Zillow Group, Inc.
ZILLOW INC (Form: 10-Q, Received: 08/06/2013 17:03:25)
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 June 30, 2013

 

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

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

As of July 31, 2013, 28,305,790 shares of Class A common stock and 7,088,892 shares of Class B common stock were outstanding.

 

 

 


Table of Contents

ZILLOW, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended June 30, 2013

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

     15   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     28   

Item 4.

  

Controls and Procedures

     29   
PART II – OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     30   

Item 1A.

  

Risk Factors

     31   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 4.

  

Mine Safety Disclosures

     32   

Item 5.

  

Other Information

     32   

Item 6.

  

Exhibits

     33   
  

Signatures

     34   

 

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As used in this Quarterly Report on Form 10-Q, the terms “Zillow,” “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 Part I, Item 2 (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 in a cost-effective manner; our ability to maintain or establish relationships with listings and data providers; our ability to attract consumers to our mobile applications and websites; 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, 2012. 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.

WHERE YOU CAN FIND MORE INFORMATION

Our filings with the Securities and Exchange Commission, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available on our website at www.zillow.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the Securities and Exchange Commission. The information contained on our website is not a part of this quarterly report on Form 10-Q.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings, and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about us, our services, and other matters, and for complying with our disclosure obligations under Regulation FD:

 

   

Zillow Twitter Account (https://twitter.com/zillow)

 

   

Zillow Facebook Page (https://www.facebook.com/Zillow)

 

   

Zillow Company Blog (http://www.zillowblog.com/)

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our investor relations website, press releases, SEC filings, and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q.

 

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Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

ZILLOW, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share data, unaudited)

 

     June 30,
2013
    December 31,
2012
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 131,552      $ 150,040   

Short-term investments

     38,138        44,054   

Accounts receivable, net of allowance for doubtful accounts of $1,310 and $965 at June 30, 2013 and December 31, 2012, respectively

     13,083        8,655   

Prepaid expenses and other current assets

     3,081        2,652   
  

 

 

   

 

 

 

Total current assets

     185,854        205,401   

Long-term investments

     38,368        9,389   

Property and equipment, net

     19,117        13,634   

Goodwill

     54,284        54,284   

Intangible assets, net

     19,597        21,248   

Other assets

     312        279   
  

 

 

   

 

 

 

Total assets

   $ 317,532      $ 304,235   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 5,817      $ 3,158   

Accrued expenses and other current liabilities

     3,473        6,318   

Accrued compensation and benefits

     3,853        2,514   

Deferred revenue

     9,308        8,349   

Deferred rent, current portion

     149        94   
  

 

 

   

 

 

 

Total current liabilities

     22,600        20,433   

Deferred rent, net of current portion

     3,308        3,485   

Commitments and contingencies (Note 10)

    

Shareholders’ equity:

    

Preferred stock, $0.0001 par value; 30,000,000 shares authorized as of June 30, 2013 and December 31, 2012; no shares issued and outstanding as of June 30, 2013 and December 31, 2012

     —          —     

Class A common stock, $0.0001 par value; 600,000,000 shares authorized as of June 30, 2013 and December 31, 2012; 28,129,164 and 26,414,414 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively

     3        3   

Class B common stock, $0.0001 par value; 15,000,000 shares authorized as of June 30, 2013 and December 31, 2012; 7,088,892 and 7,462,526 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively

     1        1   

Additional paid-in capital

     377,267        351,981   

Accumulated deficit

     (85,647     (71,668
  

 

 

   

 

 

 

Total shareholders’ equity

     291,624        280,317   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 317,532      $ 304,235   
  

 

 

   

 

 

 

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
June 30,
     Six Months Ended
June 30,
 
     2013     2012      2013     2012  

Revenue

   $ 46,920      $ 27,765       $ 85,886      $ 50,598   

Costs and expenses:

         

Cost of revenue (exclusive of amortization) (1)

     4,294        3,264         8,424        6,614   

Sales and marketing

     32,924        12,153         52,718        20,468   

Technology and development

     11,071        5,818         21,682        10,848   

General and administrative

     8,978        5,232         17,211        9,677   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     57,267        26,467         100,035        47,607   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (10,347     1,298         (14,149     2,991   

Other income

     115        34         170        65   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (10,232   $ 1,332       $ (13,979   $ 3,056   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) per share — basic

   $ (0.30   $ 0.05       $ (0.41   $ 0.11   

Net income (loss) per share — diluted

   $ (0.30   $ 0.04       $ (0.41   $ 0.10   

Weighted-average shares outstanding — basic

     34,553        28,946         34,164        28,647   

Weighted-average shares outstanding — diluted

     34,553        31,320         34,164        31,163   

 

(1)    Amortization of website development costs and intangible assets included in technology and development

   $ 4,492      $ 2,374       $ 8,700      $ 4,378   

See accompanying notes to condensed financial statements.

 

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ZILLOW, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

     Six Months Ended
June 30,
 
     2013     2012  

Operating activities

    

Net income (loss)

   $ (13,979   $ 3,056   

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

    

Depreciation and amortization

     9,934        5,085   

Share-based compensation expense

     14,613        2,643   

Loss on disposal of property and equipment

     668        69   

Bad debt expense

     765        280   

Deferred rent

     (122     900   

Amortization of bond premium

     210        398   

Changes in operating assets and liabilities:

    

Accounts receivable

     (5,193     (2,397

Prepaid expenses and other assets

     (462     1,464   

Accounts payable

     2,659        1,570   

Accrued expenses

     (1,506     1,076   

Deferred revenue

     959        2,920   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,546        17,064   

Investing activities

    

Proceeds from maturities of investments

     33,000        —     

Purchases of investments

     (56,272     —     

Purchases of property and equipment

     (10,996     (5,898

Purchases of intangible assets

     (1,707     (1,688

Acquisitions, net of cash acquired of $0 in 2013 and $2,029 in 2012

     —          (36,405
  

 

 

   

 

 

 

Net cash used in investing activities

     (35,975     (43,991

Financing activities

    

Proceeds from exercise of Class A common stock options

     8,941        4,793   
  

 

 

   

 

 

 

Net cash provided by financing activities

     8,941        4,793   

Net decrease in cash and cash equivalents during period

     (18,488     (22,134

Cash and cash equivalents at beginning of period

     150,040        47,926   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 131,552      $ 25,792   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Noncash transactions:

    

Capitalized share-based compensation

   $ 1,732      $ 1,081   

Write-off of fully depreciated property and equipment

   $ 792      $ —     

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, and we launched the initial version of our website, Zillow.com, in February 2006. Zillow operates the leading real estate and home-related information marketplaces on mobile and the Web, with a complementary portfolio of brands and products to help people find vital information about homes, and connect with local professionals. In addition to our websites, including Zillow.com, we also own and operate Zillow Mobile, our suite of home-related mobile applications, Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get competitive mortgage rates, Zillow Digs, our home improvement marketplace where consumers can find visual inspiration and local cost estimates, Zillow Rentals, a marketplace and suite of tools for rental professionals, Postlets, Diverse Solutions, Agentfolio, Mortech and HotPads. Zillow provides products and services to help consumers through every stage of homeownership – buying, selling, renting, borrowing and remodeling.

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 mobile applications and 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, 2012 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February 22, 2013. The condensed balance sheet as of December 31, 2012, 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 June 30, 2013, our results of operations for the three and six month periods ended June 30, 2013 and 2012, and our cash flows for the six month periods ended June 30, 2013 and 2012. The results of the three and six month periods ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ended December 31, 2013 or for any 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 February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. An entity must report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This guidance is effective for interim and annual reporting periods beginning after

 

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December 15, 2012, with earlier adoption permitted, and must be applied prospectively. We adopted this guidance on January 1, 2013. The adoption of this guidance did not have any impact on our financial position, results of operations or cash flows as we do not have any items of other comprehensive income in any period presented.

In July 2013, the FASB issued guidance on the presentation of certain unrecognized tax benefits in the financial statements. This guidance provides that a liability related to an unrecognized tax benefit must be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This guidance is effective for interim and annual reporting periods beginning after December 15, 2013, with earlier adoption permitted, and may be applied prospectively or retrospectively. We expect to adopt this guidance on January 1, 2014. The adoption of this guidance is not expected to have a significant impact on our financial position, results of operations or cash flows as we have provided a full valuation allowance against our net deferred tax assets.

 

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 money market funds 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 securities, which include U.S. government agency securities, commercial paper, and corporate notes and bonds. Investments with maturities greater than three months but less than one year are classified as short-term investments. Investments with maturities greater than one year are classified as long-term investments. 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. Our U.S. government agency securities are classified as Level 1 in the fair value hierarchy. Our commercial paper and corporate notes and bonds are classified as Level 2 in the fair value hierarchy. Our short-term and long-term investments 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 short-term and long-term investments approximates their fair value.

Of the short-term investments and long-term investments on hand as of June 30, 2013, 49.8% mature on or prior to June 30, 2014, and the remaining 50.2% mature on or prior to June 30, 2015.

The following tables present the balances of assets measured at fair value on a recurring basis as of the dates presented (in thousands):

 

     June 30, 2013  
     Total      Level 1      Level 2  

Cash equivalents:

        

Money market funds

   $ 120,705       $ 120,705       $ —     

Short-term investments:

        

U.S government agency securities

     25,853         25,853         —     

Commercial paper

     8,992         —           8,992   

Corporate notes and bonds

     3,293         —           3,293   

Long-term investments:

        

U.S government agency securities

     36,473         36,473         —     

Corporate notes and bonds

     1,895         —           1,895   
  

 

 

    

 

 

    

 

 

 

Total

   $ 197,211       $ 183,031       $ 14,180   
  

 

 

    

 

 

    

 

 

 

 

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     December 31, 2012  
     Total      Level 1      Level 2  

Cash equivalents:

        

Money market funds

   $ 143,246       $ 143,246       $ —     

Short-term investments:

        

U.S government agency securities

     26,085         26,085         —     

Commercial paper

     16,965         —           16,965   

Corporate notes and bonds

     1,004         —           1,004   

Long-term investments:

        

U.S government agency securities

     7,079         7,079         —     

Corporate notes and bonds

     2,310         —           2,310   
  

 

 

    

 

 

    

 

 

 

Total

   $ 196,689       $ 176,410       $ 20,279   
  

 

 

    

 

 

    

 

 

 

We did not have any Level 3 assets or liabilities measured at fair value on a recurring basis as of June 30, 2013 or December 31, 2012.

 

Note 4. Property and Equipment, net

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

 

     June 30,
2013
    December 31,
2012
 

Website development costs

   $ 39,720      $ 33,448   

Computer equipment

     9,695        8,380   

Leasehold improvements

     1,728        831   

Software

     1,407        1,209   

Construction-in-progress

     4,759        3,093   

Office equipment, furniture and fixtures

     3,015        2,186   
  

 

 

   

 

 

 

Property and equipment

     60,324        49,147   

Less: accumulated amortization and depreciation

     (41,207     (35,513
  

 

 

   

 

 

 

Property and equipment, net

   $ 19,117      $ 13,634   
  

 

 

   

 

 

 

We recorded depreciation and amortization expense related to property and equipment (other than website development costs) of $0.7 million and $0.4 million, respectively, during the three months ended June 30, 2013 and 2012, and $1.2 million and $0.7 million, respectively, during the six months ended June 30, 2013 and 2012.

We capitalized $4.1 million and $3.1 million, respectively, in website development costs during the three months ended June 30, 2013 and 2012, and $8.0 million and $5.3 million, respectively, during the six months ended June 30, 2013 and 2012. Amortization expense for website development costs included in technology and development expenses was $2.8 million and $1.6 million, respectively, during the three months ended June 30, 2013 and 2012, and $5.3 million and $2.8 million, respectively, during the six months ended June 30, 2013 and 2012.

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

 

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Note 5. Intangible Assets, net

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

 

     June 30, 2013  
     Cost      Accumulated
Amortization
    Net  

Developed technology

   $ 14,335       $ (2,851   $ 11,484   

Purchased content

     10,750         (7,334     3,416   

Customer relationships

     4,875         (929     3,946   

Trademarks

     1,061         (310     751   
  

 

 

    

 

 

   

 

 

 

Total

   $ 31,021       $ (11,424   $ 19,597   
  

 

 

    

 

 

   

 

 

 

 

     December 31, 2012  
     Cost      Accumulated
Amortization
    Net  

Developed technology

   $ 14,335       $ (1,534   $ 12,801   

Purchased content

     9,044         (6,015     3,029   

Customer relationships

     4,875         (387     4,488   

Trademarks

     1,061         (131     930   
  

 

 

    

 

 

   

 

 

 

Total

   $ 29,315       $ (8,067   $ 21,248   
  

 

 

    

 

 

   

 

 

 

Amortization expense recorded for intangible assets for the three months ended June 30, 2013 and 2012 was $1.7 million and $0.8 million, respectively. Amortization expense recorded for intangible assets for the six months ended June 30, 2013 and 2012 was $3.4 million and $1.6 million, respectively. These amounts are included in technology and development expenses.

