Escolar Documentos
Profissional Documentos
Cultura Documentos
TRANSCRIPT: 080409a2339041.741
BODY:
Corporate Participants
Presentation
RAPHAEL GROSS, IR, ZIPREALTY INC.: Thank you and good afternoon, everyone.
With me on the call today are Pat Lashinsky, President and Chief Executive
Officer of ZipRealty, and Lanny Baker, the Company's Chief Financial Officer.
Earlier today, the Company issued a press release describing its results for
the second quarter (inaudible) www. ziprealty. com under the Investor Relations
section.
Before we begin, I'd like to note that during the course of this call,
various remarks we make about our future business, our plans, goals, and
Actual results may differ materially from the plans, goals, and activity
contemplated in these forward-looking statements and are subject to risks and
uncertainties, including those described in the Company's Form 10-K for fiscal
year 2008, a copy of which can be viewed on the Company's website under the
Investor Relations section. The risk factors identified in our SEC filings are
incorporated by reference into this earnings call.
LANNY BAKER, CFO, EVP, ZIPREALTY INC.: Thank you, Raph. ZipRealty achieved
solid volume and revenue growth in the second quarter and further expanded
market share at a time of turmoil in the real estate market. We also made
progress on key strategic initiatives intended to drive value in the long term.
And Pat will discuss these in more detail in a few minutes.
On the bottom line, we again saw the effect of sharply lower home sale prices
in our margins and operating loss. But we ended the quarter with roughly the
same amount of cash as we started with. And we're focused on getting to
profitability while investing in the Company's future.
The market backdrop in the second quarter resembled that of the last few
quarters with large year-to-year increases in foreclosure activity, lower
average home sale prices, and sharply higher transaction volumes in most
markets. But we also saw some new developments in the second quarter with
entory, greater price stability, and new regulations that may
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
affect the business going forward.
I mentioned that some fundamentals began to change in the second quarter. And
one such area is nonstandard transactions. Foreclosures and short sales
represented 43% of our volume in the quarter. And while that's well above the
29% a year ago, it is lower than the 53% mix we saw in the first quarter.
Referral and other revenue was $432,000 in the second quarter, still lower
than a year ago, but improved from the first quarter. And Pat will talk about a
new agreement which should put us back on track on this small but promising and
high-margin revenue stream.
Moving to expenses, cost of revenue grew 10% in the second quarter, outpacing
revenue growth of 6%. As a result, our gross margin declined by 245 basis points
year to year. And gross profit was essentially flat year to year for the
quarter.
Almost two-thirds of the gross margin compression during the second quarter
is linked to the deleveraging effect of lower average revenue per transaction
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
and the decline in non-transaction revenue, which work against semivariable
cost, such as expense reimbursement and health insurance within our cost of
goods. The remaining piece of the margin decline reflects slightly higher splits
paid to our agents.
At the end of the period, we had 3,172 agents, a 24% increase from a year
ago. And we continue to attract great people with the strength of our technology
platform and its ability to make agents more knowledgeable and productive.
Although agent productivity was essentially flat year to year in the second
quarter, our more experienced agents have continued to make year-to-year
productivity gains across each of the last four quarters.
Product development expense increased 10% in the second quarter from a year
ago and at $2.3 million was consistent with Q1 on a dollar basis. Higher
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
website traffic, a new data and hosting location, and product investments that
Pat will highlight accounted for the higher spend.
Sales and marketing cost of $10.2 million declined slightly compared with the
year-earlier period as we continue to expand our client pipeline with effective
online marketing and the organic drawing power of our website in consumer
offering. Customer acquisition spending was flat with last year. And lead volume
grew double digits. We believe we have room to further improve our marketing
efficiency. But we do expect falling lead prices to stabilize at some point.
Before moving on, looking at our second quarter results in the existing
veals the revenue growth contribution of the new
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
markets while also spotlighting the profitability traits of these two groups of
markets.
In the second quarter, total revenue in the 23 existing markets open prior to
2007 was down 1% year to year to $27.1 million, while revenue in our 13 new
markets opened after January 2007 was up more than 70% to $4.7 million versus
$2.6 million a year ago.
Income in existing markets was flat year to year with a 17% operating margin
before the allocation of technology and corporate expense. In the new markets,
strong revenue growth trimmed our market level operating loss from $650,000 in
the second quarter of '08 to less than $150,000 in the most recent quarter.
As the newer markets continue to grow and gain scale, their overall
profitability levels should more closely resemble that of our existing markets
group, providing a return on the investment we've made since opening these
markets in 2007 and 2008.
Returning to the P&L, below the operating line, interest income of $200,000
in the second quarter was well below $600,000 in interest a year ago, due to
lower interest rates and a lower cash balance.
Turning to the balance sheet, we ended the quarter with $44.8 million of
cash, cash equivalents, and short-term investments and without any long-term
debt. As noted earlier, our cash balances ended the second quarter very close to
where they ended the first quarter, down just $130,000 in the period. And we
continue to be comfortable with our capital and liquidity positions as well as
our ability to fund our growth plan.
Before discussing the financial outlook, I want to point out that we
completed a stock option exchange program during the second quarter to
strengthen the incentive and retention attributes of the Company's equity
compensation program. As a result, we have an additional $600,000 to $700,000 in
equity compensation expense that will be amortized over the three-year vesting
period of the newly issued options or roughly $50,000 per quarter.
We plan to invest in our agents and attract growing numbers of new customers
throughout 2009. And we will aggressively manage field and overhead expenses in
the second half.
Consistent with our prior outlook, we expect revenue growth in the mid-single
digits to low-double digit range for the full year 2009 compared to year-earlier
levels. On the bottom line, we expect the GAAP net loss for 2009 to be narrower
than the 2008 net loss of $14.7 million, excluding legal settlements. On that
basis, our pro forma net loss should also improve from the $10.8 million
recorded for the full year of 2008.
PAT LASHINSKY, CEO, PRESIDENT, ZIPREALTY INC.: Thanks, Lanny. As you just
heard, ZipRealty continued its growth momentum in the second quarter. And I'll
add a little color to Lanny's comments, including a regional discussion and
update on our market share progress. I'll also talk about the macro
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
environment.
But what I really want to focus on and what I'm most excited about are the
things we're doing to continue to drive ZipRealty's internal growth and
innovation as this is where we expect to separate ZipRealty from the competition
and create value in the long term.
On another note, I'm pleased with our success in allocating resources wisely.
As Lanny mentioned, our cash position declined by just $130,000 from March to
June, the lowest quarterly decline in eight quarters. But that doesn't mean
we've reduced investment, just the opposite. We made some exciting investments
in our products during the quarter, which I'll describe in a moment.
On a regional and market level, conditions were mixed. And business trends
evenue gainsile. For example, we were encouraged by year-to-year r
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
in roughly 60% of our markets in the second quarter, about the same as in Q1.
However, the makeup of this group has changed. And the double-digit revenue
growth we saw in the first quarter in California and Florida faded in the second
quarter, while markets in Texas, the mid-Atlantic, and Midwest fared much
better.
We continue to outpace the real estate industry overall with our 29% increase
in close transaction volume comparing to a 3% decline in nationwide home sales,
as reported by the National Association of Realtors. We gained market share in
26 of our markets year to year, including four of our five highest-share
markets, making the Zip brand ever more prominent in our leading markets. We
continue to be very focused on growing market share, even in these turbulent
times.
We believe that banks' biggest priorities these days is repaying TARP and
reducing government control. So they're very selective about writing loans
currently. The federal subsidy for first-time homebuyers has certainly mitigated
this mindset. But these buyers still have to save for a significant down
payment, even at lower home prices.
The new rules prohibit mortgage brokers from ordering the appraisal on a
home, leaving the lender to select an in-house appraiser or outside appraisal
company. Regardless, neither the lender nor the mortgage broker is allowed to
talk to the appraiser about the value of the property in question.
We've observed over the last few months that lenders are increasingly
selective of appraisal management companies based on low fees and quick
tual knowledgeof the local market.sideration to the appraiser's ac
In this economy, the unexpected additional expense can be a deal breaker. The
good news is that the government has shown that it's open to refining
ineffective policies. And various industry groups are lobbying for attention to
the HVCC matter.
Now turning to ZipRealty, we remain excited about our market opportunity and
confident about our advantages in an approach that makes us unique in the
industry. We're in the midst of a transition from industry upstart to
increasingly influential player. And we are not waiting around for the real
estate cycle to turn. We are organizing and prioritizing for profitability and
long-term growth. And you will hear more detail about our strategy in the months
ahead.
Let me talk about technology first. The ZipRealty website continues to evolve
and develop, attracting strong user activity as a result. Unique visitors to our
site rose 23% year over year in the second quarter. The lead pipeline continued
to grow at double-digit rates. And the strong online activity translated into a
45% year-over-year increase in home visits and offers made by ZipRealty clients.
We launched a new website version in March of this year, adding home detail
pages on over 60 million homes in the US as well as school district boundaries
on our maps and key word search tools for hunting through listings. Then in
mid-July we hit again, releasing an onsite communication tool, enabling clients
to chat about specific properties and save those discussion right on the home
detail page for easy future reverence and follow up.
All of these innovations are aimed squarely at broadening our consumer appeal
and enhancing the functionality of the Zip site, which itself is designed to
help customers become more informed and more confident as they approach the home
buying and selling process.
This kind of visibility and scale, both online and offline, positions
ZipRealty to thrive in the transactions core of our business and also to develop
referral, advertising, and other revenue streams over time. In that vein, we are
very pleased to inform that important and value marketing alliance during the
second quarter with one of the largest financial institutions in the world.
Our new alliance with Bank of America will leverage ZipRealty's online reach
to millions of interested home buyers in conjunction with our local agent
presence to help consumers access Bank of America's full range of home mortgage
services as well as its local lending team. As part of the agreement, Bank of
America is committed to providing superior customer service. We've been working
with B of A on a test basis for some months. And the bank is now present
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
across the breadth of our online products. The new alliance is scheduled to be
fully rolled out to all over our markets by the end of August.
The real estate market certainly remains choppy. But we do believe that some
trends are starting to move in the right direction. We remain encouraged by our
market share gains, thrilled by customer response to what we're doing, and
committed to investing in ZipRealty's long-term future.
OPERATOR: Thank you. (Operator Instructions). And our first question comes
from Jim Wilson with JMP Securities.
JIM WILSON: Was wondering your -- first question -- your average price ticked
up from Q1, at least what I'm calculating. Was just wondering that pure mix or
anything else you can color that you saw in individual markets? I know you said
actually some of the markets that I would think of as a little cheaper markets
compared to California actually are the ones that kicked in for the quarter.
LANNY BAKER: Well, there were I think a number of factors that go into that
increase that you know. First of all, one of the things that Lanny noted was
that the percentage of deals that were done in the mix that were done as
distressed properties were down. And those tend to have a larger reduced price
than the others. Additionally, the resale homes that we sold, those price
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
points were actually up over the period as well.
So we got the benefit on both the fact of the actual homes that we were
selling, that home price was up. And we sold fewer of the distressed properties.
And the combination led to the increase that you were talking about.
PAT LASHINSKY: And I think the only thing I would add to that is that the
biggest momentum came in fairly likely places, some of the large cities in
California and in the mid-Atlantic.
JIM WILSON: Okay. All right. And then you're still growing the agent count
very nicely at a good jump in Q2. Any -- I would assume not -- but any further
pressures or any real competitive pressures in trying to find good people? Or is
it arguably even staying just as easy or getting easier to still find good
people, given what's going on in general and on how well you guys are doing?
LANNY BAKER: Well, it's always a challenge to find good people. And we
continue to work very hard at it and put a lot of effort into it. That being
said, one of the advantages that we have is that we have a lot of clients. And
we have a lot of demand. And as other agents struggle with their ability to find
clients and to stay in the business, they found that we provide a great
opportunity for them to come in, to use the technology, the leads, the
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
resources that we have, and to actually take care of clients that are interested
in doing business.
PAT LASHINSKY: Thank you all for being on the call and for the second
quarter. I'd like to thank all of our employees and agents for their excellent
efforts in what was done to get through in these difficult conditions. We're
excited about the future and look forward to talking to you on the third quarter
call. Thank you very much.
OPERATOR: That does conclude our conference. We thank you for your
participation.
Q2 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
[Thomson Financial reserves the right to make changes to documents, content,
or other information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 2 OF 23 STORIES
TRANSCRIPT: 050509a2184894.794
BODY:
Corporate Participants
Presentation
RAPHAEL GROSS, IR, ZIPREALTY INC.: Thanks. And good afternoon, everyone.
With me on the call today are Pat Lashinsky, President and Chief Executive
Officer of ZipRealty, and Lanny Baker, the Company's Chief Financial Officer.
Earlier today, the Company issued a press release describing its results for
the first quarter ended March 31st, 2009. A copy of that release can be viewed
on the Company's website at www. ziprealty. com under the Investor Relations
section.
Actual results may differ materially from the expectations, plans, and
prospects contemplated in these forward-looking statements and are subject to
risks and uncertainties, including those described in the Company's Form 10-K
for fiscal year 2008 and other filings with the Securities and Exchange
Commission, copies of which can also be viewed on the Company's website under
the Investor Relations section. The risk factors identified in our SEC filings
are incorporated by reference into this conference call.
Further, this non-GAAP method involves key data management uses for planning
and forecasting its future operations. The presentation of this additional
information should not be considered in isolation or as a substitute for results
prepared in accordance with GAAP and can be viewed at the Company's website
under the Investor Relations section.
PAT LASHINSKY, PRESIDENT & CEO, ZIPREALTY INC.: Thanks, Raph. And thanks to
everyone on the call today. ZipRealty's results for the first quarter of 2009
reflect the strength of the Company's strategic position. Despite a difficult
market environment that brought our margins and bottom line down relative to a
year ago, we grew the top line and sustained the operating momentum we have
built with an innovative online presence, unmatched behind-the-scenes operating
technology, and a growing customer-oriented local agent force.
Within the quarter, we saw strengths and weaknesses. And January was
particularly difficult for our clients. We believe numerous factors contributed
to January being such a difficult month. First, layoff announcements filled the
news. And potential buyers were left wondering if they were going to have jobs.
Second, there were great fears in the markets that home prices would continue to
drop dramatically. Third, many potential buyers were concerned that they would
still not be able to qualify for a conventional loan.
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Finally, there was uncertainty about President Obama's and Congress's
economic plan. And we believe this uncertainty slowed loan approvals by banks
and credit suppliers until they better understood the new regulations and
requirements. The clients who were active in January tended to be extreme value
seekers, hitting 20% or more below listing price and also finding little seller
interest.
So the net result in January was continued steep declines in home prices
throughout much of the nation without the resulting bouts in transaction volume
that we would've normally expected.
With that as a backdrop, let me discuss some of our key metrics for the full
quarter. Closed transaction volume was up more than 30% year to year for the
third consecutive quarter. Distressed property transactions continued to be very
important, accounting for 53% of our transaction mix for the period, up from
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
46% in the fourth quarter and 36% in the third quarter.
Home prices for the first quarter dropped by about 23% year over year. If you
recall, home prices were down between 15% and 19% in each quarter of 2008. So
the early 2009 price declines were more pronounced than what we experienced last
year. And the 2009 trend is compounding price erosion we experienced last year.
Since the start of 2007, our average home sale price has now fallen 35%. And in
one quarter of our markets, we've seen price declines in more than 45% over that
period.
During the first quarter, we grew our agent base by 173. And we now have 704
more agents than we did one year ago. We continue to attract great people with
the strength of our technology and platform. And that is especially the case
given current market conditions.
Agent productivity was flat compared to last year's first quarter at 0.48
transactions per agent per month. Our experienced agents achieved increased
productivity. But that improvement was countered by lower productivity among new
Zip agents who are taking longer to become productive in the current climate.
To sum up the quarter, as tough as January was, volumes for the quarter were
solid. But both net revenue and profits were lower than we would've liked. We
are encouraged by what we have seen moving into the key spring season. And I
will comment further after Lanny reviews our financial results in greater
detail. Lanny?
LANNY BAKER, CFO, ZIPREALTY INC.: Thank you, Pat. At the end of the first
quarter of 2009, we are still working our way through a very challenging
operating environment with home prices under great pressure. The effects of home
price declines are evident in our gross margins and our net loss for the first
quarter, both of which were below year-earlier levels.
Our loss per share was larger than a year ago, impacted additionally by lower
interest income and fewer outstanding shares in the current period. And yet we
are seeing early hints of stabilization in some regional markets. And we believe
that our ability to gain share today will provide attractive returns and expand
our growth potential into an eventual recovery.
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
We plan to continue prudent investment in marketing, technology, and our
agent force while keep a close watch on the bottom line and our cash position.
Consistent with this overview, the operating highlights of the first quarter
include strong website traffic; a 15% year-to-year increase in new customer
leads; and more importantly a 44% increase in client activity as measured in
actual home visits and offers; an increase in our agent count, and steady
productivity; an improved lead-to-close conversion rate, which helped propel
ZipRealty's transaction volume gain even as nationwide transaction volume
declined about 7% year to year according to the National Association of
Realtors.
The first quarter also presented its challenges, the most significant of
which was a 23% year-to-year decline in the average value of homes sold by
ZipRealty and net transaction revenue per close, which declined by about $1,300
or 20% year to year to an average of $5,119 in the first quarter.
The compression in revenue per transaction was the most severe that we've
seen in the cycle. And it put pressure on gross margins, which were 36.3% in the
first quarter compared to 40.2% a year ago. I'll provide more color on gross
margins shortly.
Net transaction revenue, which excludes referral and other revenue, was $21.4
million, a 6% increase from last year. Transaction revenue per close was down
year to year in all but 4 of our 40 districts with the steepest declines in
Nevada and California. Here and elsewhere, non-standard transactions, such as
foreclosure and short sale, represent an increasing share of our transaction
volume and have a negative effect on average price since these transactions are
typically occurring at prices up to 25% below our normal resale transactions.
And second, in the markets that were first to experience the downdraft, we
are starting to see slightly more encouraging business trends. For instance,
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
ZipRealty's revenue from California, Nevada, Arizona, and Florida districts grew
by 12% year to year in the first quarter, even though the combined revenue in
our other markets was still down about 1% for the quarter.
As encouraging as this looks, however, we're still very cautious about the
near-term outlook. And note that the fundamentals are a mixed bag. In the
Northeast, for example, our first quarter revenue from existing markets was down
16% year to year in the first quarter. And both volume and prices were down year
to year.
Returning to the P&L, the referral and other revenue line declined about 28%
for the first quarter versus the prior period. And these are typically
high-margin revenues for the Company. We are working on rebuilding revenue and
expanding our opportunity in this part of the business.
Moving onto expenses, cost of revenue grew 12.1% in the first quarter,
outpacing revenue growth at 5%. As a result, our gross margin declined by almost
four points. And gross profit was down 5% year to year in the first quarter.
Slightly more than two points of the decline in gross margins in the first
quarter was due to a 25% increase in costs related to agent health insurance,
expense reimbursement, and awards for tenure and experience. These
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
semi-variable expenses typically account for less than one-quarter of cost of
revenue. And they tend to move in relation to headcount, not in relation to
prices, home prices.
Accordingly, when home prices are as weak as they were in the first quarter,
these expenses contribute to reducing our gross margin. And when price
comparisons eventually move upward in our business, these costs of revenue
should have an opposite and positive effect on gross margins. In the meantime,
we will manage our field costs aggressively and have taken steps to reduce the
impact going forward.
Another one point of the decline in gross margins came from slightly higher
commissions paid to our agents in the first quarter of 2009 than a year ago.
This reflects higher productivity among more seasoned agents with higher
payouts. Finally, the decline in non-transaction revenue compared with a year
ago accounted for about 0.5 point of reduction in gross margin in the first
quarter.
Sales and marketing costs declined slightly year to year. We invested more in
customer acquisition in the first quarter, increasing our spend at a
mid-single-digit rate from last year. But we continued to become more efficient.
And our cost per lead was down 7% year to year in the first quarter.
General and administrative expenses were down 6% year to year and declined as
a percentage of revenue. Unfortunately, though, tight operating costs and 5%
revenue growth were not enough to offset the decline in gross margins in the
first quarter. And our operating loss was $7.9 million in the first quarter of
Below the operating line, interest income was $309,000 in the first quarter
of 2009, down from $911,000 in the first quarter of last year, reflecting lower
average cash balances and reduced interest rates in the current period.
Our net loss for the quarter was $7.5 million compared with a net loss of
$7.3 million in the first quarter of 2008. On a pro forma earnings basis,
excluding non-cash stock compensation costs and the legal charge in the first
quarter of '08, our net loss was $6.6 million versus a $5.6 million loss in the
first quarter of last year.
A lower share count due to last year's share repurchase increased the
calculation of pro forma net loss per share to $0.33 in the first quarter
compared to a pro forma net loss of $0.24 per share in the first quarter of
2008.
Let me discuss the first quarter results for our 23 existing and 12 new
markets. In existing markets, net revenue for the quarter decreased by 0.6% to
$18.5 million with a 25.6% increase in the number of transactions more than
offset by a 20.9% decrease in average net revenue per transaction in our
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
existing markets. Market-level income from existing markets was $384,000
compared to $700,000 a year ago in the first quarter.
In new markets, net revenue for the quarter was $2.9 million, up 86% from the
first quarter of 2008. And it represented approximately 14% of total net revenue
in the quarter. Our new markets collectively lost approximately $950,000 during
the quarter compared to a loss of roughly $940,000 last year.
Turning to the balance sheet, we ended the quarter with $45 million of cash,
cash equivalents, and short-term investments and without any long-term debt. We
plan to invest further in our business in 2009. And we remain comfortable with
our capital and liquidity position.
On the bottom line, we expect the GAAP net loss for 2009 to be narrower than
the 2008 net loss of $14.7 million, excluding legal settlements. On that basis,
our pro forma net loss should also improve from the $10.8 million recorded for
the full year of 2008. I'll now turn the call back to Pat.
PAT LASHINSKY: Thanks, Lanny. By the end of March, all of our markets saw
inventories decline on a year-over-year basis and in many of our key markets,
do, Sacramento, Las Vegas, Charlotte, all
showed inventory declines versus February despite seasonality that usually
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
dictates inventory increases.
Additionally, the median home list price in many of these markets increased
during Q1 for the first time in approximately 18 months. And while one month or
one quarter doesn't make a trend, March was certainly positive, reaffirming what
we said on our last call about certain markets across the country being in
various stages of deterioration and repair.
Let's take California for example. As we exited the quarter, we saw increased
activity between buyers and sellers, particularly at low- to mid-level price
points. We are participating in multiple bids on homes. And there are active
negotiations taking place around many transactions. This was unheard of six
months ago.
One reason for the improvement is that banks are using a different approach
for bringing foreclosures to the market. Rather than just dumping inventory,
they've become better at metering out supply, doing so gradually in an effort to
preserve price.
And while the market works through this process, we remain energized and
excited about our market position and continue to invest in initiatives that
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
improve the customer experience and our agents' productivity.
We believe this feature will provide our sell-side clients with the added
advantage of great centralized information about their home's worth relative to
comparables in their neighborhood from three different estimate sources. All of
these features are designed to make ZipRealty clients better informed and
prepared than other buyers in the market.
In terms of our market position, it's worth briefly restating that most of
our competitors are either very large or fairly small. Some of the larger
players are dealing with expansion costs and debt levels taken on in the last
cycle. And many of our small peers are challenged by a lack of capital. In
either case, we don't believe they are necessarily in an investment mode like
ZipRealty. And few if any of them share our level of commitment to developing
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
technology that makes the process easier, more transparent, and satisfying for
consumers and agents.
With that, I'd like to open the line up for questions. Operator?
OPERATOR: Thank you, sir. (Operator Instructions) All right, and we'll take
our first question from [Claus Van Schtuderhan].
CLAUS VAN SCHTUDERHAN, ANALYST: Claus Van Schtuderhan. Hi, guys. Did I get it
right? The cash burn in the quarter was the $6.6 million non-GAAP loss. Is that
right?
LANNY BAKER: No, the cash in the quarter was -- if you look at the cash flow
statement, about $4.1 million from operations and another $400,000, $500,000
from capital expenditures.
CLAUS VAN SCHTUDERHAN: That's was what, $5 million cash burn? Is that what
you're saying?
LANNY BAKER: Yes, $4.1 million for cash used in operations and $200,000 in
capital expenditures. So it's about $4.5 million, a little bit less than $4.5
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
million.
CLAUS VAN SCHTUDERHAN: $4.5 million? Okay. And did you say what you expect
the cash burn for the year to be and the cash position at the end of the year
therefore?
LANNY BAKER: No, we didn't. But I think I can address it a couple of ways.
First of all, the seasonality in our business is such that normally the first
quarter is the smallest in terms of revenue. And therefore, it's simply our
heaviest in terms of cash used. And if you work with the numbers in our
financial statements and in the outlook, there's some useful direction there. We
expect to narrow our GAAP net loss for the year from $14.7 million. Depreciation
and amortization is running about $2.5 million in the last 12 months. Non-cash
compensation expenses are about $4 million annually. Capital expenditures should
be less than the $2 million we invested last year. So if you put those pieces
together, cash used from operations less CapEx would be about $10 million. And
the year-end balance should be in the range of $40 million, as we've said
previously.
CLAUS VAN SCHTUDERHAN: Okay. I've got a couple of other questions. Well, let
me just ask one. And then I'll go back in the queue. I don't want to monopolize
it. On market share, I mean, previously you said what -- increases in market
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
share. And I always thought that was one of the strong points. So can you talk
about market share increases? I assume there's only increase, right?
LANNY BAKER: Sure. There are a couple of ways to look at it. I think
historically the way we've talked about market share is we've compared
ZipRealty's growth rate to the growth rate of the markets in which we operate
into the national market overall.
Another way would be to go into each one of the individual markets and look
at our share of size or our share of --.
CLAUS VAN SCHTUDERHAN: How about California? I mean, that was your first
market. That's the number you've quoted in the past.
CLAUS VAN SCHTUDERHAN: These guys presumably will go away when that's over.
LANNY BAKER: Yes, I think they're special providers who ran into the market
during these windows.
OPERATOR: Thank you. And we'll take our next question from Jim Wilson with
JMP Securities.
JIM WILSON: Was wondering -- I mean, as I'm playing with your guidance,
trying to work through some numbers here, it suggests to me, unless I got
something else wrong here that you're expecting your transaction count per
agent, which is basically flat year over year in Q1 to start improving the rest
of the year.
PAT LASHINSKY: Yes, I think that that's true. I mean, there are a couple
reasons for that. Historically, that's happened because as you go into
seasonality and you get into the main selling season, we do see productivity
increases. Second of all, as we've hired a large number of people in the first
quarter and as they become more seasoned and they get more experience going
forward, that will drive up our productivity as well as we get to that point. So
there's probably a couple of things that will all drive together to drive up
that agent productivity starting in the second quarter.
JIM WILSON: Okay. And that should obviously help gross margins as well?
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
PAT LASHINSKY: Yes.
JIM WILSON: Okay. All right. And could you comment maybe just -- another
question on sales pace in some of your other individual markets. Obviously, you
noted California, but anything else of note particularly good or particularly
bad?
PAT LASHINSKY: Sales pace, is that what you were asking about?
PAT LASHINSKY: I think that the thing that we've been probably most energized
by and have felt the best about is that other markets that have been through
really difficult times, such as Nevada and Florida, seem to really be coming
back and seeing some positive energy that we haven't seen in awhile,
particularly Florida. Florida has really been hammered significantly over the
last few years. And we're starting to see some initial rays of sunshine coming
through and some beginning of light down there, which we have not seen in quite
awhile.
OPERATOR: (Operator Instructions) We'll take our next question from Matt
Chesler with Deutsche Bank.
MATT CHESLER, ANALYST, DEUTSCHE BANK: Hi. It's Matt Chesler for Jeetil Patel.
Good afternoon.
MATT CHESLER: Hi. Just wanted to revisit the gross margins -- and you're
pretty detailed about breaking down the contributors to the margin decline in
the quarter. Apart from the productivity you just mentioned in response to
another caller's question, were there any quarter-specific issues that drove
down the margin? Or was it really just what you cited and that the business
comes back, should see smaller year-over-year declines going forward?
LANNY BAKER: You're breaking up a little bit. But I don't think there was
anything out of the ordinary necessarily in the quarter. The biggest impact in
gross margins is very clearly the decline in average home sale price. And while
the bulk of our cost of revenue is commission and variable income that moves
right along with that change in price, as Pat said, we're now looking at
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
prices that over the last 24 months are down 35% and more than that in some of
our markets. And there's a component of the cost of revenue that's related to
things like expense reimbursement and health insurance and some of the awards
programs that is not variable with house price. And there was some really kind
of deleveraging or compression against that.
And then the other element was the reduction in non-transaction revenue,
which is a priority for us to build that pipeline and build that stream. Those
are very high margin dollars. And we were down about $160,000 in revenue year to
year. And most of that came right off the gross profit margin line as well.
MATT CHESLER: Okay. So you said that you were working on rebuilding that
referrals and other line. What's the update on how -- the timeline for when that
line item might begin to show some rebound?
PAT LASHINSKY: As Lanny said, it's been a priority for us for awhile now. And
we continue to make pretty good progress on it. I expect that we will have some
real results to show sooner rather than later, not sure on the exact timing. But
we've put a lot of time and effort into it. We understand the importance. And we
think that in a fairly short period of time we'll have something to share there.
PAT LASHINSKY: We'd like to thank everyone for being on the call and all of
our agent employees for their great efforts in this quarter and for the busy
time we had. We look forward to talking with you all next quarter. Thank you
very much.
OPERATOR: And that concludes today's conference. We thank you for your
participation and hope that you have a wonderful day.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
Q1 2009 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 3 OF 23 STORIES
TRANSCRIPT: 031209a2109468.768
BODY:
Corporate Participants
* Jeetil Patel Deutsche Bank - Analyst * Jim Wilson JMP Securities - Analyst
Presentation
OPERATOR: Please stand by. We're about to begin. Good day, everyone. And
welcome to the ZipRealty Inc.'s fourth quarter 2008 earnings conference
call. At this time, all participants have been placed into a listen-only mode.
And the floor will be open for your questions following the presentation. It is
now my pleasure to turn the floor over to your host, Mr. Raphael Gross. Please
go ahead, sir.
RAPHAEL GROSS, IR, ZIPREALTY INC.: Thanks. And good afternoon, everyone.
With me on the call today is Pat Lashinsky, President and Chief Executive
Officer of ZipRealty, and Lanny Baker, the Company's Chief Financial Officer.
Earlier today, the Company issued a press release describing its results for
the fourth quarter and full year ended December 31st, 2008. A copy of that
release can be viewed on the Company's website at www. ziprealty. com under the
Investor Relations section.
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Before we begin, I'd like to note that during the course of this call various
remarks we make about our future performance, including 2009 business outlook
and guidance, evolving market conditions, and our plans, goals, expectations,
and prospects for the Company involve forward-looking statements.
Forward-looking statements also include comments on outperforming the market and
gaining share, focusing on sustained profitability, opening new markets,
investing in our business, improving productivity, and the timing of a potential
real estate bottom. All of these constitute forward-looking statements for the
purposes of the safe harbor provisions under the Private Securities Litigation
Reform Act of 1995.
Actual results may differ materially from the expectations, plans, and
prospects contemplated in these forward-looking statements and are subject to
risks and uncertainties, including those described in the Company's Form 10-Q
for the third quarter ending September 30th, 2008, and other filings with the
Securities and Exchange Commission, copies of which can also be viewed on the
Company's website under the Investor Relations section. The risk factors
identified in our SEC filings are incorporated by reference into this earnings
call.
Further, this non-GAAP method involves key data management uses for planning
and forecasting its future operations. The presentation of this additional
information should not be considered in isolation or as a substitute for results
prepared in accordance with GAAP and can be viewed at the Company's website
under the Investor Relations section.
With that out of the way, I'll turn the call over to Pat.
PAT LASHINSKY, PRESIDENT & CEO, ZIPREALTY INC.: Thanks, Raph. And thanks to
everyone on the call today. Let me start by making a few high-level comments
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
on the quarter and the year. We are pleased to report that net revenues
increased 18% in the fourth quarter to $25 million, in line with our
expectations in what was a very tough economic environment.
Our strength on volume was partially offset by lower average home sale
prices, which dropped 18% year to year. That softness in home prices impacted
our profitability. And we were disappointed to fall below our bottom line
outlook for the quarter and the year. However, there were signs in 2008
indicating that our strategy is working. And our market position is as strong as
ever.
Specifically, we increased revenues and gained market share once again. And
2008 marked the tenth consecutive year of top line growth for ZipRealty, no easy
task in any industry.
We don't know when a recovery may occur. But as we look at the country, we
see different regions in varying stages of either deterioration or recovery. And
I'd like to share a bit of that with you now.
Florida, Nevada, and Arizona are also working their way toward stability but
currently lag California. Simply put, there's still significant inventory levels
in these markets. And they haven't shown the same level of price capitulation as
on the West Coast. And we have seen that there's a certain amount of price
capitulation and affordability required before the housing market starts to
really move.
The east and the northeast have shown some stability over the last years. But
prices are certainly declining. Our sense is that this region was never as
inflated as California, Florida, Arizona, or Nevada. So the markets in the east
may not have as far to go on the down side.
Last, the Midwest has hung in pretty well over the last two years. But we're
starting to see foreclosures increase here as the economy deteriorates and
unemployment rises. All of this leads us to believe that a market bottom could
possibly form sometime in the back half of 2009 or more probably early into
2010, although numerous factors could certainly affect the timeframe.
Typically 40% of the visitors who come to the site do so organically, which
means we don't pay to attract these users. Best of all, our website continues to
be of great value to our agents. And we're converting our online leads into
ZipRealty real estate customers in record numbers. Consequently, we believe we
have a great footprint. Our brand is increasingly well known. And we're making
the most of our market position to outperform our peers.
Our competitors fall into two groups generally, either very large or fairly
small. Some of the larger players are dealing with expansion costs and debt
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
levels taken on in the last cycle that are forcing them to cut back and retract.
Our smaller peers often lack the capital necessary to survive and grow through
today's prevailing conditions.
Ultimately, we believe it's critical that buyers and sellers work with
knowledgeable agents in this environment. And that's where we believe our
technology and business model have an edge. So at the end of the day, we're
executing well in a tough environment. And we've demonstrated that we can grow
in up markets and down markets.
We're certainly cautious about 2009. But we like our seat at the table and
have a great deal of confidence in the future, given our progress.
And now, I'm very pleased to introduce Lanny Baker, who joined ZipRealty in
December as our Chief Financial Officer. Prior to joining ZipRealty, Lanny was
Chief Financial Officer of Monster Worldwide, the global leader in online
recruitment. In addition to managing financial operations and reporting, Lanny
a series ofster's strategic and financial planning, including
important acquisitions, partnerships, and capital allocation decisions.
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Earlier in his career, Lanny spent 16 years as a top-rated sell-side research
analyst. And we are excited about the contribution he has already started to
make to all facets of our business. Lanny?
LANNY BAKER, CFO, ZIPREALTY INC.: Thank you, Pat. I am tremendously excited
to be part of the ZipRealty team. And it's a privilege to be on the call today.
Before I get into the quarter, I want to share what brought me to ZipRealty and
what I've found here in my first three months.
First, I have enormous admiration and respect for Pat, the executive team,
and the Board of Directors at ZipRealty. Like me, this group is focused on the
long-term opportunity that emanates from creating an outstanding, innovative,
and deeply customer-oriented company, leveraging technology and the internet in
the process.
The leadership and employees of ZipRealty know real estate, the internet, and
the consumer cold. The team is passionate about near-term execution, serving
customers, employees, and shareholders, and about values that are essential to
me, including analytical rigor, integrity, transparency, and teamwork.
Second, I see not only enormous potential at ZipRealty in the long term, but
also convincing momentum in the present. ZipRealty has opened a wide growth
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
rate advantage over most of its peers in an environment that has brought of the
industry to its knees.
Third, we also share a view that there is much more we can do to serve
customers in the real estate industry, given ZipRealty's unique collection of
assets. I'm excited to help chart our strategic course toward those
opportunities over time. But let me also reiterate a key point. The top priority
for ZipRealty remains gaining market share within the $50 billion real estate
brokerage industry and doing so on the path to profitability.
But the reality is that Pat, Dave Rector, [Jenny Coombs], and the team have
ty forreat work on the financial operating side, providing the opportuni
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
us to focus on strategy, the business model, and the Company's long-term growth
and profitability.
Now turning to the financials, ZipRealty's results for the fourth quarter and
the full-year 2008 reflect the fundamental strength of the Company's strategic
position, as well as the significant impact of turbulence in the real estate
market. We entered 2009 positioned for continued volume, revenue, and market
share growth with operating costs under tight control and a balance sheet that
is strong and liquid.
Revenue growth of 18% year over year compares to 12% growth in our third
quarter. And revenues declined for many of our peers. And a healthy year-to-year
improvement in our net loss was propelled by a 47% incremental operating margin
on the revenue growth we achieved over the fourth quarter of '07.
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
At the same time, we continue to battle the cyclical headwinds Pat described.
We saw an 18% year-to-year decline in the average value of homes sold by
ZipRealty during the fourth quarter. And net transaction revenue per close
declined a little over $1,100 year to year for an average of $5,690.
Turning to the P&L in greater detail, fourth quarter 2008 net revenue totaled
$25.1 million. Net transaction revenue, which excludes referral and other
revenue, was $24.7 million, a 19% increase from last year. As mentioned, close
transactions increased by 42.8% for the quarter. But this was offset by lower
home selling prices.
As you might expect, we've seen a moderation in sales of new homes. However,
this has been more than offset by a surge in non-standard transactions, such as
REO, foreclosure, and short sale. Nearly 46% of our transactions in the fourth
quarter were non-standard transactions, which roughly matches the National
iation of Realtors data. The mix shift toward non-standard is pulling
overall revenue per close down as these transaction values are currently about
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
27% lower than those on standard transactions.
The referral and other revenue line dropped about 19% for the fourth quarter
versus the prior period, reflecting the end of our E-LOAN relationship in
October. Though the absolute dollar amount is small, these are typically
high-margin revenues for the Company. We are working to replace the E-LOAN
relationship and see non-transaction revenue as a real source of revenue and
profit opportunity in the future.
Our net loss for the fourth quarter was $2.7 million compared with a net loss
of $5.9 million in the final quarter of 2007. On a pro forma basis, excluding a
$2 million one-time gain from legal settlement in the recent quarter and
excluding non-cash stock compensation cost in both periods, our net loss was
$3.7 million versus a $5 million pro forma net loss in Q4 '07. The pro forma net
loss per share was $0.18 in Q4 compared with a pro forma net loss of $0.22 per
share in the fourth quarter of '07.
Now let me discuss results for our 23 existing and 12 new markets. I'll start
with our existing markets, where net transaction revenue for the quarter
increased by 12% to $21.9 million, driven by two main factors, a 33% increase in
the number of transactions closed offset by an 18% decrease in the average home
selling price.
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
We're pleased that productivity increased to 0.55 from 0.46 a year ago in our
existing markets. As we gain scale and efficiency, the contribution margin
improved by 400 basis points from the same period last year, resulting in market
level income of approximately $2.5 million compared to $1.4 million a year ago.
Moving to new markets, net transaction revenue for the quarter was $2.7
million, almost 2.5 times last year and representing approximately 11% of our
total net transaction revenue. Our new markets lost approximately $700,000
during the quarter compared to a loss of just over $900,000 last year as we
continue to march toward profitability with these investments.
On the agent front, we ended 2008 with 2816 ZipRealty agents about even with
September 2008 and up 29% or 636 relative to a year ago. Of the agent additions
year to year, 285 were added in existing markets while 351 came onboard in new
markets.
Pat and the team have talked for some time about ZipRealty offering a unique
and attractive agent platform for agents. And we're seeing increasing evidence
of that. Over the last eight quarters, while agents have generally left the
industry, we've grown our agent count by over 1,000 new agents. And our
d with the agent turnover rate lower year to year in each
corner of 2008.
Putting the data points together, we see a motivated and growing group of
agents who are becoming more familiar and effective with the lead flow and
productivity tools that ZipRealty provides, which showcases the substantial
advantages in closing transactions and satisfying customers that our model
offers.
Moving onto expenses, total expenses, excluding the one-time legal item noted
earlier, were up 7% year to year in the fourth quarter. Corporate costs,
excluding variable agent commission and compensation were down 4% year to year
in the fourth quarter, which is noteworthy considering the 40% increase in
traffic, 43% increase in closes, and 18% gain in revenue achieved in the
quarter.
Product development for the fourth quarter increased 10% on an absolute basis
but was steady at 9% revenue. The increase in product development was due to
higher website volume, supporting new markets, and an increased agent count, as
well as continued investments to improve our consumer website and agent tools.
G&A, general and administrative expenses were down 16% year to year in the
fourth quarter and decreased by nearly five points percentage of revenue for the
quarter. The year-over-year improvement reflects reduced corporate compensation
cost in 2008 as well as our commitment to grow without expanding overhead.
Although some new additions and programs were built into G&A going forward, we
will manage these costs aggressively given the economic backdrop and our focus
on moving to profitability.
Turning to the balance sheet, we ended the year with $49.4 million of cash,
cash equivalents, and short-term investment and without any long-term debt. Our
cash position was $80.4 million at the start of 2008. And we used $17.5 million
to repurchase one large block of common stock. $2 million went to capital
expenditures, largely related to technology infrastructure. And cash used in
operations was $11.6 million.
We believe that we have a better alternative for both agents and consumers.
And it centers around online strength and experienced local agents. This
combination of resources is a blueprint for growth and market share gains in
residential real estate. And our 2008 results under very tough conditions
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
reflect just that.
In fact, I believe that without the website-agent tandem, we would not have
taken such significant market share the past few years, nor would we have driven
our top line in this economy.
JEETIL PATEL, ANALYST, DEUTSCHE BANK: Great. Thanks. Hey, guys, I have a
couple questions here. I guess as you look at -- as you talk to your buyers in
the system everyday with your agents, I guess can you talk about whether they're
switching from buying a home in a traditional process? Or are they kind of
gravitating towards buying short-sale-oriented homes or foreclosures, et cetera?
Is there a shift in the way they're kind of looking at inventory out there? Or
is it just maybe a distinct buyer looking for that type of inventory? Or I guess
some behavior -- I just wanted to get a sense of how the customer is behaving in
general.
Second, I guess can you talk about is there any sort of rule of thumb that
you see in the business today where you see maybe a 50% pricing drop from peak
to trough. And that usually results in an up tick. And I guess maybe if you
could talk about where -- of the markets that you're in today, kind of how many
are in which camp of pricing drop of close to 50% versus maybe only down 10%
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
to 15%, 10%, to 20%? And I guess when do you kind of see the majority of your
markets coming out in terms of seeing that volume up tick in the business?
PAT LASHINSKY: Okay. I'll start with your first question, Jeetil. Hi. The
first question having to do with how consumers are looking at properties and
whether they're looking separately between distressed properties, REO,
foreclosure, and short sale versus traditional --
PAT LASHINSKY: -- most clients right now are coming in, starting off with the
hope that they can find a distressed or an REO or a short sale under the
expectation and thought that they will get a better value at a lower price on
those homes. And so most people come in. And that is the part where they're
starting in the process. However, as they get into the process and they start to
find more about what those tradeoffs are and the risks and the fact that you
don't get disclosures on the home when you buy an REO home. And short sales can
take 60, 90, 120 days after you make your offer until someone accepts. We're
finding that they're going back. And they're looking at more traditional homes.
And they're kind of balancing each of them off.
In terms of the peak to trough, that issue really does vary market by market.
In California, we've seen that once home prices drop 30% to 35%, it seems like
there's a real significant value difference that gets consumers much more
involved. And you start to see consumers getting much more active in the buying
of those homes and to the point of even seeing multiple offers.
That being said, it's pretty much all across the board. Market by market,
it's really different. It's kind of -- Lanny made some statements in his
comments. We're seeing varying degrees all throughout the country. Places like
California, we're definitely seeing home prices are down enough to be able to
move property. We're seeing Nevada and Arizona having good progress. But in
places like Chicago, we haven't seen home prices -- or Seattle, Texas -- we
haven't seen home prices drop as dramatically. And the volumes are still not
coming about as fast as they are on the West Coast.
JEETIL PATEL: And I guess we're now into March. And I'm just curious -- I
know you gave some broad comments about the year. But can you talk about how the
spring season is looking from at least a buyer activity interest level
standpoint? I guess transactions may be going into escrow as well.
LANNY BAKER: Sure, Jeetil. I can give you a little bit of a view on that. And
one way would be to go back and address the momentum in the short-sale and
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
foreclosure, non-standard transactions, where we saw accelerated growth in that
market between the start of 2008 and the end of 2008. And that has continued
even stronger probably into the first part of 2009. And that -- we're looking
there at growth rates that are 150% to 200% year over year in the non-standard
transactions. And that is clearly driving the volume for the Company. So I think
the brightest or sort of the strongest portion of the market right now is
clearly that non-standard that you stalked about.
OPERATOR: Thank you. (Operator Instructions) And we'll go next to Jim Wilson
Securities.
JIM WILSON: Let's see. I was wondering if you could give maybe a little more
granularity on pricing trends in particularly the existing market pool and
particularly maybe differentiating California -- obviously can see the overall
number and obviously some influence with your new markets being, of course, at
lower prices than places like California. But was wondering a little bit more
about the pricing trends.
LANNY BAKER: Sure. I think looking at the overall transaction revenue and the
pricing dynamics, there are probably three main factors to focus on. One is the
general trend toward lower home sale prices is probably the leading
consideration in the market right now. Second, we talked about a minute ago the
growing mix of foreclosure and non-standard is blending the average price point
down. And as I said, the non-standard transactions typically occur at prices
that are 25% lower than the standard transactions. And then the third thing is
that with jumbo mortgages so difficult to come by right now, the proportion of
higher-priced home sales has also been reduced.
JIM WILSON: Okay. And then I guess the other question -- your marketing and
business development expense in dollars dropped off a little bit year over year.
