Zillow Group, Inc.
ZILLOW INC (Form: 10-Q, Received: 05/04/2012 15:34:46)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended March 31, 2012

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-35237

 

 

ZILLOW, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Washington   20-2000033

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1301 Second Avenue, Floor 31, Seattle, Washington   98101
(Address of principal executive offices)   (Zip Code)

(206) 470-7000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of April 30, 2012, 20,163,871 shares of Class A common stock and 8,657,126 shares of Class B common stock were outstanding.

 

 

 


Table of Contents

ZILLOW, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended March 31, 2012

TABLE OF CONTENTS

 

          Page  
   PART I – FINANCIAL INFORMATION   

Item 1.

  

Financial Statements (unaudited)

     2   
  

Condensed Balance Sheets

     2   
  

Condensed Statements of Operations

     3   
  

Condensed Statements of Cash Flows

     4   
  

Notes to Condensed Financial Statements

     5   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     13   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     22   

Item 4.

  

Controls and Procedures

     23   
   PART II – OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     24   

Item 1A.

  

Risk Factors

     25   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     26   

Item 6.

  

Exhibits

     27   
  

Signatures

     28   

 

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As used in this Quarterly Report on Form 10-Q, the terms “the Company,” “we,” “us” and “our” refer to Zillow, Inc., unless the context indicates otherwise.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including but not limited to, our ability to maintain and effectively manage an adequate rate of growth; the impact of the real estate industry on our business; our ability to innovate and provide products and services that are attractive to our users and advertisers; our ability to increase awareness of the Zillow brand; our ability to maintain or establish relationships with listings and data providers; our ability to attract consumers to our websites and mobile applications; our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments; our ability to compete successfully against existing or future competitors; the reliable performance of our network infrastructure and content delivery process; and our ability to protect our intellectual property. Further discussion of factors that may affect our business and results of operations is included in Part 1, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2011. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

ZILLOW, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share data, unaudited)

 

     March 31,     December 31,  
     2012     2011  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 54,300      $ 47,926   

Short-term investments

     28,780        28,925   

Accounts receivable, net of allowance for doubtful accounts of $702 and $683 at March 31, 2012 and December 31, 2011, respectively

     6,140        5,638   

Prepaid expenses and other current assets

     2,151        3,214   
  

 

 

   

 

 

 

Total current assets

     91,371        85,703   

Long-term investments

     15,230        15,285   

Property and equipment, net

     8,484        7,227   

Goodwill

     3,676        3,676   

Intangible assets, net

     4,289        4,532   

Other assets

     223        245   
  

 

 

   

 

 

 

Total assets

   $ 123,273      $ 116,668   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 1,268      $ 1,681   

Accrued expenses and other current liabilities

     4,173        4,893   

Accrued compensation and benefits

     1,838        1,587   

Deferred revenue

     6,533        5,769   

Deferred rent, current portion

     62        60   
  

 

 

   

 

 

 

Total current liabilities

     13,874        13,990   

Deferred rent, net of current portion

     1,756        1,347   

Other non-current liabilities

     —          118   

Commitments and contingencies (Note 11)

    

Shareholders’ equity:

    

Preferred stock, $0.0001 par value; 30,000,000 shares authorized as of March 31, 2012 and December 31, 2011; no shares issued and outstanding as of March 31, 2012 and December 31, 2011

     —          —     

Class A common stock, $0.0001 par value; 600,000,000 shares authorized as of March 31, 2012 and December 31, 2011; 20,025,528 and 18,580,292 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

     2        2   

Class B common stock, $0.0001 par value; 15,000,000 shares authorized as of March 31, 2012 and December 31, 2011; 8,703,126 and 9,528,313 shares issued and outstanding as of March 31, 2012 and December 31, 2011

     1        1   

Additional paid-in capital

     183,523        178,817   

Accumulated deficit

     (75,883     (77,607
  

 

 

   

 

 

 

Total shareholders’ equity

     107,643        101,213   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 123,273      $ 116,668   
  

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

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ZILLOW, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)

 

     Three Months Ended
March 31,
 
     2012      2011  

Revenue

   $ 22,833       $ 11,260   

Costs and expenses:

     

Cost of revenue (exclusive of amortization) (1)

     3,350         1,817   

Sales and marketing

     8,315         5,484   

Technology and development

     5,030         2,996   

General and administrative

     4,445         1,828   
  

 

 

    

 

 

 

Total costs and expenses

     21,140         12,125   
  

 

 

    

 

 

 

Income (loss) from operations

     1,693         (865

Other income

     31         39   
  

 

 

    

 

 

 

Net income (loss) attributable to common shareholders

   $ 1,724       $ (826
  

 

 

    

 

 

 

Net income (loss) per share attributable to common shareholders — basic

   $ 0.06       $ (0.06

Net income (loss) per share attributable to common shareholders — diluted

   $ 0.06       $ (0.06

Weighted-average shares outstanding — basic

     28,348         13,347   

Weighted-average shares outstanding — diluted

     30,994         13,347   

 

(1)    Amortization of website development costs and intangible assets included in technology and development is as follows:

   $ 2,004       $ 1,223   

See accompanying notes to condensed financial statements.

 

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ZILLOW, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

     Three Monds Ended
March 31,
 
     2012     2011  

Operating activities

    

Net income (loss)

   $ 1,724      $ (826

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     2,336        1,526   

Share-based compensation expense

     1,418        390   

Loss on disposal of property and equipment

     63        20   

Bad debt expense

     99        21   

Deferred rent

     411        (35

Amortization (accretion) of bond premium (discount)

     199        (2

Changes in operating assets and liabilities:

    

Accounts receivable

     (601     234   

Prepaid expenses and other assets

     1,085        (1,259

Accounts payable

     (413     517   

Accrued expenses

     (587     1,420   

Deferred revenue

     764        1,478   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,498        3,484   

Investing activities

    

Proceeds from maturities of investments

     —          500   

Purchases of investments

     —          (3,498

Purchases of property and equipment

     (2,525     (1,236

Purchases of intangible assets

     (504     (130

Acquisition, net of cash acquired

     —          (1,000
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,029     (5,364

Financing activities

    

Proceeds from exercise of Class A common stock options

     2,905        657   
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,905        657   

Net increase (decrease) in cash and cash equivalents during period

     6,374        (1,223

Cash and cash equivalents at beginning of period

     47,926        12,278   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 54,300      $ 11,055   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Noncash transactions:

    

Capitalized share-based compensation

   $ 383      $ 101   

Class A common stock issued in connection with an acquisition

   $ —        $ 910   

Deferred offering costs not yet paid

   $ —        $ 976   

See accompanying notes to condensed financial statements.

 

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ZILLOW, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 1. Organization and Description of Business

Zillow, Inc. was incorporated as a Washington corporation effective December 13, 2004. We operate a real estate information marketplace dedicated to providing vital information about homes, real estate listings and mortgages and enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals.

Certain Significant Risks and Uncertainties

We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: rates of revenue growth; engagement and usage of our products; scaling and adaptation of existing technology and network infrastructure; competition in our market; management of our growth; acquisitions and investments; qualified employees and key personnel; protection of our brand and intellectual property; changes in government regulation affecting our business; intellectual property infringement and other claims; protection of customers’ information and privacy concerns; and security measures related to our websites, among other things.

 

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes as of and for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 2, 2012. The condensed balance sheet as of December 31, 2011, included herein, was derived from the audited financial statements as of that date.

The unaudited condensed interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of March 31, 2012, our results of operations for the three months ended March 31, 2012 and 2011, and our cash flows for the three months ended March 31, 2012 and 2011. The results of the three month period ended March 31, 2012 are not necessarily indicative of the results to be expected for the year ended December 31, 2012 or for any other interim period or for any other future year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Estimates are used for revenue recognition, the allowance for doubtful accounts, website development costs, goodwill, recoverability of intangible assets with definite lives and other long-lived assets and for share-based compensation. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.

Recently Issued Accounting Standards

In May 2011, the FASB amended existing rules covering fair value measurement and disclosure to clarify guidance and minimize differences between GAAP and International Financial Reporting Standards (“IFRS”). The guidance requires entities to provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. The guidance is effective during interim and annual periods beginning after December 15, 2011. We adopted this guidance on January 1, 2012. The adoption of this guidance did not have any impact on our financial position, results of operations or cash flows.

In June 2011, the FASB issued guidance on the presentation of comprehensive income to increase the prominence of other comprehensive income in the financial statements. An entity has the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. This guidance is effective for interim and annual

 

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reporting periods beginning after December 15, 2011, with earlier adoption permitted, and must be applied retrospectively. We adopted this guidance on January 1, 2012. The adoption of this guidance did not have any impact on our financial position, results of operations or cash flows as we do not have any items of other comprehensive income in any period presented and therefore we are not required to report other comprehensive income or comprehensive income.

In September 2011, the FASB issued guidance on testing goodwill for impairment to permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for fiscal years beginning after December 15, 2011, with earlier application permitted. We early adopted this guidance for our annual goodwill impairment test performed in our fourth quarter of 2011. The early adoption of this guidance did not have any impact on our financial position, results of operations or cash flows.

 

Note 3. Fair Value Measurements

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.

 

   

Level 3 — Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

We applied the following methods and assumptions in estimating our fair value measurements:

Cash equivalents — Cash equivalents are comprised of highly liquid investments, including money market funds and certificates of deposit with original maturities of less than three months. The fair value measurement of these assets is based on quoted market prices in active markets and, therefore, these assets are recorded at fair value on a recurring basis and classified as Level 1 in the fair value hierarchy.

Short-term and long-term investments — Our investments consist of fixed income U.S. government agency securities. The fair value measurement of these assets is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means, and therefore is classified as Level 1 in the fair value hierarchy. Our government agency securities are classified as held-to-maturity and are recorded at amortized cost, as we do not intend to sell the investments, and it is not more likely than not that we will be required to sell these investments prior to maturity. The amortized cost of our government agency securities approximates their fair value.

The following table presents the balances of assets measured at fair value on a recurring basis as of the dates presented (in thousands), all of which are classified as Level 1 in the fair value hierarchy:

 

     March 31,
2012
     December 31,
2011
 

Cash equivalents:

     

Money market funds

   $ 31,274       $ 24,201   

Certificates of deposit

     20,000         20,000   

Short-term investments:

     

Fixed income government agency securities

     28,780         28,925   

Long-term investments:

     

Fixed income government agency securities

     15,230         15,285   
  

 

 

    

 

 

 

Total

   $ 95,284       $ 88,411   
  

 

 

    

 

 

 

We did not have any Level 2 or Level 3 assets or liabilities measured at fair value on a recurring basis as of March 31, 2012 or December 31, 2011.

 

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Note 4. Accounts Receivable, net

The following table presents the detail of accounts receivable as of the dates presented (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Accounts receivable

   $ 6,842      $ 6,321   

Less: allowance for doubtful accounts

     (702     (683
  

 

 

   

 

 

 

Accounts receivable, net

   $ 6,140      $ 5,638   
  

 

 

   

 

 

 

 

Note 5. Property and Equipment, net

The following table presents the detail of property and equipment as of the dates presented (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Computer equipment

   $ 9,628      $ 9,265   

Website development costs

     25,948        23,410   

Leasehold improvements

     585        519   

Software

     1,400        1,367   

Construction-in-progress

     1,303        1,629   

Office equipment, furniture and fixtures

     1,218        1,051   
  

 

 

   

 

 

 

Property and equipment

     40,082        37,241   

Less: accumulated amortization and depreciation

     (31,598     (30,014
  

 

 

   

 

 

 

Property and equipment, net

   $ 8,484      $ 7,227   
  

 

 

   

 

 

 

We recorded amortization and depreciation expense related to property and equipment other than website development costs of $0.3 million and $0.3 million, respectively, during the three months ended March 31, 2012 and 2011.

