile devices where, when and how they want it. Sixty-five percent of our traffic now comes from a mobile device; on weekends its more than 70%.We believe that the technological platform shift from desktop computers to mobile devices benefits technology leaders like Zillow that are quick to innovate.
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Competitive Advantages
We believe we have the following competitive advantages:
| Inimitable Database of Homes. Our living database of homes is the result of years of substantial investment, sophisticated economic and statistical analysis, complex data aggregation and millions of user contributions. Our dynamic and comprehensive living database includes detailed information on more than 110 million U.S. homes, and includes homes for sale, for rent and recently sold, as well as properties not currently on the market. This database is central to the value we provide to consumers and real estate, rental, mortgage and home improvement professionals. It contains extensive information that users can search, through an easy-to-use interface, to identify, analyze and compare homes. Our database is relevant to a broad range of users, including buyers, sellers, renters, homeowners, real estate agents and other real estate professionals. It includes information such as: |
| Property facts: Zestimate and its corresponding value range, number of bedrooms, number of bathrooms, square footage, lot size, assessed tax value and property type such as single-family, condominium, apartment, multifamily, manufactured home or land. |
| Listing information: price, price history and reductions, dollars per square foot, days on the market, listing type (such as for sale by agent, for sale by owner, pre-market inventory, which includes foreclosure, pre-foreclosure, and Make Me Move listings, new construction and rental homes) open houses, property photos and estimated monthly payment. |
| Purchase and sale data: prior sales information and recent sales nearby. |
We synthesize data from hundreds of automated feeds, representing information from tens of thousands of public and private sources. Applying extensive computer analytics to the data, we transform it into information that is accessible, understandable and useful.
We refer to the database as living because the information is continually updated by the combination of our proprietary algorithms, synthesis of third-party data from hundreds of sources, and through improvements by us and, importantly, by our community of users. User-generated content from owners, agents and others enriches our database with photos and additional property information. More than 35 million pieces of user-generated content have been manually contributed to Zillow, and this is growing by more than 1 million contributions per month. Individuals and businesses that use Zillow have updated information on more than 45 million homes in our database and added more than 205 million home photos, creating exclusive home profiles not available anywhere else. Our inimitable database enables us to create content, products and services not available anywhere else, and attracts an active, vibrant community of users. As of December 31, 2013, we had published more than 460,000 reviews of local real estate agents and more than 58,000 reviews of mortgage professionals submitted by our users, and our users had submitted more than 800,000 questions and answers in our discussion forum, Zillow Advice. Zillow Advice allows consumers to ask questions of real estate, rental, mortgage and home improvement professionals and other consumers and quickly learn more about homes and real estate topics of interest. In particular, many of our dedicated active contributors devote substantial time sharing their expertise about Zillow and the real estate market on Zillow Advice. Real estate, rental, mortgage and home improvement professionals who participate in Zillow Advice play a key role in helping to educate consumers, and benefit from exposure to consumers and resulting referrals.
| Zestimates, Rent Zestimates and Digs Estimates. We have developed industry-leading automated home valuation models that use advanced statistical methods and complex, proprietary algorithms. We use these models to provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on more than 100 million U.S. homes. Based on our Zestimates, we produce Zillow Home Value Indexes at the neighborhood, zip code, city, metropolitan statistical area, county and national levels. Our Zillow Home Value Indexes have been cited by government entities such as the Federal Reserve Bank and the Congressional Oversight Panel, university studies and respected national publications. For historical comparisons, we provide up to 15 years of Zestimate history on each home |
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and valuable information about property and real estate market trends. Our Zestimates, Rent Zestimates and Zillow Home Value Indexes allow consumers to evaluate homes and neighborhoods, and to easily evaluate historical trends, as they contemplate critical home-related decisions. With Zillow Digs, home shoppers and homeowners can find visual inspiration and understand the cost of remodeling projects. Users can browse tens of thousands of photos and see Zillows proprietary Digs Estimates for the estimated cost, based on where they live, of the actual bathrooms and kitchens they are viewing. Unique to Zillow, Digs Estimates give consumers the estimated cost of thousands of real bathrooms and kitchens in Zillow Digs ever-increasing portfolio of photos and are computed using Zillows proprietary algorithm, which includes real-world data from local contractors such as size, materials, finish level, and regional labor and material rates. The Digs Estimates patent-pending technology helps home shoppers and homeowners create more realistic budgets appropriate for their specific market. |
| Powerful Brand and Scale. We have established a powerful brand identity and built a large user community in a short time. The majority of our traffic comes direct, not dependent on search engines, with demonstrated consumer intent to visit the Zillow brand. During December 2013, 52.2 million unique users visited Zillows mobile applications and websites, representing year-over-year growth of 50%. |
| Mobile Leadership and Monetization. Shopping for a home is a far more meaningful consumer experience when it occurs curbside, untethered and on location, so we have developed and operate the most popular suite of mobile real estate applications across all major platforms. In December 2013, 275 million homes, or 103 homes per second, were viewed on Zillow on a mobile device. Sixty-five percent of our traffic now comes from a mobile device; on weekends its more than 70%. Our suite of mobile applications includes 27 distinct real estate, rental, mortgage and home improvement applications that enable people to access and analyze information where, when and how they want it. We monetize our marketplace businesses on our mobile platform in the same way we do on our web platform. |
| Independent Market Positions and Consumer Focus. Zillow has been built independent of any real estate industry group. We maintain an unwavering commitment to giving consumers free access to as much useful information as possible. We provide unbiased information, products and services, empowering consumers to make informed decisions about homes and the residential real estate market. We believe our independence enables us to create compelling products and services with broad consumer appeal. |
| Multiple Robust Home-Related Marketplaces. We have created trusted and transparent marketplaces in real estate, rentals, mortgages and home improvement where consumers can identify and connect with local professionals that are best suited to meet their needs. Our living database of homes provides a foundation on which we can build new consumer and professional marketplaces in other home-related categories. |
| Technology Solutions for Professionals. We offer a suite of marketing and technology solutions to help real estate, rental and mortgage professionals grow their businesses and personal brands. |
| Consumer-Oriented Mortgage Marketplace. Unlike other sources of mortgage rate quotes, in Zillow Mortgage Marketplace consumers can anonymously submit mortgage loan requests and receive an unlimited number of personalized mortgage quotes directly from hundreds of consumer-rated lenders. Consumers can then choose to contact those lenders at their discretion. Because we operate this marketplace as part of our real estate home shopping experience, we can efficiently attract motivated users to the marketplace and prioritize the consumers experience. For the year ended December 31, 2013, consumers submitted more than 20 million mortgage loan requests in Zillow Mortgage Marketplace. |
| Personalized Experience. We present consumers and real estate, rental, mortgage and home improvement professionals with many opportunities to personalize their Zillow experience, leading to more informed home shopping and financing decisions. Users can save favorite homes on Zillow and receive monthly email updates on changes in those homes values, listing status, price changes and other data. Users also can customize saved searches for any neighborhood or zip code and receive daily email updates on new homes listed for sale, for rent, or price changes for existing listed |
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homes. Once a favorite home or search parameters are saved on Zillow, a consumer or professional may access these personalized options every time they visit Zillow through a mobile device or on our websites, personalizing a Zillow experience unique to them. |
| Proven Management Team. We believe the broad experience and depth of our management team are distinct competitive advantages in the complex and evolving industry in which we compete. The Zillow management team has an extensive history building successful consumer Internet companies. In particular, we believe that the shared experience of 11 of our executives, who held similar positions together at Expedia Inc., provides our management team with unique cohesion and insight. |
Growth Strategies
Our growth strategies are:
| Focus on Consumers. Maintain our unwavering focus on consumers and leverage our industry independence to enhance existing products and services and develop new offerings with broad consumer appeal. |
| Enhance Our Living Database. Enhance the information in our database of homes, and use it as the foundation for new analyses, insights and tools to inform consumers throughout the home ownership lifecycle. |
| Leverage Our Mobile Leadership. Innovate and expand our offerings for mobile devices, launching more applications and extending our brand and products across additional mobile platforms. |
| Deepen and Strengthen and Expand Our Marketplaces. Deepen and strengthen our marketplaces by creating new opportunities for high-quality consumer-initiated connections with real estate, rental, mortgage and home improvement professionals when consumers want their services. Our living database of homes provides a foundation on which we can build new consumer and professional marketplaces in other home-related categories. |
| Efficiently Increase Brand Awareness. Expand targeted advertising programs, public relations, social media and content distribution to efficiently increase brand awareness. |
| Expand Our Platform. Expand our platform beyond advertising services for real estate, rental, mortgage and home improvement professionals by developing additional marketing and business technology solutions to help those professionals manage and grow their businesses and personal brands. |
| Optimize Opportunities for Premier Agent Participation. Optimize opportunities for Premier Agent participation in our marketplaces through development of a broad variety of marketing and business technology solutions. |
| Leverage Our Sales Force. Leverage our sales forces expertise with new advertising and technology offerings. |
| Pursue Strategic Opportunities. Pursue strategic opportunities, including commercial relationships and acquisitions, to strengthen our market position, enhance our capabilities and accelerate our growth. In August 2013, we acquired StreetEasy, Inc., formerly known as NMD Interactive, Inc., d/b/a StreetEasy, a New York City-based, consumer-facing real estate website, featuring high-quality for-sale and for-rent listings, information about new developments, co-ops, and luxury real estate, and a complementary suite of features for real estate and rental professionals. The acquisition aligns with our growth strategies, including focusing on consumers and deepening, strengthening, and expanding our marketplaces. With the addition of StreetEasy, Zillow expanded its audience and brand awareness by leveraging StreetEasys leadership among both consumers and real estate professionals in the New York region and, in particular, the New York for-sale and rentals market. And with the introduction of new tools and solutions, such as Zillow Rentals, Property Management Websites and Premier Agent Websites, we continue to focus on strengthening our marketplaces for both consumers and professionals and enhancing the Premier Agent experience. |
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Advertising Products and Services
We provide advertising products and services for real estate, rental, mortgage and home improvement professionals that enable them to create and promote useful content for consumers.
Marketplace Advertising
Premier Agent Program
Zillows Premier Agent program offers a suite of marketing and business technology solutions to help real estate agents grow their businesses and personal brands. The Premier Agent program allows agents to select products and services that they can tailor to meet their business and advertising needs. The program has three tiers of participation including Premier Platinum, our original flagship subscription product, as well as Premier Gold and Premier Silver, to meet different marketing and business needs of a broad range of agents. All tiers of Premier Agents receive access to a dashboard portal on our website that provides individualized program performance analytics, as well as our personalized website service, and our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent through our mobile and web platforms. Our Premier Gold product also includes featured listings whereby the agents listings will appear at the top of search results on our mobile and web platforms. Our Premier Platinum product includes the dashboard portal on our website, our personalized website service, our CRM tool, featured listings, and inclusion on our buyers agent list, whereby the agent appears as the agent to contact for listings in the purchased zip code. Our multi-tiered Premier Agent advertising program, along with our Diverse Solutions agent website services, our CRM tools, and our Postlets syndication tool, extend our platform beyond just marketing services for real estate agents to a platform that also includes other types of trade services and tools.
Zillow Mortgage Marketplace
In Zillow Mortgage Marketplace, consumers request free, personalized quotes in response to their submission of limited anonymous data, such as specific loan amount, zip code, purchase price or estimated home value, and credit score. For the year ended December 31, 2013, consumers submitted more than 20 million mortgage loan requests in Zillow Mortgage Marketplace. Consumers decide if and when to contact the mortgage professionals who provide quotes. User-generated ratings and reviews of mortgage professionals are provided as a powerful tool to help consumers shop for their loans.
Zillow Rentals
Zillow continues to develop its rental marketplace on mobile and Web. In October 2012, we launched Zillow Rentals, a free marketplace and suite of tools for rental professionals, which includes listing distribution across the Zillow Rental Network, reaching millions of renters on Zillow.com, Zillow Mobile, Yahoo!® Homes and HotPads. In February 2013, we announced the launch of Zillow Rentals on iPad, our first dedicated rental app optimized for iPad. Zillow now operates six dedicated apps for renters and rental professionals, available across multiple platforms.
Display Advertising
Our display advertising primarily consists of graphical mobile and web advertising sold on a cost per thousand impressions (CPM) basis. We offer customers display advertising opportunities on our mobile applications through display ads that are optimized for the mobile experience, on our home page, and on individual web pages, through graphical displays and text links.
Information Products and Services
We provide consumers with information products and services to enable them to make intelligent decisions about homes.
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Zestimates and Rent Zestimates
Our Zestimate and Rent Zestimate valuations are computed using complex, proprietary algorithms we have developed and refined through years of statistical analysis and technological development.
A Zestimate is our estimated current market value of a home. We generate Zestimates using proprietary information, including:
| Physical attributes: location, lot size, square footage, number of bedrooms and bathrooms and many other details. |
| Tax assessments: property tax information, actual property taxes paid, exceptions to tax assessments and other information provided in the tax assessors records. |
| Prior and current transactions: actual sale prices over time of the home itself and comparable recent sales of nearby homes. |
We use proprietary automated valuation models that apply advanced algorithms to analyze our data to identify relationships within a specific geographic area between home-related data and actual sales prices. Home characteristics, such as square footage, location or the number of bathrooms, are given different weights according to their influence on home sale prices in each specific geography over a specific period of time, resulting in a set of valuation rules, or models, that are applied to generate each homes Zestimate.
To improve the accuracy of our Zestimates, our algorithms automatically remove or reconcile data that would otherwise inappropriately skew the valuation rules. In addition, our algorithms will automatically generate a new set of valuation rules based on the constantly changing universe of data included in our database. This allows us to provide timely home value information on a massive scale, updated three times a week.
We publicly disclose the accuracy of our Zestimates to further empower consumers in assessing a homes value. The accuracy may be impacted by a variety of factors, including the amount of data about homes we have for a particular geographic area.
A Rent Zestimate is our estimated current monthly rental price of a home, computed using similar automated valuation models we have designed to address the unique attributes of a rental home. We estimate rental prices on more than 100 million homes, including apartments, single-family homes, condominiums and townhomes.
Digs Estimates
With Zillow Digs, home shoppers and homeowners can find visual inspiration and understand the cost of remodeling projects. Users can browse tens of thousands of photos and see Zillows proprietary Digs Estimates for the estimated cost, based on where they live, of the actual bathrooms and kitchens they are viewing. Unique to Zillow, Digs Estimates give consumers the estimated cost of thousands of real bathrooms and kitchens in Zillow Digs ever-increasing portfolio of photos and are computed using Zillows proprietary algorithm, which includes real-world data from local contractors such as size, materials, finish level, and regional labor and material rates. The Digs Estimates patent-pending technology helps home shoppers and homeowners create more realistic budgets appropriate for their specific market.
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Rich, Searchable Home-Related Data and Analysis
We provide consumers and real estate professionals with a rich set of home-related information. Through our mobile applications and websites, users can access detailed information about homes, including:
Value Information | Zestimate | Prior sale prices | ||
Rent Zestimate | Historical Zestimate values | |||
For sale price | Historical Rent Zestimate values | |||
Estimated mortgage payment | Zillow Home Value Index | |||
Rental price | Zillow Home Value Index Forecasts | |||
Make Me Move price | Tax-assessed value | |||
Easy links to county assessor records | Property taxes paid | |||
Digs Estimates | Price per square foot | |||
Regional foreclosure statistics | Regional 12 month home value forecast | |||
Home Details | Bedrooms | Number of stories | ||
Bathrooms | Number of units in building | |||
Square footage | Finished basement | |||
Lot size | Cooling system | |||
Year built | Heating system | |||
Property type | Heat source | |||
County | Fireplace | |||
Parcel number | Exterior material | |||
Legal description | Parking type | |||
Construction quality | Garage size | |||
Neighborhood Information | School district | High school | ||
Elementary school | Walkability | |||
Middle school | Transit access | |||
School ratings | ||||
Listing Details | Price | Price reductions | ||
Listing agent information | Days on Zillow | |||
Listing brokerage information | MLS number | |||
Link to listing source | Foreclosure stage and details | |||
Rent amount | Historical rental listings |
Consumers and real estate professionals can update property information by, for example, adding home photos and personalized information regarding the neighborhood or school district, creating exclusive home profiles not available anywhere else.
Our map-based user interface enables our users to search, navigate and zoom to areas of interest and find and compare home information quickly and efficiently from a variety of different perspectives across homes, neighborhoods, cities, counties and other geographical regions. Our consumer search experience supports complex search queries and filters across our data set of homes, allowing consumers to customize their searches and gain actionable insights.
Our team of economists and statisticians generates unbiased local and national real estate data and analysis on 931 metropolitan areas and approximately 10,300 individual neighborhoods that we provide to consumers and real estate, rental, mortgage and home improvement professionals at no cost. This gives our users access to local
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market trends and data, such as home price cuts, list to sale price ratio and foreclosure data that was historically not easily obtained, if available at all. Users can compare these metrics across neighborhoods and different time periods using our real-time charting and filtering.
For Sale and Rental Listings
We provide comprehensive for sale and rental listings through relationships with real estate brokerages, real estate listings aggregators, multiple listing services, apartment management companies, home builders and other third-parties. In addition, we provide consumers with access to exclusive home listings, such as our Make Me Move listings, which are a homeowners posted price at which they would be willing to move. We also show listings that may not be available on other sources, such as for sale by owner, pre-market inventory and rental listings. Real estate agents and landlords may feature and gain more exposure for their listings through our advertising products.
A substantial portion of the listings displayed on our mobile applications and websites are provided to us pursuant to a Platform Services Agreement with Threewide Corporation. Under the terms of this agreement, Threewide granted to us a nonexclusive license to display listings on our mobile applications and websites. This agreement has a 48-month term, beginning in April 2011, and renews automatically for additional one year terms unless canceled by either party with 90 days prior notice, subject to earlier termination under limited circumstances.
Marketplace of Real Estate Agents
We present consumers with ratings and contact information for the listing agent and local buyers agents alongside home profiles and listings for homes to assist them in evaluating and selecting the real estate agent best suited for them. We enhance this offering by providing an online professional directory for consumers to search and contact real estate professionals that they might wish to engage. Our directory includes rich profiles of real estate professionals, including more than 460,000 ratings and reviews provided by our users, allowing consumers to evaluate these agents based on a number of criteria, including neighborhood specialization, number of listings and number of contributions to Zillow Advice.
Marketplace of Mortgage Professionals
In Zillow Mortgage Marketplace, consumers can anonymously request free, personalized mortgage quotes from consumer-rated and -reviewed lenders. Consumers can then choose to contact those lenders at their discretion. For the year ended December 31, 2013, consumers submitted more than 20 million mortgage loan requests in Zillow Mortgage Marketplace. As of December 31, 2013, we had published more than 58,000 reviews of mortgage professionals submitted by our users.
