Equity Research

Brian Bolan Research

5 December 2011

3Q11 Earnings Update

Company Overview and Key Data
Zillow (Nasdaq: Z)
Share Price: Price Target: 52-Week Range: Shares Outstanding: Market Capitalization: Dividend Yield: $22.06 $30 $21.22- $60.00 32 million $607 million NA

BUY

Zillow (Nasdaq: Z)
Investment Concept
Zillow is a leading Real Estate information site that has a database of 100M US homes of which 29M have user updated information and added 60M photos. Zillow is best known for its Zestimate proprietary estimate of home values. The company also uses its platform to attract the ancillary services that revolve around the real estate market. Zillow provides rent Zestimates, as well as home value Zestimates, in serving the rental market. It provides advertising opportunities for home financing companies and similar opportunities to the home maintenance & improvement industry. Zillow beat Wall Street consensus on the top and bottom lines, posting $19.1M in revenue and a loss of $0.02 in EPS. Non GAAP EPS was $0.15, a full nickel above my aggressive estimate. We reiterate our BUY rating and lowered our price target to $30.

Zillow, Inc. (Zillow) is a real estate information marketplace. The Company provides information about homes, real estate listings and mortgages, through its Website and mobile applications, enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals. The Companys database has more than 100 million United States homes, including homes for sale, homes for rent and homes not currently on the market.

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Brian Bolan 1 773 413 0285

Twitter: @BBolan1 BBolan1@Gmail.com

5 December 2011
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED AT THE END OF THE REPORT. Research as only a single factor in making their investment decision. Investors should consider Brian Bolan

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Zillow (Nasdaq Global Markets: Z)

Inside

Earnings Summary Key Metrics Unique Users Marketplace Revenue Display Revenue Income Statement Marketplace Revenue Premier Agent Subscribers Revenue per Subscriber Display Revenue Unique Users Revenue per Unique User Approximate CPM Rates Cost of Sales Investment Risks Recommendation and Valuation 2Q11 Estimate and Acutual Table Income Statement (Model) Annual Income Statement Valuation table Price Chart Disclosures

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Zillow (Nasdaq Global Markets: Z)

Earnings summary
Zillow reported revenues of $15.8M above our estimate of $14.5M and reported EPS of $0.00 vs. our estimate of a loss of $0.01 per share. Guidance for 3Q11 calls for revenue of between $16M - $17M and EBITDA of approximately 15% of revenue. The decrease in EBITDA comes as the company continues invest in its growth.

Key Metrics
Marketplace revenues of $11.8M was an increase of 21% from the prior quarter and 226% more than the year ago period. Display revenue was $7.2M, an increase of 17.9% from the prior quarter and 57% from the year ago period. Premier Agent Subscriptions increase 11% and ended the quarter at 14,876, 10% below our aggressive estimate of 16,597. Unique Users checked in at 24.2M, below our estimate of 26.5M. We had high expectations due to July 2011 metrics that were previously released. Monthly Revenue per subscription saw a significant increase to $265 from $242 in the prior quarter and $187 in the prior year. There have been 4M request for loan in the Zillow Mortgage Marketplace that have garnered an average of 18 replies per request for consumers.

New Data Points for Silver and Basic Subscribers In the quarter, Zillow initiated a new program for on the AOL and Yahoo real estate pages which allows realtors to purchase advertising for either $79 for a Silver subscription or for $39 for a Basic subscription. Due to these significantly reduced prices, we are encouraged for significant growth in the months and quarters ahead. However, we want to temper much of the enthusiasm in the near term and realtors tend to spend less on marketing in the winter months. Marketplace Revenues. Marketplace revenues consist of subscriptions sold to real estate agents under the Premier Agent program and CPC advertising related to the Zillow Mortgage Marketplace sold to mortgage lenders. Marketplace revenues of $11.8M were below our estimate of $12.5M, representing 21% increase from the prior quarter and 226% more than the year ago period. These growth rates have been interpreted as a deceleration of growth. Marketplace revenues are driven mostly through premier agents subscriptions. Display Revenues Display revenues primarily consist of graphical web and mobile 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. Display revenues were $7.2M, below our estimate of $8.6M. This represents 17.9% growth from the previous quarter and 56% ahead of year ago levels. The quarterly growth rate showed signs of deceleration, but the year over year number show acceleration.