We capitalized $2.3 million and $1.1 million, respectively, in website development costs during the three months ended March 31, 2012 and 2011. Amortization expense for website development costs included in technology and development expenses was $1.3 million and $1.0 million, respectively, during the three months ended March 31, 2012 and 2011.

Construction-in-progress primarily consists of website development costs that are capitalizable, but for which the associated applications had not been placed in service.

 

Note 6. Intangible Assets

The following table presents the detail of intangible assets subject to amortization as of the dates presented (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Purchased content

   $ 5,654      $ 5,150   

Developed technology

     2,635        2,635  

Customer relationships

     724        724  

Trademarks

     461        461  
  

 

 

   

 

 

 

Intangible assets

     9,474        8,970   

Less: accumulated amortization

     (5,185     (4,438
  

 

 

   

 

 

 

Intangible assets, net

   $ 4,289      $ 4,532   
  

 

 

   

 

 

 

Amortization expense recorded for intangible assets for the three months ended March 31, 2012 and 2011 was $0.7 million and $0.3 million, respectively. These amounts are included in technology and development expenses.

 

Note 7. Income Taxes

We are subject to federal income taxes in the United States. During the three months ended March 31, 2012 and 2011, we did not have taxable income, and we are not projecting taxable income for the year ending December 31, 2012, and, therefore, no tax liability or expense has been recorded in the financial statements. We have accumulated tax losses of approximately $68.6 million as of December 31, 2011, which are available to reduce future taxable income.

 

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Note 8. Shareholders’ Equity

Common Stock

Upon the effectiveness of the our registration statement on July 19, 2011, all of the outstanding shares of convertible preferred stock and all of the outstanding shares of Class C common stock automatically converted into 9,276,190 and 2,305,980 shares of Class A common stock, respectively. Our Class A common stock has no preferences or privileges and is not redeemable. Holders of Class A common stock are entitled to one vote for each share.

Our Class B common stock has no preferences or privileges and is not redeemable. At any time after the date of issuance, each share of Class B common stock, at the option of the holder, shall be converted into one share of Class A common stock, or automatically converted upon the affirmative vote by or written consent of holders of a majority of the shares of the Class B common stock. During the three months ended March 31, 2012, 825,187 shares of Class B common stock were converted into Class A common stock at the option of the holders. Holders of Class B common stock are entitled to 10 votes for each share.

 

Note 9. Share-Based Awards

Upon execution of the underwriting agreement related to our initial public offering of our Class A common stock (“IPO”) on July 19, 2011, our 2011 Incentive Plan (the “2011 Plan”) became effective. The 2011 Plan is administered by the compensation committee of the board of directors. Under the terms of the 2011 Plan, the compensation committee of the board of directors may grant equity awards, including incentive stock options or nonqualified stock options, to employees, officers, directors, consultants, agents, advisors and independent contractors. After the effective date of the 2011 Plan, all equity awards have been, and will be, granted under the 2011 Plan rather than the Amended and Restated 2005 Equity Incentive Plan (the “2005 Plan”), which was the preexisting plan. On August 5, 2011, we filed a registration statement on Form S-8 under the Securities Act of 1933, as amended (the “Securities Act”), to register 6,816,135 shares of our Class A common stock for issuance under our 2005 Plan and 2011 Plan.

Stock Options

All stock options outstanding under the 2005 Plan and the 2011 Plan are nonqualified stock options. Options under the 2011 Plan are granted with an exercise price per share not less than 100% of the fair market value of our Class A common stock on the date of grant, and are exercisable at such times and under such conditions as determined by the compensation committee. Under the 2011 Plan, the maximum term of an option is ten years from the date of grant. Any portion of an option that is not vested and exercisable on the date of a participant’s termination of service expires on such date. Employees generally forfeit their rights to exercise vested options after 3 months or 12 months following their termination of employment, depending on the reason for the termination. Options granted to date under the 2011 Plan have been granted with seven-year terms. Options granted under the 2011 Plan typically vest 25% after 12 months and ratably thereafter over the next 36 months, except for options granted under the Stock Option Grant Program for Nonemployee Directors (“Nonemployee Director Awards”), which are fully vested and exercisable on the grant date.

The following table summarizes stock option activity for the year ended December 31, 2011 and the three months ended March 31, 2012:

 

     Options
Available
for Grant
    Number
of Shares
Subject to
Existing
Options
    Weighted-
Average
Exercise
Price Per
Share
     Weighted-
Average
Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2010

     1,021,571        5,010,310        4.03         4.48       $ 3,843,806   

Authorized increase in plan shares

     1,477,514        —          —           

Granted

     (1,688,636     1,688,636        10.25         

Exercised

     —          (1,169,115     2.50         

Forfeited or cancelled

     168,575        (168,575     7.05         
  

 

 

   

 

 

         

Outstanding at December 31, 2011

     979,024        5,361,256        6.23         4.51       $ 89,749,207   

Granted

     (830,744     830,744        30.42         

Exercised

     —          (620,049     4.69         

Forfeited or cancelled

     24,448        (24,448     19.69         
  

 

 

   

 

 

         

Outstanding at March 31, 2012

     172,728        5,547,503        9.96         4.83         142,173,170   

Vested and exercisable at March 31, 2012

       2,439,629        5.24         3.49         74,037,507   

 

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The fair value of options granted, excluding Nonemployee Director Awards, is estimated at the date of grant using the Black-Scholes-Merton option-pricing model, assuming no dividends and with the following assumptions for the periods presented:

 

     Three Months Ended
March 31,
 
     2012     2011  

Expected volatility

     51     52

Expected dividend yields

            

Risk-free interest rate

     0.76     1.87

Weighted-average expected life

     4.58 years        4.58 years   

Weighted-average fair value of options granted

   $ 12.91      $ 2.13   

During the three months ended March 31, 2012, stock options for 45,005 shares of our Class A common stock were granted as Nonemployee Director Awards. The fair value of options granted for the Nonemployee Director Awards, $11.52 per share, is estimated at the date of grant using the Black-Scholes-Merton option-pricing model, assuming no dividends, and expected volatility of 51%, a risk-free interest rate of 0.43%, and a weighted-average expected life of 3.5 years. During the three months ended March 31, 2012, share-based compensation expense recognized in our statement of operations related to Nonemployee Director Awards was $0.5 million, and is included in general and administrative expenses.

Restricted Stock

In consideration for the acquisition of substantially all of the operating assets of Diverse Solutions, Inc. (“Diverse Solutions”) under the terms of the asset purchase agreement, Zillow issued to Diverse Solutions 75,000 restricted shares of Zillow’s Class A common stock effective on October 31, 2011. The grant date fair value of the restricted shares is approximately $2.2 million. One-third of the restricted shares will vest and no longer be subject to forfeiture on the first anniversary of the vesting commencement date, which is October 31, 2012, subject to Justin LaJoie’s (the controlling shareholder of Diverse Solutions) continued employment or service to Zillow until such date. The remaining shares will vest ratably over the twenty-four months following such first anniversary, subject to Mr. LaJoie’s continued employment or service to Zillow. In the event of Mr. LaJoie’s termination of service by Zillow without cause or by Mr. LaJoie for good reason, any unvested shares on the date of such termination will become vested and no longer subject to forfeiture.

The fair value of the restricted shares relates to post-combination services and will be recorded as share-based compensation expense over the vesting period. As of March 31, 2012, there was $1.9 million of total unrecognized compensation cost related to the restricted shares.

Share-Based Compensation Expense

The following table presents the effects of share-based compensation expense recognized in our statements of operations during the periods presented (in thousands):

 

     Three Months Ended
March 31,
 
     2012      2011  

Cost of revenue

   $ 85       $ 41   

Sales and marketing

     190         107   

Technology and development

     310         86   

General and administrative

     833         156   
  

 

 

    

 

 

 

Total

   $ 1,418       $ 390   
  

 

 

    

 

 

 

For the three months ended March 31, 2012, the table above includes approximately $0.2 million of share-based compensation expense related to the restricted shares, which was recorded in technology and development expense.

 

Note 10. Net Income (Loss) Per Share Attributable to Common Shareholders

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares (including Class A common stock, Class B common stock and Class C common stock) outstanding during the period. For the three months ended March 31, 2011, no losses were allocated to Series A, B and C convertible preferred shareholders, as these shareholders did not have contractual obligations to share in or fund the losses of the Company. Thus, for the three months ended March 31, 2011, the net loss is allocated entirely to the Class A common stock, Class B common stock and Class C common stock.

 

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Diluted net income (loss) per share attributable to common shareholders is computed by dividing net income (loss) by the weighted-average number of common shares (including Class A common stock, Class B common stock and Class C common stock) outstanding during the period and potentially dilutive Class A common stock equivalents, except in cases where the effect of the Class A common stock equivalent would be antidilutive. Potential Class A common stock equivalents consist of Class A common stock issuable upon exercise of stock options using the treasury stock method, and for the three months ended March 31, 2011, include Class A common stock issued upon the automatic conversion of our Series A, B and C convertible preferred stock on July 19, 2011.

For the three months ended March 31, 2012, 2,579,693 Class A common stock equivalents underlying stock options were included in the computation of diluted net income per share attributable to common shareholders because they had a dilutive impact. For the three months ended March 31, 2012, 66,653 shares of Class A common stock underlying nonvested restricted shares were included in the computation of diluted net income per share attributable to common shareholders as they had a dilutive impact.

For the three months ended March 31, 2011, 5,477,032 shares underlying stock options and 9,276,190 shares of Class A common stock issued upon the automatic conversion of our convertible preferred stock on July 19, 2011 have been excluded from the calculations of diluted net loss per share attributable to common shareholders because their effect would have been antidilutive.

In the event of liquidation, dissolution, distribution of assets or winding-up of the Company, the holders of all classes of common stock have equal rights to receive all the assets of the Company after the rights of the holders of the preferred stock have been satisfied. We have not presented net income (loss) per share attributable to common shareholders under the two-class method for our Class A common stock, Class B common stock and Class C common stock because it would be the same for each class due to equal dividend and liquidation rights for each class.

 

Note 11. Commitments and Contingencies

Lease Commitments

We have various operating leases for office space and equipment. We moved into our current headquarters in Seattle, Washington in August 2011 under an operating lease for which we will be obligated to make escalating monthly lease payments beginning in December 2012 and continuing through November 2022. We lease additional office space in San Francisco, California, Irvine, California, Chicago, Illinois and New York, New York.

The operating lease for our headquarters prior to August 2011 expires in February 2013. As a result of vacating the office space, during the year ended December 31, 2011 we recorded a facility exit charge for $1.7 million related to costs that will continue to be incurred under the operating lease for the remaining term. As of March 31, 2012, there was $1.3 million of accrued facility exit costs included in accrued expenses and other current liabilities.

A summary of activity for the three months ended March 31, 2012 related to the facility exit charge accrual is as follows (in thousands):

 

Balance, beginning of the period

   $  1,541   

Charges and adjustments

     139   

Less: cash payments

     (393
  

 

 

 

Balance, end of period

   $ 1,287   
  

 

 

 

Future minimum payments for all operating leases as of March 31, 2012 are as follows (in thousands):

 

2012

   $ 1,383   

2013

     2,120   

2014

     1,845   

2015

     1,799   

2016

     1,864   

All future years

     12,370   
  

 

 

 

Total future minimum lease payments

   $ 21,381   
  

 

 

 

Rent expense for the three months ended March 31, 2012 and 2011 was $0.5 million and $0.4 million, respectively.

