Raymond Jones - Zillow Group, Inc. Spencer M. Rascoff - Zillow Group, Inc. Kathleen Philips - Zillow Group, Inc..

Mark Mahaney - RBC Capital Markets LLC Nat H. Schindler - Bank of America - Merrill Lynch Robert S. Peck - SunTrust Robinson Humphrey, Inc. Ronald V. Josey - JMP Securities LLC Heath Terry - Goldman Sachs & Co. Kevin Liu - Morgan Stanley & Co. LLC Michael Patrick Graham - Canaccord Genuity, Inc. Aaron M. Kessler - Raymond James & Associates, Inc.

Lloyd Walmsley - Deutsche Bank Securities, Inc. John Campbell - Stephens, Inc. Kerry Rice - Needham & Co. LLC Mark A. May - Citigroup Global Markets, Inc. (Broker) Tom White - Macquarie Capital (USA), Inc..

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Zillow Group Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we'll host the question-and-answer session and our instructions will follow at that time.

As a reminder to our audience, this conference is being recorded. It is now my pleasure to hand the conference over to Mr. RJ Jones, Vice President of Investor Relations. Sir, the floor is yours..

Thank you. Good afternoon, and welcome to Zillow Group's third quarter 2016 earnings conference call. Joining me today to talk about our results are Spencer Rascoff, Chief Executive Officer; and Kathleen Philips, Chief Financial Officer. During the call, we will make forward-looking statements regarding future financial performance and events.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we can't guarantee these results. We caution you to consider the risk factors described in our SEC filings, which could cause actual results to differ materially from those in the forward-looking statements made on this call.

The date of this call is November 1, 2016, and forward-looking statements made today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. During the call, we will discuss GAAP and non-GAAP measures.

We encourage you to read our earnings press release, as it contains important information about our reported and non-GAAP results, including reconciliation of non-GAAP financial measures.

In our remarks, the non-GAAP financial measure adjusted EBITDA is referred to as EBITDA, which excludes other income, depreciation and amortization expense, share-based compensation expense, acquisition-related costs, restructuring costs, the gain or loss on divestiture of businesses, interest expense and income tax benefits.

This call is being broadcast on the Internet and is available on the Investor Relations section of the Zillow Group website, along with our earnings press release. A copy of management's prepared remarks has already been posted to the quarterly results section of our Investor Relation's website. A recording of the call will be available later today.

Today, we will open the call with prepared remarks. We will follow prepared remarks with live Q&A. In addition to taking questions from those dialed into the call, we will answer questions asked via Twitter. Individuals may submit questions by tweeting @ZillowGroup using the #ZEarnings. I'll now turn the call over to Spencer..

Thank you for joining the call today to discuss our third quarter 2016 financial results. Zillow Group delivered strong third quarter results that exceeded our expectations, and that demonstrated progress in executing our strategic priorities.

Total revenue for the quarter grew 35% year-over-year to a record of approximately $225 million and exceeded the high end of our guidance range.

The increase in revenue was driven by strong contributions from each of our marketplaces, but primarily from the Premier Agent business, which grew revenue 33% year-over-year to more than $158 million, also ahead of our outlook.

On the bottom line, GAAP net income was $6.8 million, or 3% of revenue, and third quarter EBITDA was $59.5 million, or 26% of revenue. Our profitability this quarter was well ahead of our expectations and an exception to our typical cadence of steady year-over-year margin expansion.

The outperformance in profitability was primarily driven by strong revenue results and operating expense savings, which Kathleen will discuss in a moment. As we entered the second half of 2016, we continued to gain momentum from the first two quarters.

Total revenue growth has accelerated across our business throughout the year, and all of our marketplaces are performing strongly. With just one quarter left in 2016, we are on track to deliver full-year revenue growth of better than 30% year-over-year. We are excited to finish 2016 strong, with a continued focus on our four strategic priorities.

Number one, growing our audience size; number 2, growing our Premier Agent business; number 3, growing our emerging marketplaces; and 4, attracting and retaining the best talent in the technology, media and real estate industries. We're making great progress against each of these strategic priorities.

Our audience across all of Zillow Group's mobile applications and websites continues to grow in an expanding category. Zillow Group's market share remains substantial as our traffic lead persisted.

According to comScore, all five of Zillow Group's consumer brands combined represented nearly two-thirds of the total online real estate category in September, and nearly three-quarters of the category on mobile only.

Average monthly unique users for the quarter grew 16% year-over-year to more than 164 million, reaching a seasonal high point in July with nearly 170 million unique users.

Traffic to the Zillow Group mobile apps and website hit a new record high, while traffic – sorry, traffic to the Zillow mobile apps and website hit a new record high, while traffic to the Zillow – to the Trulia mobile apps and website grew steadily year-over-year and contributed meaningfully to Zillow Group's overall audience leadership.

We're able to achieve these impressive audience numbers by building great products that consumers love, and then effectively marketing our brands through earned and paid media. This growth is a testament to our product, engineering and marketing teams' excellence. Turning to our Premier Agent marketplace, revenue grew 33% year-over-year.

The nation's best real estate agents, those who convert leads at high rates, are gaining transaction share in their respective markets as a result of advertising on Zillow Group's platform. Our Premier Agent program provides our advertisers with a tremendous opportunity to grow their business in the form of high quality leads connected with software.

During the third quarter, we delivered 4.6 million leads to Premier Agent advertisers across our brands' mobile apps and websites. This was an increase of nearly 40% year-over-year.

As a reminder, the growth rate of leads is expected to normalize in 2017 when we begin comparisons to greater lead volume resulting from Trulia's traffic improvement in early 2016. That said, we expect the growth rate in leads will continue to be greater than the growth rate of unique users in the near term.

We recently announced the launch of exciting new features to our Premier Agent platform that will drive even more leads to our advertisers. In October, we launched our Seller Boost program, which is an ad product that connects Premier Agents with prospective home-sellers from Zillow and Trulia.