 

Note 6. Income Taxes

We are subject to federal and state income taxes in the United States. During the three and six month periods ended June 30, 2013 and 2012, we did not have reportable taxable income, and we are not projecting reportable taxable income for the year ending December 31, 2013. We have provided a full valuation allowance against our net deferred tax assets as of June 30, 2013 and December 31, 2012 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. Therefore, no tax liability or expense has been recorded in the financial statements. We have accumulated tax losses of approximately $115.7 million as of December 31, 2012, which are available to reduce future taxable income.

 

Note 7. Shareholders’ Equity

Our board of directors has the authority to fix and determine and to amend the number of shares of any series of preferred stock that is wholly unissued or to be established and to fix and determine and to amend the designation, preferences, voting powers and limitations, and the relative, participating, optional or other rights, of any series of shares of preferred stock that is wholly unissued or to be established, subject in each case to certain approval rights of holders of our outstanding Class B common stock. There was no preferred stock issued and outstanding as of June 30, 2013 or December 31, 2012.

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, may 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 and six month periods ended June 30, 2013, 179,734 shares and 373,634 shares of Class B common stock, respectively, were converted into Class A common stock at the option of the holders. During the year ended December 31, 2012, 2,065,787 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.

 

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In September 2012, we sold 3,844,818 shares of our Class A common stock, including 419,818 shares of our Class A common stock pursuant to the underwriters’ option to purchase additional shares, and certain shareholders sold 575,000 shares of our Class A common stock, at a price of $43.00 per share. We received net proceeds of $156.7 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We received no proceeds from the sale of our Class A common stock by the selling shareholders.

 

Note 8. Share-Based Awards

On July 19, 2011, our 2011 Incentive Plan (as amended and/or restated from time to time, the “2011 Plan”) became effective and was subsequently amended and restated effective as of June 1, 2012, to, among other things, increase the total number of authorized shares and include the material terms of performance goals for performance-based awards. The 2011 Plan was amended effective as of May 31, 2013 to increase the number of authorized shares of Class A common stock available for awards under the 2011 Plan by 1,500,000 shares. 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, nonqualified stock options, restricted stock or restricted stock units, to employees, officers, directors, consultants, agents, advisors and independent contractors. The compensation committee has also authorized certain senior executive officers to grant equity awards under the 2011 Plan, within limits prescribed by the compensation committee.

Stock Options

All stock options outstanding as of June 30, 2013 are nonqualified stock options, with the exception of substituted incentive stock options for 15,143 shares of Zillow’s Class A common stock that were granted in connection with the December 14, 2012 acquisition of HotPads, Inc. 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, with the exception of substituted stock options granted in connection with acquisitions, 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 following their termination of employment or 12 months in the event of termination by reason of death, disability or retirement. Options granted under the 2011 Plan are typically granted with seven-year terms and 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 date of grant, and except for certain options granted to the Company’s chief executive officer in December 2012 and January 2013.

The following table summarizes stock option activity for the year ended December 31, 2012 and the six months ended June 30, 2013:

 

     Shares
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 January 1, 2012

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

Authorized increase in plan shares

     1,068,374        —          —           

Granted

     (1,884,079     1,884,079        30.01         

Exercised

     —          (1,624,304     4.59         

Forfeited or cancelled

     158,359        (158,359     21.42         
  

 

 

   

 

 

         

Outstanding at December 31, 2012

     321,678        5,462,672        14.48         4.88         78,912,364   

Authorized increase in plan shares

     2,887,064        —          —           

Granted

     (1,716,793     1,716,793        38.37         

Exercised

     —          (1,111,474     8.05         

Forfeited or cancelled

     151,082        (151,082     27.94         
  

 

 

   

 

 

         

Outstanding at June 30, 2013

     1,643,031        5,916,909        22.27         5.46         201,399,169   

Vested and exercisable at June 30, 2013

       1,891,515        9.65         3.64         88,246,779   

As of June 30, 2013, the numbers above do not include 139,000 shares of restricted stock and 63,432 restricted stock units granted pursuant to our 2011 Plan.

 

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The fair value of options granted, excluding Nonemployee Director Awards described below and certain options granted to the Company’s chief executive officer in December 2012 and January 2013, 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
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Expected volatility

     50     52     50%-51     52

Expected dividend yields

     —          —          —          —     

Risk-free interest rate

     0.59%-1.22     0.59%-0.71     0.59%-1.22     0.59%-0.91

Weighted-average expected life

     4.58 years        4.58 years        4.58 years        4.58 years   

Weighted-average fair value of options granted

   $ 23.22      $ 19.65      $ 16.53      $ 14.45   

In March 2013, stock options for an aggregate of 30,690 shares of our Class A common stock were granted as Nonemployee Director Awards. The fair value of options granted for the Nonemployee Director Awards, $16.29 per share, is estimated at the date of grant using the Black-Scholes-Merton option-pricing model, assuming no dividends, expected volatility of 51%, a risk-free interest rate of 0.36%, and a weighted-average expected life of 3.5 years. During the three and six month periods ended June 30, 2013, share-based compensation expense recognized in our statement of operations related to Nonemployee Director Awards was $0 and $0.5 million, respectively, and is included in general and administrative expenses.

Restricted Stock Awards

The following table summarizes restricted stock award activity for the year ended December 31, 2012 and the six months ended June 30, 2013:

 

     Shares of
Restricted Stock
    Weighted-
Average Grant-
Date Fair
Value
 

Unvested outstanding at January 1, 2012

     75,000      $ 29.69   

Granted

     299,213        30.43   

Vested

     (34,110     29.41   

Forfeited or cancelled

     —          —     
  

 

 

   

Unvested outstanding at December 31, 2012

     340,103        30.34   

Granted

     3,673        44.66   

Vested

     (16,173     33.09   

Forfeited or cancelled

     (6,540     26.28   
  

 

 

   

Unvested outstanding at June 30, 2013

     321,063        30.70   
  

 

 

   

The fair value of the outstanding shares of restricted stock awards will be recorded as share-based compensation expense over the vesting period. As of June 30, 2013, there was $8.5 million of total unrecognized compensation cost related to restricted stock awards.

 

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Restricted Stock Units

The following table summarizes activity for restricted stock units for the year ended December 31, 2012 and the six months ended June 30, 2013:

 

     Restricted Stock
Units
    Weighted-
Average Grant-
Date Fair
Value
 

Unvested outstanding at January 1, 2012

     —        $ —     

Granted

     300,961        38.77   

Vested

     —          —     

Forfeited or cancelled

     (4,957     39.69   
  

 

 

   

Unvested outstanding at December 31, 2012

     296,004        38.76   

Granted

     4,875        52.96   

Vested

     (230,912     39.69   

Forfeited or cancelled

     (6,535     39.69   
  

 

 

   

Unvested outstanding at June 30, 2013

     63,432        40.71   
  

 

 

   

In April 2013, pursuant to the terms of a Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement between Zillow and a former employee, 218,071 unvested restricted stock units held by such employee became vested, such that the former employee received one share of Zillow’s Class A common stock for each outstanding restricted stock unit. As a result of the accelerated vesting of the restricted stock units, we recognized approximately $7.1 million of share-based compensation expense within sales and marketing expense during the three and six month periods ended June 30, 2013.

The fair value of restricted stock units will be recorded as share-based compensation expense over the vesting period. As of June 30, 2013, there was $2.2 million of total unrecognized compensation cost related to restricted stock units.

Share-Based Compensation Expense

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Cost of revenue

   $ 176       $ 92       $ 339       $ 177   

Sales and marketing

     7,777         289         9,004         479   

Technology and development

     1,034         498         2,068         808   

General and administrative

     1,480         346         3,202         1,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,467       $ 1,225       $ 14,613       $ 2,643   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Note 9. Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares (including Class A common stock and Class B common stock) outstanding during the period. In the calculation of basic net income (loss) per share, undistributed earnings are allocated assuming all earnings during the period were distributed.

Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares (including Class A common stock and Class B 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 and Class A common stock underlying unvested restricted stock and unvested restricted stock units using the treasury stock method.

 

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For the periods presented, the following Class A common stock equivalents were included in the computation of diluted net income per share because they had a dilutive impact (in thousands):

 

                                                                           
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Class A common stock issuable upon the exercise of stock options

     —           2,324         —           2,459   

Class A common stock underlying unvested restricted stock awards

     —           50         —           57   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Class A common stock equivalents

     —           2,374         —           2,516   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the periods presented, the following Class A common stock equivalents were excluded from the calculations of diluted net loss per share because their effects would have been antidilutive (in thousands):

 

                                                                           
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Class A common stock issuable upon the exercise of stock options

     2,950         —           2,899         —     

Class A common stock underlying unvested restricted stock awards

     86         —           78         —     

Class A common stock underlying unvested restricted stock units

     44         —           102         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Class A common stock equivalents

     3,080         —           3,079         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 outstanding preferred stock have been satisfied. We have not presented net income (loss) per share under the two-class method for our Class A common stock and Class B common stock because it would be the same for each class due to equal dividend and liquidation rights for each class.

 

Note 10. Commitments and Contingencies

Lease Commitments

We have various operating leases for office space and equipment. In March 2011, we entered into a lease for approximately 66,000 square feet of office space that houses our corporate headquarters in Seattle, Washington, for which we are obligated to make escalating monthly lease payments that began in December 2012 and continue through November 2022. In June 2012, we entered into a lease amendment for our corporate headquarters in Seattle, Washington, which increased the rentable area of the premises by 21,575 square feet, for which we are obligated to make escalating monthly lease payments that began in January 2013 and continue through November 2022. In April 2013, we entered into a lease amendment for our corporate headquarters in Seattle, Washington, which will increase the rentable area of the premises by 22,583 square feet as of October 1, 2013, and will increase the rentable area of the premises by an additional 22,583 square feet as of September 1, 2014, for which we are obligated to make escalating monthly lease payments beginning in January 2014 and continuing through November 2022. In April 2012, we entered into an operating lease in Irvine, California for 20,025 square feet under which we are obligated to make escalating monthly lease payments which began in August 2012 and continue through July 2022. In November 2012, we entered into an operating lease in San Francisco, California for 18,353 square feet under which we are obligated to make escalating monthly lease payments which began in December 2012 and continue through November 2018. We lease additional office space in Chicago, Illinois, Lincoln, Nebraska, and New York, New York.

Future minimum payments for all operating leases as of June 30, 2013 are as follows (in thousands):

 

Remainder of 2013

   $ 1,922   

2014

     5,010   

2015

     6,067   

2016

     6,599   

2017

     6,795   

All future years

     28,893   
  

 

 

 

Total future minimum lease payments

   $ 55,286   
  

 

 

 

 

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Rent expense for the three months ended June 30, 2013 and 2012 was $1.1 million and $0.6 million, respectively. Rent expense for the six months ended June 30, 2013 and 2012 was $2.2 million and $1.1 million, respectively.

Purchase Commitments

As of June 30, 2013, we had non-cancelable purchase commitments for content related to our mobile applications and websites totaling $14.7 million. The amounts due for this content as of June 30, 2013 are as follows (in thousands):

 

Remainder of 2013

   $ 2,042   

2014

     4,157   

2015

     4,291   

2016

     3,435   

2017

     817   
  

 

 

 

Total future purchase commitments

   $ 14,742   
  

 

 

 

Line of Credit and Letters of Credit

During March 2011, we entered into a loan and security agreement with a financial institution to establish a line of credit of $4.0 million. In April 2012, we amended our loan and security agreement to increase our line of credit from $4.0 million to $25.0 million. The line of credit is secured by substantially all our assets, including our intellectual property, and provides us with flexibility for future potential financing needs. The revolving line of credit contains customary financial covenants, including the maintenance of a minimum adjusted quick ratio (calculated as (i) unrestricted cash plus net accounts receivable divided by (ii) current liabilities less the sum of deferred revenue and any indebtedness owing from borrower to bank), 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 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 customary restrictions on our ability to, among other things, engage in certain mergers and acquisition transactions and create liens on assets. The revolving line of credit contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of certain covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events and material judgments. The occurrence of an event of default will increase the applicable rate of interest by five percentage points and could result in the acceleration of Zillow’s obligations under the revolving line of credit. As of June 30, 2013, we were in compliance with all covenants, and there were no amounts outstanding under the line of credit. The line of credit is available through April 2016.