You're only adding one or two markets anyway. Do you see a trend of probably
spending a little bit less in that area in dollars than you had been for the
last few quarters?
PAT LASHINSKY: I think that you'll see that those dollars will continue to go
up on a sequential basis. But as a percentage of sales, we're trying to keep
that under control and pull that down slightly. But we are -- as we hire new
agents, as we bring new clients on, as we generate new leads, those costs go up
in those regards. It's not about trying to launch a new market where we do a
re about making sureping a good discipline there. It's mo
that we're growing through this market. And we're growing through a time when
we're adding a lot of agents and that we've got the appropriate fuel to drive
Q4 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
their productivity and to drive their success.
PAT LASHINSKY: I would like to thank you all for being part of this call. I
would like to thank all of our employees and agents for their great work and of
what was a very difficult environment and leading to results that we felt were
good in light of everything that was going on in the economy. We look forward to
talking to you again shortly and talking about the first quarter and what the
rest of the year maintains. Thank you very much.
OPERATOR: That does conclude today's conference. You may disconnect your
lines at this time.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 4 OF 23 STORIES
TRANSCRIPT: 110508a2005069.769
BODY:
Corporate Participants
Presentation
RAPHAEL GROSS, IR, ZIPREALTY, INC.: Thanks, and good afternoon, everyone.
With me on the call today is Pat Lashinsky, President and Chief Executive
Officer of ZipRealty, and David Rector, the Company's Chief Financial Officer.
Earlier today, the Company issued a press release describing its results for the
third quarter of 2008. A copy of that release can be viewed on the Company's
website at www. ziprealty. com.
All these constitute forward-looking statements for the purposes of the Safe
Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from the expectations, plans and prospects
contemplated in these forward-looking statements and are subject to risks and
uncertainties, including those described in the Company's Form 10-K for fiscal
d other filings with the Securities and Exchange Commission, copies of which can
also be viewed on the Company's website. The risk factors
identified in our SEC filings are incorporated by reference into this earnings
Q3 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
call.
Further, this non-GAAP method involves key data management uses for planning
and forecasting its future operations. The presentation of this additional
information should not be considered in isolation or as a substitute for results
prepared in accordance with GAAP. With that out of the way, I'll turn the call
over to Pat.
Close transactions were up 31% for the period, leading to revenue growth of
12% year over year. We were able to drive double-digit revenue growth in an
environment where our average transaction value dropped significantly. And
contributing to the decrease in transaction value was the deterioration of
credit during the period, where we saw, among other things, a precipitous drop
in the number of jumbo loans underwritten.
So I think the good news is that agents and customers continue to respond
very positively to our service model and technology platforms, but unfortunately
our bottom-line results for the period were adversely affected as volumes
essentially couldn't completely offset price declines.
Based on these results, we're refining 2008 guidance, which Dave will discuss
in a moment. But I think it's fair to say that the bigger takeaway was our gains
in productivity and transaction volumes for the period. Simply put, our model
Q3 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
is working and our brand is being recognized, despite the environment. We look
forward to making strategic progress in all our markets under the circumstances
and fully believe that we'll be a major beneficiary of a market turn which
should be characterized by solid volumes and higher transaction values.
Dave?
DAVE RECTOR, SVP AND CFO, ZIPREALTY, INC.: Thanks, Pat. Our net revenues for
the quarter were $31.4 million, an 11.9% increase from the third quarter last
year. Net transaction revenues, which exclude referral and other income, were
$30.8 million, a 13% increase from last year. Those transactions increased by
31% for the quarter, offset by decreased home selling prices.
Nearly 36% of our transactions for the quarter were nonstandard transactions,
such as REO, foreclosure, and short sales, which typically feature lower selling
prices. In fact, the selling prices of these nonstandard transactions average
25% less than the selling prices of our normal transactions.
Our pro forma net loss for the quarter was approximately $680,000 on a
decline of $601,000 in interest income alone. This equated to a pro forma loss
of $0.03 per share, compared to the pro forma loss of approximately $414,000, or
ing to new and existing market results, let me
Q3 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
remind you that new markets are defined as those having been opened for less
than one full calendar year.
The third quarter this year includes 23 existing markets and 12 new markets,
including the 10 markets opened during 2007, plus Long Island, New York, opened
this March ,and Hartford, Connecticut, opened in July. Net transaction revenues
for the quarter in existing markets increased by 3.5%, or nearly $1 million.
This was driven primarily by two factors, a 17.2% increase in the number of
transactions closed, offset by a decrease in average home selling price of
14.5%. The cost of revenue percentage for existing markets increased 120 basis
points to 58.4%, attributable primarily to increased [age] and expense
reimbursements, benefit programs to promote retention, as well as some mix of
agent commissions paid. Sales support and marketing expenses decreased by
$300,000, or 4.7%, compared to last year, primarily attributable to the
cost-cutting measures taken last fall. The net result, our existing markets
delivered market-level income of approximately $5.1 million, compared to $4.7
million a year ago.
Turning to new markets, net transaction revenues in new markets for the
quarter were $3.1 million, compared to $500,000 last year, and represented
approximately 10% of our total net transaction revenues. New markets cost of
Q3 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
revenues percentage for the quarter was approximately 53.9%. Sales support and
marketing expenses were $2.1 million, an increase of approximately $870,000
versus the year-ago period. This is primarily the result of supporting for the
entire quarter the five markets opened in last year's third quarter, as well as
the three additional markets opened subsequently.
Overall, new markets lost approximately $670,000 during the quarter, compared
to nearly $1 million last year. We're pleased to report that we continued to
gain market share in many of our markets, consistent with the trend we've
experienced over the last seven quarters. California, our closed transactions
for the quarter increased by more than 60%, keeping pace with the overall market
increase of approximately 65% in our markets.
California represented 38.2% of our total net transaction revenues for the
quarter, compared to 34.9% last year and 40% in 2006. In our existing markets
outside of California, closed transactions for the quarter increased by
approximately 4.8%, outperforming the overall market contraction of
approximately 7.2% in our markets.
Average net revenue per transaction in our new markets averaged $4,684 for
the current quarter. We added 551 net new agents over last year's third quarter,
bringing the total agent headcount to 2,814 as of September 30, 2008. Of the
total net additions, 221 agents were added in our existing markets and 330 in
our new markets, bringing our total agent headcount to 2,273 in existing markets
and 541 in new markets. Total agent headcount further breaks down to 791 agents
in our California markets and 2,023 in our markets outside of California.
Turning to the balance sheet, we ended the period with 51.9 million of cash,
cash equivalents and short-term investments and without any long-term debt. In
October, we reached a settlement in a pending lawsuit which provides for a
payment to us in the amount of $3.2 million.
PAT LASHINSKY: Thanks, Dave. This is certainly a historic period for credit
markets and residential real estate. And, as distracting as the headlines may be
from day to day, I think it's important to step back and realize that people are
still living their lives, relocating, moving into higher-valued homes and, in
many cases, lower-valued homes, but they're moving nonetheless. And although we
don't see current trends in the market necessarily reversing in the near term,
we may be seeing the early stages of inventory reductions in some of our key
markets.
This was particularly evident in areas where price points had declined by 30%
or more. In these areas, transaction volumes continued to increase
significantly. Let me take a minute to talk about California to illustrate my
point. Throughout the state, overall market transaction volumes in the third
ased 65% on the heels of a 13% increase in transaction volumes in
Q2. This spike in our view signaled more capitulation on the part of banks and
sellers and a step forward. Within California, there continued to be a lack of
Q3 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
consistency as volume increases were largely driven by the inland areas, such as
Sacramento and the southern California Inland Empire, with increases trending at
or above 100% year over year.
Overall, months of inventory have come down significantly year over year in
California, from about 16 months in September of 2007 to about seven months this
year. So what does this mean for California? Well, we believe that rising
volumes due to foreclosures is necessary. These transactions show no signs of
abating right now, but like we said last quarter, as these homes are cycled out
of existing inventory, market volumes will likely soften, positioning ZipRealty
for higher-quality volumes and presumably higher prices.
While our business was up versus October 2007, we did see a sequential
decline in pending transactions relative to September and the drop-off in our
opinion was largely due to a customer base that became distracted and very
cautious based on a daily rash of bank failures, bank mergers and what was
billed nightly by the press as the collapse of the US financial system. That
slowly morphed into talk of nationwide layoffs and recession.
As a result, we witnessed a slowing of growth in almost every category,
including registrations, offers, opens and close transactions, versus September.
We believe that these conditions are temporary and in 2009 and 2010 we believe
we can gain more ground in California through an increased emphasis on hiring
more aggressively, increasing our share of the foreclosure market and benefiting
as the jumbo loan market comes back. In markets outside of California, the story
third quarter.e
Still, other markets, such as Seattle, Houston, Austin and Dallas witnessed
significant year-over-year volume declines during the third quarter that were
fairly similar to those experienced in the first half of 2008. Generally
speaking, these markets have not witnessed significant home price declines, but
in October there was the same hesitancy we saw in California.
We're hopeful that recent government action will ease these short-term
concerns, and, as such, we remain busy managing costs and investing in areas of
the business that will allow us to scale without adding significant
infrastructure when the market turns. We've invested in several new markets over
the past 18 months and will continue to concentrate on driving performance.
Simply put, we view these markets as great opportunities for growth and we
plan to keep directing capital and human resources towards maximizing our
customer opportunities. Part of that planned effort will include technology, as
we continue to invest in features and tools on our website.
Q3 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Recent additions to the site include the ability for our clients to search
for bank-owned foreclosed properties, community walkability scores and agent
ratings, submitted by their clients. We believe that these and other new
features will further aid our clients in their home search, provide for a better
customer experience and also increase productivity.
In fact, our productivity this quarter increased year over year for the first
time in four years, and we credit better recruitment and training, retention of
great agents and our willingness to part with agents that haven't contributed.
Ultimately, it's critical that buyers and sellers work with knowledgeable agents
in this environment, and that's where we believe our technology and business
model have an edge.
Much like every other quarter in 2008, we continue to see high levels of
activity on our website, and third quarter registered visits were up 78% year
over year. The increase in visitation has also helped us identify and
communicate with lots of potential customers. In fact, we have a significant
database of buyers who, over the past two to four years, may have felt they
couldn't afford to enter the market at high prices. We're continuing a dialogue
mers and expect many of them to reenter the market
when credit stabilizes.
Q3 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Moving to costs, we continue to benefit from our 2007 cost rationalization
plan as evidenced by our decreased G&A as a percentage of sales over the past
two quarters. We're actively looking to become even more efficient but do not
intend to sacrifice the agent and customer experience to do so.
So, in the meantime, we are focusing on the agent and customer experience,
pulling back on new market development versus prior years and allocating dollars
and resources prudently to existing markets. We're also focused on preserving
our balance sheet strength and in combination we believe we'll be strongly
positioned for a market turn. We look forward to our next call and keeping you
Q3 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
posted on what we're seeing in the industry and, more importantly, our business.
Operator, we'd like to open the line for questions.
OPERATOR: Thank you. The question and answer session will be conducted
electronically. (Operator Instructions)
JIM WILSON, ANALYST, JMP SECURITIES: Oh, thanks, good afternoon, everyone.
Pat, I guess if -- I was looking at market share, both California and then non
California, so I guess by the numbers it was obviously a big bounce up in the
marketplace in general, but your sales growth was a little below obviously the
robust 65% for the whole state in total.
How did it look outside of California? Do you think you were still gaining
share and can you quantify it? The other question about California is, is there
-- you've been gaining share almost every quarter, I think, prior to this.
Anything structural that wouldn't prevent you to keep gaining share in the
future, even though it's slipped a little bit this quarter?
PAT LASHINSKY: Great. I'd like to end with just a message from me to our
employees. I want to thank you all for all you continue to do to continue to
ensure that our clients get the best service possible, and all the information
and support they need to get through these difficult times, while maintaining
our 96% satisfaction as you're doing it all.
OPERATOR: That does conclude today's conference. You may disconnect your
lines at this time.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 5 OF 23 STORIES
TRANSCRIPT: 080708an.794
BODY:
Before we begin, I'd like to note that during the course of this call,
various remarks we make about future expectations, plans, goals and prospects
for the Company, including, but not limited to, those involving our future
performance, business outlook and 2008 guidance involve forward-looking
statements.
PAT LASHINSKY, PRESIDENT, CEO, ZIPREALTY, INC.: Thanks, Raf. On today's call,
we're going to change things up a bit. I'm going to make some very brief remarks
upfront and the turn call over to our CFO Dave Rector to discuss second quarter
results. I'll then reserve the bulk of my comments for the second half of the
call.
So, with that out of the way, our results for the second quarter were in line
with our expectations given the ongoing economic challenges we all hear about
everyday. But despite these headwinds, we feel good about the business and see
no reason to change our full-year guidance at this time. We see this as
significant.
Given that at the time of our original forecast, we assumed that credit
markets would have improved relative to where they will likely be in the second
half of 2008. Due to solid execution, we believe that increases in transaction
volumes, 17% in the second quarter alone, along with market share gains should
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
help preserve our outlook.
Don't get me wrong, we'll have to continue to execute at a high level, but
we're seeing progress in the business as evidenced in part by the fact that we
were the number one most trafficked residential real estate brokerage site in
the nation in June. Dave?
DAVID RECTOR, SVP, CFO, ZIP REALTY, INC.: Thanks, Pat. Net revenues for the
quarter were $30.4 million, a 2.7% decrease from the second quarter last year.
Net transaction revenues which exclude referral and other income were $29.9
million, a 2.1% decrease from last year.
This was entirely attributable to decreased home selling prices that our
closed transactions increased by over 17% for the quarter. Approximately 29% of
our transactions for the quarter were non-standard transactions, such as REO,
foreclosure and short sales, which typically feature lower selling prices. In
fact, the selling prices of these non-standard transactions averaged over 23%
less than selling prices of our normal transactions.
Our pro forma net loss for the quarter was approximately $800,000 or $0.04
per share. This compares to pro forma income of approximately $140,000 or $0.01
per share in last year's second quarter.
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Turning to new and existing market results. Let me remind you, the new
markets are defined as those having been opened for less than one full calendar
year. Therefore, new markets for the second quarter this year, include the 10
open in 2007, also Long Island, New York, opened in March. So, we have 11 new
markets and 23 existing markets for the quarter.
Turning to our new markets. Net transaction revenues in new markets for the
edarter were $2.6 million compared to $100,000 last year, and represent
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
nearly 9% of our total net transaction revenues. The new markets'
cost-to-revenues percentage for the quarter was approximately 51.5%.
We're pleased to report that we continue to gain market share in many of our
markets consistent with the trend we've experienced over the last six quarters.
California. Our closed transactions for the quarter increased by
approximately 20.4%, significantly outperforming the overall market increase of
approximately 13% in our markets. California represented 35.3% of our total
transaction -- net transaction revenues for the quarter, compared to 38.9% last
year and 40.3% in 2006.
Average net revenue per transaction in our new markets averaged $4,562 for
the current quarter. We added 489 net new agents over last year's second
quarter, bringing the total agent count to 2,559 as of June 30, 2008.
So, the total net additions, 148 agents were added in our existing markets,
349 in our new markets, bringing our total agent head count to 2,118 in existing
markets and 441 in new markets.
This total agent head count further breaks down to 733 agents in our
California markets and 1,826 in our markets outside of California. This
represents an increase of 274 net new agents on a sequential quarterly basis.
Average age of productivity for the quarter was approximately 0.66 transactions
per agent per month.
Turning to the balance sheet. We ended the period with $55.1 million of cash,
cash equivalents, and short-term investments without any long-term debt. As you
will recall, in early April, we repurchased all of the shares of our common
stock held by Pyramid Technology Ventures for approximately $17.4 million, which
primarily accounts for the variances from last quarter.
Let me wrap up by reiterating our guidance for 2008, which remains consistent
with what we communicated on our last call. For the year, we expect net revenues
of between $114 million and $118 million, representing growth of 10% to 14%
imately $104 million.revenues of approx
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Overall, we expect a GAAP loss in 2008 between $8.9 million and $10.4
million, which equates to a loss of $0.42 and $0.50 per share based on our
approximately 20.9 million average shares outstanding. On a pro forma basis, we
expect our loss to range from $4.9 million to $6.4 million or $0.23 to $0.30 per
share compared to 2007 pro forma loss of $7.6 million or $0.34 per share.
PAT LASHINSKY: Thanks, Dave. We believe that some of the market forces that
will ultimately repair the residential real estate market are at work, but
there's certainly a daily ration of bad news for everyone to digest. That said,
there are some positives intermingled with the negatives. So, I'm happy to
discuss what we're seeing on our website and hearing from our clients.
As I stated, volume in these areas are still lower than what we'd like as
buyers who read the negative headlines everyday think prices are coming down,
but sellers who may not yet be feeling the pinch of the economy are still
holding out on price. We believe, the two sides will come together in the next
18 months as personal situations will ultimately require action.
So, again, foreclosures are working their way out of the system, which is
positive. But buyers and sellers just have a different perspective right now as
the headlines encourage buyers to wait for a better deal with sellers holding
out on price for the time being. We believe that if economic conditions persist,
we'll likely see a capitulation and a compromise on price, but we can't be sure
if and when that will happen.
So, while market forces remain at work, we're continuing to invest prudently
in the business and where we can rationalize costs. Let me discuss both areas of
focus.
We've also invested in the features and tools on our website, which serves as
our main connection with agents and customization line. Recent additions to the
site, include the ability for our clients to search for bank-owned foreclosed
properties and a voting feature that polls the ZipRealty community on which
homes they feel are the best value.
We have also introduced a real estate price prediction game that asks players
to guess the sales price of current for-sale homes, which is a Web 2.0 Power of
the Crowds web application. We believe that these new features will further aid
our clients in their home search and will provide unique information on for-sale
homes only available on ziprealty.com.
And we think that these additions are making a difference. We continue to see
high levels of activity on our website through the first six months of 2008.
Registered visits to our website have been up 35% year-over-year. And in June,
according to Hitwise, we were the number one trafficked brokerage site in the
country and the third most trafficked site in all of real estate.
The increase in visibility has also helped us attract and retain some
talented people. In fact, as you saw in the second quarter, margins were
slightly down due to the fact that our most experienced and highest paid agents
are driving volumes. This comes at a time when many realtors are leaving the
industry.
Now, there are wildcards out there, both positive and negative. And
regardless of our executions, they will play a part in how long the cycle lasts.
On the negative side, we don't know the speed with which bank lending can
rebound. Right now, credit is tight and that certainly has slowed overall
volumes. On the positive side is the Housing and Economic Recovery Act that
President Bush recently signed into law. So, let me take moment to discuss it's
implications.
First, the Act creates a $7,500 tax credit for select first-time homebuyers
urchase between April 9th, 2008, and June 30, 2009. The
Second, at the end of 2008, there will be change to conforming loan limits.
This modification permanently increases the size of the loans that Fannie and
Freddie can buy, which is important to many of our markets where the average
home price is higher than the previous conforming limit.
In our opinion, each of these points are good for the market, but how much
they will help, if any, and over what time period remains uncertain. So, again,
despite the market, we are executing our plan. Our brand is really showing signs
of emerging promise. And we're excited about our market position. Operator?
And, second, I guess, if you could talk about the tightening credit markets
-- you talked about how it had some impact on your volume. If you can kind of
quantify that for us that would be helpful? Thanks.
PAT LASHINSKY: So, hi, Herman. We basically -- we're looking at average home
prices for the year being down about 15% as we would go into our guidance. What
was the second part of the question?
PAT LASHINSKY: The tightening credit markets has been one of the real
difficulties that are agents have to deal with everyday and when they work
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
with clients. It's a real factor that's out there for -- largely on our homes
that are jumbo. Those loans are very, very difficult to get right now. If you're
outside the conforming and outside of a great credit client, it takes a
significantly more time. And we're having more clients that believe that they've
got approval.
They go in. They work with an agent. They find a property. They get a
contract written. And then, they find out that the loan that they had applied
for is no longer there and they're not able to get the credit anymore. And so,
the volumes are still being restricted based on the tightness in the credit
markets, the tightening of the conditions and the inability for clients to find
great lending sources right now.
PAT LASHINSKY: It has extended. And the hard thing is to differentiate how
much it's extended because the banks are just busy with dealing with foreclosure
and REO properties and what they have. But it is taking longer for deals to get
nd we think that part of it is because there's just more caution out
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
there and they're dealing with more properties. But it is -- that time to close
has lengthened.
UNIDENTIFIED PARTICIPANT: Got it. And last question, I guess. On your share
of -- you talked about how shares of non-standard transactions are now
representing about 29% of your transactions, but ASPs are less. But clearly an
opportunity for you guys to help kind of cleanup some of the mess that's been
out there.
I was wondering if you could talk about how you guys are getting access to
that inventory? And what share do you think you guys have of that marketplace?
PAT LASHINSKY: I don't have any idea, honestly, on what share we have of the
marketplace. I don't know that we have a good enough data source to give you
that information. But what I will tell you is that we have what we feel are very
good comprehensive data sources that we've been providing to our agents for
about the last four to five months. And just recently, as of about three weeks
ago, we started providing -- making that same information available to clients
on our site. So, clients can go on and search for foreclosed properties, REO.
And we also allow our agents to see all of those. Based on all the public
information, documents that are filed. We get a data feed directly to us and
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
we're able to provide that to clients that we think it's appropriate for.
So, it's one of the tools that we're able to provide to clients. We think
that we have a very good option for both our agents and clients that allow us to
be probably better dealing with this than many other brokerages that are out
there. And that's part of the reason why we think we've seen the increases in
this business.
And then, also, a similar question around changes to the economic model
itself. Have you changed the way you're paying out your brokers? Do you
anticipate making any changes to that? And then, finally, just generally
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
speaking, do you think you can achieve profitability without having a macro
turnaround? Thanks.
PAT LASHINSKY: Okay. Couple questions there. Let me start with the first one.
Positioning of the brand. I think that one of the things that has definitely
happened in this market is there has been -- there's even more of a demand for
full-service, high knowledge, very transparent brokers that can provide value to
clients.
And I think that that is really the position that ZipRealty has attained and
it has in the marketplace. It's perceived as being one of the best sources for
data. It's very interesting that despite the fact that we're only in 34 markets
-- 35 markets now, that we had the number one most trafficked real -- brokerage
site in the month of June, despite the fact that we're competing against many,
many brokerages that are national.
The reason for that is because clients believe that we give them very, very
good information and very good data. Then, the reason that we see a 17% increase
in the volume in the second quarter is because we're providing a very good level
of service and a good value. And so, the brand is really developing.
In terms of changing the model and what we've done in terms of paying agents.
We continue to evaluate and tweak the model on a regular basis -- on a monthly,
quarterly and yearly basis. We're always looking at ways to become more
efficient. Ways to increase the structure. Ways to add value. We are in the
process of doing a compensation test in a couple of districts for a different
way to pay agents to see if we can encourage productivity and allow agents to
make more and allow the Company to make more at the same time. And so, we're
continuing to work on that as we go forward.
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
But, in terms of the macro conditions of the business, I don't think that we
need to make real changes to the model right now. I think that we believe that
we are showing that this model works. And it works in a good market. And it
works in a tough market. And we're gaining. And we believe that our positions
are growing. We're growing market share in all of these markets that we're --
many of the markets we're competing in.
And we're continuing to show that our model is differentiated for both agents
and clients. One of the things that we're seeing is that we're getting more
experienced agents coming over and joining us than we've ever had before. And I
think part of the reason for that is that they've realized that the market is
very difficult. It's expensive. It's hard to stay in.
And in a situation like ours, where we provide them the technology, the
tools, we get rid of some of the risk of their upfront costs and we provide them
clients to work with to be very significant for them. Another advantage of our
model that allows us to grow through these difficult times.
So, I think that the model is working. I think that on a macro level, it's
got many of the right things in place. And we will continue to evolve it and
look at new ways of doing business as we go forward. But right now, we're not
looking for any major macro adjustments in the business.
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
In terms of profitability. Do we need the market to turnaround to be
profitable. I think that one of the advantages we have is that new markets will
drive us towards profitability as they ramp. A stable market would definitely be
a positive. But if we could continue to grow our new market business, we
increase our agent productivity, I think that we can get the profitability with
some minor adjustments. As long as the market doesn't continue a nose-down dive,
I think that we've got some good upside.
OPERATOR: (OPERATOR INSTRUCTIONS). We'll take our next question from Jeff
Graf with Springhouse Capital.
JEFF GRAF, ANALYST, SPRINGHOUSE CAPITAL: Hi. I was just wondering if you
could elaborate on your guidance a little bit more? It looks like -- I believe
you said you're going to be breakeven in the second half of the year, which
would be about a $7 million improvement over last year. So, I'm just wondering,
if you could drill down into what you're seeing that gives you confidence for
that improvement?
First of all, as Pat talked about earlier, we have no idea how long it's
going to take to digest this inventory of these non-standard transactions and
foreclosures. So, we're expecting those trends to sort of continue throughout
the remainder of the year.
We do expect to increase our agent head count, which will help us on
transactions, primarily in our new markets as they continue to ramp up. They are
contributing a growing percentage to the number of transactions overall in our
revenue.
The other thing is, we have been seeing our productivity trending up slowly
over the year. And we're optimistic that what we saw in California in the second
quarter with transaction count up -- that if productivity continues to trend up
a little bit and with additional agents and with the new markets, that's where
we're looking for that incremental revenue.
And the other thing is sort of a comparison to last year. Last two quarters
of 2007 were heavily impacted by the mortgage meltdown. So, we anticipate a
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
much stronger second half of the year for '08 compared to what we had in '07.
DAVID RECTOR: When we're talking about that that's obviously the
profitability on a pro forma basis.
JEFF GRAF: Of course. Could you talk a little bit more about SG&A or G&A in
the quarter. Down to $2.9 million, sequentially, from $3.7 million? Is there
more room for a decrease in G&A? And then, can you also talk about what led to
that reduction?
DAVID RECTOR: I think, there a couple of things. Now, one, you have to keep
in mind that last year, we had approximately $700,000 of one-time expenses on
the -- when our previous CEO left. So, the -- to kind of level the playing field
there, there is a different level there. But, I think, it -- a lot of this goes
back to the cost rationalization program that we put in last fall.
We continue to look at all of the cost in the Company and think that -- at
this point, we manage the Company to the current circumstances. We think we have
an adequate level of support in G&A and I think we're optimistic that given a
rather steady state there that we can maintain that cost level.
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
PAT LASHINSKY: Yes, Jeff, one thing is costs may go up a little bit, as we
continue to grow the business and it gets bigger. But as a percentage, we
definitely think that there is room for the -- for it come down as a total
percentage. But that -- just because it's coming down doesn't mean that total
absolute dollars will come down. Because as we continue to grow the business and
get more transactions done and have more agents, there is the opportunity where
we may need to have some support there to help that. But as a percentage, we do
think that there is good room there.
JEFF GRAF: Okay. But this $2.9 million in the quarter, I mean, is that a
decent number to work with? Or was that abnormally low?
DAVID RECTOR: That is just a little bit low. There were certain -- we
actually had an incentive program that was in our first quarter 10-Q that looks
like it was not met at mid-year, so we had about a $300,000 credit in there. So,
I think, you want to look at that being a -- probably a run rate around 3.2.
JEFF GRAF: Okay. Great. Thanks for the answers.
PAT LASHINSKY: Thank you very much. We will continue to focus on executing
and taking care of our buyers and sellers throughout the rest of the year. I'd
like to thank all of our agents and employees for their continual hard work in
these very difficult times as we continue to work hard to separate ourselves out
and continue to provide a superior service for our clients that are out there.
Thanks everyone, and we look forward to talking to you in the third quarter.
OPERATOR: That does conclude our conference call for today. Thank you,
everyone, for your participation. Have a wonderful day.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from
Q2 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
those stated in any forward-looking statement based on a number of important
factors and risks, which are more specifically identified in the companies' most
recent SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 7 OF 23 STORIES
Copyright 2008 Voxant, Inc.
All Rights Reserved.
Copyright 2008 CCBN, Inc.
All Rights Reserved.
FD (Fair Disclosure) Wire
TRANSCRIPT: 050708a1833902.702
BODY:
Corporate Participants
* Jeetil Patel Deutsche Bank - Analyst * Ben Schachter UBS - Analyst * Jim
Wilson JMP Securities - Analyst * Jack Pitts Steadfast Financial - Analyst
Presentation
It is now my pleasure to turn the call over to Don Tomoff. Please go ahead,
sir.
DON TOMOFF, IR, ZIPREALTY INC.: Thanks, and good afternoon, everyone. With
me on the call today is Pat Lashinsky, President and Chief Executive Officer of
ZipRealty, and Dave Rector, the Company's Chief Financial Officer. Earlier
today, the Company issued a press release describing its results for the first
quarter of 2008. A copy of that release can be viewed on the Company's website
at ziprealty. com.
Actual results may differ materially from the expectations, plans and
prospects contemplated in these forward-looking statements and are subject to
risks and uncertainties, including those described in the Company's form 10-K
for fiscal 2007, and other filings with the Securities and Exchange Commission,
copies of which can also be viewed on the Company's website.
The risk factors identified in our SEC filings are incorporated by reference
into this earnings call. Please also note that the supplement is consolidated
ance with Generally Accepted Accounting Principles in the United States. ZipReal
ty uses a non-GAAP measure of
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
net-income loss it refers to as pro forma net-income-loss earnings. That
excludes certain items, including stock-based compensation, non-cash income
taxes and certain one-time items, if any.
Further, this non-GAAP method involves key data-management uses for planning
and forecasting its future operations. And presentation of this information
should not be considered in isolation or as a substitute for results prepared in
accordance with GAAP.
With that out of the way, I'll turn the call over to Pat.
PAT LASHINSKY, PRESIDENT AND CEO, ZIPREALTY, INC.: Thank you, Don, and thank
you all for joining us on the call today. First, I'd like to provide a brief
overview of our first-quarter performance, after which, Dave Rector will discuss
financial specifics. I'll then wrap up the call with some closing thoughts and
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
provide perspective on our outlook for the remainder of 2008.
To give you some perspective, Yahoo was number three and Zillow was number
four on the list, and they have a far denser national penetration. We also
surpassed the $100 million mark in client rebates in late April. To me, this
means we're delivering on our service-driven value proposition every day.
And that effort has grown nationally as we've opened new markets across the
country and consumers are becoming more aware of us and how we change the
experience of buying and selling homes. We're proud to say that we've
%, whichshed this while maintaining a client-satisfaction rating of 96
is remarkable for any business.
DAVE RECTOR, CFO, ZIPREALTY, INC.: Thanks, Pat. As we review the quarter,
please keep in mind that we expect the first two quarters of 2008 to show
negative comparisons to the similar periods last year, as the impact of the
third quarter 2007 residential mortgage crisis wasn't reflected in our results
in the first half of 2007. As 2008 progresses, however, our comparisons to last
year will become more favorable, and we expect positive year-over-year
performance in the third and fourth quarters.
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
So, with that in mind net revenues for the quarter were $20.6 million, an
11.8% decrease from the first quarter last year. Net transaction revenues, which
exclude referral and other income were $20.1 million, an 11.3% decrease from
last year. Our pro forma net loss for the quarter was approximately $5.6
million, or $0.24 per share. This compares to a pro forma loss of approximately
$2.3 million, or $0.10 per share, in last year's first quarter.
Turning to new and existing markets results, let me remind you that the new
markets are defined as those having been opened for less than one full calendar
year. And, therefore, new markets for the first quarter this year include the
ten opened in 2007, plus Long Island, New York, which we opened in March.
Turning to new markets. Net transaction revenues in new markets for the
quarter were $1.6 million, and represented nearly 8% of our total net
transaction revenues. We had no significant operations in the first quarter last
year, as we had only opened the first two of our 2007 markets in March.
The new markets cost-to-revenues percentage for the quarter was approximately
50%. Sales, support and marketing expenses were $1.7 million, an increase of
almost $1.6 million versus the year-ago period. This was the result of
supporting the nine additional markets opened since the first quarter of last
year. Overall, the new markets lost approximately $940,000.
Average net revenue per transaction decreased by 8.6% in our existing markets
to $6,662, from $7,292 in the prior year, due primarily to the significant
increase in foreclosure, bank REO and short-sale transactions. Average net
revenue per transaction in our new markets averaged $4,661 for the current
quarter.
We added 410 net new agents over last year's first quarter, bringing the
total agent account to 2,285 as of March 31, 2008. Of the total net additions,
94 agents were added in our existing markets, and 316 in our new markets,
bringing our total agent headcount in existing markets to 1,951, with 334 in new
markets.
If first-quarter revenues this year matched the first quarter of 2007, G&A as
a percentage of revenues would have been 15.7%, a decrease of approximately 130
productoints. In fact, all corporate-level expenses, including
development, regional and corporate sales support and marketing, in addition
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
to G&A, would have been 33.1% of revenues, a decrease of 440 basis points. We
feel this begins to demonstrate the potential leverage in our model,
particularly under more normalized market conditions.
We reached a settlement near the end of March, which calls for a payment for
approximately $625,000. And, as a result, we recorded a charge in that amount
during the first quarter. Wrapping up the P&L review, as Pat stated earlier, the
first quarter came in basically in line with our expectations.
Although we did not provide specific guidance on our last earnings call, we
stated that we expected the quarter would continue the trend line of the fourth
quarter, down year-over-year on the top line, with a pro forma loss comparable
to the fourth quarter. And that's basically how it played out.
Turning to the balance sheet. We ended the period with $72.4 million of cash,
cash equivalents and short-term investments, and without any long-term debt.
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
In early April, we repurchased all of the shares of our common stock held by
pyramid technology ventures for approximately $17.4 million, which will be
reflected on our second-quarter balance sheet.
Let me wrap up by updating our guidance for 2008, which remains consistent
with what we communicated on our last call, except for adjustments required to
reflect the impact of the 3.5 million shares [repurchased] from Pyramid. The
revised guidance reflects the reduction in interest income, and the related
decrease in weighted-average shares outstanding for the full year.
Therefore, for 2008, we expect net revenues of between $114 million and $118
million, representing growth of 10% to 14%, compared to 2007 net revenues of
approximately $104 million. Overall, we expect a GAAP loss in 2008 of between
$8.9 million and $10.4 million, which equates to a loss of $0.42 and $0.50 per
share, based on approximately 20.9 million average shares outstanding.
On a pro forma basis, we expect our loss to range from $4.9 million to $6.4
million, or $0.23 to $0.30 per share, compared to the 2007 pro forma loss of
$7.6 million, or $0.34 per share. As our full-year guidance suggests, we expect
d half of the year, asthe 2007 new markets mature against the backdrop of more f
avorable
year-over-year comparisons.
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
And at this point, we still see opening two to four new markets during 2008,
including Long Island, New York, which I previously mentioned, and Hartford,
Connecticut, for which we've announced a third-quarter opening.
Pat?
PAT LASHINSKY: Thanks, Dave. After a full year of expanding our brand
nationally, we're now focused primarily on optimizing results in the 16 markets
we opened in 2006 and 2007, along with the two to four markets we'll open in
2008. In my mind, optimizing results centers around productivity and gaining
share, and I believe we can make progress on both of these goals.
First, in terms of productivity, over the last two quarters, we've discussed
our agent-accountability initiative and the focus on retaining and rewarding
those agents who meaningfully contribute to improving this metric. If you
recall, this resulted in us losing agents at the end of 2007. But as we stated
on our last call, we retained all but four of our top-200-performing agents.
The game plan on productivity in 2008 remains the same -- stress quality over
quantity, and look for people who can excel in our culture. The good news is we
feel very good about our entire team as we head into our peak season.
We've also added features to our search, including the ability to look for
homes based on monthly payment, rather than just price or location. For many
clients, one of the most important factors that determines a home purchase is
litiesnthly payment. Based on that fact, we've developed search capabi
that allow clients to filter the possibilities that way and arrive at a set of
choices that match their budgets.
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Additionally, we continue to add functionality to our mobile search tool so
that our clients can easily and effectively search anywhere they are, on their
mobile devices. These features come on the heels of December's addition, which
offered interactive map features and reviews on local businesses.
All these customer and agent enhancements have one thing in common -- through
innovation, they simplify and enhance the experience, which, in our view, will
position our agents for higher productivity and greater market share, while
building a brand that exemplifies value in the marketplace.
Third, senior management, along with the rest of our team, is energized, and
our management and board have confidence in the future. Part of that confidence
is underscored by our commitment of capital towards the Pyramid repurchase. As
time passes, we feel confident that we'll look back and view that as a great use
of shareholder capital. Finally, I am very proud of all of our people, and
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
would like to thank them for their ongoing efforts as we continue to execute our
plan.
Operator?
(OPERATOR INSTRUCTIONS)
Can you talk about what percentage of the transaction mix came from just
REOs, foreclosures, short sales, et cetera? And second, on that point, what is
the driver of growth on the -- on that transaction side? Is it access to
inventory, and you guys getting access to where these homes are, or is it
actually more the buy side still, in that segment? And I have a follow-up.
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
PAT LASHINSKY: Great. Thanks, Jeetil. So, on the first question, which is on
the percentage of transactions that are from non-traditional, it really has
varied on a month-to-month basis in terms of what we're seeing. We're seeing
anywhere from, let's say, 30% -- the mid 30s to the low 40s as a percentage of
what those transactions are making up for us overall.
And we think that that's being driven by, one, our agents having more access
to that information, being more comfortable with that part of the process and
being able to see those homes. And, second, as those homes have come down in
prices more aggressively than a traditional seller has, its made affordability
for a number of buyers be much higher. And so buyers are more willing to
participate in that because of the affordability of those homes.
The fact that we're able to provide them access to it, we're able to
negotiate through, and it is a different process than a traditional -- you do on
a traditional home -- you have to interact with the banks and with their
departments more -- much more aggressively. And we think that that just adds
value to the value that our agents are adding to the clients.
PAT LASHINSKY: So when we -- these transactions are taking place all over the
country. It is not just in California. We are seeing these, basically,
everywhere we look. And it's broad-spread across the entire country. There are
some places where it seems like there has been a little bit less. And those are
primarily in markets where there was not as much -- where the housing markets
never got as heated as they did in some others.
PAT LASHINSKY: The spring season, we think, has started off okay. It's doing
fine. We're seeing very good demand from consumers. We're seeing lots of
activity. The big question is whether there will continue to be liquidity in the
credit markets.
It seems like there's some liquidity coming back in the credit markets, which
is a good thing, and will be very helpful as we go into the spring season. And
we seem to be getting a lot of -- making pretty good traction at getting through
will be the homes that are going into foreclosure and REO, which
In terms of prices for '09, we don't really know yet. We're not even sure
where '08 is going to end up. I would tell you that if we can assume that there
is some liquidity that comes back into the credit markets, and that we get
through the heavy amount of resets that are supposed to take place with the ARM
loans that were supposed to be taking place in kind of May, June, July of this
year -- and we get through those inventory spikes, we think that there's a good
chance that the price declines will, at best -- or at worst -- moderate and
probably hold their own going into '09.
BEN SCHACHTER, ANALYST, UBS: Hey, guys. I missed the first part of the call,
so I'm not sure if you went over this, but could you give the operating metrics
for guidance for the year in terms of agent count and productivity and those
kind of things?
BEN SCHACHTER: Agent count at the end of the year -- what do you expect?
PAT LASHINSKY: So, as we look at it, we're basically -- we have not been
commenting on where we expect the total agent count to end up this year, except
for to say that it will be up, driven primarily by growth in our new markets, as
we build up and establish those teams overall.
But we did not give an ending agent count overall for the year. And that's
something we're just -- we're continuing to build the business as we go forward,
and we're trying to maintain some flexibility based on what we're seeing in the
markets and based on the activity levels and what we're seeing. So we're --
BEN SCHACHTER: Well, in terms of agent productivity, would you expect that to
be down throughout the year?
And the last question you had was about pricing -- overall pricing. And I
think our expectation is that we'll continue to see some degradation in pricing
as we go through, between now and the end of the year -- probably not dramatic
amounts. But, as we said, pricing could be down as much as 10% between now and
the end of the year.
BEN SCHACHTER: Okay. And the last question I have -- can you just explain the
circumstances of how your client came to buy back the shares from Pyramid?
PAT LASHINSKY: The circumstances there were that we knew that Pyramid was
selling their shares off over a period of time. They were putting them out on
the market every 90 days. They were selling a tranche that they were allowed to
sell.
And so, we felt like it was a very good use of the capital to get those
shares back and to bring them back into the fold.
BEN SCHACHTER: Okay. And then last question -- in terms of the competitive
environment, are there potential acquisitions out there that would make sense in
this environment?
PAT LASHINSKY: Well, we're always going to look at everything that's out
there from an M&A standpoint. Our goal right now is to focus on optimizing on
all of our markets and do what we're supposed to do. But we're always looking.
We're always listening. We're always seeing opportunities.
The one thing that I'll tell you that's difficult is if you look in a very
close-in environment, many of the big competitors are losing a lot of money and
they have very high fixed costs with their costs of their offices and their
environments that they have. And so I think that those environments are going to
be very difficult.
But we're going to look at every opportunity. We're also going to look at
unique things that, maybe, are a little different, that are tied to this
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
space, where there's more value as the market has gotten tough, and it's
squeezed some players.
JIM WILSON, ANALYST, JMP SECURITIES: Thanks. Good afternoon. I did miss the
first part of the call, but I was wondering if, as you target the market and the
opportunities, and obviously, you expand it by city, is there -- are you -- are
there any initiatives -- are you seeing greater success at different ends of the
market? Are you being able to assist the [buy-more] activity at the entry-level
part of the market, as an example?
And so the upper end of the market, we're finding, is pretty difficult right
now. And the lower, very-first-time-buyer is also a difficult market because
there's been significant tightening of the credit standards. And so, whereas
people were able to get loans for 0% down or 3% down a year ago, those loans
really don't exist right now.
And so, where it really is is we're finding that there is a very good kind of
middle niche there between people who are not necessarily first-time home
buyers, but people who have bought a condo, for example, or gotten some equity
out of somewhere else, and they're kind of moving into that second place.
The additional thing that really helps is the movement of the conventional
loan rates to higher amounts -- has meant that that -- in those markets, we've
been able to move those price points up where consumers are able to do better
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
to those new higher price points that are allowed to be part of the conventional
loan. So the mix of moving up continues to be pretty good in that middle side.
The buy-side -- for us, the buy-side mix remains very, very high. That's
probably one of our great strengths -- is that we know how to take care of
buyers, and we know how to help them. And we have great tools on our website.
Our agents are very comfortable and familiar. And in this market, where it's
very hard for buyers to figure out how to value a property, our agents are
expert at that and do have good advantage.
I think, right now, it's a big advantage to have a lot of buyers. And I think
that there are a lot of people that don't have buyers. And if you go out and you
find a property you like, most sellers are willing to negotiate. So that's a
real strength for us.
And we have a significant number of buyers -- a very, very high number of
buyers. That's a real area that we continue to leverage. And that gives us a
good ability to understand what's going on in the market, to have good awareness
and a good negotiating power when we go in to help our clients, because of the
fact that we have so many buyers.
Well, I'm sure you're not going to tell us where you're going to see the
least improvement. But anyway, why not focus on the greatest improvement?
The other thing that happens is, just overall, on a macroeconomic condition,
we see that when you get to higher home prices, productivity is lower overall,
as agents tend to be willing to do less deals because they're making more money.
You combine that with the fact that there are less deals being done in the
higher-priced markets -- in those markets, productivity has dropped
dramatically.
PAT LASHINSKY: Okay, Jack, just to clarify, I gave you the beginning of Q1.
The end of Q1 or the beginning of Q2 would have been 627. So I just want to
clarify I'm giving you the right answer for that question.
JACK PITTS: Okay. And if you had 30% to 50% of your transactions -- were
non-traditional, do you think that matches the rest of the market in terms of
your competitors?
JACK PITTS: And in your non-new markets, do you expect agent counts to be
flat, grow, come down?
JACK PITTS: Okay. And then, if you could, mention a little bit on marketing,
and maybe some efficiencies you're getting there, because it seems like that
might be an area to spend some time in terms of, perhaps, becoming more
efficient per side or per revenue.
PAT LASHINSKY: Yes, we are finding good efficiency in the marketing side.
Matter of fact, during the call, we talked about the fact that in March, we were
the fifth largest. And the data just came out and we just saw the Hitwise data
that says, for April, we were actually the fourth-largest-tracked real estate
website out there.
One thing that we're seeing in this market is that there's some people out
there that just aren't really following the rules because they're pretty --
they're in a situation where they're just trying to survive, and they're doing
some pretty unusual things. But that doesn't last very long.
And we just continue to become better and better and optimize more and more
on our online side. One of our things that we're focusing on is driving market
share and driving listings. And when we drive market share and when we drive
listings, one of the big advantages we get is we get significantly more market
power and more market presence, which helps our marketing spend overall.
You know, one of the things that we didn't talk about that really is driving
our business overall, from a marketing standpoint, is 39% of our traffic came
t quarter. That's a pretty significant
amount of people that are coming, that have got brand awareness, that have seen
us on a sign. They've met one of our agents.
Q1 2008 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
They've talked to someone who had a great experience with one of our agents,
and their friend told them about it while they're getting coffee at Starbucks in
the morning, or whatever it is. So we're getting a good word of mouth. We're
getting a good marketing presence. And we'll continue to build that as we go
forward.
And having no further questions, I'd like to turn the conference back to our
speakers for any closing remarks.
PAT LASHINSKY: Thank you all for being here with us on the call. We
appreciate everything that our agents and supporters have done. And we look
forward to talking with you as we come out with our second-quarter results and
earnings call. Thank you very much.
OPERATOR: Thanks, everyone. That does conclude today's conference. You may
now disconnect.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 9 OF 23 STORIES
TRANSCRIPT: 031308ad.792
BODY:
OPERATOR: Thank you for standing by, ladies and gentlemen. You're online for
today's ZipRealty Fourth Quarter Earnings Conference. We are currently
gathering participants and expect to be underway in just a moment or so. We do
appreciate your patience and ask that you please remain on the line. Good day
and welcome to the ZipRealty Incorporated Fourth Quarter Year End 2007
Earnings Conference Call.