Home-Related Advice and Discussions
Consumers have many questions and often seek advice during various stages of their home-ownership lifecycle. The Zillow Advice section of our Zillow.com website captures questions and discussion topics from our users, both consumers and real estate, rental, mortgage and home improvement professionals. This allows our consumers to ask questions of other consumers and real estate, rental, mortgage and home improvement professionals and quickly learn more about relevant topics. Our users have submitted more than 800,000 questions and answers to Zillow Advice as of December 31, 2013. Zillow Advice also provides real estate, rental, mortgage and home improvement professionals with an opportunity to help educate consumers and demonstrate their local expertise. These discussions and content are also indexed and searchable by geography and other custom parameters, allowing users to quickly find the information they seek. Email updates are used to provide ongoing monitoring and delivery of posts related to topics of interest.
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Mobile Access
We operate the most popular suite of mobile real estate applications across all major mobile platforms. Our mobile real estate applications provide consumers and real estate, rental, mortgage and home improvement professionals with location-based access to many of our products and services, including Zestimates, Rent Zestimates, for sale and rental listings and extensive home-related data. Through our mobile applications, for example, a consumer standing curbside at a home for sale can learn about the homes for-sale price, Zestimate, number of bedrooms, square footage and past sales, as well as similar information about surrounding homes. The consumer can call a real estate professional through our mobile applications to get more information or schedule a showing. During December 2013, 275 million homes were viewed on Zillow on a mobile device.
Marketing
We believe Zillow has considerable opportunity to increase brand awareness and grow traffic through product development, targeted advertising programs and strategic partnerships. As such, we selectively advertise to consumers and professionals in various online and offline channels that have tested well for us and pursue strategic partnerships that drive traffic and brand awareness for Zillow.
At Zillow, marketing begins with product development, which then becomes amplified by effective brand advertising and marketing communications. We create immersive consumer products that people want to use frequently, talk about and share. The engaging nature of our products enables us to execute compelling advertising campaigns integrated with our robust and viral communications program, which together comprise the primary driver of our brand awareness and traffic acquisition efforts. We launched our consumer brand with communications at the core of our marketing strategy. Next, after years of vigorous field testing, we began large-scale national advertising in early 2013 on television and across other complementary channels. As a result of these advertising efforts, our traffic has grown to 54.4 million average monthly unique users for the three months ended December 31, 2013, an increase of 57% compared to the three months ended December 31, 2012. The majority of our traffic and brand awareness comes direct, not dependent on search engines, with demonstrated consumer intent to visit the Zillow brand.
Our communications team includes former print and broadcast journalists who have established Zillow as an authoritative source for information on a broad range of home and real estate-related subjects. A typical week includes commentary from our real estate experts across dozens of national print and broadcast media outlets, guest opinion pieces or blog posts by our chief economist, and wide-ranging national and local media coverage of Zillow products, listings, data and consumer tips. We also produce considerable home and real estate-related content on Zillow Blog that is syndicated across dozens of prominent media sites. Zillow Blog content ranges from real estate market trends, to home financing tips, to celebrity real estate listings.
We focus substantial public relations effort around the marketing of our Zillow Real Estate Market Reports, which are in-depth reports produced by our economics and analytics bureau for 793 U.S. markets. Data is released on a monthly and quarterly basis, and Zillow data is widely used by government entities such as the Federal Reserve and Congressional Oversight Panel, as well as regularly featured in respected media outlets such as the Wall Street Journal, New York Times, Bloomberg, Reuters and across numerous national network and cable news shows including CNBC, CNN, Fox News, Bloomberg and MSNBC. We believe the considerable effort we have spent on public relations and social media has allowed us to build a large and credible brand.
Our living database of homes creates significant opportunities for home-ownership lifecycle marketing. A typical person will at various times in life be a renter, buyer, homeowner, remodeler, mortgage refinancer or seller, and this presents opportunities to communicate with consumers over many years before, during and after a transaction. We actively communicate with our users through email and social media channels.
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Sales and Customer Support
Our sales team is responsible for generating advertising customers across our mobile applications and websites.
Our largest sales teams sell Premier Agent subscriptions to real estate agents, and are located in Seattle, Washington and Irvine, California. We also have offices in San Francisco, California, New York, New York, and Lincoln, Nebraska, that support sales in our mortgage and rental marketplaces. We attract customers through a combination of outbound calling and inbound customer requests generated from our websites and event marketing activities. We also maintain a field sales team in San Francisco, California, New York, New York, Chicago, Illinois, and Detroit, Michigan, to specifically target larger advertising customers in the real estate and related content categories, such as real estate brokerages, home builders, lenders and home service providers, as well as advertisers in the telecommunications, automotive, insurance and other industries.
As part of our sales and distribution strategy, we entered into a strategic relationship with Yahoo! Inc. that launched in the first quarter of 2011. Our sales team serves as the exclusive sales force for real estate agent advertising and certain graphical advertising on the Yahoo! Real Estate site.
We believe that customer support is important to our success. Our customer support team, which is located primarily in Seattle, Washington, responds to commercial, technical and consumer issues from our user community and advertisers. The Zillow Advice forum augments our direct customer support by enabling consumers to obtain answers to questions from our employees and other members of our user community, including real estate, rental, mortgage and home improvement professionals.
Technology and Infrastructure
Zillow is a data- and technology-driven company. Our technical infrastructure, mobile applications and websites are built to provide consumers and real estate, rental, mortgage and home improvement professionals with access to rich real estate data and powerful online tools to help them accomplish their home-related goals. Many of our services are available through real-time web-based application programming interfaces that allow our information to be easily integrated into third-party websites. We provide HTML and JavaScript-based widgets to allow easy integration of Zillow information onto other websites, with little custom programming. Our technology platform is built using industry-leading third-party and internally developed software as well as open source technologies. This combination allows for rapid development and release of high-performance software in a cost-effective and scalable manner. For information about our research and development costs, see Note 2 of the accompanying notes to our financial statements included within this annual report.
Our mobile applications and websites are primarily hosted at a third-party facility located in the Seattle area. Additionally, we utilize a third-party web service for cloud computing and storage to assist in service growth and redundancy. Content delivery network solutions have been put in place to ensure fast and local access to content. Development and test environments are located in a data center we manage at our corporate headquarters.
Intellectual Property
We protect our intellectual property through a combination of trademarks, trade dress, domain names, copyrights, trade secrets and patents, as well as contractual provisions and restrictions on access to our proprietary technology.
Our trademarks registered in the United States and several other jurisdictions include Zillow, Zillow.com, Zestimate, Dueling Digs, Make Me Move, Postlets, Diverse Solutions, dsIDXpress, Mortech, Marksman, hotpads.com, StreetEasy and the Zillow logo. We also have filed other trademark applications in the United States and certain other jurisdictions and will pursue additional trademark registrations to the extent we believe it will be beneficial and cost-effective.
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We have six patents issued in the United States, one that expires in 2026, two that expire in 2029, three that expire in 2030, and one patent issued in Australia that expires in 2027. These cover proprietary techniques that relate to determining a current value for a real estate property, performing summarization of geographic data points in response to zoom selection, the incorporation of individual aerial images and incorporating visual information into a master planar image, the collection, storage and display of home attribute values, and providing for a multi-faceted search. We have 23 patent applications pending in the United States, which seek to cover proprietary techniques relevant to our products and services. We intend to pursue additional patent protection to the extent we believe it will be beneficial and cost-effective.
We are the registered holder of a variety of domestic and international domain names that include Zillow.com, Postlets.com, DiverseSolutions.com, Agentfolio.com, Mortech.com, HotPads.com, Streeteasy.com, our other trademarks and similar variations.
In addition to the protection provided by our intellectual property rights, we enter into confidentiality and proprietary rights agreements with our employees, consultants, contractors and business partners. Our employees and contractors are also subject to invention assignment provisions. We further control the use of our proprietary technology and intellectual property through provisions in both our general and product-specific terms of use on our mobile applications and websites.
Competition
We face competition to attract consumers to our mobile applications and websites and to attract advertisers to purchase our advertising products and services.
Competition for Consumers
We compete for the attention of consumers with companies that operate, or could develop, national and local real estate, rental, mortgage and home improvement mobile applications and websites. We compete for consumers primarily on the basis of the quality of the consumer experience, the utility of the data and services we provide, the breadth, depth and accuracy of information, and brand awareness and reputation. We believe we compete favorably on these factors.
Competition for Advertisers
We compete for advertising customers, such as real estate professionals, with media sites, including companies dedicated to providing mobile and web-based real estate, rental, mortgage and home improvement information and services to real estate professionals and consumers, and major Internet portals, general search engines and social media sites, as well as other online companies. We also compete for a share of advertisers overall marketing budgets with traditional media such as newspapers, television, magazines, and home/apartment guide publications, particularly with respect to advertising dollars spent at the local level by real estate agents, mortgage lenders, property managers or rental agents to advertise their qualifications or listings. We compete for advertising revenue based on perceived return on investment, the effectiveness and relevance of our advertising products, pricing structure and our ability to effectively deliver types of ads to targeted demographics. We believe we compete favorably on these factors.
Government Regulation
We are affected by laws and regulations that apply to businesses in general, as well as to businesses operating on the Internet. This includes a continually expanding and evolving range of laws, regulations and standards that address information security, data protection, privacy, consent and advertising, among other things. By providing a medium through which users can post content and communicate with one another, we may also be subject to laws governing intellectual property ownership, obscenity, libel, and privacy, among other
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issues. In addition, the real estate agents, mortgage brokers, banks, property managers, rental agents and some of our other customers and advertisers on our mobile applications and websites are subject to various state and federal laws and regulations relating to real estate, rentals and mortgages. While we do not believe that we are currently subject to these regulations, we intend to ensure that any content created by Zillow is consistent with them by obtaining assurances of compliance from our advertisers and customers for their activities through, and the content they provide on, our mobile applications and websites. Since the laws and regulations governing real estate, rentals and mortgages are constantly evolving, it is possible that some part of our business activities could fall within the scope of regulation or be prohibited altogether at some point in the future.
Employees
As of December 31, 2013, we had 817 full-time employees.
Where You Can Find More Information
Our filings with the Securities and Exchange Commission, or SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are available on our website at www.zillow.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this Annual Report on Form 10-K.
Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings, and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about us, our services, and other matters, and for complying with our disclosure obligations under Regulation FD:
| Zillow Twitter Account (https://twitter.com/zillow) |
| Zillow Facebook Page (https://www.facebook.com/Zillow) |
| Zillow Company Blog (http://www.zillowblog.com/) |
The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our investor relations website, press releases, SEC filings, and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Annual Report on Form 10-K.
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Our business is subject to numerous risks. You should carefully consider the following risk factors, as any of these risks could harm our business, results of operations, financial condition and our prospects. In addition, risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.
Risks Related to Our Business
If Real Estate, Mortgage and Rental Professionals or Other Advertisers Reduce or End Their Advertising Spending With Us and We are Unable to Attract New Advertisers, Our Business Would Be Harmed.
Our current financial model depends on advertising revenue generated primarily through sales to real estate agents and brokerages, mortgage lenders, rental professionals and advertisers in categories relevant to real estate. Our ability to attract and retain advertisers, and ultimately to generate advertising revenue, depends on a number of factors, including:
| increasing the number of consumers of our products and services; |
| competing effectively for advertising dollars with other online media companies; |
| continuing to develop our advertising products and services, including the expansion of those products and services to new advertising customers; |
| keeping pace with changes in technology and with our competitors; and |
| offering an attractive return on investment to our advertisers for their advertising spending with us. |
We do not have long-term contracts with most of our advertisers. Our advertisers could choose to modify or discontinue their relationships with us with little or no advance notice. In addition, as existing subscriptions for our Premier Agent program expire, we may not be successful in renewing these subscriptions, securing new subscriptions or increasing the amount of revenue we earn for a given subscription over time. We may not succeed in retaining existing advertisers spending or capturing a greater share of such spending if we are unable to convince advertisers of the effectiveness or superiority of our products as compared to alternatives, including traditional offline advertising media such as television and newspapers. In addition, future changes to our pricing methodology for advertising services may cause advertisers to reduce their advertising with us or choose not to advertise with us. If current advertisers reduce or end their advertising spending with us and we are unable to attract new advertisers, our advertising revenue and business, results of operations and financial condition would be harmed. In addition, if we do not realize the benefits we expect from strategic relationships we enter into, including for example, the generation of additional advertising revenue opportunities, our business could be harmed.
If We Do Not Innovate and Provide Products and Services That Are Attractive to Our Users and to Our Advertisers, Our Business Could Be Harmed.
Our success depends on our continued innovation to provide products and services that make our mobile applications and websites useful for consumers and real estate, rental, mortgage and home improvement professionals, and attractive to our advertisers. As a result, we must continually invest significant resources in research and development to improve the attractiveness and comprehensiveness of our products and services and effectively incorporate new mobile and Internet technologies into them. If we are unable to provide products and services that users, including real estate professionals, want to use, then users may become dissatisfied and use competitors mobile applications and websites. If we are unable to continue offering innovative products and services, we may be unable to attract additional users and advertisers or retain our current users and advertisers, which could harm our business, results of operations and financial condition.
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We May Make Acquisitions and Investments, Which Could Result in Operating Difficulties, Dilution and Other Harmful Consequences.
We continue to evaluate a wide array of potential strategic opportunities. For example, we acquired StreetEasy, Inc. during the year ended December 31, 2013. Any transactions that we enter into could be material to our financial condition and results of operations. The acquisitions may not result in the intended benefits to our business, and we may not successfully evaluate or utilize the acquired products, technology, or personnel, or accurately forecast the financial impact of an acquisition transaction. The process of integrating an acquired company, business or technology could create unforeseen operating difficulties and expenditures. The areas where we face risks include:
| diversion of management time and focus from operating our business to acquisition integration challenges; |
| implementation or remediation of controls, procedures and policies at the acquired company; |
| coordination of product, engineering and sales and marketing functions; |
| retention of employees from the acquired company; |
| liability for activities of the acquired company before the acquisition; |
| litigation or other claims arising in connection with the acquired company; |
| impairment charges associated with goodwill and other acquired intangible assets; and |
| in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries. |
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business, results of operations and financial condition.
We May Be Unable to Increase Awareness of the Zillow Brand Cost-effectively, Which Could Harm Our Business.
We rely heavily on the Zillow brand, which we believe is a key asset of our company. Awareness and perceived quality and differentiation of the Zillow brand are important aspects of our efforts to attract and expand the number of consumers who use our mobile applications and websites. Should the competition for awareness and brand preference increase among providers of mobile or online real estate information, we may not be able to successfully maintain or enhance the strength of our brand. In 2013, we significantly increased our advertising investment to increase brand awareness and grow traffic. In the year ended December 31, 2013, our marketing and advertising expenses increased by $27.7 million compared to the year ended December 31, 2012, primarily related to increased advertising spend to acquire shoppers across online and offline channels. We expect to continue to increase our paid advertising. The results of increased paid advertising may not be successful or cost-effective. If we are unable to maintain or enhance user and advertiser awareness of our brand cost-effectively, or if we are unable to recover our additional marketing and advertising costs through increased usage of our products and services, our business, results of operations and financial condition could be harmed.
We Have Incurred Significant Operating Losses in the Past and We May Not Be Able to Generate Sufficient Revenue to Be Profitable Over the Long Term.
We have incurred significant net operating losses in the past and, as of December 31, 2013, we had an accumulated deficit of $84.1 million. Although we have experienced significant growth in our revenue, our revenue growth rate may decline in the future as the result of a variety of factors, including the maturation of our business. At the same time, we also expect our costs to increase in future periods as we continue to expend substantial financial resources to develop and expand our business, including on:
| product development; |
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| sales and marketing; |
| technology infrastructure; |
| strategic opportunities, including commercial relationships and acquisitions; and |
| general administration, including legal and accounting expenses related to being a public company. |
These investments may not result in increased revenue or growth in our business. If we fail to continue to grow our revenue and overall business and to manage our expenses, we may incur significant losses in the future and not be able to maintain profitability.
We Depend on the Real Estate Industry, and Changes to That Industry, or Declines in the Real Estate Market or Increases in Mortgage Interest Rates, Could Reduce the Demand for Our Products and Services.
Our financial prospects significantly depend on real estate shoppers using our services. Real estate shopping patterns depend on the overall health of the real estate market. Changes to the regulation of the real estate industry, including mortgage lending, may negatively impact the prevalence of home ownership. Changes to the real estate industry, declines in the real estate market or increases in mortgage interest rates could reduce demand for our services. Real estate markets also may be negatively impacted by a significant natural disaster, such as earthquake, fire, flood or other disruption.
We May Not Be Able to Maintain or Establish Relationships With Real Estate Brokerages, Real Estate Listing Aggregators, Multiple Listing Services, Property Management Companies, Home Builders and Other Third-Party Listing Providers, Which Could Limit the Information We Are Able to Provide to Our Users.
Our ability to attract users to our mobile applications and websites depends to some degree on providing a robust number of for-sale and rental listings. To provide these listings, we maintain relationships with real estate brokerages, real estate listing aggregators, multiple listing services, property management companies, home builders, other third-party listing providers, and homeowners and their real estate agents to include listing data in our services. Many of our agreements with real estate listing providers are short-term agreements that may be terminated with limited notice. The loss of some of our existing relationships with listing providers, whether due to termination of agreements or otherwise, or an inability to continue to add new listing providers, may cause our listing data to omit information important to users of our products and services. This could reduce user confidence in the sale and rental data we provide and make us less popular with consumers, which could harm our business, results of operations and financial condition.
We currently depend on a single real estate listing aggregator to provide us with a substantial portion of the listings in our database. These listings provide for revenue-generating opportunities as impressions are delivered through our mobile applications and websites. While these listings are available from their original sources, it would take substantial time and effort for us to aggregate these listings from all of the original sources. Therefore, if the agreement with our largest real estate listing aggregator is terminated, we may not be able to fully replace the listings in a timely manner or on terms favorable to us, if at all, which could harm our business, results of operations and financial condition.
We May Not Be Able to Maintain or Establish Relationships With Data Providers, Which Could Limit the Information We Are Able to Provide to Our Users and Impair Our Ability to Attract or Retain Users.
We obtain real estate data, such as sale transactions, property descriptions, tax-assessed value and property taxes paid, under licenses from third-party data providers. We use this data to enable the development, maintenance and improvement of our information services, including Zestimates and Rent Zestimates and our living database of homes. We have invested significant time and resources to develop proprietary algorithms, valuation models, software and practices to use and improve on this specific data. We may be unable to renew
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our licenses with these data providers, or we may be able to do so only on terms that are less favorable to us, which could harm our ability to continue to develop, maintain and improve these information services and could harm our business, results of operations and financial condition.
We Face Competition to Attract Consumers to Our Mobile Applications and Websites, Which Could Impair Our Ability to Continue to Grow the Number of Users Who Use Our Mobile Applications and Websites, Which Would Harm Our Business, Results of Operations and Financial Condition.