In March 2011, we executed a standby letter of credit of $1.5 million in connection with the lease of our Seattle offices, and in July 2012, we amended the standby letter of credit to increase the amount to approximately $1.7 million. In connection with the April 2013 amendment to the lease of our Seattle offices, we amended our standby letter of credit to increase the amount from approximately $1.7 million to approximately $2.0 million. In November 2012, we executed a letter of credit of approximately $0.2 million in connection with the lease of our San Francisco office. The letters of credit are secured by our investments and are effective until 60 days after the expiration date of the lease.

Legal Proceedings

In March 2010, Smarter Agent, LLC (“Smarter Agent”) filed a complaint against us for patent infringement in the U.S. District Court for the District of Delaware. The complaint seeks, among other things, a judgment that we may have infringed certain patents held by Smarter Agent, an injunctive order against the alleged infringing activities and an award for damages. In November 2010, the U.S. Patent Office granted our petition for re-examination of the three patents-in-suit, and in an initial office action rejected all claims. In March 2011, the court granted a stay of the litigation pending the completion of the re-examination proceedings. We were granted a stay against the patent infringement complaint. In addition, in October 2011, Smarter Agent filed a substantially similar complaint against Diverse Solutions, Inc. (“Diverse Solutions”), and other defendants, for patent infringement in the U.S. District Court for the District of Delaware. On October 31, 2011, we acquired substantially all of the operating assets and certain liabilities of Diverse Solutions, including the Smarter Agent complaint against Diverse Solutions. In addition, in March 2010, Smarter Agent filed a substantially similar complaint against HotPads, Inc. (“HotPads”), and other defendants, for patent infringement in the U.S. District Court for the District of Delaware. On December 14, 2012, we acquired HotPads, including the Smarter Agent complaint against HotPads. We have not recorded an accrual related to these complaints as of June 30, 2013 or December 31, 2012 as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In September 2010, LendingTree, LLC filed a complaint against us for patent infringement in the U.S. District Court for the Western District of North Carolina. The complaint seeks, among other things, a judgment that we may have infringed certain patents held by LendingTree, an injunctive order against the alleged infringing activities and an award for damages. We have denied the allegations and asserted counterclaims seeking declarations that we are not infringing the patents and that the patents are

 

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unenforceable and invalid. We have not recorded an accrual related to this complaint as of June 30, 2013 or December 31, 2012 as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In November 2012, a securities class action lawsuit was filed against us and certain of our executive officers seeking unspecified damages in the U.S. District Court for the Western District of Washington at Seattle. The complaint purports to state claims for violations of federal securities laws on behalf of a class of those who purchased our common stock between February 15, 2012 and November 6, 2012. A consolidated amended complaint was filed in June 2013. In general, the complaint alleges, among other things, that during the period between February 15, 2012 and November 6, 2012, we issued materially false and misleading statements regarding our business practices and financial results. We intend to deny the allegations of any wrongdoing and vigorously defend the claims in the lawsuit. We have not recorded an accrual related to this lawsuit as of June 30, 2013 or December 31, 2012 as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In January 2013, a shareholder derivative lawsuit was filed against certain of our executive officers and directors seeking unspecified damages on behalf of Zillow in the U.S. District Court for the Western District of Washington at Seattle. In general, the complaint alleges, among other things, that the defendants breached their fiduciary obligations owed to Zillow, and that as a result of the breach of such fiduciary duties, Zillow wasted corporate assets defending itself in the securities class action lawsuit described above, and that defendants were unjustly enriched by selling shares of our common stock on the basis of knowledge of adverse trends before such information was publicly disclosed. The derivative action is the subject of a stipulated order staying proceedings until the District Court rules on a motion to dismiss the consolidated amended complaint in the securities action. The defendants intend to deny the allegations of wrongdoing and vigorously defend the claims in the lawsuit. We have not recorded an accrual related to this lawsuit as of June 30, 2013 or December 31, 2012 as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In addition to the aforementioned, 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 11. 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, including marketplace revenue and display revenue. The following table presents our revenue categories during the periods presented (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Marketplace revenue:

           

Real estate

   $ 30,637       $ 17,046       $ 56,746       $ 31,231   

Mortgages

     5,814         2,577         10,723         4,985   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Marketplace revenue

     36,451         19,623         67,469         36,216   

Display revenue

     10,469         8,142         18,417         14,382   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 46,920       $ 27,765       $ 85,886       $ 50,598   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2012.

Overview

Zillow operates the leading real estate and home-related information marketplaces on mobile and the Web, with a complementary portfolio of brands and products to help people find vital information about homes, and connect with local professionals. In addition to our websites, including Zillow.com, we also own and operate Zillow Mobile, our suite of home-related mobile applications, Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get competitive mortgage rates, Zillow Digs, our home improvement marketplace where consumers can find visual inspiration and local cost estimates, Zillow Rentals, a marketplace and suite of tools for rental professionals, Postlets, Diverse Solutions, Agentfolio, Mortech and HotPads.

Zillow provides products and services to help consumers through every stage of homeownership – buying, selling, renting, borrowing and remodeling. We are transforming the way people make home-related decisions, and enabling homeowners, buyers, sellers and renters to find and connect with local professionals best suited to meet their needs.

Our living database of more than 110 million U.S. 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 nearly 42 million homes and added more than 173 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 industry-leading mobile applications that enable consumers to access our information when they are curbside, viewing homes, and through our websites. 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, rental professionals, and brand advertisers. Our revenue includes marketplace revenue, consisting primarily of subscriptions sold to real estate agents based on the number of impressions delivered in zip codes purchased, and advertising sold on a cost per click, or CPC, basis to mortgage lenders, as well as display revenue, which consists of advertising placements sold primarily on a cost per thousand impressions, or CPM, basis.

During the three months ended June 30, 2013, we generated revenue of $46.9 million, as compared to $27.8 million in the three months ended June 30, 2012, an increase of 69%. This increase is primarily the result of a 71% increase in our Premier Agent subscribers to 38,807 as of June 30, 2013 from 22,696 as of June 30, 2012, as well as significant growth in traffic to our mobile applications and websites. There were approximately 54.3 million average monthly unique users of our mobile applications and websites for the three months ended June 30, 2013 compared to 33.5 million average monthly unique users for the three months ended June 30, 2012, representing year-over-year growth of 62%.

As of June 30, 2013, we had 688 full-time employees, compared to 560 full-time employees as of December 31, 2012.

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, rental 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 our mobile applications using a mobile device during a calendar month and the first time an individual accesses one of our websites using a web browser during a calendar month. If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. If an individual accesses our websites using different web browsers within a given month, the first

 

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access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain. We measure unique users with Google Analytics. Beginning in December 2012, the reported monthly unique users reflect the effect of Zillow’s December 14, 2012 acquisition of HotPads, Inc.

 

     Average Monthly Unique
Users for the Three
Months Ended June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands)         

Unique Users

     54,317         33,474         62

Premier Agent Subscribers

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

 

     At June 30,      2012 to 2013
% Change
 
     2013      2012     

Premier Agent Subscribers

     38,807         22,696         71

Basis of Presentation

Revenue

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

Marketplace Revenue. Marketplace revenue consists of real estate revenue and mortgages revenue. Real estate revenue primarily includes subscriptions sold to real estate agents under our Premier Agent program, as well as revenue generated by Zillow Rentals. Mortgages revenue primarily includes CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders, as well as revenue generated by Mortech, Inc., a company we acquired in November 2012 that provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.

Zillow’s Premier Agent program offers a suite of marketing and business technology solutions to help real estate agents grow their businesses and personal brands. The Premier Agent program allows agents to select products and services that they can tailor to meet their business and advertising needs. The program has three tiers of participation including Premier Platinum, our original flagship subscription product, as well as Premier Gold and Premier Silver, to meet different marketing and business needs of a broad range of agents. All tiers of Premier Agents receive access to a dashboard portal on our website that provides individualized program performance analytics, as well as our personalized website service, and our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent through our mobile and web platforms. Our Premier Gold product also includes featured listings whereby the agent’s listings will appear at the top of search results on our mobile and web platforms. Our Premier Platinum product includes the dashboard portal on our website, our personalized website service, our CRM tool, featured listings, and inclusion on our buyer’s agent list, whereby the agent appears as the agent to contact for listings in the purchased zip code.

We charge for our Platinum Premier Agent subscription product based on the number of impressions delivered on our buyer’s agent list in zip codes purchased based on a contracted maximum cost per impression. Our Platinum Premier Agent subscription product includes multiple deliverables which are accounted for as a single unit of accounting, as the delivery or performance of the undelivered elements is based on traffic to our mobile applications and websites. We recognize revenue related to our impression-based Platinum Premier Agent subscription product based on the lesser of (i) the actual number of impressions delivered on our buyer’s agent list during the period multiplied by the contracted maximum cost per impression, or (ii) the contractual maximum spend on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months or twelve months and then month-to-month thereafter.

We charge a fixed subscription fee for our Premier Gold and Premier Silver subscription products. Subscription advertising revenue for our Premier Gold and Premier Silver subscription products is recognized on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months and then month-to-month thereafter.

In Zillow Mortgage Marketplace, participating qualified mortgage lenders make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Consumers who request rates for mortgage loans in Zillow Mortgage Marketplace are presented with personalized lender quotes from participating lenders. We only charge mortgage lenders a fee when users click 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. We recognize revenue when a user clicks on a mortgage advertisement or on a link to obtain additional information about a mortgage loan quote.

 

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

Costs and Expenses

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

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

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

Other Income

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

Income Taxes

We are subject to federal and state income taxes in the United States. During the three and six month periods ended June 30, 2013 and 2012, we did not have reportable taxable income, and we are not projecting reportable taxable income for the year ending December 31, 2013. We have provided a full valuation allowance against our net deferred tax assets as of June 30, 2013 and December 31, 2012 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax asset will not be realized. Therefore, no tax liability or expense has been recorded in the financial statements. We have accumulated federal tax losses of approximately $115.7 million as of December 31, 2012, which are available to reduce 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
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (in thousands, except per share data, unaudited)  

Statements of Operations Data:

           

Revenue

   $ 46,920       $ 27,765       $ 85,886       $ 50,598   

Costs and expenses:

           

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

     4,294         3,264         8,424         6,614   

Sales and marketing (1)

     32,924         12,153         52,718         20,468   

 

 

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     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013     2012      2013     2012  
     (in thousands, except per share data, unaudited)  

Technology and development (1)

     11,071        5,818         21,682        10,848   

General and administrative (1)

     8,978        5,232         17,211        9,677   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     57,267        26,467         100,035        47,607   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (10,347     1,298         (14,149     2,991   

Other income

     115        34         170        65   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (10,232   $ 1,332       $ (13,979   $ 3,056   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) per share — basic

   $ (0.30 )   $ 0.05      $ (0.41 )   $ 0.11  

Net income (loss) per share — diluted

   $ (0.30 )   $ 0.04      $ (0.41 )   $ 0.10  

Weighted-average shares outstanding — basic

     34,553        28,946         34,164        28,647   

Weighted-average shares outstanding — diluted

     34,553        31,320         34,164        31,163   

Other Financial Data:

         

Adjusted EBITDA (3)

   $ 5,275      $ 5,272       $ 10,398      $ 10,719   

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (in thousands, unaudited)  

(1)    Includes share-based compensation as follows:

           

Cost of revenue

   $ 176       $ 92       $ 339       $ 177   

Sales and marketing

     7,777         289         9,004         479   

Technology and development

     1,034         498         2,068         808   

General and administrative

     1,480         346         3,202         1,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,467       $ 1,225       $ 14,613       $ 2,643   
  

 

 

    

 

 

    

 

 

    

 

 

 

(2)    Amortization of website development costs and intangible assets included in technology and development

   $    4,492       $   2,374       $    8,700       $   4,378   

(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
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (unaudited)  

Percentage of Revenue:

        

Revenue

     100     100     100     100

Costs and expenses:

        

Cost of revenue (exclusive of amortization)

     9        12        10        13   

Sales and marketing

     70        44        61        40   

Technology and development

     24        21        25        21   

General and administrative

     19        19        20        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     122        95        116        94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (22     5        (16     6   

Other income

     0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (22 %)      5     (16 %)      6
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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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.