Additionally, we launched the Premier Agent Direct program, which promotes our Premier Agent advertisers on Facebook. Buying ads on Facebook using Zillow Group's precision targeting allows real estate agents, teams or brokerages to expand the audience to whom they advertise through our simple platform.

Meanwhile, we continue to invest heavily in our Premier Agent app, adding important functionality for our advertisers with the goal of improving their lead conversion. Recent features include better lead routing and lead ingestion from other lead sources.

The free Premier Agent app is rapidly becoming a full-featured business management platform which can handle all of an agent's, team's, or broker's workflow. We've also started to rollout our self-serve account interface to Premier Agents nationally, with the goal of completing the rollout by the end of the year.

After testing, and based on feedback and data from our advertisers, we now provide account management tools that enable our advertisers to independently control their budgets and impression buys. This flexibility and control strengthens our partnership with Premier Agents and facilitates their growth on our platform.

This transition introduces some uncertainty in the near-term in regard to Premier Agent revenue, and we've incorporated sensitivity for this into our outlook for Q4. We recently modified and extended our Premier Agent program to accommodate brokers' needs.

The Premier Broker program allows brokers to purchase impressions and route leads to agents at their firms. We provide brokers with the tool to monitor performance of their agents through our Premier Agent app platform to ensure that leads are responded to within a reasonable timeframe.

Including brokerages as Premier advertisers brings additional advertiser liquidity into our marketplace, provides consumers with better service, and improves our overall partnership with the brokerage community. Turning now to our third strategic priority, growing our emerging marketplaces, including rentals, mortgages and New York City.

We've been very successful here, and each of these emerging marketplaces is growing even faster than our core Premier Agent business. These newer marketplaces together will bring in annual revenue this year that's nearly three times larger than all of Zillow at our IPO five years ago.

Our Mortgages marketplace once again performed very well in the quarter. Revenue grew 57% year-over-year and we're on track to exceed $70 million for the full year. In the third quarter, we completely overhauled the lender directory and the Mortgages ratings and review platform.

Enterprises and individual loan officers now have more flexibility in managing the presentation of their profiles with consumer feedback on our mobile apps and websites, which is a big win for consumers and for our lender partners. Our Rentals marketplace once again experienced year-over-year revenue growth greater than 100% in the third quarter.

According to comScore, the Zillow Group brands of Zillow, Trulia and HotPads are now three of the top four brands in the rental category. In addition to Premier Agent Direct, we launched a similar partnership with Facebook for rentals, which enables our multi-family advertisers to buy Facebook ads through us, using our precision targeting.

Our New York City marketplace continues to grow rapidly across both of our New York brands; StreetEasy and Naked Apartments. These platforms provide New York home shoppers and their real estate agents with accurate for-sale and for-rent listings from thousands of landlords and real estate brokerages throughout New York.

StreetEasy is testing a new lead product for open rentals, which are apartments marketed by multiple agents. Representing the first integration between the StreetEasy and Naked Apartments teams, this product brings new inventory on to StreetEasy, creating a more comprehensive search experience of available New York apartments.

It also helps agents connect with StreetEasy's unparalleled audience of New York renters. Both brands continue to generate significant PR in New York City, with StreetEasy positioned as the media's primary resource for New York real estate information.

Our fourth strategic priority which is crucial to the success of everything we do here at Zillow Group is attracting and retaining the best talent while maintaining our unique company culture focused on innovation. Our people and culture are key competitive advantages.

We strongly believe that great people build great products, which in turn attract audience. We dedicate significant resources and focus at Zillow Group toward creating a culture and an environment in which our more than 2,600 employees can do their best work.

I'm thrilled to say that Zillow Group employees continue to positively rate their experience working here in our regular anonymous surveys. In addition, I'm proud to report that Trulia employee reviews on Glassdoor are now at their highest level since the merger with Zillow, highlighting a successful integration.

This positive feedback supports our efforts in attracting the best talent to Zillow Group so we can continue innovating in the online real estate media space. I'd like to extend my sincere thanks to all of Zillow Group's hardworking employees for contributing to our ongoing success.

Now, turning to our outlook for the year, we are raising our full-year 2016 revenue outlook to $837 million to $842 million and our EBITDA outlook range to $136 million to $141 million, excluding litigation settlement charge from last quarter.

We are in growth mode and focused on our long-term strategy to drive audience and revenue growth along with steady margin expansion. Our long-term target of more than 40% EBITDA margin at scale remains intact.

As we approach 2017, we remain focused on growing our audience across all Zillow Group brands and delivering more high-quality leads to advertisers. To do this, we are investing heavily in our products, tools like dotloop and our Premier Agent app, to improve lead conversion and improve the efficiency of Premier Agents.

As part of our disciplined approach to growth through investment, we'll continue to deliver steady margin expansion over time. We'll discuss our 2017 outlook further when we finalize our annual plan and report our full year 2016 results next year.

Agents and homebuilders are spending nearly $11 billion annually on advertising, and the portion of that dedicated to online and mobile advertising increases each year. In addition, our emerging marketplaces; Mortgages, Rentals and New York City, represent several billion more in online advertising spending that we've just begun to address.

With that in mind, we're very excited about the future for Zillow Group. I'll now turn it over to Kathleen..

Thank you, Spencer, and hello to everyone joining us on today's call. Let's dive into our financial results. Total revenue for the third quarter increased 27% year-over-year to a record of $224.6 million from $176.8 million in the same period last year.

Excluding Market Leader from last year's results, which was divested in the third quarter of 2015, total revenue increased 35% year-over-year. Looking at our primary revenue category, Marketplace revenue was $206.9 million for the third quarter, an increase of 35% year-over-year.