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
(OPERATOR INSTRUCTIONS)
It is now my pleasure to turn the floor over to your host, Mr. [Don Tomoff].
Please go ahead, sir.
DON TOMOFF, ZIPREALTY INC.: Thank you. Good afternoon, everyone. With me on
the call today is Pat Lashinsky, President and Chief Executive Officer of Zip
Realty, and David Rector, the Company's Chief Financial Officer. Earlier today
the Company issued a press release describing its results for the fourth quarter
and full year 2007. A copy of that release can be viewed on the Company's
website at ziprealty.com.
Before we begin, I'd like to note that during the course of this call we make
various remarks about future expectations, plans, goals and prospects for the
Company, including, but not limited to those involving our future performance,
business outlook and 2008 guidance. Additional forward looking statements
include remarks concerning results of our existing markets, introducing
technological improvements, gaining market share, reducing costs and driving
operational efficiencies.
All of these constitute forward looking statements for purposes of the safe
harbor provisions under the Private Securities Litigation Reform Act of 1995.
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
The actual results may differ material from expectations, plans and prospects
contemplated in these forward looking statements and are subject to risks and
uncertainties, including those described in the Company's form 10K for fiscal
year 2007 and other filings with the Securities and Exchange Commission, copies
of which can also be viewed on the Company's website. The risk factors
identified in our SEC filings are incorporated by reference into this earnings
call.
PAT LASHINSKY, PRESIDENT AND CEO, ZIPREALTY INC.: Thank you, Don. And thank
you for joining us on the call today. First, I'd like to provide a brief
overview of our 2007 performance, after which I'll turn the call over to Dave
Rector to discuss specifics of our fourth quarter. I'll then wrap up the call
with some closing thoughts and provide some perspective on our outlook for 2008.
First, let me review the year. As you may recall, our goal for 2007 was to
accelerate the development of our national network as we felt that investing in
a down market while others were retreating would position us for longer term
success. Our investment was predicated on a belief that the market will
ultimately correct, like it has so many times and that our leadership and
technology, innovation and other services will sustain what we believe to be an
advantage over the traditional residential real estate model.
Due primarily to the roll out, we knew that 2007 would be an investment year
and we provided guidance back in February of 2007 reflecting that view. A pro
In addition, the secondary market for mortgages remains soft, which has and
will negatively impact our business. However, as I've stated before, we still
know transactions areest in residential real estate. We
being pursued because scheduled visits are up 29% year over year.
DAVID RECTOR, CFO, ZIPREALTY INC.: Thanks, Pat. Overall, net revenues for the
fourth quarter decreased to $21.2 million. A decline of 8.3% from the fourth
quarter last year. Net transaction revenues, excluding the revenue referral and
other income were $20.7 million for the quarter, 7.6% decrease against the prior
year. Our pro forma net loss was $5 million for the quarter, $0.22 loss per
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
share and was in line with our expectations.
We lost approximately $1.6 million, or $0.07 per share, in the fourth quarter
last year. As Pat mentioned, revenues increased by 9% to $103.9 million for the
full year and resulted in a pro forma loss of $7.6 million. Total transactions
closed were up by 10% year over year compared to a significantly down overall
market.
The bottom line, our existing markets delivered unit level income of
approximately $1.6 million compared to $3.8 million a year ago. Turning to
fourth quarter results for the six new markets opened in 2006 and the ten we
ned in 2007. Net transaction revenues in the new markets for the quarter were$3.
4 million, a 126% increase over the prior year. We're encouraged by this
trend and expect new market revenue to continue to ramp in 2008.
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Average net revenue per transaction in our new markets averaged $5,066 for
the current quarter. A year over year decrease of 6.4%. Cost of revenues
increased to 55.1% from 51.6% last year due to the mix of commissions paid to
our agents. This was expected, as new markets mature, increasing numbers of
agents achieve higher commission splits and therefore increase our cost of
revenues. New market sales and marketing expenses increased approximately $1.5
million for the period as a result of the new market offices opened year over
year.
Overall, this resulted in new markets lost at the unit level of approximately
$1.2 million, versus a loss of approximately $430,000 in the fourth quarter last
year. We added 386 net new agents over last year, bringing the total agent count
to 2180 agents at December 31, 2007. Of the total net additions, 36 agents were
added in our existing markets and 350 in our new markets. We announced an agent
accountability initiative on our last call and largely as a result of this
initiative, we experienced a new decrease of 83 agents during the fourth
quarter.
Overall, market level sales and marketing expenses were approximately -- rose
approximately $1.2 million to $7.7 million in the fourth quarter of 2007, driven
primarily by the new market expansion. At the regional and corporate level,
sales and marketing expenses increased approximately $200,000. General and
administrative expenses decreased approximately $275,000 for the fourth quarter.
We continue to expect significant leverage on our G&A cost as we scale the
business benefit from our implemented cost reductions and drive increased
operating efficiencies.
Turning the to the balance sheet. We ended the year with $80.5 million of
cash, cash equivalents, short term investments and no long term debt. We started
2007 with a balance of $88.8 million and are pleased to have maintained a strong
balance sheet despite our operating loss and investment in new market expansion
and technology assets during the year.
Let me wrap up by providing our guidance for 2008. For the year, we expect
th of 10% to 14%een $114 and 118 million, representing grow
compared to our 2007 avenues of approximately $104 million. Overall, we expect
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
a GAAP loss in 2008 of between $8.2 and 9.7 million, which equates to a loss of
$0.35 to 0.41 per share, based on approximately 23.5 million average shares
outstanding. On a pro forma basis, excluding stock based compensation, we expect
our loss for the year to range from $4.2 million to $5.7 million, or $0.18 to
0.24 per share, compared to the 2007 pro forma loss of $7.6 million.
Although we do not give specific quarterly guidance, we expect that the first
quarter will continue the trim line of the fourth quarter. Down year over year
on the top line with a pro forma loss comparable to the fourth quarter. However,
as the 2007 new markets mature and with the year over year comparisons providing
a sharp contrast with the late 2007 credit crisis trough, we expect reverse this
trend through the full year. We plan to open two to four new markets during
2008, including Long Island which we announced in 2007 and will open this
spring. Pat?
PAT LASHINSKY: Thanks, Dave. 2007 was a significant year for ZipRealty in
that we expanded our reach nationally and continued to gain market share. And we
did so within our guidance parameters and around ground zero of the credit
crunch, which occurred in August.
In fact, our agent count was down 3.6% from the third to the fourth quarter.
Yet, during 2007 we retained all but four of our top 200 performing agents. This
is remarkable in the current environment, where demand for top agents is very
intense. I believe it is a testament to our business model and our prospects as
agents are essentially voting with their fee for the Company that they believe
will position them best for success.
Looking forward, we will continue to stress quality over quantity and focus
our staffing efforts on finding sales professionals that we believe will excel
del. As I have said before, we will only accept and retain agents
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
that are committed to the ZipRealty vision and are willing to embrace the
process and tools at their disposal to deliver value to the customer. That's the
bottom line.
Last, we continue to expect to gain market share. In 2007 it was broad based
with gains in all 17 of our existing markets. Which provides an interesting
contract with our competitors. Ultimately, our goal is to build on this momentum
and maintain double digit market share gains versus our competitor for 2008.
Achieving these goals, in part, will hinge on technological innovation and the
speed of innovation. Two things we believe we know how to do.
Before we take questions, I wanted to give you all some insight into what we
perceived as success in the current market. What I will tell you is that senior
management along with the rest of our team, feels very strongly about what we're
doing and we are attacking the challenges we face every day. Unlike many in our
industry, we're not going to use the slumping market as an excuse for our
performance. In fact, we believe our results will anticipate improvement in 2008
versus 2007 as our guidance suggests.
So our goal is to deliver on all the little things that create the wow factor
with agents and customers with each transaction. We have work to do, but I see
evidence that we're getting there. We're certainly cognizant that if we do
things right and consistently it will boost our performance it will translate
into long term shareholder value, which is our primary goal. Finally, I am very
proud of al of our people and would like to thank them for their efforts during
2007. I look forward to 2008 as another year of substantial progress. So at this
point, we will address any questions you may have. Operator?
And then finally, the idea that that's come up in the past also is the costs
around remaining a public company. Would it be -- is there an opportunity to
potentially take the Company public -- private. Anything you can comment on
that? Thanks.
DAVID RECTOR: I think, first thing, let's go through the cash flow. For 2007
we burned about $8.3 million for the year. Roughly, $3.5 million of that is
attributable to our new markets, both in their operating costs and the CapEx
that we spent for equipment going into the ten new market offices. We had
another -- about $3 million, about $3.4 million of capital expenditure, some of
that in the normal -- for our server capacity here. And we opened up a
secondary, a back up data site in Denver. So that was the CapEx.
PAT LASHINSKY: In terms of your question on the additional details for 2008.
At this point we're not going to be giving any guidance beyond what Dave already
laid out on this call. We think it's premature within this year and within the
rapidly changing environment that occurring for us to be able to do that.
BEN SCHACHTER: Can I just ask something. Do you think you can get to that
number at the same or decreased headcount? Or should we assume increased agent
count?
In terms of the third question about the cost of being public, it is a cost
and it's a significant cost to be public. And there are definitely trade offs on
it. However at this time, we are really focused on operating and running the
Company in the current environment in the situation we're in and trying to do
e that we provide for stakethe total level of valu
holders and that's been our focus and we haven't really focused on anything
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
else in regards to that.
OPERATOR: Thank you. We'll take our next question with Jeetil Patel with
Deutsche Bank Securities.
And then secondly, can you just talk about -- I guess we're getting now --
only now getting into the spring selling season. Are you seeing a lot of
inventory? Are you seeing buyer commitment or buyers looking to kick the tires
or at least go visit homes, increase relative to that 29% or is it a little bit
lower than that as we look at coming into the big seasonal push here.
So we've built that into our assumptions for the year. I will tell you that
as we get later in the year we assume -- we think that those comparisons will
start coming down and home prices will be more likely to stabilize than they are
during the first half of the year for sure.
In terms of the second question, in terms of the spring season and activity.
We are seeing that activity is pretty high overall across. We are showing 29%
more showings and scheduled visits with our clients. Our clients appear to be
very active at participating in the market. They -- there is more viewing -- I
wouldn't necessarily call it tire kicking because I think of tire kicking as
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
being someone who is just there looking at it with no real intent.
We're seeing that people are very interested in the market right now and
they're just trying to figure out if this is the right time and if they can find
the right house at a good value. But there is significant interest that we're
seeing across the board and across all of our key metrics that show that there
is a very, very -- that we're seeing very strong activity from the clients that
we have.
JEETIL PATEL: And that gets the 10% decline that you -- that's a yearly
number so I guess the first half would be probably down closer to lets say --
down 20 and the back half is getting down to a flat type of a comparison.
PAT LASHINSKY: Probably it will down a little heavier in the first half as
you're suggesting and not as much, but I don't think that we project that it's
going to be as drastic as you're suggesting there.
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
JEETIL PATEL: And you are actually seeing an acceleration or consistent
scheduled visit number out there right now in terms of growth year on year?
We also had a tough -- in 2006 toward the end, we were having a tough time in
California and we made a number of significant changes in that market between
management and some processes we were doing and we think that we are really
starting to see the effects of those changes.
Outside of California they got into the problem a little bit later and we're
working our way through them right now and we're taking the learning that we
applied to California and we're applying that throughout to the rest of the
country. So it's trailing a little bit behind it, but we think that we really
have figured out a good way of making sure that our agents are able to take care
of clients. That we have the right tools available and that we're able to help
them get the information they need in a declining market to be able to make
successful good choices and options on that.
PAT LASHINSKY: You know, it's very, very hard to tell that number because
it's hard to tell when someone else starts working with someone or when they get
it in. I will tell you that I think that we do a great job in closing a high
percentage of the people that come to us. I think that, in general, we believe
that we do help people fins what they're looking for much faster because we
allow them to see everything and have access to full information, which is an
advantage to helping them make a smarter choice.
But we just doing know how long it takes other people because no body else
discloses it and it's hard to know exactly what they're doing. Our clients give
us -- continue to give us very high ratings, continue to score us at a 96%
satisfaction rate, which to me is a sign that our clients believe that we're
taking care of them as well, if not better than they could be taken of anywhere
else. And in this market and in the housing market, speed is one of the key
factors about how happy a client is. So I think that based on the 96%
satisfaction, clients are very happy with the speed at which we're able to help
them transact.
PAT LASHINSKY: Well, we're seeing a different thing. We're actually seeing
that inventories are going up, overall. Which would sign -- which would be a
signal that there are less buyers out there because that's why the inventory
levels are going up. So we thing that that's even more impressive for the amount
of activity that we're seeing.
We have not seen that inventory levels are dropping and in fact, we expect
inventories to increase even more in the next two to three months as the loan
adjustments take place and there are more homes that are put into the
foreclosure market and into the REO. We expect total inventory that's available.
Not just homes on the MLS because our inventory that we're selling off of
isn't just the MLS, that's one piece, and it's a big piece and it's important.
(OPERATOR INSTRUCTIONS)
JACK PITTS: And how does that compare to December of '06 headcount?
DAVID RECTOR: And it think the one thing to remember as you look at those
fourth quarter numbers is the agent accountability initiative that we put in
place where agents that were just maybe not a fit for this model or weren't able
to successfully produce. We put significantly more pressure on that segment
during the fourth quarter of this year than we'd done in the past. And we were
more proactive about deciding to part friends with some people that had been
here that just were not as successful as either we or they would like them to
be.
JACK PITTS: Thanks. And one additional, is the -- if you could talk about
marketing, because a lot of people are afraid that with Google's paid clicks
being down, it might actually make a more favorable marketing market for you
guys, or Google's management seems to argue maybe the opposite is true. So
they're not really seeing much economic effects. But since you guys are right in
the heart of the declining real estate market, it would be interesting to know
know if you're doing anyoffline advertising but if you could talk about that too
as well it would be
great.
There's -- it's very choppy and there's lots of information and so people are
saying I can go online and I can get a good feel for what's happening. So we're
seeing more people going online. It's just about how good you can do to take
care of those clients once they get there.
JACK PITTS: Thanks a lot. And do you have any measurement other than any hard
data on what the agent -- I guess reverse or negative growth is on agents?
Because it seems like if the agents are going down and yours are staying flatter
or steady, then I would guess that the greater the rate of negative growth on
that would actually be better for you because less agent competition than an
inventory situation. And the number of sides wouldn't be as much of a problem
for you guys or seem to be a little more efficient. So is there any better way
to measure than the NAR data?
PAT LASHINSKY: Not that we know of, though yes, your point is right. We don't
mind seeing the number of agents going down than our data. Most of the state
associations put information, you just have to go to them individually. I know
that car does, I know that the New Jersey association of realtor does, I know
actually go and compile on aors do. So you can
state basis through that -- the local association.
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
But -- and you're seeing almost exactly what you'd expect, the states that
have been the hardest hit are having the biggest declines in the number of
agents right now. And states that had the highest run up are the ones where
you're seeing more decline going on and we think that's great. One of the
problems that happened last year is there is a significant declining number of
homes being sold and the number of agents stayed relatively constant.
Economically it doesn't make sense.
So we think it's a good thing that the number of agents is coming down and
we'll continue to get our share and do well. But we don't know of any better
source of that than those local associations.
OPERATOR: Thank you and with no further questions I'd like to turn the
program back over to Mr. Lashinsky for any additional or closing comments.
PAT LASHINSKY: Thank you all for joining us on the call. We were very happy
to have gotten through 2007 and done the results that we did. We look forward to
talking with you all again in May and we look forward to have a respectable
Q4 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
2008. Thank you very much.
OPERATOR: That does conclude today's conference. You may disconnect your
lines at this time.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 11 OF 23 STORIES
TRANSCRIPT: 110707ab.799
BODY:
Actual results may differ materially from the expectations, plans, and
prospects contemplated in these forward-looking statements and are subject to
risks and uncertainties, including those described in the Company's Form 10-K
for fiscal year 2006 and other filings with the Securities and Exchange
Commission, copies of which can also be viewed on the Company's website. The
risk factors identified in our SEC filings are incorporated by reference into
this earnings call.
Further, this non-GAAP method involves key data management uses for planning
and forecasting its future operations. The presentation of this additional
information should not be considered in isolation or as a substitute for results
prepared in accordance with GAAP. With that out of the way, I'll turn the call
over to Pat.
PAT LASHINSKY, PRESIDENT, CEO, ZIPREALTY INC.: Thank you, Don. I'd like to
start today's call by providing some perspective on our third quarter
performance along with commentary on the current state of the residential real
estate market. I'll lay out what we're doing in response to market conditions.
And then I'll turn the call over to Dave Rector to discuss specifics of our
financial performance. I'll then wrap things up before opening the call up to
Q&A.
August and September represented the most challenging months of the year in
our view as we saw the secondary market for mortgages slow down significantly.
This caused our close ratio to materially drop after seven months of momentum.
The good news is that we've seen some liquidity come back into the system for
credit-worthy buyers. And our close ratio beginning in October has improved. Yet
the fact that we've seen some recent momentum doesn't mean that we're seeing the
light at the end of the tunnel in terms of the overall market. Inventory levels
are still very high. And buyers and sellers still seem confused and somewhat
paralyzed by headlines and actual market risk.
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
However, we still see tremendous interest in residential real estate.
Furthermore, we know that buyers and sellers are out there interested in
pursuing a transaction. We know this because scheduled visits for the third
quarter are up 25% year over year. And our new registration saw double-digit
growth during the same period.
Also, our website has never had more visitors as customers and potential
customers use our tools to evaluate the market. And because we're confident that
the market conditions will stabilize over time, we remain committed to our
investment thesis, which is pretty simple. If people still have tremendous
interest in the market and are actively looking to buy or sell their homes, it's
just a matter of time before they do so. And although we certainly can't call
the market turn, with everyday that passes, we believe ZipRealty's improving
it's position.
So our goal for 2007 was to accelerate the growth of our national network and
bring ZipRealty to those markets where we thought we'd have an advantage. We've
almost completed that goal. But given the worsening market conditions, and as
our previously announced cost reduction suggested, we have rationalized our
ke the majority of theresources that we'd otherwise allocate to new market expan
sion and use them to
fortify the markets we've already launched.
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Specifically, we will focus on people, technology, and initiatives designed
to enhance the customer and agent experience. After Dave reviews the financial
results, I will cover a few of these initiatives and explain why they will help
us drive traffic, leads, and eventually conversion. I'd now like to turn the
call over to Dave Rector.
DAVID RECTOR, SVP, CFO, ZIPREALTY INC.: Thanks, Pat. Overall net revenues for
the quarter increased to $28 million, a 7% increase from the year-ago quarter.
Net transaction revenues, which exclude referral and other income, increased by
$1.8 million for the quarter to $27.2 million, a 7.1% increase from the prior
year.
Our pro forma net loss was approximately $400,000 for the quarter, or $0.02
per basic share, versus pro forma income of approximately $1.4 million, or $0.06
per diluted share, in last year's third quarter.
I will now review the major components of our income statement and highlight
the key factors contributing to the difference in performance from last year.
First, our existing markets performance for the quarter. Existing markets net
transaction revenues decreased by $900,000, or 3.8%, driven primarily by a
decrease in the number of transactions closed of 4.1%. The cost of revenues
percentage for existing markets increased by about 1.75% due primarily to the
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
mix of agent commissions paid during the quarter, as well as specific
adjustments made to our agent compensation plans.
These plan adjustments were designed to better motivate and retain our agents
in a very difficult market. Our existing market field sales support office
expenses increased by approximately $200,000, principally consisting in
increased customer leads for our agents. As a result, our existing markets
delivered unit level income of approximately $4.4 million compared to nearly
$5.5 million a year ago.
Turning to our new market results for the quarter, as a reminder, new markets
are defined as having been open for less than one full calendar year. And as of
September 30, 2007, this includes the six markets we opened in 2006 and the nine
markets opened through the end of the third quarter 2007.
Net transaction revenues in new markets for the quarter were $3.6 million, an
increase of $2.7 million over the prior year. Cost of revenues increased to 54%
from 51% last year due to the mix of commissions paid to our agents. This is
expected in our new markets as an increasing number of agents achieve higher
commission splits, causing the cost of revenues to increase as our new markets
mature.
Despite the serious weaknesses in the residential real estate market, we're
pleased to report that we continue to gain significant market share in our
existing markets during the third quarter. We are encouraged by our continued
strong performance in California, where our closed transactions for the quarter
decreased by approximately 5.2%, significantly outpacing the 38% overall market
contraction in our markets. California represented 34.9% of our total net
transaction revenues for the quarter compared to 40% last year.
Finally, our new markets contributed over 13% of total net transaction
revenue for the quarter with particularly encouraging revenue performances in
Orlando, Minneapolis, and Austin. Average net revenue per transaction increased
by 0.4% in our existing markets to $7,471 from $7,444 in the prior year.
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Average net revenue per transaction in our new markets averaged $5,387 for the
current quarter, an increase of 6.3% from $5,066 last year.
We added 516 net new agents over the last year, bringing the total agent
count to 2,263 as of September 30, 2007. Of the total net additions, 162 agents
were added in our existing markets and 354 in our new markets. Average agent
productivity for the quarter was approximately 0.59 transactions per agent per
month.
Moving to the rest of our expense structure, product development expenses for
the third quarter totaled 6.5% of net revenues versus 5.3% last year. This is
primarily due to ongoing investment in our website along with the development of
enhanced tools for our ZipAgents and support our new markets expansion. Pat will
describe some of these new features later.
Regional and corporate sales before the marketing cost increased modestly by
approximately $100,000 primarily due to our new market expansion cost. General
and administrative expenses were essentially flat, increasing by approximately
$100,000, but declining as a percentage of revenue to 12% compared to 12.3% in
the prior year quarter. We continue to believe that we can drive significant
leverage on G&A cost as we scale the business, start to benefit from our
implemented cost reductions, and drive further operating efficiencies.
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
As we disclosed in our second quarter 10-Q, we were named in a class action
lawsuit filing by four former employee agents of the Company. The complaint
relates primarily to our policies for expense allowances and expense
reimbursements for non-California agents and includes claims similar to those
alleged in the Benjamin class action lawsuit we settled in 2005 pertaining to
our California agents.
We expect to file the documentation shortly and receive court approval during
the first quarter of 2008. As a result, we've taken a one-time charge in the
amount of the proposed settlement of $3.55 million during the third quarter and
expect to actually pay the settlement sometime during 2008.
at were the primary focus ofthese lawsuits. Because this matter remains in activ
e litigation and the
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
proposed settlement is subject to final approval, we cannot comment on the
details of this case beyond our prepared remarks.
Turning to the balance sheet, we ended the quarter with $85.4 million of
cash, cash equivalents, and short-term investments without any long-term debt.
As expected, we will finish the year investing approximately $10 million in
connection with the execution of our market expansion plan along with the
continued enhancement of our technology platform, including the establishment of
a second data center, which will open late this year or early 2008.
Let me wrap up by providing our guidance for 2007 and some insight into 2008.
For the full year ended December 31, 2007, we estimate that revenues will range
from $97.5 million to $102.5 million, consistent with the revenue guidance we
updated on October 11th.
We expect an agent count at the end of the year between 2,100 and 2,300
agents. As Pat will discuss, we are undertaking an agent accountability
initiative during the fourth quarter, which may cause a temporary decrease in
our agent headcount by the end of the year. We do, however, expect to expand our
agent force over time and end 2008 with significantly more agents than 2007.
This leads to a 2007 GAAP loss between $14 million and $17 million, including
the effects of the loss of the settlement I just outlined. This equates to $0.61
to $0.74 per share, based on approximately 23 million average shares
outstanding. On a pro forma basis, excluding stock-based compensation and the
one-time litigation settlement, we expect our loss for the year to range from $8
million to $10 million, or $0.35 to $0.44 per share.
Before I turn the presentation back over to Pat, I want to give some insight
into what we see for 2008, although we'd be in better position to share
specifics on our fourth quarter call. In a nutshell, we see revenue growth in
the 12% to 18% range in spite of continuing strong headwinds in the market,
resulting in a pro forma loss about one-half of what we expect to experience in
2007.
This outlook is different from our goal of pro forma profitability next year
of which we have spoken earlier this year. Unfortunately, the credit crunch
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
has changed the market for the worse, which has caused us to reevaluate our
position.
We are now operating in Naples, Tucson, Denver, Jacksonville, Salt Lake City,
Richmond, and Virginia Beach, and have most recently opened in Charlotte and
Raleigh, NC. We are pleased with how these markets are performing. And they're
progressing according to plan.
The priorities for the business going forward are fourfold. First, we will
look to maximize our returns on investment in all markets. While we are pleased
with how our new markets are performing, we believe there is great opportunity
to ramp these markets beyond their current performance. Accordingly, we are
allocating resources towards productivity and technology enhancers, so we expect
to improve market share, revenue growth, and profitability.
Our focus is on making sure that we retain and reward those agents who
meaningfully contribute to our productivity focus. We continually strive to
provide improved training and coaching to every agent who approaches the role
and has a strong desire to succeed. And despite our best efforts in this regard,
there may be a temporary decrease in our total agents.
However, we will continue to drive agent growth and plan to focus our
staffing efforts on finding the type of sales professional that will excel
within our model. I've talked in the past about our commitment to the hiring and
training process. This exemplifies that point. We will only accept and keep
agents that are committed to the ZipRealty vision and are willing to embrace the
process and tools at their disposal to deliver volume to the customer.
Four, pursue expansion, but make that a secondary strategy. While we're
encouraged about the results we're seeing in new markets, we understand that the
priority is existing markets. And the decision to potentially open two to four
in 2008 as compared to 11 in 2007 is primarily the result of maximizing our
current asset base in the most efficient way possible in driving higher
contribution margins in our post-2005 markets.
For example, on a $500,000 home, a client may think that they want to offer
$425,000 to get a real deal. The evaluator will show them that less than 1% of
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
offers at that discount get accepted. On the other hand, if they offer $485,000,
95% of offers in this neighborhood accept it.
This tool helps buyers figure out how to put in a good realistic offer that
is likely to either be accepted or negotiated. Additionally, this tool gives our
agents another way to help build trust with our clients over time and helps
clients evaluate unrealistic offers, which can be frustrating for everyone
involved.
Ultimately, this is one more tool that uniquely highlights our innovation in
the marketplace. We believe that we have the best site in the industry. And
these changes will help us maintain our preeminent position.
Finally, we have a great team focused on the task at hand. And we're
energized about the multibillion dollar market opportunity. I'm very proud of
all of our people and would like to thank them for their efforts, especially as
we work through our recent changes. So at this point, we will address any
questions you may have. Operator?
OPERATOR: Thank you, sir. (OPERATOR INSTRUCTIONS). And we'll take our first
question from Jeetil Patel with Deutsche Bank Securities.
JEETIL PATEL, ANALYST, DEUTSCHE BANK: Thanks. Hi, guys. I have a couple of
questions. First of all, your business at least in your guidance for Q4 is a
decline of about 35% to 45% quarter on quarter, which is understandable given
some of the seasonality out there typically in Q4. But can you talk about, I
guess, how you think the market is comparing against the 35% to 45% sequential
you're suggesting? I guess, how's the market looking relative to
that number?
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Second, if you look at your new markets, you grew call it 40% or so in Q3. Do
you think you still continue to see the new market growth continue as you look
at Q4 and beyond? Or do you think it's definitely the challenges that are out
there on the credit side affect the newer market ramp as well? And then I have a
quick follow up.
PAT LASHINSKY: Thanks, Jeetil. The first question about the 35% to 40%
decline sequentially in the fourth quarter, there's probably two issues that are
going in. First of all, as you stated, it's seasonality where business does drop
in general during that quarter. And we think it's going to be a little bit more
pronounced this year than it's been in the past just because there is still a
credit issue out there and a credit crisis, where there are not as many clients
who are able to get through and get the loans as there were a year ago during
this time.
A year ago at this time, we didn't have the alt-A and subprime issue. And
jumbos were definitely in a better situation as well. So the combination of just
fewer people able to get through as well as the fact that markets in general
have just been very, very, very soft. And if you combine those two things with
seasonality, that's why we think that that's kind of a realistic number of what
the fourth quarter will be.
JEETIL PATEL: So it's safe to assume that the market growth is probably worse
than the call it down 40% sequentially. Maybe the market's down over more than
50% Q3 to Q4. And then I guess, on the new market side, you're still saying that
you're going to grow year on year on the new market revenue.
And then I guess I have a couple of quick follow ups, which is, I guess, what
percentage of your buyers do you think if there's an anecdotal view do you think
are not able to get a loan given the credit woes that we've been seeing here in
the last couple of months?
PAT LASHINSKY: So to answer your first question, yes, we do think that the
market is going to be down more than what we're seeing. We feel very good that
we're continuing to outperform the market and will continue to do that. And
asting that we're going to continue to grow our new marketsas well. So we will c
ontinue to outperform the markets. And we are going to
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
continue to grow our new businesses. So that's right. We think that the market
will -- it's in for a really tough fourth quarter.
Now more people can get back into jumbo loans right now than they were
previously able to. However, the conditions and the criteria are much stricter
than they were before, different product. I don't have an actual percentage. But
I would tell you based on conversations that we've had with our agents that
we're probably hearing upwards of 20% of the clients are struggling to either
get a loan or a loan that they can afford or one where the terms aren't changing
as they're going through the loan process.
One of the frustrating things for clients has been that they're going out and
getting loan pre-approvals. And then when they go to lock in, they find out that
those conditions have changed. Instead of being at I want to put down 3% and get
a 6.5% or 6.75% loan, they're being told, okay, well, that loan program doesn't
exist anymore. Now you've got to come up with 5% or 10% and add that 7.5% or
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
8%.
And what happens is there's just an affordability issue where they can no
longer either get the down payment together, or the payment, monthly payment,
gets to be too high for them. And they're able to qualify for it, but the terms
have changed so dramatically that it's not really a realistic loan for them.
JEETIL PATEL: And so yet another shoe to drop in terms of, I guess, if your
cost to capital as a consumer has gone up by 20%, doesn't the price of the home
have to come down 20% to justify the affordability?
PAT LASHINSKY: I don't know that it's a one-to-one ratio. But there is
definitely going to be some pressure on pricing for a lot of reasons. One is, as
you said, the total amount of available capital that they have as well as just
in inventory levels out there. There's a lot more competition out there and a
lot more homes that you're going up against. So we've already seen it in some
markets. And some markets, you've already seen pricing continue and have started
to take that into account. Other markets are just learning that and getting
there right now.
OPERATOR: And we'll take our next question from [Claus von Stutterheim] with
Deutsche Bank.
CLAUS VON STUTTERHEIM, ANALYST, DEUTSCHE BANK: Hi. I'm relatively new to the
story. Can you talk a bit about the agents, their compensation range and the
number of transactions per agent as compared to the industry? And let's see. I
had another question. You said that you're sort of upgrading some of your
agents. How hard or easy is it to find good agents in this environment?
PAT LASHINSKY: Well, thanks, Claus. I'll answer a couple of questions here.
The first one is about the agent compensation system. Our system is
designed to
reward our agents who perform the best with the highest amount of payment. So
agents outside of California come in. They make 40% split on the first three
deals they make in a month or the first $15,000. And once they go above that,
they go to 60%.
California, they make 35% for the first 10 deals they do. And once they go
across ten deals, they then go to 40%. And they are in the same thing. The
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
first three deals they do in a month, they make the 40% or the first $15,000 in
RAR. Anything that they generate over that is earned at 60%.
Additionally, they earn their way into expense reimbursement. And they can
earn their way into other Presidents' level clubs and other deals where there
are additional payments and compensation that they earn over that period of
time, including stipends and additional support that they can get on that piece.
In terms of productivity--
DAVID RECTOR: Productivity was at 0.59 transactions per agent per month for
this quarter, which is down from a year ago, which I think is reflective of
what's going on in the market. It's much more difficult. The agent's chasing far
fewer deals.
PAT LASHINSKY: So honestly, for privacy reasons, we can't give out what our
agents are making. It's very competitive and very good. And our top agents make
a very, very good living. I would tell you that a top agent at another firm
that's at the very top will make more money than the very top agent at ZipRealty
in general.
However, if you go down below that top 2% and go into the next group, our
agents will be basically making more. And what's more important isn't just the
amount that they make, but it's the amount that they take home. And the
t because we pay all the expenses for our agents and we pick upall the cost, our
agents gross significantly higher than they would
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
traditionally somewhere else.
So it's not just a straight apples-to-apples top line comparison. It's the
amount of money that they take home. Our agents would do significantly better.
In terms of recruiting, it's been a very interesting time. We expect that the
number of agents in the industry is going to drop as the number of deals go down
and as more people find it's not an easy way, just an easy way to make easy
cash. Agents have to work very hard. This is a tough job. It requires you to be
available on nights and weekends and be responsive to all different types of
clients.
So it's a hard job. And a lot of people I think during the heyday thought,
wow, what an easy way to come in and make a lot of money really, really quickly.
And it's not that easy. And it's really hard. And even more than that, it's
really hard to find clients nowadays because there are so many places and so
many ways that they're able to go out and try and figure out. It's hard to for a
traditional agent to find it.
So while recruiting is a little more different in the line that more people
are going to get out of the industry, we think that our model is going to do
very, very well. And in fact, we think that we've done a very good job in
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
recruiting up until now. We continue to add agents in the right places in the
way we want.
And even more important, agents that had previously done well with us and
left and decided to go and try another side and to try see what's on the other
side of the tracks are coming back to us in numbers they never have before
because they found that it's very difficult to replicate what we've been able to
do here and to do that by themselves.
And so not only are we getting good, good traction with the agents we're
recruiting, but we're getting good traction with agents who have previously been
with us who thought there was an easier way. And as they've gone out and tried
it, they've found that it's not easier. And they've become kind of our walking
billboards to tell everybody, you know what? I've done both sides. And I'd much
rather take this rate and have no expenses and make something than be out here
spending all this money and not knowing if I'm ever going to make anything.
So while recruiting is a little more difficult as the numbers go down, we
think we have the right model to really take on the current market environment.
CLAUS VON STUTTERHEIM: Great. Thanks.
DAVID RECTOR: Let me kind of read that again. Obviously, we're still in that
litigation. So we're not really expanding on this. But let me just repeat my
comments.
We expect to file the documentation shortly and receive court approval during
the first quarter of 2008. As a result, we've taken a one-time charge in the
third quarter in the amount of the proposed settlement of the $3.55 million. We
expect to actually pay the settlement sometime next year.
KENT HOLDEN: But this is then not related to the prior class action?
DAVID RECTOR: It is similar. The prior class action related to agents in the
State of California. And this relates to our non-California agents.
KENT HOLDEN: I thought the settlement agreement on the first class action
precluded any additional claims. But perhaps I was mistaken by that.
DAVID RECTOR: I think what we can say today is we discontinued in 2005 the
practices that were the primary focus of this lawsuit.
KENT HOLDEN: Okay. And so now it appears that the forecast for 2008 is going
to be a loss. And you said it's going to be half the size of '07. Which '07
numbers are you anticipating, the pro forma numbers or the gross numbers?
DAVID RECTOR: We're referring to the pro forma numbers. What we've indicated
is the revenue we expect to grow between 12% to 18% for 2008, which is based
largely on the ramping up of our new markets. We are not anticipating any
improvement in the market dynamics.
KENT HOLDEN: So the pro forma loss I think that you were talking about was
$0.35 to $0.43 for the year of '07.
KENT HOLDEN: And so then '08, you're looking at someplace in the $0.17 to
$0.215 --
OPERATOR: And we'll take our next question from Jim Wilson of JMP Securities.
JIM WILSON, ANALYST, JMP SECURITIES: Thanks. Good afternoon, guys.
JIM WILSON: I really just had one more question. As you look forward I think
in your guidance, are you assuming any changes in the transaction level per
agent? Or do you have initiatives that you think will--maybe you aren't assuming
it. But did you have any programs, anything specific you might want to talk
about that you think might truly help the transaction level per agent, even
PAT LASHINSKY: Right now, we're not really commenting on the metrics for '08.
We're working through those right now and figuring out the exact system that it
is. But our focus right now is that our initiatives are designed around
increasing productivity of our agents and making them more productive than
everyone else in the industry.
Our initiatives, our goals for next year, and our efforts are all focused
around driving agent productivity and increasing it and making strides on it.
That being said, we're not sure exactly where it's going to come out until we
get all the way through our evaluation on what we think the market's going to be
like next year. And we'll have significantly more detail for you on that on the
fourth quarter call.
OPERATOR: Ladies and gentlemen, that does conclude today's conference call.
We thank you for your participation. You may now disconnect.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
inaccurate or incorrect and, therefore, there can be no assurance that the resul
ts contemplated in the forward-looking statements will
Q3 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
be realized.
TRANSCRIPT: 080707ar.704
BODY:
OPERATOR: Good day, everyone, and welcome to the ZipRealty, Inc. second
quarter 2007 earnings conference call. Today's call is being recorded. At this
time, all participants are in a listen-only mode. And the floor will be open for
your questions following the presentation.
DON TOMOV, IR, ZIPREALTY, INC.: Thank you. Good afternoon, everyone. With
me on the call today is Pat Lashinsky, President and Chief Executive Officer,
and David Rector, the Company's Chief Financial Officer. Earlier today, the
Company issued a press release describing its results for the second quarter of
2007. A copy of that release can be viewed on the Company's website at
ziprealty. com.
Before we begin, I'd like to note that during the course of this call,
various remarks we make about future expectations, plans and prospects for the
Company constitute forward-looking statements for the purposes of the Safe
Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from the expectations, plans and prospects
contemplated in these forward-looking statements and are subject to risks and
uncertainties, including those described in the Company's Form 10-K for the full
fiscal year 2006 and other filings with the Securities and Exchange Commission,
copies of which can also be viewed on the Company's website.
Further, this non-GAAP method is the primary basis management uses for
planning and forecasting its future operations. The presentation of this
additional information should not be considered in isolation or as a substitute
for results prepared in accordance with GAAP.
With that out of the way, I'll turn the call over to Pat.
PAT LASHINSKY, PRESIDENT AND CEO, ZIPREALTY, INC.: Thank you, Don. I'd like
to start today's call by providing some perspective on our second quarter
performance along with commentary on the current state of the residential real
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
estate market. I will then turn the call over to Dave Rector to discuss
financial specifics for the quarter, after which I'll wrap things up with a
review of our strategy.
First, I'm pleased to be addressing you all in my new capacity as CEO. And
I'm absolutely focused on pursuing the growth strategy we've previously
articulated. We have a great team in place. And I'm highly confident that our
investment in the current down market will create sustainable, long-term value
for our shareholders.
Our expenses were in line with expectations for the period. And all of our
core metrics more or less tracked with our expectations, leading to a slight pro
forma profit for the quarter. We're very proud to have been profitable on a pro
forma basis given that the market is so challenging.
For example, NAR recently reported that existing home sales are expected to
drop 5.7% for 2007 along with a projected 1.4% drop in the median home price.
Headlines and statistics aside, however, buyers and sellers are simply tentative
and confused about their local market, which may or may not mirror the national
headlines or trends. And I think it's going to require some time for the buyer's
demand curve and the seller's supply curve to come back into alignment. To get
there, we'll have to see compromise from both sides. And we are surprised we
haven't seen that capitulation already.
All that said, what we're sure of is that there's still a significant amount
of interest in real estate, and people remain focused on what's happening in
their local market. In fact, we continue to see plenty of people looking to buy
and sell, and our scheduled visits for the second quarter were up
ver-year. Also, our website has never had more visitors, as buyers and
sellers use our tool to evaluate the market and make their decisions.
DAVID RECTOR, CFO, ZIPREALTY, INC.: Thanks, Pat. Overall, net revenues
increased to $31.3 million, a 16.2% increase from the year-ago quarter.
Excluding referral and other income, net transaction revenues for the quarter
increased by $4.3 million to $30.5 million, a 16.5% increase from the prior
year. Existing markets contributed $1.6 million, or 6% of this increase, driven
by higher-than-expected average home prices on transactions closed in those
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
markets, including a 46% increase in $1 million-plus transactions.
Profit margins contributions at the unit level declined 130 basis points,
21.5% versus a year ago, due primarily to the mix of agent commissions paid
during the quarter as well as specific adjustments made to our agent
compensation plan. These plan enhancements were designed to better motivate and
retain our agents.
Net transaction revenues for the quarter in our new markets were [$2.9
million], an increase of $2.7 million over the prior year. New markets are
defined as having been opened for less than one full calendar year. As I've
stated in previous calls, we transferred new markets to existing markets on
January 1st after one full year of operations.
New markets for the quarter includes the six markets opened in 2006 and the
four markets we opened before June 30 this year -- Naples, Tucson, Denver and
Jacksonville. These new markets experienced a loss at the unit level of
approximately $700,000 versus $500,000 a year ago.
Factors driving the higher net transaction revenues for the quarter compared
to the prior year include the continued strong performance in California, which
represented 38.9% of our total net transaction revenues versus 40.3% last
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
year.
Finally, our new markets contributed nearly 9.5% of total net transaction
revenue for the quarter with particularly encouraging revenue performances in
some of our new markets, namely Orlando, Minneapolis, and Austin.
Average net revenue per transaction grew by about 7% in our existing markets,
$7,908 up from $7,395 in the prior year.
Average net revenue per transaction in our new markets averaged $5,825 for
the quarter, up from $5,490 last year. We added 401 net new agents over the last
year, bringing the total to 2,070 as of June 30, 2007. Of the total net
additions, 123 agents were added for our existing markets and 278 in our new
markets.
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Average agent productivity for the quarter was approximately 0.69
transactions per agent per month.
Cost of revenues were $17.3 million, or 55.3% of net revenues for the second
quarter, an increase of 110 basis points. The increase was primarily due to the
mix of commissions paid to our agents as well as the compensation plan
adjustments mentioned earlier.
Product development expenses for the second quarter totaled 5.8% of net
revenues versus 5% last year, an increase of 80 basis points. This increase was
primarily due to continued investment in our website development and to support
our new market expansion.
Unit level sales and marketing expense for the quarter was $8 million or
25.5% of net revenues, up from $6.2 million or 22.9% in the prior year.
Roughly $1.4 million of this increase was due to the seven new market
openings since the end of the 2006 second quarter. The remaining $400,000 was
attributable to increased cost of operating our existing markets.
Excluding these severance costs, our G&A declined from the first quarter
level by approximately $200,000. We continue to believe that we can drive
significant leverage on G&A cost as we scale the business.
In terms of the bottom line, we earned a pro forma net income of $140,000 for
the second quarter or $0.01 per diluted share versus $0.07 a share a year ago.
In terms of our balance sheet, we ended the quarter with $86.7 million of
cash, cash equivalents, and short-term investments and without any long-term
debt.
Let me wrap up by reviewing our guidance for the back half of the year. For
the full year, we estimate that revenues will range from $105 million to $110
million. This is based on average agent productivity of roughly 0.6 to 0.7
transactions per agent per month and average net revenue per transaction in the
range of $6,500 to $7,000.
We expect an agent count at the end of the year between 2,200 and 2,400
agents.
Gross margins should be in the 44% to 45% range for the year, and in terms of
other operating expenses, we anticipate that sales and marketing will be
approximately 37% to 39% of revenues with product development in the 7% range.
We expect that G&A should be approximately 13% to 15% as a percentage of
revenues.
This leads to a 2007 GAAP net loss between $10 million and $13 million, or
$0.45 to $0.60 per share, based on approximately 23 million average shares
outstanding.
Before I turn the presentation back over to Pat, please note that while we
are not providing quarterly guidance this year, we do want to emphasize that
2007 has been choppy and unpredictable. To that point, we expect this
unpredictability to continue for the remainder of the year. Pat?
And in the near future, we'll be entering two other previously announced new
markets, Charlotte, and Raleigh-Durham, NC. We've been actively recruiting
agents for these cities. And we're excited to get those markets launched.
Before Q&A, let me talk briefly about some initiatives we've recently
launched and one initiative that we previously announced that it's starting to
contribute to our business. These all center around innovation, not just for
innovation sake, but to better the experience for agents and customers.
So in that spirit, first, we've added sales trend technology to our site that
allows visitors to monitor pricing and sales trends in their area.
For example, we have historical sold-to-list price data available for every
property in someone's neighborhood. And this feature is beneficial to both our
buyers and our agents.
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
To that point, to separate the reality on the ground from the headlines in
the press, we show our clients with the trailing 12-month ratio of sold price to
list price. This educates them on pricing trends in their neighborhood.
This is a great tool for our agents. And that allows them to better educate
their clients through the use of real data, not just instincts. This creates a
sense of trust and oftentimes facilitates a transaction.
Second, we've introduced a new tool just for sellers. Specifically, we allow
sellers to gain more insight and control over the selling program for their
home.
Unique to the industry, the seller can now choose how they market their home,
have transparency into the commission, and set a preferred price as they study
the comps in their neighborhood.
Our agents take them through the process and the empowerment. And the
transparency builds trust. And we think it's another great way to shift from a
buy-centric model to more sellers over time.
Finally, the new homes effort that we've been building out in recent quarters
is beginning to pay off.
If you recall, this effort, which we began in early 2006, is made up of
building direct relationships and market agreements with new home builders who
are looking to move their properties. And the need to do this has been amplified
in the current market.
As a result of these efforts, new home sales have increased to 28% of our
business in the second quarter -- have increased 28% in the second quarter. This
effort has played an important role in our ability to counter a difficult market
environment.
After all, we realize we'll only be as good as the people we hire. And
they'll only be good if they've mastered the tools at their disposal to deliver
value to the customer. And I truly believe we're making progress despite the
headwind. Our second quarter pro forma profitability in the current market
underscores that to a degree.
We'd like to take a moment to thank all of our corporate employees and agents
for their hard work that have helped the company achieve the second quarter
results. We believe having the best people in the industry makes all the
difference.
At this point, we will address any questions you may have. Operator, I'll
open the line.
OPERATOR: Thank you, sir. (OPERATOR INSTRUCTIONS) And for our first question,
we go to Jeetil Patel with Deutsche Bank Securities.