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     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  
     (in thousands, unaudited)  

Reconciliation of Adjusted EBITDA to Net Income (Loss):

        

Net income (loss)

   $ (10,232   $ 1,332      $ (13,979   $ 3,056   

Other income

     (115     (34     (170     (65

Depreciation and amortization expense

     5,155        2,749        9,934        5,085   

Share-based compensation expense

     10,467        1,225        14,613        2,643   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $      5,275      $   5,272      $     10,398      $     10,719   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Revenue

 

     Three Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

Revenue:

        

Marketplace revenue:

        

Real estate

   $ 30,637       $ 17,046         80

Mortgages

     5,814         2,577         126
  

 

 

    

 

 

    

Total Marketplace revenue

     36,451         19,623         86

Display revenue

     10,469         8,142         29
  

 

 

    

 

 

    

Total revenue

   $ 46,920       $ 27,765         69
  

 

 

    

 

 

    

 

     Three Months Ended
June 30,
 
     2013     2012  

Percentage of Total Revenue:

    

Marketplace revenue:

    

Real estate

     65     61

Mortgages

     12     9
  

 

 

   

 

 

 

Total Marketplace revenue

     78     71

Display revenue

     22     29
  

 

 

   

 

 

 

Total revenue

     100     100
  

 

 

   

 

 

 

Overall revenue increased by $19.2 million, or 69%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Marketplace revenue increased by 86%, and display revenue increased by 29%.

Marketplace revenue grew to $36.5 million for the three months ended June 30, 2013 from $19.6 million for the three months ended June 30, 2012, an increase of $16.8 million. Marketplace revenue represented 78% of total revenue for the three months ended June 30, 2013 compared to 71% of total revenue for the three months ended June 30, 2012. The increase in marketplace revenue was primarily attributable to the $13.6 million increase in real estate revenue, which was primarily a result of growth in the number of subscribers in our Premier Agent program to 38,807 as of June 30, 2013 from 22,696 as of June 30, 2012, representing growth of 71%. The increase in real estate revenue was also partially attributable to price increases supported by growth in our audience across our mobile and desktop platforms, as well as increased sales to existing Premier Agent subscribers looking to expand their presence on our platform. Average monthly revenue per subscriber increased by 1% to $266 for the three months ended June 30, 2013 from $263 for the three months ended June 30, 2012. We calculate our average monthly revenue per subscriber by dividing the revenue generated by our Premier Agent subscription products in the period by the average number of Premier Agent subscribers in the period, divided again by the number of months in the period. The average number of Premier Agent subscribers is derived by calculating the average of the beginning and ending number of Premier Agent subscribers for the period.

Mortgage revenue, which is included in marketplace revenue, also increased by $3.2 million, or 126%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Approximately $1.5 million of the increase was the result of our November 2012 acquisition of Mortech, Inc. The remaining increase of $1.7 million was primarily a result of an increase in the number of loan requests submitted by consumers in Zillow Mortgage Marketplace. There were approximately 5.3 million mortgage loan requests submitted by consumers for the three months ended June 30, 2013 compared to 2.9 million mortgage loan requests submitted by consumers for the three months ended June 30, 2012, an increase of 86%. The growth in loan requests submitted by consumers increases the likelihood that users will click on a mortgage advertisement or on a link to obtain additional information about a mortgage loan quote, but there is not a direct correlation between the number of loan requests and mortgage revenue because loan requests do not always result in revenue recognition.

Display revenue was $10.5 million for the three months ended June 30, 2013 compared to $8.1 million for the three months ended June 30, 2012, an increase of $2.3 million. Display revenue represented 22% of total revenue for the three months ended June 30, 2013 compared to 29% of total revenue for the three months ended June 30, 2012. The increase in display revenue was primarily the result of an increase in the number of unique users to our mobile applications and websites, which increased to 54.3 million average monthly unique users for the three months ended June 30, 2013 from 33.5 million average monthly unique users for the three

 

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months ended June 30, 2012, representing growth of 62%. The growth in unique users increased the number of graphical display impressions available for sale and advertiser demand for graphical display inventory. Although there is a relationship between the number of average monthly unique users and display revenue, there is not a direct correlation, as the Company does not sell its entire display inventory each period and some of the inventory is sold through networks and not directly through our sales team which impacts the cost per impression we charge to customers. As a result, similar to prior periods, the growth rate in the Company’s average monthly unique users outpaced the growth rate of display revenue.

Cost of Revenue

 

     Three Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

Cost of revenue

   $ 4,294       $ 3,264         32

Cost of revenue was $4.3 million for the three months ended June 30, 2013 compared to $3.3 million for the three months ended June 30, 2012, an increase of $1.0 million, or 32%. The increase in cost of revenue was attributable to increased headcount-related expenses of $0.4 million, including share-based compensation expense, driven by growth in headcount, increased credit card and ad serving fees of $0.3 million, a $0.3 million increase in data center operations costs, a $0.5 million increase in various miscellaneous expenses, including connectivity costs and other costs paid to third parties, partially offset by a $0.5 million decrease in revenue sharing costs. We expect our cost of revenue to increase in absolute dollars in future years as we continue to incur more expenses that are associated with growth in revenue.

Sales and Marketing

 

     Three Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

Sales and marketing

   $ 32,924       $ 12,153         171

Sales and marketing expenses were $32.9 million for the three months ended June 30, 2013 compared to $12.2 million for the three months ended June 30, 2012, an increase of $20.8 million, or 171%. The increase in sales and marketing expense was primarily due to an $8.4 million increase in marketing and advertising expenses, primarily related to advertising spend to acquire shoppers across online and offline channels, which supports our growth initiatives, and a $7.5 million increase in share-based compensation expense. We also incurred a $0.8 million increase in consulting costs to support our marketing and advertising spend. We believe we have considerable opportunity to increase brand awareness and grow traffic through targeted advertising programs. As such, we plan to continue to selectively advertise to consumers and professionals in various online and offline channels that have tested well for us to drive traffic and brand awareness for Zillow.

For the three months ended June 30, 2013, share-based compensation expense includes the impact of $7.1 million of expense related to the accelerated vesting of 218,071 unvested restricted stock units. In April 2013, pursuant to the terms of a Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement between Zillow and a former employee, all unvested restricted stock units held by such employee became vested, such that the former employee received one share of Zillow’s Class A common stock for each outstanding restricted stock unit.

In addition to the increases in marketing and advertising and share-based compensation expense, headcount-related expenses increased by $3.7 million, driven primarily by growth in the size of our sales team to promote our marketplace business.

We expect our sales and marketing expenses to increase in absolute dollars in future years as we continue to expand our sales team and invest more resources in extending our audience through marketing and advertising initiatives.

Technology and Development

 

     Three Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

Technology and development

   $ 11,071       $ 5,818         90

 

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Technology and development expenses, which include research and development costs, were $11.1 million for the three months ended June 30, 2013 compared to $5.8 million for the three months ended June 30, 2012, an increase of $5.3 million, or 90%. Approximately $2.1 million of the increase related to growth in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering headcount to support current and future product initiatives. Approximately $2.1 million of the increase was the result of increased amortization of intangible assets, including website development costs, purchased content and acquired intangible assets. The increase in technology and development expenses was also attributable to a $0.3 million increase in consulting costs, a $0.2 million increase in depreciation expense, and a $0.6 million increase in various miscellaneous expenses, including connectivity costs and travel.

Amortization expense included in technology and development for capitalized website development costs was $2.8 million and $1.6 million, respectively, for the three months ended June 30, 2013 and 2012. Amortization expense included in technology and development for purchased data content intangible assets was $0.7 million and $0.5 million, respectively, for the three months ended June 30, 2013 and 2012. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $1.0 million and $0.3 million, respectively, for the three months ended June 30, 2013 and 2012. Other data content expense was $0.1 million and $0.1 million, respectively, for the three months ended June 30, 2013 and 2012. We expect our technology and development expenses to increase in absolute dollars over time as we continue to build new mobile and website functionality.

General and Administrative

 

     Three Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

General and administrative

   $ 8,978       $ 5,232         72

General and administrative expenses were $9.0 million for the three months ended June 30, 2013 compared to $5.2 million for the three months ended June 30, 2012, an increase of $3.7 million, or 72%. The increase in general and administrative expenses was a result of a $2.2 million increase in headcount-related expenses, including share-based compensation expense, driven primarily by growth in headcount and increases in compensation, a $0.7 million increase in building lease-related expenses including rent, utilities and insurance, a $0.2 million increase in bad debt expense, and a $0.6 million increase in various other miscellaneous expenses, including consulting costs, professional services fees, state and local taxes, and travel and meals expense. We expect general and administrative expenses to increase over time in absolute dollars as we continue to expand our business.

 

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Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenue

 

     Six Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

Revenue:

        

Marketplace revenue:

        

Real estate

   $ 56,746       $ 31,231         82

Mortgages

     10,723         4,985         115
  

 

 

    

 

 

    

Total Marketplace revenue

     67,469         36,216         86

Display revenue

     18,417         14,382         28
  

 

 

    

 

 

    

Total revenue

   $ 85,886       $ 50,598         70
  

 

 

    

 

 

    

 

     Six Months Ended
June 30,
 
     2013     2012  

Percentage of Total Revenue:

    

Marketplace revenue:

    

Real estate

     66     62

Mortgages

     12     10
  

 

 

   

 

 

 

Total Marketplace revenue

     79     72

Display revenue

     21     28
  

 

 

   

 

 

 

Total revenue

     100     100
  

 

 

   

 

 

 

Overall revenue increased by $35.3 million, or 70%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. Marketplace revenue increased by 86%, and display revenue increased by 28%.

Marketplace revenue grew to $67.5 million for the six months ended June 30, 2013 from $36.2 million for the six months ended June 30, 2012, an increase of $31.3 million. Marketplace revenue represented 79% of total revenue for the six months ended June 30, 2013 compared to 72% of total revenue for the six months ended June 30, 2012. The increase in marketplace revenue was primarily attributable to the $25.5 million increase in real estate revenue, which was primarily a result of growth in the number of subscribers in our Premier Agent program to 38,807 as of June 30, 2013 from 22,696 as of June 30, 2012, representing growth of 71%. The increase in real estate revenue was also partially attributable to price increases supported by growth in our audience across our mobile and desktop platforms, as well as increased sales to existing Premier Agent subscribers looking to expand their presence on our platform. Average monthly revenue per subscriber increased by 1.5% to $262 for the six months ended June 30, 2013 from $258 for the six months ended June 30, 2012.

Mortgage revenue, which is included in marketplace revenue, also increased by $5.7 million, or 115%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. Approximately $2.8 million of the increase was the result of our November 2012 acquisition of Mortech, Inc. The remaining increase of $2.9 million was primarily a result of an increase in the number of loan requests submitted by consumers in Zillow Mortgage Marketplace. There were approximately 9.9 million mortgage loan requests submitted by consumers for the six months ended June 30, 2013 compared to 5.5 million mortgage loan requests submitted by consumers for the six months ended June 30, 2012, an increase of 80%. The growth in loan requests submitted by consumers increases the likelihood that users will click on a mortgage advertisement or on a link to obtain additional information about a mortgage loan quote, but there is not a direct correlation between the number of loan requests and mortgage revenue because loan requests do not always result in revenue recognition.

Display revenue was $18.4 million for the six months ended June 30, 2013 compared to $14.4 million for the six months ended June 30, 2012, an increase of $4.0 million. Display revenue represented 21% of total revenue for the six months ended June 30, 2013 compared to 28% of total revenue for the six months ended June 30, 2012. The increase in display revenue was primarily the result of an increase in the number of unique users to our mobile applications and websites, which increased to 54.3 million average monthly unique users for the three months ended June 30, 2013 from 33.5 million average monthly unique users for the three months ended June 30, 2012, representing growth of 62%. The growth in unique users increased the number of graphical display impressions available for sale and advertiser demand for graphical display inventory. Although there is a relationship between the number of

 

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average monthly unique users and display revenue, there is not a direct correlation, as the Company does not sell its entire display inventory each period and some of the inventory is sold through networks and not directly through our sales team which impacts the cost per impression we charge to customers. As a result, similar to prior periods, the growth rate in the Company’s average monthly unique users outpaced the growth rate of display revenue.

Cost of Revenue

 

     Six Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

Cost of revenue

   $ 8,424       $ 6,614         27

Cost of revenue was $8.4 million for the six months ended June 30, 2013 compared to $6.6 million for the six months ended June 30, 2012, an increase of $1.8 million, or 27%. The increase in cost of revenue was attributable to increased credit card and ad serving fees of $0.8 million, increased headcount-related expenses of $0.7 million, including share-based compensation expense, driven by growth in headcount, a $0.5 million increase in data center operations costs, a $0.2 million increase in connectivity costs, a $0.7 million increase in various miscellaneous expenses, including royalties and other costs paid to third parties, partially offset by a $1.1 million decrease in revenue sharing costs.