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Zillow (Nasdaq Global Markets: Z)

Conference Call Notes The Company ended the quarter with $96M in cash and zero debt. Shares outstanding guidance was set at 32M shares for 4Q and 23M for 2011. Consumers looked at houses on Zillow 2.4M times a day in the previous month.

Income Statement Without having had a significant discussion with management on how to think about modelling the company out, we adopted a use everything approach to come to our estimates Our estimates are based on a number of moveable parts in the Zillow model, including but not limited to: 1) Marketplace revenue 2) number of agent subscribers 3) revenue per subscriber 4) Display Revenues 5) Unique users 6) revenue per unique user and 7) Approximate CPM rates. We have limited data on other important data points such as mobile pageviews and mortgage loan requests and hope to incorporate those into our projections in the future

Changes to our model Following the 3Q11 conference call, we have adjusted our model for Zillow to reflect less aggressive estimates going forward. After individual research calls with several real estate agents, we believe that 4Q and 1Q will likely be the softer than 2Q and 3Q. This seasonal pattern may not fully present itself until 2013, as Zillow is still quite a young company. We have moderated premier subscriber growth expectations to 5% in 4Q and 7%in 1Q12. With a slight increase of 12% for 2Q and 3Q in 2012 are still likely to be enough to provide growth of 75% from the expected 120% growth that is projected for 2011.

Insider Sales The normal 6 month lock up on insiders was removed when Zillow traded 20% above the IPO price of $20 for a specific period of time. This clause was written into the S-1, so it should not be a surprise. However, the timing of the sales and the amounts have caught several investors off guard. We note that the documentation for the sales by CEO Spencer Rascoff did not clearly reflect the percentage of his holdings that were sold. The filing noted that prior to the sale of approximately 100K shares, there were ~200K held so it appeared to many that a 50% sale by the CEO had taken place. This was, and maybe still is a red flag to some investors that did not do any further due diligence. I contacted Zillow and learned that the sale represents less than 10% of total holdings of vested and non-vested stock and options. That said, the CEO selling on the first day at such a low price may given certain investors the idea that a type
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Zillow (Nasdaq Global Markets: Z)

of cap or ceiling has been set. Other insider sell from technology companies have resulted in perception barriers that may stagnate stock performance. Other sales from the CMO, CFO and CRO (table below) show a fairly sizeable amount of early selling. We do not begrudge long term employees of Zillow from taking some risk off the table, but insider sales, prior to the standard 6 month lock up certainly do not help perceptions

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Zillow (Nasdaq Global Markets: Z)

Diverse Solutions acquisition In the quarter, Zillow acquired Diverse Solutions for $7.8M in stock and cash. Diverse Solutions has more than 6,000 unique customers, consisting primarily of local real estate agents, and 18 employees. Diverse Solutions' software services include providing listings content and property search for the Web. Diverse Solutions provides mapping solutions to real estate agents that have their own website or use a WordPress blog to reach clients. This add on to Zillow allows agents to plus in MLS search capabilities for customers. This added touch point for 6,000 agents will not likely overlap many of the premier agents, as we believe there are very few agents that operate their own website. Aside from some new customer touch points (at far lower monthly ASPs) Diverse Solutions adds some technology to the Zillow.com umbrella including a syndication of the walkscore.com.

Revenue is generated monthly, with IDX search solutions being priced at $99.95 per month for website integration or $29.95 for WordPress blog add on. Email Marketing services are priced at either $19.95 or $29.95 a month.

We modelled in a revenue boost of approximately $500,000 for the first quarter of 2011. The impact of Diverse Solutions in 4Q will be nearly immaterial.

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Zillow (Nasdaq Global Markets: Z)

AOL .

The Aol real estate site has a slightly different feel to it, more a straight list for people that find themselves on that site. Zillows Mortgage Marketplace can be utilized from this site. Since Marketplace revenues are still predominantly Premier Subscriptions, we are not adding in any affect until that line item get broken out in more detail.

Marketplace Revenue Our Marketplace Revenue estimates are based on the number of Premier subscriptions and the ASP for each. We have dialled down our expectations for both subscriptions and ASP, but over the course of the next year, significant growth can still be expected.

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Zillow (Nasdaq Global Markets: Z)

Premier Agent Subscribers The Premier Agent Subscribers metric is a key metric that can give insight into how professionals in the industry view the value of Zillow. Coming in 10% below our estimate, we have right sized

Revenue per Subscriber (RPS) RPS saw a healthy increase in the quarter. We are maintaining our cautious approach to future increases. The tone of the call indicated that we should expect RPS on a monthly basis to continue to increase for the foreseeable future.