Our success depends on our ability to continue to attract additional consumers to our mobile applications and websites. Our existing and potential competitors include companies that operate, or could develop, national and local real estate, rental, mortgage and home improvement websites. These companies could devote greater technical and other resources than we have available, have a more accelerated time frame for deployment and leverage their existing user bases and proprietary technologies to provide products and services that consumers might view as superior to our offerings. Any of our future or existing competitors may introduce different solutions that attract consumers or provide solutions similar to our own but with better branding or marketing resources. If we are not able to continue to grow the number of consumers who use our mobile applications and websites, our business, results of operations and financial condition would be harmed.
We May Not Be Able to Compete Successfully Against Our Existing or Future Competitors in Attracting Advertisers, Which Could Harm Our Business, Results of Operations and Financial Condition.
We compete to attract advertisers with media sites, including websites dedicated to providing real estate, rental, mortgage and home improvement information and services to real estate professionals and consumers, and major Internet portals, general search engines and social media sites, as well as other online companies. We also compete for a share of advertisers overall marketing budgets with traditional media such as television, magazines, newspapers and home/apartment guide publications, particularly with respect to advertising dollars spent at the local level by real estate professionals to advertise their qualifications and listings. Large companies with significant brand recognition have large numbers of direct sales personnel and substantial proprietary advertising inventory and web traffic, which may provide a competitive advantage. To compete successfully for advertisers against future and existing competitors, we must continue to invest resources in developing our advertising platform and proving the effectiveness and relevance of our advertising products and services. Pressure from competitors seeking to acquire a greater share of our advertisers overall marketing budget could adversely affect our pricing and margins, lower our revenue, and increase our research and development and marketing expenses. If we are unable to compete successfully against our existing or future competitors, our business, results of operations or financial condition would be harmed.
If We Fail to Manage Our Growth Effectively, Our Brand, Results of Operations and Business Could Be Harmed.
We have experienced rapid growth in our headcount and operations, which places substantial demand on management and our operational infrastructure. The majority of our employees have been with us for fewer than two years. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, while maintaining the beneficial aspects of our company culture. In particular, we intend to pursue strategic opportunities and make substantial investments in our technology and development and sales and marketing organizations. If we do not manage the growth of our business and operations effectively, the quality of our services and efficiency of our operations could suffer, which could harm our brand, results of operations and overall business.
Our Dedication to Making Decisions Based Primarily on the Best Interests of Consumers May Cause Us to Forgo Short-Term Gains.
Our guiding principle is to build our business by making decisions based primarily on the best interests of consumers, which we believe has been essential to our success in increasing our user growth rate and engagement and has served the long-term interests of our company and our shareholders. In the past, we have
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forgone, and we will in the future forgo, certain expansion or short-term revenue opportunities that we do not believe are in the best interests of consumers, even if such decisions negatively impact our short-term results of operations. In addition, our philosophy of putting consumers first may negatively impact our relationships with our existing or prospective advertisers. This could result in a loss of advertisers, which could harm our revenue and results of operations. For example, we believe that some real estate agents have chosen not to purchase our Premier Agent product because we display a Zestimate on their for-sale listings. We believe, however, that it is valuable to consumers to have access to a valuation starting point on all homes and so we display a Zestimate on every home in our database for which we have sufficient data to produce the Zestimate. Similarly, we gather and make available to our consumers reviews on real estate, rental, mortgage and home improvement professionals, even if those reviews are unfavorable. Although real estate, rental, mortgage and home improvement professionals who receive unfavorable reviews may be less likely to purchase our advertising products and services, we continue to post favorable and unfavorable reviews because we believe the reviews are useful to consumers in finding the right professional. Our principle of making decisions based primarily on the best interests of consumers may not result in the long-term benefits that we expect, in which case our user traffic and engagement, business and results of operations could be harmed.
We May in the Future Be Subject to Disputes Regarding the Accuracy of Our Zestimates and Rent Zestimates.
We provide our users with Zestimate and Rent Zestimate home and rental valuations. A Zestimate is our estimated current market value of a home based on our proprietary automated valuation models that apply advanced algorithms to analyze our data; it is not an appraisal. A Rent Zestimate is our estimated current monthly rental price of a home, using similar automated valuation models that we have designed to address the unique attributes of rental homes. Revisions to our automated valuation models, or the algorithms that underlie them, may cause certain Zestimates or Rent Zestimates to vary from our expectations for those Zestimates or Rent Zestimates. In addition, from time to time, users disagree with our Zestimates and Rent Zestimates. Any such variation in Zestimates or Rent Zestimates or disagreements could result in distraction from our business or potentially harm our reputation and could result in legal disputes.
If Use of Mobile Technology and the Internet, Particularly With Respect to Real Estate Products and Services, Does Not Continue to Increase as Rapidly as We Anticipate, Our Business Could Be Harmed.
Our future success substantially depends on the continued use of mobile technology and the Internet as effective media of business and communication by our consumers. Mobile technology and Internet use may not continue to develop at historical rates, and consumers may not continue to use mobile technology or the Internet as media for information exchange. Further, these media may not be accepted as viable long-term outlets for information for a number of reasons, including actual or perceived lack of security of information and possible disruptions of service or connectivity. If consumers begin to access real estate information through other media and we fail to innovate, our business may be negatively impacted.
We Rely on the Performance of Highly Skilled Personnel, and if We Are Unable to Attract, Retain and Motivate Well-Qualified Employees, Our Business Could Be Harmed.
We believe our success has depended, and continues to depend, on the efforts and talents of our management and our highly skilled team of employees, including our software engineers, statisticians, marketing professionals and advertising sales staff. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. The loss of any of our senior management or key employees could materially adversely affect our ability to build on the efforts they have undertaken and to execute our business plan, and we may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business could be harmed.
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Any Significant Disruption in Service on Our Mobile Applications or Websites or in Our Network Could Damage Our Reputation and Brand, and Result in a Loss of Users of Our Products and Services and of Advertisers, Which Could Harm Our Business, Results of Operations and Financial Condition.
Our brand, reputation and ability to attract users and advertisers depend on the reliable performance of our network infrastructure and content delivery processes. We have experienced minor interruptions in these systems in the past, including server failures that temporarily slowed the performance of our mobile applications and websites, and we may experience interruptions in the future. Interruptions in these systems, whether due to system failures, computer viruses, software errors or physical or electronic break-ins, could affect the security or availability of our products and services on our mobile applications and websites and prevent or inhibit the ability of users to access our services. Since our users may rely on our products and services, including our customer relationship management tools, for important aspects of their businesses, problems with the reliability, availability or security of our systems could damage our users businesses, harm our reputation, result in a loss of users of our products and services and of advertisers and result in additional costs, any of which could harm our business, results of operations and financial condition.
The majority of the communications, network and computer hardware used to operate our mobile applications and websites are located at facilities in Seattle, Washington. We do not own or control the operation of certain of these facilities. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes and similar events. The occurrence of any of the foregoing events could result in damage to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur.
A failure of our systems at one site could result in reduced functionality for our users, and a total failure of our systems could cause our mobile applications or websites to be inaccessible. Problems faced by our third-party web-hosting providers with the telecommunications network providers with which they contract or with the systems by which they allocate capacity among their customers, including us, could adversely affect the experience of our users. Our third-party web-hosting providers could decide to close their facilities without adequate notice. Any financial difficulties, such as bankruptcy reorganization, faced by our third-party web-hosting providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party web-hosting providers are unable to keep up with our growing needs for capacity, our business could be harmed. In addition, if distribution channels for our mobile applications experience disruptions, such disruptions could adversely affect the ability of users and potential users to access or update our mobile applications, which could harm our business.
We do not carry business interruption insurance sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, which may result from interruptions in our service as a result of system failures. Any errors, defects, disruptions or other performance problems with our services could harm our reputation, business, results of operations and financial condition.
We Are Subject to a Variety of Federal and State Laws, Many of Which Are Unsettled and Still Developing and Which Could Subject Us to Claims or Otherwise Harm Our Business.
We are subject to a variety of federal and state laws that are continuously evolving and developing, including laws regarding the real estate, rental, mortgage and home improvement industries, mobile- and Internet-based businesses and other businesses that rely on advertising, as well as privacy and consumer protection laws. These laws can be costly to comply with, can require significant management time and effort, and can subject us to claims or other remedies. These laws may conflict with each other, and if we comply with the laws of one jurisdiction, we may find that we are violating laws of another jurisdiction. Additionally, our ability to provide a specific target audience to advertisers is a significant competitive advantage. Any legislation reducing this ability would have a negative impact on our business and results of operations.
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If we are unable to comply with these laws or regulations, if we become liable under these laws or regulations, or if unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies are implemented, we could be directly harmed and forced to implement new measures to reduce our exposure to this liability and it could cause the development of product or service offerings in affected markets to become impractical. This may require us to expend substantial resources or to discontinue certain products or services, limit our ability to expand our product and services offerings, or expand into new markets or otherwise harm our business, results of operations and financial condition. In addition, the increased attention focused on liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and results of operations.
We assist with the processing of customer credit card transactions, which results in us receiving personally identifiable information. This information is increasingly subject to legislation and regulation in the United States. This legislation and regulation is generally intended to protect the privacy and security of personal information, including credit card information that is collected, processed and transmitted. We could be adversely affected if government regulations require us to significantly change our business practices with respect to this type of information.
We May Be Unable to Continue to Use the Domain Names That We Use in Our Business, or Prevent Third Parties From Acquiring and Using Domain Names That Infringe on, Are Similar to, or Otherwise Decrease the Value of Our Brand or Our Trademarks or Service Marks.
We have registered domain names for our websites that we use in our business. If we lose the ability to use a domain name, we may incur significant expenses to market our products and services under a new domain name, which could harm our business. In addition, our competitors could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the United States and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names and determining the rights of others may require litigation, which could result in substantial costs and diversion of managements attention.
We May Be Unable to Adequately Protect Our Intellectual Property, Which Could Harm the Value of Our Brand and Our Business.
We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and contracts to protect our proprietary rights. If we are not successful in protecting our intellectual property, the value of our brand and our business, results of operations and financial condition could be harmed.
While we believe that our issued patents and pending patent applications help to protect our business, we cannot ensure that our operations do not, or will not, infringe valid, enforceable patents of third parties or that competitors will not devise new methods of competing with us that are not covered by our patents or patent applications. We cannot ensure that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, that such patents will not be challenged by third parties or found to be invalid or unenforceable, or that our patents will be effective in preventing third parties from utilizing a copycat business model to offer the same products or services. Moreover, we rely on intellectual property and technology developed or licensed by third parties, and we may not be able to obtain licenses and technologies from these third parties on reasonable terms or at all.
Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services may be provided. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect intellectual property and our proprietary technology adequately against unauthorized
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third-party copying or use, which could harm our competitive position. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that might diminish the value of our proprietary rights or harm our reputation, even if we have agreements prohibiting such activity. To the extent third parties are obligated to indemnify us for breaches of our intellectual property rights, these third parties may be unable to meet these obligations. Any of these events could harm our business, results of operations or financial condition.
In addition, we may actively pursue entities that infringe our intellectual property, including through legal action. Taking such action may be costly, and we cannot ensure that such actions will be successful. Any increase in the unauthorized use of our intellectual property could make it more expensive for us to do business and harm our results of operations or financial condition.
Intellectual Property Disputes Are Costly to Defend and Could Harm Our Business, Results of Operations, Financial Condition and Reputation.
From time to time, we face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties. We are currently subject to patent infringement claims. These claims allege, among other things, that aspects of our technology infringe upon the plaintiffs patents. If we are not successful in defending ourselves against these claims, we may be required to pay damages and may be subject to injunctions, each of which could harm our business, results of operations, financial condition and reputation. We may be subject to future claims or allegations relating to our intellectual property rights. As we grow our business and expand our operations, we expect that we will continue to be subject to intellectual property claims and allegations. Patent and other intellectual property disputes or litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain products, services or features, purchase licenses that may be expensive to procure, or modify our products or services. In addition, patent or other intellectual property disputes or litigation may result in significant settlement costs. Any of these events could harm our business, results of operations, financial condition and reputation.
In addition, we use open source software in our services and will continue to use open source software in the future. From time to time, we may be subject to claims brought against companies that incorporate open source software into their products or services, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license, or require us to devote additional research and development resources to changing our products or services, any of which would have a negative effect on our business and results of operations.
Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, the time and resources necessary to resolve them could harm our business, results of operations, financial condition and reputation.
We are From Time to Time Involved In, or May In the Future be Subject to, Claims, Suits, Government Investigations, and Other Proceedings That May Result In Adverse Outcomes.
We are from time to time involved in, or may in the future be subject to, claims, suits, government investigations, and proceedings arising from our business, including actions with respect to intellectual property claims, privacy, consumer protection, information security, data protection or law enforcement matters, tax matters, labor and employment claims, commercial claims, as well as actions involving content generated by our users, shareholder derivative actions, purported class action lawsuits, and other matters. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, any such legal proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in reputational harm, liability, penalties, or sanctions, as
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well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, operating results and financial condition. See Legal Proceedings below in Part 1, Item 3.
Confidentiality Agreements With Employees and Others May Not Adequately Prevent Disclosure of Trade Secrets and Other Proprietary Information.
In order to protect our technologies and processes, we rely in part on confidentiality agreements with our employees, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. To the extent that our employees, contractors or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our business, results of operations, reputation and competitive position.
We May Not Be Able to Halt the Operations of Websites That Aggregate or Misappropriate Our Data.
From time to time, third parties have misappropriated our data through website scraping, robots or other means, and aggregated this data on their websites with data from other companies. In addition, copycat websites have misappropriated data on our network and attempted to imitate our brand or the functionality of our websites. When we have become aware of such websites, we have employed technological or legal measures in an attempt to halt their operations. We may not be able, however, to detect all such websites in a timely manner and, even if we could, technological and legal measures may be insufficient to halt their operations. In some cases, particularly in the case of websites operating outside of the United States, our available remedies may not be adequate to protect us against the impact of the operation of such websites. Regardless of whether we can successfully enforce our rights against the operators of these websites, any measures that we may take could require us to expend significant financial or other resources, which could harm our business, results of operations or financial condition. In addition, to the extent that such activity creates confusion among consumers or advertisers, our brand and business could be harmed.
If Our Security Measures Are Compromised, Consumers May Curtail Use of Our Products and Services and Advertisers May Reduce Their Advertising on Our Mobile Applications and Websites.
Our products and services involve the storage and transmission of users information, some of which may be private or include personally identifiable information, and security breaches could expose us to a risk of loss or exposure of this information, which could result in potential liability and litigation. For example, a hacker could steal a users profile password and manipulate information about that users home or post to a forum while posing as that user. Like all mobile application and website providers, our mobile applications and websites are vulnerable to computer viruses, break-ins, phishing attacks, attempts to overload our servers with denial-of-service or other attacks, and similar disruptions from unauthorized use of our computer systems, any of which could lead to interruptions, delays, or website shutdowns, causing loss of critical data or the unauthorized disclosure or use of personal or other confidential information. Further, outside parties may attempt to fraudulently induce employees, users or advertisers to disclose sensitive information in order to gain access to our information or our users or advertisers information, and our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. If we
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experience compromises to our security that result in mobile application or website performance or availability problems, the complete shutdown of our mobile applications or websites, or the loss or unauthorized disclosure of confidential information, our users and advertisers may lose trust and confidence in us, we may be subject to legal claims, and users may decrease the use of our mobile applications or websites or stop using our mobile applications or websites in their entirety, and advertisers may decrease or stop advertising on our mobile applications or websites. In January 2013, for example, we detected an anonymous user within our externally facing web services, which do not host any customer or financial data. Upon detection, the anonymous user was quarantined and security incident response procedures were executed. As a result of the unauthorized access, we have implemented additional security measures to further enhance security over our Internet-facing services. This incident did not have a material adverse effect on our business and our internal controls were not compromised. Despite the additional security measures we implemented, we cannot ensure that we will not experience future incidents.
We depend on data storage vendors to store certain user information, some of which may be private or include personally identifiable information. If our data storage vendors fail to maintain adequate information security systems and our users information is compromised, our business, results of operations and financial condition could be harmed.
Further, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until launched against a target, and may originate from less regulated and remote areas around the world, we may be unable to proactively address all these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new users and increase engagement by existing users, cause existing users to curtail or stop use of our products or services or close their accounts, cause existing advertisers to cancel their contracts, or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our business, results of operations and financial condition.
We Are Subject to a Number of Risks Related to the Credit Card and Debit Card Payments We Accept.
We accept payments through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees may require us to increase the prices we charge and would increase our operating expenses, either of which could harm our business, financial condition and results of operations.
We depend on processing vendors to complete credit and debit card transactions. If we or our processing vendors fail to maintain adequate systems for the authorization and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if these systems fail to work properly and, as a result, we do not charge our customers credit cards on a timely basis or at all, our business, revenue, results of operations and financial condition could be harmed.
We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it more difficult for us to comply. We are required to comply with payment card industry security standards. Failing to comply with those standards may violate payment card association operating rules, federal and state laws and regulations, and the terms of our contracts with payment processors. Any failure to comply fully also may subject us to fines, penalties, damages and civil liability, and may result in the loss of our ability to accept credit and debit card payments. Further, there is no guarantee that such compliance will prevent illegal or improper use of our payment systems or the theft, loss, or misuse of data pertaining to credit and debit cards, card holders and transactions.
If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures, and significantly higher credit card-related costs, each of which could harm our business, results of operations and financial condition.
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If we are unable to maintain our chargeback rate or refund rates at acceptable levels, our processing vendors may increase our transaction fees or terminate their relationships with us. Any increases in our credit and debit card fees could harm our results of operations, particularly if we elect not to raise our rates for our service to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.
We Expect Our Results of Operations to Fluctuate on a Quarterly and Annual Basis.
Our revenue and results of operations could vary significantly from period to period and may fail to match expectations as a result of a variety of factors, some of which are outside our control. The other risk factors discussed in this Risk Factors section may contribute to the variability of our quarterly and annual results. In addition, our results may fluctuate as a result of fluctuations in the quantity of, and the price at which we are able to sell, our remnant advertising and the size and seasonal variability of our advertisers marketing budgets. As a result of the potential variations in our revenue and results of operations, period-to-period comparisons may not be meaningful and the results of any one period should not be relied on as an indication of future performance. In addition, our results of operations may not meet the expectations of investors or public market analysts who follow us, which may adversely affect our stock price.
Our Ability to Use Our Net Operating Loss Carryforwards and Certain Other Tax Attributes May Be Limited.