Excluding Market Leader from last year's results, Marketplace revenue increased 45% year-over-year. Marketplace revenue now accounts for 92% of our total revenue as compared to 87% during the same period last year. As a reminder, our Marketplace category includes Premier Agent, Other Real Estate and Mortgages revenue.

Zillow Group Premier Agent revenue increased 33% year-over-year to a record $158.3 million in the third quarter. The annualized run rate for our agent advertising marketplace reached $626 million at the end of the quarter compared to $468 million at the same time last year.

We ended the quarter with 89,147 agent advertisers, a modest and expected decline from the end of the second quarter of 2016. For the third quarter of 2016, average revenue per advertiser, or ARPA, was $585, increasing 46% year-over-year. As a reminder, we will no longer report on the number of agent advertisers and ARPA beginning in 2017.

Revenue from same agent advertisers, or those who have been on our platform for more than one year, grew by more than 59% compared to the prior year. New sales to existing advertisers made up 71% of total bookings in the third quarter.

Year-over-year growth of the agent advertiser cohort that spends more than $5,000 per month was 80% on a total dollar basis, and 79% in advertiser count. Churn in this cohort continues to be minimal. We continue to support more agent teams and independent brokers who buy advertising at much higher levels than the average.

We are accelerating the broader trend across the real estate agent population of higher producing agents gaining market share from those who are less productive. Third quarter revenue for our Other Real Estate subcategory grew 182% year-over-year to $28.8 million.

Other Real Estate revenue includes agent services, dotloop, StreetEasy, Naked Apartments, rentals and other offerings to our endemic advertisers that are not traditional display advertising. Moving now to our Mortgages marketplace, our revenue reached $19.8 million in the quarter, which represents a 57% increase year-over-year.

Average revenue per loan information request increased 191% year-over-year. Our strategic decision to improve the quality of loan information requests during the first quarter of 2016 by asking consumers to provide more details before a request is sent to a lender resulted in a 46% decrease of such requests year-over-year.

We view this as a continuing positive trend, and these changes have increased consumer and advertiser adoption of mortgage advertising products that yield higher revenue. In our Display category, revenue was $17.7 million, a decrease of approximately 25% over the same period last year, and within our expectations.

Our intentional shift from traditional display advertising revenue continues, as we focus on providing consumers with personalized experiences that lead to valuable connections for our marketplace advertisers. Moving now from revenue to our expenses. Total operating expenses were $216.8 million in the third quarter.

Taking a closer look at our operating expenses by line item, our cost of revenue during the quarter was $18.3 million, or 8% of revenue. Sales and marketing expense was $92.8 million, or 41% of revenue.

We continue to make strategic and opportunistic investments in advertising, which support the expansion of our audience leadership in the online real estate category. Technology and development costs in the third quarter were $69.2 million, or 31% of revenue.

General and administrative costs in the third quarter were $37.7 million, or 17% of revenue, and lower than we had planned. Moving on to our bottom line, GAAP net income reached a record $6.8 million, or 3% of revenue. GAAP basic and diluted earnings per share was $0.04.

Our EBITDA for the quarter was $59.5 million, or 26% of revenue, well above guidance due to revenue outperformance and operating expense savings throughout the company. Zillow Group ended the third quarter with more than 2,600 employees and approximately $445 million in cash and investments.

Now turning to our outlook for the fourth quarter and full year 2016. I encourage you to review our press release that was issued this afternoon. It is available on our Investor Relations website and includes detailed fourth quarter and full year 2016 guidance and related GAAP reconciliations.

Fourth quarter 2016 total revenue is expected to be in the range of $218 million to $223 million. Premier Agent revenue in the fourth quarter is expected to be in the range of $161 million to $163 million. Display revenue is expected to be in the range of $14 million to $15 million.

EBITDA in the fourth quarter is expected to be in the range of $46 million to $51 million. For the full year 2016, we are raising our total revenue outlook to a range of $837 million to $842 million, and our Premier Agent revenue outlook to a range of $601 million to $603 million.

We also are raising our Display revenue outlook to a range of $66 million to $67 million. EBITDA for the full year 2016 is expected to be in the range of $136 million to $141 million. For illustrative purposes, this EBITDA outlook range excludes the impact of our $130 million June litigation settlement.

Our third quarter performance was excellent, and we beat all expectations for the quarter, including our own. We expect to end the year strong and will enter 2017 in an outstanding position to continue growing our business and audience share.

Even with all of the progress we have made establishing Zillow Group as the leader in the online real estate category, there is still much opportunity ahead. With that, we will now open up the call for questions..

Thank you. Our first question comes from the line of Mark Mahaney with RBC Capital. Your question, please..

Okay. Thanks, it's Mark Mahaney. In terms of the guidance for the fourth quarter. It looks like it's pretty much similar to what you just – what you had implied in the annual guidance before.

Now, you obviously had some nice outperformance this quarter; and Spencer, in the opening remarks, you talk about this a little bit of, I'm sorry, this sensitivity in the outlook related to this change in the – in some of the management tools.

Could you just go through those? Is that why you want to be a little bit more cautious to not flow through some of the upside you cede in the third quarter into the fourth quarter? How material could the variance be due to these new account management tools? Thank you..

Sure. Yeah, I mean, we've been testing different interface for the purchase of our ad products both what agents used to buy advertising, as well as what our sales people use, which gives the advertiser more control and more visibility into what they're buying.

And we've rolled out to about a quarter of the country up till now and we've learned a lot along the way.

And we've incorporated those learnings and as we roll it out to the remaining three-quarters of the country over the next couple weeks between now and the end of year, there's always uncertainty, whenever you – whenever you make wholesale changes like that to our biggest revenue line.

And so, we've incorporated that amount of uncertainty into Q4 numbers. So, that's what that's in regards to, Mark..