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Zillow (Nasdaq Global Markets: Z)

Display Revenue Display revenue is based off a combination of Unique users, an estimated pageviews per visit estimate and a CPM estimate. Our model saw an increase in the estimated number of pageviews per user for the next 12 months. This results in significantly higher revenue estimates. At the same time, we lowered our CPM estimates to attempt to even out the affect.

Unique users

Revenue per Unique users

Approximate CPM rates

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Zillow (Nasdaq Global Markets: Z)

Cost of Sales Without much in the way of guidance from management, we are calling for an continuation of the gross margin that was seen in the last two quarters. While we believe there is room for margin expansion, we believe that over the next several quarters that gross margin has a better chance of disappointing than reaching new highs.

Competition Real estate website Trulia said on Thursday (12/1/11) it has hired veteran finance executive and deal-maker Sean Aggarwal from eBay Incs PayPal to help manage its business. Aggarwal will join as the companys CFO. Trulia is backed by venture capital firms Accel Partners and Sequoia Capital.

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Zillow (Nasdaq Global Markets: Z)

Investment Risks
If the company experiences any or all of the following risk factors, as well as others, the companys stock price may be affected. Several macro-economic indicators could damage the broader industry. The real estate industry is subject to several macro indicators that could serve to diminish demand. Prolonged high rates of unemployment, increases in inventory and lack of liquidity in the market may keep some consumers out of the market. A better advertising platform is developed for the real estate market. Competition can be found all over the web, Tulia, Realtor.com and RedFin are among the strongest in the space. Another website that incorporates more completely with MLS could prove to be a formidable competitor. Prolonged Value Erosion is keeping many market participants on the sidelines. With home values falling on a consistent basis since 2007, there are many participants waiting for the broader market to recover before they re-enter the market. . Zillow must also add new streams of revenue. The company has two segments that drive revenue, the marketplace and subscription business. The addition of vacation home rentals or other ancillary businesses in the real estate industry Loss of key management. The loss of either co-founder or the CEO would be harmful to the stock. The companys leadership has done well in the short life of the company, any loss would be a negative for shareholders. One major shareholder could sell. One of the positives of the tight float and small number of shares outstanding is that supply tends to be smaller than demand. The same thing can happen when a seller wants to shed shares to buyers in a market is not looking to bid up the stock. Update speeds need to increase. In speaking with several realtors who use the site daily, their lone complaint tended to be the speed of the updates. When a listing is removed or repriced, the sellers and agents believe that the changes need to be more instantaneous than the potential 48 hour potential wait that is currently the norm. Recommendation and Valuation With the uncertainty revolving around the insider sales, the dilution affect from the increased shares and the purchase of Diverse Solutions, we are lowering our target price to $30 from $34. We derive our target price of $30 using a multiple of our 2012 earnings estimate of $0.25. Our 4Q11 earnings are calling for increased expenses and a bigger loss of GAAP EPS to a loss of $0.03 per share. Our recommendation remains a BUY, as we believe that there are several catalysts that will drive growth over the next twelve months. Mobile usage represents at least 50% of all views of Zillow.com, and we believe that tablets will be large sellers this holiday season. As the economy begins to recover, we believe that interest in the housing market will increase which will aid Zillows customers (real estate agents) and in turn Zillow itself.

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Zillow (Nasdaq Global Markets: Z)

Appendix

Zillow 3Q11 Earnings Results

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Zillow (Nasdaq Global Markets: Z)

Zillow 2Q11 Earnings Results

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Zillow (Nasdaq Global Markets: Z)

Zillow Income Statement Forecast

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Zillow (Nasdaq Global Markets: Z)

Annual Income Statement

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Zillow (Nasdaq Global Markets: Z)

Zillow (Nasdaq GM: Z) Historical Price Chart Initiated on 8/10/11 BUY Price Target $34 Target Lowered on 12/5/11 BUY Price Target $30

Source: Finviz.com

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Brian Bolan Research Important disclosures:

Zillow (Nasdaq Global Markets Z)

Analyst Certification:
The following analysts hereby certify that their views about the companies and securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Brian Bolan. As of the date of this report, the analyst has no financial interest in any companies mentioned in this report.

Ratings:
Buy: The stocks total return is expected to exceed 15% over the next 6-12 months. Hold: The stock is expected to have a positive return of less than 15% over the next 6-12 months. Sell: The stock is expected to have a negative return over the next 6-12 months.

Disclosures:
None

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