As of December 31, 2013, we had federal net operating loss carryforwards of approximately $236.5 million, state net operating loss carryforwards of approximately $6.1 million (tax effected), and tax credit carryforwards of approximately $5.1 million. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ownership change, the corporations ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. In general, an ownership change will occur if there is a cumulative change in our ownership by certain 5-percent shareholders that exceeds 50 percentage points over a rolling three-year period. In connection with our August 2013 public offering of our Class A Common stock, we experienced an ownership change that triggered Section 382 and 383, which may limit our ability to utilize net operating loss and tax credit carryforwards. If we experience one or more ownership changes in the future as a result of future transactions in our stock, our ability to utilize net operating loss carryforwards could be limited. Furthermore, our ability to utilize net operating loss carryforwards of any companies that we have acquired or may acquire in the future may be limited. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, other pre-change tax attributes, or net operating loss carryforwards of any acquired companies to offset our federal taxable income or reduce our federal income tax liability may be subject to limitation.
The Requirements of Being a Public Company May Strain Our Resources and Distract Our Management, Which Could Make It Difficult to Manage Our Business.
We are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements can be time-consuming and results in increased costs to us and could harm our business, results of operations and financial condition.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These requirements could strain our systems and resources. The Exchange Act also requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Exchange Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have committed significant resources, hired additional staff and provided additional management oversight. We have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies.
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Sustaining our growth will require us to commit additional management, operational and financial resources to identify new professionals to join us and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert managements attention from other business concerns and could make it difficult to manage our business, which could harm our business, results of operations, financial condition and cash flows. In addition, if we identify any material weaknesses in our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the market price of our Class A common stock to decline.
Risks Related to Ownership of Our Class A Common Stock
Our Class A Stock Price May Be Volatile, and the Value of an Investment in Our Class A Common Stock May Decline.
An active, liquid and orderly market for our Class A common stock may not be sustained, which could depress the trading price of our Class A common stock. The trading price of our Class A common stock has at times experienced substantial price volatility and may continue to be volatile. For example, since shares of our Class A common stock were sold in our initial public offering in July 2011 at a price of $20.00 per share, the closing price of our Class A common stock has ranged from $21.63 per share to $100.50 per share through December 31, 2013. The market price of our Class A common stock could be subject to wide fluctuations in response to many of the risk factors discussed in this Annual Report on Form 10-K and others beyond our control, including:
| actual or anticipated fluctuations in our financial condition and results of operations; |
| changes in projected operational and financial results; |
| addition or loss of significant customers; |
| actual or anticipated changes in our growth rate relative to that of our competitors; |
| announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments; |
| announcements of technological innovations or new offerings by us or our competitors; |
| additions or departures of key personnel; |
| changes in laws or regulations applicable to our services; |
| fluctuations in the valuation of companies perceived by investors to be comparable to us; |
| issuance of new or updated research or reports by securities analysts; |
| sales of our Class A common stock by us or our shareholders; |
| stock price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and |
| general economic and market conditions. |
Furthermore, the stock markets in recent years have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of the equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We are currently the target of this type of litigation as described in Legal Proceedings below in Part I, Item 3, and we may continue to be the target of this type of litigation in the future. Current or future securities litigation against us, including the pending matters described below, could result in substantial costs and divert managements attention from other business concerns, which could harm our business, results of operations or financial condition.
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The Dual Class Structure of Our Common Stock as Contained in Our Charter Documents Has the Effect of Concentrating Voting Control With Our Founders, and Limits Your Ability to Influence Corporate Matters.
Since Zillows inception, our capital structure has had authorized Class A common stock and authorized Class B common stock. Our Class A common stock has one vote per share, and our Class B common stock has 10 votes per share. All shares of Class B common stock have been and are held or controlled by our founders, Richard Barton and Lloyd Frink. As of December 31, 2013, Mr. Bartons holdings and Mr. Frinks holdings represented approximately 39.3% and 27.0%, respectively, of the voting power of our outstanding capital stock.
For the foreseeable future, Mr. Barton and Mr. Frink will therefore have significant control over our management and affairs and will be able to control all matters requiring shareholder approval, including the election or removal (with or without cause) of directors and the approval of any significant corporate transaction, such as a merger or other sale of us or our assets. This concentrated control could delay, defer or prevent a change of control, merger, consolidation, takeover, or other business combination involving us that you, as a shareholder, may otherwise support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock due to the limited voting power of such stock relative to the Class B common stock and might harm the market price of our Class A common stock.
Future Sales of Our Class A Common Stock in the Public Market Could Cause Our Stock Price to Decline.
Our Class A common stock began trading on The Nasdaq Global Market on July 20, 2011. We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the prevailing trading price of our Class A common stock from time to time. There is currently no contractual restriction on our ability to issue additional shares, and all of our outstanding shares are generally freely tradable, except for shares held by our affiliates as defined in Rule 144 under the Securities Act, which may be sold in compliance with the volume restrictions of Rule 144. Sales of a substantial number of shares of our Class A common stock could cause our stock price to decline.
If Securities or Industry Analysts Do Not Publish Research or Publish Inaccurate or Unfavorable Research About Our Business, Our Class A Common Stock Price and Trading Volume Could Decline.
The trading market for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about our company. If few or no securities or industry analysts cover our company, the market price of our Class A common stock could be negatively impacted. If securities or industry analysts cover us and if one or more of such analysts downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts covering us fail to publish reports on us regularly, demand for our Class A common stock could decline, which could cause our stock price and trading volume to decline.
If We Issue Additional Equity Securities or Issue Convertible Debt to Raise Capital, It May Have a Dilutive Effect on Shareholders Investment.
If we raise additional capital through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution in their percentage ownership of us. Moreover, any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.
Anti-Takeover Provisions in Our Charter Documents and Under Washington Law Could Make an Acquisition of Us More Difficult, Limit Attempts by Shareholders to Replace or Remove Our Management and Affect the Market Price of Our Class A Common Stock.
Provisions in our articles of incorporation and bylaws, as amended and restated, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated articles of
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incorporation or amended and restated bylaws include provisions, some of which will become effective only after the date, which we refer to as the threshold date, on which the Class B common stock controlled by our founders represents less than 7% of the aggregate number of shares of our outstanding Class A common stock and Class B common stock, that:
| set forth the dual class structure of our common stock, which concentrates voting control of matters submitted to a vote of our shareholders with the holders of our Class B common stock, which is held or controlled by our founders; |
| authorize our board of directors to issue, without further action by our shareholders, up to 30,000,000 shares of undesignated preferred stock, subject, prior to the threshold date, to the approval rights of the holders of our Class B common stock; |
| establish that our board of directors will be divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms; |
| prohibit cumulative voting in the election of directors; |
| provide that, after the threshold date, our directors may be removed only for cause; |
| provide that, after the threshold date, vacancies on our board of directors may be filled only by the affirmative vote of a majority of directors then in office or by the sole remaining director; |
| provide that only our board of directors may change the boards size; |
| specify that special meetings of our shareholders can be called only by the chair of our board of directors, our board of directors, our chief executive officer, our president or, prior to the threshold date, holders of at least 25% of the combined voting power of our outstanding Class A common stock and Class B common stock; |
| establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders, including proposed nominations of persons for election to our board of directors; |
| require the approval of our board of directors or the holders of two-thirds of the voting power of our outstanding Class A common stock and Class B common stock, voting together as a single group, to amend or repeal our bylaws; and |
| require the approval of two-thirds of the outstanding voting power of our Class A common stock and Class B common stock, voting together as a single group, to amend certain provisions of our articles of incorporation. |
Prior to the threshold date, our directors can be removed with or without cause by holders of our Class A common stock and Class B common stock, voting together as a single group, and vacancies on the board of directors may be filled by such shareholders, voting together as a single group. Given the dual class structure of our common stock, our founders, Richard Barton and Lloyd Frink, who hold or control our Class B common stock, will have the ability for the foreseeable future to control these shareholder actions. See the risk factor above titled The Dual Class Structure of Our Common Stock as Contained in Our Charter Documents Has the Effect of Concentrating Voting Control With our Founders, and Limits Your Ability to Influence Corporate Matters.
The provisions described above, after the threshold date, may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, which board is responsible for appointing our management. In addition, because we are incorporated in the State of Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which prohibits certain business combinations between us and certain significant shareholders unless specified conditions are met. These provisions may also have the effect of delaying or preventing a change of control of our company, even if this change of control would benefit our shareholders.
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Item 1B. Unresolved Staff Comments
Not applicable.
In March 2011, we entered into a lease for approximately 66,000 square feet of office space that houses our corporate headquarters in Seattle, Washington, for which we are obligated to make escalating monthly lease payments that began in December 2012 and continue through November 2022. In June 2012, we entered into a lease amendment for our corporate headquarters in Seattle, Washington, which increased the rentable area of the premises by 21,575 square feet, for which we are obligated to make escalating monthly lease payments that began in January 2013 and continue through November 2022. In April 2013, we entered into a second lease amendment for our corporate headquarters in Seattle, Washington, which increased the rentable area of the premises by 22,583 square feet as of October 1, 2013, and will increase the rentable area of the premises by an additional 22,583 square feet as of September 1, 2014, for which we are obligated to make escalating monthly lease payments beginning in January 2014 and December 2014, respectively, and continuing through November 2022. In January 2014, we entered into a third lease amendment for our corporate headquarters in Seattle, Washington, which will increase the rentable area of the premises by 22,694 square feet as of October 1, 2016, for which we are obligated to make escalating monthly lease payments beginning in January 2016 and continuing through November 2022. In April 2012, we entered into an operating lease in Irvine, California for 20,025 square feet under which we are obligated to make escalating monthly lease payments which began in August 2012 and continue through July 2022. In September 2013, we entered into a lease amendment for our operating lease in Irvine, California, which increased the rentable area of the premises by 20,024 square feet, for which we are obligated to make escalating monthly lease payments beginning in February 2014 and continuing through July 2022. In November 2012, we entered into an operating lease in San Francisco, California for 18,353 square feet under which we are obligated to make escalating monthly lease payments which began in December 2012 and continue through November 2018. We lease additional office space in Chicago, Illinois, Lincoln, Nebraska, and New York, New York.
In March 2010, Smarter Agent, LLC (Smarter Agent) filed a complaint against us and multiple other defendants, including HotPads, Inc. (HotPads), for patent infringement in the U.S. District Court for the District of Delaware. The complaint seeks, among other things, a judgment that we have infringed certain patents held by Smarter Agent, an injunctive order against the alleged infringing activities and an award for damages. In November 2010, the U.S. Patent and Trademark Office granted our petition for re-examination of the three patents-in-suit, and to date, all claims of all three patents remain rejected in the re-examination proceedings. In March 2011, the court granted a stay of the litigation pending the completion of the re-examination proceedings. In addition, in October 2011, Smarter Agent filed a substantially similar complaint against Diverse Solutions, Inc. (Diverse Solutions), StreetEasy, Inc. (StreetEasy) and other defendants, for patent infringement in the U.S. District Court for the District of Delaware. On October 31, 2011, we acquired substantially all of the operating assets and certain liabilities of Diverse Solutions, including the Smarter Agent complaint against Diverse Solutions. On August 26, 2013, we acquired StreetEasy, including the Smarter Agent complaint against StreetEasy. On December 14, 2012, we acquired HotPads, including the Smarter Agent complaint against HotPads.
In September 2010, LendingTree, LLC (LendingTree) filed a complaint against us for patent infringement in the U.S. District Court for the Western District of North Carolina. The complaint seeks, among other things, a judgment that we have infringed certain patents held by LendingTree, an injunctive order against the alleged infringing activities and an award for damages. We have denied the allegations and asserted counterclaims seeking declarations that we are not infringing the patents and that the patents are unenforceable and invalid. The LendingTree matter currently is subject to a trial by jury that began on February 10, 2014.
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In November 2012, a securities class action lawsuit was filed against us and certain of our executive officers seeking unspecified damages in the U.S. District Court for the Western District of Washington at Seattle. The complaint purports to state claims for violations of federal securities laws on behalf of a class of those who purchased our common stock between February 15, 2012 and November 6, 2012. A consolidated amended complaint was filed in June 2013. In general, the complaint alleges, among other things, that during the period between February 15, 2012 and November 6, 2012, we issued materially false and misleading statements regarding our business practices and financial results. In August 2013, we moved to dismiss the lawsuit. That motion to dismiss is pending. We intend to deny the allegations of any wrongdoing and vigorously defend the claims in the lawsuit.
In January 2013, a shareholder derivative lawsuit was filed against certain of our executive officers and directors seeking unspecified damages on behalf of Zillow in the U.S. District Court for the Western District of Washington at Seattle. In general, the complaint alleged, among other things, that the defendants breached their fiduciary obligations owed to Zillow, and that as a result of the breach of such fiduciary duties, Zillow wasted corporate assets defending itself in the securities class action lawsuit described above, and that defendants were unjustly enriched by selling shares of our common stock on the basis of knowledge of adverse trends before such information was publicly disclosed. The shareholder derivative lawsuit was dismissed without prejudice on September 26, 2013.
Although the results of litigation cannot be predicted with certainty, we currently believe we have substantial and meritorious defenses to the outstanding claims and that the final outcome of the outstanding litigation matters will not have a material effect on our business, financial position, results of operations or cash flow.
From time to time, we are involved in litigation and claims that arise in the ordinary course of business and although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
Our Class A common stock is traded on The Nasdaq Global Market under the symbol Z. Our Class B common stock is not listed and there is no established public trading market. The following table sets forth, for each quarterly period indicated, the high and low sales prices for our Class A common stock as quoted on The Nasdaq Global Market:
Year Ended December 31, 2013: | High | Low | ||||||
First Quarter |
$ | 57.82 | $ | 28.00 | ||||
Second Quarter |
63.76 | 48.52 | ||||||
Third Quarter |
103.00 | 54.38 | ||||||
Fourth Quarter |
91.93 | 70.28 |
Year Ended December 31, 2012: | High | Low | ||||||
First Quarter |
$ | 36.60 | $ | 22.17 | ||||
Second Quarter |
44.23 | 30.60 | ||||||
Third Quarter |
46.86 | 35.57 | ||||||
Fourth Quarter |
42.82 | 23.00 |
As of February 14, 2014, there were 72 holders and three holders of record of our Class A common stock and our Class B common stock, respectively.
Dividends
We have never declared or paid a cash dividend on our capital stock and we intend to retain all available funds and any future earnings to fund the development and growth of our business. We therefore do not anticipate paying any cash dividends on our Class A common stock or Class B common stock in the foreseeable future. Any future determinations to pay dividends on our Class A common stock or Class B common stock would depend on our results of operations, our financial condition and liquidity requirements, restrictions that may be imposed by applicable law or our contracts, and any other factors that our board of directors may consider relevant.
Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
Recent Sales of Unregistered Securities
On March 26, 2013, in connection with a sponsorship agreement involving an equity-based payment to a non-employee recipient, we issued 3,673 restricted shares of our Class A common stock to the recipient. This transaction was exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The recipient of restricted shares of our Class A common stock in this transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. The recipient had adequate access, through their relationships with us, to information about Zillow.
There were no other sales of unregistered securities during the year ended December 31, 2013.
Purchases of Equity Securities by the Issuer
None.
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Performance Graph
The following graph compares our cumulative total shareholder return on our Class A common stock with the NASDAQ Composite Index and the RDG Internet Composite Index. This graph covers the period from July 20, 2011, using the closing price for the first day of trading immediately following the effectiveness of our initial public offering per SEC regulations (rather than the IPO offering price of $20.00 per share), through December 31, 2013. This graph assumes that the value of the investment in our Class A common stock and each index (including reinvestment of dividends) was $100 on July 20, 2011. The information contained in the graph is based on historical data and is not intended to forecast possible future performance.
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Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction with the information under Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and related notes included elsewhere in this Annual Report on Form 10-K and our previously audited financial statements that are not included herein. Our historical results are not necessarily indicative of our results to be expected in any future period.
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Revenue |
$ | 197,545 | $ | 116,850 | $ | 66,053 | $ | 30,467 | $ | 17,491 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of revenue (exclusive of amortization) (1)(2) |
18,810 | 14,043 | 10,575 | 4,973 | 4,042 | |||||||||||||||
Sales and marketing (1) |
108,891 | 49,105 | 25,725 | 14,996 | 9,654 | |||||||||||||||
Technology and development (1) |
48,498 | 26,614 | 14,143 | 10,651 | 11,260 | |||||||||||||||
General and administrative (1)(3) |
38,295 | 21,291 | 14,613 | 6,684 | 5,501 | |||||||||||||||
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|
|
|
|
|
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Total costs and expenses |
214,494 | 111,053 | 65,056 | 37,304 | 30,457 | |||||||||||||||
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|
|
|
|
|
|||||||||||
Income (loss) from operations |
(16,949 | ) | 5,797 | 997 | (6,837 | ) | (12,966 | ) | ||||||||||||
Other income |
385 | 142 | 105 | 63 | 111 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
(16,564 | ) | 5,939 | 1,102 | (6,774 | ) | (12,855 | ) | ||||||||||||
Income tax benefit |
4,111 | | | | | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (12,453 | ) | $ | 5,939 | $ | 1,102 | $ | (6,774 | ) | $ | (12,855 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to common shareholders |
$ | (12,453 | ) | $ | 5,939 | $ | | $ | (6,774 | ) | $ | (12,855 | ) | |||||||
Net income (loss) per share attributable to common shareholdersbasic |
$ | (0.35 | ) | $ | 0.20 | $ | | $ | (0.53 | ) | $ | (1.02 | ) | |||||||
Net income (loss) per share attributable to common shareholdersdiluted |
$ | (0.35 | ) | $ | 0.18 | $ | | $ | (0.53 | ) | $ | (1.02 | ) | |||||||
Weighted average shares outstandingbasic |
36,029 | 30,194 | 19,815 | 12,770 | 12,613 | |||||||||||||||
Weighted average shares outstandingdiluted |
36,029 | 32,709 | 22,305 | 12,770 | 12,613 | |||||||||||||||
(1) Includes share-based compensation as follows: |
||||||||||||||||||||
Cost of revenue |
$ | 737 | $ | 380 | $ | 189 | $ | 210 | $ | 183 | ||||||||||
Sales and marketing |
10,969 | 2,433 | 388 | 445 | 408 | |||||||||||||||
Technology and development |
4,660 | 1,886 | 546 | 389 | 394 | |||||||||||||||
General and administrative |
7,070 | 1,912 | 822 | 671 | 666 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
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Total |
$ | 23,436 | $ | 6,611 | $ | 1,945 | $ | 1,715 | $ | 1,651 | ||||||||||
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|
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(2) Amortization of website development costs and intangible assets included in technology and development |
$ | 19,791 | $ | 11,179 | $ | 5,384 | $ | 4,184 | $ | 4,797 | ||||||||||
(3) General and administrative includes a facility exit charge as follows: |
$ | | $ | | $ | 1,737 | $ | | $ | |
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At December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance Sheet Data: |
|
|||||||||||||||||||
Cash, cash equivalents and investments |
$ | 437,726 | $ | 203,483 | $ | 92,136 | $ | 13,777 | $ | 16,091 | ||||||||||
Property and equipment, net |
27,408 | 16,948 | 7,227 | 4,929 | 4,409 | |||||||||||||||
Working capital |
282,127 | 184,661 | 71,713 | 11,941 | 16,432 | |||||||||||||||
Total assets |
608,063 | 307,549 | 116,668 | 24,013 | 24,608 | |||||||||||||||
Convertible preferred stock |
| | | 4 | 4 | |||||||||||||||
Total shareholders equity |
567,796 | 280,317 | 101,213 | 17,448 | 21,126 |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Risk Factors.