And then also can you talk about how the trends have looked in July and Q3 to
date? And I have a quick follow up.
PAT LASHINSKY: Hi, Jeetil. Thanks for the question. So the stricter lending
standards are just starting to take effect right now. As we've stated in our
previous calls, we were not very subject to the issues with sub-prime because it
was such a small percentage of our market.
We feel like we do have an advantage in that we're able to see who those
lenders are and who our clients are working with very early in the process.
And we're able to be very proactive to make sure that we keep them in loans
and with mortgage providers who are going to be able to service them. We have
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
not seen a slowdown due to lending criteria or lending tightening so far. And we
haven't been in--we haven't seen any effect of that at this point.
JEETIL PATEL: You talked about increasing coverage or the amount of markets
you're in and inventory. Have you thought about -- I guess there's a growing
number of foreclosures out there on the marketplace.
Have you thought about incorporating those onto the site as another pool of
inventory to tap into by region? Or is that difficult to actually find what's
coming up in that marketplace?
PAT LASHINSKY: There's a lot of places out there to get the inventory for
foreclosure or pre-foreclosure data. And what we're working on right now is we
don't think that it's a great vehicle for most consumers.
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
They don't understand the difficulties. They don't understand all the issues
that go into buying a foreclosure property. And it's very complicated. And a lot
of consumers think it's just a way to get a cheap deal, which sometimes it is.
But a lot of times, it's very difficult.
So what we're working on is getting some active feeds that allow our agents
to have access to free information and to know about pre-foreclosures as well as
foreclosures, that if they have a client who says they're interested and really
understands what's going on with it, they'll be able to proactively work with
them on a real time basis to get them that information. But we're not planning
at this time to put any foreclosure information on our site.
JEETIL PATEL: Last question, but it seems like your business, you're seeing
pretty good growth in the high end market for properties out there.
PHIL LAMOREAUX: Okay. And is that still a GAAP loss of about $10 million? Or
are we focusing--was that on '07?
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
PAT LASHINSKY: That was on '07.
PHIL LAMOREAUX: Okay. So no numbers, but just you're going to be pro forma
profitable.
OPERATOR: And for our next question, we go to Jack Pitts with Steadfast
Capital.
JACK PITTS, ANALYST, STEADFAST CAPITAL: Hi. I apologize. I always miss these
numbers during the call. But would you go over again just in the State of
California what your growth was year over year in the quarter and then compare
that to what it was for -- or what you think -- what you estimate it was for
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
the overall California market based on the NAR stats?
And then also, could you tell us what your agent growth in the submarket of
California was? I think it was like 12.5% last quarter.
DAVID RECTOR: Okay. The increase was 2.5% on our California transactions over
a year ago. And we believe that the market in the markets that we're in, in
California contracted by 32% for the same period.
JACK PITTS: Okay. And then do you have any idea what your agent growth -- I
think it was 24%. But I would suspect it's less than that in California.
JACK PITTS: And then maybe while he's looking that up, I noticed that your
revenues per transaction actually went up, which is a bit surprising given that
overall house prices are kind of on a slight decline.
PAT LASHINSKY: We think there's a couple things that are driving that
increase.
First of all, we've seen good strength and resiliency in the California
market, which has a significant impact in that number, which as that market --
as we continue to outperform the market, we think that that helps that net
revenue.
And so over time, as those markets become more developed and more advanced,
we will see that net revenue per transaction continue to drop.
That being said, we think that we've found and shown that we can do an
excellent job with high end customers.
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
We think that as word gets out and more of them tell their friends about it
and more people want to come in and participate in the value proposition of
being able to get a big rebate, getting superior service, being able to
participate in the transaction.
We think that all of that will lead to more word of mouth in this market. And
it's a market that's difficult to break into but once you break into it is one
that's great to be able to stay in. And it does provide upside for us in some of
the markets we're in.
But over the time, we do expect that number to come back down as we diversify
across more markets across the country.
DAVID RECTOR: Hey, Jack, we did miss the stats. The $1 million-plus
transactions were up 46% over that period. So that certainly helps on that
number.
DAVID RECTOR: And the California agents were up about 10% from where they
were a year ago.
PAT LASHINSKY: So going into the -- at the end of the first half this year, a
number of people that we had that were actually listers and were selling were
actually down a little bit in relations to other years, primarily driven by the
market condition and the fact that there are so many people that are out there
selling their home. And everybody was looking for buyers.
And as the market switched from being a seller market to a buyer market, our
buyers got more power. And we were able to convert a higher percentage of that.
That being said, we've made the decision to go after listings now because,
one, we're hearing other brokers are pulling out of the listing business. Two,
it's expensive for other people to do. And they don't know how to add
And three, we think that between all of the tools that we have we can put
against sellers and all the buyers we have, we can add a significant efficiency
against that.
We just launched our seller tool a week ago. And so it's very, very new for
us to be able to give you even any initial indications.
I'll tell you that we're getting excellent feedback from our clients. We're
getting excellent feedback from our agents that this tool seems so much better
and more efficient and allows them to have a better discussion. We think that
this combination is going to work very well.
And the same kind of transparency that we added to buyers seven years ago,
and we're the first ones to put it on the internet, we're adding that same
transparency to sellers right now.
It's not going to be something that turns around overnight. But it will start
to have an impact. By next year, we hope to have some very strong momentum going
against sellers.
And if you can kind of expand, it sounded like you said that you get kind of
an earlier indication as to what type of financing your buyers are looking to
use. How is that? I mean, I'm not --
PAT LASHINSKY: We actually track who are mortgage providers of all of our
buyers are from the minute they start in the process through the entire thing,
through their entire process and transaction.
So what that means is that we can tell if someone says that they've gotten --
their loan is going to be done with American Home Mortgages and we know that
they have declared bankruptcy.
We don't wait until they're a week before closing and try and get them into a
new deal and try and help them solve that problem because we didn't know about
it.
And E-Loan does a great job of helping us take care of those as one of the
options that we provide for clients that are out there.
DAN SILVER, ANALYST, UBS: Hey, guys. This is Dan Silver in for Ben at UBS. A
couple quick questions--first a housekeeping question. Could you guys give us
depreciation for the quarter? I'm also curious if you could provide any detail
on cash burn or expected cash burn for the year.
And then kind of as an aside, if you could couple that with the visibility
that you have into third quarter in terms of how the metric is trending. Thanks
a lot.
DAVID RECTOR: I don't have the depreciation number with me. Let me see if I
can track that down. As far as the cash burn, we still expect to be in the $10
million range for the year. Now we're not at that pace through the first six
months.
But you have to keep in mind that with all the new markets that we're
expanding into that most of that expense is in the last half of the year. And
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
then couple that with on our CapEx, we're looking at developing a second data
site.
And all of that expense will be in the second -- or all that cash burn will
be in the second half of the year.
PAT LASHINSKY: Dan, what were the last two questions you had?
DAN SILVER: I was just hoping that you guys could reconcile the increase and
expected average on revenue per transaction with top line guidance because it
certainly seems like given the increase in the metric, why is guidance not going
up top line?
PAT LASHINSKY: Well, one of the things that we're doing is we're being
conservative. And we're going to make sure that we do the things that we say
we're going to do.
The market has been very, very choppy. It's been very hard to predict. And
it's very hard to have a clear understanding exactly what's going to happen in
the next quarter and in the fourth quarter, particularly in light of what's
going on with the creditizing.
As for guidance in terms of how we think the third quarter's doing, we are
not giving quarterly guidance at this time.
We stopped that at the beginning of this year. What we're doing is just
saying that as we look at the year, we feel like we are definitely on target.
We're making progress.
We're hitting all of the key milestones that we need to hit to at least do
exactly what we said that we're going to do as a company and that we will hit
the guidance that we've given the street at this time on an annual basis.
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
DAN SILVER: Thank you very much.
OPERATOR: And with that, ladies and gentlemen, we have no further questions
on our roster. Therefore, Mr. Lashinsky, I'll turn the conference over to you
for any closing remarks.
PAT LASHINSKY: Thank you, everyone for spending time with us today. We're
very excited to be able to deliver these results for you. And we look forward to
having another great call in the third quarter. Thank you very much.
OPERATOR: And, ladies and gentlemen, that does conclude the ZipRealty
Incorporated Second Quarter 2007 Earnings Conference Call. We do appreciate your
participation. And you may disconnect at this time.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
Q2 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 13 OF 23 STORIES
TRANSCRIPT: 050907ai.776
BODY:
OPERATOR: Thank you for standing by, and welcome to the ZipRealty, Inc.
first quarter and yearend 2007 earnings conference call.
(OPERATOR INSTRUCTIONS)
DON TOMAS, ZIPREALTY, INC.: Thanks, and good afternoon, everyone. With me
on the call today is Richard Sommer, Chief Executive Officer, and Pat Lashinsky,
President.
Also on the call today is Dave Rector, Chief Financial Officer.
Please note that earlier today, the company issued a press release describing
its results for the first quarter of 2007.
Before we begin, I'd like to note that during the course of this call,
various remarks we make about future expectations, plans, and prospects for the
company constitute forward-looking statements for the purposes of the Safe
Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from expectations, plans, and prospects
contemplated in these forward-looking statements and are subject to risks and
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
uncertainties, including those described in the company's Form 10-K for the full
fiscal year 2006 and other filings with the Securities and Exchange Commission,
copies of which can also be viewed on the company's website.
With that out of the way, I'll turn the call over to Richard.
I will also explain how first quarter results and expectations for the full
year fit into that picture.
I will then turn the call over to Dave Rector to discuss specifics for the
quarter, and Pat Lashinsky will end the call with some color about our markets
and strategy. So with that out of the way, I'd like to discuss the market thus
far in 2007.
Nonetheless, we are very pleased with our market share gain for the first
quarter and we see no reason at the moment to change our full-year guidance,
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
as Dave will explain in a moment.
This thesis is complimented in the short-term by the fact that we're seeing
no shortage of people looking for homes with scheduled visits up 45%, year over
year.
In the terms of the former, we saw the rate of inventory increases slow in
our markets for the first three months ended March 31st with average inventories
increasing by only 43%, year over year, in existing markets.
During the first quarter, we also saw a psychological shift with sellers
where, for the first time in quite a while, expectations seemed to have come
down, moving closer to where buyer expectations are. So how did this affect
ZipRealty for the period?
Our first quarter showed strong relative market share gains across the board.
Those gains translated to revenues for the period that set a record for any
first quarter in the company's history.
With that said, I preface my remarks today by stating that the market is
challenging and we stand by that statement. I would now like to turn the call
over to Dave Rector. Dave?
DAVE RECTOR, CFO, ZIPREALTY, INC.: Thanks, Richard. Before discussing our
first quarter results, I want to summarize some changes we've made to our
external reporting format.
Secondly, we're breaking out our net transaction revenues, cost to revenues,
sales and marketing between comparable existing markets and new markets.
With that out of the way, let's discuss the first quarter results. Overall,
net revenues increased by 21.7% from the year-ago quarter to $23.4 million.
This was driven primarily by market share gains in existing markets in the
higher-than-expected average home prices or our transactions closed in the those
markets.
However, given the seasonality of our business, we believe that the full-year
contribution margin represents a much better major of our operating performance
and we encourage you to track the number throughout 2007.
In fact, in 2006, we generated a profit margin of over 20% at the unit level
in our existing market, and that was primarily due to strength in the middle
portion of the year.
Net transaction revenues were $1.7 million for the quarter for our new
markets. New markets are defined as having been open for less than one full
calendar year.
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
For purposes of our comparative analysis, we transferred new markets to
existing markets on January 1 after one full year of operations.
Accordingly, our 2005 new markets, Las Vegas, Houston, and Miami, are now
included in the comparative existing market.
As you'll see, our new markets experienced a loss at the unit level of
approximately $600,000 versus $200,000 a year ago.
Underlying the higher net transaction revenues for the first quarter compared
to the prior period, our strong performance in California, which represented
40.2% of our total net transaction revenue versus 43.1% a year ago.
Average net revenue per transaction grew by 6.7% in our comparative existing
markets to $7,546, up from $7,069 in the prior year first quarter.
We added 394 agents net over the last year, bringing the total to 1,875 as of
March 31, 2007.
Of the total net additions, 145 agents were added in our comparable existing
markets and 249 in our new markets.
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Productivity for the first quarter, on average, was 0.57 transactions per
agent per month.
Next, I'd like to review our cost structure. Cost of revenues were $13.1
million, or 55.9% of net revenues, for the first quarter, flat on a percentage
basis to the year-ago period.
Product development expenses for the first quarter totaled 7.2% of net
revenues versus 7.3% of net revenues for the comparable prior-year period.
Sales and marketing expenses for the first quarter, a total of $8.8 million,
or 37.8% of net revenues, up from 36.9% in the comparable prior-year period.
This was primarily due to our opening new markets in the corresponding
salaries, benefits, and overhead associated with establishing offices in those
markets.
Also contributing to the increase were customer acquisition costs, which are
typically higher in the first quarter as we invested with spring and summer
sales season that are critical, longer term, in building our national footprint.
On a pro forma earnings basis, which excludes the effects of non-cash income
taxes and stock compensation expense, we lost $2.3 million for the first
quarter, or $0.10 per basic share, versus a loss per share of $0.09 a year ago.
Please notice we outlined in our year-end call, we recorded a full valuation
allowance against our deferred tax assets and expected taxable loss for the
year.
As a consequence, no tax benefit is provided for the quarter ended March 31,
2007.
In terms of our balance sheet, we ended the quarter with $85.5 million of
cash, cash equivalents, and short-term investments, and we have no long-term
debt.
We also expect an agent count at the end of the year between 2,200 to 2,500.
Gross margins should be in the 44% to 45% range for the year.
On a pro forma basis, we expect our loss for the year to range from $6
million to $9 million, or $0.25 to $0.40 per share.
One final note. While we're not planning on providing quarterly guidance, we
do want to emphasize that the second quarter started off much slower than the
first, so please take that into account.
As a result of our new market expansion, most of the yearly revenue growth
will occur in the last half of the year. And I'll turn the call over to Pat.
And despite the fact that hiring people fairly rapidly is something we've
done for quite awhile, it's absolutely critical that each person is properly
trained and doctrinated into our culture, extending to the field with an
absolute command as the tools to their disposal.
Not doing so will compromise customer experience and damage our brand at a
time that we have a real opportunity to gain share nationally.
In fact, with four full months a year under our belt, we remain highly
confident that we've chosen the right cities to invest our capital.
So let me give you a quick update on each market and my discussions with some
comments about platform development.
Naples and Tucson were launched in Q1 and are off to a strong start. Denver
launched two weeks ago and we've already had early success in recruiting
experienced agents who are attracted to our buyer eccentric lead-based models.
We are pleased to announce plans to enter Virginia Beach later this summer,
followed by expansion into North Carolina this fall. More specifically, the
Charlotte and Raleigh/Durham markets.
As I stated earlier in the year, these cities represent another step towards
our national market strategy that by the end of the year should give us the
preliminary footprint we need to maximize the value of our network.
Before I turn the call back over to Richard, I'd like to discuss
productivity, both the industry's and ours.
In terms of our own productivity, none of us were happy with the 0.57
transactions for the period, despite the fact that it was higher than the
industry's average.
But as we sit here and look at our performance, it's this category that's our
biggest opportunity.
Improving it starts with doing the little things right every day with every
client, which is our singular focus.
And supporting that effort is enhanced training, better technology, and the
business model itself, which unites everyone in a common culture under a common
platform.
With that, I'd like to turn the call back over to Richard.
OPERATOR: Thank you. (OPERATOR INSTRUCTIONS). We'll pause for just a moment
to assemble our queue. We'll go first to Jeetil Patel with Deutsche Bank.
JEETIL PATEL, ANALYST, DEUTSCHE BANK: Thank you, guys. A couple of questions.
Can you talk about, I guess, any sort of impact on the escrow?
Is the amount of transactions being closed, from open to closed based on just
the loan restrictions and the marketplace being placed as we progress through
the first quarter and here into Q2?
And second, you had talked about a weak start to Q2. Is that somewhat
broad-based across most of the territories?
PAT LASHINSKY: Great. Hi, Jeetil. Thanks. As we look at the transactions that
were closed in the first quarter, you know, one of the things that we stated on
the last call is that we were not overly impacted by the sub-prime market
overall.
It's a very, very small percentage of our business and we did a very, very
good job of closing the deals that got opened in the first quarter. It's a
strength that we think that we've really been able to leverage and do a very
good job at.
We are being very proactive with our agents to make sure that they are very
aware up front on all of their consumer needs and that we're getting in front of
the lending issue.
So rather than let the lending issue drive us, we're going to make sure that
we're in charge of it and doing what we can.
Where the lending issue comes into place is that it makes it so that some
buyers who previously were able to get loans are not currently able to get loans
or may have to get a more expensive loan than previously what they were able
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
to get, but that is something that we wouldn't see the net result of probably
for a few more months.
That tightening of the credit is really just taking place in the near term.
In terms of the market and was it broad-based or was it local, it really was
a broad-based kind of issue that we saw everywhere.
JEETIL PATEL: I guess is it a deceleration off of just the trends that you've
seen in the first quarter? Or is it more of a change relative to the
year-on-year comparison?
PAT LASHINSKY: It's a deceleration for sure from what we saw in the first
quarter. And it's, you know, on a year-over-year basis, it appears that there
has been some deceleration there.
PAT LASHINSKY: Hi, Michael. Most of our closings take place in about a 30- to
45-day window. That is a vast majority of everything.
So if you look at closings that took place in January, the majority of those
would have come from December, maybe late November, with some small portion
coming in January.
There some cases of new homes. For example, it could be three, four, five
months out, but that doesn't happen as much, particularly in the first quarter,
as it does at the end of the year.
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
MICHAEL MILLMAN: And did you see, as the quarter went on, any extension of
that time period?
MICHAEL MILLMAN: And what's the completion level? In other words, what
percentage of contracts go to closing?
PAT LASHINSKY: That's something that we have made a decision not to disclose
that.
We've focused our management attention in making sure that clients who do get
a contract signed are getting to the finish line and they're able to close a
home.
And we focus that by making sure that our closing service managers, our
staffs, our agents have all the information they need to be able to work with
those clients. And we have seen a steady improvement in those numbers as a
result of those efforts.
MICHAEL MILLMAN: And that improvement continues into the second quarter?
MICHAEL MILLMAN: And, I guess, a question -- this is a real softball for you,
and that's why you've outperformed the market and existing markets, in your
opinion.
PAT LASHINSKY: I think a lot of reasons, but I think the bottom line is the
business model that was started many years ago and invested is ahead of the rest
of the industry and has really embraced technology and centralizing technology,
integrated CRM and lead management.
DAVE RECTOR: Let me just look back here and get you the -- California was
40.2% of our total transaction revenues versus 43.1% a year ago.
JACK PITTS: Okay. So you outgrew them by 30% then. What do you think is the
driving factor behind California improving so much? Is that kind of backend
efficiency?
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Or is it, you know, better agents? Better training? What do you think is the
main driver there in the last couple quarters?
PAT LASHINSKY: Well, one of the things that happened is California really was
one of the first markets that we saw to really get hit by the slowing and the
downturns. So as it was the first to get hit, it's also the first one that we've
seen start to strengthen back.
And, you know, we've also got a great strong macro-environment in California.
Employment is good. A lot of other areas continue to be strong in the state.
It's not being as affected by the loans as it is in some other places.
And, you know, we have focused the management team on making sure that
California got fixed and that it was back to the level and succeeding at the way
we wanted, and we think that that has worked.
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
You know, now our focus is going to be making sure that other key markets
outside that are performing as well or performing just as well as California is
doing right now.
JACK PITTS: What was your agent growth, year over year, in just California? I
know it was, looks like 27% for your whole company, but do you know what it is
for just California?
PAT LASHINSKY: Well, yes. The bottom line is I got here, what? Eight months
ago. We made a series of management changes over the fourth quarter and
beginning of first quarter, and a lot of those management changes are taking
effect.
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
And this is a people business in terms of leadership so you need to make sure
you have the right leaders in each area.
JACK PITTS: So it's mainly execution. There's not some strange thing that
just happened this quarter that could make that --
PAT LASHINSKY: I will tell you that as we look at the quarter, we're not
necessarily projecting this going forward and thinking that this is going to
maintain this difference. But for the first quarter, we really do believe that
we performed at a very high level and a lot of things went right.
We're going to continue to operate the best we can, but you know, this gap is
a very large gap, as you noted, and it's probably larger than we expect to have
going forward.
JACK PITTS: And the sequential growth last year from March to the June
quarter was about 40%, I think. Do you know kind of what seasonality should
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
look like approximately this year?
Or has the market gone so sour in April and May such that it's not going to
look anything like that?
PAT LASHINSKY: One of the things is that we've decided that we're not going
to give any quarterly guidance, and we think that that is probably a little too
close to us giving quarterly guidance.
You know, we believe that the annual numbers that we've given and that our
guidance for the year is right on and it's the place that we're going to stand
by. So at this point, we're really not ready to discuss kind of where we think
the second quarter is going to come in.
DAVE RECTOR: With that said, we'll be filing our Form 10-Q tomorrow, and one
of the metrics that we always include in our footnotes is the seasonality of the
business and we do indicate that for '06 and '05 what percentage of the total
year that the first quarter ended up representing.
PAT LASHINSKY: I think that we can tell you that we believe that we will
continue to outperform and out-operate in California, but I can't give you any
indication, we don't have any indication, on what that number will be.
And so, part of the benefit may be that we have a competitive advantage and
we're going to continue to exploit that. And part of it's that our competitors
go of people,g and pulling back and closing office and letting
Q1 2007 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
and so they're not growing.
And the other hard part is that we don't have any market data on the market
as a whole in California to be able to compare against. So it doesn't, you know,
that gap is driven by not only what we do but how the market as a whole is.
And so we get a little bit more market data overall. We just don't have an
idea of how that second quarter is going to compare.
JACK PITTS: Okay. Well, congratulations. And unless I'm missing something, it
looks like the execution's going rather excellently.
It's something that we feel like we've really raised the level of
transparency in this new release, and we've given it a lot more information than
we've ever given before, but we really made a conscious decision on where to
draw the line in terms of California market.
CYNTHIA RUBEN: Can you talk about, say, northern as compared to southern
California?
PAT LASHINSKY: At this point, we're really not ready to go into anything more
than California versus outside of California.
OPERATOR: Thank you. That concludes today's conference. You may now
disconnect.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most
FOCUS - 14 OF 23 STORIES
TRANSCRIPT: 031407ar.701
BODY:
OPERATOR: Good day, everyone, and welcome to the ZipRealty Inc. fourth
quarter 2006 pre-announcement earnings conference call. At this time, all
participants have been placed in a listen-only mode, and the floor will be open
for your questions following the presentation. It is now my pleasure to turn the
floor over to your host, Raph Gross. Please go ahead. I'm sorry. Raph Gross, you
may please proceed.
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
UNIDENTIFIED COMPANY REPRESENTATIVE: Thanks. Okay, I think we're going to
read this from here. Karen, do you want to read this?
KAREN SETO, VP, GENERAL COUNSEL, ZIPREALTY INC.: In Raph's absence, thanks
and good afternoon, everyone. I'm Karen Seto, Vice President, General Counsel of
ZipRealty, and with me on the call today is Richard Sommer, Chief Executive
Officer, and Pat Lashinsky, President. Also on the call today is David Rector,
our Interim Chief Financial Officer.
Please note that earlier today, the company issued a press release describing
its results for the fourth quarter and full year 2006. A copy of that release
can be viewed on the company's website at www.ziprealty.com. Before we begin,
I'd like to note that during the course of this call, various remarks we make
about future expectations, plans, and prospects for the company constitute
forward-looking statements for the purposes of the Safe Harbor provisions under
the Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from expectations, plans, and prospects contemplated in these
forward-looking statements and are subject to risks and uncertainties, including
those described in the company's Form 10-Q for the third quarter 2006 and other
filings with the Securities and Exchange Commission, copies of which can also be
viewed on the company's website.
RICHARD SOMMER, CEO, ZIPREALTY INC.: Thank you, Karen. In late February, we
released preliminary fourth quarter results and laid out an accelerated
expansion plan that involved eight to 12 new markets, versus the six we had
communicated in the past. Although we may recap some of the reasoning behind our
all, we'll keep our remarks brief, given that we've addressed themarket just und
er 30 days ago.
I'll now ask Dave Rector to briefly review our fourth quarter results. After
Dave speaks, Pat Loshinski will reiterate a few specifics on our plan. Finally,
I'll wrap up things and open up our call for questions. Dave?
DAVE RECTOR, INTERIM CFO, ZIPREALTY INC.: Thanks, Richard. I'll quickly
highlight some of the key points from our February call, and then address the
fourth quarter specifically. For existing markets outside of California, our
closed transactions decreased by 4%, significantly outperforming the market
contraction of approximately 17% to the same period. In California, after
several quarters of tracking with the market, we finally gained ground,
contracting about 20.5%, roughly 400 basis points better than the market. For
the fourth quarter, California represented slightly less than 40% of our
transaction revenue, compared with 47% of last year's fourth quarter, and 61%
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
in the fourth quarter of 2004. Conversely, new markets represented approximately
14.4% of total transaction revenue for the quarter.
I'll now cover some of the P&L specifics for the fourth quarter. Net revenues
for the quarter were $23.1 million, an increase of 7% over the fourth quarter of
2005. This outpaced expectations driven in part by very strong performance in
some of the new markets we entered during the year, notably Orlando,
Minneapolis, and Austin. Our gross margin as a percentage of revenues was 45.4%
for the fourth quarter, down about 60 basis points from the prior year. This
decrease in the fourth quarter 2005 was caused primarily by a shift in the mix
of commission splits earned by our Zip agents. For the full year, our gross
margin was 45.3%, which is flat with the prior year.
On the bottom line, we reported a GAAP net loss for the quarter of $20.2
million. As we explained in February, this loss includes a non-cash income tax
charge of approximately $17.7 million, attributable to reestablishing the
valuation allowance on our deferred tax assets relating to our net operating
loss carried forwards. This translates to a GAAP loss of $0.96 per basic share
versus earnings per diluted share of $0.73 in the fourth quarter of last year.
The 2005 fourth quarter results reflected a non-cash gain of $16.8 million,
attributable to the release of a significant portion of the previously
established valuation allowance attributable to the deferred tax assets.
On a pro forma earnings basis, which excludes the effects of non-cash income
taxes and stock compensation expense, we lost $1.6 million for the fourth
quarter, or $0.07 per basic share, versus pro forma income per diluted share of
$0.04 a year ago. And for the full year, our pro forma loss per basic share
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
was $0.01 versus pro forma income per diluted share of $0.32 in 2005. We have
included a reconciliation of GAAP to pro forma results in our earnings release.
In terms of the balance sheet, we remain in great shape. We ended the year with
$88.8 million of cash, cash equivalents, and short-term investments, and no
long-term debt.
Looking to our outlook for 2007, for the full year we estimate that revenues
will range from $105 million to $110 million. We anticipate average agent
productivity of roughly 0.6 to 0.7 transactions per agent per month, and average
net revenue per transaction in the range of $6,000 to $6,500. We also see an
ending agent headcount of between 2,200 and 2,500 agents. We expect the gross
margins in the 44% to 45% range for 2007. In terms of other operating expenses,
we anticipate the marketing and customer acquisition expenses will be 14% to 15%
of revenues, while product development expenses will be approximately 7% of
revenues.
At the root of any successful market strategy are the people and technology.
And as part of our plan, we expect to invest in three areas -- data utilization,
agent efficiency, and the engine that really drives our business for both
customers and agents, the ZipRealty website. First, in terms of data. We'll look
to better utilize the information that we currently have and the information
that we're acquiring. This includes data that can help us recruit more
efficiently versus the shotgun approach we tended to use in the past. It would
lyzing data to predict the likelihood and timing that a client
might transact or need our services.
Finally, we will continue to invest in our website with useful and leading
edge innovations. One recent example of this is ranking homes based on the
amount of interest that clients have shown in that property relative to other
homes in the area. Like every feature we incorporate into our site, it's
consistent with our goals and empowering our customers with useful and specific
information.
ZipRealty, on the other hand, is changing the status quo one market at a
time, and I think our results will prove that out. And the reason I can say this
is because our value proposition starts with unified culture and a common
platform where agents are employees, and the focus is on the existing customer
rather than the next deal. As that platform evolves, interests become aligned,
and the customer at hand is the sole focus. And as we replicate that seemingly
simple concept across the country, we'll have the opportunity to attract
millions of customers that have traditionally had poor experiences and thousands
ng people in the homes of their choice.o well -- placi
JEETIL PATEL, ANALYST, DEUTSCHE BANK: Hey, guys. A couple of questions here.
I guess going through the fourth quarter, your California business,
transaction-wise, was down, I believe 20%, revenues down 10%. Do you think that
the overall pricing variance, which seemed like it was generally up, was that
factor more of a price firming environment or just the mix of low end in the
overall mix in California diminishing in the business, first? And second, as you
look at that $6,000 to $6,500 revenue per transaction for this year, can you
just talk about how much are you assuming is mix-driven as you expand into new
markets versus pricing decreases in the overall industry? And then, I have a
quick follow up.
In terms of the net transaction revenue per transaction and the difference
between the two years, perhaps it's really a couple of factors that are
influencing that. First of all, you know, we continue to shift our mix outside
of California, and when you look at the new markets that we're doing, we're
adding significant markets where the average home price is just significantly
lower than what it is in California. And we're also planning for a slight
decrease across the board in home prices, which when you combine those two
ion revenue that [inaudible - background
noise] call.
JEETIL PATEL: Okay. Two follow ups, just I guess, I know it's early, it's
March, and the spring push probably hasn't really gotten going. But, I guess,
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
can you just give us a sense of whether you're seeing high-quality inventory
pick up in your markets judging by just by the inventory availability and what
the buyer response looks like early on here? And then, second, I guess as you
look at the new 8 to 12 markets, are you timing those in terms of expansion with
where they are in terms of potentially transitioning in the real estate cycle
between areas like Denver versus Naples, etc.?
PAT LASHINSKY: So you've got two questions there. We'll take the what we're
seeing in the spring first, and then we'll deal with the new market, second. So
in terms of this spring, the spring is traditionally the strong selling season.
Right now, we think it's honestly too early to call in terms of what we're going
to see in terms of the market. We can tell you that demand continues to be very
high, and demand from the buyer side continues to be very strong. We continue to
see great activity and lots of requests for that. The homes are up, and the
inventory is up overall, but the gains that we would expect to see kind of at
this time of year are not as high as they've been in the past.
We think part of that is driven just by the fact that inventory levels are so
much higher this year on a year-over-year basis versus last year that some of
that probably came in a little bit earlier this year than it typically has done
in the past, as people are waiting to kind of see what's going on in the market.
But those that had to sell got into the market a little bit earlier. The good
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
thing is that we think that we're moving back to more of a historical normal
range. This is kind of what it's been if you look back across thirty years and
you take out the last three or four years of exuberance. This is a much more
normal market in terms of what we're seeing, in terms of inventory levels, and
number of days on market.
In terms of the new markets, we've taken into account some factors of where
they're at in the cycle, in terms of trying to make sure that we're going into a
time when it's not at a down part. That being said, our key idea is to make sure
that we're maximizing the opportunity in each one of those markets, and we're
doing it in a way that allows us to continue to sustain and grow that area. It
really is a long-term decision for us in terms of how we look at these markets.
When we go in right now is really an investment towards the future. It's an
investment for 2008, investment for 2009, 2010. And so the short-term answer is
that while we're aware of the different conditions that affect each market,
that's not really driving our decision. It's a factor but not the key factor.
Our key factor is really going to be where do we get the biggest bang and the
biggest return from.
OPERATOR: Moving on, the next question comes from Jim Wilson with JMP
Securities.
JIM WILSON, ANALYST, JMP SECURITIES: Thanks. Maybe two similar questions. In
the recent sales trends, can you tell any fallout from, the obvious question,
the subprime lending environment? Any fallout you can tell occurring, maybe at
the low end of the business you might see?
JIM WILSON: Okay. And then, as you look at moving into new markets, actually
even in existing margins, any change in the competitive environment? Anybody you
see in the new markets you're entering or anybody that's started to materialize?
I don't see much, but any that started materializing in existing markets like
California?
PAT LASHINSKY: You know, we haven't seen any new models or anything really
different that's gotten a lot of share or that is in a large segment in any of
the markets that we're going into. There's lots of money coming into this space
and there's lots of opportunities. But at this point, we haven't seen any other
brokerages that have really been able to gain a strong foothold and really be
able to make any [inaudible] in any of the markets that we're in at this point.
JIM WILSON: Okay. All right. Very good, thanks.
RICHARD SOMMER: Well, Dave, why don't you answer the first part of the
question. I'll answer the second.
DAVE RECTOR: I think on the first part of the question, I think we actually
did see a little more flow through on the actual commissions, which I think
we didn't see maybe as muchlf of the year
discounting, or on the higher-priced homes where it's more competitive, that
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
over a broader base, and this may be some of our diversification, getting into
lower price markets. But that doesn't seem to be the price-cutting. So we
actually saw a little more of a pass-through on the effective commission rate on
those transactions.
RICHARD SOMMER: In terms of subprime and credit tightening, the bottom line
of the market now is, you want to be the purchase business, and that's what
we're in, the purchase business. We're about purchasing homes, and that's the
solid part of this business to be in, in terms of real estate and the finance
sector. So a lot of sectors that effect mortgage have greater impact on
mortgage, a much greater impact on mortgage, than they do with us.
MICHAEL MILLMAN: Are you actually seeing that, or you're hearing that, "Boy,
we need that 50 basis points, because we can't get zero, we can't get 40 years,
or 50 years?", or whatever the deals were?
RICHARD SOMMER: No, we're get -- we're just watching it closely. But I think
the bottom line is we're not seeing any significant impact to the business. It's
just important that it's out there, we're watching it, we're looking at all the
industries and reports to see, to watch, in terms of how it affects the
business. It's obviously changing relatively quickly, and we're going to
continue to watch it closely.
PAT LASHINSKY: What we are seeing is that there are -- lenders are definitely
tightening down on their zero down loans, and they're non-state, they're
stated-only loans. And stated income has a real effect on that, so the
combination between those is that there is some tightening in those areas. But
the effect of that is still yet to be seen. But we're not projecting that that's
ing to have a large impact. But it is going to make consumers have to be
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
more aware of how their cash flow is.
MICHAEL MILLMAN: And would that suggest, if there's still buys in terms of
transaction, no change, but in terms of pricing? Would that suggest a change,
that they would buy less a house?
PAT LASHINSKY: Well, for most people the price of the house that they buy is
actually tied towards the monthly payment and towards the interest rates that
are being paid. And so it tends not to be as much a function of the other
pieces. So as long as the interest rate environment stays strong, we expect that
the pricing element will continue to be there. Richard, do you want to add?
RICHARD SOMMER: Yes. You have to see it in a full landscape. So you've got
interest rates at historically still good levels, you've got the economy
creating more homeowners every month, you've got immigration patterns bringing
more people into the country. And then, on the other side, you have credit
standards sort of becoming more like it they have historically been over the
last ten years as opposed to the last three years. And we have to sort of watch
and see what impact that has.
MICHAEL MILLMAN: Okay. And the other question about how buyers reacting, or
buyers taking longer to make a decision, buyers moving, willing to increase
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
their offers, or do they feel empowered and waiting for the sellers? Just some
color on the buyer-seller dynamic that you're seeing and the shifts that you may
be seeing in that dynamic.
RICHARD SOMMER: Well, I think a lot of that shift has been occurring over the
last year and a half. So if you look at the last year and a half, we went from
an abnormal situation where we had several seller markets year after year. We
shifted to a buyer market. Inventory levels were abnormally low a year and a
half ago, and now we're seeing inventory levels return to more normal levels.
And as a result, we have more of a traditional buyer's market, which is more the
norm.
MICHAEL MILLMAN: But it's not gone. It's traditional not become an extreme
buyer's market.
PAT LASHINSKY: No. Probably the biggest thing that we've seen so far is
actually that buyers and sellers are looking at the market still a little
different. Sellers, despite the fact that inventory levels are up significantly
over last year, they're holding their prices very firm. They're not reducing
prices. And buyers are coming in a little bit more aggressively, saying "I have
more options and more choices. I can be willing to negotiate." The fact that
m is moving the market to a point of
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
equilibrium. It is definitely not moving to an extreme on either side that we're
seeing.
PAT LASHINSKY: It's more a negotiation than a standoff. What it is, is both
players are trying to figure out what's the accurate, fair market price for
this, and what are they willing to do. And buyers are putting in offers and
they're getting sellers to try and move, and sellers are sometimes holding off,
and they may not accept the first one, and they may say, "Hey, I'm going to wait
for a second offer, and have to go back to that buyer in two or three or four
weeks." But what we're finding is that there's a lot more discussion and
dialogue going on before. Neither party can say, "Hey, this is it. Let's take it
or leave it." Both parties are having to move off where they want to move, and
they're having to spend more time negotiating together.
RICHARD SOMMER: Yes, and I think the bottom line is, in terms of total
transactions, you're still seeing a strong number of transactions of both
buy-sell. It's just not at its historic high.
OPERATOR: Moving on, the next question will come from Kent Holden with
Gagnon.
PAT LASHINSKY: We're saying that the market is saying that stated income is
going to be more constrained, and there's going to be more pressure on that
going forward. That's something that --
PAT LASHINSKY: We, overall, tend to have a lower effect in terms of number of
those. And our credit scores and our clients' credit scores tend to be higher
than the industry average from the partners that we've seen information on. We
don't expect that to be a large portion, but we won't know until we get a little
farther in.
RICHARD LINHART, ANALYST, OPUS CAPITAL: Thank you. Two questions. The first
one, looks like the G&A in the fourth quarter is up about 20% from the third
quarter. Could you give us some feel for what the key elements of that are? And
the second question, are there operating metrics you can point to in your more
mature markets to give us confidence that longer-term, there is a good
profitable business model here company-wide?
And so we're seeing that in our existing businesses to the point where about
34% of our clients now are coming directly to our site without going through any
other means to get there. They're not coming through a third party and
aggregated, they're not coming through search. They're coming directly to our
site. So when you start to see those kind of numbers in an existing business,
it's a very, very good sign that the brand is building its credibility,
developing its footprint, and gaining share.
RICHARD LINHART: Do you have, just to follow that though, do you have any
markets that are reasonably mature enough that you can look at the operating
metrics and say, and with that, I'm not asking you to name the markets, but say
we've got X number of markets that have reached 5% of the market share in those
markets, and here are the key operating metrics.
PAT LASHINSKY: You know, we look at the business, and we definitely are
analyzing it that way. We haven't shared any of that information yet, and I
think it's something that we're going to have to look at as a management team
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
and decide if we're going to do for the next call. I will tell you that it's
important for us, the ROI of each of the markets that we're in, and each of the
new markets we go into, is really a key element of how we look at it, and how do
we drive incremental profits from each market is really our key indicator.
But we'll definitely take a look at that as we go forward and decide if we're
going to give you some information like that. Obviously, there are some reasons,
competitively, that we want to be careful about what we say about each
individual market that we're in, but I understand your point in terms of trying
to get a better analysis of the markets that we're in and which ones are
successful and why they're successful. And we'll look at a way to coming across
and getting that information out.
PAT LASHINSKY: I appreciate the comment, Mr. Linhart, and we will definitely
look into that.
RICHARD SOMMER: Thank you, everyone, for joining us today. I appreciate all
the questions, and we'll look forward to talking to you again in a few months.
OPERATOR: And everyone, once again, this will conclude today's program. We
thank you for joining us. Please enjoy the rest of your day.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be
Q4 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
no assurance that the results contemplated in the forward-looking statements
will be realized.
FOCUS - 16 OF 23 STORIES
TRANSCRIPT: 110806am.721
LENGTH: 9873 words
BODY:
Before we begin, I'd like to note that during the course of this call,
various remarks we make about future expectations, plans, and prospects for the
Company constitute forward-looking statements for the purposes of the Safe
Harbor Provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from expectations, plans and prospects
contemplated in these forward-looking statements and are subject to risks and
uncertainties including those described in the Company's Form 10-Q for the
second quarter 2006 and other filings with the Securities and Exchange
Commission, copies of which can also be viewed on the Company's Web site.
With that out of the way, I'll turn the call over to Richard.
RICHARD SOMMER, CEO, ZIPREALTY INC.: Thank you, Tom, and thanks for joining
us today. Before we review our financial performance, I thought it would be
helpful to share with you a little bit about my background and why I decided to
join ZipRealty just about 60 days ago.
First, I've been working in the convergence of the real estate, mortgage and
Internet sectors for sometime now. Mostly recently, I was CEO of HomeGain, an
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
online real estate lead generation company, which happened to be ZipRealty's
largest source of leads. Consequently, I gained a solid appreciation for the
Company's customer acquisition capabilities, which I think are second to none in
the brokerage industry. Prior to HomeGain, I held senior executive positions at
IndyMac Bank, one of the largest wholesale mortgage lenders in the country and
one of the leaders in online mortgage originations, and Realtor.com, where I was
President and Managing Director of International Real Estate Operations. During
that time, I helped to build the nation's leading real estate site, Realtor.com.
Further, I helped NAR fund and established the formation of the International
Consortium of Real Estate Associations, a group of 23 leading real estate
associations that promotes professional standards around the world.
Through these experiences, I feel I've been at the forefront of change in the
industry at it's embraced the Internet. And while I have deep relationships in
real estate industry, my passion is innovation and new business models, which is
why I'm so excited about my new role here at ZipRealty. Furthermore, after
meeting with the Board of Directors and the broader team at the Company, I see a
significant opportunity to create value. In fact, I welcome the opportunity to
lead a company that I've always admired and I hope that my presence will help
the entire organization go to the next level.
As many of you know, Zip has already expanded successfully into several new
markets and has done so with exceptional returns on invested capital. All this
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
adds up to a great market position in my mind and one that can lead to
significant profitability over time. But it will take more assessment on my part
before we are in a position to talk about strategic and performance objectives.
So let's talk about the recent past for a moment.
During the third quarter, market conditions remained challenging. Overall
sales volume in our markets contracted with total Q3 market transaction volume
down approximately 25% in our existing markets versus last year. California was
down about 35%, while outside of California decreased about 20%. As we will
discuss later, on a relative basis, we were able to perform better than the
market, allowing us to gain share during the market contraction.
Our Los Angeles and Houston markets, two cities in which we've been operating
for more than a year, are still profitable and performing quite well. And the
recently launched Minneapolis-St. Paul market is off to a great start, which is
promising.
With respect to our latest new markets, we're in the process of hiring our
management team in Philadelphia. This market actually involves a three-state
launch as the Greater Philadelphia Metropolitan area encompasses suburban New
Jersey, Delaware, in addition to Pennsylvania.
I will now turn the call over to Gary, who will review our financials for the
third quarter, update our guidance for the balance of the year and offer some
commentary on Q1.
GARY BEASLEY, PRESIDENT AND CFO, ZIPREALTY INC.: Thanks Richard. Like last
quarter, we grew our share despite a substantial decline in overall transaction
volume. In fact, for markets outside of California, where we've been operating
prior to 2005, our closed transactions decreased by 5%, significantly
outperforming the 20% market contraction for the same period. In California,
after several quarters of tracking with the market, we finally gained ground,
contracting about 33% or 200 basis points better than the market. We're closely
watching the monthly year-over-year contraction figures for California, which
seem to have leveled at about 35% since the beginning of the quarter.
Turning to productivity, we saw about 0.7 deals per agent per month, which
was within our range. Our agents who have been with us for at least 12 months
demonstrated productivity of about 1.0, a 43% premium to our overall average. In
terms of headcount, we added 78 agents net for the quarter and ended Q3 with
1,747 agents, up from 1,669 agents in the second quarter. This represents an
increase of 26% from a year ago, suggesting that many agents see ZipRealty as a
credible alternative to traditional models, which rely very heavily on sell-side
business.
Average net revenue per transaction for the third quarter was essentially
flat on a sequential basis at $7,332 versus $7,375 in the second quarter, which
is also slightly below our record-high of $7,475 in Quarters 2 and 3 of last
year. This is consistent with overall sales prices in our existing markets,
which are essentially flat on a year-over-year basis. These, along with the
other metrics I mentioned, drove net revenues of 26.2 million for the quarter,
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
which was slightly above the high end of our $24 million to $26 million guidance
range.
Moving to the expense side of the P&L, gross margin in the third quarter was
45.6%, a bit higher than expected, due primarily to the mix of commission splits
earned by our Zip agents. For the full year, we maintain our previous
expectations of 44% to 45%. G&A was 7.9 million, up modestly on a sequential
basis, driven primarily by higher stock comp and seasonally increasing S-Ox
expenses. Marketing and business development represented 3.1 million or about
12% of revenues versus 3.6 million or almost 13% of revenues a year ago. We
continue to drive efficiencies in this area as cost per lead dropped again on a
year-over-year basis. Contributing to this success were increases in our
direct-to-site traffic and a continuation of our Web site optimization and SEO
efforts.
Turning to the balance sheet, our cash and cash equivalents of 88.4 million
once again represents a significant portion of our market capitalization at
roughly $3.76 per diluted share. We have no long-term debt, inventory costs or
material accounts receivable exposure.
For the full-year 2006, acknowledging the better than expected third quarter
results while remaining cautious about the near-term market condition, we are
improving our year-end GAAP EPS outlook by $0.10, reducing our loss per share
range to between $0.15 and $0.20. The improved outlook for the year on a pro
forma basis decreases our loss per share to between $0.10 and $0.15.
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
For the fourth quarter, this translates into a projected GAAP loss per share
of between $0.13 and $0.18, and pro forma loss per share of $0.17 and $0.22 on
expected Q4 revenues of approximately $18 million to $20 million. This guidance
is based on approximately 20.4 million basic shares outstanding for the year and
20.5 million for the fourth quarter.