Sales and Marketing

 

     Six Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

Sales and marketing

   $ 52,718       $ 20,468         158

Sales and marketing expenses were $52.7 million for the six months ended June 30, 2013 compared to $20.5 million for the six months ended June 30, 2012, an increase of $32.3 million, or 158%. The increase in sales and marketing expense was primarily due to a $13.1 million increase in marketing and advertising expenses, primarily related to advertising spend to acquire shoppers across online and offline channels, which supports our growth initiatives, and an $8.5 million increase in share-based compensation expense. We also incurred a $2.1 million increase in consulting costs to support our marketing and advertising spend. We believe we have considerable opportunity to increase brand awareness and grow traffic through targeted advertising programs. As such, we plan to continue to selectively advertise to consumers and professionals in various online and offline channels that have tested well for us to drive traffic and brand awareness for Zillow.

For the six months ended June 30, 2013, share-based compensation expense includes the impact of $7.1 million of expense related to the accelerated vesting of 218,071 unvested restricted stock units. In April 2013, pursuant to the terms of a Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement between Zillow and a former employee, all unvested restricted stock units held by such employee became vested, such that the former employee received one share of Zillow’s Class A common stock for each outstanding restricted stock unit. The remaining increase in share-based compensation expense of $1.4 million was driven primarily by growth in the size of our sales team to promote our marketplace business.

In addition to the increases in marketing and advertising and share-based compensation expense, headcount-related expenses increased by $7.6 million, driven primarily by growth in the size of our sales team. We also incurred a $0.5 million increase in tradeshow expenses, including related travel costs, and a $0.5 million increase in various miscellaneous sales and marketing expenses.

Technology and Development

 

     Six Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

Technology and development

   $ 21,682       $ 10,848         100

 

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Technology and development expenses, which include research and development costs, were $21.7 million for the six months ended June 30, 2013 compared to $10.8 million for the six months ended June 30, 2012, an increase of $10.8 million, or 100%. Approximately $4.9 million of the increase related to growth in headcount-related expenses, including share-based compensation expense, as we continue to grow our engineering headcount to support current and future product initiatives. Approximately $4.3 million of the increase was the result of increased amortization of intangible assets, including website development costs, purchased content and acquired intangible assets. The increase in technology and development expenses was also the result of a $0.5 million increase in consulting costs, a $0.4 million increase in depreciation expense, and a $0.7 million increase in various miscellaneous expenses.

Amortization expense included in technology and development for capitalized website development costs was $5.3 million and $2.8 million, respectively, for the six months ended June 30, 2013 and 2012. Amortization expense included in technology and development for purchased data content intangible assets was $1.3 million and $1.0 million, respectively, for the six months ended June 30, 2013 and 2012. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $2.0 million and $0.6 million, respectively, for the six months ended June 30, 2013 and 2012. Other data content expense was $0.2 million and $0.2 million, respectively, for the six months ended June 30, 2013 and 2012.

General and Administrative

 

     Six Months Ended
June 30,
     2012 to 2013
% Change
 
     2013      2012     
     (in thousands, unaudited)         

General and administrative

   $ 17,211       $ 9,677         78

General and administrative expenses were $17.2 million for the six months ended June 30, 2013 compared to $9.7 million for the six months ended June 30, 2012, an increase of $7.5 million, or 78%. The increase in general and administrative expenses was a result of a $3.8 million increase in headcount-related expenses, including share-based compensation expense, driven primarily by growth in headcount and increases in compensation, a $1.4 million increase in building lease-related expenses including rent, utilities and insurance, a $0.6 million increase in professional services fees, a $0.5 million increase in bad debt expense, a $0.3 million increase in travel and meals expense, a $0.3 million increase in consulting costs, and a $0.6 million increase in various other miscellaneous expenses, including connectivity costs and state and local taxes.

Liquidity and Capital Resources

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

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 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 were invested into money market funds, certificates of deposit and fixed income U.S. government agency securities.

In September 2012, we sold and issued 3,844,818 shares of our Class A common stock, including 419,818 shares of our Class A common stock pursuant to the underwriters’ option to purchase additional shares, and certain shareholders sold 575,000 shares of our Class A common stock, at a price of $43.00 per share. The nets proceeds for all shares sold by us in the public offering were approximately $156.7 million after deducting underwriting discounts and commissions of approximately $7.9 million and additional offering-related expenses of $0.7 million, for total expenses of $8.6 million. We received no proceeds from the sale of our Class A common stock by the selling shareholders. The net offering proceeds were invested into money market funds and U.S. government agency securities.

As of June 30, 2013 and December 31, 2012, we had cash, cash equivalents and investments of $208.1 million and $203.5 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions and money market funds. Investments as of June 30, 2013 and December 31, 2012 consist of fixed income securities, which include U.S. government agency securities, commercial paper and corporate notes and bonds. Amounts on deposit with third-party financial institutions exceed the applicable Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable. We believe that cash from operations and cash, cash equivalents and investment balances will be sufficient to meet our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months.

 

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During March 2011, we entered into a loan and security agreement with a financial institution to establish a line of credit of $4.0 million. In April 2012, we amended our loan and security agreement to increase our line of credit from $4.0 million to $25.0 million. The line of credit is secured by substantially all our assets, including our intellectual property, and provides us with flexibility for future potential financing needs. The revolving line of credit contains customary financial covenants, including the maintenance of a minimum adjusted quick ratio (calculated as (i) unrestricted cash plus net accounts receivable divided by (ii) current liabilities less the sum of deferred revenue and any indebtedness owing from borrower to bank), 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 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 customary restrictions on our ability to, among other things, engage in certain mergers and acquisition transactions and create liens on assets. The revolving line of credit contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of certain covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events and material judgments. The occurrence of an event of default will increase the applicable rate of interest by five percentage points and could result in the acceleration of Zillow’s obligations under the revolving line of credit. As of June 30, 2013, we were in compliance with all covenants, and there were no amounts outstanding under the line of credit. The line of credit is available through April 2016.

In March 2011, we executed a standby letter of credit of $1.5 million in connection with the lease of our Seattle offices, and in July 2012, we amended the standby letter of credit to increase the amount to approximately $1.7 million. In connection with the April 2013 amendment to the lease of our Seattle offices, we amended our standby letter of credit to increase the amount from approximately $1.7 million to approximately $2.0 million. In November 2012, we executed a letter of credit of approximately $0.2 million in connection with the lease of our San Francisco office. The letters of credit are secured by our investments and are effective until 60 days after the expiration date of the lease.

The following table presents selected cash flow data for the six months ended June 30, 2013 and 2012:

 

     Six Months Ended
June 30,
 
     2013     2012  
     (in thousands, unaudited)  

Cash Flow Data:

    

Cash flows provided by operating activities

   $ 8,546      $ 17,064   

Cash flows used in investing activities

     (35,975     (43,991

Cash flows provided by financing activities

     8,941        4,793   

Cash Flows Provided By Operating Activities

For the six months ended June 30, 2013, net cash provided by operating activities was $8.5 million. This was primarily driven by a net loss of $14.0 million, adjusted by depreciation and amortization expense of $9.9 million, share-based compensation expense of $14.6 million, bad debt expense of $0.8 million, and loss on disposal of property and equipment of $0.7 million. Changes in operating assets and liabilities decreased cash provided by operating activities by $3.5 million.

For the six months ended June 30, 2012, net cash provided by operating activities was $17.1 million. This was primarily driven by net income of $3.1 million, adjusted by depreciation and amortization expense and share-based compensation expense of $5.1 million and $2.6 million, respectively, and an increase in the balance of deferred rent of $0.9 million. Changes in operating assets and liabilities increased cash provided by operating activities by $4.6 million.

Cash Flows Used In Investing Activities

Our primary investing activities include the purchase and maturity of short-term and long-term investments, the purchase of property and equipment and intangible assets, and cash paid for acquisitions.

For the six months ended June 30, 2013, net cash used in investing activities was $36.0 million. This was the result of $23.3 million of net purchases of investments and $12.7 million of purchases for property and equipment and intangible assets.

For the six months ended June 30, 2012, net cash used in investing activities was $44.0 million. This was the result of $7.6 million of purchases of property and equipment and intangible assets, and $36.4 million paid in connection with the acquisition of RentJuice Corporation, net of cash acquired of $2.0 million.

Cash Flows Provided By Financing Activities

For the six months ended June 30, 2013 and 2012, our financing activities resulted entirely from the exercise of employee stock options. The proceeds from the issuance of Class A common stock from the exercise of stock options for the six months ended June 30, 2013 and 2012 was $8.9 million and $4.8 million, respectively.

 

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Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2013.

Contractual Obligations

The following table provides a summary of our contractual obligations as of June 30, 2013:

 

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

Operating lease obligations

   $ 55,286       $ 4,475       $ 11,814       $ 13,546       $ 25,451   

Purchase obligations

     14,742         4,099         8,153         2,490         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70,028       $ 8,574       $ 19,967       $ 16,036       $ 25,451   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We have various operating leases for office space and equipment. In March 2011, we entered into a lease for approximately 66,000 square feet of office space that houses our corporate headquarters in Seattle, Washington, for which we are obligated to make escalating monthly lease payments that began in December 2012 and continue through November 2022. In June 2012, we entered into a lease amendment for our corporate headquarters in Seattle, Washington, which increased the rentable area of the premises by 21,575 square feet, for which we are obligated to make escalating monthly lease payments that began in January 2013 and continue through November 2022. In April 2013, we entered into a lease amendment for our corporate headquarters in Seattle, Washington, which will increase the rentable area of the premises by 22,583 square feet as of October 1, 2013, and will increase the rentable area of the premises by an additional 22,583 square feet as of September 1, 2014, for which we are obligated to make escalating monthly lease payments beginning in January 2014 and continuing through November 2022. In April 2012, we entered into an operating lease in Irvine, California for 20,025 square feet under which we are obligated to make escalating monthly lease payments which began in August 2012 and continue through July 2022. In November 2012, we entered into an operating lease in San Francisco, California for 18,353 square feet under which we are obligated to make escalating monthly lease payments which began in December 2012 and continue through November 2018. We lease additional office space in Chicago, Illinois, Lincoln, Nebraska, and New York, New York. We also have purchase obligations for content related to our mobile applications and websites. We do not have any debt or capital lease obligations. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. 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, 2012. 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, 2012.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Part 2, Item 7A (Quantitative and Qualitative Disclosures About Market Risk) in our Annual Report on Form 10-K for the year ended December 31, 2012. Our exposures to market risk have not changed materially since December 31, 2012.

 

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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 June 30, 2013. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective as of June 30, 2013.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended June 30, 2013 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

In March 2010, Smarter Agent, LLC (“Smarter Agent”), a provider of mobile real estate applications, filed a complaint against us and multiple other defendants for patent infringement in the U.S. District Court for the District of Delaware. The complaint alleges, among other things, that our mobile technology infringes three patents held by Smarter Agent purporting to cover: a “Global positioning-based real estate database access device and method,” a “Position-based information access device and method” and a “Position-based information access device and method of searching,” and seeks an injunctive order against the alleged infringing activities and an award for damages. We have denied the allegations and asserted counterclaims seeking declarations that we are not infringing the patents and that the patents are invalid. In November 2010, the U.S. Patent and Trademark Office granted our petition for re-examination of the three patents-in-suit and its first office action found all claims invalid. In March 2011, the court stayed the litigation pending the completion of the re-examination proceedings. In addition, in October 2011, Smarter Agent filed a substantially similar complaint against Diverse Solutions, Inc. (“Diverse Solutions”), and other defendants, for patent infringement in the U.S. District Court for the District of Delaware. On October 31, 2011, we acquired substantially all of the operating assets and certain liabilities of Diverse Solutions, including the Smarter Agent complaint. In addition, in March 2010, Smarter Agent filed a substantially similar complaint against HotPads, Inc. (“HotPads”), and other defendants, for patent infringement in the U.S. District Court for the District of Delaware. On December 14, 2012, we acquired HotPads, including the Smarter Agent complaint.