Overview
Zillow operates the leading real estate and home-related information marketplaces on mobile and the Web, with a complementary portfolio of brands and products that help people find vital information about homes and connect with local professionals. In addition to our living database of homes, accessible on Zillow.com, we also own and operate Zillow Mobile, our suite of home-related mobile applications, Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get competitive mortgage rates, Zillow Digs, our home improvement marketplace where consumers can find visual inspiration and local cost estimates, Zillow Rentals, a marketplace and suite of tools for rental professionals, Postlets, Diverse Solutions, Agentfolio, Mortech, HotPads and StreetEasy.
Zillow provides products and services to help consumers through every stage of homeownership buying, selling, renting, borrowing and remodeling. We are transforming the way people make home-related decisions, and enabling homeowners, buyers, sellers and renters to find and connect with local professionals best suited to meet their needs.
Our living database of more than 110 million U.S. homeshomes for sale, homes for rent and homes not currently on the marketattracts an active and vibrant community of users. Individuals and businesses that use Zillow have updated information on more than 45 million homes and added more than 205 million home photos, creating exclusive home profiles not available anywhere else. These profiles include detailed information about homes, including property facts, listing information and purchase and sale data. We provide this information to our users where, when and how they want it, through our industry-leading mobile applications that enable consumers to access our information when they are curbside, viewing homes, and through our websites. Using complex, proprietary automated valuation models, we provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on more than 100 million U.S. homes.
The following is a listing of our significant milestones for the year ended December 31, 2013:
| In February, we announced the launch of Zillow Digs, a free app available exclusively for iPad® and as a Web service where home shoppers and homeowners can find visual inspiration and scope the estimated costs of remodeling projects. |
| In February, we announced the launch of Zillow Rentals on iPad®, our first dedicated rental app optimized for iPad. |
| In February, we announced the opening of a new office in San Francisco, California. |
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| In June, we announced the launch of a new TV spot, Long Distance, as part of our first national TV advertising campaign, entitled Find Your Way Home. |
| In June, we announced the launch of Agentfolio®, which provides a unique collaboration and co-shopping platform via mobile and Web that streamlines communication and organization for agents and home buyers working together during a home search. |
| In August, Zillow hosted President Barack Obama during a virtual housing roundtable discussion. |
| In August, we completed the acquisition of StreetEasy, Inc., formerly known as NMD Interactive, Inc., d/b/a StreetEasy, (StreetEasy), which provides for-sale and for-rent listings and information about condos, co-ops, new developments and luxury real estate, primarily in the New York region. The acquisition aligns with our growth strategies, including focusing on consumers and deepening, strengthening, and expanding our marketplaces. With the addition of StreetEasy, Zillow expanded its audience and brand awareness by leveraging StreetEasys leadership among both consumers and real estate professionals in the New York region and, in particular, the New York for-sale and rentals market. |
| In August, we sold 3,253,522 shares of our Class A common stock, including 753,522 shares of our Class A common stock pursuant to the underwriters option to purchase additional shares, and certain shareholders sold 2,523,486 shares of our Class A common stock, at a price of $82.00 per share. We received net proceeds of $253.9 million after deducting underwriting discounts and commissions and offering expenses payable by us. We received no proceeds from the sale of our Class A common stock by the selling shareholders. |
| In August, we announced the opening of a new office in Lincoln, Nebraska. |
| In September, we announced the launch of a new schools search tool that allows home shoppers to search by boundaries and quality of schools elementary through high school, public and private in their desired area. |
| In September, we announced the launch of a new interface enhanced for iOS 7 and redesigned home shopping features for the Zillow Real Estate Apps for iPhone®, iPad® and iPod touch®. |
| In October, we announced that our Zillow Digs home remodeling app is available on iPhone® and iPod touch®. |
| In October, our Zillow Pro for Brokers program reached a milestone with more than 200 participating real estate brokerages. |
| In November, we launched Zillow Tech Connect, which allows brokers and agents to easily use Zillow with their current customer relationship management program. |
We generate revenue from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals, rental professionals and brand advertisers. Our revenue includes marketplace revenue, consisting primarily of subscriptions sold to real estate agents based on the number of impressions delivered in zip codes purchased, and advertising sold on a cost per click, or CPC, basis to mortgage lenders, as well as display revenue, which consists of advertising placements sold primarily on a cost per thousand impressions, or CPM, basis.
We have experienced significant revenue growth over the past three years. In 2011, 2012 and 2013 we focused on growing our marketplace revenue, which accounted for the majority of our revenue growth over that period. The increase in marketplace revenue resulted primarily from growth in our Premier Agent program. Our Premier Agent program represents a significant source of more predictable subscription-based revenue that complements our display revenue, resulting in a more diversified revenue mix. As a greater proportion of our revenue has shifted to marketplace revenue with a corresponding lesser proportion of revenue being display revenue, we believe we are experiencing less quarterly seasonality in our business as compared to prior periods.
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For the years ended December 31, 2013, 2012 and 2011, we generated revenue of $197.5 million, $116.9 million and $66.1 million, respectively, representing year-over-year growth of 69%, 77% and 117%, respectively. We believe achieving these levels of revenue growth was primarily the result of significant growth in the following areas:
| Traffic to our owned and operated mobile applications and websitesindicated by the average number of monthly unique users for the three months ended December 31, 2013, 2012 and 2011 of 54.4 million, 34.5 million and 23.5 million, respectively, representing year-over-year growth of 57%, 47% and 86%, respectively; |
| Marketplace revenuedue primarily to growth in our Premier Agent program, for which we have generally experienced increases in the number of subscribers and in the average monthly revenue per subscriber. Increases in the average monthly revenue per subscriber were primarily driven by price increases supported by growth in our audience across our mobile and desktop platforms, as well as increased sales to existing Premier Agent subscribers looking to expand their presence on our platform; and |
| Display revenueresulting from our traffic growth and the improved productivity of our sales force. |
As noted above, we announced the launch of a new TV spot, Long Distance, as part of our national TV advertising campaign, entitled Find Your Way Home, in June 2013. We believe we have considerable opportunity to increase brand awareness and grow traffic through targeted advertising programs like our Find Your Way Home TV advertising campaign. As such, we have invested in selective advertisements to consumers and professionals in various online and offline channels that have tested well for us. As compared with the prior year period, sales and marketing expenses increased by $59.8 million in 2013, primarily due to a $27.7 million increase in marketing and advertising expenses related to advertising spend to acquire shoppers across online and offline channels. We also incurred a $3.3 million increase in consulting costs to support our marketing and advertising spend.
As of December 31, 2013, we had 817 full-time employees, compared to 560 full-time employees as of December 31, 2012.
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Key Growth Drivers
To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we frequently review the following key growth drivers:
Unique Users
Measuring unique users is important to us because our marketplace revenue depends in part on our ability to enable real estate, rental and mortgage professionals to connect with our users, and our display revenue depends in part on the number of impressions delivered. Furthermore, our community of users improves the quality of our living database of homes with their contributions. We count a unique user the first time an individual accesses our mobile applications using a mobile device during a calendar month and the first time an individual accesses one of our websites using a web browser during a calendar month. If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain. Beginning in October 2011, we have measured unique users with Google Analytics. Prior to October 2011, we measured monthly unique user metrics with Omniture analytical tools. We believe Google Analytics and Omniture result in materially consistent measurements of our monthly unique users. Beginning in June 2012, the reported monthly unique users reflect the effect of Zillows May 31, 2012 acquisition of RentJuice Corporation. Beginning in December 2012, the reported monthly unique users reflect the effect of Zillows December 14, 2012 acquisition of HotPads, Inc. Beginning in September 2013, the reported monthly unique users reflect the effect of Zillows August 26, 2013 acquisition of StreetEasy, Inc.
Average Monthly
Unique Users for the Three Months Ended December 31, |
2012 to 2013 % Change |
2011 to 2012 % Change |
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2013 | 2012 | 2011 | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Unique Users |
54,358 | 34,535 | 23,507 | 57 | % | 47 | % |
Premier Agent Subscribers
The number of Premier Agent subscribers is an important driver of revenue growth because each subscribing agent pays us a subscription fee to participate in the program. We define a Premier Agent subscriber as an agent with a paid subscription at the end of a period.
At December 31, | 2012 to 2013 % Change |
2011 to 2012 % Change |
||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||
Premier Agent Subscribers |
48,314 | 29,473 | 15,799 | 64 | % | 87 | % |
Basis of Presentation
Revenue
We generate revenue from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals, rental professionals and brand advertisers. Our revenue includes marketplace revenue and display revenue.
Marketplace Revenue. Marketplace revenue consists of real estate revenue and mortgages revenue. Real estate revenue primarily includes subscriptions sold to real estate agents under our Premier Agent program, as well as revenue generated by Zillow Rentals. Mortgages revenue primarily includes CPC advertising related to
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our Zillow Mortgage Marketplace sold to mortgage lenders, as well as revenue generated by Mortech, a company we acquired in November 2012 that provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.
Zillows Premier Agent program offers a suite of marketing and business technology solutions to help real estate agents grow their businesses and personal brands. The Premier Agent program allows agents to select products and services that they can tailor to meet their business and advertising needs. The program has three tiers of participation including Premier Platinum, our original flagship subscription product, as well as Premier Gold and Premier Silver, to meet different marketing and business needs of a broad range of agents. All tiers of Premier Agents receive access to a dashboard portal on our website that provides individualized program performance analytics, as well as our personalized website service, and our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent through our mobile and web platforms. Our Premier Gold product also includes featured listings whereby the agents listings will appear at the top of search results on our mobile and web platforms. Our Premier Platinum product includes the dashboard portal on our website, our personalized website service, our CRM tool, featured listings, and inclusion on our buyers agent list, whereby the agent appears as the agent to contact for listings in the purchased zip code.
From the launch of our Platinum Premier Agent subscription product until the end of the third quarter of 2012, we charged for this product based upon a percentage of the total Platinum Premier Agent views in the zip code rather than the number of impressions actually delivered on our buyers agent list. Thus, up until the end of the third quarter of 2012, Premier Agent subscription advertising revenue was primarily recognized on a straight-line basis during the contractual period over which the advertising was delivered. In the year ended December 31, 2012, we transitioned sales of our Platinum Premier Agent subscription product to charging based on the number of impressions delivered on our buyers agent list in zip codes purchased and a contracted maximum cost per impression. Our Platinum Premier Agent subscription product includes multiple deliverables which are accounted for as a single unit of accounting, as the delivery or performance of the undelivered elements is based on traffic to our mobile applications and websites. We recognize revenue related to our impression-based Platinum Premier Agent subscription product based on the lesser of (i) the actual number of impressions delivered on our buyers agent list during the period multiplied by the contracted maximum cost per impression, or (ii) the contractual maximum spend on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months or twelve months and then month-to-month thereafter.
We charge a fixed subscription fee for our Premier Gold and Premier Silver subscription products. Subscription advertising revenue for our Premier Gold and Premier Silver subscription products is recognized on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months and then month-to-month thereafter.
In Zillow Mortgage Marketplace, participating qualified mortgage lenders make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Consumers who request rates for mortgage loans in Zillow Mortgage Marketplace are presented with personalized lender quotes from participating lenders. We only charge mortgage lenders a fee when users click for more information regarding a mortgage loan quote. Mortgage lenders who exhaust their initial prepayment can then prepay additional funds to continue to participate in the marketplace. We recognize revenue when a user clicks on a mortgage advertisement or to obtain additional information about a mortgage loan quote.
Display Revenue. Display revenue primarily consists of graphical mobile and web advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers. Our advertising customers also include telecommunications, automotive, insurance and consumer products companies. We recognize display revenue as impressions are
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delivered to users interacting with our mobile applications or websites. Growth in display revenue depends on continuing growth in traffic to our mobile applications and websites and migration of advertising spend online from traditional broadcast and print media.
Costs and Expenses
Cost of Revenue. Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries and benefits and share-based compensation expense and bonuses. Cost of revenue also includes credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships, and data center operations costs.
Sales and Marketing. Sales and marketing expenses consist of advertising costs and other sales expenses related to promotional and marketing activities, as well as headcount expenses, including salaries, commissions, benefits, share-based compensation expense and bonuses for sales, sales support, customer support, marketing and public relations employees.
Technology and Development. Technology and development expenses consist of headcount expenses, including salaries and benefits, share-based compensation expense and bonuses for salaried employees and contractors engaged in the design, development and testing of our mobile applications and websites, equipment and maintenance costs, and facilities costs allocated on a headcount basis. Technology and development expenses also include amortization costs related to capitalized website and development activities, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our mobile applications and websites, and amortization of intangible assets recorded in connection with acquisitions.
General and Administrative. General and administrative expenses consist of headcount expenses, including salaries, benefits, share-based compensation expense and bonuses for executive, finance, accounting, legal, human resources, recruiting and administrative support. General and administrative expenses also include legal, accounting and other third-party professional service fees and bad debt expense.
Other Income
Other income consists primarily of interest income earned on our cash, cash equivalents and investments.
Income Taxes
We are subject to federal and state income taxes in the United States. During the years ended December 31, 2013, 2012 and 2011, we did not have taxable income. We have provided a full valuation allowance against our net deferred tax assets as of December 31, 2013 and 2012 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax asset will not be realized. Therefore, no related tax liability or expense has been recorded in the financial statements. We have accumulated federal tax losses of approximately $236.5 million and state tax losses of approximately $6.1 million (tax effected) as of December 31, 2013, which are available to reduce future taxable income.
We recorded an income tax benefit of $4.1 million for the year ended December 31, 2013 due to a deferred tax liability generated in connection with Zillows August 26, 2013 acquisition of StreetEasy that can be used to realize certain deferred tax assets for which we had previously provided a full allowance.
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Results of Operations
The following tables present our results of operations for the periods indicated and as a percentage of total revenue:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands, except per share data) | ||||||||||||
Statements of Operations Data: |
||||||||||||
Revenue |
$ | 197,545 | $ | 116,850 | $ | 66,053 | ||||||
Costs and expenses: |
||||||||||||
Cost of revenue (exclusive of amortization) (1)(2) |
18,810 | 14,043 | 10,575 | |||||||||
Sales and marketing (1) |
108,891 | 49,105 | 25,725 | |||||||||
Technology and development (1) |
48,498 | 26,614 | 14,143 | |||||||||
General and administrative (1)(3) |
38,295 | 21,291 | 14,613 | |||||||||
|
|
|
|
|
|
|||||||
Total costs and expenses |
214,494 | 111,053 | 65,056 | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) from operations |
(16,949 | ) | 5,797 | 997 | ||||||||
Other income |
385 | 142 | 105 | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) before income taxes |
(16,564 | ) | 5,939 | 1,102 | ||||||||
Income tax benefit |
4,111 | | | |||||||||
|
|
|
|
|
|
|||||||
Net income (loss) |
$ | (12,453 | ) | $ | 5,939 | $ | 1,102 | |||||
|
|
|
|
|
|
|||||||
Net income (loss) attributable to common shareholders |
$ | (12,453 | ) | $ | 5,939 | $ | | |||||
Net income (loss) per share attributable to common shareholdersbasic |
$ | (0.35 | ) | $ | 0.20 | $ | | |||||
Net income (loss) per share attributable to common shareholdersdiluted |
$ | (0.35 | ) | $ | 0.18 | $ | | |||||
Weighted-average shares outstandingbasic |
36,029 | 30,194 | 19,815 | |||||||||
Weighted-average shares outstandingdiluted |
36,029 | 32,709 | 22,305 | |||||||||
Other Financial Data: |
||||||||||||
Adjusted EBITDA (unaudited) (4) |
$ | 29,741 | $ | 25,181 | $ | 11,869 | ||||||
(1) Includes share-based compensation as follows: |
||||||||||||
Cost of revenue |
$ | 737 | $ | 380 | $ | 189 | ||||||
Sales and marketing |
10,969 | 2,433 | 388 | |||||||||
Technology and development |
4,660 | 1,886 | 546 | |||||||||
General and administrative |
7,070 | 1,912 | 822 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 23,436 | $ | 6,611 | $ | 1,945 | ||||||
|
|
|
|
|
|
|||||||
(2) Amortization of website development costs and intangible assets included in technology and development |
$ | 19,791 | $ | 11,179 | $ | 5,384 | ||||||
(3) General and administrative includes a facility exit charge as follows: |
$ | | $ | | $ | 1,737 |
(4) | See Adjusted EBITDA below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP. |
43
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Percentage of Revenue: |
||||||||||||
Revenue |
100 | % | 100 | % | 100 | % | ||||||
Costs and expenses: |
||||||||||||
Cost of revenue |
10 | 12 | 16 | |||||||||
Sales and marketing |
55 | 42 | 39 | |||||||||
Technology and development |
25 | 23 | 21 | |||||||||
General and administrative |
19 | 18 | 22 | |||||||||
|
|
|
|
|
|
|||||||
Total costs and expenses |
109 | 95 | 98 | |||||||||
Income (loss) from operations |
(9 | ) | 5 | 2 | ||||||||
Other income |
0 | 0 | 0 | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) before income taxes |
(8 | ) | 5 | 2 | ||||||||
Income tax benefit |
2 | 0 | 0 | |||||||||
|
|
|
|
|
|
|||||||
Net income (loss) |
(6 | )% | 5 | % | 2 | % | ||||||
|
|
|
|
|
|
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA within this annual report, a non-GAAP financial measure. Below, we have provided a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this annual report as it is a key metric used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
| Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation; |
| Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
| Adjusted EBITDA does not reflect the impact of income taxes; |
| Adjusted EBITDA does not reflect certain facility exit charges; and |
| Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.