Okay. And, Spencer, if I could. In the quarter that you've seen it rolled out too so far. I assume that you're essentially giving your customers kind of more control over their spend, is that – I would assume this is something that they would want to have, so is that something you see as being possibly embraced by the first 25%.

You just want to be unknown or careful about the next 75%?.

Yeah. That was a good characterization of it. We've made – we started testing this new interface and this new – the new advertising visibility almost a year ago in just a couple of cities. And then we made some changes along the way. We rolled it out to a region, to a second region, and now it's up in about a quarter of the country.

The results have been good so far, but we want to be cautious and circumspect as we roll it out to the remaining – the remainder of the country because there's always – you always introduce risk when you make changes like this, but thus far we've been pleased, and obviously that's why we're continuing to roll it out nationwide..

Thank you, Spencer..

Sure. Next question please operator..

Our next question comes from the line of Nat Schindler with Bank of America Merrill Lynch. Your questions please..

Yes. Hi. Thank you for taking my question. I'm actually interested in your Mortgage business. Some of your competitors who are more focused on the refi space got affected by Brexit causing banks to see a sudden drop in rates and people basically walking in the door, thus less demand for their leads.

Is this affect the purchase space as much for you guys and do you think your results were in any way impacted?.

We have not seen an impact from Brexit on our mortgage business.

Low rates overall improve traffic and contacts in our Mortgage business for a refi request, but we're mostly focused on purchase request, which really are not rate sensitive, so by far the biggest driver of our Mortgage business is traffic, and purchase loan requests as a result of home shopper activity.

So, in that regard, we're quite different from other online lead-generation businesses in the Mortgage space, which primarily rely in low rates to generate refi business.

In our case, Zillow Group Mortgages is attached of course to two of the largest real estate search portals Trulia and Zillow and so most of our business is purchased, and therefore not affected by rate changes or by things like Brexit. I'm sorry. Go ahead, Nat..

Oh, I was just going to say that leads into a next question, and it actually relates on traffic. Obviously, traffic grows every part of your business, but you are just seeing for the first time a sequential decline in Q3.

Is this the – a normal seasonality that we should expect to build on going forward with Q2 being a much bigger spike than it has been in the past and then Q3 falling off, going down to Q4 and then back up again as you come through the year?.

Yeah. This is normal seasonality in the online real estate space, every company in the category has quarter-over-quarter declines as you go into Q3 and Q4. Home shopping slows down between really Thanksgiving and Super Bowl, and so traffic tends to decline in Q3, Q4, and then spikes back up in Q1.

So, our year-over-year numbers for traffic is what you really have to look at. And there unique users are growing very quickly, 16% – approximately 16%. And then of course even more importantly, leads to Premier Agents is growing around 40%.

And as I explained in the script that we aspire for lead growth to exceed unique user growth, but 40%-plus year-over-year lead growth is unsustainable, we're lapping easier comps, and as we start to lap harder comps from Trulia's traffic improvements, the year-over-year lead growth will slow somewhat, but it should still be faster than traffic.

In the case of Mortgages, which started your thread, of course, Mortgages is driven not just by traffic growth, but by prominence on our site and awareness among our home shoppers that they can get a mortgage or purchase mortgage from Trulia or Zillow.

And so, we have sort of, yet another kicker, yet another lever in our Mortgages business, which is simply raising awareness among our existing users about our Mortgages product. And that's one of the reasons why Mortgages revenue historically has grown even faster than traffic or Premier Agent leads.

Operator, I think, we'll go to the next question, please..

Thank you. Our next question comes from the line of Robert Peck with SunTrust. Your questions, please..

Yeah. Thank you, Spencer. Just want to clarify those comments on the last question there. As we think about 2017 and more of a normalized growth, you stated that leads should grow greater than user growth, which I believe is in the mid-teens this quarter, 15%, 16%.

So, as we think about the revenue per leads and then the growth of leads to drive Premier Agent revenue in 2017, how should we think about that? Is that something that's shaking out to around 20% or so? Or what are the puts and takes we should consider as we think about a normalized growth in Premier Agent revenue for 2017? Thanks..

Well, Robert, there are a couple of different metrics here all sort of working in concert. There's unique user growth, there is lead growth, and then there is Premier Agent revenue growth, which drops out the bottom. And in between those two, there is effectively an implied cost per lead, which we don't sell on a cost per lead basis.

We sell on a cost per impression basis. But if you're trying to model that Premier Agent revenue funnel, you have to think about cost per lead in between lead volume and Premier Agent revenue. What we've tried to do for investors to provide visibility in all this, is give revenue guidance on the Premier Agent line item in total.

Because there are a lot of moving pieces, and I realize it's hard from the outside looking in to understand how these different metrics work in tandem with one another.

As Kathleen mentioned, we're still working on determining what the right metrics are going into 2017 as we phase out advertiser count and average revenue per advertiser, which we think are not great metrics and aren't really indicative of understanding the business results. So, look for more visibility on that in next quarter's call..

Thank you..

I think we'll do one or two from Twitter now. Neil Doshi asks, what are our efforts to improve lead conversion for agents and are there promising product changes with respect to lead conversions? So, this is obviously a significant area of focus of ours.

Even back to the last question, where I was just discussing the impact of lead growth and its impact on Premier Agent revenue, implied there is a lead conversion rate, so what portion of these leads actually become commission checks and we want that to be as high as possible to drive greater purchase of Premier Agent impressions.

So, the first and probably the most successful thing that we've done to improve lead conversion have been to reduce the number of Premier Agent advertisers.

And, this is something that has been ongoing over the last two years, where we've been focusing on upleveling our Premier Agents and by extension upleveling the real estate industry overall, focusing on great agents. And, as I've mentioned, great agents are gaining share from hobbyists and Zillow Group is a big contributor to that.

So, getting more of our leads in the hands of agents that already perform high lead conversion is the single best thing we can do to improve our overall lead conversion. The other significant initiative has been around the improvements to our Premier Agent app.