 

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Purchase Commitments

As of March 31, 2012, we had non-cancelable purchase commitments for content related to our websites totaling $8.5 million. The amount due for this content is as follows (in thousands):

 

2012

   $  1,983   

2013

     1,888   

2014

     1,888   

2015

     1,888   

2016

     897   

All future years

     —     
  

 

 

 

Total future purchase commitments

   $ 8,544   
  

 

 

 

Line of Credit and Letters of Credit

In March 2011, we entered into a loan and security agreement with a financial institution to establish a line of credit of $4.0 million, secured by substantially all our assets other than our intellectual property, to be used for general business purposes. The line of credit contains financial and non-financial covenants. As of March 31, 2012, we were in compliance with all covenants. The line of credit is available through March 2013. In March 2011, we executed a standby letter of credit of $1.5 million in connection with the lease of our new Seattle offices and reserved this amount against the line of credit, which reduces the available line to $2.5 million. As of March 31, 2012 there were no other amounts outstanding under the line of credit.

We have four outstanding letters of credit totaling $0.6 million as of March 31, 2012, payable to the landlord of our prior headquarters office in Seattle, Washington, in the event we default on our lease, which expires in February 2013. The letters of credit are secured by our investments and are effective until 60 days after the expiration date of the lease.

Legal Proceedings

There have been no material developments in legal proceedings during the quarter ended March 31, 2012. For a description of previously reported legal proceedings, refer to Part I, Item 3 (Legal Proceedings) of our Annual Report on Form 10-K for the year ended December 31, 2011.

From time to time, we are involved in litigation and claims that arise in the ordinary course of business. Although we cannot be certain of the outcome of any litigation and claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our financial position, results of operations or cash flow. This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of arbitrators, judges and juries. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Note 12. Segment Information and Revenue

We have one reportable segment. Our reportable segment has been identified based on how our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. The chief executive officer acts as the chief operating decision-maker and reviews financial and operational information on an entity-wide basis. We have one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components. Accordingly, we have determined that we have a single reporting segment and operating unit structure.

The chief executive officer reviews information about revenue categories for purposes of allocating resources and evaluating financial performance. The following table presents our revenue categories during the periods presented (in thousands):

 

     Three Months Ended
March 31,
 
     2012      2011  

Marketplace revenue

   $ 16,593       $ 6,881   

Display revenue

     6,240         4,379   
  

 

 

    

 

 

 

Total

   $ 22,833       $ 11,260   
  

 

 

    

 

 

 

 

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Note 13. Subsequent Events

In April 2012, we signed a lease agreement with an initial term of ten years for new corporate office space in Irvine, California. The following table is a schedule of future minimum lease payments for the new corporate office space in Irvine (in thousands):

 

2012

   $ 40   

2013

     320   

2014

     414   

2015

     540   

2016

     557   

All future years

     3,009   
  

 

 

 

Total future minimum lease payments

   $ 4,880   
  

 

 

 

In April 2012, we entered into an agreement for a non-cancelable purchase commitment for content related to our website. The amount due for this content is as follows (in thousands):

 

2012

   $ 458   

2013

     1,100   

2014

     1,142   

2015

     1,242   

2016

     1,342   

All future years

     816   
  

 

 

 

Total future purchase commitments

   $ 6,100   
  

 

 

 

In April 2012, we amended our loan and security agreement with a financial institution to increase our line of credit from $4.0 million to $25.0 million. The line of credit is secured by substantially all our assets, including our intellectual property. The revolving line of credit contains customary financial covenants, including the maintenance of a minimum adjusted quick ratio, measured on a monthly basis, of 1.50 to 1.00, and minimum Adjusted EBITDA, measured on a quarterly basis, of greater than or equal to negative $5.0 million for each quarterly period through December 31, 2012 and greater than or equal to $0 for each quarterly period thereafter. In addition, the revolving line of credit contains restrictions on our ability to, among other things, engage in certain mergers and acquisition transactions and create liens on assets. The line of credit is available through April 2016.

In May 2012, Zillow, RentJuice Corporation, a Delaware corporation (“RentJuice”), Renegade Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of Zillow (“Merger Sub”), and Shareholder Representative Services LLC, acting as the stockholder representative, entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for the acquisition of RentJuice by Zillow. Under the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into RentJuice, with RentJuice remaining as the surviving company and a wholly owned subsidiary of Zillow (the “Merger”). The total Merger consideration payable to RentJuice equity holders is approximately $40 million in cash, less certain transaction expenses and other costs. All vested options to purchase shares of RentJuice’s common stock will be cancelled and, in settlement of such cancellation, the holders of such options will receive cash payments representing a portion of the Merger consideration. A portion of the Merger consideration will be attributed to the substitution of unvested stock options of RentJuice outstanding as of the closing for stock options to purchase shares of our Class A common stock at an exchange ratio implied by the Merger consideration. The Merger is expected to close in the second quarter of 2012. Pursuant to the terms of the Merger Agreement, we have agreed to adopt a retention bonus plan after the closing pursuant to which restricted stock units for 280,978 shares of our Class A common stock will be granted to employees of RentJuice who accept employment with Zillow in proportion to each employee’s total equity holdings in RentJuice prior to the closing of the Merger. Twenty-five percent of each restricted stock unit award will vest on the one-year anniversary of the closing of the Merger and the remainder will vest in substantially equal installments each three-month period thereafter for the next three years, subject to the recipient's continued full-time employment or service to Zillow.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, including in the section titled “Note Regarding Forward-Looking Statements,” and also those items listed in Part 1, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

We are the leading real estate information marketplace. In addition to Zillow.com, we also operate Zillow Mobile, our suite of mobile real estate applications, and Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get the competitive mortgage rates.

Zillow provides information about homes, real estate listings and mortgages through our websites and mobile applications, enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals best suited to meet their needs.

Our living database of more than 100 million U.S. homes — homes for sale, homes for rent and homes not currently on the market — attracts an active and vibrant community of users. Individuals and businesses that use Zillow have updated information on more than 30 million homes and added more than 83 million home photos, creating exclusive home profiles available nowhere else. These profiles include detailed information about homes, including property facts, listing information and purchase and sale data. We provide this information to our users where, when and how they want it through our websites and through our industry-leading mobile applications that enable consumers to access our information when they are curbside, viewing homes. Using industry-leading automated valuation models, we provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on approximately 100 million U.S. homes.

We generate revenue from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals and brand advertisers. Our revenue includes marketplace revenue, consisting of subscriptions sold to real estate agents and advertising sold on a cost per click, or CPC, basis to mortgage lenders, and display revenue consisting of advertising placements sold primarily on a cost per thousand impressions, or CPM, basis.

During the three months ended March 31, 2012, we generated revenue of $22.8 million, as compared to $11.3 million in the three months ended March 31, 2011, an increase of 103%. The increase in revenue is primarily attributable to the increase in our marketplace revenue, which increased $9.7 million, or 141%, to $16.6 million during the three months ended March 31, 2012 from $6.9 million during the three months ended March 31, 2011, as a result of growth in our Premier Agent program. There was a 74% increase in our Premier Agent Subscribers to 18,616 as of March 31, 2012 from 10,710 as of March 31, 2011. We also experienced significant growth in traffic to our websites and mobile applications. There were approximately 31.8 million average monthly unique users of our websites and mobile applications for the three months ended March 31, 2012 compared to 17.3 million average monthly unique users for the three months ended March 31, 2011, representing year-over-year growth of 84%.

As of March 31, 2012, we had 377 full-time employees, compared to 329 full-time employees as of December 31, 2011.

Key Growth Drivers

To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we frequently review the following key growth drivers:

Unique Users

Measuring unique users is important to us because our marketplace revenue depends in part on our ability to enable our users to connect with real estate and mortgage professionals, and our display revenue depends in part on the number of impressions delivered. Furthermore, our community of users improves the quality of our living database of homes with their contributions. We count a unique user the first time an individual accesses one of our websites using a web browser during a calendar month, and the first time an individual accesses our mobile applications using a mobile device during a calendar month. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites in a single month, the first access to each website is counted as a separate unique

 

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user since unique users are tracked separately for each domain. If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. Beginning in October 2011, we measure unique users with Google Analytics. Prior to October 2011, we measured monthly unique user metrics with Omniture analytical tools. We believe Google Analytics and Omniture result in materially consistent measurements of our monthly unique users.

 

     Average Monthly Unique
Users for the Three
Months Ended March 31,
     2012 to 2011
% Change
 
     2012      2011     
     (in thousands)         

Unique Users

     31,797         17,306         84

Premier Agent Subscribers

The number of Premier Agent subscribers is an important driver of revenue growth because each subscribing agent pays us a monthly fee to participate in the program. We define a Premier Agent subscriber as an agent with a paid subscription at the end of a period.

 

     At March 31,      2012 to 2011
% Change
 
     2012      2011     

Premier Agent Subscribers

     18,616         10,710         74

Basis of Presentation

Revenue

We generate revenue from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals and brand advertisers. Our revenue includes marketplace revenue and display revenue.

Marketplace Revenue. Marketplace revenue consists of subscriptions sold to real estate agents under our Premier Agent program and CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders.

Our Premier Agent program allows local real estate agents to establish a persistent online and mobile presence on Zillow in the zip codes they serve. We present contact information for each Premier Agent alongside home profiles and home listings within the agent’s zip code, assisting consumers in evaluating and selecting the real estate agent best suited for them. Pricing for our Premier Agent subscriptions varies by zip code and the tier level of participation, Platinum Premier, Silver Premier and Basic Premier. Subscription advertising revenue is recognized on a straight-line basis during the contractual period over which the advertising is delivered. Typical terms of our Premier Agent subscription contracts are six months. Growth in our subscription advertising product is based on our ability to continue to attract agent subscribers and drive consumer traffic to those agents on our websites and through our mobile applications.

In Zillow Mortgage Marketplace, participating qualified mortgage lenders make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Consumers who request rates for mortgage loans in Zillow Mortgage Marketplace are presented with personalized lender quotes from participating lenders. We only charge mortgage lenders a fee when users click on their links for more information regarding a mortgage loan quote. Mortgage lenders who exhaust their initial prepayment can then prepay additional funds to continue to participate in the marketplace.

Display Revenue. Display revenue primarily consists of graphical web and mobile advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers. Our advertising customers also include telecommunications, automotive, insurance and consumer products companies. We recognize display revenue as impressions are delivered to users interacting with our websites or mobile applications. Growth in display revenue depends on continuing growth in traffic to our websites and mobile applications and migration of advertising spend online from traditional broadcast and print media.

Costs and Expenses

Cost of Revenue. Our cost of revenue consists of expenses related to operating our websites and mobile applications, including associated headcount expenses, such as salaries and benefits and share-based compensation expense and bonuses. Cost of revenue also includes credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships and facilities costs allocated on a headcount basis.

Sales and Marketing. Sales and marketing expenses consist of headcount expenses, including salaries, commissions, benefits, share-based compensation expense and bonuses for sales, sales support, customer support, marketing and public relations employees. Sales and marketing expenses also include other sales expenses related to promotional and marketing activities and facilities costs allocated on a headcount basis.

 

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Technology and Development. Technology and development expenses consist of headcount expenses, including salaries and benefits, share-based compensation expense and bonuses for salaried employees and contractors engaged in the design, development and testing of our websites, equipment and maintenance costs and facilities costs allocated on a headcount basis. Technology and development expenses also include amortization costs related to capitalized website and development activities, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our websites and amortization of intangible assets recorded in connection with acquisitions.

General and Administrative. General and administrative expenses consist of headcount expenses, including salaries, benefits, share-based compensation expense and bonuses for executive, finance, accounting, legal, human resources, recruiting and administrative support. General and administrative expenses also include legal, accounting and other third-party professional service fees, bad debt expense and facilities costs allocated on a headcount basis.

Other Income

Other income consists primarily of interest income earned on our cash and cash equivalents and investments.