Given the lack of visibility into next year at this time, as well as the fact
we're in the midst of a full business review with Richard just having joined the
Company, we're not prepared at this time to provide any formal guidance for
2007. We hope to be in a better position to discuss our growth strategy and 2007
outlook on our next call.
The first quarter is always a challenging one in our business and it will be
particularly challenging this year unless we see an unexpected improvement in
market fundamentals over the next couple of months. However, we're confident in
our ability to continue to make progress through this market contraction with
the objective of emerging on the other end of the cycle in a stronger relative
competitive position than when it began.
With that, I'd like to turn the call back over to Richard, after which we'll
open up the floor to questions.
To conclude, I'm very excited to be at the helm of Zip and I believe the
long-term opportunities are considerable. We look forward to laying out more
detail on our next call, and with that I hope I've given you a feel for my
background and what I believe is important for the organization. Operator, let's
open the line for questions.
OPERATOR: [OPERATOR INSTRUCTIONS] And we'll take our first question from
Jeetil Patel with Deutsche Bank. Please go ahead.
JEETIL PATEL, ANALYST, DEUTSCHE BANK: Yes, thank you. Hey, guys, a couple of
questions actually. Can you just give us a sense of what you're seeing in terms
of volumes or pricing relative to expectations? Can you just give us a sense of
how things are changing and what you saw in the quarter between California and
non-California markets relative to volume versus pricing -- volume and pricing
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
trends to get a better handle of what's moving around dramatically relative to
what you're thinking? And then secondly, I have a couple of more questions but I
may as well start with that.
GARY BEASLEY: In terms of, if you first look at transaction volumes, what
we've seen in each quarter this year, both inside and outside of California, is
each quarter the year-over-year declines have been greater. So if you look at
overall, it was down about 9% in our markets -- our existing markets, in
aggregate, in the first quarter, down about 13.5% in Q2 and down about 25% in
the third quarter. California, over the same time periods, down 21%, 25%, 35%.
And non-California was only down about 1% in the first quarter, was down about
6% in the second, and about 20% in the third. So I think what you're seeing is
an accelerating decline outside of California and a decelerating decline inside
of California. What we've seen is the last three months -- in the last three
months of the quarter, in California, we're all around 35%. So, one can surmise
that things might have leveled out a little bit in California.
JEETIL PATEL: This is probably a tougher question to answer, but what do you
think is a kind of a healthy amount that you would want to seeing pricing
correct in the -- I guess, across the board from a pricing standpoint, which
would I guess since you work on the buy-side equation from an agent standpoint,
you would obviously have a sense of where -- what would be market clearing price
from a buyer standpoint? So, how do you think pricing needs to contract to get a
sense of we get back to some transaction volumes kicking in?
And then second, just as you look at your new market strategy, is there --
are you looking at any sort of framework inventory positions in particular
markets that make it much more attractive? I mean, said another way, are you
looking at markets that have already seen a significant uptick in inventory,
meaning that they're actually in significant transition where you start to step
in and say, "Look, we can come in and start to help buyers find those homes
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
given the significant amount of inventory?"
GARY BEASLEY: Okay. First, it's really hard to answer the pricing question,
Jeetil, because one, it's sort of speculative and my guess would not be
necessarily better than anyone else's. It's probably more than what we've seen
now, which is essentially prices coming down to be about flat year-over-year.
What we are seeing is we do track market by market what percentage of home
listings have been reduced and that has continued to increase over the last
several months in just about all of our markets. In fact, a market like Boston,
about 50% now of all the listings have been -- have decreased. So I think
there's a combination of more homes being reduced and people getting a little
bit more realistic about the listing prices as well as bringing down transaction
prices.
So I'm not going to give you a number about how far it needs to come down
because it also varies a lot by market. In terms of the new markets,
interestingly, we do look at what's going on with inventory and transaction
trends and all that, but what we have found is with our model going into market,
we've experienced similar traction in markets of -- in various stages. For
example, Orlando, as Richard said in our prepared remarks, became profitable
within four months of operation and Orlando has been in the press as being one
of the markets with the worst inventory problem out there. But we attacked it
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
with an excellent management team and have been able to gain share there very
quickly and get profitable despite what would look from an external standpoint
maybe some not great initial market conditions to enter. So we do -- we look at
a lot of things, but we're in this for the long-term and so we're really not
going to let short-term market aberrations influence too much our rollout as we
look at new markets. We're trying to accomplish a lot of things including
geographic diversification.
OPERATOR: Thank you. We'll go ahead next to Ben Schachter with UBS.
GARY BEASLEY: Can you repeat the second part of the question?
BEN SCHACHTER: If you could just discuss a bit about some of the ancillary
businesses given your background in the mortgage business?
RICHARD SOMMER: Sure. Obviously, I've been here 60 days and part of the full
business review - I'll answer the second part of your question first -- is
really to take a look at everything we're currently doing in terms of ancillary
revenue streams. And as we go through that, we need to figure out what we can do
better. We are launching a new title partnership with First American, which is
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
the largest -- second largest title company in the United States, but certainly
one of the two largest and that's been - that's something we're very excited
about. We have to continue to look about -- at all of our opportunities and
figure out what makes the most sense because you have to carefully plan those
and the make sure you execute effectively.
In terms of the first part of the question, I thought -- I think what you're
going to see in any market where you've had almost a nine-year run on the
market, you're going to see the number of agents change dramatically and we
predicted heavier turnover in January as dues came due. And so, I would think
we're going to continue to see agents probably leave the market with the number
1.2 million, that number probably will decrease over time. So we're -- also
remember, with agents, there's a lot of part-time agents who, when times get
tough, don't really continue their license and continue their activities or they
continue their license and don't do a whole lot. So I think we'll continue to
see that trend going forward.
GARY BEASLEY: And then, one thing we're definitely seeing is smaller classes
coming out of real estate schools across the country. There's much less interest
in becoming a real estate agent today than there was 18 months ago.
OPERATOR: Thank you. We'll take our next question from Jim Wilson with JMP
Securities.
JIM WILSON, ANALYST, JMP SECURITIES: Thanks. Welcome aboard Richard. I was
wondering -- and I know it's -- obviously with listing volumes going down, maybe
this was hard to look at, but have you seen any shift where you're getting more
sell-side listings and representing more sellers given the conditions out there
for your conventional competitors?
GARY BEASLEY: Yes. We're actually seeing - we're taking record numbers of
listings today. We're always -- we view ourselves as a being a bit contrarian
anyway and we view this as an opportunity to grow our sell-side business. It's a
helping us a bit on the recruiting side as well with agents who are bearing
marketing costs for homes that are selling and looking at our model as a way to
get buyers, but it's also -- I think because we do have buyers, I think it's
helping us when we make our listing pictures, we can help get homes sold because
we do have a growing and active stable of many buyers in each of the market. So,
yes, I think this is a -- it's a time for us to -- if people don't want to
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
take listings as aggressively, we're happy to take them. There's obviously
advantageous to helping get exposure and grow the brand as well by taking those
listings for us.
JIM WILSON: Gary, is there a percentage you could give of the difference
between buy-side and sell-side listings or is that something I can pick up
later?
GARY BEASLEY: We're still around the same percentage. We've been in that 80%
to 85% buy-side. So, over time if that changes materially, we'll let you guys
know. But right now, we're in the point where we are taking a lot of listings
but they're not necessarily all selling either, so that hasn't flowed through
the statements yet.
JIM WILSON: Transactions, yes, okay. And then, I guess the other thing is are
you seeing any movement by conventional realtors to adjust their pricing or come
up with creative ways to combat the slow market? I'm sure not quite equivalent
to yours, but at least heading towards lower commission rates in one way or
another?
GARY BEASLEY: Yes. What we've seen is almost a bit counterintuitive, but
we're seeing more upward pressure on pricing than downward pressure on the
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
listing side because as you know pricing set by the listing agent. And there is
a bit of a supply/demand dynamic going on that's interesting, is there are fewer
agents actively seeking listings in some of these markets because of the
marketing costs when they're not selling. So, they're commanding a higher -
they're wanting to seek -- get more of a full commission to go through that
process. So, because of that, that's helped our side of the equation in getting
half of the fee, we've actually seen that go up a little bit this quarter. So,
again, it's almost counterintuitive.
But, I think the biggest competitive response we're seeing is probably more
traditional folks cutting back on some of their marketing and lead gen activity,
and in some cases, starting -- closing down branches, which -- because as you
know, in the traditional world, the bricks and mortar expense is fairly
significant, which we don't have because we have the virtual office
infrastructure for our field agents. So it's a little bit of a different
situation. I don't know if, Richard, you want to add something to that?
RICHARD SOMMER: Just another comment as we still continue to see folks in the
industry, brokers and agents more traditional, still spending a significant
amount of their spend offline and they're finding it difficult to shift their
spend over as fast as maybe they would like to.
OPERATOR: Thank you. [OPERATOR INSTRUCTIONS] And we'll take our next question
from David Cohen with Midwood.
DAVID COHEN, ANALYST, MIDWOOD: Hi, gentlemen. I think Richard had made some
comment about the returns on capital in this business and I just want to sort of
discuss that notion. I mean, this Company has raised almost $140 million of
capital, it's got accumulated deficit of $32 million, negative operating income
in the year-to-date period, the recent quarter -- where are the returns in this
business? What kind of returns are there? I mean, were it not for the cash
balance and the interest income, there wouldn't be net income in this Company
right now?
GARY BEASLEY: Well -- this is Gary. The returns that we're talking about, the
returns on invested capital are in our new market expansion. We're obviously in
the early stages of building out a national footprint here. So, I'll give you an
example of Las Vegas, which is our first new market that we opened and you tell
me if you find these returns attractive. We deployed less than $300,000 to open
Las Vegas. This year, it will do, which is in its first full year of
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
operation, about 3 million of revenue with district income contribution of about
22%. So, call it $650,000 or so on a less than $300,000 investment. I think
that's a pretty good incremental return on capital as we look at adding markets.
We have a centralized corporate infrastructure that we will leverage over time
by building out new markets and going deeper in our existing markets. We're in
the early stages of this Company and there's tremendous operating leverage over
time, as you look at getting from 1,700 or 1,800 agents to maybe thousands of
agents over time.
RICHARD SOMMER: And only thing I'd add to that is having I think been in this
particular sector, the real estate industry has been slow to adopt the Web as
fast as certain other industry sectors, and part of that is due to a lot of the
disaggregation in terms of agents. But, bottom line is it's moved slowly and
we're seeing I think a rapid increase in change in the industry. So, we want to
continue to build out what we think is the best model and being in the probably
second or third inning, we want to continue to build that out and we think there
for this model fitting into that market.and there is a long bright horizon
GARY BEASLEY: I think another thing, just to keep in mind, is over the long
run, we view ourselves as being well positioned. Remember, we've been over the
last year facing one of the largest real estate corrections we've seen in
OPERATOR: Thank you. [OPERATOR INSTRUCTIONS] We'll go next to John Pitts with
Steadfast Financial.
JOHN PITTS, ANALYST, STEADFAST FINANCIAL: Hi, thanks. I was wondering if you
could just first off repeat the change in closed transactions for the Company
and then for the market in both California and non-California? And then a
follow-up.
GARY BEASLEY: Okay, the market transaction volume was down about 25% in our
existing markets.
GARY BEASLEY: And California market was down about 35%; outside of California
was down about 20%.
JOHN PITTS: -- you're actually starting to pick up market share there. So, I
was kind of wondering, I noticed that if you look at your website versus the
other websites, the quality of content is much, much better than every other
real estate website out there, in just California alone. And I was wondering if
that kind of difference could increase. I mean, obviously, your competitors are
going to improve upon that and I was wondering if you could a little bit more
about how maybe your agents, in putting listings, could actually -- in other
words, could your agents, as you get more listings and certainly as you grow the
business and grab more traffic, I would think you'd be able to leverage that
into getting on the sell-side of things and with that would come maybe better
data entry because I noticed a lot of listings just have horrible data entry.
Maybe it's an MLS problem, but --
RICHARD SOMMER: Well, I think -- it's Richard. It sounds like there is two
parts to your question. The first I will comment on and maybe let Gary answer
the second. The first in terms of sites, one of the reasons I came to Zip is
because there is a culture of innovation here and there has extremely been a
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
significant investment in technology over the years that's now starting to pay
off. And you see that in the website, you see that in the platform that we have
for agents. And so, it's more than just a website, it's what's behind that as
well. And while competitors will continue to improve and I'm sure they will
continue to get better and better, we're going to continue to improve and get
better and better as well. And one of the advantages we also have is having an
employee model allows us to have better management information system of
actually what's going on with our professional sales force. And those are two
things that really, I think, we're strong in and we can do better. We will
continue to innovate the website, innovate it to make it more attractive and to
bring in as much organic traffic as we can do so.
JOHN PITTS: Along that line, I know that you can kind of calculate what your
productivity level is for an agent in terms of number of units sold per month,
quarter or year. But do you have any idea or -- how to calculate that for
non-ZipRealty, like for the rest of your competitors and maybe -- in other
words, how are you able to figure out whether your agents are actually more
efficient than the rest of the industry?
JOHN PITTS: Thanks for the question and congratulations on gaining market
share in California again.
OPERATOR: Thank you. We'll take our next question from Patrick Stowe with
Priority Capital.
GARY BEASLEY: No, it's really kind of modest reduction but it's consistent
with what we've been talking about in the last couple of quarters of really
stressing quality over quantity. So we're -- what we really want to make sure
people aren't doing is trying to get inflated headcount numbers and compromising
quality of individual. So -- and the market, as you know, continues to be soft
so --
GARY BEASLEY: -- we'd rather, given finite resources, make sure our agents
that we've got in the system are getting plenty of leads and support, and we
will continue over time to build on that. But, that's now just a -- more of a
tweak.
PATRICK STOWE: Yes. And I guess that's kind of a second part to my question.
Nobody knows how long this slowdown will last, but if it extends for any
significant period of time and you pencil in the math on what your average
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
agent is making, it seems like churn could become a problem at some point, just
people need to support a family. I mean is there -- are your agents able to work
kind of on a part-time basis or are you flexible with them on that? I know you
have the virtual office, but can you just speak to that a little bit?
RICHARD SOMMER: So, you know that we are different that other folks on that.
Second, we want to get productive agents. So, we want to take control of
attrition over time, so that people are performing and measuring up and we are
giving them the right tools whether it is technology or training to perform and
do well. So, those are always things you need to improve and do better at.
GARY BEASLEY: Yes. And the whole idea of part-time agents is something that
we have talked about in the past and we are always looking at ways of figuring
out how to attract better people, keep people happy, keep them engaged, and
that's something that we may end up testing again at some point here in the
future to see if that is a model. As long as we can -- the biggest issue for us
with part-time agents has been responsiveness. And if someone is not available
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
to work with our clients half the time, that's not consistent with our model.
So, it would really have to be, if we want that direction, probably something
more in the lines of a job-sharing program where -- it would be a team of a
couple of people so there is always coverage.
PATRICK STOWE: Yes. I guess it's just question of balance, of being able to
keep your good people who can't help it being a down market. They have to get
the volume and make the money. So --
GARY BEASLEY: No, that's correct. You cut out for a part of your question,
Michael. But, it sounded like you were referring to my Las Vegas example.
GARY BEASLEY: Yes. The rough numbers there are, this year we should do about
3 million in revenue with about a 22% district income contribution.
GARY BEASLEY: Well, it's still in the ramp up stage. So I wouldn't say it's
necessarily comparable because we've been in California longer. So we've
obviously made a bit more progress there. But it's an example of where we would
like to see a market kind of in its first full year of operation.
MICHAEL MILLMAN: And is there something about a first year that gets you a
good bump with something new and you have all these agents and obviously, the
great growth from 0 to 3 million has to slow, but could you expect in year to 6
million?
MICHAEL MILLMAN: But, let's talk about a hypothetical market that does 3
million in the first year.
GARY BEASLEY: No, we wouldn't expect to keep growing at that pace. But, what
we would anticipate is in the next year, it would certainly grow faster than our
legacy markets would. And so, there will be -- over time, the idea is
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
obviously developing a broad platform, going deep in our existing markets and
also selling ancillary revenues along the way. And so, in our legacy markets, we
think that that's where over time we can layer on some nice growth with
additional products we will be able to sell or through partnerships, monetizing
some passion to continue to have nice growth in our legacy markets in addition
to this -- the new ones.
RICHARD SOMMER: It's a good question. I mean part of our business review is
to continue to figure out where we want to put investment and the Company has
been very successful at going to markets and we want to continue to be
successful with penetrating into markets.
MICHAEL MILLMAN: And related to that is, your new and in a market where there
is a lot of -- presumably, most of these markets like the national market have
inventory, why -- does it necessarily or new market buyers will be more
aggressive in buying than they might have been with existing infrastructure of
brokers and the sellers become aggressive in reducing their price or is it Zip
then because it's XYZ or [call it a banker] or something?
MICHAEL MILLMAN: Yes. There is a whole bunch of brokers in Las Vegas. And so,
Zip comes in and to make transactions work, buyers and sellers have to up and
down, why are they likely to do this with Zip more than with the existing
infrastructure of brokers in Las Vegas or some hypothetical city?
RICHARD SOMMER: I think when you go into a market, there's always going to be
some responses to what other people are doing in the market. I think I would say
a couple of things. One, generally in the market, people -- our competitors have
been slow to really move online there. They're moving online but they need to
continue to set that pace. Second, the competitive advantage of the model is
being entirely online. We come in with great focus and execution, hitting on all
cylinders using our technology and our great skills in online lead generation to
really build a penetration. And as this Company has demonstrated great success
in it, so investors should have strong confidence of our ability to do that. And
as we look at markets and how we approach them, there are responses you get from
competitors, but it really depends on the dynamics in each market whether you've
got two brokers who each own 30% or do you have a market where no broker has
more than 5%. The competitive dynamics may change.
MICHAEL MILLMAN: So I guess the biggest brokers presumably have gotten there
because they're responsive and I guess, there's a whole class of brokers that
haven't been enough and so, that's where you're I suppose seeing the market.
Could you also talk - and I apologize, you may have talked about this, whether
w much?seeing any cash burn and if so, ho
GARY BEASLEY: Well, not year-to-date because if you look at our - we've
actually made a little bit of money year-to-date. We're looking at - we're
forecasting, it's built into our guidance, a loss in Q4. But, this year, we
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
made a little bit of money year-to-date.
RICHARD SOMMER: And let me spend a minute maybe talking about the first part
of the question which is sort of the competitive dynamics of the industry.
Traditionally real estate, whether in terms of marketing, whether we are using
newspaper ads or word of mouth or open houses, the industry has relied heavily
on those techniques and almost exclusively on those techniques to find buyers
and sellers. And so, when you go into a market, the folks who have high market
share there are private companies. They are traditionally not strong technology
companies and they are having and making adjustment to an entire industry that's
moving on to the Web. And with 80% to 90% of buyers, for example, being on the
Web, whether it's the NAR statistic or the CAR statistic, suggest that there has
been major change in the industry. So, we are seeing a major change in how the
industry does business and the old ways of doing business may not be the most
successful ways of doing business. And Zip has focused on building customer
satisfaction and by building customer satisfaction combined with the technology,
combined with the agents; it's really a completely different model than what
else is out there. And having been out there in the other world, it is a
different business model.
TOM WYMAN, ANALYST, LAMOREAUX PARTNERS: Thank you for taking my call. So, my
question relates to lead generation which sounds like is kind of the key metric
for your Company driving leads to your agents. Could you comment on how that
process is coming along with where it was maybe a year ago? What the lead
generation looks like today? Where it might go over time? And how do you -- what
are the tools that you use to drive lead generation? Thank you.
As to how we do it, we don't want to give you too much detail because we
think that that's part of our competitive advantage, but we spend a lot of time
-- we have a dedicated team of people here who spend a lot of time on how to do
it. We also spend a lot of time on optimizing our website and making sure that
the clicks that come through -- that's only part of the equation, it's what do
you do with those clicks, how you land them in the right place and present them
with the right offerings to get them to actually go further in the process. And
that's a really, really -- that's a process, not an event for us. We're always
doing that. And we're also doing some work on our search engine optimization,
which obviously helps us from an organic lead standpoint. So, it's a pretty full
-- it's a full program that we're constantly evolving and it's a rapidly
changing field. So we have to stay all over it.
TOM WYMAN: What are your unique visitors per month as compared to Realtor.com
for example?
GARY BEASLEY: We don't talk about unique visitors. We are not an advertising
model. So, it's not -- particularly, I don't know if it is necessarily that
relevant for you guys. But --
GARY BEASLEY: That is -- yes, about a third of our people come to the Web
site directly and register for us. It's all about getting the right people there
and converting them through.
RICHARD SOMMER: It's the bottom of the funnel. We want to make sure we are
converting these people through and having come from the lead generation world
in this Company, I came here in part because the Company has demonstrated
tremendous skills that's second to none or anybody in this industry sector on
how to do that better. But, as opposed to the advertising models, we are really
focused on getting deals done.
TOM WYMAN: Okay. Just one other question. Agent churn, can you comment on
what the trends have been like there? Obviously, more difficult market, I am
assuming that more agents have been peeling out of your Company and out of the
business, but do you provide metrics along those lines?
GARY BEASLEY: We definitely talk directionally and give color on churn. Churn
was a bit higher this quarter than last quarter. But the composition of the
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
churn I think was healthier. One of the things we talked about in our last call
was kind of recommitting ourselves to productivity and really -- and making sure
that the agents we do have in our team are productive agents and are doing the
right things. And so, if you look at the composition of our churn, almost
two-thirds of the churn this last quarter were from agents of very, very low
productivity. And a majority, over 60% of our churn came from agents with less
than seven months of tenure. So the people -- sort of converse, the people who
are staying are more productive and more tenured. And that's an effort that we
want to continue and for us it's all about making the system attractive for
people who are productive agents and getting those who have that potential to
get productive. But, as you do point out, in a market downturn, a lot of people
do leave the industry, not just individual brokerages but leave the industry in
general. So that is something that we're dealing with.
RICHARD SOMMER: You got sort of two parts to it. NAR has predicted sort of
some pretty hefty dramatic reductions, which I don't have the statistics off the
top of my head, in terms of people leaving the industry. But, there are some
dramatic predictions for a high level of churn anyway -- I think everyone has
experienced a high level of churn. I think what you are saying is people come in
into the industry, find out that this is a hard time to do it and you really
keep the ones who really want to do real estate and really want to stay, and our
goal on churn is we want to keep the productive agents. We want to keep them
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
and retain them. And that's something that we are evaluating in terms of our
focus.
TOM WYMAN: Are there compensation tools that you can use to make sure that
don't lose them as they get better at their jobs? Like such as maybe using the
stock and some [inaudible].
TOM WYMAN: I just have one last question, sorry for so many. I went to the
road show a couple of years back, if I remember correctly, I think I came away
feeling that the biggest competitive advantage was the pricing advantage for the
buyer or the seller, obviously, other good tools at the website too. But, is
that a fair description of kind of the key competitive advantage?
RICHARD SOMMER: I will let Gary give his perspective too. As a newcomer,
there are several, that is one in terms of consumer value proposition that helps
us track customers and they see value in coming to us. But, in terms of
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
competitive advantages, I think there is several of which -- the ability to
market on the Internet, take that traffic, put it on a platform that leads to
skilled agents following up and leading to close the transaction. That process
in terms of a platform is where this Company stands out. So, I think that's a
little bit broader in terms of our competitive advantage than just what we are
pointing on the price. It's how do we optimize, how do we bring efficiency and
by optimizing what people do on the Internet is how we make a successful
business.
GARY BEASLEY: Yes, I think -- just to add to that, I think that we like to --
we have an unusual model in that we're offering full service at a lower price,
which is sometimes a difficult value proposition to convey without marginalizing
people's opinion of your service delivery. Because we do have -- we have
full-time agents who -- and we have a 94% customer satisfaction. So, we're doing
something right in the service delivery but we also charge less.
So I think that the idea that we can do that over time and over time attract
great agents and deliver great service and use information to our advantage, I
think one of the things that we should be able to do with our model, because of
the way we are set up, is be able to use information to make our agents the
smartest agents out there, and hence our clients the most well informed and best
educated clients. And if we can do all that and have the cost advantages that
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
we have being an Internet-based platform and get the scale and leverage the
information capabilities across the enterprise, then that should put us in a --
hopefully in a unique position to offer great service and continue to offer a
great value.
OPERATOR: Thank you. That is all the time we have for questions. At this
time, I'd like to turn the program back over to Richard Sommer for closing
comments.
RICHARD SOMMER: Well, I just want to thank everybody for being on the call.
I've enjoyed meeting everybody at least on the call in this manner, but I thank
everybody for participation. We look forward to future calls.
OPERATOR: That does conclude today's conference. You may disconnect your line
at any time.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
Q3 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 17 OF 23 STORIES
TRANSCRIPT: 080806as.766
BODY:
Before we begin, I'd like to note that during the course of this call various
remarks we make about future expectations, plans, and prospects for the company
constitute forward-looking statements, for the purposes of the Safe Harbor
Provisions under the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from expectations, plans, and prospects
contemplated in these forward-looking statements, and are subject to risks and
uncertainties including those described in the companies form 10-Q for the first
quarter 2006, and other filings with the Securities and Exchange Commission,
copies of which can also be viewed on the company's website.
With that out of the way, I'll turn the call to Gary.
GARY BEASLEY, PRESIDENT AND CFO, ZIPREALTY INC.: Thanks, Tom. Today, I'd like
to review our performance, and update you on several key initiatives. After
that, I'll end with a review of our guidance for the third quarter and fiscal
year, and update everyone on the status of our CEO search. Finally, we will open
the call for questions. First off, we were pleased with our second quarter
performance which exceeded expectations on almost every metric, including our
guidance range from both the top and bottom line perspective. Despite these
results however the overall environment remains challenging and we don't see
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
evidence yet that we've seen a market bottom.
These trends are also consistent with national data released recently by the
National Association of Realtors. During the month of June NAR reported that the
r and that rate of existing home sales declined 89% year-over-yea
Pending Home Sales Index, which measures contracts signed during the month, was
down 9.6%. Given the typical timing of transaction closings we believe this is a
leading indicator for the upcoming quarter. Finally, in the California region
for June, the California Association of Realtors reported that existing home
sales decreased by 26.3% year-over-year. So on a micro and macro level, all of
these data points indicate to us that fundamentals will continue to soften at
least in the short-term.
Second, we are always looking for technology solutions that will and power
our consumers, and help them get into the right home. We are pleased to
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
announce the introduction of two initiatives in this area, one targeted towards
for sale by owner or FSBO sellers, and the other toward the new home segment.
With our new FSBO products, sellers can register on our site and learn how many
ZipRealty buyers are searching for homes in their neighborhood within 10% of the
property's asking price.
Should the FSBO seller decide to accept our terms, which include paying us a
commission, each of our agents with relevant clients will be notified of the
home's availability. The agents can then notify their clients searching for
homes that meet that profile with the touch of a button. The other product we've
launched targets the new home segment, specifically builders and it's currently
being tested in the Phoenix area. The way it works is as follows; in exchange
for signing an agreement to pay ZipRealty a commission we upload the builders
available inventory with the goal of exposing it to our extensive buyer
database.
We believe the program should have increasing appeal to homebuilders given
the growing inventories of unsold properties in a down market. Finally, we
believe we are the first real estate brokerage to offer capability for consumers
to post and view comments on listed properties, a feature that just went live
last week. It represents another step towards building an active community on
our site, which is critical in a new Web 2.0 world.
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Our objective is to alter the paradigm of Internet leads, transforming them
into a growing community of users, rather than the perishable goods they've
traditionally been viewed as. And although this transformation will take some
time, we believe the payoff will be significant. Second, agent productivity.
Given the fact that our productivity has slipped, our near-term operational
focus will attempt to reverse that trend. It all starts with hiring the right
people. We are in the process of taking a hard look at how we recruit and hire
our agents, with a goal of measurably improving quality. Part of this exercise
will be to utilize our data warehouse to better analyze agent attributes, and
correlate them to such things as productivity and tenure. We are just beginning
this exercise, but we hope that some meaningful insights will emerge in the
coming months.
Second, in the spirit of quality not quantity generally, I think we've been
overly accepting of agents with poor productivity, or those not exhibiting the
right level of effort on behalf of our clients. While growing our headcount is
important and essential, it should not be done at the expense of finding the
right people. Ultimately, we believe that our long-term growth objectives will
be better met with this philosophy, one that stresses all at the performers who
will be with us for the long haul.
During the quarter we continued to diversify our revenue base away from
California, with the state representing only about 40% of our transaction
revenue, versus 52% in Q2 of 2005. Conversely, new markets represented 7% of
total transaction revenue for the quarter and they should generate a larger
percentage of our revenues for the year as those markets continue to ramp.
Turning to productivity, the seasonally strong second quarter saw about 0.8
deals per agent per month, which was a bit better than expected. Our agents who
have been with us for at least 12 months demonstrated productivity of about 1.2,
a roughly 50% premium to our overall average. While productivity is clearly
lower than we would like to see, despite contracting market conditions we were
able to generate an increase in closed transaction volume of 5.2% versus the
prior year.
Recruiting for the period [gave us] some traction as we were able to take
advantage of the untitled market. We ended Q2 with 1669 agents, representing 35%
growth from a year ago. And on a net basis, added 188 agents since the end of
Q1, exceeding our estimate of 125. These results indicate that many agents see
ZipRealty as a credible alternative to the traditional model, a position we've
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
always maintained. In fact, as power continues to shift from seller to buyer,
many agents are shying away from taking listings as there can be significant
costs associated with marketing homes that aren't selling.
Moving to the expense side of the P&L, please be aware that we have allocated
stock comp expense to each line item which unfortunately distorts comparability
of it with prior periods. Gross margin in the second quarter was 45.8%, a bit
higher than expected, due primarily to the mix of commission splits earned by
our Zip agents. We continue to expect a response and to approximate 44 to 45%
for the year. G&A came in at 7.5 million, which represented 27.8% of revenues.
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Included in this figure was approximately 416,000 of stock comp expense.
Turning to the balance sheet, our cash and cash equivalents of 86.4 million,
represents a significant portion of our market capitalization, roughly $3.50 per
diluted share. We have no long-term debt, inventory costs, or material accounts
receivable exposure. Moving on to guidance, while we were encouraged by the
better than expected second quarter results, we continue to face a tough market.
In addition, as I outlined previously, we plan to invest a small amount of our
capital to ensure we attack key business opportunities and grow our platform.
For these reasons we are lowering both revenue and earnings guidance for the
remainder of the year. In terms of the top line, we are lowering our fiscal
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
2006 outlook from a range of between 105 and 115 million to a range of 90 to 95
million. Underlying this assumption, we expect agent productivity to be roughly
0.6 to 0.7 transactions per agent. We'll also see average net revenue per
transaction at roughly $7100 to $7200, and we are projecting an ending agent
count of between 1800 and 1900.
In terms of bottom-line guidance, for the full year we expect our net loss
per share to be between $0.25 and $0.30, including an estimated $0.15 in stock
compensation expense under FAS123R. For the third quarter, we expect revenues to
range from 24 to 26 million. Underlying that assumption is productivity of about
0.7 transactions per agent, net revenues per transaction of about 7,200 to
$7,300, and an ending agent count of 1800 to 1850. At these revenue levels,
reported loss per share is estimated to range between 0 and $0.05.
On a pro forma basis, a measure that we believe is also useful for investors,
we expect full-year loss per share to range from $0.15 to $0.20, with third
quarter pro forma EPS to be approximately breakeven. Implicit in this guidance
is a pro forma loss of approximately $0.15 to $0.20 per share in Q4, which is
predicated upon an assumption of a substantial decline in sequential revenues in
the fourth quarter driven by further erosion in market conditions.
With that, I'd like to thank everyone for listening and open up the call to
questions.
HERBERT MED, ANALYST, DEUTSCHE BANK: Hey guys, this is actually [Herbert
Med] for Jeetil. A couple of questions. First question is basically in terms of
y kind of issue was wondering on the demand equation,
was wondering if you guys are still getting a lot of kind of folks getting into
cars with agents and just kind of what the equilibrium point is and have you
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
seen in a bit of improvement from that standpoint?
And the second question is regarding real estate agents and was wondering if
you can comment on some of the hiring trends over there. I think you guys had --
obviously had a pretty good quarter on the hiring front and was wondering if
there's any improvement [inaudible] standpoint. Thanks.
GARY BEASLEY: Okay, start with the demand. We have continued to see increased
demand in terms of activity, although consistent with what we saw last quarter,
it's not necessarily translating into offers being written or offers being
accepted. Our registration volume is up about 14% year-over-year. Our scheduled
visits are up more than 50% and I think -- but offers are down slightly, down
about 3% if you look at the comparison year-over-year. So you're seeing a lot of
people in cars active, but a lot of tentativeness on the part of buyers. Another
trend we're seeing is taking about 50% more homes for a buyer to see before that
buyer is tending to write offers.
So for example last year we were seeing probably nine homes on average and
now today people are looking at roughly 14 to make an offer. So our agents are
busy and there's clearly record website activity in our sector in general and on
our site, but it's not translating into necessarily closed business yet. In
terms of the hiring trends, yes, we did have a good quarter in terms of
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
hiring.
We hired a lot of people, our attrition was a little bit higher than it was
in the first quarter, but a bit better than it was in the fourth quarter, but
what we are seeing is slowly but steadily more experienced agents who are
considering another alternative to their traditional model, calling us. So that
the phone is ringing more, which is good. It's very in line with what we're
trying to do in terms of focusing on agent quality and productivity. We think
that this should the a good time to possibly attract some more seasoned agents
into our system who could hit the ground running and plug them into our system.
HERBERT MED: Great, thank you.
GARY BEASLEY: They do not. They are commission based. What we do cover is for
certain agents we do pay their expenses. For all the agents in California we do
and for agents of a certain performance level we do as well outside of
California, and then after six months or so we pay for half the health care
costs and we have a small 401(k) match, things like that, but the majority of
the costs associated with the agents are the variable costs of delivering leads
to them.
What you may see next quarter is flat; prices may be flat or slightly down,
like we're actually seeing in some of our individual markets, and there is a big
variety as we look across the company and what's happening, but generally what
we are talking about is inventories have increased dramatically, so the supply
of homes is there. Pricing has not corrected materially enough to reach clearing
prices, which will accelerate transaction volume. That's kind of the overall
thesis -- that's what we're seeing.
Markets where we're seeing prices come down more are probably closer to
stability and reaccelerating, than others where you still see a big disconnect.
For example, in places like Los Angeles we see inventories increasing a lot,
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
and in Phoenix, but pricing still went up 10% year-over-year. So people are
holding -- they are not transacting. There is a big disconnect between buyers
and sellers. You see other markets where pricing growth has been say flat or
just slightly up, and the volume of transactions is not down nearly as much.
MICHAEL MILLMAN: When you say pricing is up 10%, do you mean that's the
asking price or the transaction price?
GARY BEASLEY: The actual transaction price. So what I'm saying in Los Angeles
for example, in LA market, in the second quarter the median home price that
traded was 10% higher than the median home price a year ago. And that's the same
thing when we are talking about the 4% in aggregate in our existing markets.
That's the median home price in all of our markets compared to a year ago.
MICHAEL MILLMAN: Do you have a rough breakdown between California and other?
GARY BEASLEY: In terms of those --
GARY BEASLEY: The second quarter in aggregate, but transaction volume was
down almost 27%.
GARY BEASLEY: Right. No, this is not our experience, this is the market data
in the markets that we are in.
GARY BEASLEY: Okay. And outside of California, the median selling price is up
about 3.3%, and then transaction volume down about 7.7%. So transaction volumes
not down nearly as much. Pricing is not up as much, so the level of price
reduction as gone a little bit further in some of the non-California markets.
MICHAEL MILLMAN: And can you tell us a little bit about the CEO search? Is
the company looking for someone with real estate experience or is the company
looking for someone with consumer sales experience or something else?
MICHAEL MILLMAN: I see. And just a final question, is it fair to say that in
your opinion the market needs the sellers to come down, at this point the buyers
are unlikely to step up?
GARY BEASLEY: Yes. I think the buyers are going with their feet, and what
we're seeing is they are not writing offers at the rate, or at the prices that
sellers would like to see. I think one thing that we are seeing which is
evidence of what's finally starting to happen though along these lines is we
have started to track the percentage of listings in our markets that have
reduced prices, and in this latest month what we've seen is 36% of the listings
in our markets have been reduced, which is really extraordinary. We don't have
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
the historical data on that, but because we just started pulling the data, we
will track it now going forward, but my guess is that was a much, much lower
number a year ago.
GARY BEASLEY: The average is probably -- yes, don't look at the averages, but
I would say -- are you talking about the average reduction in the market in --?
MICHAEL MILLMAN: Or the average reduction between the original listing --
these 36% of reduced homes how much were they reduced?
GARY BEASLEY: Oh, I understand your question. I don't know, I can tell you
that.
MICHAEL MILLMAN: Okay, great.
GARY BEASLEY: All we did was track to see what percentage was reduced.
DAN SOLVERIN, ANALYST, UBS: Hey, this is [Dan Solverin] in for Ben, I have
two quick questions. First, I was wondering if we could get some more color on
the newer markets as a percentage of total revenue, looking out over the next
couple quarters. And also, which markets you think have the largest short-term
potential in terms of actually contributing meaningfully, on the top line that
is, and second question, would it is possible to get any sort of timeframe,
color, detail, on when you'd expect to wrap up the CEO search? Thanks a lot.
GARY BEASLEY: Okay, start with the last question first. Don't know the answer
to that, that's an ongoing -- it's a priority for the Board and I know that
there have been a lot of great candidates that they've talked to, and it could
be next week, it could be many weeks from now, it could be months from now. I
honestly can't tell you, but as soon as a decision's being made we will
obviously communicate it to the marketplace. In terms of the new markets -- what
was your second question, I'm sorry.
GARY BEASLEY: Yes. Well, what's interesting is the way our business model
works, home prices and [inaudible] tend to be very similar inversely, so in
higher home price markets, productivity tends to be low and vice versa. So the
amount of revenues that we are generating from markets aren't dependent on home
prices, so I would say when you look at all the markets that we opened last
year; Las Vegas, Houston and Miami, those should all be meaningful contributors
to us. So I think each market has a lot of potential for that. In terms of your
first question, which was how much will the new markets contribute this year. We
think it's probably in the eight to 10% range by the end of the year.
PATRICK STOWE, ANALYST, PRIORITY CAPITAL: Hey, thanks for taking the call. I
was a little surprised that the ARPU was so strong, given just your move away
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
from California and the higher medium homes. Is there any color you can give as
to what drove that in the quarter?
GARY BEASLEY: Oh, that's okay. Well, you know, what's interesting -- I think
what's important, what's supporting that, is the fact that pricing hasn't
corrected as much as we would like to see. So we're seeing volumes way down, but
we're not seeing pricing down as much. So, I think that's really the explanation
and we'd be willing to make a trade of pricing for volume --
PATRICK STOWE: Yes, I understand. I just thought as the mix moved from
California, you know, you guys were growing in some just lower median price type
markets. Just thought that the expectation was that for that number to kind of
gradually as you spread.
PATRICK STOWE: Yes. You can quote me on that. You gave some good color kind
of from a macro perspective on where you see buying and selling activity. I
wondered if maybe we can dig a little deeper just on what you saw through the
quarter if there was middle of May end of May, start of June, was there a time
where activity really fell off or was it pretty gradual through the quarter and
kind of moving into July.
GARY BEASLEY: Are you talking about market activity in general, our activity,
be a little more specific.
PATRICK STOWE: I mean in your market specifically, if you can give us any
color there or just in general if that's easier.
GARY BEASLEY: Yes. You know, I think that what we've seen is now we are kind
of in the high season of the real estate market. We were anticipating to see
probably at least more of a stabilizing of some key metrics in the second
quarter and not an erosion of that. The reason we are being rather cautious
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
for the balance of the year, although quite honestly we don't really have
visibility into Q4 right now.
We're looking for that listing price reduction metric that we look at to
start showing the number of homes that have been reduced percentage decreasing,
all those things kind of in aggregate, there's no one kind of thing that we're
looking for, but when we look at all of those things together and we want to see
some evidence over time that those things are holding steady in moving in the
right direction. There may be some noise in there where we see for a month or
two or a quarter that something improves, but we want to see kind of a
sustainable improvement in a lot of those metrics.
That will give us confidence that we [inaudible] moving right, but there
hasn't been, over the course of this quarter, any sort of events for -- you
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
know, one point in time where activity dropped, our activity has been steady. If
anything, what we've seen is more kind of a gradual increasing of the caution,
if you will, with buyers, where when they are making offers, they are less
aggressive and in general, fewer people making offers than we'd like to see.
PATRICK STOWE: Understood, that's helpful, thank you. And maybe one more, as
you look at Q4 and there's obviously some implied gamuts, with your fiscal year
numbers and I think you mentioned that you foresee kind of even another
sequential decline in Q4. How much of that is just typical seasonality versus
all the macro factors, pressures you've described, including inventory?
GARY BEASLEY: Well, until last year every year we've experienced typically
relatively flat revenues in Q4 versus Q3. So the short answer is I would
attribute it pretty much all to the macro environment. If we felt better about
the macro environment, we would be probably guiding towards more a flatfish Q4
versus Q3. Last year we had a substantial drop in Q4. If you recall, things
started to soft and in September and we saw it coming and so we let everyone
know that it was going to be a down quarter. We are sort of anticipating that
things will continue to worsen and building that into our forecast, just because
of the preponderance of the evidence we are seeing today.
GARY BEASLEY: Interestingly, we are not. We are having very good success in
Florida. We are new there, but partially because maybe we are just [inaudible]
model and there's a lot of curiosity about our system. And partially I think
because the macro environment there is very tough. I know Orlando have seen --
the inventory numbers for Orlando are some of the biggest expansions in the
country, yet we are doing very well in Orlando, and we are recruiting very well
in Orlando. So we are not seeing issues recruiting in Florida as of yet.
PATRICK STOWE: All right. Well, thanks for the time, good luck to you.
GARY BEASLEY: Okay. What Zip did in terms of California was about what the
market did about 26 1/2% decline, and outside of California, the market
contracted about 7.7%, and we grew about 8.8% or 8.9%, those are in our existing
markets.
JACK PITTS: Okay, thanks. And then could you also give us a number for what
you would have grown non-California with just the agents that were in existence
last year at this time, sort of the same-store sales growth rather than -- you
know, obviously you've got a lot of growth from new agents in non-California
markets.
GARY BEASLEY: Yes, the comp is de minimis last year, because we really didn't
have -- you try to compare new markets now to new markets last year because we
just started them sort of last summer, so the growth is extraordinary. It's not
meaningful in terms of percentage.
JACK PITTS: I guess what I'm getting at is one of your three initiatives
seems to be related to agent productivity and minus the obvious difficult real
estate market countrywide, I'm just trying to understand what it is you think
you can do better because it was my understanding that agent productivity
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
relative to non-Zip agents was pretty good, and did that change this quarter?
Was your productivity in your Zip agents relative to the rest of the world not
so good and therefore you need to make some drastic changes?
GARY BEASLEY: You know, it's hard to say because there's not necessarily any
current data on agent productivity. Just objectively, we feel like our
productivity should be better, and we're not necessarily -- it's interesting to
benchmark us against traditional realty companies, but we don't necessarily want
to hold ourselves to that standard. We look at some of our agents who are doing
three, four deals a month, with the same number and types of leads as we are
giving to agents who aren't doing any. And we look at how they're working the
system.
It's very different from how other agents are working the system and we feel
like through attracting the right people who are going to work the system
properly and then training the people to use the system properly, there's
enormous upside in our productivity. So again, it's hard to compare us against
the industry. We will be able to look back at industry transaction data a year
from now, once that stuff all gets reported, but I still feel like we do have a
premium. We'd like to see that increase though substantially.
GARY BEASLEY: Yes, we are certainly going to try, but the market is -- it's
very unpredictable right now. And we have a market that's declining 25, 26%,
it's fairly turbulent. So certainly we are going to -- our guidance doesn't
anticipate that we are going to gain share. If we are successful in doing that,
it will be helpful, this year at least. Certainly, long-term, that's our
objective, is to gain substantial share in California.
FRANK GRISTINA, ANALYST, AVONDALE PARTNERS: Thank you. I'm sorry I missed a
good bit of the call, so I apologize if this question has been asked, but it
us whatike the environment is still at a standoff, and I was just curio
you guys do in this kind of environment, where do you spend your ad dollars to
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
attract leads? I mean are you still directing, spending online to pull people to
the website to create the leads? And then how do you change the advertising to
get buyers, which I imagine our -- you are obviously going for potential
homebuyers, so if you could talk about how you're marketing spend, in terms of
mix, and then if you given any guidance on what you expect to do with marketing
for the remainder of the year, if you could repeat that.
GARY BEASLEY: We do target buyers and have for some time. About 85% of our
business is buyers. Our performance in leads this quarter was pretty strong.
Cost per lead was down actually about 9%, even though we are facing double-digit
cost per click increases. So the market for leads is competitive, but we're
still -- it's a growing market. You've got companies like Zillow and [Truly] out
there, generating a lot of interest in the real estate space. We still think
traffic is up 15 or 20% year-over-year in our space, so there's plenty of
traffic that's coming to us. We are also this last quarter we had 33% of our
leads came direct to site, which is up from 29% last year in the second quarter,
which is a real positive. We find that encouraging for obvious reasons.
And part of that, I think part of that, is arming our agents with
information, arming consumers with information so they know what's going on in
their markets and help them feel good about their decisions and confidence I
think comes with information in that circumstance.
STEVE NOVAK, ANALYST, PALLADIO CAPITAL MANAGEMENT: Gary, could you elaborate
on the inventory growth trends, what level you're seeing in terms of number of
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
weeks of inventory out there, given current sell-through rates?
GARY BEASLEY: Yes. Well, in general, and I'm speaking just to our markets
because what we do is we aggregate all the data in the markets that we serve and
really, just our existing markets, so our new markets which we started in '05
are not included because we have partial data. So granted it's an imperfect
subset, but in our markets we've seen months of inventory go from roughly two a
year ago to about five today. We've seen total inventories up about 100% in that
same period of time, and transaction volume down about 15%. And were you curious
about individual macros or just in general?