44
The following table presents a reconciliation of Adjusted EBITDA to net income (loss) for each of the periods presented:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Reconciliation of Adjusted EBITDA to Net Income (Loss): |
||||||||||||
Net income (loss) |
$ | (12,453 | ) | $ | 5,939 | $ | 1,102 | |||||
Other income |
(385 | ) | (142 | ) | (105 | ) | ||||||
Depreciation and amortization expense |
23,254 | 12,773 | 7,190 | |||||||||
Share-based compensation expense |
23,436 | 6,611 | 1,945 | |||||||||
Income tax benefit |
(4,111 | ) | | | ||||||||
Facility exit charge |
| | 1,737 | |||||||||
|
|
|
|
|
|
|||||||
Adjusted EBITDA (unaudited) |
$ | 29,741 | $ | 25,181 | $ | 11,869 | ||||||
|
|
|
|
|
|
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenue
Year Ended December 31, | 2012 to 2013 % Change |
|||||||||||
2013 | 2012 | |||||||||||
(in thousands, unaudited) | ||||||||||||
Revenue: |
||||||||||||
Marketplace revenue: |
||||||||||||
Real estate |
$ | 132,396 | $ | 75,900 | 74 | % | ||||||
Mortgages |
21,812 | 10,770 | 103 | % | ||||||||
|
|
|
|
|||||||||
Total Marketplace revenue |
154,208 | 86,670 | 78 | % | ||||||||
Display revenue |
43,337 | 30,180 | 44 | % | ||||||||
|
|
|
|
|||||||||
Total revenue |
$ | 197,545 | $ | 116,850 | 69 | % | ||||||
|
|
|
|
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
Percentage of Total Revenue: |
||||||||
Marketplace revenue: |
||||||||
Real estate |
67 | % | 65 | % | ||||
Mortgages |
11 | % | 9 | % | ||||
|
|
|
|
|||||
Total Marketplace revenue |
78 | % | 74 | % | ||||
Display revenue |
22 | % | 26 | % | ||||
|
|
|
|
|||||
Total revenue |
100 | % | 100 | % | ||||
|
|
|
|
Overall revenue increased by $80.7 million, or 69%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. Marketplace revenue increased by 78%, and display revenue increased by 44%.
Marketplace revenue grew to $154.2 million for the year ended December 31, 2013 from $86.7 million for the year ended December 31, 2012, an increase of $67.5 million. Marketplace revenue represented 78% of total revenue for the year ended December 31, 2013 compared to 74% of total revenue for the year ended December 31, 2012. The increase in marketplace revenue was primarily attributable to the $56.5 million increase in real estate revenue, which was primarily a result of growth in the number of subscribers in our Premier Agent program to 48,314 as of December 31, 2013 from 29,473 as of December 31, 2012, representing growth of 64%.
45
Average monthly revenue per subscriber increased by less than 1% to $267 for the year ended December 31, 2013 from $266 for the year ended December 31, 2012. We calculate our average monthly revenue per subscriber by dividing the revenue generated by our Premier Agent subscription products in the period by the average number of Premier Agent subscribers in the period, divided again by the number of months in the period. The average number of Premier Agent subscribers is derived by calculating the average of the beginning and ending number of Premier Agent subscribers for the period. We believe the increase in average monthly revenue per subscriber was primarily driven by price increases supported by growth in our audience across our mobile and desktop platforms, as well as increased sales to existing Premier Agent subscribers looking to expand their presence on our platform.
The increase in marketplace revenue was also attributable to growth in mortgage revenue, which increased by $11.0 million, or 103%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. Approximately $5.7 million of the increase was the result of our November 2012 acquisition of Mortech. The remaining increase of $5.3 million was primarily a result of an increase in the number of loan requests submitted by consumers in Zillow Mortgage Marketplace. There were approximately 20.2 million mortgage loan requests submitted by consumers for the year ended December 31, 2013 compared to 11.8 million mortgage loan requests submitted by consumers for the year ended December 31, 2012, an increase of 71%. The growth in loan requests submitted by consumers increases the likelihood that users will click on a mortgage advertisement to obtain additional information about a mortgage loan quote, but there is not a direct correlation between the number of loan requests and mortgage revenue because loan requests do not always result in revenue recognition.
Display revenue was $43.3 million for the year ended December 31, 2013 compared to $30.2 million for the year ended December 31, 2012, an increase of $13.2 million. Display revenue represented 22% of total revenue for the year ended December 31, 2013 compared to 26% of total revenue for the year ended December 31, 2012. The increase in display revenue was primarily the result of an increase in the number of unique users to our mobile applications and websites, which increased to 54.4 million average monthly unique users for the three months ended December 31, 2013 from 34.5 million average monthly unique users for the three months ended December 31, 2012, representing growth of 57%. The growth in unique users increased the number of graphical display impressions available for sale and advertiser demand for graphical display inventory. Although there is a relationship between the number of average monthly unique users and display revenue, there is not a direct correlation, as the Company does not sell its entire display inventory each period and some of the inventory is sold through networks and not directly through our sales team, which impacts the cost per impression we charge to customers. As a result, similar to prior periods, the growth rate in the Companys average monthly unique users outpaced the growth rate of display revenue.
Cost of Revenue
Cost of revenue was $18.8 million for the year ended December 31, 2013 compared to $14.0 million for the year ended December 31, 2012, an increase of $4.8 million, or 34%. The increase in cost of revenue was attributable to increased credit card and ad serving fees of $1.8 million, increased headcount-related expenses of $1.6 million, including share-based compensation expense, driven by growth in headcount, a $2.0 million increase in data center operations and connectivity costs, a $1.2 million increase in various miscellaneous expenses, including royalties and other costs paid to third parties, partially offset by a $1.8 million decrease in revenue sharing costs. We expect our cost of revenue to increase in absolute dollars in future years as we continue to incur more expenses that are associated with growth in revenue.
Sales and Marketing
Sales and marketing expenses were $108.9 million for the year ended December 31, 2013 compared to $49.1 million for the year ended December 31, 2012, an increase of $59.8 million, or 122%. The increase in sales and marketing expenses was primarily due to a $27.7 million increase in marketing and advertising expenses, primarily related to advertising spend to acquire shoppers across online and offline channels, which supports our
46
growth initiatives, and an $8.5 million increase in share-based compensation expense. We also incurred a $3.3 million increase in consulting costs to support our marketing and advertising spend. We believe we have considerable opportunity to increase brand awareness and grow traffic through targeted advertising programs. As such, we plan to continue to selectively advertise to consumers and professionals in various online and offline channels that have tested well for us to drive traffic and brand awareness for Zillow.
For the year ended December 31, 2013, share-based compensation expense includes the impact of $7.1 million of expense related to the accelerated vesting of 218,071 unvested restricted stock units. In April 2013, pursuant to the terms of a Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement between Zillow and a former employee, all unvested restricted stock units held by such employee became vested, such that the former employee received one share of Zillows Class A common stock for each outstanding restricted stock unit. The remaining increase in share-based compensation expense of $1.4 million was driven primarily by growth in the size of our sales team to promote our marketplace businesses.
In addition to the increases in marketing and advertising and share-based compensation expense, headcount-related expenses increased by $16.7 million, driven primarily by growth in the size of our sales team. We also incurred a $2.4 million increase in tradeshow and conference expenses, including related travel costs, and a $1.2 million increase in various miscellaneous sales and marketing expenses.
We expect our sales and marketing expenses to increase in absolute dollars in future years as we continue to expand our sales team and invest more resources in extending our audience through marketing and advertising initiatives.
Technology and Development
Technology and development expenses, which include research and development costs, were $48.5 million for the year ended December 31, 2013 compared to $26.6 million for the year ended December 31, 2012, an increase of $21.9 million, or 82%. Approximately $9.8 million of the increase related to growth in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering headcount to support current and future product initiatives. Approximately $8.6 million of the increase was the result of increased amortization of intangible assets, including website development costs, purchased content and acquired intangible assets. The increase in technology and development expenses was also the result of a $1.7 million increase in depreciation expense and software costs, a $0.7 million increase in consulting costs, a $0.3 million increase in connectivity costs, and a $0.8 million increase in various miscellaneous expenses.
Amortization expense included in technology and development for capitalized website development costs was $12.2 million and $6.9 million, respectively, for the years ended December 31, 2013 and 2012. Amortization expense included in technology and development for purchased data content intangible assets was $2.8 million and $2.2 million, respectively, for the years ended December 31, 2013 and 2012. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $4.8 million and $2.2 million, respectively, for the years ended December 31, 2013 and 2012. Other data content expense was $0.4 million for the years ended December 31, 2013 and 2012. We expect our technology and development expenses to increase in absolute dollars over time as we continue to build new mobile and website functionality.
General and Administrative
General and administrative expenses were $38.3 million for the year ended December 31, 2013 compared to $21.3 million for the year ended December 31, 2012, an increase of $17.0 million, or 80%. The increase in general and administrative expenses was a result of a $9.3 million increase in headcount-related expenses, including share-based compensation expense, driven primarily by growth in headcount and increases in compensation, a $2.2 million increase in building lease-related expenses including rent, utilities and insurance, a
47
$1.8 million increase in professional services fees, including legal and accounting, a $0.7 million increase in depreciation expense and software costs, a $0.7 million increase in bad debt expense, a $1.1 million increase in travel and meals expense, a $0.5 million increase in consulting costs, and a $0.7 million increase in various other miscellaneous expenses. We expect general and administrative expenses to increase over time in absolute dollars as we continue to expand our business.
Income Taxes
We recorded an income tax benefit of $4.1 million for the year ended December 31, 2013 compared to $0 for the year ended December 31, 2012. The increase in the income tax benefit was due to the deferred tax liability generated in connection with Zillows August 26, 2013 acquisition of StreetEasy that can be used to realize certain deferred tax assets for which we had previously provided a full valuation allowance.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenue
Year Ended December 31, | 2011 to 2012 % Change |
|||||||||||
2012 | 2011 | |||||||||||
(in thousands, unaudited) | ||||||||||||
Revenue: |
||||||||||||
Marketplace revenue: |
||||||||||||
Real estate |
$ | 75,900 | $ | 36,749 | 107 | % | ||||||
Mortgages |
10,770 | 5,441 | 98 | % | ||||||||
|
|
|
|
|||||||||
Total Marketplace revenue |
86,670 | 42,190 | 105 | % | ||||||||
Display revenue |
30,180 | 23,863 | 26 | % | ||||||||
|
|
|
|
|||||||||
Total revenue |
$ | 116,850 | $ | 66,053 | 77 | % | ||||||
|
|
|
|
Year Ended December 31, | ||||||||
2012 | 2011 | |||||||
Percentage of Total Revenue: |
||||||||
Marketplace revenue: |
||||||||
Real estate |
65 | % | 56 | % | ||||
Mortgages |
9 | % | 8 | % | ||||
|
|
|
|
|||||
Total Marketplace revenue |
74 | % | 64 | % | ||||
Display revenue |
26 | % | 36 | % | ||||
|
|
|
|
|||||
Total revenue |
100 | % | 100 | % | ||||
|
|
|
|
Overall revenue increased by $50.8 million, or 77%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. Marketplace revenue increased by 105%, and display revenue increased by 26%.
Marketplace revenue grew to $86.7 million for the year ended December 31, 2012 from $42.2 million for the year ended December 31, 2011, an increase of $44.5 million. Marketplace revenue represented 74% of total revenue for the year ended December 31, 2012 compared to 64% of total revenue for the year ended December 31, 2011. The increase in marketplace revenue was primarily attributable to the $39.2 million increase in real estate revenue, which was primarily a result of growth in the number of subscribers in our Premier Agent program to 29,473 as of December 31, 2012 from 15,799 as of December 31, 2011, representing growth of 87%. Average monthly revenue per subscriber increased by 5% to $266 for the year ended December 31, 2012 from $254 for the year ended December 31, 2011. We believe the increase in average monthly revenue per subscriber was primarily driven by price increases supported by growth in our audience across our mobile and desktop platforms, as well as increased sales to existing Premier Agent subscribers looking to expand their presence on our platform.
48
The increase in marketplace revenue was also attributable to growth in mortgage revenue, which increased by $5.3 million, or 98%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase in mortgage revenue was primarily a result of an increase in the number of loan requests submitted by consumers in Zillow Mortgage Marketplace. There were approximately 11.8 million mortgage loan requests submitted by consumers for the year ended December 31, 2012 compared to 5.5 million mortgage loan requests submitted by consumers for the year ended December 31, 2011, an increase of 114%. The growth in loan requests submitted by consumers increases the likelihood that users will click on a mortgage advertisement to obtain additional information about a mortgage loan quote, but there is not a direct correlation between the number of loan requests and mortgage revenue because loan requests do not always result in revenue recognition.
Display revenue was $30.2 million for the year ended December 31, 2012 compared to $23.9 million for the year ended December 31, 2011, an increase of $6.3 million. Display revenue represented 26% of total revenue for the year ended December 31, 2012 compared to 36% of total revenue for the year ended December 31, 2011. The increase in display revenue was primarily the result of an increase in the number of unique users to our mobile applications and websites, which increased to 34.5 million average monthly unique users for the three months ended December 31, 2012 from 23.5 million average monthly unique users for the three months ended December 31, 2011, representing growth of 47%. The growth in unique users increased the number of graphical display impressions available for sale and advertiser demand for graphical display inventory. Although there is a relationship between the number of average monthly unique users and display revenue, there is not a direct correlation, as the Company does not sell its entire display inventory each period and some of the inventory is sold through networks and not directly through our sales team which impacts the cost per impression we charge to customers. As a result, similar to prior periods, the growth rate in the Companys average monthly unique users outpaced the growth rate of display revenue.
Cost of Revenue
Cost of revenue was $14.0 million for the year ended December 31, 2012 compared to $10.6 million for the year ended December 31, 2011, an increase of $3.5 million, or 33%. The increase in cost of revenue was primarily attributable to increased credit card and ad serving fees of $1.1 million, increased headcount related expenses of $1.0 million, including share-based compensation, driven by growth in headcount, a $0.3 million increase in data center operations costs, a $0.3 million increase in costs related to our revenue share agreements, and a $0.2 million increase in royalties paid to third parties. The remaining increase of $0.6 million was primarily related to an increase in various miscellaneous expenses, including connectivity costs and other costs paid to third parties.
Sales and Marketing
Sales and marketing expenses were $49.1 million for the year ended December 31, 2012 compared to $25.7 million for the year ended December 31, 2011, an increase of $23.4 million, or 91%. The increase was primarily due to a $10.8 million increase in headcount related expenses, including share-based compensation, driven by growth in the size of our sales team to promote our marketplace business, and an increase of $8.5 million in marketing and advertising expenses, primarily related to testing of advertising spend to acquire shoppers across online and offline channels, which supports our growth initiatives. We also incurred a $2.8 million increase in consulting costs to support our marketing and advertising spend, and we incurred a $1.2 million increase in tradeshow and conference expenses, including related travel costs.
Technology and Development
Technology and development expenses, which include research and development costs, were $26.6 million for the year ended December 31, 2012 compared to $14.1 million for the year ended December 31, 2011, an increase of $12.5 million, or 88%. Approximately $5.8 million of the increase was the result of increased amortization of intangible assets, including website development costs, purchased content and acquired intangible assets. Amortization expense for the year ended December 31, 2012 also included $0.5 million of
49
additional amortization expense recorded for a trademark intangible asset related to an acquisition based on a change in the estimated useful life of the intangible asset. Approximately $5.1 million of the increase related to growth in headcount related expenses, including share-based compensation, as we continue to grow our engineering headcount to support current and future product initiatives. The remaining increase of $1.6 million was primarily the result of additional consulting costs.
Amortization expense included in technology and development for capitalized website development costs was $6.9 million and $4.1 million, respectively, for the years ended December 31, 2012 and 2011. Amortization expense included in technology and development for purchased data content intangible assets was $2.2 million and $0.9 million, respectively, for the years ended December 31, 2012 and 2011. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $2.2 million and $0.4 million, respectively, for the years ended December 31, 2012 and 2011. Other data content expense was $0.4 million and $0.8 million, respectively, for the years ended December 31, 2012 and 2011.
General and Administrative
General and administrative expenses were $21.3 million for the year ended December 31, 2012 compared to $14.6 million for the year ended December 31, 2011, an increase of $6.7 million, or 46%. The increase in general and administrative expenses was a result of an increase of $2.9 million in headcount related expenses, including share-based compensation, driven primarily by growth in headcount, a $1.2 million increase in professional services fees, including $0.7 million of acquisition-related costs incurred in connection with our acquisition of RentJuice, a $1.2 million increase in building lease-related expenses including rent, utilities and insurance, a $0.9 million increase in state and local taxes, a $0.7 million increase in travel and meals expense, a $0.6 million increase in bad debt expense, a $0.3 million increase in business and license fees, and a $0.7 million increase in various other miscellaneous expenses, including consulting costs. The increase in general and administrative expenses was partially offset by a decrease in expense of $1.4 million primarily related to a facility exit charge that was recorded during the year ended December 31, 2011, and a $0.4 million decrease related to the settlement of legal matters.