Income Taxes

We are subject to U.S. federal income taxes. As of March 31, 2012 and December 31, 2011, we did not have taxable income, and we are not projecting taxable income for the year ending December 31, 2012 and, therefore, no tax liability or expense has been recorded in the financial statements. We have provided a full valuation allowance against our net deferred tax assets as of March 31, 2012 and December 31, 2011, because there is significant uncertainty around our ability to realize the deferred tax assets in the future. We have accumulated tax losses of approximately $68.6 million as of December 31, 2011, which are available to reduce current future taxable income.

Results of Operations

The following tables present our results of operations for the periods indicated and as a percentage of total revenue:

 

     Three Months Ended
March 31,
 
     2012      2011  
    

(in thousands, except per share

data, unaudited)

 

Statements of Operations Data:

     

Revenue

   $ 22,833       $ 11,260   

Costs and expenses:

     

Cost of revenue (exclusive of amortization) (1) (2)

     3,350         1,817   

Sales and marketing (1)

     8,315         5,484   

Technology and development (1)

     5,030         2,996   

General and administrative (1)

     4,445         1,828   
  

 

 

    

 

 

 

Total costs and expenses

     21,140         12,125   
  

 

 

    

 

 

 

Income (loss) from operations

     1,693         (865

Other income

     31         39   
  

 

 

    

 

 

 

Net income (loss) attributable to common shareholders

   $ 1,724       $ (826
  

 

 

    

 

 

 

Net income (loss) per share attributable to common shareholders — basic

   $ 0.06       $ (0.06

Net income (loss) per share attributable to common shareholders — diluted

   $ 0.06       $ (0.06

Weighted-average shares outstanding — basic

     28,348         13,347   

Weighted-average shares outstanding — diluted

     30,994         13,347   

Other Financial Data:

     

Adjusted EBITDA (3)

   $ 5,447       $ 1,051   

 

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     Three Months Ended
March 31,
 
     2012      2011  
     (in thousands, unaudited)  

(1)    Includes share-based compensation as follows:

     

Cost of revenue

   $ 85       $ 41   

Sales and marketing

     190         107   

Technology and development

     310         86   

General and administrative

     833         156   
  

 

 

    

 

 

 

Total

   $ 1,418       $ 390   
  

 

 

    

 

 

 

(2)    Amortization of website development costs and intangible assets included in technology and development is as follows:

   $ 2,004       $ 1,223   

(3)    See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

         

 

     Three Months Ended
March 31,
 
     2012     2011  
     (unaudited)  

Percentage of Revenue:

    

Revenue

     100     100

Costs and expenses:

    

Cost of revenue (exclusive of amortization)

     15        16   

Sales and marketing

     36        49   

Technology and development

     22        27   

General and administrative

     19        16   
  

 

 

   

 

 

 

Total costs and expenses

     92        108   
  

 

 

   

 

 

 

Income (loss) from operations

     8        (8

Other income

     0        0   
  

 

 

   

 

 

 

Net income (loss)

     8     (7 %) 
  

 

 

   

 

 

 

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA within this Quarterly Report on Form 10-Q, a non-GAAP financial measure. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key metric used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and

 

   

Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

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Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to net income (loss) for each of the periods presented.

 

     Three Months Ended
March 31,
 
     2012     2011  
     (in thousands, unaudited)  

Reconciliation of Adjusted EBITDA to Net Income (Loss):

    

Net income (loss)

   $ 1,724      $ (826

Other income

     (31     (39

Depreciation and amortization expense

     2,336        1,526   

Share-based compensation expense

     1,418        390   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 5,447      $ 1,051   
  

 

 

   

 

 

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Revenue

 

     Three Months Ended
March 31,
     2011 to 2012
% Change
 
     2012      2011     
     (in thousands, unaudited)         

Revenue:

        

Marketplace revenue

   $ 16,593       $ 6,881         141

Display revenue

     6,240         4,379         42
  

 

 

    

 

 

    

Total

   $ 22,833       $ 11,260         103
  

 

 

    

 

 

    

 

     Three Months Ended
March 31,
 
     2012     2011  

Percentage of Revenue:

    

Marketplace revenue

     73     61

Display revenue

     27     39
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

Overall revenue grew by $11.6 million, or 103%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Marketplace revenue grew by 141%, and display revenue grew by 42%.

Marketplace revenue was $16.6 million for the three months ended March 31, 2012 compared to $6.9 million for the three months ended March 31, 2011, an increase of $9.7 million. Marketplace revenue represented 73% of total revenue for the three months ended March 31, 2012 compared to 61% of total revenue for the three months ended March 31, 2011. The increase in marketplace revenue was primarily attributable to growth in the number of subscribers in our Premier Agent program to 18,616 as of March 31, 2012 from 10,710 as of March 31, 2011, an increase of 74%, as well as an increase in the average subscription price for new Premier Agents and for existing Premier Agents who renewed their subscriptions for additional six-month terms. We believe the increase in Premier Agent subscribers and the increase in the average price in our Premier Agent program was driven by our further development of our marketplace program with the support of our sales team and the overall growth in the number of unique users of our websites and mobile applications.

Display revenue was $6.2 million for the three months ended March 31, 2012 compared to $4.4 million for the three months ended March 31, 2011, an increase of $1.9 million. Display revenue represented 27% of total revenue for the three months ended March 31, 2012 compared to 39% of total revenue for the three months ended March 31, 2011. The increase in display revenue was primarily the result of an increase in unique users to our websites and mobile applications which increased to 31.8 million average monthly unique users for the three months ended March 31, 2012 from 17.3 million average monthly unique users for the three months ended March 31, 2011, an increase of 84%. The growth in unique users increased the number of graphical display impressions available for sale and advertiser demand for graphical display inventory. This resulted in increased advertising spend by larger businesses and industry-endemic advertisers such as real estate brokers, builders and lending institutions.

 

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Cost of Revenue

 

     Three Months Ended
March 31,
     2011 to 2012
% Change
 
     2012      2011     
     (in thousands, unaudited)         

Cost of revenue

   $ 3,350       $ 1,817         84

Cost of revenue was $3.4 million for the three months ended March 31, 2012 compared to $1.8 million for the three months ended March 31, 2012, an increase of $1.5 million, or 84%. The increase in cost of revenue was primarily attributable to revenue sharing costs related to our strategic relationship with Yahoo! Real Estate, which launched in February 2011, as well as a $0.3 million increase in headcount related expenses, including share-based compensation, driven by growth in headcount, and a $0.2 million increase in credit card and ad serving fees. We expect our cost of revenue to increase in future years as we continue to incur more expenses that are associated with growth in revenue.

Sales and Marketing

 

     Three Months Ended
March 31,
     2011 to 2012
% Change
 
     2012      2011     
     (in thousands, unaudited)         

Sales and marketing

   $ 8,315       $ 5,484         52

Sales and marketing expenses were $8.3 million for the three months ended March 31, 2012 compared to $5.5 million for the three months ended March 31, 2011, an increase of $2.8 million, or 52%. The increase was primarily a result of growth in headcount related expenses, including share-based compensation, of $1.3 million driven by increases in the size of our sales team to promote our marketplace business, as well as a $1.3 million increase in marketing and advertising expenses, including tradeshows and related travel costs. The remaining increase of $0.2 million was primarily the result of additional consulting costs. We expect our sales and marketing expenses to increase in future years as we continue to invest more resources in growing our sales team and in marketing and advertising. Although these expenses may increase as a percentage of revenue in the near term, we expect these expenses will decrease as a percentage of revenue in the long term.

Technology and Development

 

     Three Months Ended
March 31,
     2011 to 2012
% Change
 
     2012      2011     
     (in thousands, unaudited)         

Technology and development

   $ 5,030       $ 2,996         68

Technology and development expenses, which include research and development costs, were $5.0 million for the three months ended March 31, 2012 compared to $3.0 million for the three months ended March 31, 2011, an increase of $2.0 million, or 68%. Approximately $1.0 million of the increase was related to growth in headcount related expenses, including share-based compensation, and approximately $0.8 million of the increase was the result of amortization of intangible assets, including website development costs, purchased content and acquired intangible assets. The remaining increase of $0.2 million was primarily the result of additional consulting costs.

Amortization expense included in technology and development for capitalized website development costs was $1.3 million and $1.0 million, respectively, for the three months ended March 31, 2012 and 2011. Amortization expense included in technology and development for purchased data content intangible assets was $0.5 million and $0.3 million, respectively, for the three months ended March 31, 2012 and 2011. Other data content expense was $0.1 million and $0.2 million, respectively, for the three months ended March 31, 2012 and 2011. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $0.2 million and $29 thousand, respectively, for the three months ended March 31, 2012 and 2011. While we expect our technology and development expenses to increase over time as we continue to build new website and mobile functionality, we expect these expenses will decrease as a percentage of revenue.

 

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General and Administrative

 

     Three Months Ended
March 31,
     2011 to 2012
% Change
 
     2012      2011     
     (in thousands, unaudited)         

General and administrative

   $ 4,445       $ 1,828         143

General and administrative expenses were $4.4 million for the three months ended March 31, 2012 compared to $1.8 million for the three months ended March 31, 2011, an increase of $2.6 million, or 143%. The increase in general and administrative expenses was a result of an increase of $1.3 million in headcount related expenses, including share-based compensation, driven primarily by growth in headcount, a $0.5 million increase in building related expenses including rent, utilities and insurance at our new corporate headquarters in Seattle, and a $0.6 million fluctuation in state and local taxes which was primarily the result of a $0.3 million tax credit received in 2011 relating to a refund of certain state and local taxes from 2006 to 2009, which caused there to be less state and local tax expense during the three months ended March 31, 2011. The remaining $0.2 million increase was the result of various other miscellaneous expenses. Although these expenses may increase as a percentage of revenue in the near term, we expect these expenses will decrease as a percentage of revenue in the long term.

Liquidity and Capital Resources

Prior to our initial public offering during July 2011, we funded our operations primarily from the issuance of common and preferred stock. Through 2007, we raised approximately $81.0 million through various offerings of our convertible preferred stock and approximately $5.9 million from the sale of our common stock.

On July 25, 2011, we sold and issued 3,981,300 shares of our Class A common stock, including 519,300 shares of Class A common stock pursuant to the underwriters’ option to purchase additional shares, at a public offering price of $20.00 per share, and we sold and issued 274,999 shares of our Class A common stock at a price of $20.00 per share in a concurrent private placement. As a result of the offerings, we received net proceeds of approximately $76.3 million, after deducting underwriting discounts and commissions of approximately $5.6 million and additional offering-related expenses of $3.3 million, for total expenses of $8.9 million. The net offering proceeds have been invested into money market funds, certificates of deposit and U.S. treasury securities.

As of March 31, 2012 and December 31, 2011, we had cash and cash equivalents and short-term and long-term investments of $98.3 million and $92.1 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions and money market funds. Short-term and long-term investments as of March 31, 2012 and December 31, 2011 consisted of U.S. government agency securities. Amounts on deposit with third-party financial institutions exceed the applicable Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable. We believe that cash from operations and cash and cash equivalents and short-term and long-term investment balances will be sufficient to meet our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months.

During March 2011, we entered into a loan and security agreement with a financial institution to establish a line of credit of $4.0 million, secured by substantially all our assets other than our intellectual property, to be used for general business purposes. The line of credit contains financial and non-financial covenants. As of March 31, 2012, we were in compliance with all covenants. The line of credit is available through March 2013. During March 2011, we executed a standby letter of credit of $1.5 million in connection with the lease of our new Seattle offices and reserved this amount against the line of credit, which reduces the available line to $2.5 million. As of March 31, 2012, there were no other amounts outstanding under the line of credit.