STEVE NOVAK: Right. Could you elaborate a little bit on the kinds of
assumptions you're making about the fourth quarter decline? You stated earlier
that that was you know all -- increment in terms of it not being flat would be a
function of the softness, but do you see -- do you expect fewer transactions and
stable commission levels in terms of dollars per transaction or are you
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
forecasting declines in both on a sequential basis?
GARY BEASLEY: Yes. We think that what's giving us a little bit of pause is
we've seen California market conditions potentially reach what appears to be a
relatively stable trough, in some respects, in that at least in terms of
transaction contraction has been kind of mid-20s now for a couple quarters. What
we have seen though outside of California is transaction volume decline from
kind of mid single digits to greater than that. So what we don't know is outside
of California does that continue to grow and it works or, does that stabilize
sooner, so our working assumption is things get worse outside of California and
are you know flat to slightly worse within California, and that's just based on
the best information that we've got.
KENT HOLDEN, ANALYST, GAGNON SECURITIES: Yes, hi Gary. I got the net ads at
188 and I was curious what the gross ads added in the last quarter.
GARY BEASLEY: You know, that's not something that we talk about publicly.
What I did say about the attrition level this quarter was that it was a bit
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
higher than last quarter, a bit lower than Q4. And it's quite honestly something
-- well, I don't want to minimize the importance of attrition at all, but I
think one of the points from the prepared remarks is that we might have
financially focused a bit too much on reducing our attrition percentages. That
is a means to an end, that's not an end in and of its self.
If agents aren't doing deals for several months and we're paying their leads
and expenses, then it might not be healthy to have a low attrition level and
keep them on. So you might see that we have some higher churn over the next
quarter or two as we work through and you know in difficult market conditions,
and holding people to the right standard of not only productivity.
But I would say even more so than that, effort because if someone is doing
the right behaviors, being responsive to clients, working with people, writing
offers, the fact that those offers aren't getting accepted could very well be
market conditions, but if you have another agent whose doing none of those
things, that's probably not someone that belongs with the company.
KENT HOLDEN: Yes, I understand that. I did notice that one of the President's
Club people had left and was just curious about if you're losing some
good-quality agents.
GARY BEASLEY: No. We did lose some -- we lost some by -- some really good
people and some producers at the end of last year when we went through the
compensation changes in the lawsuit, things like that. That has really
stabilized and we feel very good about that and we're building on that core
group of performing agents. That's not something that is really a concern to us.
KENT HOLDEN: Okay. And then can you run me through the for sale by owner,
what your compensation on that is going to be and how that's going to split out?
GARY BEASLEY: Yes. For that product, it's a 2 1/2% commission, the way that
we have it designed, so if you are a FSBO seller, you go on ZipRealty's website,
you can very easily put in the information on your home and our site will spit
back at you how many -- it may say we have 346 buyers within 10% of this price
range, looking in this area. And then are you interested in reviewing our terms
of use? And if so, read down, click here.
KENT HOLDEN: Okay. In the revenue is split between the agent and the firm. It
would be the same as standard?
GARY BEASLEY: Yes, standard, and we offer our standard 20% rebate to our
client as well.
KENT HOLDEN: Okay. And then my last question, you talked about a little bit
of capital expenditure in setting up some of these new programs. I don't think
that will add up to a lot of cash will it?
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
GARY BEASLEY: No.
KENT HOLDEN: Then does it make sense to consider buying back some stocks?
GARY BEASLEY: Well, you know, it's a fair question and obviously with the
stock at the levels it's at, it's something that we take very seriously and we
talk about it at -- the Board talks about it at every meeting. We'll be looking
over the course of the next several months. Obviously we've got a new CEO
hopefully coming on board at some point in the relatively near future and that
has strategic implications. We're going to be looking at different ways to grow
the company and different uses of our cash over the balance of the year in the
next year, so it's a fair question and something that we will take very
seriously.
GARY BEASLEY: I'm being told we have time for one more question.
OPERATOR: Our final question will come from Michael Millman, with Soleil
Securities. Please go ahead.
OPERATOR: Yes sir, its star one please. Mr. Mellman, please go ahead.
MICHAEL MILLMAN: Yes, sorry. Could you talk about affordability in line with
rates -- mortgage rates have been declining slightly recently and Fed held the
rates today. Is that an important near-term impetus?
GARY BEASLEY: I don't know that it necessarily is. I think affordability has
been a challenge generally in the housing market recently. I think what we saw
was finally a breaking point in the fall of last year where some macro factors
lined up and finally consumers took a pause and a breather and with rates having
gone up and now may be recently flattening a little bit will affordability
improved? I think affordability at this time may be more influenced by some
price declines that you'll see in certain markets.
You know, we are seeing -- it's also interesting that there are lots of new
mortgage products that are popping up that are -- where people can get 100%
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
financing for example at much, much lower rates and we saw product from our
mortgage partner E-loan 100% mortgage for about 7% recently. So that's less than
one month old. Those types of products I think counterbalance the lack of
affordability. I think historically we've seen particularly new home buyers,
first home buyers, impacted to a great degree with affordability. If you don't
have the equity to trade up its a bit hard, but we will just have to see how it
shakes out here over the upcoming months.
MICHAEL MILLMAN: Also, Las Vegas, at least for one, has a reputation of being
a low commission market. Do you look at those kind of things or maybe that's not
even correct?
GARY BEASLEY: It's not correct. It's an average market for us in terms of
commission.
MICHAEL MILLMAN: I see. And maybe final question, to what extent do you find
that possibly your very productive agents move on to collect 70% rather than 50%
when they feel they got it sold?
GARY BEASLEY: Well, it's a fair question. I would say that we see a fair
number of those producers actually come back company after going over to the
dark side if you will. Remember, the commission split is only part of it. Our
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
commission split goes from 35% up to about 80%, and our top producing agents
tend to be toward the higher end of commission splits, so the delta between our
compensation package for producers and then going over to a new firm may be
smaller than you think.
We have production goals obviously, we hold people accountable for that, but
for us it's really ultimately about customer service and it's a different
environment I think when you leave. So we have an open door policy. As long as
someone leaves on good terms with us we'd love to see them come back and some of
those people tend to be our best and most loyal contributors.
OPERATOR: Thank you. Ladies and gentlemen, this does conclude today's
teleconference. We do appreciate your participation. You may does connect your
phone lines at this time.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
Q2 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 18 OF 23 STORIES
TRANSCRIPT: 050806ai.776
BODY:
TOM RYAN, INVESTOR RELATIONS, ZIPREALTY, INC.: Good afternoon and thank you
for joining us today to discuss ZipRealty 's first quarter results. With me on
the call is Eric Danziger, our CEO; and Gary Beasley, President and Chief
Financial Officer. Please note that earlier today the company issued a press
release describing its results for the first quarter 2006 that included guidance
for the second and full year ended December 31, 2006. A copy of that release can
be viewed on the company's website at www. ziprealty. com.
Before we begin, I would like to note that during the course of this call
various remarks we make about future expectations, plans and prospects for the
company constitute forward-looking statements for the purposes of the Safe
Harbor provision under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from expectations, plans and prospects
contemplated in these forward-looking statements and are subject to risks and
uncertainties including those described in the company's Form 10-K for fiscal
2005 and other filings with the Securities and Exchange Commission copies of
which can also be viewed on the company's website.
With that out of the way, I will turn the call over to Eric.
ERIC DANZIGER, CEO, ZIPREALTY, INC.: Great. Thanks Tom. Let's start by
reviewing our performance. After that Gary will cover the financial results in
more detail, I will then come back with an update on the growth initiatives and
we will conclude with Q&A. First and foremost, we were very pleased with our
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
first quarter results. Despite ongoing market challenges our revenues exceeded
the top end of our guidance range and consensus estimates driving 8% year over
year. We also saw our earnings exceed guidance. Our revenue performance for the
period was driven principally by better than anticipated closing deals in our
existing markets outside the California, as well as better than expected
momentum in our new markets.
The result was a 13% increase in transaction volume versus the prior year's
quarter when we were expecting it to be essentially flat. Therefore, our bottom
line results were a function of better than expected gross margin and various
operational efficiencies particularly in the area of customer acquisition. To
that point, we continue to do a great job with optimization and we are seeing
higher conversion rates than ever before. This is particularly gratifying and we
credit the content of our sight and our ability to create simple, yet meaningful
tools for our visitors to help them make these critical buy or sell decisions in
relation to their home.
The fact of the matter is that the current system has been constructed around
the agent not the consumer. And as a consequence the consumer often suffers. In
contrast, we look at everything through the lens of the consumers, and
ultimately believe that by sticking with that philosophy our employees and
stockholders will prosper. So, our success today stems from attacking the
current industry dynamics with a whole new level of information and
organization, making it easier for consumers to make decisions and easier for
our ZipAgents to generate and convert leads. And in the process we have
maniacally focused on servicing the customer and that effort has led to above
industry performance.
Turning to new markets, we are very excited to report the Houston, a market
we launched just last July achieved profitability in March. This nine month ramp
is well ahead of the 12 to 18 month timeline we forecasted and even more
impressive, was the capital investment of less than $500,000.
This is the second market, the other being Las Vegas, to reach profitability
within one year and certainly speaks to the portability of our brand. These
results give us increasing confidence as we think about our new market growth
plan for 2007 and beyond. Miami, which launched just five months ago, is gaining
solid traction despite a noticeable cooling over the past several months
particularly evidenced by growing condominium inventories. With this launch, we
implemented several new initiatives including a Spanish language version on our
website, live online chat with ZipAgents, satellite images and enhanced search
criteria.
We launched Tampa late in the first quarter, and are in the process of
opening up Orlando this quarter. Moving to the middle of the country we remain
on track to being operations in Minneapolis this summer, and we think it
provides a great opportunity for us to enhance our penetration in the Midwest.
Moreover, last month we announced our plans to enter Austin, our third Texas
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
market. This further builds our presence in the Southwest and we are excited to
bring ZipRealty's business model and expertise to this vibrant metropolitan
area.
Accordingly, with this new market, we will in effect be entering three new
states. As we stated in the past, each new market presents a great opportunity
for us, not only to expand and diversify geographically, but to refine the
launch process stressing superior returns on invested capital. And although we
lity guidance of 12 to 18 months in new
markets, we are certainly pleased with Las Vegas and Houston and hope to
replicate that success in all new markets.
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
I will now turn it over to Gary, and he'll review the financial results in
greater detail.
GARY BEASLEY, PRESIDENT AND CFO, ZIPREALTY, INC.: Thanks Eric. Just like we
did on our last conference call in January, I would like to begin my remarks by
contrasting ZipRealty's performance with market averages, an exercise that
illustrates our market share gains. During the first quarter, we estimate that
overall transaction side volume in our markets was materially down about 11%
year-over-year driven by an ongoing decline in California, which was down around
23%. According to our estimates, markets outside of California where we had had
a presence for at least a year showed a decrease in transaction side volume in
Q1 of about 3% year-over-year.
And as Eric suggested, our new market progress certainly illustrates our
intent on promoting geographic diversification, mitigating the impact of
California on our consolidated financial results. Towards that end, California
represented only 43% of our transaction revenue this quarter versus 58% in Q1 of
2005. A significant reason that we were able to achieve this revenue
diversification was our new market expansion efforts, which represented 7% of
total transaction revenue for the quarter. Bear in mind that all of our new
markets are outside of California and that we just began launching them last
May.
Turning to productivity, the seasonally slow first quarter saw about 0.64
deals per agent per month, which was a bit better than we had anticipated in our
last guidance. With record numbers of real estate agents in competition for a
decreasing number of transactions, we believe industry productivity was very low
during the period, much like it was during the fourth quarter. We continue to
think that as market conditions act as a catalyst for many agents to leave the
industry, productivity should ultimately improve for those who remain. Average
net revenue per transaction for the first quarter decreased to $7,069, compared
to $7,203 at the end of the year. This decline is due primarily to mix shift
caused by more rapid growth outside of California's high priced markets.
Moving to the expense side of the P&L. Please be aware that in connection
with our implementation of FAS 123R, we have allocated stock comp expense to
each expense line item, which unfortunately distorts comparability a bit with
prior periods. Gross margin in the fourth quarter was 44.1%, a bit higher than
expected despite the inclusion of stock comp expense, which negatively affected
this line item by about 60 basis points. We continue to expect gross margin to
approximate 44% to 45% for the year. Due to aggressive cost control, G&A came
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
in at 7.4 million, which on the seasonally low revenue base represented
approximately 39% of revenues. Included in this figure was approximately 370,000
of stock comp expense.
Turning to the balance sheet, our cash and cash equivalents of 83.5 million
represents a significant portion of our market capitalization, roughly $3.40 per
diluted share. We have no long-term debt inventory cost or material accounts
receivable exposure. In terms of capital expenditures, we spent approximately
2.1 million during the quarter reflecting among other things payment for the
build out of our new office space. Note that this figure -- note that this
not reflect our landlords TI allowance of approximately 525,000
which per GAAP is being applied over the term of the lease to reduce occupancy
cost.
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Moving on to guidance, while we are encouraged by our better than expected
first quarter performance, we do not believe that the overall housing market has
churned. For that reason we think it is appropriate to leave our annual guidance
unchanged. We expect second quarter revenues to range between 22 million and 24
million, and reiterate our fiscal 2006 revenue guidance of between 105 million
and 115 million. Underlying our revenue assumptions for the year, we expect
agent productivity to decline approximately 10% to 15% compared to 2005. Average
net revenue per transaction is expected to decrease to roughly $7,000 from
approximately $7,400 in 2005. Still projecting an increase in count of between
1,800 and 2,000 agents.
In terms of the second quarter, our objective is to add about 125 agents net.
In terms of bottom line guidance, our second quarter loss per outstanding share
is expected to range from $0.02 to $0.04. For the full year, we reiterate our
diluted earnings per share guidance of between $0.02 and $0.08 including an
estimated $0.08 to $0.09 in stock compensation expense under FAS 123R. Note that
a couple of items will now be impacting our EPS that had not previously been a
factor. I have already mentioned our implementation of FAS 123R.
With that, I would like to turn the call back over to Eric for some
additional thoughts.
ERIC DANZIGER: Great, thanks Gary. You know we spent a lot of time on our
last two calls referencing industry statistics that support our transitioning
market thesis. We think it is pretty evident by now that buyers are more
tentative as sellers evaluate their stance on pricing. So, instead of sharing
more macro numbers with you, I thought I would spend some time on ZipRealty's
investments over the last two quarters from technology to new markets.
Second, the View Similar Homes feature offers users the option to see homes
with similar criteria that were previously viewed by other home buyers. That's
similar to the Amazon.com feature that shows what prior customers of the same
product have bought in the past. These online investments are intended to
perpetuate a virtuous cycle, where site traffic generate leads, leads turn into
closed clients, satisfied clients boost traffic through word of mouth
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
testimonials.
Another area where we continue to invest in is new markets, which will plant
the seed of growth for 2007 and beyond. This includes ongoing investments in
Miami, Orlando, Minneapolis, Tampa and Austin, as well as some preliminary work
in Palm Beach and Philadelphia. Given our new market success to-date, our
objective is to increase the number of new markets we enter in 2007 above the
six that we plan to enter this year. Stay tuned, we will keep you updated as our
2007 plan develops.
Our investments are certainly starting to pay off for us in very tangible
ways. Site activity remains at record levels and client visit activity is very
strong. Total scheduled visits increased by approximately 50% in the first
quarter. We are still finding that the average consumers' interest in real
estate remains very high. While offers were virtually flat in Q1 of '06 versus
the same period last year, we believe that the overall strong client activity
should translate into more offers and improved offer conversion as we navigate
through this transition market for the rest of the year.
So, as we enter the remainder of the year, we are certainly battling the
headwinds that we stated before. That said, we are investing in the business
during this period so that we'll be even stronger when the market turns. And
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
as our core business and new market data suggests, we are seeing progress with
regards to our efforts. We think it's only a matter of time before market
equilibrium reveals the true leverage inherent in this business model.
One more thing before I open it up to your questions, briefly I just wanted
to address the press release we sent out last week. After five years at the helm
of the company, I intend to move back to my home in Arizona on August 1. I have
had the pleasure and honor of leading this company from its very early days,
through its IPO and its initial growth period. And I say initial simply that all
of us here are very excited about the many, many wonderful opportunities which
lie ahead.
You know there is that line, that to everything there is a season, and this
is just simply my season to return to Arizona and to be near friends and family.
So, I hope that you would agree after hearing what we have just shared with you
that the performance of this company is solid. A fabulous and great experienced,
knowledgable and dedicated team is in place, and it follows, then, that it is a
good time to exit stage right, and let others move it to the next level.
[OPERATOR INSTRUCTIONS]
And our first question comes from Jeetil Patel with Deutsche Bank.
ERIC DANZIGER: Great, sure Jeetil. You know, I think what we are trying to do
is trying to triangulate around a reasonable set of assumptions for the rest of
the year in the context of - still a fair degree of uncertainty. If you look at
a few indicators, one of the fundamental questions is, has the market turned?
And in our view, it hasn't. If you look at inventories of homes for sale, for
example, this year they've increased about 18% in the last three months from
January to March.
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
And we haven't seen the April data yet, but if you look at a year ago
January, February, March, the level of inventories was flat. So, we have seen
inventories continuing to increase and we just have not seen a reversal of that
trend yet. Overall transaction volumes, we have seen go from about 10% growth in
Q3 to going down about 3% in Q4, down about 11% in Q1 in our markets. We don't
know if that's the trough yet, the trough very well may be still later this
year.
ERIC DANZIGER: Well, you know, it's hard to say Jeetil, because we would love
to see the California percentage of revenue maybe migrate back up a little bit,
because that would mean things are picking up from these really anemic levels in
the state. So, it's hard to say; there are a lot of moving pieces there.
But what we are seeing is, as we said in our prepared remarks, surprising
strength outside of California in terms of our performance in a declining
market, we are definitely gaining share. And then we are also seeing new market
growth being more rapid than we had anticipated. So, whereas before I think we
had said, we expected new market growth not to contribute as much, you know it
looks like that could be 10 percent-ish of our overall revenues this year, which
for us as we look at the platform going forward that's a very encouraging sign.
JEETIL PATEL: Great, thanks.
PATRICK STOWE: I wonder if you could comment just on the environment in terms
of average commissions out there, I mean given that things have slowed down a
little bit has there been compression in what I would call the competitive
environment in terms of commissions? You see your competitors offering
discounts?
ERIC DANZIGER: You know, it's interesting Patrick, we have not seen that. In
fact, what you are seeing is almost counterintuitive, but you are actually
seeing commissions being increased in some areas as people are offering more
attractive incentives to get people to buy their homes and look at their homes.
So, we have not seen pressures on commissions during this downturn, which is, as
I say, a bit counterintuitive.
PATRICK STOWE: Okay. And you mentioned the churn rate improved both I guess
year-over-year and sequentially, anything you would attribute that to in terms
of what you guys are doing?
ERIC DANZIGER: You know as you will recall from every call and since the
beginning of our company, it's been a high priority for us to focus on hiring
better, finding the right ways to hire the kind of people who -- it sounds
trite, who have that "it". So, as we get better at that, certainly that helps.
And then, too, as the value of the company continues to morph and evolve to
help people become successful, to help them market and use technology and help
customers where they have been on the other side and don't have those sorts of
tools particularly in a down market, it helps people retain. And the company
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
works on everything from culture improvement, your reward systems, touch, feel,
banks, corporate kinds of things that make people feel part of the company to
systems, process and procedures.
ERIC DANZIGER: You know I don't know, you could call it either way. My
personal opinion is it's going to be easier. You know there are so many realtors
out there all fighting for fewer opportunities. So, to have a company behind
you, a system of marketing, it's not just you know we are on National TV, which
we are not.
ERIC DANZIGER: I'd be happy to help work through that offline with you, but
it's not. Our productivity guidance is actually down. If you look at Q3, it's
looking as being slightly up in Q4, but that's because of the comp because Q4
last year, if you remember, our revenues dropped dramatically because that was
the onset of the transition market, we dropped from about 28 million to about
And over the prior several years, revenues from Q3 to Q4 have been pretty
flat and we anticipate that that will be the case again this year, we would see
no -- we can't foresee another catalyst which would cause that dramatic fall
off. So, that's probably where the disconnect is.
PATRICK STOWE: Okay, fair enough. I appreciate the time. Good luck to you.
OPERATOR: And we will now hear from Frank Gristina with Avondale Partners.
FRANK GRISTINA, ANALYST, AVONDALE PARTNERS: First of all Eric, good luck on
your future seasons in Arizona.
FRANK GRISTINA: You mentioned two interesting data points, a 50% increase in
users year-over-year and a 24% decrease in the costs to I guess, acquire those
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
users. What's going on with your marketing mix, is there something that you are
doing better that's bringing traffic to the site for less? I mean have you
dumped one medium for another or is this word of mount kicking in, but there is
some good fundamentals if you could expand on those a little bit?
ERIC DANZIGER: We don't want to tell everybody Frank, because they will want
to go out and do it too, but I think Gary will give you a couple of the
highlights of it. But, you know keep in mind, before he does the specifics of
[direct to] site and all that, and all the efforts we have had with SEO and we
have been working on tons of stuff for a year or two that make us better. You
know, that is an area of core competency for us, and it was the way this company
started six years ago [that it] was in the online leads acquisition business.
The others that are into now are short of babes in the woods and God bless
them, and I am glad they are doing that. We should all work on doing the right
things for customers, but the fact is we have people who have been a part of if
from the beginning, we have the relationships, we know how to move [it], and
that's -- so that's kind of the -- truly if there is a first mover advantage, it
is that we are the experts in that area and we have incredibly talented people
who work on that.
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Then secondary, the kind of other warm piece of that is, obviously as a brand
grows and it has 94% or better customer satisfaction and it is entering into new
markets and it is now longer and deeper into the original markets, it is clearly
building up the direct to site traffic, referrals, and all of those things which
help decrease the actual cost. So, that's the warm stuff, but I will let Gary
give some real stats.
GARY BEASLEY: Yes, the direct to site figure this quarter was again around
32% so that number has been very consistent, we love that number. Our affiliates
remained about 44% and paid search increased a bit to almost 20%, about 19% in
terms of our overall mix. The other components, a smattering of other
partnerships and things like that make up the balance.
FRANK GRISTINA: Have you seen price, better pricing from your affiliates
since the market is at least -- from a transaction standpoint looking solid or
weak?
GARY BEASLEY: You know, we don't really want to talk about pricing by segment
because obviously that's the price area we obviously -- have relationships with
a lot of different folks there. But what we can say is on the pagepaid search
side, we feel like we really made some strides as Eric said, we threw some more
resources at that last year.
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
So, in fairness, Q1 it's a little bit an easy comp for us because we don't
think we did a very good job last Q1 compared to the way we did it this year.
But we have more resources thrown at it, we have another body and we've also
done some, I think, pretty interesting optimization work on our website, landing
people in the more relative sites and presenting them with the right information
more quickly.
So, the other thing I think that's benefited us quite honestly is kind of
again counterintuitive, but traffic in our space the real estate vertical seems
to be up materially year-over-year, we estimate maybe around 20%. And that's --
we thank our friends out there, our friendly competitors, who spend a lot of
money on television advertising and get people interested in how much is their
home's worth, and drive -- ultimately these people go to the Internet and we
take advantage of that by, we think, creating a pretty compelling place for them
to go as long as they are trolling around the Internet. So, it's surprising
transaction volume is down, but people interested in real estate is higher than
ever.
FRANK GRISTINA: Great. And then just to clarify the direct to site traffic a
year ago, what percent was it of the lease, is it still 32% or --?
FRANK GRISTINA: Okay. And then on the guidance, you said decline of 10% to
15%, was that in productivity, is that for the year?
GARY BEASLEY: That's consistent with where we started the year with our
guidance.
And our next question comes from Wendy Snow with Lamoreaux Partners.
So to me you are already accelerating it. I was wondering if you could give
some color, is that to trying to diversify out of California quicker, is it
easier with the market slowdown to hire agents and open new markets and now this
is getting easier since you have done so many so far, what's driving this
acceleration?
ERIC DANZIGER: Well. I think that -- so I will go back down memory lane a
little bit Wendy thanks for your comments. You know, keep in mind, we only added
our first market this time last year, up until last time what we wanted to do
with the business was learn how to do what we did here.
Let's run all of our markets, make them profitable learn, then let's add one,
let's learn from that which was Vegas. And then let's add two which was Houston.
And so we decided to truly being under no pressure to do it until we knew how to
do it well, let's learn. So, we did one then we did two then we did the third
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
one, and we got pretty good at it here. We have sort of created the ability to
do it, do it well and we know what we are doing in it, it is obviously proving
to be successful for us. The first two are at profit, you know, well below what
we said.
So, we now feel more comfortable and confident in rolling out the brand. And,
we always said that the brand would be diversified across the United States in
all kinds of markets leading outside of California, so that although California
is a great market when it's good we never wanted this brand to be dependent on a
one state market. So, it's simply a matter of we have know experienced it, we
like it, you know we did it, we like it, we want more.
So, we have simply said, we are ready now to do a slightly more aggressive
rollout than we had obviously started with, and that is happening here as you
see here in summer and in the fall, and then here in the next few months we'll
talk to you about '07. So, I am sorry to go on except to say, we now know we're
good at it, we now know it works in various different markets, from Vegas to
Houston to Miami and so on.
The receptivity we are seeing to us, and initially in some of our other new
markets where we are really just starting, is fantastic. So, we are going to do
more of it. As we always promised you, this brand is portable, it could be
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
almost anywhere and we will begin a thoughtful rollout to truly become a
national brand.
OPERATOR: And Joe McDonald with Barrington Partners has our next question.
JOE MCDONALD: Let me say, also thank you Eric for your leadership of the
company over these eventful years. I'd ask you guys to comment on the
competitive environment with specific reference to what Google and eBay are
doing, and also do I understand correctly that realestate.com is adopting your
model for doing business?
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
ERIC DANZIGER: Well, thanks Joe. So, let me just again sort of talk at 50,000
and Gary can add the substance to it as he always does in case it's not adequate
enough. The reality is, you know, all -- Google and eBay and partridge in a pear
tree -- participating in real estate is a natural evolution of the Internet. The
fact that -- I want you to know that [inaudible] coming in here yelling that --
the fact that customers are changing their buying habits in all phases just like
-- travel agents don't exist much any more because customers go to the Internet.
So, it's a migration of the way that customers look and buy real estate where
they never did until companies like us and a few others came along.
So the big Googles and eBays are populated by really smart people who know
they've got to be in the game. Now they are in a slightly different game, they
are in a game like basketball and we play baseball. So, what we do have in
common is we are in professional sports, but we are in different sports. What I
mean by that is, we are in the transaction business. We have real live realtors
with technology, we are not a search agent, we are that virtuous cycle.I am
sorry to repeat again, where people can use the technology, they can
-participate in, through the power of technology, [inaudible] but Google doesn't
have people, I mean they have got people, smart people but they don't have
transaction people; neither does eBay. So, it's slightly different. So, let's
look at that as a really positive thing because in the same way Gary said, the
companies out there like the traditional realtors who are advertising for
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
people to come to internet.com, century21.com or whatever, I just use that as an
example, are helping people come to the Internet.
The [Zealos] of the worldare helping people come to the Internet. So, [I
think] relationship with all these companies is a really good thing and we look
at it as a new channel of business for what we have here which is unique in the
way we operate in real estate space. I don't know that Gary could even add to
that Joe, I think that probably was about as complete as it can possibly be
said.
GARY BEASLEY: Yes, our understanding is that they are operational in two
markets and we really haven't come across them yet, so I can't really speak to
how, whether they are dipping their toe in or diving, but we will obviously
continue to monitor that over time.
OPERATOR: And our next question comes from Kent Holden with Gagnon
Securities.
KENT HOLDEN, ANALYST, GAGNON SECURITIES: Good afternoon gentlemen. You had
mentioned churn a couple of times, but I missed the number, what was the churn
for the quarter?
GARY BEASLEY: Well Kent, as you know, and you ask us this every quarter, we
don't specifically disclose churn, what we talk about are trends and we talk
about net additions to the agent force. So, what we specifically said was that
the churn was improved both over last quarter and over the same quarter last
year.
KENT HOLDEN: AndIt's like trying to get a square out of a [Boston sand],
okay. On the new additions of the agents was 115, 120 something like that, how
many of those were inside of California and how many were outside?
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
GARY BEASLEY: The majority were outside of California.
KENT HOLDEN: Okay. And then my last question on the New Jersey portion of
Philadelphia, do you have a feel for what size of percentage of the Philadelphia
market the New Jersey thing is, and kind of how you will attack it if you are
not allowed to do the rebates?
ERIC DANZIGER: Well, we won't talk to you about how we are going to attack
it, we have some very interesting ideas that we are talking about, and so we are
going to continue to talk about those internally but not externally; that's
another thing we won't tell you, I guess, can't forecast, just [not give any
estimate].
But you know again, the principal value to the company is, although a piece
of it certainly is rebate, there is lots of ways we can attack that issue, but
the value of the Internet and the Agents and all that is still going to be in
place. So, if you look at Delaware, at Philadelphia, New Jersey [inaudible] so
about 20% looks to be in the Jersey area.
KENT HOLDEN: Okay. Does Delaware have the same rebate rule?
ERIC DANZIGER: All right, thanks Kent. And you know, you can try next time
again.
KENT HOLDEN: Okay, I will -- yes just write me down for that same question
next time.
OPERATOR: And there are no further questions. I will turn the call back over
to you gentlemen for any closing remarks or comments.
ERIC DANZIGER: Well, we thank you all very much for your participation, and I
hope you are as enthused with our both performance and prognosis. Although it is
a tough market and there are headwinds ahead, this company is getting better
what it does in both the way it operates in existing markets, in it's growth
strategy. We appreciate your support in that as we continue to rollout this
great brand. We are proud to be part of it, we hope you are as well. Thanks
Q1 2006 ZipRealty Inc. Earnings Conference Call - Final FD (Fair
FOCUS
very much for listening in. Let the force be with you. Thanks. See you.
OPERATOR: And that does conclude our conference call. Thank you everyone for
your participation, and we do wish you a great day.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 19 OF 23 STORIES
TRANSCRIPT: 022806ab.783
BODY:
OPERATOR: Good day and welcome to the ZipRealty Incorporated Fourth Quarter
2005 Earnings Conference Call. At this time, all participants have been placed
in a listen only mode and the floor will be open for your questions following
the presentation. It is now my pleasure to turn the floor over to your host, Mr.
Tom Ryan. Please go ahead, sir.
Please note that earlier today, where recently the Company issued it's press
release describing its results for fourth quarter for 2005 and giving guidance
for the first quarter and full year ending December 31, 2006. A copy of that
release can be viewed on the Company's website at www. ziprealty. com.
Before we begin, I'd like to note that during the course of this call various
remarks we make about future expectations, plans and prospects for the Company
constitute forward-looking statements for the purposes of the Safe Harbor
provisions under the Private Securities Litigation Reform Act of 1995 actual
results may differ materially from expectations, plans and prospects
contemplated in these forward-looking statements that are subject to risks and
uncertainties, including those described in the Company's Form 10-Q for its
third quarter 2005 and other filings with the Securities and Exchange Commission
copies of which can also be viewed at the company's website.
ERIC DANZIGER, PRESIDENT AND CEO, ZIPREALTY, INC.: Great, thanks, Tom. Lets
start by reviewing our performance. After that, Gary will cover the financial
results in more detail. I'll then come back with an update on our growth
initiatives, and we'll conclude with Q&A.
First, given the challenge and macro environment in the back half of 2005, we
were very pleased with what we were able to accomplish. We closed a record
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
number of transactions, 12,317 in 2005 compared with 8,500 in 2004, or a 45%
increase. And the total value of those transactions increased nearly 50%, to 4.4
billion compared to 3 billion in the prior year. We ended 2005 with 1,366 Zip
Agents, up from 914 a year ago. And from a financial perspective, we were
pleased to see a near-50% rise in year-over-year revenue.
Let's shift gears for a moment and talk about the tangible steps we're taking
to grow the business over the long term. First, our revenue still represents
less than 2/10 of 1% of the $60 billion market we are targeting and
quarter-over-quarter, year-over-year, we're gaining market share as we grow our
company. It's important to appreciate that in our market we grew closed
transactions 25% in the fourth quarter year-over-year when viewed in the context
4% overall decline over that same period.
Clearly, market headwinds slowed our growth, but we were, nonetheless, able
to grow our business at a meaningful rate in the face of declining volume. This
is a clear signal of growth in market share, and, in fact, with each
transaction, we're leaving behind overwhelming numbers of satisfied customers,
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
in numbers well above what we believe is typical in our industry. And in our
view, that's ultimately what makes our people and our brand nationally
successful, focusing passionately on our customers.
One of the new markets we opened last year in Las Vegas continues to ramp,
and if you recall, it reached profitability in just four months, well ahead of
our original 12 month to 18 month forecast, and the profitability timeline,
although impressive, was also complemented by the fact that our investment was
just under $300,000, compared to the .5 million to 1 million we originally
expected.
Houston also continues to do very well for us. Given the lower average home
prices in that market, we believe it will take Houston a bit longer to reach
breakeven than it did in Las Vegas, but we continue to believe that it will
reach profitability within its first year of operations on a total investment of
less than $500,000.
We are very pleased to launch Miami on December 1st, and with this launch, we
also implemented several new initiatives, including a Spanish language version
of our website, live online chat with Zip Agents, satellite images that enhance
search criteria. While Miami may have been our first metropolitan area in
Florida, we have not let any grass grow under our feet in terms of expanding
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
our Florida presence. We plan to officially launch Tampa late this quarter, and
we also announced a launch of Orlando in the second quarter, making it our third
market in the state.
Our goal is to enter a total of four to six markets in 2006, and to that end,
it is my pleasure to announce another new market today. We are planning to
commence operations in Minneapolis, Minnesota mid-summer, and we are excited to
solidify our presence in the midwest as we strengthen our national footprint.
Each of our new markets presents a great opportunity for us not only to
expand and diversify geographically but to fine-tune our launch strategy and
become increasingly proficient at getting new markets off to a strong start. We
think it bears repeating that our return on invested capital profile in new
markets continues to be truly compelling. I'll now turn it over to Gary, and he
can review some of the financial results in greater detail.
GARY BEASLEY, EXECUTIVE VICE PRESIDENT AND CFO, ZIPREALTY, INC.: Thanks,
Eric. The company reported revenues of $21.6 million in the fourth quarter, a
23% increase over the fourth quarter of 2004.
In terms of profitability, net income for the period was $17.9 million which
includes an income tax benefit of $16.8 million related to the reversal of our
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
valuation allowance, which was primarily attributable to our net operating loss
carry forwards. We have conditioned the market for this occurrence on all of our
previous earnings calls, and we determined, after consultation with our
advisers, that Q4 would be the appropriate period to undertake this action.
Excluding this one-time non-cash benefit, net income for the fourth quarter was
$1.1 million, or $0.04, per diluted share compared to $0.9 million, or $0.01, in
a year ago period.
In order to contrast our results with market averages, an exercise that
illustrates our share gains, let me talk about the overall market and then
specifically about ZipRealty.
During the fourth quarter, we estimate that overall transaction side volumes
in our markets was slightly down about 4% year-over-year, driven by a
significant decline in California which was down around 13%. According to our
estimates, markets outside of California, where we have a presence, actually
showed a slight increase in transaction side volume in Q4 of about 3%
year-over-year.
Other breaking out markets and data like this is certainly helpful in better
understanding our business and its potential. We can't deny the fact that we
have a material California presence, and in a down environment as we've
experienced these past several months, we'll be disproportionately affected on a
consolidated basis.
It's important to note though that when California ultimately rebounds, which
history suggests it will, its impact on our business should be as
disproportionately effective on the upside.
As Eric stated earlier, our new market progress certainly illustrates our
intent on mitigating the impact of regional shifts in market dynamics. And to
quantify that fact, California represented 47% of net transaction revenues
during the fourth quarter, versus 61% in the same period a year ago. We think
direction. And ourtage point drop is a step in the right
objective as we grow will be to continue to diversify our revenues and reduce
Turning to productivity, the fourth quarter saw about 0.7 deals per agent per
month. With record numbers of real estate agents fighting over a decreasing
number of transactions, we believe industry productivity was likely very low
during the period in comparison, probably averaging less than half a deal per
agent per month.
As we've seen recent evidence that market conditions will serve as a catalyst
for many agents to leave the industry, as they did in early 1990s when
membership in NAR dropped from about 1 million members to only about 600,000 in
a few years; as was the case then productivity should improve for those
remaining in the industry.
Average net revenue per transaction for the fourth quarter decreased 4% to
$7,203, compared to the third quarter. This figure is in line with the $7,200 we
projected on our last call, with a decline due primarily to mix shift caused by
more rapid growth outside of California's high priced markets.
Underlying our revenue assumptions for the year, we expect agent productivity
to decline approximately 10% to 15% in 2006, compared to 2005. Average net
revenue per transaction is expected to decrease to roughly $7,000 from
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
approximately $7,400 this year. We're now projecting an ending agent count of
between 1,800 and 2,000, slightly below our earlier guidance as we are choosing
not to add agents as aggressively as previously planned in some markets. In
terms of Q1, our objective is to add about 100 agents net over the course of the
quarter.
Second, because we reversed the valuation allowance for our net operating
loss carry forwards, we will now carry a book tax rate on our P&L despite the
fact that we should pay no material cash taxes until we exhaust our federal and
state carry forwards. Our EPS guidance will reflect these two items beginning in
Q1.
So based on these changes, our first quarter loss for outstanding shares
expected to range from $0.17 to $0.22 with the option expense components being
about $0.02. For the full year, we expect diluted earnings per share to be
between $0.02 and $0.08, including an estimated $0.08 in stock compensation
expense under FAS123R.
Our strategy will be to manage the business in a tight fashion, assuming more
modest revenue targets with a goal of getting strong flow through to the bottom
line once revenues ultimately rebound. With that, I would like to turn the call
back over to Eric for additional thoughts.
Site activity remains at record levels, and client visit activity is very
strong. Total online offers and scheduled visits have increased approximately
38% year-over-year through the first six weeks of the first quarter, and we're
finding that average consumers' interest in real estate remains very high.
They're just having a tough time on pricing.
Let me give you an example. In Phoenix last week alone, we showed 780 homes
which interestingly enough resulted in only 47 offers, probably about half as
many as would have been the case a year ago. This typifies the current market,
we have eager buyers in our store;is that
it's just that they're waiting for items to go on sale before they head to the
checkout counter.
Before we go to questions, let me briefly talk about two new website features
that we also believe will enhance the customer experience and further our
reputation as innovators in this business.
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
First, "price track." That enables buyers to search for and track price
reductions on listed homes and to give sellers the chance to get more interest
from buyers through additional visibility. The new feature displays a listed
home's complete listing price history including the amount and date of each
price reduction. Buyers can also see the number of days each house has been on
the market in most regions.
Second, the "view-similar-homes feature" offers users the option to see homes
with similar criteria that were previously viewed by other home buyers. This is
similar to the Amazon.com feature that shows what prior customers of the same
product have also bought in the past. With these features buyers now have even
more ways to search for homes and sort through these rising levels of inventory
now available in the marketplace.
So when we add all this up, 2006 will likely be a year where market trends
are working against us. Could the market change and shift in our favor at some
point throughout the year? Certainly, but we don't want to count on that in
terms of our guidance. We'd much rather be realistic and conservative at this
point. The silver lining in all this is that it is only February, and given our
buyer- centric model, we believe over time, a more normalized market will
certainly benefit us. With that, I'd like to thank you all for listening this
afternoon and open up the call to Q&A.
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
OPERATOR: Yes sir, thank you. [OPERATOR INSTRUCTIONS] And we'll take our
first question from Jeetil Patel, Deutsche Bank. Please go ahead.
JEETIL PATEL, ANALYST, DEUTSCHE BANK: Question one, you lowered revenues in
the guidance for Q1 in 2006 roughly by our estimates, but I guess the real
question is what do you think the change in the expectations on guidance for
this year is related to market versus - I'm just trying to figure out how much
the agent attrition or productivity is affecting you relative to just the market
dynamic and setback in the industry? Then I have a quick follow-up.
ERIC DANZIGER: Hi, Jeetil. Well, Gary can follow on with anything. Look, the
reality is, sort of what I said last call, we were three weeks of this history
into the transition market when we last spoke. It's started after Labor Day in
September, and we reduced guidance a little bit, saying we don't know any
better. We now have three months, but we don't know any better in terms of how
long this thing lasts.
You know, we know we are in a market, that it's a hard market, you read the
paper every day. And so we are really just choosing to take a posture that since
we don't know any better, we are just going to assume the market is what it is
until it changes, and then we will offer a more encouragement when we actually
experience it as opposed to trying to be in the prediction business, which we
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
are not.
So I would say to you that that is generally the issue. We are not shy of
agents, to the number of agents that we wanted to have, we continue to work in
this company on retention issues, which you know, we are not going to get into
too much details, we peaked as a high turnover, which we talked about as a
result of the California lawsuit and the expense thing which followed last
September, October. It's been declining since then, we are doing very well
relative to that peak this year already.
So I really choose to say that we are battling a tough market, we are going
to continue to work at growing market share and improve our position within each
of those markets, but still, it is a nasty market out there, it's tough, it has
not yet worked its way through the transition, and that's the principal issue
that we are being guided by in our guidance.
JEETIL PATEL: Got it, and if you just look at market equilibrium, you've
talked about you know I guess improving inventory levels, which I would kind of
view it as a positive 50% increase in California, but where do you think you are
in terms of kind of monthly averages for the industry as you look at California
versus, let's say, a market like Boston, where I think the transition probably
started even earlier than even California and then just broadly in the US.
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
ERIC DANZIGER: Yes, fair enough, and I did say last time that the average
inventory kind of equilibrium [like stuff], we are really intended to be like 5
1/2 or six months, and that many of our markets had already achieved that. And
by the way, that's why in some cases, we are 30% above last year when the market
is down. The problem is it's not just inventory, let's say, in California,
because here you have the [biggest sticker] shock issue of the pricing issue, so
whereas the inventory has increased substantially, which is really what we
wanted, we want to have more houses available for buyers, it doesn't necessarily
mean that sellers have yet reduced the price to where the buyers are willing to
pay. And I love that the inventory is what it is, I love that our buyers have
all these great choices.
Phoenix was a great example to give you, Jeetil, that there's tons of
inventory. We've got tons of buyers, but they are not buying at the prices that
the sellers are selling for, so the sellers have to get a little bit more
realistic, and that's what we don't know how long that takes. That's a market
specific issue. That could take months, it could take three, we just don't know,
so we don't want to predict it.
But I would say to you again that California has been our biggest problem,
witness the numbers that we gave to you. Outside of California much less of an
issue. In fact, I'm very proud of 40% year-over-year growth in a market which,
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
I don't know, thirtysomething points better than the market or whatever it was,
I forgot the exact number. So inventories are good, but this transition market
is still not settled in, and I don't know when it will stop.
GARY BEASLEY: Jeetil, to put some numbers for that, you asked about inventory
in California relative to some markets like Boston. California right now is, in
our markets, a little bit below four months of inventory, about 3.8, where a
year ago during the same period, it was about 1.9 months of inventory, so that
shows you the increase in California.
Boston, however, if you look at Q4, was about six months of inventory, which
is pretty much kind of at an equilibrium level, so that, as we had mentioned
before, seemed to start to transition several months before the rest of the
market, for whatever reason; so just to put some numbers around those examples.
JEETIL PATEL: Quick follow up then. Do you think that-- I hate to go to the--
ask about the markets, I'm sure you don't want to, but feeling at Boston with
six months of inventory, are you kind of getting to the point where you're
seeing transactions start to get done in that marketplace?
And the last thing is do you think just broadly, in terms of open
transactions or closed transactions, however you want to look at it, you are
GARY BEASLEY: Well, I would say that we are actually doing quite well in
Boston as a market. In fact, last year we were one of the top offices in the
whole state of Massachusetts, if you look, because ZipRealty is effectively one
office. We do all of our business out of there. So we do a lot of business
there, and it's healthy.
OPERATOR: And we will take our next question from Frank Gristina, Avondale
partners. Please go ahead.
FRANK GRISTINA, ANALYST, AVONDALE PARTNERS: Thanks, guys, thanks for taking
my questions. You mentioned lead generation, how you are accelerating lead
generation now, starting in 06. I was curious what exactly does that mean? Does
that entail marketing designed to drive traffic right to your site, or are you
actually buying third-party leads?
And then a follow-up to that is when you launch these new markets, given that
you are in a transition environment, especially in California, what does that
entail exactly? Do you tackle it with, you know, a blend of TV, print, local
page search? How do you tackle that? And you mentioned the cost to set up a
market. Is that marketing spend included in that cost?
ERIC DANZIGER: Great. Listen, so the new markets, we don't -- no where in our
company is currently do we do TV and radio. All of our customer acquisition is
done via technology and we have so many initiatives underway, not only third
party and partners, and [SEO]. I mean we have lots of ways at which we attract
customers to the site. Referrals, of the 95% customer satisfaction, you'll
recall we told you it was around 30% direct to site registration.
FRANK GRISTINA: Yes, sir, let me get a little clarity then. How does a
consumer know to go to the site? How do you get all this direct to site traffic?
Is it word of mouth that's kicking in, or how are they exposed to it? All
online?
GARY BEASLEY: Frank, this is Gary. I'ts word of mouth, as well as natural
search, organic. We've developed off some affiliate web sites, things like that,
with good localized content, some blogs, things like that that are getting us
picked up without having to pay for it.
ERIC DANZIGER: And one of the reasons, Frank, we get so much attention, I
mean first of all we have a bunch of traffic to the site. When we turned on
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
Las Vegas, it was amazing to us -- you know, keep in mind, any given moment in
time that someone's on the site, you don't know exactly where they're looking.
We had incredible traffic to our Las Vegas leads, like, in day one. I think in
one of our cities in Florida we had a thousand or something leads the first day
or two or three or whatever.