In September 2010, LendingTree, LLC, a provider of an online lending marketplace, filed a complaint against us, and other defendants, for patent infringement in the U.S. District Court for the Western District of North Carolina. The complaint alleges, among other things, that our website technology infringes two patents purporting to cover a “Method and computer network for coordinating a loan over the internet,” and seeks an injunctive order against the alleged infringing activities and an award for damages. We have denied the allegations and asserted counterclaims seeking declarations that we are not infringing the patents and that the patents are unenforceable and invalid.

In November 2012, a securities class action lawsuit was filed against us and certain of our executive officers seeking unspecified damages in the U.S. District Court for the Western District of Washington at Seattle. The complaint purports to state claims for violations of federal securities laws on behalf of a class of those who purchased our common stock between February 15, 2012 and November 6, 2012. A consolidated amended complaint was filed in June 2013. In general, the complaints allege, among other things, that during the period between February 15, 2012 and November 6, 2012, we issued materially false and misleading statements regarding our business practices and financial results. We intend to deny the allegations of any wrongdoing and vigorously defend the claims in the lawsuit.

In January 2013, a shareholder derivative lawsuit was filed against certain of our executive officers and directors seeking unspecified damages on behalf of Zillow in the U.S. District Court for the Western District of Washington at Seattle. In general, the complaint alleges, among other things, that the defendants breached their fiduciary obligations owed to Zillow, and that as a result of the breach of such fiduciary duties, Zillow wasted corporate assets defending itself in the securities class action lawsuit described above, and that defendants were unjustly enriched by selling shares of our common stock on the basis of knowledge of adverse trends before such information was publicly disclosed. The derivative action is the subject of a stipulated order staying proceedings until the District Court rules on a motion to dismiss the consolidated amended complaint in the securities action. The defendants intend to deny the allegations of wrongdoing and vigorously defend the claims in the lawsuit.

Although the results of litigation cannot be predicted with certainty, we currently believe we have substantial and meritorious defenses to the outstanding claims and that the final outcome of the outstanding litigation matters will not have a material effect on our business, financial position, results of operations or cash flow.

In addition to the aforementioned, from time to time, we are involved in litigation and claims that arise in the ordinary course of business and although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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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, 2012. However, you should carefully consider the factors discussed in 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

Unregistered Sales of Equity Securities

There were no unregistered sales of equity securities during the three months ended June 30, 2013.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

On August 2, 2013, Zillow announced that Kathleen Philips has been appointed Chief Operating Officer, effective as of August 1, 2013. In addition to her role as Chief Operating Officer, Ms. Philips will continue to serve as our General Counsel and Secretary.

Ms. Philips, age 46, has served as our General Counsel since July 2010. Ms. Philips served as General Counsel at FanSnap, Inc., a search engine for live event tickets, from June 2008 to June 2010, as General Counsel at Pure Digital Technologies, Inc., the producer of Flip Video camcorders, from September 2007 to June 2008 and as General Counsel at StubHub, Inc., an online live event ticket marketplace, from May 2005 to April 2006. Ms. Philips served as General Counsel at Hotwire, Inc. from 2001 to 2004 and as its Corporate Counsel from 2000 to 2001. Ms. Philips was an attorney in private practice at Cooley Godward LLP from 1998 to 2000 and at Stoel Rives LLP from 1997 to 1998. Ms. Philips holds a B.A. in Political Science from the University of California, Berkeley, and a J.D. from the University of Chicago.

 

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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*   Listings and Sales Agreement by and among Yahoo! Inc., Yahoo! Realty Inc. and Zillow, Inc. dated July 2, 2010.
  10.2   Second Amendment to Lease by and between FSP-RIC, LLC and Zillow, Inc. dated as of April 16, 2013. (1)
  10.3**   Amendment No. 1 to the Zillow, Inc. Amended and Restated 2011 Incentive Plan. (2)
  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.

 

(1) Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 22, 2013, and incorporated herein by reference.
(2) Filed as Appendix A to Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 16, 2013, and incorporated herein by reference.
* Portions of this exhibit are omitted and were filed separately with the Securities and Exchange Commission pursuant to Registrant’s application requesting confidential treatment under Rule 406 of the Securities Act of 1933, as amended, and Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Registrant initially filed this exhibit with Amendment No. 3 to the Registration Statement on Form S-1 filed on June 20, 2011 and was granted an Order Granting Confidential Treatment through August 3, 2013. Subsequent to the initial filing of this exhibit, the parties to the Listings and Sales Agreement extended the term of the Agreement to August 3, 2014. Registrant’s application requested an extension of the confidentiality period through August 3, 2014.
** Indicates a management contract or compensatory plan or arrangement.
*** 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 under those Sections.

 

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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: August 6, 2013     ZILLOW, INC.
    By:  

/s/ C HAD M. C OHEN

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

 

34

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.

EXECUTION COPY

YRI – YAHOO, INC. – ZILLOW

LISTINGS AND SALES AGREEMENT

This Listings and Sales Agreement (the “ Agreement ”) is entered into as of July 2, 2010 (the “ Effective Date ”) by and among Yahoo! Inc., a Delaware corporation, with offices at 701 First Avenue, Sunnyvale, California, 94089 (“ Yahoo ”), Yahoo! Realty Inc., a California corporation, with offices at 701 First Avenue, Sunnyvale, CA 94089 (“ YRI ”), and Zillow Inc., a Washington corporation with offices at 999 Third Avenue, Suite 4600, Seattle WA 98104 (“Zillow”). Yahoo, YRI and Zillow collectively are referred to as the “ Parties ” and each, individually, as a “ Party .”

RECITALS

WHEREAS, Yahoo is an Internet media company that offers a network of branded programming that serves millions of users of the Internet daily;

WHEREAS, YRI, a wholly-owned subsidiary of Yahoo, is a licensed real estate brokerage in the state of California, USA;

WHEREAS, Zillow provides Internet based residential property listings and home related content throughout the United States; and

WHEREAS, the Parties wish to enter into this Agreement so that (i) Zillow can display the residential real estate property listings and other mutually-agreed advertisements which appear on the Zillow Site on Yahoo! Real Estate and other Yahoo Properties and (ii) Yahoo and YRI will provide contacts generated by such display to Zillow’s advertisers.

NOW THEREFORE, in consideration of the mutual promises contained herein, the Parties agree as follows:

SECTION 1: DEFINITIONS

“Activity Data” has the meaning set forth in Exhibit B .

“Affiliates” means any company or any other entity world-wide, including, without limitation, corporations, partnerships, joint ventures, and limited liability companies, in which Yahoo or Zillow, as the case may be, directly or indirectly owns at least a fifty-one percent (51%) ownership, equity, or financial interest and which operate under the “Yahoo” or related brand or the “Zillow” or related brand, or which either directly or indirectly, owns more than fifty-one percent (51%) of Yahoo or Zillow, as the case may be. Additionally, in the case of Yahoo, Affiliates includes Yahoo’s joint ventures in China, Japan and Australia regardless of Yahoo’s percentage ownership in such ventures.

[***] 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.


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“API Specifications” is defined in Section 2.2.1(a).

“Change of Control Event” is defined in Section 14.6.

“COGS” means Cost of Goods Sold which includes: (i) credit card or other payment processing fees, (ii) bad debt, (iii) chargebacks, (iv) disputes, and (v) taxes. COGS is set at [***]% of Gross Revenue for the first quarter of the Term. After the first quarter (post Launch Date) is reconciled and for each quarter thereafter (which shall be reconciled no later than 21 days following the end of the previous quarter), Zillow will report the actual COGS. If the actual COGS is lower than [***]%, then such actual lower rate will be applied in the next quarter. If actual COGS is higher, but below [***]%, than the actual rate will be applied in the next quarter. If actual COGS is [***]% or higher, then COGS rate of [***]% will be applied in the following quarter. For example: [***]% applied at Launch Date; then if the COGS for Q1 is actually [***]%, then the COGS rate of [***]% will be applied in Q2. If COGS in Q1 is actually [***]%, then COGS rate of [***]% will be applied in Q2. If the COGS rate for Q2 is actually [***]%, then the COGS rate of [***]% will be applied in Q3. If Q2 COGS rate is actually [***]%, then the COGS rate of [***]% will be applied in Q3. If Q2 COGS rate is actually [***]%, then COGS rate of [***]% (the maximum allowable rate) will be applied in Q3.

“Confidential Information” is defined in Section 13.2(a).

“Display Ads” means the Yahoo Class One guaranteed (300 x 250 in size) ad units displayed on the Homes for Sale Section and/or New Homes Section of YRE, and any other YRE display ad inventory of which Yahoo notifies Zillow pursuant to Section 2.1(b)(vi). As used in this Agreement, “Yahoo Class One” does not include Run of Network advertising or ads that are behavior targeted.

“Existing Specification” is defined in Section 2.2.1(a).

“Featured Listing” means a paid real estate listing for a Property which is displayed in a manner that is distinctive from other listings. Featured Listings are further described in Exhibit H .

“Gross Revenue” means the revenue recognized by Zillow (including any cancellation fees) with respect to any advertiser for: (a) Real Estate Ad Products that include distribution on the Yahoo Properties; or (b) for Display Ads sold by Zillow.

“Home” means residential real estate being offered for sale and included in the Listings.

“Homes for Sale Section” means that area of YRE dedicated to the resale of existing home inventory.

“Intellectual Property Rights” means all rights in and to trade secrets, patents, patentable inventions, copyrights, trademarks, know-how, moral rights and similar rights of any type under the laws of any governmental authority, domestic or foreign, and rights in and to all applications, registrations, and renewals of any of the foregoing.

“Internet” means the worldwide collection of computers, networks, infrastructure, connections and devices, whether now know or later developed, that can access, connect to,

 

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[***] 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.


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communicate with, or transfer data to, from, through or by way of the worldwide collection of networks (including without limitation telephone, wireless and third party networks) that is in fact the Internet and/or that is commonly referred to as the “Internet” regardless of whether the display is through a computer, connected device, proprietary platform, PDA, or television.

“Launch Date” means the mutually agreed upon date on which the Zillow Listings are first made publicly available on the YRE property, which is expected to be on or about six (6) months after the Effective Date.

“Law” means all applicable legal requirements, including, without limitation, all administrative, local, state, and federal laws and regulations, any valid order, verdict, judgment, consent decree, or injunction governing or regulating any Party to this Agreement.

“Leads” means the email (or phone, if applicable under Section 2.2.1(e)) leads generated by [***] (unless otherwise mutually agreed in the API Specifications, including as they may be updated during the Term). Leads may be generated for [***], or as specified in Section 2.2.1(d).

“Listings API” means an API that provides access to Zillow Listings.

“Market Data Content” means the Zillow content described in Section 2.2.3(a).

“New Homes Section” means that portion of Yahoo Real Estate dedicated to providing listings of new homes hosted by Yahoo and operated by YRI.

“Net Revenue” means Gross Revenue, [***] and if applicable as set forth in Section [***].

“Page” means any World Wide Web page (or, for online media other than Web sites, the equivalent unit of the relevant protocol).

“Property” means a parcel of residential real estate, including new or existing homes and/or land, offered for sale and included in the listings provided by the Zillow Site.

“Real Estate Ad Products” are paid programs designed to generate Leads that are sold to residential real estate brokers and agents (or their marketing representatives), real estate franchisors, or homeowners. Real Estate Ad Products may include by way of example Featured Listings, enhanced realtor profiles in a realtor directory, and Paid Manual Listings (FSBO & FSBA) products. Real Estate Ad Products are further described in Exhibit H .

“Search Results Page” means the Pages of Yahoo Real Estate that provide Listings to a User, based on the User’s entry of search criteria for Homes for Sale.

“Teaser Content” means any excerpt of the Zillow Content that Yahoo creates for placement on YRE and/or other Yahoo Properties in order to promote the features and functionality of applicable pages or sites in support of Lead-generating activities contemplated by this Agreement, subject to the express terms of this Agreement (including without limitation Section 4.1).

 

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[***] 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.


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“Term” is defined in Section 10.1.

“User” means a user of the Yahoo Properties.

“User Data” means any personally identifiable data relating to a User’s use of the Yahoo Properties, including data that Yahoo or its Affiliates, or Zillow or its Affiliates collects from a User of YRE, or that a User provides to Yahoo or Zillow in connection with the Zillow Content, including Zillow Listings. User Data includes, but is not limited to, name, email address, phone number, password, credit card or other identifying information, internet protocol address, and information provided during User registration.

“Yahoo Brand Features” means those trademarks, service marks, logos and other distinctive brand features of Yahoo and its Affiliates that are used in or relate to a Yahoo Property and that are described in Exhibit D , including the Yahoo “look and feel,” as updated by Yahoo from time to time in its sole discretion.