And, in that regard, we announced last week at our Premier Agent summit in Las Vegas to 1,500 advertisers some significant improvements to our Premier Agent app including ingestion of leads from third-party websites.

So, no longer is our Premier Agent app just a great way to manage your Trulia or Zillow leads, it's also a great way to manage leads from other sources.

That has the benefit of turning the Premier Agent app into a much more full-featured CRM and to the extent that agents use that more often then they're going to do a better job converting the Trulia and Zillow leads that reside in the Premier Agent app. In 2017, we'll be doing a tighter integration of dotloop into the Premier Agent app.

That also will improve efficiency and improve lead conversion. And then finally, I will just mention training and local events including last week's event for example in Las Vegas.

Those are great sessions which impact lead conversion as we run clinics on lead conversion and agents train one another on how to make the most of their Zillow Group advertising and all of that drives into lead conversion. Operator, we'll take the next question from the call please, and then I'll go back to Twitter in a bit..

Thank you. Our next question comes from the line of Ron Josey with JMP Securities.

Your questions please?.

Great. Thanks for taking the questions. Spencer, I wanted to maybe circle back on Mark's question early on self-service and another one on the Premier Agent losses. So, in self-service, understanding the uncertainty.

I was just wondering if it's fair to compare at all this model change that you're seeing and that what you've seen in the quarter of the country, any comparison to when you all switched from share-of-voice to impressions, I think, was in 4Q 2012.

And then from the 2K, it looks like there's about 2,000 Premier Agents that were churned off this quarter, and that's different from the stabilizing trends we've seen recently.

I know, you said Kathleen, it was an expected decline, but are there certain agents that are getting priced out by higher producing agents, which I guess Spencer, you just said, but specifically I'd point to accelerating growth, the number of agents spending $5,000 or more, that was pretty interesting.

But, is there anything else going on that's driving that higher churn? Thanks..

So, on what's driving the – well, let's see. I mean, the bigger question here....

Lot of questions..

Yeah. I'm trying to answer the second one first.

I'd say that the biggest change has been increasing teams, buying impressions, which creates the appearance of fewer advertisers, because a single agent is supporting multiple advertisers, yet another reason why we don't love advertiser count as a metric, because it can be a little bit misleading in that regard.

But, if not – you said something that I would sort of push back on a little bit. You said, some types of agents getting priced out. That's not really how I would describe it.

It's more a matter of hobbyists who were part-time real estate agents spending a couple hundred dollars a month with us, those agents that just don't – if you're still spending couple hundred dollars a month, over the last couple of years, you're probably not converting our leads at a high rate.

Because, if you were, you'd be spending a couple thousand dollars a month by now, you'd have reinvested those earnings back into the ad product. And so, we've been systematically taking those impressions back and selling them to agents who spend more and have higher lead conversion.

In terms of trying to compare our switch to the self-serve ad product as compared with the switch from share-of-voice to fixed price, I would say that in terms of complexity and just difference, it's pretty comparable. But I would say that we've done this change much more slowly.

Therefore, I feel personally that there is less risk associated with what remains in front of us as compared with when we a couple years ago made the switch from share-of-voice to fixed price.

So, it's similar in terms of the amount of change, but we're already through a lot of the risk, not all the risk but a lot of the risk, from having spent so much time testing this over the course of 2016..

And are there any potential metrics you could share that give you that certainty? And then I'll go back in the queue after that..

I mean, we looked at hundreds of them on the agents that we've migrated, so – or in the regions that we migrated.

So, up-sell percentage, churn, agent retention, purchase levels by cohort, CPM over – CPM by ZIP, I mean, we're looking at all of these things, and we've made changes along the way as we've been rolling this out as I say to about a quarter of the country now.

So, I don't think we're sharing any of the answers to those metrics, but we have been looking at a lot of them along the way.

The next question is from Twitter, somebody asks color on rentals, traffic and leads, and whether you're taking share from Craigslist in certain markets? I'll say that at our multifamily forum couple weeks ago where we had couple hundred clients from the apartment rental industry, there was a lot of discussion about Craigslist, but only to the extent that multifamily executives were basically agreeing with one another that its days are numbered, that there seems to be a growing consensus on the part of multifamily industry that there's now sufficient renter market share on Zillow Group's brands and other online brands, such that the network effect that Craigslist has always had is eroding.

And I heard that consistently from our multi-family partners. So, very hard to get data on that. But we talked with lots of buildings – or lots of property managers who say they're just not posting to Craigslist anymore because they can get enough leads from Zillow Group and others. And I think we'll go back to the call now, operator.

And then there are a couple more on Twitter which I'll hit at the end. So, go ahead please..

Thank you. Our next question comes from the line of Heath Terry with Goldman Sachs. Your questions please..

Great. Thanks.

Spencer, I was hoping you could give us an update on the tests around dynamic pricing and how you're thinking about continued rollout of that into additional markets or even more broadly across the platform? And then, to the extent that you're looking at sort of other ways to monetize whether or not we should expect sort of any return to sponsored results in the search or if there are some other way to monetize the premium placement there?.

Sure. So, the first question around dynamic pricing is essentially what we discussed around the self-serve ad product, which just gives the agents more control and more visibility into their ad spend. So, we're through about a quarter of the country, we'll finish the next three-quarters by the end of the year, and feeling good.

But there's always risk, of course, when you roll something out like that. In terms of other forms of monetization in the Agent business, the big new one is what we launched last week, or really two things that we launched last week.

One is Seller Boost, which finally monetizes the sell side of the marketplace, the listing side which is of course half of the commission TAM, and allows Premier Agents to buy listing leads or leads from sellers from Trulia and Zillow. We've bundled that with the Premier Agent business as an upsell.