In April 2012, we amended our loan and security agreement to increase our line of credit from $4.0 million to $25.0 million. The line of credit is secured by substantially all our assets, including our intellectual property, and provides us with greater flexibility for future potential financing needs. The revolving line of credit contains customary financial covenants, including the maintenance of a minimum adjusted quick ratio, measured on a monthly basis, of 1.50 to 1.00, and minimum Adjusted EBITDA, measured on a quarterly basis, of greater than or equal to negative $5.0 million for each quarterly period through December 31, 2012 and greater than or equal to $0 for each quarterly period thereafter. In addition, the revolving line of credit contains restrictions on our ability to, among other things, engage in certain mergers and acquisition transactions and create liens on assets. The line of credit is available through April 2016.

In May 2012, Zillow, RentJuice Corporation, a Delaware corporation (“RentJuice”), Renegade Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of Zillow (“Merger Sub”), and Shareholder Representative Services LLC, acting as the stockholder representative, entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for the acquisition of RentJuice by Zillow. Under the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into RentJuice, with RentJuice remaining as the surviving company and a wholly owned subsidiary of Zillow (the “Merger”). The total Merger consideration payable to RentJuice equity holders is approximately $40 million in cash, less certain transaction expenses and

 

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other costs. All vested options to purchase shares of RentJuice’s common stock will be cancelled and, in settlement of such cancellation, the holders of such options will receive cash payments representing a portion of the Merger consideration. A portion of the Merger consideration will be attributed to the substitution of unvested stock options of RentJuice outstanding as of the closing for stock options to purchase shares of our Class A common stock at an exchange ratio implied by the Merger consideration. The Merger is expected to close in the second quarter of 2012. Pursuant to the terms of the Merger Agreement, we have agreed to adopt a retention bonus plan after the closing pursuant to which restricted stock units for 280,978 shares of our Class A common stock will be granted to employees of RentJuice who accept employment with Zillow in proportion to each employee’s total equity holdings in RentJuice prior to the closing of the Merger. Twenty-five percent of each restricted stock unit award will vest on the one-year anniversary of the closing of the Merger and the remainder will vest in substantially equal installments each three-month period thereafter for the next three years, subject to the recipient's continued full-time employment or service to Zillow.

The following table presents selected cash flow data for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (in thousands, unaudited)  

Cash Flow Data:

    

Cash flows provided by operating activities

   $ 6,498      $ 3,484   

Cash flows used in investing activities

     (3,029     (5,364

Cash flows provided by financing activities

     2,905        657   

Cash Flows Provided By Operating Activities

For the three months ended March 31, 2012, net cash provided by operating activities was $6.5 million. This was driven by net income of $1.7 million, adjusted by depreciation and amortization expense and share-based compensation expense of $2.3 million and $1.4 million, respectively, and an increase in the balance of deferred rent of $0.4 million. Changes in operating assets and liabilities increased cash provided by operating activities by $0.2 million.

For the three months ended March 31, 2011, net cash provided by operating activities was $3.5 million. This was driven by a net loss of $0.8 million, adjusted by depreciation and amortization expense and share-based compensation expense of $1.5 million and $0.4 million, respectively. Changes in operating assets and liabilities increased cash provided by operating activities by $2.4 million.

Cash Flows Used In Investing Activities

Our primary investing activities include the purchase and maturity of investments and the purchase of property and equipment and intangible assets.

For the three months ended March 31, 2012, we used $3.0 million of net cash in investing activities, which was a result of $3.0 million for the purchase of property and equipment and intangible assets.

For the three months ended March 31, 2011, we used $5.4 million of net cash in investing activities. This was the result of $3.0 million of net purchases of investments, $1.4 million for the purchase of property and equipment and intangible assets and $1.0 million paid in connection with our March 2011 acquisition of the operating assets of Postlets LLC.

Cash Flows Provided By Financing Activities

For the three months ended March 31, 2012 and 2011, our financing activities have resulted entirely from the exercise of employee non-qualified stock options. The proceeds from the issuance of Class A common stock from the exercise of stock options for the three months ended March 31, 2012 and 2011 was $2.9 million and $0.7 million, respectively.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2012.

 

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Contractual Obligations

The following table provides a summary of our contractual obligations as of March 31, 2012:

 

     Payment Due By Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (in thousands)  

Operating lease obligations

   $ 21,381       $ 2,087       $ 3,709       $ 3,696       $ 11,889   

Purchase obligations

     8,544         2,455         3,776         2,313         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,925       $ 4,542       $ 7,485       $ 6,009       $ 11,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We have various operating leases for office space and equipment. We have entered into an operating lease for our current headquarters in Seattle, Washington under which we will be obligated to make payments beginning in December 2012 through November 2022. Our prior headquarters in Seattle, Washington is under an operating lease expiring in February 2013. We also have purchase obligations for content related to our websites. We do not have any debt or capital lease obligations. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For information on our critical accounting policies and estimates, see Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.

We do not have any long-term borrowings as of March 31, 2012 or December 31, 2011.

Under our current investment policy, we invest our excess cash in money market funds, FDIC-insured certificates of deposit and U.S. Treasury securities. Our current investment policy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting our principal at risk.

Our investments are exposed to market risk due to the fluctuation of prevailing interest rates that may reduce the yield on our investments or their fair value. As our investment portfolio is primarily short-term in nature, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our results of operations or cash flows to be materially affected by a sudden change in market interest rates.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of March 31, 2012. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective as of March 31, 2012.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

There have been no material developments in legal proceedings during the quarter ended March 31, 2012. For a description of previously reported legal proceedings, refer to Part I, Item 3 (Legal Proceedings) of our Annual Report on Form 10-K for the year ended December 31, 2011.

From time to time, we are involved in litigation and claims that arise in the ordinary course of business and although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. This forward-looking statement is based on management’s current understanding of the relevant law and facts; and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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Item 1A. Risk Factors

There have not been any material changes to the risk factors affecting our business, financial condition or future results from those set forth in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2011. However, you should carefully consider the factors discussed in such section of our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the three months ended March 31, 2012.

On July 25, 2011, we sold and issued 3,981,300 shares of our Class A common stock, including 519,300 shares of Class A common stock pursuant to the underwriters’ option to purchase additional shares, at a public offering price of $20.00 per share. The aggregate gross proceeds for all shares sold by us in the IPO were $79,626,000. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-173570), which was declared effective by the SEC on July 19, 2011, and a prospectus filed pursuant to Rule 424(b) of the Securities Act. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

 

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Item 6. Exhibits

The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit
Number

 

Description

  10.1*   Amendment No. 1 to the Listings and Sales Agreement by and among Yahoo! Inc., Yahoo! Realty Inc. and Zillow, Inc., dated August 30, 2011.
  10.2*   Amendment No. 2 to the Listings and Sales Agreement by and among Yahoo! Inc., Yahoo! Realty Inc. and Zillow, Inc., dated February 7, 2012.
  31.1   Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema Document.
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Portions of this exhibit are omitted and were filed separately with the Securities and Exchange Commission pursuant to Zillow, Inc.’s application requesting confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
** Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Exchange Act of 1934 and otherwise are not subject to liability.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: May 4, 2012     ZILLOW, INC.
    By:  

/s/ C HAD M. C OHEN

    Name:   Chad M. Cohen
    Title:   Chief Financial Officer and Treasurer

 

28

Exhibit 10.1

[***] Indicates confidential material that has been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission. A complete copy of this agreement has been separately filed with the Securities and Exchange Commission.

Homes for Sale Partnership

AMENDMENT NO. 1

TO THE LISTING AND SALES AGREEMENT

This Amendment No. 1 to the Listing and Sales Agreement dated July 2, 2010 (the “Agreement”) is entered into as of August 30, 2011 by and among Yahoo! Inc., and Yahoo Realty Inc. (collectively “Yahoo”), on the one hand, and Zillow Inc. (“Zillow”), on the other hand, modifies certain terms of the Agreement. Unless otherwise specified, all defined terms used herein shall have the meanings ascribed to them in the Agreement.

For good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree to amend the Agreement as set forth below:

1. The definition of COGS is amended to add a sentence that reads: “For Display Ads sold by Zillow under this Agreement, COGS is [***]% of Gross Revenue.”

2. The Agreement is amended to replace the term “Listings API” with the term “Zillow Listings Feed” throughout the Agreement, except that: (i) “Listings API” shall remain a definition in Section 1 and (ii)

“Listings API” shall not be replaced in Exhibit A, provided that the definition of Listings API is amended to include the phrase “including all related images.”

3. The Agreement is amended to add the following definition to Section 1:

“Zillow Listings Feed” means the XML feed that contains all data relevant to Zillow Listings which complies with the specifications set forth on Exhibit A and is delivered in an XML format in accordance with the current RETS feed found at www.rets.org with the addition of two fields (Share of Voice and DisplayMode).

4. Section 2.1(b)(iii) is amended to replace the phrase “Listings Detail section of Listings API Specification” with “Functional Listings Specification Document.”

5. Section 2.1(b)(iv) is deleted in its entirety and replaced by the following new section 2.1(b)(iv):

“(iv) Listing Results Order . YRI will use Zillow’s default sort order for Zillow Listings on all Search Results Pages. Such default sort order will prioritize Platinum Featured Listings (as described in Exhibit A) above non-Platinum Featured Listings above basic Zillow Listings. All such groupings of listings shall be further sorted by prioritizing most recently listed. Except with respect to such first priority default sort order, Zillow has the right to revise the listings sort methodology, so long as the same listings sort methodology is applied on Zillow’s Site and to every other partner in the Zillow Network. If a user re-sorts the search results in any way, the user’s sort preference shall take precedence. If a user refines the search results in any way, YRI will use the default sort order specified in this Subsection. If YRI launches a product with a unique functionality, and subject to the conditions that such product does not cause modifications to the default sort order for Search Results Pages, YRI may display Listings in such new product based on other parameters being first in priority. During any such implementation, Yahoo shall respect the Featured Listing designation placed by Zillow, and YRI shall visually distinguish such Featured Listings in its product implementation. For


example, if the foregoing conditions are met, in a mobile application, YRI may pull listings based on user geographic location as the primary sort criteria (i.e. listings closest to user) and for “most recent update” modules, YRI may pull listings based on recency. If a Zillow licensor opts out of syndication on YRE, any listings from such advertiser will not be included in the Zillow Listings Feed. Notwithstanding the foregoing, YRI reserves the right to comingle any Zillow Listings with listings from other real estate listing categories, including new homes and foreclosures, provided that the Zillow Featured Listings are sorted first in accordance with the provisions outlined in this Subection and are presented in accordance with the terms of this Agreement. For clarity, if a user re-sorts a co-mingled set of listings, the user’s sort preference shall take precedence.”

6. Section 2.2.1(a) is hereby deleted in its entirety and replaced with the new section 2.2.1(a) as follows:

Data Access Requirements . During the Term, Zillow will provide YRI and Yahoo with access to APIs or a data feed in compliance with the Functional Listings Specification Document set forth on Exhibit A. Throughout the Term, Zillow shall maintain a For Sale By Owner service that will enable homeowners to post their homes for sale on both Zillow and Yahoo, which service shall be made available to Yahoo users according to the SLA set forth in Exhibit A.”

7. Section 2.2.1(b) is amended to delete the words “(Alerts API Section).”

8. Section 2.2.3 is amended to delete the first sentence and replace it with the following: “At the Launch Date, Zillow will provide YRI with an API providing access to a graph containing year-over-year market value percentage change in median price of homes for sale data (the “ Market Data Content ”).”

9. Section 2.2.3(f) is deleted in its entirety.

10. Section 3.1(a) is amended such that the following sentence is added at the end:

“In addition, Yahoo may sell to builders, and real estate brokerage companies, graphical display advertising for placement on YRE, provided that: (i) Yahoo does not sell such advertising to real estate agents; and (ii) Zillow competitors, including Move Inc., Trulia, and Dominion Enterprises, may not be granted the right to resell graphical display advertising on Yahoo! Real Estate.”