50
Quarterly Results of Operations
The following tables set forth our unaudited quarterly statements of operations data for each of the periods presented below. In the opinion of management, the data has been prepared on the same basis as the audited financial statements included in this Annual Report on Form 10-K, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. The results of historical periods are not necessarily indicative of the results of operations of any future period. You should read this data together with our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
Three Months Ended | ||||||||||||||||||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
|||||||||||||||||||||||||
(in thousands, except per share data, unaudited) | ||||||||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||||||
Revenue |
$ | 58,348 | $ | 53,311 | $ | 46,920 | $ | 38,966 | $ | 34,337 | $ | 31,915 | $ | 27,765 | $ | 22,833 | ||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Cost of revenue (exclusive of amortization) (1)(2) |
5,270 | 5,116 | 4,294 | 4,130 | 3,806 | 3,623 | 3,264 | 3,350 | ||||||||||||||||||||||||
Sales and marketing (1) |
24,978 | 31,195 | 32,924 | 19,794 | 14,519 | 14,118 | 12,153 | 8,315 | ||||||||||||||||||||||||
Technology and development (1) |
14,649 | 12,167 | 11,071 | 10,611 | 9,079 | 6,687 | 5,818 | 5,030 | ||||||||||||||||||||||||
General and administrative (1) |
10,727 | 10,357 | 8,978 | 8,233 | 6,422 | 5,192 | 5,232 | 4,445 | ||||||||||||||||||||||||
|
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|
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|
|
|
|
|
|||||||||||||||||
Total costs and expenses |
55,624 | 58,835 | 57,267 | 42,768 | 33,826 | 29,620 | 26,467 | 21,140 | ||||||||||||||||||||||||
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|
|||||||||||||||||
Income (loss) from operations |
2,724 | (5,524 | ) | (10,347 | ) | (3,802 | ) | 511 | 2,295 | 1,298 | 1,693 | |||||||||||||||||||||
Other income |
145 | 70 | 115 | 55 | 38 | 39 | 34 | 31 | ||||||||||||||||||||||||
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|
|||||||||||||||||
Income (loss) before income taxes |
2,869 | (5,454 | ) | (10,232 | ) | (3,747 | ) | 549 | 2,334 | 1,332 | 1,724 | |||||||||||||||||||||
Income tax benefit (expense) |
(154 | ) | 4,265 | | | | | | | |||||||||||||||||||||||
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|
|||||||||||||||||
Net income (loss) |
$ | 2,715 | $ | (1,189 | ) | $ | (10,232 | ) | $ | (3,747 | ) | $ | 549 | $ | 2,334 | $ | 1,332 | $ | 1,724 | |||||||||||||
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Net income (loss) per sharebasic |
$ | 0.07 | $ | (0.03 | ) | $ | (0.30 | ) | $ | (0.11 | ) | $ | 0.02 | $ | 0.08 | $ | 0.05 | $ | 0.06 | |||||||||||||
Net income (loss) per sharediluted |
$ | 0.06 | $ | (0.03 | ) | $ | (0.30 | ) | $ | (0.11 | ) | $ | 0.02 | $ | 0.07 | $ | 0.04 | $ | 0.06 | |||||||||||||
Weighted-average shares outstandingbasic |
39,050 | 36,667 | 34,553 | 33,770 | 33,408 | 30,040 | 28,946 | 28,348 | ||||||||||||||||||||||||
Weighted-average shares outstandingdiluted |
42,116 | 36,667 | 34,553 | 33,770 | 36,292 | 32,230 | 31,320 | 30,994 | ||||||||||||||||||||||||
Other Financial Data: |
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Adjusted EBITDA (3) |
$ | 15,222 | $ | 4,121 | $ | 5,275 | $ | 5,123 | $ | 6,838 | $ | 7,624 | $ | 5,272 | $ | 5,447 |
51
Three Months Ended | ||||||||||||||||||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
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(in thousands, unaudited) | ||||||||||||||||||||||||||||||||
(1) Includes share-based compensation as follows: |
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Cost of revenue |
$ | 213 | $ | 185 | $ | 176 | $ | 163 | $ | 109 | $ | 94 | $ | 92 | $ | 85 | ||||||||||||||||
Sales and marketing |
1,094 | 871 | 7,777 | 1,227 | 1,084 | 870 | 289 | 190 | ||||||||||||||||||||||||
Technology and development |
1,607 | 985 | 1,034 | 1,034 | 704 | 374 | 498 | 310 | ||||||||||||||||||||||||
General and administrative |
2,141 | 1,727 | 1,480 | 1,722 | 359 | 374 | 346 | 833 | ||||||||||||||||||||||||
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Total |
$ | 5,055 | $ | 3,768 | $ | 10,467 | $ | 4,146 | $ | 2,256 | $ | 1,712 | $ | 1,225 | $ | 1,418 | ||||||||||||||||
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(2) Amortization of website development costs and intangible assets included in technology and development |
$ | 5,999 | $ | 5,092 | $ | 4,492 | $ | 4,208 | $ | 3,603 | $ | 3,198 | $ | 2,374 | $ | 2,004 |
(3) | See Adjusted EBITDA below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP. |
The following tables present our revenue by type and as a percentage of total revenue for the periods presented:
Three Months Ended | ||||||||||||||||||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
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(in thousands, unaudited) | ||||||||||||||||||||||||||||||||
Revenue: |
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Marketplace revenue: |
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Real estate |
$ | 40,514 | $ | 35,136 | $ | 30,637 | $ | 26,109 | $ | 23,667 | $ | 21,002 | $ | 17,046 | $ | 14,185 | ||||||||||||||||
Mortgages |
5,347 | 5,742 | 5,814 | 4,909 | 3,171 | 2,614 | 2,577 | 2,408 | ||||||||||||||||||||||||
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Total Marketplace revenue |
45,861 | 40,878 | 36,451 | 31,018 | 26,838 | 23,616 | 19,623 | 16,593 | ||||||||||||||||||||||||
Display revenue |
12,487 | 12,433 | 10,469 | 7,948 | 7,499 | 8,299 | 8,142 | 6,240 | ||||||||||||||||||||||||
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Total revenue |
$ | 58,348 | $ | 53,311 | $ | 46,920 | $ | 38,966 | $ | 34,337 | $ | 31,915 | $ | 27,765 | $ | 22,833 | ||||||||||||||||
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Three Months Ended | ||||||||||||||||||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
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Percentage of Revenue: |
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Marketplace revenue: |
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Real estate |
69 | % | 66 | % | 65 | % | 67 | % | 69 | % | 66 | % | 61 | % | 62 | % | ||||||||||||||||
Mortgages |
9 | 11 | 12 | 13 | 9 | 8 | 9 | 11 | ||||||||||||||||||||||||
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Total Marketplace revenue |
79 | 77 | 78 | 80 | 78 | 74 | 71 | 73 | ||||||||||||||||||||||||
Display revenue |
21 | 23 | 22 | 20 | 22 | 26 | 29 | 27 | ||||||||||||||||||||||||
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Total revenue |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
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52
Total revenue increased sequentially in all quarters presented. The strong increase in consumer adoption of our mobile applications and websites in the year ended December 31, 2013 was reflected in the significant growth in unique users year over year. The composition of revenue continues to shift from display revenue to marketplace revenue, as we continue to dedicate more of our advertising placements on search, map and home detail pages to our marketplace products, which provide consumers with services that are directly relevant to home-related searches. As a greater proportion of our revenue has shifted to marketplace revenue, with a corresponding lesser proportion of revenue being display revenue, we believe we are experiencing less quarterly seasonality in our business as compared to prior periods.
The following table presents our average monthly revenue per subscriber for the periods presented:
Three Months Ended | ||||||||||||||||||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
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(unaudited) | ||||||||||||||||||||||||||||||||
Average Monthly Revenue per Subscriber |
$ | 271 | $ | 264 | $ | 266 | $ | 259 | $ | 267 | $ | 270 | $ | 263 | $ | 263 |
Average monthly revenue per subscriber decreased by 2% to $259 for the three months ended March 31, 2013 from $263 for the three months ended March 31, 2012. We believe the decrease in average monthly revenue per subscriber was primarily a result of accelerated growth in the number of Premier Agent subscribers in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, as new Premier Agent subscribers typically buy additional inventory over time, and our current impression-based pricing allows new Premier Agents to purchase smaller allocations of inventory than under the historical pricing model, which was in effect until the end of the third quarter of 2012.
Average monthly revenue per subscriber increased by 1% to $266 for the three months ended June 30, 2013 from $263 for the three months ended June 30, 2012. We believe the increase in average monthly revenue per subscriber was primarily attributable to price increases supported by growth in our audience across our mobile and web platforms, as well as increased sales to existing Premier Agent subscribers looking to expand their presence on our platform.
Average monthly revenue per subscriber decreased 2% to $264 for the three months ended September 30, 2013 from $270 for the three months ended September 30, 2012. We believe the decrease in average monthly revenue per subscriber was primarily a result of accelerated growth in the number of Premier Agent subscribers in the three months ended September 30, 2013 compared to the three months ended September 30, 2012, as new Premier Agent subscribers typically buy additional inventory over time, and our current impression-based pricing allows new Premier Agents to purchase smaller allocations of inventory than under the historical pricing model, which was in effect until the end of the third quarter of 2012.
Average monthly revenue per subscriber increased 1% to $271 for the three months ended December 31, 2013 from $267 for the three months ended December 31, 2012. We believe the increase in average monthly revenue per subscriber was primarily attributable to increased sales to existing Premier Agent subscribers looking to expand their presence on our platform.
53
Adjusted EBITDA
The following table sets forth a reconciliation of Adjusted EBITDA to net income (loss) for each of the periods presented below. See Adjusted EBITDA under Results of Operations above in this Item 7 for additional information about why we have included Adjusted EBITDA in this Annual Report on Form 10-K and how we use Adjusted EBITDA.
Three Months Ended | ||||||||||||||||||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
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(in thousands, unaudited) | ||||||||||||||||||||||||||||||||
Reconciliation of Adjusted EBITDA to Net Income (Loss): |
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Net income (loss) |
$ | 2,715 | $ | (1,189 | ) | $ | (10,232 | ) | $ | (3,747 | ) | $ | 549 | $ | 2,334 | $ | 1,332 | $ | 1,724 | |||||||||||||
Other income |
(145 | ) | (70 | ) | (115 | ) | (55 | ) | (38 | ) | (39 | ) | (34 | ) | (31 | ) | ||||||||||||||||
Depreciation and amortization expense |
7,443 | 5,877 | 5,155 | 4,779 | 4,071 | 3,617 | 2,749 | 2,336 | ||||||||||||||||||||||||
Share-based compensation expense |
5,055 | 3,768 | 10,467 | 4,146 | 2,256 | 1,712 | 1,225 | 1,418 | ||||||||||||||||||||||||
Income tax (benefit) expense |
154 | (4,265 | ) | | | | | | | |||||||||||||||||||||||
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Adjusted EBITDA |
$ | 15,222 | $ | 4,121 | $ | 5,275 | $ | 5,123 | $ | 6,838 | $ | 7,624 | $ | 5,272 | $ | 5,447 | ||||||||||||||||
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Key Growth Drivers
The following tables set forth our key growth drivers for each of the periods presented below. Refer to Key Growth DriversUnique Users above in this Item 7 for information about how we measure unique users.
Average for the Three Months Ended | ||||||||||||||||||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
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(in thousands) | ||||||||||||||||||||||||||||||||
Unique Users |
54,358 | 61,118 | 54,317 | 46,652 | 34,535 | 36,096 | 33,474 | 31,797 |
Period Ended | ||||||||||||||||||||||||||||||||
December 31, 2013 |
September 30, 2013 |
June 30, 2013 |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
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Premier Agent Subscribers |
48,314 | 44,749 | 38,807 | 34,030 | 29,473 | 26,703 | 22,696 | 18,616 |
Liquidity and Capital Resources
Prior to our initial public offering in July 2011, we funded our operations primarily from the issuance of common and preferred stock. Through 2007, we raised approximately $81.0 million through various offerings of our convertible preferred stock and approximately $5.9 million from the sale of our common stock.
In July 2011, we sold and issued 3,981,300 shares of our Class A common stock, including 519,300 shares of Class A common stock pursuant to the underwriters option to purchase additional shares, at a public offering price of $20.00 per share, and we sold and issued 274,999 shares of our Class A common stock at a price of $20.00 per share in a private placement. As a result of the offerings, we received net proceeds of approximately $76.3 million, after deducting underwriting discounts and commissions of approximately $5.6 million and additional offering-related expenses of $3.3 million, for total expenses of $8.9 million. We used all of our net offering proceeds in a manner consistent with the description of our planned use of proceeds from our IPO as set forth in our final prospectus filed with the SEC pursuant to Rule 424(b).
54
In September 2012, we sold and issued 3,844,818 shares of our Class A common stock, including 419,818 shares of our Class A common stock pursuant to the underwriters option to purchase additional shares, and certain shareholders sold 575,000 shares of our Class A common stock, at a price of $43.00 per share. The nets proceeds for all shares sold by us in the public offering were approximately $156.7 million after deducting underwriting discounts and commissions of approximately $7.9 million and additional offering-related expenses of $0.7 million, for total expenses of $8.6 million. We received no proceeds from the sale of our Class A common stock by the selling shareholders. The net offering proceeds were invested into money market funds.
In August 2013, we sold and issued 3,253,522 shares of our Class A common stock, including 753,522 shares of our Class A common stock pursuant to the underwriters option to purchase additional shares, and certain shareholders sold 2,523,486 shares of our Class A common stock, at a price of $82.00 per share. The net proceeds for all shares sold by us in the public offering were approximately $253.9 million after deducting underwriting discounts and commissions of approximately $12.0 million and additional offering-related expenses of $0.9 million, for total expenses of $12.9 million. We received no proceeds from the sale of our Class A common stock by the selling shareholders. The net offering proceeds were invested into money market funds and U.S. government agency securities.
As of December 31, 2013 and 2012, we had cash, cash equivalents and investments of $437.7 million and $203.5 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions, money market funds and U.S. government agency securities. Investments as of December 31, 2013 and 2012 consisted of fixed income securities, which include U.S. government agency securities, commercial paper, and corporate notes and bonds. Amounts on deposit with third-party financial institutions exceed the applicable Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable. We believe that cash from operations and cash, cash equivalents and investment balances will be sufficient to meet our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months.
During March 2011, we entered into a loan and security agreement with a financial institution to establish a line of credit of $4.0 million. In April 2012, we amended our loan and security agreement to increase our line of credit from $4.0 million to $25.0 million. In September 2013, we terminated the loan and security agreement.
In March 2011, we executed a standby letter of credit of $1.5 million in connection with the lease of our Seattle, Washington offices, and in July 2012, we amended the standby letter of credit to increase the amount to approximately $1.7 million. In connection with the April 2013 amendment to the lease of our Seattle offices, we amended our standby letter of credit to increase the amount from approximately $1.7 million to approximately $2.0 million. The letter of credit is secured by our investments and is effective until 60 days after the expiration date of the lease.
In August 2013, we completed the acquisition of StreetEasy, a website that provides for-sale and for-rent listings and information about condos, co-ops, new developments and luxury real estate, primarily in the New York region. The total purchase price for the acquisition of StreetEasy was approximately $48.2 million. Based on the allocation of the purchase price in connection with our acquisition of StreetEasy, a substantial majority of the purchase price has been allocated to goodwill and intangible assets.
The following table presents selected cash flow data for the periods presented:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Cash Flow Data: |
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Cash flows provided by operating activities |
$ | 31,298 | $ | 35,612 | $ | 14,826 | ||||||
Cash flows used in investing activities |
(251,827 | ) | (97,672 | ) | (58,383 | ) | ||||||
Cash flows provided by financing activities |
272,249 | 164,174 | 79,205 |
55
Cash Flows Provided By Operating Activities
Cash flows provided by operating activities of $31.3 million for the year ended December 31, 2013 was primarily driven by a net loss of $12.5 million, adjusted by share-based compensation expense of $23.4 million, depreciation and amortization expense of $23.3 million, a $4.1 million non-cash change in the valuation allowance related to a deferred tax liability generated in connection with our acquisition of StreetEasy, bad debt expense of $1.9 million and loss on disposal of property and equipment of $0.9 million. Changes in operating assets and liabilities decreased cash provided by operating activities by $2.7 million.
Cash flows provided by operating activities of $35.6 million for the year ended December 31, 2012 was primarily driven by net income of $5.9 million, adjusted by depreciation and amortization expense of $12.8 million, share-based compensation expense of $6.6 million, bad debt expense of $1.2 million, and the change in deferred rent of approximately $5.5 million. Changes in operating assets and liabilities increased cash provided by operating activities for the year ended December 31, 2012 by $2.5 million.
Cash flows provided by operating activities of $14.8 million for the year ended December 31, 2011 was primarily driven by net income of $1.1 million, adjusted by depreciation and amortization expense of $7.2 million, a facility exit charge of $1.7 million, share-based compensation expense of $1.9 million and the change in deferred rent of approximately $1.2 million. Changes in operating assets and liabilities increased cash provided by operating activities for the year ended December 31, 2011 by $0.7 million.
Cash Flows Used In Investing Activities
Our primary investing activities include the purchase and maturity of investments, the purchase of property and equipment and intangible assets, and cash paid in connection with acquisitions.
For the year ended December 31, 2013, net cash used in investing activities was $251.8 million. This was the result of $183.1 million of net purchases of investments, $42.7 million paid in connection with the acquisition of StreetEasy, and $26.0 million of purchases for property and equipment and intangible assets.
For the year ended December 31, 2012, net cash used in investing activities was $97.7 million. This was the result of $10.0 million of net purchases of investments, $20.1 million of purchases for property and equipment and intangible assets, and a total of $67.6 million, net of cash acquired, paid in connection with the acquisitions of RentJuice, Buyfolio, Mortech and HotPads.
For the year ended December 31, 2011, net cash used in investing activities was $58.4 million. This was the result of $43.0 million of net purchases of investments, $8.8 million of purchases for property and equipment and intangible assets, and a total of $6.5 million paid in connection with the acquisitions of the operating assets of Diverse Solutions, Inc. and Postlets LLC.
Cash Flows Provided By Financing Activities
Our financing activities have primarily resulted from the exercise of employee stock options and proceeds from our public offerings.
For the year ended December 31, 2013, net cash provided by financing activities was approximately $272.2 million, which was primarily the result of $253.9 million in proceeds, net of offering costs, from our August 2013 public offering, and $18.4 million in proceeds from the issuance of Class A common stock from the exercise of stock options.
For the year ended December 31, 2012, net cash provided by financing activities was approximately $164.2 million, which was primarily the result of $156.7 million in proceeds, net of offering costs, from our September 2012 public offering, and $7.5 million in proceeds from the issuance of Class A common stock from the exercise of stock options.
56
For the year ended December 31, 2011, net cash provided by financing activities was approximately $79.2 million, which was primarily the result of $70.8 million in proceeds from our initial public offering, net of offering costs, approximately $5.5 million in proceeds from our concurrent private placement, and $2.9 million in proceeds from the issuance of Class A common stock from the exercise of stock options.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2013.
Contractual Obligations
The following table provides a summary of our contractual obligations as of December 31, 2013:
Payment Due By Period | ||||||||||||||||||||
Total | Less Than 1 Year |
1-3 Years | 3-5 Years | More Than 5 Years |
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(in thousands) | ||||||||||||||||||||
Operating lease obligations |
$ | 58,171 | $ | 5,353 | $ | 14,373 | $ | 14,940 | $ | 23,505 | ||||||||||
Purchase obligations |
13,613 | 4,546 | 8,250 | 817 | | |||||||||||||||
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Total |
$ | 71,784 | $ | 9,899 | $ | 22,623 | $ | 15,757 | $ | 23,505 | ||||||||||
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We have various operating leases for office space and equipment. In March 2011, we entered into a lease for approximately 66,000 square feet of office space that houses our corporate headquarters in Seattle, Washington, for which we are obligated to make escalating monthly lease payments that began in December 2012 and continue through November 2022. In June 2012, we entered into a lease amendment for our corporate headquarters in Seattle, Washington, which increased the rentable area of the premises by 21,575 square feet, for which we are obligated to make escalating monthly lease payments that began in January 2013 and continue through November 2022. In April 2013, we entered into a second lease amendment for our corporate headquarters in Seattle, Washington, which increased the rentable area of the premises by 22,583 square feet as of October 1, 2013, and will increase the rentable area of the premises by an additional 22,583 square feet as of September 1, 2014, for which we are obligated to make escalating monthly lease payments beginning in January 2014 and December 2014, respectively, and continuing through November 2022. In April 2012, we entered into an operating lease in Irvine, California for 20,025 square feet under which we are obligated to make escalating monthly lease payments which began in August 2012 and continue through July 2022. In September 2013, we entered into a lease amendment for our operating lease in Irvine, California, which increased the rentable area of the premises by 20,024 square feet, for which we are obligated to make escalating monthly lease payments beginning in February 2014 and continuing through July 2022. In November 2012, we entered into an operating lease in San Francisco, California for 18,353 square feet under which we are obligated to make escalating monthly lease payments which began in December 2012 and continue through November 2018. We lease additional office space in Chicago, Illinois, Lincoln, Nebraska, and New York, New York. We also have purchase obligations for content related to our mobile applications and websites. We do not have any debt or capital lease obligations. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
57
We believe that the assumptions and estimates associated with revenue recognition, the allowance for doubtful accounts, website and software development costs, goodwill, recoverability of intangible assets with definite lives and other long-lived assets, and share-based compensation have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Revenue Recognition
Our revenue is primarily derived from advertising services. In general, we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. We consider a signed agreement, a binding insertion order or other similar documentation reflecting the terms and conditions under which products will be provided to be persuasive evidence of an arrangement. Collectability is assessed based on a number of factors, including payment history and the creditworthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. Our two revenue categories are marketplace revenue and display revenue.