We started selling it last week at our Premier Agent forum in Las Vegas. It was very well received. It's extremely early, it's been less than a week of course. But, we're optimistic about it and certainly there is a lot of demand from our Premier Agents to acquire listing leads, not just buyer leads.

Historically the Premier Agent product has been mostly about acquiring buyer leads. And then the other product announcement that we launched last week, was Premier Agent Direct, which is the Facebook precision targeting which also was very well received in Las Vegas at our Premier Agent forum.

Again, it's only been a week of selling, so I'm optimistic, but it's too early to say. Next question please, operator..

Thank you. Our next question comes from the line of Brian Nowak with Morgan Stanley. Your questions please..

Thank you for taking the question. This is Kevin on for Brian. Two, if possible.

First, on the self-serve interface, can you step back, could you talk a little bit more about initial learnings from self-serve and maybe a little bit about the growth trajectory of ad spend from self-serve agents? And then, you mentioned as well that you're baking in some uncertainty in regards to the Premier Agent revenue.

How much cushion have you incorporated and it seems kind of like the incremental margins in the 4Q guide has been lower than expected, would you elaborate on that a little bit more?.

Sure. So, the goal of the switch on the Premier Agent ad product was to provide Premier Agents with more control and flexibility to have the marketplace determine the CPM rather than Zillow Group determine the CPM, and to give more functionality to the agents, so they could literally self-serve their advertising if they chose to.

Now they can still of course buy through our phone sales teams as well, but they also have the flexibility to do it themselves. So, what we learned along the way, of course, informed the final rollout of the – well, the first quarter and now will inform the rollout to the next three quarters. And we learned a lot along the way, obviously.

For competitive reasons, we're not going to get into too much detail about how we changed it along the way.

But suffice it to say, we feel like we've maintained the benefits of the fixed price model, where in agents were buying a fix number of impressions over a period of time, while still improving some of the challenges to that model including the fact that that model ends up with sold out impressions in ZIP codes from time to time, and it requires us to proactively call agents to increase their price in order to increase CPM.

So, we think we've kept the best of the old model, and we think we've introduced some benefits to the new model. To try to – I guess, the second part of your question is to try to quantify or conceptualize the level of conservatism on the Q4 guide with respect to the remainder of this rollout, it's hard to say, it's really hard to do that.

There are a lot of moving pieces here including the introduction of two brand new ad products, Seller Boost and Premier Agent Direct app. A big – there's a lot – been a lot of focus on in the Q&A so far on Q4 and the impact of the change in the Premier Agent model and how it impacts Q4.

The reason that we're making this change to the self-serve model is we're very confident that that positions us much better for the medium and long-term where eventually the $10 billion-plus of real estate advertising will move online and we believe it will move to the site that has the largest audience share, which is of course us, and we think that this self-serve dynamic pricing model positions us much better to capture the lion's share of that budget as it moves online.

So, what will happen in Q4 we'll – I mean, we'll of course have to see, but frankly I'm much more focused on making sure that we're well-positioned for the billions of dollars of real estate agent ad spend which will surely migrate on to the internet over the next couple of years, and making sure that we've the right ad model to capture the lion's share of that.

There – let's see there's a question on Twitter from (42:13) that asks, what was the organic revenue growth rate? So, we haven't – we don't historically breakout M&A from revenue, but with the exception of Trulia, I don't think – I mean, I guess, it has – we haven't really driven growth rate – revenue growth rate through M&A with the exception of the Trulia acquisition.

Dotloop was the largest revenue acquisition, and it wasn't significant to the total revenue. Of course, it's very significant strategically. And then, the second part of this question asks, as leads slow towards traffic growth, is that an appropriate proxy for Premier Agent revenue growth? And I'd say no.

It's not because of the discussion about cost per lead that I mentioned. And again, one of the reasons that we're switching the Premier Agent ad product to the self-serve model and with dynamic pricing is to position us such that once the whole country has moved over to this new pricing model, the prices will float as demand increases. Okay.

I think, operator, we're going back to the call for the next couple..

Thank you. Our next question comes from the line of Michael Graham with Canaccord.

Your questions please?.

Thank you.

Does the self-serve model change margin structure at all, like your sales commission is the same to your sales force there? And then, Spencer, on the last call, you gave a really interesting metric, which is that – shouldn't call it a metric, but an idea that you would want to keep expanding the sum of revenue growth plus EBITDA margin over time and you did that nicely this quarter, it was $34 million in Q2, $53 million in Q3, your guidance for Q4 imply something like $57 million.

Can we still kind of think about that as a framework to work with as we think about the next year or two years?.

Yes. So, the first question on self-serve, and sort of commissioned and selling expense. The answer is I think that the self-serve model does allows us to service more revenue per sales person head count than the older model, but it by no means means a reduction in the size of our current sales force.

So, it might mean we need to grow it less quickly than we otherwise would. But it's not going to result in a smaller sales team than we currently have. You reckon last call, I introduced this concept of revenue growth plus EBITDA margin. So, let me just describe my thoughts around 2017 revenue and EBITDA margin.

So, firstly, we have not completed our 2017 planning process yet, so it's very premature for me to speculate on what revenue growth or EBITDA might be for next year. But that having been said, we're a growth company. Revenue growing around 30% year-over-year. And we look at these two dials, revenue growth and margin.

And we evaluate tradeoffs between the two of them. And when we do that, we take a very long-term orientation, which means we make investments that pay off in terms of revenue expansion and margin expansions down the road. So, I'll give you three quick examples here.

We spend a lot of money advertising to increase our audience leadership, which suppresses near-term margin, but of course we think creates long-term value by expanding our audience leadership.

We also build out emerging marketplaces, which again, suppresses near-term margin when we make investments in things like rentals and mortgages in New York City, but we think creates long-term revenue expansion and margin expansion. And number three, software tools, for our real estate agents, which clearly suppresses near-term margin.