So number one, we have a lot of natural search. A lot of people looking. And
one of our advantages when we go to a new market, as we said before, if you
think about it, and gosh, particularly in tough times, if you think about it,
you know, it's not that we are just another real estate company coming in doing
business like everybody else, and our Blazers are orange instead of yellow or
red; we are so different. We have such a value proposition for customers that it
draws and drags a very significant initial and sustained level of interest to
the brand.
FRANK GRISTINA: OK, and then in terms of lead generation, I think you've kind
of answered this, most of the leads are direct to site, organically originated,
or how many are acquired, for example -- I know you turned on a partnership with
[zilo], and that created leads. How many come from affiliates like that?
GARY BEASLEY: About 40% come from affiliates. About 30%, 30 1% in Q4 came
direct to site, and about 18% come from paid search, principally Google, but I
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
think one thing to keep in mind, I mean, there's a lot of talk about the cost of
paid search and how the cost per click has been going up, which it has, but our
cost per lead in Q4 actually went down fairly substantially because what we've
been able to do, although our cost per click has gone up, we have -- our
conversion of clicks into registrations has improved dramatically, and that's
one of the things that we focus on a lot here in terms of optimizing our web
site, making the landing pages more relevant, making the registration process
easier, all that kind of stuff. So there are ways even in the context of more
expensive leads and more expensive lead environment, we feel like that we cannot
control. What we can control is what we do with those clicks when they come, and
that we think is a core competency that we can continue to work on.
ERIC DANZIGER: One last thing, too Frank, just again, to put it in context,
you know, we are a fairly small company on our way to doing things bigger, we
because of what we do, howe public-relations, both
we do it, and how we are received out there. So you know three weeks ago we were
covered in the Wall Street Journal, a little company like us, with the writer
who was talking about doing a business with us and why, and whether we -- and we
are in the top 20 of the BusinessWeek top 20 or whatever it's called. I don't
know if I said that right, I think it was Web 20, things like that. So the --
the what? The fact is that we have incredible presence and public relations, so
people are looking at what is this company is all about? So it certainly helps
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
with direct to site traffic.
[Operator Instructions]
OPERATOR: And we will go next to Derek Brown, Pacific Growth Equities. Please
go ahead.
DEREK BROWN, ANALYST, PACIFIC GROWTH EQUITIES: Thank you. Two questions.
First, can you my guess is sort of in the aggregate talk about the percentage of
revenue from the new markets that you launched during 2005 and sort of the
year-over-year growth I guess in organic business during the fourth quarter? And
then as a comment about guidance, or a question about guidance, can you just
walk through the EPS on I guess a fully taxed basis or does that even -- is that
even reflected in the guidance that you gave or -- and I guess more
specifically, how has the EPS guidance changed relative to prior guidance on a
tax adjusted basis?
In terms of the guidance, Derek, we've given our guidance two ways; fully
taxed, including stock comp and everything. That was our GAAP guidance we just
gave. The comparable guidance to what we gave historically, which excluded stock
comp's, and taxes, what we are talking about now is that we are calling it a pro
forma, which is excluding stock comp's, and non-cash taxes. It's $.15 to $.25,
so that's comparable to be $.40 or so you probably would want to compare to on a
pretax basis.
OPERATOR: And we will take our next question from [Ben Schachter]. Please go
ahead.
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
BEN SCHACHTER, ANALYST: Just wondering if you could discuss what the cash
burn might be for 2006, and then also has there been any discussion about
changing the fundamental business model structure in terms of how you employ the
agents, how you pay the agents? And that's it.
ERIC DANZIGER: Yes, I'll answer that one, Ben, and we will go back to Gary.
You know, that is also one of those continuing discussions here. We have made
some modifications in the last couple quarters, and I suspect we will continue
to, whether it's different incentives or different groupings, or different
levels of pay for performance or different initial compensation, different
long-term.
So I think the answer -- your question was has there been discussion. The
answer is there's always discussion and it's a continual evolving. We are not at
the place we were last year, we've changed it. We are not at the place we will
be next year, I doubt. We will just always review the ways that makes it better
for our people, to get the right people in, to get them better trained, more
productive, more income generation, and more successful because it's good for us
to have us do that.
So I'm not going to detail any specific things we've changed, only to say
that we have evolved the model several times. Well, first of all, the model
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
has evolved many many times in the last five years, but I could say to you it
has evolved at least two or three times this last year and will continue to. OK?
GARY BEASLEY: And, Ben, regarding your question, we should generate a fair
amount of cash still this year. I mean we are talking about, with our -- even at
the low point of our guidance, you know, at the $.15, that's about 3.7 million
of net income before taxes and stock comp, which -- before non-cash taxes and
stock comp. Plus we've got in there about 1.7 million of depreciation and
amortization, and so in our CapEx we will be you know probably more in the 3 to
$3 1/2 million range, so we will definitely generate based on those numbers a
fair amount of cash.
OPERATOR: We will take our next question from Patrick Stowe, Priority
Capital. Please go ahead.
PATRICK STOWE: I'm wondering on the full-year guidance. If I just back out
what you are guiding to for Q1, it looks like the full-year guidance suggests
that the last three quarters will be up perhaps even significantly over the last
three quarters of this year, which seems to suggest you expect the environment
to improve pretty significantly. I'm just wondering what that's based on or if
that's not the assumption, if you can give us more color on some of the other
variables that go into that guidance, maybe productivity or ARPU, or any more
color you can give us there.
PATRICK STOWE: OK, and I guess in terms of the expenses, you mentioned
investing more heavily in lead generation. Will that not kind of show up in the
marketing a line or do you still expect to leverage as you grow the agents?
GARY BEASLEY: Well, we should still get some leverage their. We were speaking
investing heavily relative to what we did in Q4, where Q4 we pared back because
the market conditions dictated such that we didn't like the ROI, we didn't buy
the expensive leads in Q4 that we might have otherwise, and so costs were very
good, but what we wanted to do was deliver more leads per agent in the first
quarter, and as you probably know, leads tend to be expensive on the Internet in
Q4 generally because they are competing with retail around the holidays, so
price of leads got more attractive, so we were able to kind of refill everyone's
pipelines in the first quarter.
Many of them are experienced from 2, 5, 15 years. We have people who have
been in real estate for 25 years. So what I would say to you is we are able to
generally hit the guidelines that we seek to open new markets and grow new
markets with, and they are performing in a financial result the way I've
described in Vegas and Houston.
ERIC DANZIGER: Yes, fair question, Mark. I guess what I'd say is you know we
are in the business of building a company for more than a quarter. So we make
decisions every day around here on predictions of sort of normalized, and I hate
to put a number, you've got to look at [NAR] from now, whatever, 10 years at 6.6
million it was 7 million last year, 5.5, what ever it is, it is generally a
market that's pretty healthy from a total number of transactions done in the
United States of America.
It's still $60 billion a year in commissions, so I guess what I used to say
as we developed our strategy is never in the history of mankind has this
business gone 10% off let's say. No, that I know of, so I say never strong, I'm
going to say the last 30 years we've looked at I don't think it's ever gotten
down to that, but if it did, it would be $54 billion in commissions as a pie out
there, so it's a very significant business.
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
So we will always make the decisions on what's -- just like we scaled back
certain expenses in the fourth quarter that we felt were not appropriate from a
return on investment, but yet chose other expenses to continue to do, and then
in this quarter, we choose to even increase some of those. So we do not see a
doom and gloom, we did a lot of research into the proverbial bubble, looking at
the various reports, is there a bubble, what defines a bubble, what markets are
that?
Just for interest, the only time that -- do you remember who the report was
that did that -- the bubble. The bubble defined I think is [ex] year, where
there was more than 15% growth in a row or what ever, and intended to conclude
that when there is a kind of bubble bust, it is market specific, not related to
normal home buy and sell activity, it's related to defense contracting stocks.
Well, oil busts in Texas or those kinds of things.
CHET BOULDEN, ANALYST, GAGNON: Good evening. I came on to the call a little
bit late, so you may have covered this, but I was curious to the number of
transactions in the California market.
GARY BEASLEY: Yes, we did cover it. The transaction -- what we said was the
net transaction revenues from California in Q4 were about 47% of the total, and
that was down from about 61% a year ago.
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
CHET BOULDEN: OK, and what percentage of your agents in California?
CHET BOULDEN: OK, OK. My other question has to do with the balance sheet and
you still got this big pile of cash. Are you considering the stock buybacks at
this point?
ERIC DANZIGER: I think that the company looks at its cash reserves and tries
to evaluate on an ongoing basis the most prudent use of that, which is the best
interests of the company, including stock buybacks. That's a Board decision, the
subject is reviewed with the Board and by the Board at each quarterly meeting,
and at this point, we have chosen not to exercise that option. That will be an
ongoing discussion, as all companies should do, with not only regard to buy
back, but also various other uses of that capital, whether it be for acquisition
or other purposes.
CHET BOULDEN: OK. My last question would be what percentage of your business
was done on the buy side?
ERIC DANZIGER: About [80], we have always been about 80% buyers, 20% sellers.
As I've said for a couple of years, it was really only about a year ago that
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
we started throwing some resources against the selling side. I did not want the
company to focus on too many things and try to do a lot of things not well, so
we just really in the last few quarters introduced like the new CMA online,
various other things like that that were seller-centric, but generally we are
buyers model and you can look at us continuing to be heavily slanted towards
that for some number of years.
ERIC DANZIGER: Yes, thank you. I think we are going to do one more after
this, is that right?
OPERATOR: Yes.
OPERATOR: And we will take our final question from Stephen Silk, C. Silk &
Sons. Please go ahead.
STEPHEN SILK, ANALYST, C. SILK & SONS: Most of my questions have been
answered, so where would you see your absolute cash at the end of the year?
GARY BEASLEY: Well, just walking through the math that we walked through
earlier, you know, it should be probably a couple of million dollars higher than
it is today.
OPERATOR: And at this time, I would like to turn the conference back over to
the speakers for any additional closing remarks.
OPERATOR: And that does conclude today's presentation. We thank you for your
participation, and you may disconnect at this time.
Q4 2005 ZipRealty, Inc. Earnings Conference Call - Final FD (Fair
FOCUS
[Thomson Financial reserves the right to make changes to documents, content,
or other information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
FOCUS - 20 OF 23 STORIES
TRANSCRIPT: 110305at.773
BODY:
OPERATOR: Good afternoon, and welcome to the ZipRealty Inc. third quarter
2005 earnings conference call. This call is being recorded. (Operator
Instructions) It is now my pleasure to turn the floor over to Mr. Tom Ryan for
opening remarks and introductions. Please go ahead, Mr. Ryan.
Before we begin, I'd like to note that during the course of this call various
remarks we make about future expectations, plans and prospects for the company
constitute forward-looking statements for the purposes of the safe harbor
provision under the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from expectations, plans and prospects
contemplated in these forward looking statements and are subject to risks and
uncertainties including those described in the company's form 10-Q for second
quarter 2005 and other filings with the Securities and Exchange Commission,
copies of which can also be viewed on the company's Web site.
With that out of the way, I'll turn the call over to Eric.
ERIC DANZIGER, CEO AND PRESIDENT, ZIPREALTY INC.: Thanks, Tom. Hello,
everyone and thanks for calling. Let me start by reviewing our performance.
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
After that, of course, Gary will cover the financial results in a bit more
detail and I'll come back with some of our growth initiatives and conclude, of
course, with Q&A.
We're pleased with our third quarter results. For the period we closed 3,689
transactions, representing $1.36 billion in real estate sold. Revenue of $28.2
million was a record, up 61% year over year and within our guidance range of $27
to $29 million. This top line growth helped drive a significant earnings per
share increase to 11 cents.
This was a penny below our guidance range for a few sound reasons. First, we
incurred some final and unplanned expenses related to the lawsuit we mentioned
last quarter. This involved making some additional payouts to employees that
totaled about a penny a share. We believe that these payments are now complete
and we have received preliminary approval for the final settlement from the
court.
You know, while it wasn't planned, I felt it was critical at this time to
connect with the troops, share the vision of this company. In any event, these
kinds of expenditures are extremely important as we progress towards our
strategic objectives.
We have consistently said that our goal is not just to create growth, but to
create an enduring national brand. And I think that our willingness to invest
and our ability to balance that investment with growing profitability is a
testament to that focus.
We also indicated that it would be profitable by the end of the year. Well,
we're thrilled to announce that Las Vegas has achieved district level
profitability in just its fourth month of operation versus the 12 to 18 months
we had originally projected. On top of that, our initial investment, which we
projected at more than $1 million, has come in at less than $300,000, which is
also significantly below the low end of the $500,000-$2 million range we
discussed in our last call.
We're delighted to have successfully executed the Las Vegas launch plan and
although we don't want you to necessarily extrapolate this experience into every
new market, what you can do is factor in a terrific return on investment
relative to almost any traditional business that at least I can think of.
Houston is another market that's doing very well for us, tracking along many
of the same metrics as Las Vegas. I should point out that our business in
Houston was slightly influenced by the effects of Hurricane Rita, but the impact
was short-lived and really immaterial.
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
Given the lower average home sales price of Houston, though, we anticipate
the ramp up to profitability will take a bit longer than it did in Las Vegas.
Our current estimate is that Houston should reach profitability within its first
year of operations and that the total investment should be less than our
$500,000 low end benchmark.
In terms of Miami, we're right on track with our official launch scheduled
for December 1st.
Each of our new markets presents a great opportunity for us, not only to
expand and diversify geographically, but to fine tune our launch strategy and
become increasingly proficient at getting new markets off to strong starts.
Regarding future expansion, we're planning to enter four to six new markets
next year and as I stated before we believe the return on invested capital
profile in these new markets continues to be truly compelling.
Finally, we believe that our success in Las Vegas and earlier results in
Houston are tangible evidence that we can support our model with very low
execution risk. Let me now turn it over to Gary. He can review the financial
details in greater detail and I'll come back in just a bit.
The company reported record revenues of $28.2 million in the third quarter.
These results represent an increase of 61% over the third quarter of 2004 and
sequential quarterly growth of 10%. In terms of profitability, net income for
the third quarter was $2.9 million, or 11 cents a share, up from 1.3 million in
the year ago period, which represented zero cents a share.
We ended the quarter with 1,383 agents, up 148 net from the previous quarter,
representing 12% growth for the quarter and 51% growth since the beginning of
the year. We're certainly on track to finish the year at the high end of our
previously guided range of 1,300 to 1,400 agents.
Our objective in Q3 was to approach that target early so we can get those
agents some seasoning in advance of next year's spring selling season. We intend
to moderate our hiring pace a bit in Q4 as we like where we are headcount wise
and are focused on a smaller number of high quality hires in target areas for
the balance of this year.
Turning to productivity, we believe our ratio of 1.0 deals per agent per
month for the quarter was significant above industry averages, particularly in
light of the tremendous number of new agents who have entered the industry
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
over the past 18 months.
It's currently estimated that there are about 2.5 million licensed agents in
the United States, which translates this year into only about five closing per
agent or a 0.4 productivity ratio.
Our productivity number looks even more compelling if we look at the agents
who have been with us fro at least four months. Under that scenario, which
assumes agents have had some training and gotten their feet wet in our system,
third quarter productivity was approximately 1.3, representing a 30% premium to
our overall average and as these agents mature, their productivity typically
increases further.
At this time we remain comfortable with our ability to deliver gross margins
in this 45% range over the long term. Keep in mind that given seasonal factors,
gross margins tend to be slightly lower than that in the first and third
quarters and slightly higher in the second and third quarters.
Product development expenses for the quarter represented 2.7% of sales versus
3.7% of sales last year, reflecting a point of operating leverage in this area.
As a percentage of revenue, G&A increased to 21.4% of revenues versus 20.7% in
the third quarter of 2004, which, as a reminder, did not yet reflect public
company operating costs.
That being said, absent some of the unplanned items in the quarter that have
been mentioned, we would have shown a small amount of operating leverage in this
line item nonetheless.
Looking at the balance sheet, our cash and cash equivalents of 89.2 million
represents a significant portion of our market capitalization at roughly $3.50
per diluted share. We have no long term debt, inventory costs or material
accounts receivable exposure.
Looking ahead to the fourth quarter, we were taking into consideration some
of the company specific and macro factors. Eric will speak more about this in a
moment, but what we are seeing is the beginnings of a transition from a sellers
market to a market that reflects more of an equilibrium between home buyers and
sellers. We expect to benefit once the market shift becomes more definitive but
during the transition prior to that equilibrium, our business will likely
experience some softness relative to expectations.
Pro forma net income excludes the one time charge associated with the lawsuit
settlement we announced in the second quarter and assumes 25.5 million fully
diluted shares outstanding during the year.
Note that the midpoint of the revised revenue guidance for the full year 2005
represents a growth rate of approximately 50% over the prior year. For 2006 we
expect revenues between 130 and 135 million and pretax income per diluted share
between 40 and 45 cents.
Note that the 2006 guidance excludes the impact of stock option expensing
associated with the company's planned implementation of FAS-123(r) next year as
the impact is difficult to quantify at this time.
The middle of our range represents greater than 40% growth for both the top
and pro forma pretax net income lines.
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
Given the prevailing market dynamics, our 2006 guidance is built upon the
following metrics. We're forecasting flat agent productivity compared to this
year. The average net revenue per transaction is expected to decrease to roughly
$7,000 from the approximately $7,400 this year. We are projecting an ending
agent count of between 1,900 and 2,100 agents.
To get to this total, we need to add about the same number of agents we did
this year to our existing markets, or about 4 to 500, with the balance coming
from the new markets we plan on opening next year. As we've mentioned in the
past, it's likely that we'll recognize our deferred tax assets at some point in
the future. That would give us a significant one time gain with a book income
tax line of approximately 40% applying thereafter.
Keep that in mind when evaluating our guidance and also remember we will not
be paying material cash taxes until we exhaust our approximately 47 million of
carry-forward losses.
With that I'd like to turn the call back over to Eric for additional
thoughts.
As about 80% of our transactions are currently on the buy side, we believe
that such trends truly play to our strengths. We also believe, by the way, that
a rebate becomes even more important in a cooler real estate environment.
Digging into some of the macro numbers in our markets reveals some very
interesting trends and insights. First, the average available inventory across
our markets spiked dramatically during September to a level approximately 40%
higher than a year ago and up nine percent over August levels.
Near term market dynamics notwithstanding, our goal is to be one of the five
largest real estate brokerages in the United States in the next five years with
a minimum of 4,000 to 5,000 agents operating in 40 to 50 cities, 300 to 400
million in revenues and pretax profit margins in the range of 15 to 20%.
(Operator Instructions)
Secondly, can you talk about from a buying agent - or lead generation or kind
of lead volume standpoint, are you seeing any changes there in terms of the
number of leads that you're going to capture starting to slow down as kind of a
precursor and kind of how is the cost or sales and marketing cost going at this
point and then I have a quick follow-up.
ERIC DANZIGER: I'll answer the first one and I'll let Gary answer the second
one. The interesting thing is this is really - although we've always said that
real estate cannot be looked at nationwide. It's - you can't do it macro, you
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
have to kind of look into neighborhoods, it is interesting that this is pretty
predominant throughout the United States. Most of our markets are affected in
this transition period and it's really, really interesting to see, A, how fast
it's developed and frankly I acknowledge that I didn't see it coming and we
really did think as inventory became more plentiful things would go real fast
for buyers.
But so even here in our backyard, which you'll recall, six months ago I gave
some examples of a market that had an average of 14 offers sold for about
250,000 over list and went within a day. That market now, I mean, a real live
story which we heard yesterday is same market, same block, house gets listed at
a little less than it was six months ago, sits on the market for two and a half
months, somebody makes an offer, the seller rejected it thinking that's too low,
I can get more and then six weeks goes by and the seller calls the buyer and
says, I'll take your offer. So I think - and that's right here in a very
previously strong market, being the Bay Area.
So there are a couple - I think it's easy to answer the other way, candidly.
There are a couple markets that are not experiencing it and there are a couple
that are already out of it so if we look at all kinds of statistics, you know
which you probably know a bunch better than I do, but based on the number of
homes on inventory, how many offers, all that sort of thing, some of our
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
markets are already kind of at the tail end of it and they're doing better.
They're recovering faster. But I'd say to you generally I think it's fair to say
and honest to say that it is a general statement across the country right now
and I'd rather have us have more evidence that there are markets that are
pulling out of it than to forecast we magically will come out of it on a giving
month, which just wouldn't be right to do for you, for me, for anybody else.
GARY BEASLEY: Yeah, Jeetil, on the lead side we have actually continued to, I
think, make really good strides on the customer acquisition front. Our costs
were up modestly. The cost per lead basis. Low single digits for the quarter.
ERIC DANZIGER: I - I don't think it would be fair to answer. I don't know the
answer to that, I think each cycle - I mean, look, the reality is this is a - we
know it's cyclical. I don't know in each cycle if it's been the same period of
time or not the same period of time. And I gave you an example. One of our
markets is already almost through it all although I wouldn't try to forecast to
you for everyone else. But it just depends how long sellers take to realize that
they'd better take that offer when it comes in if it's 100,000 less than asking
in the example I gave you, we just don't know.
And so I'm sure on the fourth quarter we will have had - fourth quarter call
- we will have had more than one month. This only started in September and
again, just in fairness, happened in September. We see it continuing in October
and I just don't think it would be right to forecast this is going to stop in 30
days. It might. It might be 60. It might be 90. It might be a year or so. We'd
rather tell you it's not changing and then as soon as we see that it changes -
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
I'll give you just one more bit of color so you see that what we just mentioned
a month ago, I think Gary gave an example of this true impact that's happening
out there.
So in the case of one of our districts, we had a 33% increase in the number
of showings so customers got in the car. We are not lacking customers. Thirty
three percent increase in the number of showings a month over prior year, but
there were 22% fewer others because the people felt the pricing wasn't right and
then there's an infinitely number more still of rejections of the offers because
the sellers are not yet at peace so I really don't know is that a month, is it
three, we'll just keep you updated as we know, but I don't want to forecast
anything beyond what we know to be the facts today.
OPERATOR: Our next question comes from Derek Brown of Pacific Growth
Equities.
DEREK BROWN, ANALYST, PACIFIC GROWTH EQUITIES: Thank you. With respect to
your '05 - '06 guidance, sorry about that. You're pointing to an acceleration
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
in year over year growth and what you're seeing and what you're checking to see,
I guess, in this fourth quarter. My question is why do you have confidence that
the fourth quarter - that growth will accelerate on a year over year basis after
the fourth quarter? Is it agent additions, is it changes that you see in the
markets we're going to be going into? If you can help me understand that that
would be helpful.
GARY BEASLEY: Sure, Derek. As you know, we have never given 2006 guidance
yet. This is our first opportunity to talk to 2006. I think when you look at
what the metrics are and break it down, where we're comfortable is within those
individual pieces. We know that we can add agents at a rate - we feel very
confident we can at the level we did this year. We feel comfortable that
productivity is something that as we continue to improve our training and our
agents get more seasoning we can at least maintain that level and then the
average revenue per transaction we actually had declining a fair amount based on
what we see going on in the market.
BEN SCHACHTER, ANALYST, UBS: Hey, guys. A few questions for you. The four to
six new markets, I was wondering if that's roughly in line with your original
expectations or where your expectations have been recently or has the slowdown
sort of caused you to pull back on new markets.
ERIC DANZIGER: Right. Let me start with the new markets. We'll let Gary jump
in. How are you doing.
ERIC DANZIGER: Great. Well, we've never said how many markets we were going
to add, what we really said was this. I believe and we are certainly
demonstrating that this is a brand and a business which is highly portable, can
go almost anywhere. The degree that we would choose to grow would be one that we
would grow at a pace that we could do well, execute well, kind of pull off the
results that we had, although they were pleasantly surprising to us, do a good
job for employees, customers, shareholders to the extent that we didn't spend
too much money on a given year and whatnot and we wanted to learn across the
way.
So I would say the four to six is obviously more than zero to three, which is
what we said this year and it is a way in which we choose to accelerate the
growth in a manageable pace that's going to allow good results for everybody and
if for some reason we choose to do more than that, we will do more than that
because we feel good about it, we're ready to do it and it's the right thing to
do.
GARY BEASLEY: And Ben, on the productivity question, first of all I think I
would say it is difficult to really take one quarter of productivity and
necessarily translate beyond what is happening in this particular quarter. I
think at the onset of a market change one would surmise that the impact would be
a little more dramatic, that it would be over the course of several quarters or
a year.
And again, we're building our '06 forecast based on a low productivity
expectation for this year, so we're anticipating that and also, remember, we're
in kind of the - we have overall market headwind in that this is when
seasonality really starts to kick in anyway, so I would tend - I tend to believe
that exacerbates productivity swings because we are in the slower time of the
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
season.
ERIC DANZIGER: So, Ben, and the color I am going to add to that statement,
the color to that market that I was giving the example of earlier in addition to
some of that increase, we've been showing with fewer offers, there's an example
here in one market, saying (ph) one, it took 38 shows, so a customer, 38 average
homes to make an offer.
ERIC DANZIGER: And then, obviously, then you go back to the fewer offers even
accepted, so despite all that really what - our growth is fairly impressive, I
guess you could say, in spite of that headwind. And the fact is that there is
some time in the period where that is going to turn. We just don't know when and
if that's affecting productivity, obviously that goes away too.
So we're just saying more of the same, there are some seasonality issues
which come into play and you know of course four and one are the quarters which
are the worst in real estate, two and three would be better, that obviously
picks it up anyway. So we feel all these things are fairly conservative in the
way we put them in.
ERIC DANZIGER: Well, we usually don't comment on too many things like that
but look, this particular last month has been kind of a rough one for us. We had
the lawsuit. The lawsuit is a distraction. People want to know what's going on
but more importantly, the result of the lawsuit required us to change the
expense reimbursement policy of the company and that went from an allowance type
issue, the way we were treating it before, to an actual expense that people have
to fill out.
Expense accounts account for every mile they went, which homes did you show,
it's a whole new discipline, cause for greater turnover in the month, but then
if you keep in mind, let's look at this company not on a week or a month or a
day for heaven's sake but for the three months preceding that we had successive
record low turnover. We introduced new expense policy, it was a shock to the
system so we had a spike in our turnover and it's just one of those things -
lead (ph) time, generally, though, what you try to do in a company is I use that
it factor thing at the beginning is populate the company with people who want to
be here. Who we want to be here, so in that process we're not at all concerned
Q3 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
about that and we're hitting the numbers in terms of overall employees we said
we'd have.
OPERATOR: Our next question comes from Barry Feirstein of Feirstein Capital.
BARRY FEIRSTEIN, ANALYST, FEIRSTEIN CAPITAL: Thank you. I'm just trying to
understand - you reduced, I believe, the fourth quarter revenues by about 20%
relative to consensus estimates and you talked about maybe a five percent
decline in the value of the transaction so can I therefore conclude that
transactions are down about 15% in the last month or so relative to what you've
been seeing? Or how much transactions now relative to what you expected in this
transition environment?
We'll take our next question from Patrick Stowe from Priority Capital.
PATRICK STOWE, ANALYST, PRIORITY CAPITAL: Hey, guys. Just trying to get a
better understanding of maybe what's going on in these markets. If you look
across your markets, does this transaction weakness, do you see it kind of
broadly across these markets or could there be something going on with maybe the
first time buyers, the investor buyers that might be more prone to use ZipRealty
as a broker.
So what that speaks to is obviously, that's a rate end volume thing. That
means there's more - and absolute inventory went up - is up about 40%, as Eric
mentioned, so what you're seeing, I think, is broad-based accumulation of
inventory in markets and it doesn't appear that it's really shown up a lot of
this has shown up in the housing data because, as you know, housing data reports
closed transactions.
GARY BEASLEY: There is and so what we're seeing, at least in our market, is
this should translate into some reductions in closings if what we're
experiencing holds true across these markets.
PATRICK STOWE: Right, so your sense would be, if I take a census of competing
brokerages in your markets, that they would be seeing the exact same thing.
GARY BEASLEY: If someone isn't with us at the beginning of the quarter it's
not likely that they'll close any business.
PATRICK STOWE: I'm with you. All right. Thanks very much.
OPERATOR: Our next question comes from Kent Holden of Gagnon Securities.
GARY BEASLEY: That's a competitive stat that we have been asked that before
but it's not something we're comfortable disclosing but what we can tell you is
we are hiring a lot of new agents and as I said, those people don't close any
business for typically at least a couple of months, often two or three months
...
KENT HOLDEN: OK. And then what was the agent turnover in the quarter?
OPERATOR: Our next question comes from Joe McDonna (ph) of Barrington
Partners.
UNIDENTIFIED AUDIENCE MEMBER: I'm good, thank you. How are you guys?
UNIDENTIFIED AUDIENCE MEMBER: I'm looking forward into 2006, Eric, I think on
some calls you've mentioned the company might be looking for acquisitions and
are you going to - can you see acquisitions happening with the cash that you
have on the balance sheet and perhaps less demand for capital because you're
more efficient at rolling into new markets?
And then second of all, any comment on the likelihood of ZipRealty being an
acquisition target.
ERIC DANZIGER: Let's do the first one first. Obviously there's a lot in
there. The principal business that this company is is the residential real
estate business and we are going to continue to grow at a healthy and exciting
rate that let's us do really well on that arena.
OPERATOR: Our next question comes from Frank Gristina at Avondale Partners.
ERIC DANZIGER: Great. I'm going to just say yes and let Gary give you the
statistics because I want him to have fun with that one too. So yes, it's a good
efficiency thing, but he'll at the color to it.
ERIC DANZIGER: You know what we're doing, Frank, as well is if you think
about again, the responsibility of this company is not to accept a bad market
situation or headwinds or any of that and just say, well, it is what it is so
what we want to do is do a better job of conforming our agents, arming them,
sending them into the battle with a quiver full of arrows and therefore what
we'd rather do is say why would we go out and hire - get more page (ph) leads,
let's work the customers who have already come to us.
So for instance, we have sent to every customer, or are sending, it would be
more appropriate to say, sort of some market data about the locations that
they're in. Here's some stuff you should. Here's some stuff your agents should
note to help you sell better. Here's something your customer should know so
rather than focus on more, let's do more better with them there that we've got.
That's the focus.
OPERATOR: At this time we have no further questions. I would like to turn the
call back over to Mr. Eric Danziger for any closing remarks or any additional
comments.
ERIC DANZIGER: I thank you all for calling in and listening in and your
support for the company. We're very excited about as we always have been, the
premise of this company, the opportunity of this company and the execution that
does apply today and will continue to get better. So thanks very much. We'll
talk to you next quarter. Thanks, all.
FOCUS - 21 OF 23 STORIES
TRANSCRIPT: 080305ag.781
BODY:
Please note that earlier today the company issued its press release
describing its results for second quarter 2005 and giving guidance for the
remainder of the year. A copy of that release can be viewed on the company's Web
site at www.ziprealty.com.
Before we begin, I'd like to note that during the course of this call,
various remarks we make about future expectations, plans and prospects for the
company constitute forward-looking statements for the purposes of the Safe
Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from expectations, plans, and prospects
contemplated in these forward-looking statements and are subject are to risks
and uncertainties including those described in the company's Form 10-Q, for its
first quarter 2005 and other filings with the Securities and Exchange
Commission, copies of which can also be viewed on the company's Web site.
With that out of the way, I'll turn the call over to Eric.
We're very pleased with our record second quarter results. During the
quarter, we closed 3,375 transactions representing $1.2 billion in real estate
sold. Revenue of $25.8 million was 58% up over last year, and at the high end of
our target range of 25 to 26 million. This strong revenue performance, coupled
with lower expenses as a percentage of revenue helped drive pro forma earnings
per share of $0.12, which was also at the top of our target range. Our pro forma
EPS excludes the impact of a non reoccurring charge of $4.1 million associated
with the settlement in principal of a threatened class action lawsuit.
Let me take just a moment to share our thoughts with you on this matter. We
agreed in principal to settle the lawsuit which as we previously announced deals
with expense allowances as they relate to our California agents. Note that while
our original policy was reviewed by outside counsel, we've reexamined it and
concluded that it should be modified. You know, around here, we've always worked
on creating a company which offered our employees and customers, a new,
innovative and revolutionary way of approaching real estate, doing things not
just a little differently, but very different.
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
The very foundation of this unique and customer centric business model is
built upon embracing our agents as employees, rather than as independent
contractors. And as part of that effort, provides state of the art technology,
leads, healthcare benefits, a 401(k) plan, and stock options. Also, I believe
that people want to be apart of something special, not just for a paycheck, but
by making a difference, to make matter. Now note that as part of the settlement
process, a formal complaint will be filed, and we expect that to occur
imminently.
Back to the quarter. We consistently said that our goal is to drive revenue
growth and operating leverage, and I think that we've done a terrific job of
that both, year-to-date and for the second quarter. In large measure, these
results stem from our focus on hiring more and better agents, providing more and
better training, and driving improved productivity. And I'd like to just address
these briefly.
t to agent count, we ended the quarter with 1,235 agents, which isup over 25% fr
om the number of agents we had at the beginning of this quarter.
It also represents a 72% increase in Zip agents, relative to the same time last
year. We're hiring more. We're hiring better. We are continuing to implement
initiatives designed to decentralize the recruiting and training processes.
Today, we have completed the hiring of nine field trainers. Overall, or
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
transition to field offices is about two-thirds complete. And we believe that
over the long-term field training will translate into enhanced performance,
particularly since we will be able to scale hiring and training in a more cost
effective manner, and reinvest in programs that provide the high levels of
customer service that this brand is known for.
Now let me give you a couple of examples. The first relates to how we manage
our leads, the improvements that we've made in the back end lead allocation
system, as an example, have enabled us to better distribute and coordinate
incoming leads to our agent, which in turn optimizes conversion, customer
conversion.
Another example would be the full roll out of the team leader program, which
is designed to mentor and sort of culturalize new agents, while providing a
career path for our more experienced agents. Last but not least, with the recent
launch of significant tools on our Web site, the time is right, right now to
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
increase our focus on growing our listings business. So clearly, the
decentralization process coupled with the key initiatives mentioned above, have
positively impacted our results, and the retention of our people. Turnover this
quarter was substantially below Q1, and ranked among the best in this company's
history.
This is the stuff that makes this brand successful, the constant evolution of
our systems, processes and our people. Over the long run, we think that
initiatives such as these enable us to build upon the record results that we
just posted.
Let me turn it over to Gary, now, so he can review our financial results in
greater detail and I'll come back.
GARY BEASLEY, EXECUTIVE VICE PRESIDENT AND CFO, ZIPREALTY: Thanks, Eric. The
company reported recorded revenues of $25.8 million in the second quarter. These
results represent an increase of 58% over the second quarter of 2004, and
sequential growth of 45%.
In terms of profitability pro forma net income for the second quarter, which
excludes the one time charge associated with the lawsuit settlement was $3.1
million, up from net income or $1.2 million in the year ago period. Pro forma
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
EPS of $0.12 was at the high end of our previously announced guidance,
benefiting from operational efficiencies, as well as the cost effective
management of leads.
Given the non reoccurring nature of the law suit settlement, we feel that pro
forma earnings, excluding the impact of this extraordinary item, provides
helpful insight into our operating performance for the quarter.
We ended the quarter with 1235 agents, up 252 net from the previous quarter.
As Eric indicated, based on our success in recruiting and retention of our Zip
agents, we believe it is now more realistic to project we will end the year with
an agent count of between 1300 and 1400 agents. Please keep in mind that while
we are increasing our targeted number of Zip agents for year end, this will not
necessarily translate into higher revenues than previously estimated, given the
ramp up time associated with new agents, and the time lag between signed
contracts, and closings. We believe that the real payoff for our headcount
growth in the second half of this year will be in 2006 and beyond.
Moving to the expense side of the P&L, gross margins in the second quarter,
were 46.3%. Flat to last year, and up almost 300 basis points from the
seasonally impacted first quarter of 2005. Note that we are in the process of
making some modifications to our compensation and expense reimbursement program,
as a result of the lawsuit settlement. That being said, we remain comfortable
with our ability to deliver gross margins inline with our 45 to 46% target.
Turning to the third quarter, we expect revenues between 27 and $29 million,
and earnings per share between $0.12 and $0.14. For the full year we expect
revenues in the range of 92 to $102 million, consistent with our previous
guidance. We continue to expect pro forma net income per diluted share of $0.38
to $0.42, which excludes the one time charge associated with the lawsuit
settlement. This guidance assume fully diluted shares of approximately 26.1
million for the year.
ERIC DANZIGER: Good thanks, Gary. Well we're extremely pleased with our
operating performance, and have never been more optimistic about the company's
prospects as we move into the second half of the year. Let me tell you about our
achievements on the customer acquisition front.
You know, we've been acquiring leads here, online, since 1999 and believe
that it is a truly a core competency that provides us with a tremendous
competitive advantage. This quarter, we generated a record number of leads at a
much lower cost than anticipated. As a consequence, marketing and business
development costs were 12.8% of revenues which is a record low percentage. Now
while the momentum continues as we enter the back half of the year, it's also
important to remember, that leads are seasonally priced for a variety of
reasons. So we will target marketing and VD costs at around 14% for the year. We
also continue to work on optimizing our Web site, so that we are best positioned
to maximize conversion of clients.
During the second quarter, we focused on the natural search arena, which
represents a major opportunity for us to drive additional traffic to our site
with minimal cost, viral marketing, including our refer a friend program,
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
continues to generate encouraging results. All of these initiatives have
contributed to the record leads and Web site traffic for ZipRealty this last
quarter. While this continuing traffic is encouraging, please do keep in mind
that consumers tend to often begin researching real estate well in advance of
transacting. So many of the customers coming to us today will actually buy or
sell a home in 2006, and perhaps beyond.
Now let me remind you of our new market strategy. Early in 2005, we said we
would enter the Las Vegas market, mid year. We did add Vegas on May second,
earlier than planned. With just over 90 days now under our belt, Las Vegas is
tracking ahead of plan on all key fronts, agent headcount, transactions, revenue
per transactions, leads, and most importantly ramping to profitability.
Next, we said we would enter the Houston market. I'm excited to tell you that
Houston is also off to a terrific start as we have taken the learning from the
Las Vegas launch and applied it to the Houston launch. Houston is the largest
city in Texas, and the fourth largest nationally. We're very, very excited about
the opportunity to expand our brand presence.
On the heels of this initial success I'm happy to announce today our planned
entry into the Miami market during the fourth quarter of this year. We believe
that this city size and its compelling market characteristics, make it a great
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
fit for our company. It's a great opportunity, yes, but also a spring board, for
a longer term, more diversified presence in the rest of the state of Florida,
the fourth largest state and one of the fastest growing.
Now just a remind you, we have previously said that we thought that each
market would cost between 500,000 and $1 million to launch, achieving break even
results at the district level in roughly 12 to 18 months. Well we're certainly
tracking much better than that which gives us great encouragement with respect
to our new market strategy.
With respect to the broader market outlook listen, we could ask all of the
time what happens to our business when the market cools. Well the very nature of
a softer market would imply fewer realtors, fewer multiple offers and greater
available inventory. As about 80% of our transactions are currently on the buy
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
side, we believe such trends would actually play to the strength of this
company. We also believe that the importance of the rebate would increase in a
cooler real estate environment. This is really, really key to understanding our
company. Let me give you an example to illustrate this point.
We've talked to you a bit in the past about the Bay Area as an example, which
is clearly a sellers market right now. Well when there are multiple offers on a
home, that means that the chances of getting anyone offer accepted is pretty
low. If 12 offers are extended on the home, then there's only an 8% change for
one of those offers to be accepted. However, if there's only two offers on a
house, obviously the chances of acceptance increase to 50% and so on. Therefore,
as certain of our markets return to equilibrium we believe we will go back to
being a winner in the larger percentage of the offers and make our agents more
efficient.
arkets in history.We're experiencing record growth despite the fact the model ru
ns cross current
to these market conditions, hence, we sure do like our chances as markets move
towards equilibrium over time.
To wrap things up, we remain confident that our model will generate
accelerating levels of free cash flow over the long run with very small
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
capital requirements. Accordingly, we will continue to build balance sheet
strength, which we can use to invest in our core business, evaluate acquisitions
or otherwise create value. We are entering into an exciting period as a company.
Clearly, we've come a long, long way, but we really do think we are just playing
in one.
With that, I'd like to thank you all very much for listening this afternoon
and open the call to Q&A.
Second, the field trainers that you've hired, the nine can you talk about,
you know, how fast do you think it starts to impact sales force productivity?
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
And, you know, how much of a delta does it have in terms of, you know, without a
field trainer, versus having a field trainer, in terms of bringing in the right
folks, and also closing more business out there. Then I have a quick follow.
ERIC DANZIGER: Great. How, hi, Jeetil, how are you doing?
ERIC DANZIGER: I'll answer the second one first, and then I'll let Gary
answer the first one. So the field training, you know what we did, as you'll
recall that, you know, a year ago, three years ago, all training was done here.
And so we brought all agents into here. And they were given a weak full of, you
know, boot camp and then sent off. And what we realized was not only was
recruiting better done in the field, so we could network and get close to people
but we could give them a faster on boarding, but then an ongoing train. So that
two weeks after their initial training they can get a refresher on something.
And three weeks later, they could get some craft education. And five weeks
later, they can get sales.
So, you know, it's a fairly new process and we're not even complete yet in
the whole field office thing, as I mentioned. I'm a little disappointed,
candidly that I thought we'd be complete by now, and we're only about three
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
quarters complete with that field roll out. So while I can't put a number to it,
I can tell you that it's clear to us, that not only is it a cost efficiency, but
we didn't do it for that reason. We did it as a way to help our people become
more successful faster, give them all of the training they need, immediately
when they need it, and so they can become, efficient, productive, which benefits
them. It also helps retention PS because if they can get a deal done faster and
all of that it also helps the company. So I won't quantify for you, but clearly
it's kind of in the area of it's not - we're not looking at it is it a net cost,
net savings? It's all about making them more effective and efficient which I
think clearly it will do.
Gary, go ahead.
GARY BEASLEY: Yes, on the lead side, Jeetil, I guess a couple of things to
point out. Our direct to site traffic continued to be very strong about 30% of
our leads. We did increase paid search a bit this quarter to about 13%, and if
you remember before, we were more like 10 or 11%. But that was because we're
finding ways to make those leads much - really work harder for us.
Our cost per click went up modestly but our conversion of those clicks into
leaders went up dramatically, so our cost per lead actually went down fairly
materially in the paid search segment, which we're going to continue to try to
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
take advantage of.
JEETIL PATEL: Just a quick follow up you said 12 to 18 months on break even
on a new market, can you characterize, you know, whether Vegas is closer to that
12 month range or sub 12 month? Can you just give us a framework of how things
are progressing there? And second, if you look at the change in kind of
beginning year headcount, kind of agent based this year based on your 13 to 1400
agents. It looks like you're going to grow the agent base, maybe roughly 100 to
105% or so. You know, kind of how - or it kind of grew 105%, how do you expect
kind of the productivity to kind of, you know, ramp - do you think that
productivity will ramp from that number? Or is that basically kind of how we
should assume the kind of transaction rates flow over time based on agent count?
ERIC DANZIGER: Well let me give you the new markets question first.
ERIC DANZIGER: And I'll sound like a lawyer, thank God, I'm not. But look,
you know, every market is going to be different. As you know, Houston was the
first one we said 500,000 to a million, 12 to 18 months. Here's what I'll tell
you. We are, as I said on the prepared remarks, you know, doing much better on
all key fronts.
Having said that, here's the lawyer speak, that I think if I were a lawyer
I'd say. I also don't want to promise you that that would be the case, because
we don't know. You know, we've done two. We're going to now do Miami. I don't
know. I'd hate to characterize this as something that I can assure you but it
obviously is very appealing to us that we've demonstrated here, and only inning
one. Gosh, in the market expansion world it's batter one, not even inning one.
So we're just getting up to the plate and to have those kinds of results and
we're hugely encouraged by our opportunities.
So I think you can look for Houston profitability in Q4, which would put it
at roughly - I'm sorry Vegas, which I think which puts it at what seven months?
I don't have a calculator, whatever, something like that.
Now to the second question, which I forget because I babbled for so long I
forgot the question, but Gary probably remembers it.
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
GARY BEASLEY: Well I think your question was about agent count growth Jeetil
and how that relates to, you know, productivity over the year.
JEETIL PATEL: Exactly. So you grew agents about 100% in '04, and transaction
growth of about 60%. You know, how do you expect, call it the 50% improvement in
agent count, based on the mid point of 13 to 1400 agents, to kind of play out in
terms of transactions, let's say going forward, long term. I mean assume there's
some attrition in that number. But should those pretty much add up or match up
at some point?
GARY BEASLEY: Are you - I guess I'm not quite following the gist of your
question.
JEETIL PATEL: How long does the agent productivity take to catch up with your
agent growth, how's that?
GARY BEASLEY: I got you. Well clearly, that's what we're endeavoring to do.
What we've said is we're trying to close the productivity gap with last year,
between now and the end of the year. And then from then on we can address when
we give 2006 guidance. But clearly, what we're trying to do now is continue the
moment we have started in Q2. And over the course of the year, continue to move
in the right direction.
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
JEETIL PATEL: OK. Thanks.
OPERATOR: Thank you. And our next question comes from Derek Brown with
Pacific Growth Equity.
DEREK BROWN, ANALYST, PACIFIC GROWTH EQUITY: Hi. Two questions, and they both
relate to growth, which is obviously a good thing. The questions are in terms of
revenue growth that you guys have anticipated for the back half of the year, how
do you think about it in terms of volume versus pricing? Since obviously prices
have been escalating so dramatically in the marketplace.
The other question is at the midpoint of your revenue guidance for Q3, it
basically points to an acceleration in the year-to-year growth rate that you've
seen in revenue. And basically, I'm wondering, what gives you confidence that
there is an acceleration kind of embedded in the business.
The revenue growth - the elements of, you know, revenue per transaction or
number of deals or so on, you know, so flying up to 50,000 feet for a moment,
it's a why this company is diversified. It's why before we ever added a new
market what we wanted to do was become successful and profitable in a Dallas,
Texas market, not just depend on what a California market would do, as an
example.