11. Section 3.5 of the Agreement is amended as follows:

(a) the following sentence (the fifth sentence of Section 3.5) shall be deleted in its entirety:

“Zillow agrees to launch the Yahoo-Only Packages with the same pricing as comparable Zillow-only packages and will only alter Yahoo-Only Package pricing after six months of Yahoo Lead volume data is available to assess the average number of Leads from Yahoo.”

(b) The following sentence (the sixth sentence of Section 3.5) shall be deleted in its entirety:

“At no time shall Yahoo-Only Package pricing be greater than 20% below the Zillow-only pricing for comparable Slots without mutual agreement of the parties.” and replaced with the following:

“The pricing of Yahoo-Only Packages will be determined based on mutual agreement between Yahoo and Zillow.”

(c) The second to the last sentence of Section 3.5 is amended so that the word “may” is replaced with the word “will,” such that the sentence reads as follows:

“Zillow will set pricing for Display Ads above the floor pricing provided by Yahoo, but at no time shall Zillow set CPMs for Yahoo inventory that are different from CPMs for similar Zillow inventory, including for similar DMAs.”

(d) The following sentence is added at the end of Section 3.5:

“Throughout the Term, Zillow shall use best efforts to optimize the revenue paid to Yahoo.”

12. Section 4.1.1 is hereby amended to change the reference to “Section 4.2.2” to “Section 4.1.2.”

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 


13. Section 3.6 is hereby amended such that the following is added to the end of the first sentence:

“, except that Zillow may enter into an agreement for the sale of Real Estate Ad Products on the Curbed Network, provided that, Zillow will notify Yahoo in writing as to the date that Zillow will begin such sales (the “Curbed Launch Date”). In no event will Zillow, during the Term, make changes to the current Yahoo-Zillow Network in comScore.”

14. Section 5.1.1 is hereby amended to include the following sentences at the end:

“Notwithstanding the foregoing, Leads from the Curbed Network shall not contribute to the [***] until [***] following the Curbed Launch Date. Following the [***] of the Curbed Launch Date, the terms of this Section 5.1.1 shall apply to Leads from the Curbed Network.”

15. Exhibit A of the Agreement (“API Specifications”) is hereby deleted in its entirety and replaced by the new Exhibit A attached hereto as Exhibit A to this Amendment (“Functional Listings Specification Document”).

16. Except as modified hereby, the Agreement shall remain in full force and effect and is hereby ratified by Zillow and Yahoo.

17. Zillow and Yahoo each represent and warrant to the other that it has the right, power and authority to enter into this Amendment.

18. Zillow and Yahoo hereby agree that facsimile signatures hereto are valid and binding.

IN WITNESS WHEREOF, the Parties hereto have caused the foregoing Amendment to be signed by a duly authorized agent of each party, the day and year first above written.

 

YAHOO! INC.:      
By:  

/s/ E RIC A LEDORT

     
Title:  

VP, BD

     
Printed Name:  

Eric Aledort

     
Date:  

9/9/11

     
YAHOO! REALTY INC.:     ZILLOW, INC.
By:  

/s/ A MAN K OTHARI

    By:  

/s/ G REG S CHWARTZ

Title:  

SVP, CAO

    Title:  

Chief Revenue Officer

Printed Name:  

Aman Kothari

    Printed Name:  

Greg Schwartz

Date:  

9/8/11

    Date:  

9/6/2011

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 


Homes for Sale Partnership

Exhibit A

Functional Listings Specifications Document

 

Homes for Sale Partnership

Yahoo! Real Estate & Zillow.com

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 


Homes for Sale Partnership

 

 

Table of Contents

 

1 Introduction

     7   

1.1 Purpose and Scope

     7   

1.2 Intended Audience

     7   

1.3 Product Release Identification

     7   

1.4 Revision History

     7   

1.5 References

     7   

1.6 Glossary

     7   

1.7 Assumptions

     8   

2 Listings API Specifications

     9   

[***]

  

3 Ad Products API Specifications

     10   

[***]

  

4 Platinum Listings API

     18   

[***]

  

5 Listings Feed

     19   

[***]

  

6 Activity Data Reporting

     20   

[***]

  

7 Address Resolution Logic

     21   

8 Image Specification

     22   

9 Service Level Agreement

     23   

9.1 Definitions

     23   

9.1.1 Zillow Availability

     23   

9.1.2 Yahoo! Availability

     23   

9.1.3 Production System

     23   

9.1.4 Results Set

     23   

9.1.5 Internal Zillow Response Time

     23   

9.1.6 Minor Problem

     24   

9.1.7 Major Problem

     24   

9.1.8 Severe Problem

     24   

9.1.9 Catastrophic Problem

     24   

9.1.10 Problem Resolution

     25   

9.1.11 Unresolved Catastrophic Problem

     25   

9.1.12 Scheduled Maintenance

     25   

9.1.13 Temporary Workaround

     25   

9.1.14 Timeouts

     25   

9.1.15 Aggregate Response Time

     25   

9.1.16 Critical Threshold

     25   

9.2 Contact Information

     25   

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 


9.2.1 Yahoo! Support Personnel

     26   

9.2.2 Zillow Support Personnel

     26   

9.3 Support Procedures

     27   

9.3.1 Support Procedures.

     27   

9.3.2 Zillow Response

     27   

9.3.2.1 Support Table

     27   

9.3.3 Zillow Notification and Escalation Process

     28   

9.4 Operational Metrics

     28   

9.4.1 Availability

     28   

9.4.1.1 Zillow Availability

     28   

9.4.2 Capacity

     29   

9.4.3 Query Response Time

     30   

9.4.4 Aggregate Response Time

     30   

9.4.5 Site monitoring

     30   

9.4.6 Maintenance Requirements

     31   

9.4.7 Reporting

     31   

9.4.8 Image Serving

     31   

9.4.9 Business Continuity Planning

     31   

9.4.10 Sole and exclusive Remedy

     31   

10 Failover Requirements

     32   

11 Reviewers

     33   

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 


Introduction

 

 

A. Purpose and Scope

This document describes the requirements and functional design for Homes for Sale Partnership.

 

B. Intended Audience

The primary audience for this document is Yahoo! Real Estate and Zillow.

 

C. Product Release Identification

 

Title    Yahoo! Real Estate - Homes For Sale Partnership
Version    1.0
Customer    Yahoo! Inc. and Zillow.com

 

D. Revision History

 

Version #

  

Date

  

Revised By

  

Revision Description

1.0

   7/1/10   

Yahoo! Inc.

  

Base version.

1.1

   2/2/11   

Yahoo! Inc.

  

Amendment for Feed ingestion and additional APIs

 

E. References

This document shall be used in conjunction with the following publications:

 

Document/Book

  

Author(s)

  
  

 

F. Glossary

This document references the following terms, acronyms and abbreviations:

 

Term/Expression

  

Definition

  
  
  

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

7


G. Assumptions

Homes for Sale Partnership

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

8


Listings API Specifications

 

This document describes the API that is required to display listing data and publish alerts on Yahoo! Real Estate and as further described in the Listing and Sales Agreement to which this document is an Exhibit. [***][ Portions of this page and the following page have been omitted.]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

9


Ad Products API Specifications

 

This document describes API to display showcase ads, contact modules on Yahoo! Real Estate. This document also provides the API to submit the contacts through Zillow Ad Server.

[***][ Portions of this page and the following eight pages have been omitted.]

 

1. Form Type

 

  a) Short form

 

LOGO

 

  b) With broker logo

 

LOGO

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

10


When an agent sends a message, we will show the success message over the “Contact button” It will look like this:

 

LOGO

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

11


2. Contact Type

 

  a) Direct Contact

 

LOGO

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

12


  b) Leader board

 

LOGO

 

3. E-mail Content

This includes filling in the purpose of the visit, the address of the home etc.

[***]

 

  a) Paid Listing Agent

Showcase advertiser or manual paid for sale listings. Phone number is [***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

13


 

LOGO

 

  b) Broker Match – for sale

[***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

14


 

LOGO

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

15


  c) Dormant Agent

 

LOGO

 

  d) Active listing agent

 

LOGO

     [***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

16


  e) For Sale by Owner

 

LOGO

     [***]

 

N. Contact Information

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

17


Platinum Listings API

 

[***][ Portions of this page and the following five pages have been omitted. ]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

18


Listings Feed

 

 

P. Definitions

[***][ Portions of this page and the following page have been omitted. ]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

19


Activity Data Reporting

 

[***][ Portions of this page and the following page have been omitted. ]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

20


Address Resolution Logic

 

[***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

21


Image Specification

 

[***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

22


Service Level Agreement

 

The purpose of this Service Level Agreement (the “SLA”) is to describe the service level commitments that Zillow is obligated to deliver under the Agreement. Zillow acknowledges and agrees that failure to remedy non-compliance with the SLA will be deemed a material breach of the Agreement. Capitalized terms not defined here have the same meaning as in API Spec. 8.1, 8.2, 8.3 are proposals pending additional review and mutual agreement.

 

U. Definitions

 

1. Zillow Availability

The percentage of the total Queries for which Zillow responds (either with a “Resource Not Found” response, where that would be a correct response for the Query, or a response in the form of properly formatted Results Sets, within the Critical Threshold (defined below)).

 

2. Yahoo! Availability

The percentage of the total web requests for which Yahoo! Real Estate responds within [***]

 

3. Production System

Delivery systems used for providing services to Yahoo! Real Estate. These services include but not limited Listing Search, Listing Details, Listing Images, data returned from API calls and any other data provided by Zillow.

 

4. Results Set

A Results Set will consist of the requested Home listings and/or Related Content, or a “Resource Not Found” notification if applicable. Results Set is properly formatted in a mutually agreed XML format.

 

5. Internal Zillow Response Time

The period of time beginning at the time of Zillow’s receipt of an API call or an image request to the completion of sending the results set.

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

23


6. Minor Problem

A Minor Problem is (a) a cosmetic display issue that allows the major elements of Results Sets to display in a legible format, but causes textual irregularities (e.g., an umlaut not displaying properly), (b) minor issues that do not have widespread impact to end-users, (c) minor issues with non-Production Systems, or (d) other similar problems under the direct control of Zillow which do not need immediate resolution. Zillow will identify issues that can be fixed within a published timeline. Zillow may reasonably suspend or close out Minor issues with proper notification to Yahoo!. For clarity, an error that causes Results to fail to work, fail to display completely, or fail to be completely legible will be considered a Major Problem, Severe Problem, or Catastrophic Problem, not a Minor Problem. This is otherwise known as “Minor” issue.

 

7. Major Problem

An issue with a Service which has widespread impact to end users but which (a) does not make the Service unusable for a large percentage of queries or operations, and (b) is an SLA violation which causes [***] of Zillow’s queries to exceed the Critical Threshold within [***]. This is otherwise known as “Major”. Major Problems are given a default Priority of “P2”. Once a Major Problem has been outstanding for more than [***], either party may, using reasonable judgment, escalate the priority to “P1” or downgrade to a lower priority issue.

 

8. Severe Problem

An error, bug, incompatibility or malfunction, which causes Zillow’s API and Image Services not to operate substantially as designed, and/or renders the Results Sets substantially unavailable to or substantially unusable by Yahoo! (and which lasts for [***]), including issues which cause [***] of Queries to exceed the Critical Threshold [***]. Problems may also include security risks as identified by Yahoo or Zillow and are consistent with the Information and Security document and are deemed Severe with regard to impact and/or risk. This is otherwise known as “SEV2”. Severe Problems are assigned a default “P1” priority for resolution and response. Once a Severe Problem has been outstanding [***], either party may, using reasonable judgment, upgrade the Priority to “P0”. This is otherwise known as “P1”.