The level of investment that we're making in the Premier Agent app and in dotloop, suppresses near-term margins, but we thinks they are the seeds for greater revenue growth down the road and margin expansion down the road.

So, in that tradeoff between revenue and margin, we have a bias towards revenue growth and long-term value creation at the expense of near-term margin maximization. So, we aim for revenue growth along with steady margin expansion year-over-year.

This quarter's 26% margin, I would describe as somewhat aberrational due to a significant revenue beat and cost efficiencies. So, the Q3 guide was a 23% EBITDA margin. And we delivered 26% EBITDA margin. There's extra 300 basis points of margin, were about half revenue and half expense savings. And so, that's where the 26% came from.

So, anyway, hopefully that explains how we're thinking about 2017 and how we think about the tradeoff between revenue growth and margin expansion. Operator, next question please..

Thank you. Our next question comes from the line of Aaron Kessler with Raymond James. Your question please..

Great. A couple of questions. Just first, on the seller product, I believe this is kind of your first product really addressing the seller side, which is a big market in itself.

Do you think we'll see numerous products addressing this, or kind of give this product a while and see how it does? And just, on OpEx guide for Q4, it looks like it's a step up of maybe $8 million to $10 million range, roughly sequentially. Any specific OpEx line we should expect that increase in? Thank you..

Sure. I'll take the first portion, Aaron, and then Kathleen will take the second one about Q4 OpEx. So, on the seller product, you're right, this is our first real foray into the sell side.

Trulia had a small business called Trulia Seller Ads, which it sort of spun out of its acquisition of HouseValues and Market Leader, and, Zillow, of course, inherited that with the creation of Zillow Group.

But, Seller Boost and connecting it with Zillow Seller Leads and selling it with the full force of our wholesales team, across our entire base of Premier Agents integrated with our core Premier Agent business. This is the first time we've ever done anything like that on the sell side.

As I say, it's been less than a week, so in terms of will we iterate and innovate on that or build out other seller ad products or both, Aaron, it's too early to say.

But, we've certainly had an intense level of interest on the part of Premier Agents and frankly on the part of investor shareholders, over the last couple of years about the creation of something that monetizes the sell side of the marketplace. And, so I'm excited to have a product out there now, and certainly the reception last week was very good.

There is definitely demand from agents to acquire listings, typically they will pay significantly more for a good listings lead than they will pay for a buyer lead. And so, I'm excited about the potential for this product.

Kathleen, Q4 OpEx?.

Sure, so for Q4 OpEx, what we're seeing is a little bit of an acceleration of some of the investments we actually had hoped to make in Q3, that we delivered the results we did in Q3 in part because some of the investments in the business primarily around people and product were just happening a little more slowly than we expected.

So, some of that will come to pass in Q4, that's really the bulk of the difference there. Other than our usual focus, as Spencer just mentioned, on long term investments in product, there's nothing unusual about Q4..

Next question please operator..

Thank you. Our next question comes from the line of Lloyd Walmsley with Deutsche Bank. Your question please..

Thanks. You guys talked about baking in some conservatism into the PA revenue guidance around the model transition, but it looks like, at least at the high-end, there's not much deceleration in that growth rate. So curious if you can just give us a sense for where you're anticipating the most strength.

Are you seeing a big uptake in Broker Connect or Premier Agent Direct. Will be curious to get a sense there.

And then I guess second question would just be as you roll out this new model, is there any change in how you recognize revenue that could impact seasonality at all? And then similarly just curious if you can give us a sense for how you recognize revenue on this new Premier Agent Direct business? Is that recognized gross and then there's like a tack to Facebook? Any color you can share on that stuff would be really helpful.

Thanks..

Sure.

Kathleen, why don't you take the first portion on the Direct – on the Facebook piece?.

Sure. So on the Facebook piece, it will be a gross revenue recognition. And in terms of any change for revenue recognition for the core Premier Agent product, it will be just the same. So you shouldn't expect that to be impacted by seasonality or by the self-serve model itself..

And on this Q4 revenue, you're right to point out, Lloyd, that there really are a lot of things happening in Q4. There's the core Premier Agent business that switched from fixed price, which we've had the last couple of years, to this new self-serve model. But then there are four new ad products in the market.

On the Premier Agent business, there's Seller Boost. On the Premier Agent business, there's Premier Agent Direct, which is the Facebook with our precision targeting.

On the Premier Agent business, there's Premier Broker, and on the rental business, there's this new multi-family direct ad product where for apartment buildings we're buying their advertising on Facebook using our targeting. So we have four new ad products and a switch to our core selling model for our Premier Agent business.

So there are a lot of moving pieces in Q4, and of course, you take them altogether, that's one of the reasons that there's some conservatism as we look to what the results might be in Q4. Next question please, operator..

Thank you. Our next question comes from the line of John Campbell with Stephens, Inc.

Your questions, please?.

Hey, guys. Good afternoon. Congrats on a great quarter..

Thank you, John..

Just curious about the pace of growth within the Other Real Estate line. That's been bit of a cloudy revenue stream for us. I know you've got a mixture of acquired rev and then you've got some pretty quick organic growth engines in there.

So just curious, maybe just broad expectations over the near-to-medium term and then if you could maybe just touch on the seasonality in that business once it gets a little bit more mature?.

Yeah. So it's Kathleen, and as we said in the prepared remarks, we've been experiencing really strong growth in a number of those marketplaces. This is the first Q4 that you're going to see dotloops in the mix, so that's reflected a little bit there.

The seasonality should really track seasonality of the rest of our business at this point because the bulk of that revenue is coming from rentals and New York City, so naturally it's going to flow pretty much like the regular real estate market. So I think you can expect that that will track the rest of our business pretty closely.

We're super excited about each of these products, but at this point we don't have specific comments to make particularly along Agent Services and Bridge..

Next question, please..

Thank you. Our next question comes from the line of Kerry Rice with Needham. Your question please..