So our diversification in fact, is going quite the opposite way. It's going
out of California, obviously, throughout all kinds of different market
scenarios. So frankly what matters is you kind of build this model is about our
ability to perform transactions. And when you do that at a 0.5% of market share,
and existing markets you're in, and you're all ready kind of growing at this
level, that's very encouraging. So really our - we don't sit here and say let's
go get high end homes as an example to help RAR.
And as I've mentioned before, we start to get more high end homes not just
because the brands awareness is spreading. People hearing about it say hey, why
would I not do that? And so on. So a lot of that comes to us. A lot of that
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
comes to us. A lot of it is kind of in hotel vernacular it's nice to have some
five star hotels, it's nice to have some four star hotels and all of that sort
of stuff, but the general mix - the general thrust of the business, although
revenue per transaction and the pricing is one element, and there's just one of
three revenue drivers, the other being, of course, agent headcount and the
productivity.
So I would say that, you know, a well run company, hopefully is focusing on
all three of those things because they all matter, but we don't focus on one and
say let's go build our business model around revenue. I choose to say, by the
way, that I really like this diversification aspect of the company. I really
like that the company is successful and growing substantially in lower price
homes. And frankly, that's also - I mean gosh our value proposition is huge to -
in those kinds of markets.
Sorry for the long winded answer. It's more about let's do what we do around
here well, and we can't control pricing, but we can control those other two. We
can control the number of agents, the quality of those agents, the training of
the agents, the efficiency of the agents, and how many deals they do by the
system leadership and management. So, you know, what, we work around here on
things we can't control.
OPERATOR: (Operator Instructions) And next from UBS, we have Ben Schachter.
BEN SCHACHTER, ANALYST, UBS: Hey, guys. How are you doing?
ERIC DANZIGER: Well there's very little chance I'll answer the last one,
you're right about that. But I'll answer your 50,000 foot question.
So the first part about listings, you'll recall that especially for guys that
know the company very well, the reason that we were at an 80/20 mix, was largely
because we decided that was in the company's best interest to focus. You know,
I'll give you that statistic, I think I said last time, and if so I apologize.
But this isn't - and I may be off a little bit. But generally we -and I can't
even site the source for you. Pat might be able to remind me - where the number
one complaint that consumers had in real estate - there are several, but one of
them is responsiveness. And, generally, the average responsive time, which I
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
know is going to surprise you, perhaps, is 4.5 days for a customer to get a
response from a real estate agent, either in California or the United States. So
it's from Realtor.com.
And, by the way, PS, 50% of people who make an inquiry never get a response,
so, point being, what we want to do here is focus on people, process, systems,
to assure that that would never happen in this company. Well, to do that, the
last thing I want our agents to do is run out and make listening presentations
looking for their best deal as opposed to being a very responsive company.
So we kind of say we're not going to be in the listings business. Now, in the
last three months, as we've become pretty good at things we do, just as an
overall philosophy, Ben, you know that I believe if you don't do something well,
don't do a whole lot more of it. So what we wanted to do is what we do well. So
let's do listings when we're ready to do it well. Let's arm our agents with
great collateral. Let's add some features for our customers when they come to
the Web site, which was largely buyer oriented.
Well, now, for instance, if you went our on our Web site, today, Ben, which
might be tough from Europe, but if you went on it today and you went under the
seller's section, you can get a complete CMA online. So you can put in the
address you want to sell, all the houses that have sold in the area, all that
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
kind of stuff. Well, that's an incredible seller's tool. Well, we didn't have
that before. We didn't have the kind of collateral that I wanted this brand to
be represented to out there to millions of customers. I didn't want our people
to go out there.
So we're now beginning to see it is time for the company to start working on
that, because when we do something, we'll do it well. So we are improving our
Web site, we're improving our collateral. Part of the training that we're
talking about is for better listing presentation. We have listing experts in our
markets as an example, in most of them, those kinds of things that better
prepare us. We have tested some of these new programs in some of our markets,
just in the last 30 to 60 days, and are hugely encouraged with the growth that
o here, do what we do,rea. So, again, what we like to d
think about it, execute it well.
This is a real estate operating company, so for all those reasons, I can say
that our listings business is growing, and as we roll out more of these tools
and programs, it's going to grow more.
Now, the same kind of thing applies to the new market. I'm not going to tell
you what we're doing for '06, nor how many markets, or all that. We're going to
give you 2006 guidance when we sort of have it rolled out, but, as you know,
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
we're very thoughtful about everything we've done, so we have kind of figured
around strategies, what's the right thing to do, what did we learn from the two
this year, that Miami is coming aboard, where are good efficiencies and so on.
So we are thoughtful and have completed, kind of, an analysis of the things
that we could do, may want to do, but I'm a little bit early in sharing what
that translates to into numbers with you.
BEN SCHACHTER: Okay, and, Gary, possibly related to the question about
listings, was there any movement in Q2 on the overall commission rate that you
guys are able to get, and do you see that moving much going forward? And then
also, on the G&A, I apologize if you said this already, but I saw the bump up
and I heard you say it was related to Sarbanes-Oxley. Is that the run rate we
should be thinking about going forward?
GARY BEASLEY: Yes, the question on the commission rates, we haven't seen any
commission erosion in our markets at all, and we haven't for some time, so we're
not anticipating seeing that on a go forward basis. In terms of the
Sarbanes-Oxley costs in the G&A, I noticed you called on a little bit late, but
yes, I think we're expecting those costs to continue. It's been baked in this
quarter - through the balance of the year. Because, as you know, the way the
process works, there's some front-end loading to this, and then once the
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
company becomes fully compliant, a lot of the consultants and things you have to
employ to get through all the procedure documentations, things like that, goes
away. So, yes, I would say you should anticipate the current run rate going for
the next couple of quarters.
OPERATOR: Our next question comes from Marc Anderson (ph) with Axial Capital.
MARC ANDERSON, ANALYST, AXIAL CAPITAL: Yes, I was just trying to understand,
if your business works best in what you call a buyer's market, why are you
targeting the highest and hottest real estate markets in the company for your
next growth initiatives?
ERIC DANZIGER: Well, look, here is what we know. In terms of the growth
initiatives, what we look to is, some day, it would be great to be everywhere
where consumers want us, an alternatives. There aren't many alternatives to the
way real estate is done in any market, right? So you have brand A, B, C, D,
But we're an alternative model, and you've heard me say before we are what
Amazon is to the books business. So the alternative model is appealing to
everybody. Take a look at Vegas. Vegas, one of the hottest markets, has been for
a couple of years, and we're accelerating beyond our expectations. So I think
that when you are a company that does things like everybody else, with maybe a
little bit different, your question or concern sort of mattes more, like how are
you going to make headway in a market where you're just like everybody else but
with a different name and one different kind of niche.
MARC ANDERSON: Yes, but for people who are worried about your company and a
potential downturn, it sort of flies in the face of an earlier comment, that you
perform well in a buyer's market if your growth opportunities in an up market is
the hot markets. Do you understand where I'm headed with this?
ERIC DANZIGER: Yes, but, again, you have to go back to some kind of macro
stuff on this, because you're talking about $60 billion a year in real estate
commissions. There's 7-point-something million homes this year, 14 million
sides. Our customer satisfaction is 95%. So building a business in a competitive
environment, if you do the right things and you have a valuable model, good
people, great service, you know what you're going to do well. So the point is,
even in a cooling market, suppose it's 6 million transactions, for heaven's
sakes, instead of 7 million. The market is so huge, with no product alternatives
of substance, it doesn't really make us afraid. Because what we do is a lot of
business where the people say I love doing business the way you do business.
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
I can tell you how many times I'm asked to conferences. When are you coming
to this place, when are you coming to this place, when are you coming to this
place? So, again, for us, it's more of a macro about this is a product which is
being embraced by employees, customers, and I think it's portable. We're proving
that, and it's successful at every market you're in, and therefore it's a little
less important to us about buyer's market, seller's market. Because the reality
is, buying the home, or a better home, is always going to be fairly significant
to the American consumer. So, a better way to do it is always going to be
valuable.
MARC ANDERSON: Okay, thank you.
OPERATOR: And our next question comes from Phyllis Lamoreaux (ph) with
Lamoreaux Partners (ph).
OPERATOR: Well, that's all the time we have for questions. At this time, I
would like to turn the conference back over to our panel for any additional or
closing remarks.
OPERATOR: So that does conclude today's conference call. Thank you everyone
for your participation.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from
Q2 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
those stated in any forward-looking statement based on a number of important
factors and risks, which are more specifically identified in the companies' most
recent SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.
TRANSCRIPT: 050305as.776
BODY:
[Operator Instructions]
TOM RYAN, INVESTOR RELATIONS, ZIPREALTY INC.: Good afternoon and thank you
for joining us today to discuss ZipRealty 's first quarter results. With me on
the call today is Eric Danziger, President and CEO, and Gary Beasley, Executive
Vice President and Chief Financial Officer.
Before we begin, I'd like to note that during the course of this call,
various remarks we make about future expectations, plans and prospects for the
company constitute forward-looking statements for the purposes of the Safe
Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from expectations, plans and prospects
contemplated in these forward-looking statements based on many factors,
including the risks identified in our Form 10-K fiscal year 2004.
With that out of the way, I'll turn the call over to Eric.
ERIC DANZIGER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ZIPREALTY, INC.: Great.
Thanks Tom. Well, let me start by reviewing the performance during the quarter.
After that, Gary will come back and cover the financial results, and then I'll
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
conclude with an update on how we're doing generally and the growth initiatives,
and then we'll conclude with Q&A.
We're really pleased with our first quarter results. During the quarter, we
closed 2,343 transactions representing $832 million in real estate sold. Our
revenue was 17.8 million, was up 63% year-over-year, and at the high end of our
target range, which was 17 to 18 million.
As you know, the seasonal - I'm sorry, seasonally, the first quarter is the
slowest of the year, hence we're particularly pleased with these results.
As always, our goals are to drive significant revenue growth and operating
leverage while maintaining solid productivity. We strive to do this while adding
to our growing number of Zip agents and during the quarter, we believe we made
progress on all of these fronts.
With respect to agent count, we ended the quarter with 983 agents
representing 69 net additions.
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
Although we were focused on an improved filtering process this past quarter
with regard to new agent recruitment, we certainly also want to accelerate this
ramp.
You may recall that on our last quarterly call, I told you about some of the
process changes we were implementing in the recruiting and training area.
We expect all recruiting and training teams to be fully up and running by the
end of the second quarter.
Having said that, you should know this. Even though we are confidently
refining our recruiting efforts, as of yesterday, our agent count totaled 1,103
as we have added 120 net agents since April 1st.
Hence, we're well on track to the yearend with 1,200 to 1,300 agents as we
have previously stated. The extraordinary emphasis on recruiting is simply
reflective of our intent to be certain that this important area constantly
achieves excellence in execution.
Now turning to productivity, we remain of course committed to significantly
outperforming the industry average.
First, during the recent quarter, we made significant refinements in our lead
generation processes, which should enhance our ability to deliver greater
quality and quantity of leads to our agents at a more favorable cost to the
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
company. We expect to continue to make gains in this area throughout the
remainder of the year.
All these efforts and more are in the very early stages of introduction and
development and are expected to result in higher transaction volume, lower
costs, greater productivity.
I'll now turn it over to Gary. He can run through the financial results
before I come back on.
In terms of profitability, net income for the first quarter was $662,000, up
from a net loss in the year ago period, benefiting from operational efficiencies
as well as our ability to manage leads efficiently.
We ended the quarter with 983 agents, up 69 net from the prior quarter.
Following a very active recruiting period in April, our head count currently
stands at 1,103 agents, which is right on track.
It was also driven by a 5 percentage point reduction in our buy side rebates
which was implemented after the first quarter of last year.
Moving to the expense side of the P&L, gross margins of 44% was flat versus
the year-ago period. Note that payroll taxes tend to be front-end loaded for the
year, so we expect to see higher gross margins over the remaining quarters. We
remain comfortable with our 45 to 46% target for 2005.
Net income for the quarter was $662,000, yielding earnings per share of
$0.03, beating our target range of break even to $0.02. This compares to a loss
of $0.19 for the first quarter of 2004.
As we mentioned on our last earnings call, our principal objective during the
first quarter was to put all of the pieces in place for the spring buying
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
season, which is really when we start to make our money.
It's during the first quarter that we invest in people, training, customer
acquisition and our system with the objective of setting us up for success in
the balance of the year, and we believe we've effectively balanced profitability
and investment during the three-month period.
We reiterate that over the long-term, our goal is to realize pretax margins
in the 15 to 20% range and an after-tax margin of 10 to 12%.
Turning now to the balance sheet, we ended the quarter with 82.9 million in
cash. Capital expenditures during the quarter were $518,000 and we remain
comfortable with our $2 million CapEx expectation for the year. We have no
long-term debt, inventory costs or material accounts receivable exposure.
For the second quarter, we expect revenues between 25 and $26 million, with
earnings per share between 10 and $0.12. The mid-point of this targeted revenue
range represents a nearly 60% increase over the year ago period and a 43%
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
sequential up-tick. For the full year, we reiterate our revenue guidance of 97
million to $102 million.
Please note that as we reviewed in our last earnings call, our guidance is
untaxed due to the fact that we have accumulated roughly 46 million of federal
operating loss carried forward.
At some point in the future, we will recognize our deferred tax asset and
from that time forward, we will incorporate an income tax expense line item of
roughly 40%, despite the fact that cash taxes will still be minimal for some
time thereafter.
As Eric mentioned, we are on track to end the year with between 1,200 and
1,300 agents. While our previous guidance was predicated upon flat average net
revenue per transaction, we now anticipate that average net revenue per
transaction will slightly increase in 2005 versus 2004.
We expect closed transactions per agent per month to be within our stated
targeted range of 1.1 to 1.2 for 2005, perhaps with a slight bias towards 1.1 as
inventory remains particularly tight in a few markets.
Note that we believe that our agent productivity remains significantly higher
than the industry average.
With that, I would like to turn the call back over to Eric for some closing
thoughts.
ERIC DANZIGER: Well, when you say momentarily, you sort of mean that, don't
you Gary? Okay. Well, we're extremely pleased with the results and the
underlying momentum in our business as we enter the seasonally-strong spring and
summer selling season.
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
We continue to deliver strong revenue and earnings gains while increasing the
value we create for customers.
Let me just take a minute to remind you of ZipRealty's overall strategy and
how we are positioned in the marketplace.
Like Amazon, we simply want to provide another way for consumers to buy or
sell their home, much like Amazon did in the book industry. These gains that we
have come as a result of the fact that we are an operating company focused on
higher productivity and profitability through day-to-day management of the
business, of the employee workforce.
Our brand is centered on providing our clients the superior information and
tools and great savings, and as I said, excellent customer service.
And while we have achieved significant results to date, we have a long way to
go, and this company will continue to evolve, next month, next quarter, next
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
year. We continually listen and look for new and better ways to operate this
business.
But rather, these offices will house the local management team and training
support efforts. This allows us to scale our hiring and training in a much more
cost-effective manner.
Specifically, once we've completed this transition, we will have expanded our
new agent on board in capacity by over 200%.
Third, we have seen an increase in viral marketing. We've helped create and
nurture this by launching in April of our own viral marketing tools including
things like send a listing to a friend, or refer a friend.
Early returns of these have been very encouraging as well. We can also see
the increase in our viral presence through the increase of clients who come
directly to our site. That is up 118% versus Q1 of 2004.
Now, unlike other tools, where you enter an address and get a price, we
provide consumers with all of the comparable homes currently for sale, as well
as recent home sales, so that they are empowered to create their own market
evaluation tailored to their specific needs.
We expect additional results and increased demand for the listings and will
be a tool that is extremely viral as people tell their friends and neighbors
about it as an example.
Turning now to market expansion. We're pleased that yesterday we did indeed
announce that Las Vegas is our newest market. This announcement came well ahead
of the infernal June 1st target. We soft-launched Las Vegas on our Web site on
April 3rd, and are already seeing significant consumer activity.
As in the official launch, we had 17 agents in place and our recruiting
efforts now under way are being well-received. We expect the consumer adoption
will increase significantly as consumer awareness of our brand benefits build.
Today I'm also pleased to announce our planned entry into the Houston market
during the third quarter of this year. Houston is among the 10 largest
metropolitan areas in the country, and has experienced population growth of over
25% in the last decade.
We're real excited about the opportunity to extend our customer centric model
beyond Dallas and Fort Worth, as the state of Texas is projected to rank among
the top 5 fastest-growing states in the country in the next 30 years.
In addition to Houston, we're excited to share with you our intent to indeed
open a third new market before the end of this year.
If you recall, on our last call, we said we would open 2 to 3 markets during
2005, and we're pleased to come in at the high end of that expectation. Although
we're not going to discuss the specifics of that, we'll have more to say on the
next call.
First, our model is very different from many of the on-line residential real
estate players that we are often compared to.
Who we are, what we are and what we do has resulted in ZipRealty being named
by Real Trends as one of the top 40 brokerages in the nation for 2004, which is
up from spot 73 just a year ago.
And as exciting, Business Week has just recently included our company in the
Business Week Web Point . Second, we have a huge runway ahead of us.
ZipRealty on average has less than one-half of one percent share in our
existing markets and we see tremendous opportunity to leverage our brand
strength to drive strong revenues and profits, and our numbers would certainly
suggest that is the case.
Everywhere I look, I see articles counting, hot real estate markets, record
numbers. Well, let me that as a company, we're actually looking forward to the
day when the headlines read that the real estate market is an equilibrium or, in
fact, softens. Right now, 80% of our customers are buyers. The significant
number of those are first-time buyers.
And my last point is, and one of the main reasons I believe, of course, we're
an interesting company, is within our business model, it allows us to generate
solid levels of pre-cash flow over the long run with very small capital
requirements.
So, combined with the outlook that we've spoken about today, we believe our
prospects are very bright, as we move through the remainder of 2005 and beyond.
With all of that, I'd like to thank you very much for listening in and open the
call to Q & A. So, Amber, if we can invite everyone in?
OPERATOR: Certainly.
[Operator Instructions]
BEN SCHACTER, ANALYST, UBS: Hey, guys. Sounds like you're making some fairly
significant changes here to decentralize and move some of the training and
recruiting out to the field. I'm just wondering, why now, why you're trying to
do that, and also, how that will be reflected in the model in terms of some of
the costs.
ERIC DANZIGER: Yes, it is in the guidance and if you think about what we've
done up to this -- Oh, hello Ben, how are you by the way.
ERIC DANZIGER: Good. You know if you think about what we've done up to this
point, you recall a couple of things: Last year we had seven or eight recruiters
all based here in Emeryville, and every single person we hired, you'll recall
the numbers rose significant last year, we brought to Emeryville. So, we paid
for them to come here. We trained them for five days, hotels and all that stuff.
So, in addition to wanting to include the numbers of people we could recruit,
which we've decided mid last year to push that out to the field, and it's been
in evolution to put one recruiter in each field -- in each field district.
Now, over time, we said, somewhat from a cost perspective, to not have to fly
everybody here, but more from an immediate on-boarding, training, filter a
better person, get them in, get them trained, faster, better, and get them
So, first of all, all the expenses have always been in our guidance because
this has been a plan that we've thought about for more than now, it was last
year that we sort of thought about the evolution and budgeted it. And, I think
it's going to be meaningful.
We're a little slow in rolling it out fully, that's why I said we're only 30%
there. It's tough for people to recruit and get their onboard training in the
field when they aren't in the new offices. If you're working in the executive
suite, you can't do it. If you're in an office that has offices for the four
managers in the training room, you can do it.
GARY BEASLEY: Yes, another part of that, the logic, Ben, was to create the
localized training centers so we could deliver ongoing training to all of our
agents.
BEN SCHACTER: Okay. And quick follow-up. When you talk about the seller tools
you were putting into place
BEN SCHACTER: What are you going to do with the people who are selling in
markets that you are not currently services. Are you going to -- what are you
going to do with those leads?
GARY BEASLEY: Yes. Right now, Ben, what we're doing when you go to our
website. If you go to a market that is not a ZipRealty market, we'll just refer
that out to some of our partners in those other markets. We're not going to let
that drive where we're opening business, necessarily, but we'll --
BEN SCHACTER: So, in terms, will you generate revenue from that.
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
GARY BEASLEY: Yes. We'll generate a small amount of revenue from that, but
that's not a core business of ours.
ERIC DANZIGER: Thanks, Ben. So, we must have been pretty complete in that
long...prepared.
OPERATOR:
[Operator Instructions]
BEN SCHACTER: All right. If no one else is gonna ask questions, I'll keep you
guys on the phone all afternoon.
So, we're not going to get so granular right now to talk about revenue
contribution but there's really no change in that from what we have always
talked about. Now, that being said, as we get a little more further a long, with
Las Vegas and Houston and some of our other markets, we will talk a little bit
more specifically because I know everyone wants to understand what the unit
economics look like for new market.
OPERATOR: Our next question comes from Mark Nicholson (ph) of Segamore Hill
Capital Management.
I just kind of wanted to hear your insights on that and just maybe if you
could just comment on -- I guess it - kind of sounds like, kind of the
traditional aide and try to prevent you guys from representing sellers or I
don't know if that -- is that something that you see at all or is that kind of
--
ERIC DANZIGER: No. Let me answer your first one first, Mark. Thanks for
asking the question. Number one, let's talk about the department of justice ,
I'm glad you asked that. We're obviously very pleased to see them look at these
things. There are three parts of the deal (inaudible).
One is the eval policy, one is rebates, such as what's going on in the state
of Kentucky, and then one is a limited service issue, which is Oklahoma City.
Two of those we are very pleased that is going on likely results and positive
for us. They're certainly positive for consumers, which certainly matters.
Some a third party objective, not somebody who wrote the rules, somebody has
to comply by the rules so look into what's going on. So we're pleased that
they've been in it and we -- and they have expanded that from the original look
at the val policy to, for instance, the rebate issue, and we don't know how that
will resolve, of course, because we're not them, we're just certainly pleased
their in it. I'm not sure what your second question was but if you keep in mind
how we have played, in this sandbox, is we're a real estate company.
So, for instance, in our model, we have never provided a distance center or
another realtor from another brand, to work with us on either a selling side or
buy side because any discount has always come from our side, and we provide
other real estate person a full cove broke . So, hopefully, if not just because
it's the right thing, to do the right thing for consumers, a realtor would do
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
it because there's no disincentive to do business with us. So, there are really
no issue with us being out there as part of the community.
And by the way, you can't stop a real estate company from getting a listing
by the way. Their listing is in the hands of the consumer and it's up to you to
present to them why you're the right company to stick your sign in their yard
and represent them on the sale side because you're going to expose them to the
complete MLS, I presume, which is a good thing to do. You're going to hold open
houses; you're going for their best interest.
MARK NICHOLSON: Right. It's actually cause it- it's in an article- I mean it
might have been just one local market in Tulsa- an article in Money Magazine.
And it just basically seemed to imply that, that if a discount broker was -- if
they were given a listing, that traditional brokers just wouldn't show it.
ERIC DANZIGER: Yes. Two things, that's that the Oklahoma thing I talked about
and two is a discount broker is not what we are by the way. And that's that
limited service issue where the claim is somebody get you here that's going to
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
drive by the house every four days, representing me. I'm just using that
illustratively, of course. Should not be compensated in the same level blah,
blah, blah. That's very different from what we are.
We are a full service brokerage, and our financial model has to do with our
efficiencies so, it really is a very, very different thing. For a realtor at a
full service brokerage, to block us out of showing their houses in example, is a
huge disservice to their customer, morally wrong, ethically wrong, just plain
wrong and it's because we're full service. So, it's very different discussion,
Mark.
MARK NICHOLSON: Okay. And then just on, did you -- I might have missed it --
but did you guys say how many agents you hired, that you added this quarter?
ERIC DANZIGER: Yes, we said in the first quarter, we net added 69 agents, and
then since April 1, we net added 120.
MARK NICHOLSON: I don't know if you did it in the past, did you disclose the
gross number of agents you added?
MARK NICHOLSON: Andthen just in terms - how do you guys measure the
productivity? Is that like -you know- the basis-every month or every week or
just like what's kind of the denominator?
GARY BEASLEY: It's the total number of closed transactions in the quarter
divided by the number of by the beginning agent count. And then you turn that
into a monthly figure by dividing that by three.
OPERATOR:
[Operator Instructions]
Our next question comes from Derrick Brown of Pacific Gross Equities.
DERRICK BROWN, ANALYST, PACIFIC GROSS EQUITIES: Hi. Thank you. Different
questions, first relates to productivity and just kind of a follow-up. Is it
reasonable to look at Q1 as kind of the trough in agent productivity, just given
the cycle of the hiring that you guys have done? Also, you're obviously pretty
focused on growing the agents now but have also changed what you're looking for
and I'm wondering if you could kind of delve into what the parameters of the
ideal agents are today and what they were maybe a year ago. So, kind of how your
evolutions has changed what you're looking for and what the kind of, the hit
ratio is out there in terms of people that actually have the attributes you're
looking for. And then I guess (inaudible) any changes that you guys are noticing
on the competitive landscape.
ERIC DANZIGER: Great. With all those questions and the way I give long
answers, we'll be here till dinnertime but let me take one of them and then Gary
will answer the first one. Let me take the middle one which is the profile of
the agent. Look. That's something that we are continually involved. Our profile
is different now than to last year, and frankly it's different than 6 months ago
and it's something that I expect our newbie ps staffing to work on specifically
as well for our future, kind of identifying the perfect Zipenstein , let's say
for lack of a better work .
And I think what I say to you because it's such a different model, this kind
of goes to that churn thing as well by the way, is a company is known by the
hirers and the fires that it has. In other words, we bring a lot of people in
but some churn is good churn as we say around here, because we're trying to find
some right people to fit our company truly customer service-oriented people,
technology-oriented people, responsive-oriented people.
I don't know if you've read the studies lately about the average
responsiveness from the real estate industry is pathetic, it's horrible. Well,
that doesn't work for us, and so our management system doesn't allow that to
happen and a lot of stuff.
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
So, it's a long windup, Derrick , to say that what our safety is, we're
continuing to refine it and what we are finding is that generally speaking, sort
of a sweet spot for us tends to be newly licensed, or more in the one, two-year
license range. So, they've got some craft understanding and they've been
licensed. They from another background, selling software as an example, and even
better in a corporate environment.
So, as we profile, we look for those kinds of people and then present to them
opportunities to make a lot of money. Part 2 of the recruiting, going out to the
field, and what we'll continue to evolve with this addition of resources we're
putting, think about -- you know currently because you got to have a license to
work in real estate, you're sort of limited to fishing in the pond where license
real estate people swim. Well, maybe we've got to go out to colleges and present
why it's okay to work in real estate industry.
It's a great career, and a great money making opportunity and here's a
company the system which would allow you to be hugely successful with great
management career opportunities. So, I think again, the profile has changed from
a year and a half ago, we wanted it, give us all the experienced realtors you
can, to sort of the sweet spot that I just described and I believe we'll evolve
even further in the next year or so. Did that answer that piece of the question?
ERIC DANZIGER: Okay. So, Gary will talk about the first piece.
GARY BEASLEY: Yes, Derrick . I think it's safe to assume that Q1 should be a
trough in terms of productivity. Our guidance -- we spoke to our guidance of
being 1.1 or a bit more for that so, we expect a nice sequential up tick in
Q2-on seasonality.
OPERATOR:
[Operator Instructions]
DON MATTHEWS, ANALYST, PAYTON: Hi. Thanks for taking my call. I had heard you
say on several different occasions that you're business is less interest rate
sensitive than typical residential real estate brokerage. I was wondering if
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
you could explain that for me?
ERIC DANZIGER: Well, two things. What we've said is we've shown charts that
show real estate in a high interest environment, not so much (inaudible), so
what we've talked about is that over what is it, Gary, 23rd a year since 1973
that the average price has gone up? I mean, what's the fact here, that interest
rates have not really materially affected real estate, the industry.
GARY BEASLEY: Yes. Well, real estate pricing has increased every year since
1970, and while the transaction, the volume of transaction does flux some and in
during some high interest spikes could be affected dramatically. There are a lot
of years where there's actually been sort of a correlation that you would not
expect between interest rates and volume of transactions. So, there's certainly
not a perfect correlation.
GARY BEASLEY: Right. Or the prices, I think what have gone on record and said
is well, we're not prognosticators, we do not expect there to be continued
growth on the order of 15 or 20% in pricing, which we've seen in some of our
markets. Over the long term, residential real estate tends to appreciate 5 to 7%
and we've been in a period of rapid price growth and overtime, that's going to
moderate in the market.
ERIC DANZIGER: Don, so you think about what we've called the great American
dream. Of course, we didn't come up with that phrase but that's how we talk
about the decision to buy a house. You know, I mean, it's funny, I bought a home
-- I'm sure many of you on the phone did -- when interest rates were 19% because
my kids wanted to be in a home instead of an apartment, those sorts of things.
So the fact that interest rates today are 5, 6, 7, whatever, is certainly not
a de-motivation for immigrants who come into the country and say I want to buy a
home, or people who get married that want a home or have kids, so there really
is not a direct correlation to that. But I didn't mean that as a our company
statistic, it's a real estate's statistic.
ERIC DANZIGER: Yes, and I think we'll take one more question and sign off.
Yes?
OPERATOR: And our final question will be from Philip Lamaru (ph) of Lamaru
Investments.
ERIC DANZIGER: Well, hi Phil , and thank you for asking the question. I guess
what our safety is; our core business today is residential homes. And that is
kind of evolving, and it's kind of one of the exciting things about our growth
opportunities. We represent buyers and sellers for their homes, and a few
Q1 2005 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
times that has been a delightful experience in terms of the upper - we sold a
7.7-million-dollar home. We represented a buyer who bought a 7.7-million-dollar
home. That once was an outliner, now, all of a sudden, there's a significant not
- no let me take that back and not say significant.
There's a growing number of larger price homes that are part of our
portfolio, just because our business proposition works for everyone. Now, there
have been lots of discussions around, where do we want to take the natural
evolution and two comments I want to make, there was an article not long ago, I
can't remember who that said 20% of the numbers of homes that are bought today
are bought as second homes or investment homes. So, certainly that whole
business is something we want to attach to what we do, and in fact, do attach to
what we do. So, we have people in our markets who got 1031 exchanges and all
those sorts of things that are helpful.
We have indeed done a few multi-unit transactions and so I've stop there now
and say though that to the extent we wanted to springboard into that as a major
core business, multi-homes, commercial or whatever, we would go about it in
terms of a thoughtful develop of business plan added on not just do it because
t came up because as you know, we want to do things well and profitably.
ERIC DANZIGER: Thanks, Phil. I appreciate it. All right. I think that
probably is a wrap for today. We're very grateful and appreciative of everyone
taking time to not only follow the company and join us today for the call to
hear what's up and we'll look forward to staying in touch with you. Thanks for
calling in.
OPERATOR: That concludes conference call. You may disconnect at this time.
FOCUS - 23 OF 23 STORIES
TRANSCRIPT: 021005au.790
BODY:
OPERATOR: Good day and welcome to the ZipRealty, Inc. fourth-quarter 2004
earnings conference call. Today's call is being recorded. At this time, all
participants have been placed in a listen-only mode, and the floor will be open
for your questions following the presentation.
TOM RYAN, IR, ZIPREALTY, INC.: Thank you very much. Good afternoon, and
thank you for joining us today to discuss ZipRealty 's fourth-quarter results.
With me on the call today is Eric Danziger, President and CEO; and Gary Beasley,
CFO.
Before we begin, I would like to note that during the course of this call,
various remarks that are made about future expectations, plans and prospects for
the Company constitute forward-looking statements for the purposes of the Safe
Harbor provision under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from expectations, plans and prospects
contemplated in these forward-looking statements, as a result of various
factors, including those discussed in the Company's amended registration
statement filed on November 8, 2004.
With that out of the way, I'll turn the call over to Eric.
ERIC DANZIGER, PRESIDENT, CEO, ZIPREALTY, INC.: Great. Thanks, Tom. I'd like
to begin by welcoming everyone to our first earnings call as a public company.
We are very proud of our results, and we believe that they are a testament not
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
only to the strength of our business model, but reflect the infrastructure
investments and growth initiatives we have directed over the past few years.
Before we get into a detailed discussion of the numbers, I would like to take
a moment to explain just who we are, for those of you new to ZipRealty.
ZipRealty was founded in 1999, and is a full-service residential real estate
brokerage firm. We use the Internet, proprietary technology, a management
system, and informed employee agents to provide all buyers and sellers with
information, service and value. Our solution includes a sophisticated website
that empowers home buyers and sellers with direct access to Multiple Listing
Services or MLSs, as well as personalized information relevant to making a home
purchase or sale. The MLS listings, which traditionally have not always been
available in a comprehensive fashion to consumers, aggregate all current
MLS-listed properties for sale in a given market. They list prices and other
details relevant to this buy-or-sell decision.
The power of our front-end system, which includes very rich customer data
such as mapping, sold data, school data and much more, combined with
sophisticated customer relationship management tools, enable our clients and our
agents to be more efficient than they would be in a typical traditional
environment. This enables ZipRealty to be a low-cost alternative to traditional
brokerage firms by about 100 basis points, on average.
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
With this cost advantage and this incredible information, we are in a
position to attract a steady stream of potential agents, which is a key driver
of our financial performance. Once they are hired and trained, they focus on
what is really important -- which is, to us, the customer. In fact, our agents'
single goal is to make the customer experience a good one, whereas in some of
our competitors' case, they may compromise that experience because of the
jiggling between current transaction activities and the need for that agent to
generate future leads. That's something our agents don't have to do. Again,
through our website, we provide all the leads our agents need, so they can focus
on the transaction and the customers at hand. I think that creates a great
brand, and ultimately, we believe, creates a lot of repeat and referral business
-- very, very valuable ROI opportunity.
With that as the initial backdrop, I would like now to turn it over to Gary
so he can run through our financial results in a bit more detail.
GARY BEASLEY, EVP, CFO, ZIPREALTY, INC.: Thanks, Eric. Net revenues in the
fourth quarter of fiscal 2004 were 17.5 million, an 89 percent increase from 9.3
million in the fourth quarter of 2003. In terms of profitability, net income for
the fourth quarter was approximately $900,000, compared to approximately 200,000
last Q4. Our substantial revenue growth was driven both by increased transaction
he quarter, transaction volume increased 67 percent, with 2,337 transactions clo
sed during
the three months, compared to 1,402 in the same period in 2003. This gain was
driven by the ongoing addition of ZipAgents, as we ended 2004 with 914, up from
782 agents at the end of the third quarter, and up from 440 at the end of last
year. Average net revenue per transaction increased to $7,308 in Q4, up 13
percent from the same period last year.
For the year, average net revenue per transaction was $7,147, representing an
18 percent increase over the prior period. This gain was driven in part by
overall price depreciation in the residential real estate market, as well as
ZipRealty's success in increasing its market penetration of high-end homes.
I would like to note that our revenue per transaction has also benefited from
our strategy to reduce consumer rebates to 20 percent of our commission in early
2004, from what was as high as 33.3 percent back in 2002. As evidenced by the
steadily growing demand for our services, we found that lowering the rebate
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
did not result in material push-back from our customers, as we felt were largely
competing against ourselves in this area. As you may know, other real estate
firms typically do not offer buy-side rebates. While there may be an opportunity
at some point down the line to further modify the rebate, as we build our brands
and compete on service, we have no plans to modify the rebate level in the near
future.
Moving to the expense side of the P&L, our cost of revenues in Q4 was $9.5
million or 54 percent of revenues, versus 5.2 million or 56.2 percent of
revenues for the same period a year ago. We expect gross margins to remain in
this 45 to 46 percent range on a going-forward basis.
On a GAAP basis, earnings per diluted share were 1 cent, compared to 0 for
the fourth quarters of 2004 and 2003, respectively. More importantly, pro forma
diluted net income per share was 4 cents, compared with 1 cent for the same
period, and we are very pleased with this result. Pro forma net income per share
calculations are included, as they reflect our post-IPO capitalization
structure, and as such, give effect to the conversion that occurred upon the IPO
of all of the Company's convertible preferred stock into common. Note that for
2005 and beyond, there is no need to report pro forma figures in this area, as
stence of the preferred stock went awaywhen we went public.
Turning to the balance sheet, we ended the quarter with 83.5 million in cash.
We have no long-term debt, inventory costs or material accounts receivable
exposure.
We budgeted half of our CapEx for the year -- or about $1 million -- in Q1,
principally to increase our server capacity and also to outfit our localized
agent training facilities to support our move from centralized to field
training.
For the full year 2005, we expect revenues to range between $97 million and
$102 million. We anticipate reporting earnings per share in the range of 36
cents to 40 cents for the full year. Finally, our CapEx for the year is expected
to be approximately $2 million.
Please note that our guidance is untaxed (ph), due to the fact we have
accumulated roughly 46 million in federal operating loss carryforwards over the
years as we've built the business. Accordingly, we will not pay a material
amount of cash taxes at the federal level until we have generated enough
cumulative profits to exhaust these carryforwards. It's inevitable, however,
that ZipRealty -- that we will, provided we maintain our positive trajectory,
will recognize our deferred tax assets, resulting in a material one-time
non-cash item on our P&L. This will also force us to incorporate an income tax
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
expense of roughly 40 percent.
We expect to end the year with between 1,200 and 1,300 agents for an average
net revenue per transaction flat to slightly down in 2005, relative to 2004.
This is due to what we believe to be a slowing increase of national housing
prices, and also due to a slight mix shift. Closed transactions per agent per
month are expected to approximate 1.1 to 1.2, as we expect to continue to
generate agent productivity that is significantly higher than industry averages.
Late last year, we made the strategic decision to significantly front-load
our hiring during the fourth quarter, in an attempt to increase our base of
seasoned agents for the spring buying season, which begins in earnest in March
and April. To that end, we added 132 agents during Q4, who are in their ramp-up
period this quarter. While the productivity of rookie agents is typically
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
below the Company average, increased productivity ties directly to higher tenure
and agent benefits from our intensive training program, and begin converting
leads into transactions. As such, we would anticipate improving productivity
from recently hired agents to correlate with the seasonally strong second and
third quarters.
With that, I would like to turn the call back over to Eric for closing
thoughts.
ERIC DANZIGER: Great. Thanks, Gary. While we remain excited about the
Company's future, I would like to underscore that these opportunities are
supported by our accomplishments to date. Thanks to the recruiting
infrastructure we developed this past year, we can expect ongoing growth in
agent headcount. And in addition to that growth, we continue to focus on
quality. We are an operating company. So in 2005, we will simply stick to what
got us here, and we will execute against our plan in our markets. We are, after
all, building a brand.
Finally, before turning over the call to Q&A, I just want to leave you with a
few final thoughts on ZipRealty. First, on a commission basis, we currently
have, on average, less than 0.5 percent share in our markets and less than 0.1
percent share of the $60 billion national market -- which, by the way, suffers
from high levels of customer dissatisfaction. This is an industry, frankly, I
feel has been built more around the realtor that it has the customer, and we
feel compelled to change that equation. Our customer satisfaction ratings for
the year were the highest in the Company's history, despite this significant
growth, with an overall client satisfaction rating of 94 percent. We believe
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
that is nearly three times the national average. Here at ZipRealty, it is about
the customer. Now, we are not saying that we are eBay or Amazon, but we do think
we are an agent of change in the real estate industry, much like Amazon and eBay
are agents of change in their industries.
Second, we are building a great brand. Now, unlike most of our competitors
who are franchisors, our employees work for us, and we control the training,
support and best practices, which equates to controlling the brand. The customer
works directly with the brand, not just an independent contractor who has a
loose affiliation with a brand. And that makes all of the difference.
Third, I would like to reiterate that our company is unique. And, while it
faces its own risks, it lacks many of the risks associated with the traditional
business model. As Gary indicated, we have no debt, no inventory, no accounts
receivable risk. And in terms of our economics, we're a transaction-based model,
which results in a very straightforward accounting and high free cash flow. This
leads to a high degree of leverage, which is illustrated in our 400-plus percent
growth in net income on our nearly 90 percent growth in revenues for the
quarter.
Finally, we're committed to running the Company for the long-term benefit of
our stockholders. To that point, we feel comfortable with our financial
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
outlook and expected long-term growth. We aren't going to manage earnings to the
penny, however; rather, we will my common-sense investments in the business when
we believe it will best position us for continued growth and expansion.
With that, I'd like to thank you all very much for listening this afternoon,
and open up the call to Q&A.
Second, as you look at the agents that you have added and the expansion into
have you set (ph) (technical difficulty) Las Vegas
at this point, or talked about how many agents you plan to have, as you get into
the spring selling season? And I have a couple of follow-ups.
GARY BEASLEY: And in terms of how much revenue closed early, I would say it
was about $0.5 million.
JEETIL PATEL: Just have a couple follow-up questions -- one, can you talk
about how the recruitment process is going today, in terms of with the
And then, second, can you speak to the early returns on productivity from
your Q4 '04 vintage (ph) from an open transaction standpoint or closed
transaction standpoint?
ERIC DANZIGER: I'll do the first, Gary will do the second again. Recruiting
is, first of all, a key fundamental driver of our business. It's something that
we continually work on. This year over last, as an example, we are really
excited. We have moved -- in each district, there is a full-time recruiter in
the field, which was not the case last year at this time. We had seven
recruiters based in the corporate office; now there are 15 based in the field.
There's remote field training facilities as well, and frankly it's just part of
brand-building. As the brand becomes better known, as more agents are very
successful in the Company, there is a normal inertia that starts to bring to the
table better agents, frankly. So we are always striving to do a better job of --
whether it's testing at the beginning or overtly recruiting, we're trying to do
a better job of getting the right person in, which, of course, is to everyone's
betterment, in terms of reduction of turnover, being sure we are creating that
long-term association which, then, productivity does increase.
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
So what I would say to you is I can tell you just by my own personal
observations -- as well, by the way, as looking in our training room here, every
week we have any a new training class here in Atlanta and some other districts
-- that we are really pleased with the progress of their recruiting effort, in
terms of not only numbers, which is significant, but the quality of agents
coming in.
GARY BEASLEY: To the point of productivity of those people, it's a bit early
to tell, quite honestly, because we brought these people on around the holiday
season. And we are just starting to get into the time of year when we sort of
make hay. And what we can tell you, though, is the people -- we feel very, very
good about the quality of people we have, and the way that they are working
their platforms. And we think that's beginning to translate, I think, into some
good traction. But we will know a heck of a lot more on the next quarterly call
about how that class is doing.
JEETIL PATEL: And then, can you talk about maybe Q3 and how that is producing
in Q4?
GARY BEASLEY: Q3 hires, I think, slicing it that way, uniformly was a very
good class, relative to if you seasonally adjust and look at new hires, say,
from last Q3.
BEN SCHACTER, ANALYST, UBS: The 914 that you ended with -- I'm just wondering
if that's about in line with expectations, or was there better retention than
you might have thought, or better recruiting?
And then, secondly, the average revenue per transaction, also, was that about
where you expected it to be? And going forward, do you think we should keep it
at right around the same number that is the average for the year, or should we
keep our number more where it came in, in Q4? And then I have a follow-up after
that.
GARY BEASLEY: Let start off with where we ended up. We ended up a bit higher
than we had planned, for two reasons, at the end of the year. One, we recruited
a bit more successfully in Q4 then we thought we would be able to. That's
usually a harder time to recruit, but I think partially because of the IPO, we
Q4 2004 ZIPREALTY INC Earnings Conference Call - Final FD (Fair
FOCUS
had some good exposure, a lot more inbound calls from agents. So we had more
hires.
We also had a record low turnover quarter. Now, as you all know, we don't
report turnover specifically; we report net agent growth. But our turnover was
the lowest quarter we have ever experienced, and we did show nice improvement
year over year, 2004 to 2003, in terms of turnover. So I think we are feeling
good that we are pointed in the right direction, in terms of agent count growth.
And, I'm sorry, what was your second?
BEN SCHACTER: The average revenue per transaction. The number going forward
for '05 -- should it be more the average for '04, or should we basically keep it
steady at where it ended up the year, 7,300?
ERIC DANZIGER: Hard to say, Ben. We focus on doing what we do very, very
well. We will get Vegas off. We obviously have sort of a timeline that we spread
out through the summer and fall months, to the extent we pull the trigger on
them.
DEREK BROWN, ANALYST, PACIFIC GROWTH EQUITIES: Actually, this is Derek Brown,
and my question relates to the cost of marketing and customer acquisition.
There's been a lot of chatter that just in general online ad prices have been
going up. And I'm wondering if you have seen that hit your business; if so,
where? And can you quantify, if not, do you think it's just a matter of time?
GARY BEASLEY: As you know, we don't want to get too granular about customer
acquisition for competitive reasons, in terms of numbers of leads and actual
cost per lead. But what we can tell you is that historically, we have been at
about 14 to 15 percent of revenues. And that's our goal, to kind of stay in that
15 percent range, plus or minus a little bit, depending on the time of the year
we are in.
JAKE FULLER, ANALYST, THOMAS WEISEL: I think that about covered it.
ERIC DANZIGER: No, it's pretty much the way it always has been. As you may
recall, we sort of managed to that level. We like being largely buyers. It's a
great place to focus, it's a great commodity, as markets cooldown, that you have
this buyer when everyone else is working on sellers.
So, yes, we are working on it, but we are never going to push the pendulum to
focus extraordinarily on that. But you will start to see slight movement from
the proverbial 80/20, which has sort of been our mix, buy to sell, for the last
five years.
OPERATOR: At this time, there are no further questions. Mr. Danziger, I'll
turn the call back over to you.
ERIC DANZIGER: Thank you. Well, thank you, everyone, for listening in today
and joining us. We are happy to be doing this with you today, and we will look
forward to chatting with you again certainly at next quarter. And we will keep
you posted on the developments. Thank you, and have a great day.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies may indicate and believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate or incorrect and, therefore, there can be no
assurance that the results contemplated in the forward-looking statements will
be realized.