 

9. Catastrophic Problem

An issue which causes Zillow’s APIs as detailed in API Spec to become largely unavailable or cease to function substantially correctly and that persists for a period of [***] that is not due to Scheduled Maintenance or needed to effect a Problem Resolution. Yahoo! or Zillow can also identify catastrophic problems and may include security issues. This is otherwise known as “SEV1”.Catastrophic Problems start with a default “P0” Priority.

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

24


10. Problem Resolution

A correction, patch, fix, alteration or Temporary Workaround that minimizes the effect of a Minor Problem, Moderate Problem, Severe Problem, or Catastrophic Problem restoring the system to the levels set forth in this SLA.

 

11. Unresolved Catastrophic Problem

A Catastrophic Problem that does not have a Problem Resolution within a total period of one hour or more.

 

12. Scheduled Maintenance

A planned service maintenance or update to the service required to keep Zillow’s back-end systems functioning (e.g., hardware or software upgrades, architecture changes, etc.) that will affect the operation of systems relied upon by Yahoo Real Estate for Listing Services.

 

13. Temporary Workaround

A temporary technical solution that restores the system to, or substantially to the levels set forth in this SLA, although there may be ongoing or additional measures until a permanent solution can be implemented.

 

14. Timeouts

An action taken by a Yahoo! production server when Result Sets are not received within the Aggregate Response Time.

 

15. Aggregate Response Time

The Internal Zillow Response Time plus a mutually agreed upon worst case acceptable delay due to network latency in the USA.

 

16. Critical Threshold

The Aggregate Response Time is also known as Critical Threshold.

 

V. Contact Information

Both parties shall maintain and communicate to the other party updates to the following contact list, which shall be used to communicate and coordinate regarding technical problems that may be encountered with the Real Estate Listing Services.

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

25


1. Yahoo! Support Personnel

 

Name

  

Role/Responsibility

   Email Address    Office Phone

[***]

   Primary Systems Contact    [***]   

[***]

   Product Contact    [***]   

[***]

   Program Contact    [***]   

[***]

   Real Estate Operations Primary Contact    [***]   

[***]

   Product Contact    [***]   

[***]

   Yahoo Network Operations Center 24X7 Support    [***]    [***]

 

2. Zillow Support Personnel

 

Name

  

Role/Responsibility

   Email Address    Office Phone

[***]

   Primary Systems Contact    [***]    [***]

[***]

   Product Contact    [***]    [***]

[***]

   Program Contact    [***]    [***]

[***]

   Zillow Operations Primary Contact    [***]    [***]

[***]

   Zillow Operations Secondary Contact    [***]    [***]

[***]

   Network Engineer    [***]    [***]

[***]

   Zillow Network Operations Center 24X7 Support    [***]    [***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

26


W. Support Procedures

 

1. Support Procedures.

Zillow will provide Yahoo! with 24 x 365 support in the English language with respect to all Real Estate Listing Services as set forth herein.

All Severe Problems and Catastrophic Problems reported by either party must be submitted to the other party, as appropriate, via the technical support telephone number and/or via e-mail to the contact information set forth in the Support Table, and each such Minor Problem, Major Problem, Severe Problem and Catastrophic Problem will be given a unique reference number by the receiving party.

The responsible party shall inform the other party’s technical support personnel of ongoing efforts to provide a Problem Resolution concerning Severe Problems, and Catastrophic Problems within the response times set forth in the Support Table below.

 

2. Zillow Response

If notice of a problem is received from Yahoo!, Yahoo! will identify whether the problem is a Minor Problem, a Major Problem, a Severe Problem, or a Catastrophic Problem or none of the above according to the definitions set forth above and Yahoo! will supply Zillow with sufficient supporting and pertinent data in the problem report to analyze and debug the issue and provide data to support the classification of the issue. Both Yahoo! and Zillow need to mutually agree to the classification of the issue. After mutual, reasonable agreement, Zillow will respond to the request within the response times set forth in the Support Table and shall use all commercially reasonable efforts to resolve the Minor Problem, Moderate Problem, Severe Problem or Catastrophic Problem as rapidly as possible, and in accordance with this SLA. If the parties agree that a Minor Problem, Moderate Problem, Severe Problem, or Catastrophic Problem is not Zillow’s responsibility, then the tracking ticket is closed.

 

  a) Support Table

 

Priority Description

   Initial Response
Target
   Status Updates    Target for
Workaround or Fix

“P0”

 

•    SEV1 Issues

•    Elevated SEV2 Issues

   [***]    [***]    [***]

“P1”

 

•    SEV2 Issues

   [***]    [***]    [***]

“P2”:

 

•    Major Issues

   [***]    [***]    [***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

27


3. Zillow Notification and Escalation Process

Zillow will notify Yahoo! according to the response times set forth in the Support Table above.

If a Severe Problem or Catastrophic Problem remains unresolved for an extended period, Yahoo! and Zillow will make available any necessary personnel to discuss the issue and to effect a resolution, with an immediate conference call according to the following schedule or mutually agreed upon schedule, with the call to happen as soon as practical after the trigger time below:

 

Time Problem Outstanding

  

Yahoo! Contact

   Zillow Contact

[***]

   [***]    [***]

[***]

   [***]    [***]

[***]

   [***]    [***]

[***]

   [***]    [***]

 

X. Operational Metrics

 

1. Availability

 

  a) Zillow Availability

Inclusive of scheduled maintenance of the Zillow API, Zillow will maintain [***] daily availability, as measured by Yahoo’s internal monitoring tools, verified by Gomez Inc. agents, or other mutually agreed means of third party verification, with [***] intervals and [***]. In the event of discrepancies between Zillow’s availability and Yahoo!’s production query logs, the parties will work together to determine the root cause of such discrepancies. If the discrepancy resolution determines that Zillow’s availability falls below the specified level, Zillow will effect a Problem Resolution. In case of temporary unavailability of one of Zillow’s datacenter, Zillow will [***]. A single Zillow datacenter is capable of handling the complete Yahoo Real Estate Traffic including Peak Request Rate Traffic. It will be classified as a Severe Problem “P1” and all communications need to be followed as per the Support Table.

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

28


API

  

Availability

   Internal Zillow
Response  Time
[***]    [***]    [***]
[***]    [***]    [***]
[***]    [***]    [***]
[***]    [***]    [***]
[***]    [***]    [***]
[***]    [***]    [***]

Zillow and Yahoo will work to reach a mutually agreeable Image Service SLA.

 

2. Capacity

Zillow must maintain sufficient server capacity per datacenter such that Zillow will be able to support peak loads for all the following services simultaneously within defined SLA

 

API

  

Peak Request Rate

Contact Agent API

   [***]

Listings Ad

   [***]

Platinum API

   [***]

Showcase Ad API

   [***]

Beacon API

   [***]

Agent Profile API

   [***]

If peak traffic projections for above mentioned services increases beyond above-mentioned numbers, then Zillow needs to expand their capacity in a mutually agreed upon timeframe to cater to additional peak traffic.

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

29


3. Query Response Time

With respect to services provided by Zillow, Zillow will comply with the following maximum Internal Zillow Response

 

API

  

Internal Zillow Response

Time

Contact Agent API

   [***]

Listings Ad

   [***]

Platinum API

   [***]

Showcase Ad API

   [***]

Beacon API

   [***]

Agent Profile API

   [***]

 

4. Aggregate Response Time

The Aggregate Response Time for each service above, from each Yahoo! data center performing that Query type, shall not exceed the Internal Zillow Response Time plus a mutually agreed upon worst case acceptable delay due to network latency in the USA (the “Critical Threshold”). The parties agree that they will work together in good faith to establish appropriate Aggregate Response Times for additional countries and/or regions not listed in the preceding are added to the term. Both parties will continually monitor the Aggregate Response Time between each Yahoo! data center requesting queries and the appropriate Zillow data center which is responding to those queries, and in the event that Aggregate Response Time exceeds the above numbers, the parties will consider it a Severe Problem.

5. Site monitoring

Zillow will monitor the performance of its obligations under the Agreement using automated tools/utilities developed and/or configured by Zillow, or contracted with external third parties, to validate the Availability and Query Response Times. If Zillow detects fault, it will respond as specified in this SLA agreement. Zillow will share the results of any such monitoring and tests with Yahoo! on a daily basis. The level of detail and thoroughness of the site monitoring (and the reporting of the monitored data) shall be sufficient for both parties to ensure that the SLAs are being met.

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

30


6. Maintenance Requirements

Zillow will use commercially reasonable efforts to notify Yahoo! [***] before any Scheduled Maintenance is performed on its core Partner systems if (a) the maintenance is reasonably expected to cause any service degradation or service availability problem for Yahoo!, or (b) if the proposed maintenance would occur during a Yahoo! change-embargo period (such list of embargo periods to be provided in writing to Zillow by Yahoo!), in which case Yahoo! Must agree to the maintenance and to the timing of said maintenance. Scheduled Maintenance should not impact the overall availability specified above in any calendar month without prior written agreement from Yahoo!.

7. Reporting

Zillow will provide [***] to Yahoo! in a mutually agreed upon format as measured by Zillow’s Internal Monitoring Tool. These Zillow reports will be verified against the reports generated by Gomez Inc. agents or any other mutually agreed means of third party verification. In the event that there are material discrepancies between the numbers calculated by either of the parties and the other party, then the parties agree to use commercially reasonable efforts to work together to determine the reason for the discrepancies and to correct for such discrepancies going forward.

8. Image Serving

Yahoo! reserves the right to manage and host the Zillow images if Zillow’s image serving response times are unsatisfactory as determined by Yahoo!. Zillow agrees to assist Yahoo! in its efforts to setup and manage such an image serving solution as designed by Yahoo!

9. Business Continuity Planning

Zillow shall have a Business Continuity Plan (BCP) in place by Launch Date with respect to the services provided to Yahoo! under the Agreement. An integral part of the BCP is a High Availability (HA) requirement for all systems that provide Real Estate Listing Services. Zillow acknowledges and agrees to provide architecture diagram (with data flow) and detailed documentation of the failover procedure that shall be reviewed by Yahoo BCP team. The failover procedure shall include the time it takes for failover, DNS-TTL procedure for scheduled downtime, and detailed monitoring of Zillow API servers.

10. Sole and exclusive Remedy

Yahoo’s sole and exclusive remedy for Zillow’s breach of this Exhibit A shall be Sections 10 (Term and Termination) and 9 (Indemnification) of this Agreement.

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

31


Failover Requirements

 

The APIs should be able to recover from an outage or failure ranging from equipment failure, network failure, or total loss of a data center. This requires APIs to be hosted in at least two geographically different datacenters. Both set of servers should be operational (hot-hot) and the users of the API should be switched-over to the other datacenter in a transparent manner in case of datacenter failure.

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

32


Reviewers

 

 

Name

  

Title/Role

  
  

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

33

Exhibit 10.2

[***] Indicates confidential material that has been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission. A complete copy of this agreement has been separately filed with the Securities and Exchange Commission.

 

AMENDMENT NO. 2

TO THE LISTING AND SALES AGREEMENT

This Amendment No. 2 to the Listing and Sales Agreement dated July 2, 2010 (the “Agreement”) among Yahoo! Inc., and Yahoo Realty Inc. (collectively “Yahoo”), on the one hand, and Zillow Inc. (“Zillow”), on the other hand, is entered into as of February 9, 2012 (“Second Amendment Effective Date”) and modifies certain terms of the Agreement. Unless otherwise specified, all defined terms used herein shall have the meanings ascribed to them in the Agreement.

For good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree to amend the Agreement as set forth below:

 

  1. The definition of Display Ads is amended to add the following sentence at the end:

“Display Ads will also include any advertisements displayed on the Yahoo-Zillow Mobile Apps (as defined below).”