“Yahoo Properties” means any or all of Yahoo’s or its Affiliates’ worldwide properties, software, products, services, sites and pages, including, without limitation, those accessible in whole or in part through the Internet, whether presently existing or later developed, that are developed in whole or in part by or for Yahoo or its Affiliates.

“Yahoo Real Estate” or “YRE” means YRI’s U.S. targeted real estate related property currently located at http://realestate.yahoo.com (including but not limited to the Yahoo Real Estate Property Page) and hosted by Yahoo, including any successor(s) or extension(s) of such property operated by or on behalf of Yahoo or YRI.

“Yahoo Real Estate Property Page” means the top Page of Yahoo Real Estate operated and fully controlled by YRI, which may include functionality that provides the User an opportunity to search generally for residential real estate listed for sale or rent based on a specific area, price range, and number of bedrooms and bathrooms, among other things.

[*** ] means the [***], in a given calendar month.

“Yahoo-Only Packages” is defined in Section 3.2.2.

“Zillow Brand Features” means those trademarks, service marks, logos, and other distinctive brand features of Zillow and its Affiliates that are used in or relate to a Zillow Site and that are described in Exhibit E , including the Zillow “look and feel,” as updated by Zillow from time to time in its sole discretion.

“Zillow Content” means the Zillow Listings, Market Data Content, advice content, pro directory content, article content, and any other mutually-agreed content provided or made available by Zillow to Yahoo or YRI in accordance with this Agreement, and any updates, improvements or modifications made to, or derivative works of any of the foregoing, created from, provided to or made available to Users, YRI or Yahoo (or its Affiliates) pursuant to this Agreement.

“Zillow Listings” means the entire list and description of Resale Homes and FSBO Homes (which may include third party trademarks or brand features) listed with or licensed to Zillow

 

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[***] 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.


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or with vendors of Zillow that collect or aggregate Property listings data that Zillow has permission to license to YRI and Yahoo for use under the terms of this Agreement, and any new homes data that Zillow may elect to make available via the Listings API (subject to the terms of Section 2.2.2).

“Zillow Network” means the collection of publisher sites for which Zillow has agreements to collect Leads from any Real Estate Ad Products.

“Zillow Site(s)” means the website(s) operated by Zillow that is/are dedicated, among other things, to the promotion of real estate and located as of the Effective Date at or in http://www.zillow.com , or any successor or replacement to such site(s).

“Zillow-Yahoo Package” is defined in Section 3.2.

SECTION 2: RESPONSIBILITIES OF THE PARTIES

2.1 YRI’s Responsibilities.

(a) YRI as Executive Producer .

(i) YRI, including through Yahoo, creates and hosts a website called Yahoo Real Estate. YRI and Yahoo are the executive producers of YRE and are solely responsible for the selection of content, design, layout, posting, and maintenance of Yahoo Real Estate. YRI and Yahoo reserve the right, at any time, to redesign or modify the organization, structure, specifications, “look and feel,” navigation, guidelines and other elements of Yahoo Real Estate Pages and/or any other Yahoo Property. Additionally, YRI and Yahoo shall have the right to supplement and amend all content and listings on YRE with third party content and data and User generated content, determine all parameters regarding the display of Featured Listings and any other Real Estate Ad Products, and determine whether to offer additional premium paid services for any service offered by YRE. Yahoo reserves the right to not post any Zillow Content if the Zillow Content is deemed reasonably unacceptable by Yahoo for any reason. Nothing in this Section 2.1(a)(i) will be deemed to supersede or modify Sections 2.1(a)(iii), 2.1(b), 2.2.1(d), 2.2.2, 2.2.3(b), 2.2.3(c)(ii), 2.6(a), 3.1, 4.1, 4.3, 12.2 (with respect to the link to Zillow’s privacy policy) and 13, or Exhibit H of this Agreement, notwithstanding anything to the contrary herein.

(ii) YRI may include notices on sections of Yahoo Real Estate on which Users are providing User Data to YRI for use by Zillow that clarify to the User that Yahoo and YRI are not providing any brokerage services to the User, and are not responsible for the aggregation of any Zillow Content. In addition, YRI and Yahoo will comply with the terms of Section 12.2 with respect to including notices regarding the applicability of Zillow’s privacy policy to the collection and use of certain User Data.

(iii) YRE shall provide Zillow with attribution in accordance with YRE marketing and brand standards on Search Result Pages and Property Detail Pages of YRE where Zillow Listings are displayed. In cases where a Zillow logo does not fit

 

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[***] 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.


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due to page design or device size or format, text attribution will be provided. On Pages of YRE where other Zillow Content is the primary content on the page Zillow will receive text or logo attribution, or such attribution as is otherwise specified in this Agreement (e.g., in Section 2.2.3(d)).

(iv) During the Term, Yahoo will continue to maintain the YRE property at the web address http://realestate.yahoo.com or a substantially similar successor address. During the Term, YRE will maintain a unique user monthly count, as measured by ComScore Media Metrics panel measurement, above [***]. If ComScore Media Metrics materially changes its methodology during the Term or YRE implements a different ComScore Media Metrics methodology, both Parties will mutually agree on a new metric or number of unique monthly users for calculation of this provision. If during the first 12 months of the Agreement Yahoo does not maintain this number of unique users for any [***] period, then Zillow is released from its exclusivity obligations stated in Section 3.5.

(b) Yahoo Real Estate Pages and Services.

(i) Search Query Page . During the Term, YRI, through Yahoo, will provide search input functionality that provides, among other things, the ability to enter search criteria for Homes for Sale on the Yahoo Real Estate Home Page, the Search Results Page and such other locations of the Yahoo Properties and in such form as determined by YRI and Yahoo, subject to applicable rules and regulations.

(ii) Search Results Page . After each search which includes Resale Homes and/or FSBO Homes listings, based on the criteria provided by the User, YRI, through Yahoo, will display the Zillow Listings. In accordance with and subject to Section 2.1(a), the Search Results Page can be modified at the discretion of YRI and Yahoo.

(iii) Details Pages. On the Search Results Page, Users will be provided links to property details pages related to each Zillow Listing, hosted by YRI, through Yahoo, which will provide further information about a Home for Sale (each a “ Details Page ”). In accordance with and subject to Section 2.1(a) the Details Page can be modified at the discretion of YRI and Yahoo, except that at all times YRE will display data as delivered by Zillow for a minimum, common set of data attributes as defined in the Listing Detail section of the Listings API Specification attached as Exhibit A . YRE reserves the right to augment the listings with data from third parties, including Users, as it sees fit, so long as such augmented data is identified as being from a different source and is presented in accordance with the terms of this Section 2.1(b).

(iv) Listing Results Order . YRI will use Zillow’s default sort order as specified in the Listings API for Zillow Listings on all Search Results Pages. Such default sort order will first prioritize Featured Listings above basic Zillow Listings. Except with respect to such first priority default sort order, Zillow has the right to revise the listings sort methodology in the Listings API, 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

 

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[***] 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.


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shall take precedence. If a user refines the search results in any way, YRI will use the default sort order specified in the Listings API. 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 and does not require Zillow to modify the Listings API, YRI may make Listing API calls and display Listings in such new product based on other parameters being first in priority, and Zillow shall return the appropriate listings in a manner that identifies any Featured Listings, which Featured Listings YRI shall visually distinguish 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. Notwithstanding the foregoing, YRI reserves the right to co-mingle 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 Zillow’s Listings API default sort order without co-mingling 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.

(v) Activity Data and Reporting . The Parties have agreed to the terms set forth in Exhibit B with respect to Zillow’s collection of Activity Data (as defined therein) through the beacon described in the beacon specifications set forth in Exhibit A . Zillow also agrees that it will comply with the obligations and restrictions set forth in Exhibit K .

(vi) Inventory Updates. Yahoo will notify Zillow (email will suffice) of any material changes to the Real Estate Ad Products (e.g., material changes in position or format, subject to Exhibit H ) and display advertising units on YRE no less than 60 days prior to their going live on YRE.

2.2 Zillow Listings and Other Content

2.2.1 Zillow Listings . Zillow will provide the Zillow Listings at the Launch Date and thereafter throughout the Term in accordance with the following:

(a) Data Access Requirements. During the Term, Zillow will provide YRI and Yahoo with access to APIs (or, for the listings described in Section 2.2.3(f), a data feed) in compliance with the Listings API Specifications 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 .

(b) Additional Data Requirements . Zillow will use commercially reasonable efforts to obtain and retain the necessary approvals from its vendors and licensors to permit Zillow to license to Yahoo and YRI, as Zillow Listings as set forth in Section 4.1, all of the Resale Homes and FSBO Homes listings on the Zillow Site(s) and any other Zillow Listings provided under this Agreement. Zillow will make Zillow Listings (including pricing changes) available to Yahoo as described in Exhibit A (Alerts API section).

 

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[***] 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.


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(c) Product Enhancements by Zillow . For any products or features offered by Zillow that generate Leads, both Parties shall have equal access to such products or features. If a new website-based Lead generation product or feature is introduced on the Zillow Site, Yahoo will have up to 90 days to implement a similar product or feature before any Leads generated by such product or feature on the Zillow Site and other properties in the Zillow Network count towards the Total Leads. Such a 90 day period begins on the date Zillow makes available a fully functioning API or other tools necessary to create such similar product or feature on YRE. Yahoo shall receive access to such APIs or other tools no later than access is provided to any other member of the Zillow Network. After 90 days or upon launch of the product or feature on YRE, whichever comes first, any Leads generated by such product or feature on the Zillow Site and other properties in the Zillow Network shall count fully towards the Total Leads. It shall be Zillow’s responsibility to accurately track which ad products or features are contributing toward “countable” Leads, including from other partners in the Zillow Network, and to accurately report Lead counts to YRE as part of the regular reporting process described in Section 3.7.

(d) Lead Capture Enhancements by Yahoo . Yahoo may create new Lead capture implementations on YRE and other Yahoo Properties, provided such implementations are reasonably anticipated to generate Leads and they meet the following requirements: (i) they use contextually relevant placements; (ii) they generate Leads that satisfy the minimum user data requirements of a Lead as established and applied by Zillow to the Zillow Site(s) and Zillow Network from time to time; and (iii) Yahoo or YRI promptly takes down such Lead capture implementation if Zillow so requests based on reasonable concern about disruptions to Zillow’s licenses or business relationships with applicable providers of Zillow Content (including Zillow Listings) or Zillow advertisers. Yahoo agrees to notify Zillow no later than 90 days before a new Lead capture implementation goes live on any Yahoo Properties and Zillow agrees to track, report and include Leads from such implementations in the calculation of Total Leads, provided such implementations and Leads comply with this paragraph. Yahoo agrees not to restrict Zillow from implementing similar lead capture techniques as those used on Yahoo Real Estate on the Zillow Sites.

(e) Phone Lead Product . If a phone Lead product offering is introduced on the Zillow Site at any time during the Term, such a product offering will also be made available to YRE for implementation. If YRE chooses to add such an offering, YRE phone Leads shall be [***]. Any phone Leads shall count equal to email Leads unless specific advertisers are charged different prices for email and phone Leads. Zillow will notify Yahoo in writing of any such pricing differences prior to the launch of a phone number for any such advertiser.

(f) Real Estate Ad Products . The Parties agree to the additional terms set forth in Exhibit H with respect to Real Estate Ad Products.

2.2.2 Exclusivity . Zillow will be the exclusive provider of listings for Resale Homes and FSBO Homes on the YRE site. YRE acknowledges that some new homes may be available via the Listings API, but YRE is under no obligation to re-classify those homes or make efforts to have those listings appear in the New Homes section of YRE. Zillow will use best efforts to minimize new home listings available via the Listings API.

 

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[***] 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.


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2.2.3 Other Zillow Content

 

  (a) Market Data Content . At the Launch Date, Zillow shall provide YRI with an API providing access to the following sets of Zillow market data content (on a Zip Code/City/State/National basis): (i) number of homes for sale; (ii) median price of homes for sale; (iii) month-over-month percentage change in median price of homes for sale; and (iv) year-over-year market value percentage change in median price of homes for sale (clauses (i) through (iv), the “ Market Data Content ”). If Yahoo commits to deploying an expanded set of Zillow market data, then on a mutually agreed timeline, Zillow will provide YRI an API providing access to such other Zillow local, regional and national home value market data, including local home values and sales history data and trends similar to what’s found here: http://www.zillow.com/local-info/CA-San-Francisco/Glen-Park-home-value/r_268177/ , subject to availability of and applicable terms regarding such data for syndication under Zillow’s licensing agreements, provided that thereafter if such availability changes during the Term, Zillow will provide Yahoo with 90 days prior written notice (email will suffice) or, if this is not possible, as much prior written notice as is possible before making any changes that would affect YRE.