Thanks a lot. Maybe back to self-serve one last time.

Can you talk about at all the adoption within that 25% of the nation rollout just in general or maybe some color around the agent profile that you found most likely to use that self-service? And then on more a financial question on EBITDA and maybe opportunities for leverage going forward without guiding 2017.

But as you guys are clearly the largest player in the market, you've spent a fairly big amount on direct advertising, do you see an opportunity to pull back maybe on TV advertising? I know that does a lot for awareness, but as you have a strong brand, you look at shifting some of that maybe to more digital channels, which would improve the leverage in the model.

Thank you..

So the types of advertisers that seem to do the best in the self-serve products are those that have the highest lead conversion; no surprise, same as it ever was. Those that convert leads at the highest rate can most profitably acquire new leads by buying impressions.

So I'm not sure it's that big a change from the old model, but it does sort of throw a little more fuel on the fire, and it helps solidify our strategic focus on those better agents who are gaining share at the expense of hobbyists. The tradeoff between online and offline advertising is something that we're always looking at.

We control those two levers centrally, if you will.

So when I sit down every month to look at the efficacy of our advertising by brand at the Zillow Group level, everything is on the table, and we look at measurements on a cost per awareness point and on a cost per lead basis and on all sorts of different metrics looking at offline and online side by side.

So I think unlike many Internet brands that tend to sort of silo a TV budget off to the side and sort of that is what it is and then they dial up and down the online budget. We already do our media planning in an integrated manner, which I think is the right way to do it.

And I already believe that our measurement of our offline spend is best in class, certainly best in category, but likely best in class.

So, as we look to our 2017 ad expense, we will determine what we want the target model to be, the target margin to be for 2017, and determine what types of head count growth we need to support our revenue ambition next year, and then of course what type of ad expense that margin will allow.

And then we make the decision on offline versus online throughout the course of the year as well as by brand throughout the course of the year. I think, operator, we have time for just one or two more, please, from the queue..

Thank you. Our next question comes from the line of Mark May with Citi. Your question please..

Thanks for taking my questions. I had two, if I could. One might be a little longwinded, but back on the self-serve platform. It seems pretty significant, including in terms of how agents will be interacting now with Zillow. Just a couple of questions around that.

Do you expect pretty much most all of your Premier Agents will be bidding directly on this platform, or will there be some sort of a hybrid model where some of them do and some of them continue to work through a sales person? And then just on the bidding process itself, what type of like measurement and analytics are you providing? Will agents be able to see things like the number of impressions that they're receiving and the number of leads that they're getting within this platform? And then, if I could, a follow up on the Premier Agent Direct program?.

Sure.

So the answer is they have enormous visibility into their ad spend and enormous flexibility associated with their ad spend, so they can see on a map how many impressions are available in each of the areas that they're interested in, how many likely leads are available, what the cost per impression is, what the cost per lead is, what their potential ROI is if they advertise in that ZIP code, etcetera.

And so far our agents love that type of visibility. In terms of how many of them will do it themselves versus rely on a Zillow Group employee over the phone, it's hard to know, and we're sort of indifferent to some extent. I mean like we want the advertiser to be served however they want to be served.

So if they want to do it themselves, that's great, and if they want to do it over the phone with one of us, that's fine too. And we've built the product to work in either case. Mark, what was your second area? He's out of the queue, okay..

It was Facebook PAD..

Yeah, Facebook, so I don't know what the question was. Well, just follow up with us if you'd like, Mark.

RJ, are we wrapping or do we keep going?.

One more..

One more. Okay. Operator, last question, please..

Our last question comes from the line of Tom White with Macquarie. Your question, please..

Great. Thank you, RJ, for squeezing me in there. Just the Premier Broker program, I was hoping maybe you could just help a little bit about that, typical economics for those relationships and....

Sure..

And the ARPA profile. I'm just kind of curious reconciling that with your focus on empowering these super agents or independents. Kind of are those two focuses at odds at all? And then just on the Display business, looks like it kind of beat a little bit in 3Q, and you're guiding for a little bit of an uplift. Just an update there. Thanks..

Sure. Kathleen, will take Display, and then I'll take Premier Broker, and we'll wrap up..

Yeah. The Display of business, as you know, we have been, strategically focused on having the Display business declines. That being said, the areas in which we are prioritizing for Display are doing really well.

So we did have a modest beat there, and that team does a really terrific job in maximizing the opportunities that we want to seize for Display, while at the same time understanding that our strategic shift has shifted away from that..

On Premier Broker, this is really an extension of the Premier Agent Business. What we've done is we've allowed brokers to buy impressions. They create a broker profile base. They indicate which agents roll up to their brokerage, and the broker buys impressions in whatever ZIPs they like around the city.

They generate leads and those leads get passed through to their agents. And then when those agents close those deals, they pay referral fee to the broker for having provided the capital to source the leads. That referral fee is separate and distinct from the split than they pay to the broker for all their transactions.

And what this does is allows the broker to remargin their business.

It provides us with another sales channel that has capital, has training, it has captive agents that are there ready and able to work leads, and then we provide the lead volume and the accountability and the tracking and the software to the broker, so they can actually see where the leads go. The ARPA is very high.

In fact, where this came from was from a number of our top-spending existing Premier Agents, team leads, some of whom already are brokers. And so what we've done is we've really formalized this product and customized it to be more replicable across the country to brokerages.

And as I think I said in the prepared remarks, it has the advantage of providing additional advertiser liquidity by injecting broker capital into the mix. So it's off to a good start, and again, we'll see..

Okay. So I think we'll double-check on Twitter. If there are still some questions, we'll take them online. With that, though, thanks everyone for joining the call day today. Have a great fall season. And we'll talk to you with an update on our progress in February. Thanks, everybody..

Bye-bye..

Ladies and gentlemen, thank you for participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day..