 

  2. The definition of Leads is amended to add the phrase “and mobile application” to the first sentence, directly after the phrase “means the email”.

 

  3. The definition of “Yahoo Properties” is amended to add the following sentence at the end:

“For clarity, Yahoo Properties will include Yahoo’s or its Affiliates’ worldwide properties, software, products, services, sites and pages accessible in whole or in part through mobile and tablet devices.”

 

  4. Section 2.2 is amended to add the following new section 2.2.4:

2.2.4 Mobile Applications.

 

  (a) Yahoo-Zillow Mobile Apps. Zillow will develop and customize Yahoo branded applications that will be substantially similar, but not identical to, the Zillow home listings applications, into which Zillow will incorporate Leads and Zillow Content (each, individually a Yahoo-Zillow Mobile App, collectively, the “Yahoo-Zillow Mobile Apps”). No later than the dates listed in Exhibit A, Zillow will provide Yahoo-Zillow Mobile Apps based on the Zillow home listings applications for each of the Android, iPhone and iPad platforms, and, upon the mutual agreement of Yahoo and Zillow, for other operating platforms. The Yahoo-Zillow Mobile Apps shall include the features and functionality set forth on Exhibit A. Zillow branding on the Yahoo-Zillow Mobile Apps will be limited to a “Powered by Zillow” in plain text, the location of which will be determined at the sole discretion of Yahoo. Zillow will provide Yahoo-Zillow Mobile Apps based on the Zillow mortgage applications only in the event that Zillow and Yahoo mutually agree that Zillow will provide such applications.

 

  (b) Delivery Format of Yahoo-Zillow Mobile Apps . Zillow will deliver the application code for each Yahoo-Zillow Mobile App in a final format. Yahoo will be responsible for testing each Yahoo-Zillow Mobile App and Zillow will correct material bugs within a commercially reasonable time. The final format of the Yahoo-Zillow Mobile Apps will be: (i) [***]and (ii) [***]. Zillow will deliver an [***]. Yahoo will provide [***]. Yahoo may elect to send [***]. For the Android platform, Zillow will [***]. Yahoo will be [***].


  (c) Promotion of the Yahoo-Zillow Mobile Apps. Yahoo will be solely responsible for negotiations with each platform operator relating to the promotion and distribution of the Yahoo-Zillow Mobile Apps, as well as any corresponding distribution channel management.”

 

  5. Section 2.2.1 is amended to add the following new section 2.2.1(g):

(g) Updates to Yahoo-Zillow Mobile Apps . No later than the next regularly scheduled release after the end of a calendar quarter, Zillow will update the Yahoo-Zillow Mobile Apps with any updates made by Zillow to the Zillow branded version of the application during such quarter. Zillow will fix any significant bug in a Yahoo-Zillow Mobile App that materially affects the operation of such application within five (5) business days after any such fix is made to the Zillow branded version of the application.”

 

  6. Section 3.2 is amended to add the following new section 3.2.6:

“3.2.6 Zillow may not [***]: (a) [***], or (b) [***].”

 

  7. Section 4.1 is amended to add the following new section 4.1.5 as follows:

4.1.5 Yahoo-Zillow Mobile Apps. Zillow grants Yahoo a non-exclusive, worldwide, royalty free right to distribute the Yahoo-Zillow Mobile Apps. Solely to the extent necessary for Yahoo to exercise the foregoing right, Zillow grants Yahoo the right to use and copy the software underlying the Yahoo-Zillow Mobile Apps during the Term. ”

 

  8. Section 5.1 is amended to add the following new section 5.1.4:

5.1.4 Mortgage Products Revenue Share. In the event that Zillow provides Yahoo-Zillow Mobile Apps based on the Zillow mortgage applications, Zillow will pay to Yahoo [***] ([***]%) of [***] recognized by Zillow from Leads generated through the Yahoo-Zillow Mobile Apps for mortgages.”

 

  9. Section 10.1 is hereby deleted and replaced with the following new section 10.1:

10.1 Term. This Agreement will commence upon the Effective Date and, unless terminated as provided herein, will remain in effect for a period of forty-two (42) months from the Launch Date (“ Term ”). If delivery of the Yahoo-Zillow Mobile Apps does not meet the dates set forth on Exhibit A, the Term will be reduced as follows: for each day that delivery of a Yahoo-Zillow Mobile App is delayed (as a result of Zillow’s actions or inactions, within Zillow’s reasonable control) past the corresponding launch date in Exhibit A, the Term will be reduced by a one (1) day period, up to a maximum reduction of ninety (90) days (the “Max Reduction”). In the event that the Term is reduced by the Max Reduction, Yahoo and Zillow may mutually agree to terminate this Amendment, in which case the terms of the Agreement immediately prior to the Second Amendment Effective Date will govern the relationship between Yahoo and Zillow.”

 

  10. Section 10 is amended to add the following new section 10.4:

10.4 Effect of Termination of Amendment No. 2.

Yahoo may elect to terminate Amendment No. 2 upon ten (10) days’ written notice to Zillow. In the event of such termination of Amendment No. 2, or termination of the Agreement for any reason, a one (1) year wind-down period (the “ Mobile Transition Period ”) will occur during which the Parties’ rights and obligations with respect to Amendment No. 2 will remain in effect. Yahoo may migrate users to a new mobile application at any point during the Mobile Transition Period. For clarity, Yahoo will own the relationship with users who downloaded the Yahoo-Zillow Mobile App and will have the opportunity to migrate them to any new Yahoo mobile application. Beginning on the last day of the Mobile Transition Period, Zillow will discontinue powering the Yahoo-Zillow Mobile Apps, such that any attempt to use a Yahoo-Zillow Mobile App will result in loading an error message.”

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

ii


  11. Section 11.3 of the Agreement is amended to add the following phrase at the beginning of the first sentence, such that it reads:

No Joint Works. Except as provided in Section 11.5, the Parties do not intend that any joint works under U.S. copyright law be made in connection with this Agreement.”

 

  12. Section 11 of the Agreement is amended to add the following new section 11.5:

11.5 Joint Ownership in Custom Works Made by Zillow for Yahoo. Between Zillow and Yahoo, Zillow will be the sole owner of all Intellectual Property Rights in the software and other technology relating to the Yahoo-Zillow Mobile Apps, except as provided herein and except for any Yahoo branding or Yahoo Brand Features. In the event that Yahoo provides Zillow with a request for a customization of a Yahoo-Zillow Mobile App and Zillow, in turn, customizes the Yahoo-Zillow Mobile App in a form that is substantially similar to the customization requested by Yahoo, Yahoo and Zillow will jointly own any resulting Intellectual Property Rights in the Yahoo requested customizations. For clarity, this Section 11.5 shall not be deemed to grant Zillow joint ownership in any of Yahoo’s bona fide Intellectual Property.”

13. Except as modified hereby, the Agreement shall remain in full force and effect and is hereby ratified by Zillow and Yahoo.

14. Zillow and Yahoo each represent and warrant to the other that it has the right, power and authority to enter into this Amendment.

 

  15. Zillow and Yahoo hereby agree that facsimile signatures hereto are valid and binding.

IN WITNESS WHEREOF, the Parties hereto have caused the foregoing Amendment to be signed by a duly authorized agent of each party, the day and year first above written.

 

YAHOO! INC.:      
By:  

/s/ B RANDON H UFF

     
Title:  

VP, Commerce

     
Printed Name:  

Brandon Huff

     
Date:  

2/16/12

     
YAHOO! REALTY INC.:     ZILLOW, INC.
By:  

/s/ A MAN K OTHARI

    By:  

/s/ G REG S CHWARTZ

Title:  

SVP, Global Controller, CAO

    Title:  

Chief Revenue Officer

Printed Name:  

Aman Kothari

    Printed Name:  

Greg Schwartz

Date:  

 

    Date:  

02/15/12

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

iii


EXHIBIT A

Implementation Plan

This implementation plan sets forth the deliverables that Zillow shall complete and deliver to Yahoo as defined below, to enable Yahoo to launch the new features as defined in Exhibit B of this Agreement. This implementation plan shall be governed by the terms and conditions of the Agreement and is fully incorporated in the Agreement by this reference. Any capitalized terms not defined herein shall have the meanings set forth in the Agreement. Note: [***]

 

1. Mobile Applications

 

S. No.

  

Deliverable / Feature

   Owner    Target completion
date

1.1

   [***]    Z    [***]

1.2

   [***]    Z    [***]

1.3

   [***]    Z    [***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

iv


Exhibit B: Technical Specification

Yahoo-Zillow Mobile Apps

 

Spec Version    1.0
Spec Stage    Preliminary
Designer    N/A
Biz Owner    Greg Schwartz / Garrett McCauliffe
Dev Owners    Sunil G.
Test Owners    Yahoo!
Ops Owners    N/A
Content Owner    Yahoo!
Code Complete    Quarterly releases
Target Release    1.0

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

v


Table of Contents

 

1. Overview

    vii   

2. Product Features

    vii   
 

Homescreen

    vii   
 

Search Homes

    vii   
 

Search Filters

    vii   
 

Nearby Homes

    vii   
 

Favorite Homes

    vii   
 

Saved Searches

    vii   
 

Mortgage Rate and Calculators

    vii   
 

Home Details Page

    viii   
 

Exclusions

    viii   

3. Yahoo Customization Opportunities

    viii   
 

General

    viii   
 

Homescreen

    viii   
 

Emails

    viii   

4. Yahoo! Responsibilities

    viii   

We expect Yahoo to provide:

 

We also agreed that Yahoo will handle all:

 

5. Analytics and Reporting Requirements

    viii   

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

vi


1. Overview

The Yahoo-Zillow Mobile Apps will be powered by existing Zillow back-end systems and services and existing Zillow Real Estate iPhone features.

After first release, additional quarterly updates may be released. Additional and new features will be determined on case by case basis. Deliverables will be [***]

Not all functionality of the existing and future Zillow mobile apps may be available to transfer to the Yahoo-Zillow Mobile Apps.

2. Product Features

Homescreen

Allow easy access to popular features:

[***]

Search Homes

[***]

Search Filters

[***]

Will not include:

[***]

Nearby Homes

[***]

Favorite Homes

[***]

Will not include

[***]

Saved Searches

[***]

Will not include

[***]

Mortgage Rate and Calculators

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

vii


[***]

Home Details Page

[***]

Will not include

[***]

Exclusions

[***]

3. Yahoo Customization Opportunities

General

[***]

Homescreen

[***]

Emails

[***]

4. Yahoo! Responsibilities

Yahoo will provide

[***]

Yahoo will handle all:

[***]

5. Analytics & Reporting Requirements

[***]

 

[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

viii

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13-14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Spencer M. Rascoff, certify that:

1. I have reviewed this report on Form 10-Q of Zillow, Inc. for the fiscal quarter ended March 31, 2012;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

By:  

/s/ S PENCER M. R ASCOFF

Name:   Spencer M. Rascoff
Title:   Chief Executive Officer
Date:   May 4, 2012

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13-14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Chad M. Cohen, certify that:

1. I have reviewed this report on Form 10-Q of Zillow, Inc. for the fiscal quarter ended March 31, 2012;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

By:  

/s/ C HAD M. C OHEN

Name:   Chad M. Cohen
Title:   Chief Financial Officer and Treasurer
Date:   May 4, 2012

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Zillow, Inc. (the “Company”) for the fiscal quarter ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Spencer M. Rascoff, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/ S PENCER M. R ASCOFF

Name:   Spencer M. Rascoff
Title:   Chief Executive Officer
Date:   May 4, 2012

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Zillow, Inc. (the “Company”) for the fiscal quarter ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Chad M. Cohen, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/ C HAD M. C OHEN

Name:   Chad M. Cohen
Title:   Chief Financial Officer and Treasurer
Date:   May 4, 2012