Marketplace revenue consists of real estate revenue and mortgages revenue. Real estate revenue primarily includes subscriptions sold to real estate agents under our Premier Agent program, as well as revenue generated by Zillow Rentals. Mortgages revenue primarily includes advertising in Zillow Mortgage Marketplace sold to mortgage lenders on a cost-per-click, or CPC, basis. Mortgages revenue also includes revenue generated by Mortech, a company we acquired in November 2012 that provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform, for which we recognize revenue on a straight-line basis during the contractual period over which the services are delivered.
Zillows Premier Agent program offers a suite of marketing and business technology solutions to help real estate agents grow their businesses and personal brands. The Premier Agent program allows agents to select products and services that they can tailor to meet their business and advertising needs. The program has three tiers of participation including Premier Platinum, our original flagship subscription product, as well as Premier Gold and Premier Silver, to meet different marketing and business needs of a broad range of agents. All tiers of Premier Agents receive access to a dashboard portal on our website that provides individualized program performance analytics, as well as our personalized website service, and our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent through our mobile and web platforms. Our Premier Gold product also includes featured listings whereby the agents listings will appear at the top of search results on our mobile and web platforms. Our Premier Platinum product includes the dashboard portal on our website, our personalized website service, our CRM tool, featured listings, and inclusion on our buyers agent list, whereby the agent appears as the agent to contact for listings in the purchased zip code.
We charge customers for our Platinum Premier Agent subscription product based on the number of impressions delivered on our buyers agent list in zip codes purchased. Our Platinum Premier Agent subscription product includes multiple deliverables which are accounted for as a single unit of accounting, as the delivery or performance of the undelivered elements is based on traffic to our mobile applications and websites. We recognize revenue related to our impression-based Platinum Premier Agent subscription product based on the lesser of (i) the actual number of impressions delivered on our buyers agent list during the period multiplied by the contracted maximum cost per impression, or (ii) the contractual maximum spend on a straight-line basis during the contractual period over which the services are delivered, which is typically over a period of six or twelve months and then month-to-month thereafter.
We charge a fixed subscription fee for our Premier Gold and Premier Silver subscription products. Subscription advertising revenue for our Premier Gold and Premier Silver subscription products is recognized on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months and then month-to-month thereafter.
58
For Zillow Mortgage Marketplace, we recognize revenue when a user clicks on a mortgage advertisement to obtain additional information about a mortgage loan quote.
Display revenue primarily consists of graphical mobile and web advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers. Our advertising customers also include telecommunications, automotive, insurance and consumer products companies. We recognize display revenue as impressions are delivered to users interacting with our mobile applications or websites.
Allowance for Doubtful Accounts
We review our accounts receivable on a regular basis and estimate an amount of losses for uncollectible accounts based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. In cases where we become aware of circumstances that may impair a specific customers ability to meet its financial obligations, we record a specific allowance against amounts due from the customer and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. There is significant judgment involved in estimating the allowance for doubtful accounts. As of December 31, 2013, the allowance for doubtful accounts represented approximately 11% of total accounts receivable, or approximately $1.9 million. A change of 1% in our estimate would amount to approximately $0.2 million.
Website and Software Development Costs
The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized in property and equipment and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs (including those costs in the post-implementation stages) are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the websites (or software) that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives.
Capitalized development activities placed in service are amortized over the expected useful lives of those releases, currently estimated at one year. Estimated useful lives of website and software development activities are reviewed frequently and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing functionality.
We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our mobile applications and websites, assess the ongoing value of capitalized assets, or determine the estimated useful lives over which the costs are amortized, the amount of website and software development costs we capitalize and amortize could change in future periods.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired.
We assess goodwill for possible impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we determine that it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary. If we determine that it is
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more likely than not that the fair value of our reporting unit is less than its carrying amount, we perform the two-step goodwill impairment test. The first step of the goodwill impairment test identifies if there is potential goodwill impairment. If step one indicates that an impairment may exist, a second step is performed to measure the amount of the goodwill impairment, if any. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in our statements of operations.
For our impairment assessment performed during the year ended December 31, 2013, we performed a qualitative assessment and determined that it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, and therefore, the first and second steps of the goodwill impairment test were unnecessary. In evaluating whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we considered macroeconomic conditions, industry and market considerations, cost factors, our overall financial performance, other relevant entity-specific events, potential events affecting our reporting unit, and changes in the market price of our common stock. The primary qualitative factors we considered in our analysis for the year ended December 31, 2013 were our overall financial performance, including our revenue growth and positive cash flows, and a market capitalization that is well in excess of the book value of our Class A common stock. We have not recognized any goodwill impairments since our inception.
Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets
We evaluate intangible assets and other long-lived assets for impairment whenever events or circumstances indicate they may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. We group assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. If this comparison indicates impairment, the amount of impairment to be recognized is calculated as the difference between the carrying value and the fair value of the asset group.
Unforeseen events, changes in circumstances and market conditions and material differences in estimates of future cash flows could adversely affect the fair value of our assets and could result in an impairment charge. Fair value can be estimated utilizing a number of techniques including quoted market prices, prices for comparable assets, or other valuation processes involving estimates of cash flows, multiples of earnings or revenues, and we may make various assumptions and estimates when performing our impairment assessments, particularly as it relates to cash flow projections. Cash flow estimates are by their nature subjective, and include assumptions regarding factors such as recent and forecasted operating performance, revenue trends and operating margins. These estimates could also be adversely impacted by changes in federal, state, or local regulations, economic downturns or developments, or other market conditions affecting our industry. We have not recorded any impairment losses since inception.
Share-Based Compensation
We measure compensation expense for all share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest. We use the Black-Scholes-Merton option-pricing model to determine the fair value for option awards and recognize compensation expense on a straight-line basis over the awards vesting period. For restricted stock awards and restricted stock units, we use the market value of Zillows Class A common stock on the date of grant to determine the fair value of the award, and we recognize compensation expense on a straight-line basis over the awards vesting period.
Determining the fair value of option awards at the grant date requires judgment. If any of the assumptions used in the Black-Scholes-Merton model changes significantly, share-based compensation expense for future option awards may differ materially compared with the awards granted previously. In valuing our option awards, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives, including estimated forfeiture rates.
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Risk-free interest rate. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date.
Expected dividend yields. Expected dividend yields are based on our historical dividend payments, which have been zero to date.
Volatility. The expected volatility for our Class A common stock is estimated using a combination of our historical volatility and the published historical volatilities of industry peers in the online publishing market (primarily the financial and real estate services industries) representing the verticals in which we operate.
Expected term. We estimate the weighted-average expected life of the options as the average of the vesting option schedule and the term of the award, since, due to the limited period of time our share-based awards have been exercisable, we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The term of the award is estimated using the simplified method as the awards granted are plain vanilla share options.
Forfeiture rate. We record share-based compensation expense net of estimated forfeitures. Forfeiture rates are estimated using historical actual forfeiture trends as well as our judgment of future forfeitures. These rates are evaluated at least quarterly and any change in compensation expense is recognized in the period of the change. The estimation of option awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which the estimates are revised. We consider many factors when estimating expected forfeitures, including employee class and historical experience. Actual results, and future changes in estimates, may differ substantially from managements current estimates.
We will continue to use judgment in evaluating the expected volatility, expected terms, and forfeiture rates utilized for our share-based compensation expense calculations on a prospective basis. As we continue to accumulate additional data related to our Class A common stock, we may have refinements to the estimates of our expected volatility, expected terms and forfeiture rates, which could materially impact our future share-based compensation expense. In future periods, we expect our share-based compensation expense to increase as a result of our existing, unrecognized share-based compensation that will be recognized as the awards vest, and as we grant additional share-based awards to attract and retain employees.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued guidance on the presentation of certain unrecognized tax benefits in the financial statements. This guidance provides that a liability related to an unrecognized tax benefit must be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This guidance is effective for interim and annual reporting periods beginning after December 15, 2013, with earlier adoption permitted, and may be applied prospectively or retrospectively. We expect to adopt this guidance on January 1, 2014. The adoption of this guidance is not expected to have a significant impact on our financial position, results of operations or cash flows, as we have provided a full valuation allowance against our net deferred tax assets.
In February 2013, the FASB issued guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. An entity must report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This
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guidance is effective for interim and annual reporting periods beginning after December 15, 2012, with earlier adoption permitted, and must be applied prospectively. We adopted this guidance on January 1, 2013. The adoption of this guidance did not have any impact on our financial position, results of operations or cash flows, as we do not have any items of other comprehensive income in any period presented.
In June 2011, the FASB issued guidance on the presentation of comprehensive income to increase the prominence of other comprehensive income in the financial statements. An entity has the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with earlier adoption permitted, and must be applied retrospectively. We adopted this guidance on January 1, 2012. The adoption of this guidance did not have any impact on our financial position, results of operations or cash flows as we do not have any items of other comprehensive income in any period presented, and therefore, we are not required to report other comprehensive income or comprehensive income.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.
Interest Rate Risk
We do not have any long-term borrowings as of December 31, 2013 or 2012.
Under our current investment policy, we invest our excess cash in money market funds, U.S. government agency securities, commercial paper, and corporate notes and bonds. Our current investment policy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting our principal at risk.
Our investments are exposed to market risk due to the fluctuation of prevailing interest rates that may reduce the yield on our investments or their fair value. As our investment portfolio is primarily short-term in nature, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our results of operations or cash flows to be materially affected by a sudden change in market interest rates.
Inflation Risk
We do not believe that inflation has had a material effect on our business, results of operations or financial condition. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, results of operations and financial condition.
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Item 8. Financial Statements and Supplementary Data
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Zillow, Inc.
We have audited the accompanying balance sheets of Zillow, Inc. as of December 31, 2013 and 2012, and the related statements of operations, shareholders equity and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Zillow, Inc. at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zillow, Inc.s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 18, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Seattle, Washington
February 18, 2014
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BALANCE SHEETS
(in thousands, except share data)
December 31, | ||||||||
2013 | 2012 | |||||||
Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 201,760 | $ | 150,040 | ||||
Short-term investments |
93,531 | 44,054 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,850 and $965 at December 31, 2013 and 2012, respectively |
15,234 | 8,655 | ||||||
Prepaid expenses and other current assets |
4,987 | 2,652 | ||||||
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Total current assets |
315,512 | 205,401 | ||||||
Long-term investments |
142,435 | 9,389 | ||||||
Property and equipment, net |
27,408 | 16,948 | ||||||
Goodwill |
93,213 | 54,284 | ||||||
Intangible assets, net |
29,149 | 21,248 | ||||||
Other assets |
346 | 279 | ||||||
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Total assets |
$ | 608,063 | $ | 307,549 | ||||
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Liabilities and shareholders equity |
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Current liabilities: |
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Accounts payable |
$ | 4,724 | $ | 3,158 | ||||
Accrued expenses and other current liabilities |
11,377 | 6,318 | ||||||
Accrued compensation and benefits |
4,440 | 2,514 | ||||||
Deferred revenue |
12,298 | 8,349 | ||||||
Deferred rent, current portion |
546 | 401 | ||||||
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Total current liabilities |
33,385 | 20,740 | ||||||
Deferred rent, net of current portion |
6,882 | 6,492 | ||||||
Commitments and contingencies (Note 13) |
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Shareholders equity: |
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Preferred stock, $0.0001 par value; 30,000,000 shares authorized as of December 31, 2013 and 2012; no shares issued and outstanding as of December 31, 2013 and 2012 |
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Class A common stock, $0.0001 par value; 600,000,000 shares authorized as of December 31, 2013 and 2012; 32,934,074 and 26,414,414 shares issued and outstanding as of December 31, 2013 and 2012, respectively |
3 | 3 | ||||||
Class B common stock, $0.0001 par value; 15,000,000 shares authorized as of December 31, 2013 and 2012; 6,468,892 and 7,462,526 shares issued and outstanding as of December 31, 2013 and 2012, respectively |
1 | 1 | ||||||
Additional paid-in capital |
651,913 | 351,981 | ||||||
Accumulated deficit |
(84,121 | ) | (71,668 | ) | ||||
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Total shareholders equity |
567,796 | 280,317 | ||||||
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Total liabilities and shareholders equity |
$ | 608,063 | $ | 307,549 | ||||
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See accompanying notes to financial statements.
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STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenue |
$ | 197,545 | $ | 116,850 | $ | 66,053 | ||||||
Costs and expenses: |
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Cost of revenue (exclusive of amortization) (1) |
18,810 | 14,043 | 10,575 | |||||||||
Sales and marketing |
108,891 | 49,105 | 25,725 | |||||||||
Technology and development |
48,498 | 26,614 | 14,143 | |||||||||
General and administrative (2) |
38,295 | 21,291 | 14,613 | |||||||||
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Total costs and expenses |
214,494 | 111,053 | 65,056 | |||||||||
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Income (loss) from operations |
(16,949 | ) | 5,797 | 997 | ||||||||
Other income |
385 | 142 | 105 | |||||||||
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Income (loss) before income taxes |
(16,564 | ) | 5,939 | 1,102 | ||||||||
Income tax benefit |
4,111 | | | |||||||||
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Net income (loss) |
$ | (12,453 | ) | $ | 5,939 | $ | 1,102 | |||||
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Net income (loss) attributable to common shareholders |
$ | (12,453 | ) | $ | 5,939 | $ | | |||||
Net income (loss) per share attributable to common shareholdersbasic |
$ | (0.35 | ) | $ | 0.20 | $ | | |||||
Net income (loss) per share attributable to common shareholdersdiluted |
$ | (0.35 | ) | $ | 0.18 | $ | | |||||
Weighted-average shares outstandingbasic |
36,029 | 30,194 | 19,815 | |||||||||
Weighted-average shares outstandingdiluted |
36,029 | 32,709 | 22,305 | |||||||||
(1) Amortization of website development costs and intangible assets included in technology and development |
$ | 19,791 | $ | 11,179 | $ | 5,384 | ||||||
(2) General and administrative includes a facility exit charge as follows: |
$ | | $ | | $ | 1,737 |
See accompanying notes to financial statements.
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STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share data)
Convertible Preferred Stock | Class A Common Stock |
Class B Common Stock |
Class C Common Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Total Shareholders Equity |
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Series A | Series B | Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 |
17,931,034 | $ | 2 | 6,933,103 | $ | 1 | 6,489,660 | $ | 1 | 1,290,602 | $ | | 9,528,313 | $ | 1 | 2,305,980 | $ | | $ | 96,152 | $ | (78,709 | ) | $ | 17,448 | |||||||||||||||||||||||||||||||||||
Issuance of Class A common stock upon exercise of stock options |
| | | | | | 1,169,121 | | | | | | 2,917 | | 2,917 | |||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense |
| | | | | | | | | | | | 2,545 | | 2,545 | |||||||||||||||||||||||||||||||||||||||||||||
Class A common stock issued in connection with an acquisition |
| | | | | | 207,100 | | | | | | 910 | | 910 | |||||||||||||||||||||||||||||||||||||||||||||
Conversion of convertible preferred stock to Class A common stock in connection with initial public offering |
(17,931,034 | ) | (2 | ) | (6,933,103 | ) | (1 | ) | (6,489,660 | ) | (1 | ) | 9,276,190 | 1 | | | | | 3 | | | |||||||||||||||||||||||||||||||||||||||
Conversion of Class C common stock to Class A common stock in connection with initial public offering |
| | | | | | 2,305,980 | | | | (2,305,980 | ) | | | | | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A common stock in connection with initial public offering, net of issuance costs of $8,835 |
| | | | | | 3,981,300 | 1 | | | | | 70,790 | | 70,791 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A common stock in concurrent private placement in connection with initial public offering |
| | | | | | 274,999 | | 5,500 | | 5,500 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted shares of Class A common stock |
| | | | | | 75,000 | | | | | | | | | |||||||||||||||||||||||||||||||||||||||||||||
Net income and total comprehensive income |
| | | | | | | | | | | | | 1,102 | 1,102 | |||||||||||||||||||||||||||||||||||||||||||||
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Convertible Preferred Stock | Class A Common Stock |
Class B Common Stock |
Class C Common Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Total Shareholders Equity |
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Series A | Series B | Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2011 |
| | | | | | 18,580,292 | 2 | 9,528,313 | 1 | | | 178,817 | (77,607 | ) | 101,213 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A common stock upon exercise of stock options |
| | | | | | 1,624,304 | | | | | | 7,448 | | 7,448 | |||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense |
| | | | | | | | | | | | 8,990 | | 8,990 | |||||||||||||||||||||||||||||||||||||||||||||
Conversion of Class B common stock to Class A common stock |
| | | | | | 2,065,787 | | (2,065,787 | ) | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A common stock in connection with public offering, net of issuance costs of $8,601 |
| | | | | | 3,844,818 | 1 | | | | | 156,726 | | 156,727 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted shares of Class A common stock |
| | | | | | 299,213 | | | | | | | | | |||||||||||||||||||||||||||||||||||||||||||||
Net income and total comprehensive income |
| | | | | | | | | | | | | 5,939 | 5,939 | |||||||||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2012 |
| | | | | | 26,414,414 | 3 | 7,462,526 | 1 | | | 351,981 | (71,668 | ) | 280,317 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A common stock upon exercise of stock options |
| | | | | | 2,025,660 | | | | | | 18,350 | | 18,350 | |||||||||||||||||||||||||||||||||||||||||||||
Fair value of stock options assumed in connection with an acquisition |
| | | | | | | | | | | | 430 | | 430 | |||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense |
| | | | | | | | | | | | 27,253 | | 27,253 | |||||||||||||||||||||||||||||||||||||||||||||
Conversion of Class B common stock to Class A common stock |
| | | | | | 993,634 | | (993,634 | ) | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted shares of Class A common stock |
| | | | | | 252,114 | | | | | | | | | |||||||||||||||||||||||||||||||||||||||||||||
Cancellation of restricted shares of Class A common stock |
| | | | | | (5,270 | ) | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A common stock in connection with public offering, net of issuance costs of $12,900 |
| | | | | | 3,253,522 | | | | | | 253,899 | | 253,899 | |||||||||||||||||||||||||||||||||||||||||||||
Net loss and total comprehensive loss |
| | | | | | | | | | | | | (12,453 | ) | (12,453 | ) | |||||||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2013 |
| $ | | | $ | | | $ | | 32,934,074 | $ | 3 | 6,468,892 | $ | 1 | | $ | | $ | 651,913 | $ | (84,121 | ) | $ | 567,796 | |||||||||||||||||||||||||||||||||||
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