 

  (b) Zillow Advice Content. On a mutually agreed timeline (anticipated to be [***]) including an agreed deadline for Yahoo to deploy such content on YRE, Zillow will make available to YRI an API in a mutually agreed upon format providing full access to Zillow advice content (i.e., any questions, answers and comments posed by users or experts on the Zillow Site(s)). Yahoo shall link out to Zillow in order to provide users access to account registration, editing and updating of submitted questions and answers. It shall be at YRI’s discretion to determine where such content is made available on the YRE site, though it shall appear in contextually relevant placements. If Yahoo commits to a deployment date then Zillow will provide the requisite API functionality and following integration using such API, any questions posed by YRE users and any resulting answers and comments shall be available for posting on both YRE and Zillow, and such a subset of Zillow advice content will be jointly owned by both YRI and Zillow in perpetuity.

 

  (c) Pro Directory.

(i) At the Launch Date, Zillow will provide YRI with an API providing access to individual professional profiles linked to listings in Zillow’s pro directory and related Real Estate Ad Products such as featured pro directory listings (together, “ Pro Directory Data ”). On a mutually agreed timeline (anticipated to be [***]), Zillow will provide YRI an API in a mutually agreed upon format, providing access to a searchable form of its pro directory data. Such API shall include Pro Directory Data pertaining to all professionals, including agents, lenders and home improvement pros, similar to the pro directory currently available to users on the Zillow Site ( http://www.zillow.com/directory/ .) Zillow shall include the right to syndicate Pro Directory Data to YRE in its terms of service. YRI acknowledges that some sources of directory data, such as broker’s listings feeds, may be subject to other terms and not available for syndication. If any additional non-Lead based ad products are offered by Zillow in the pro directory (e.g. Display Ads, etc.), such products shall also

 

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[***] 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.


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be made available to YRI for implementation on the Yahoo Properties if YRI so chooses and if both Parties mutually agree upon economic compensation for any revenues from YRE-related ad packages. Any Leads from paying agents or brokers generated by users from the pro directory on Yahoo Properties or on the Zillow Site shall be included in the Total Leads. Except for search-related products that Yahoo or YRI have sold to data sources across multiple Yahoo Properties as of the Effective Date of this Agreement and renewals of such agreements, Zillow will be the exclusive provider of pro directory data to the YRE site.

(ii) YRI will use Zillow’s default sort order, as specified in the API for the searchable form of the Pro Directory Data (when it becomes available), for Pro Directory Data listings on all Pro Directory search results pages. Such default sort order will first prioritize featured Pro Directory Data above basic Pro Directory Data. Except with respect to such first priority default sort order, Zillow has the right to revise the listings sort methodology in the Pro Directory API, so long as the same listings sort methodology is applied on the Zillow Site and every other partner in the Zillow Network. If a user re-sorts the search results in any way, the user’s sort preference will take precedence. If a user refines the search results in any way, YRI will use the default sort order specified in the Pro Directory Data API. Notwithstanding the foregoing, YRE reserves the right to co-mingle Pro Directory Data from Zillow with data from Yahoo search-related products permitted under Section 2.2.3(c), provided that the featured Pro Directory Data are sorted first in accordance with Zillow’s Pro Directory API default sort order without co-mingling and are presented in accordance with the terms of this Agreement. For clarity, if a user re-sorts a co-mingled set of data, the user’s sort preference shall take precedence.

 

  (d) Article Content. Upon request by Yahoo but no sooner than three (3) months after the Launch Date, Zillow will share with YRI access to its database of article content related to the home buying and selling process. YRE will provide at least one (1) link back to the Zillow Site from this content, free from “no follow” tags. Zillow will provide to YRI and Yahoo all URLs, URL formats (as applicable), content, and other materials necessary for YRI and Yahoo to provide this link to the Zillow Site.

 

  (e) Homes for Rent Listings. If Zillow chooses, it may deliver an XML feed of homes for rent listings, whose format will be set by YRE and will be similar to the standard spec for rental listings on YRE. All homes for rent listings provided by Zillow shall be designated as basic listings in the rentals section of YRE. Zillow may also cease delivery such an XML feed of homes for rent listings (if it has engaged in such delivery) at any time in its discretion, after providing 10 business days written notice.

 

  (f) Data for YRE’s Use in Recommendations . The YRE Property Detail Pages support a recommendations module that displays listings that are similar to the property a User is viewing. Following the Launch Date, and for as long as YRE is displaying such recommendations module, Zillow will use commercially reasonable efforts to deliver to YRE, on a daily basis, a file that includes the following data from all then-current Zillow Listings: id, zip, city, state, beds, baths, sq. ft and price. The list may include additional mutually agreed fields for use by YRE’s similarity engine.

 

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[***] 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.


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2.3 Performance . Zillow agrees to comply with the Service Levels set forth on Exhibit A . Zillow will have redundant production servers for Zillow Listings, for Market Data Content (at Launch, and for an expanded set of Zillow market data content following Launch, provided that YRI commits to use such content), Pro directory content, and Real Estate Ad Product content at two geographically dispersed locations with adequate failover capabilities, and a BCP in place 45 days prior to the Launch Date that satisfies Yahoo’s reasonable infrastructure requirements. Such infrastructure and plans shall be made available to Yahoo at any time upon request. If, during the Term, any material changes to such infrastructure occur, Zillow will make YRE aware of such changes in a timely manner. Zillow and YRE will meet regularly to discuss technical improvements to the APIs provided by Zillow under this Agreement. Mutual written agreement (which will not be unreasonably withheld) of the Parties will be required in order to modify the API Specifications during the Term except as otherwise expressly set forth in this Agreement.

2.4 Security . Each Party agrees to comply with its obligations set forth in the Security Agreement attached hereto as Exhibit G .

2.5 Compliance

(a) Compliance with Rules, Regulations and Laws. The Parties agree that at all times the Parties shall undertake their obligations pursuant to this Agreement in compliance with all applicable federal, state and local Laws and ordinances. To the extent such Laws require a Party to operate during the Term in a manner materially inconsistent with, or in violation of, the terms of this Agreement, the requirement of any applicable Law shall take precedence over the terms of this Agreement and the Parties’ compliance with any applicable Laws shall not be a violation or breach of this Agreement, and the Parties shall comply with Section 2.5(b).

(b) Modification of Agreement. Any Party seeking a material modification of any right or obligation in this Agreement based on applicability of Section 2.5(a) will provide prompt written notice to the other Parties. The Parties will confer and attempt in good faith to agree upon appropriate modifications to this Agreement so that the Parties carry out their duties and responsibilities under this Agreement in compliance with the Laws giving rise to the application of Section 2.5(a). If the Parties are unable to reach an agreement on any such material modification within thirty (30) calendar days of the written notice, then any Party may terminate this Agreement pursuant to Section 10.2(d).

2.6 Marketing

(a) YRE will direct any owners, agents, brokers (including franchisors), MLSs, franchisors, aggregators or other marketing representatives wishing to submit listings for homes for sale on YRE to a process managed by Zillow. Zillow will provide any resulting listings to YRE through the Listings API. If YRE sends a new advertiser to Zillow and, in the initial phone sales call or online self-serve purchase session, Zillow sells the new advertiser real estate advertisement services outside the scope of the Agreement, Zillow agrees to pay to Yahoo a revenue share equal to [***] percent ([***]%) of [***] less [***]. YRE will not, and will not authorize any third party other

 

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[***] 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.


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than bona fide residential real estate consumer customers to: (x) directly or indirectly activate Zillow-provided Display Ads or Real Estate Ad Products (including without limitation through any action intended to generate Leads or other queries, actions, impressions of or clicks on advertising units through any automated, deceptive, fraudulent or other invalid means (including, but not limited to, click spam or macro programs)), or (y) make contact(s) with Zillow advertisers; and Yahoo will not place or authorize any third party to place any Real Estate Ad Products in any location or manner that is not contextually relevant. In addition, Yahoo will not use or authorize any third party to use any methods that are manipulative, deceptive, malicious or fraudulent in order to increase the number of Leads generated on YRE at any time. YRE will reasonably cooperate with Zillow in policing any such unauthorized activities.

(b) For any marketing materials produced by Zillow that contain mention of Yahoo, YRI or YRE, Zillow shall provide such materials to YRE for review and written approval prior to distribution.

(c) Zillow and YRE will promote this ad sales and listings aggregation partnership through a press release (subject to the terms of Section 13 of this Agreement, and to each Party’s corporate guidelines and approval), blog posts, targeted marketing efforts at industry trade shows, in email (subject to applicable SPAM regulations and each Party’s email marketing guidelines), on both web sites and through advertising placements in appropriate industry media. Zillow shall have the right to reference YRE marks in sales promotion materials. Each Party will bear its own marketing expenses, unless otherwise agreed in writing.

(d) Within 3 months of the Launch Date, Zillow will send mass marketing communications to all existing customers who have agreed to receive such communications from Zillow, with a goal of making them aware of the Zillow-Yahoo partnership and the opportunity to purchase Real Estate Ad Products that include distribution on Yahoo Properties. Such a communication shall include a phone number and other means for prospective advertisers to contact Zillow directly to initiate a purchase. Zillow is obligated to follow up with all prospective advertisers who submit such a lead.

2.7 Launch-Related Milestones. The Parties will endeavor promptly to reach mutual agreement on any open points regarding the API Specifications that are not resolved before the Effective Date and undertake their respective integration and other implementation activities. The Parties have established a series of interim development and integration Milestones, as specified in Exhibit I , that they will each endeavor to achieve after the Effective Date. If a Party does not timely meet such a Milestone, either Party may escalate review of related technical or schedule concerns with a goal of enabling the Parties to cooperate in resolving such concerns and continuing work toward the Launch Date-related Milestones. Neither Party will be liable for material breach of this Agreement based on failing to achieve one or more Milestones on a timely basis in accordance with the schedule shown in Exhibit I or any mutually agreed revised schedule.

 

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[***] 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.


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SECTION 3: ADVERTISING SALES

3.1 Exclusive Appointment for Certain Advertising Products . During the Term, Yahoo appoints Zillow as its exclusive representative for the sale of Real Estate Ad Products and graphical display advertising on YRE to agents, brokers (including franchisors) and their marketing representatives in the New Homes Section and Homes for Sale Section of YRE, except for the following:

(a) For the [***] of the Term, Yahoo will have the right to sell, on its own behalf or through its partners (for example, Yahoo’s Newspaper Consortium), graphical display advertising that utilizes behavioral and/or category targeting capabilities, to agents, brokers (including franchisors) and their marketing representatives, for display in the New Homes and Homes for Sale sections of YRE, provided that such advertising is not specifically targeted to YRE.

(b) Throughout the Term, such exclusivity shall be waived for any advertising that delivers through Yahoo’s remnant display inventory systems, currently known as the Right Media Exchange, or through Yahoo’s paid search products or services inventory, provided that such advertising is not specifically targeted to YRE.

3.2 Packaging. The following guidelines shall apply for the packaging of Real Estate Ad Products:

 

  3.2.1 Beginning on the Launch Date, Zillow will offer distribution of Real Estate Ad Products on both Zillow and YRE (“ Zillow-Yahoo Package(s) ”) as the only packaging option to all new customers who are buying unsold advertising positions and all existing customers who are adding incremental slots (“ Slots ”). For clarity, there shall be no sales after the Launch Date (month-to-month autorenewing contracts not being considered “sales” for this purpose) that include Zillow-only packages subject to 3.2.4.

 

  3.2.2 Beginning on the Launch Date, for all Slots that are sold out on Zillow but Yahoo has comparable Slots available, Zillow shall make commercially reasonable efforts in good faith to offer existing customers similar Real Estate Ad Products based on distribution on Yahoo only (“ Yahoo-Only Package(s) ”) using the sales focus described in this paragraph. For any such customer, Zillow must offer a Yahoo-Only Package length that is co-terminus with the existing, comparable Zillow-only package. When a Yahoo-Only Package and Zillow only-package targeted at similar Slots expire at the same time, Zillow shall offer customers a Zillow-Yahoo Package. If a Zillow-only customer chooses to renew on a month-to-month basis, the Yahoo-only customer shall also be offered the option to renew on a month-to- month basis. Zillow shall focus its efforts on existing customers, as determined by Zillow, in the top 30 MSAs, utilizing a combination of highest revenue opportunity and highest customer demand to pick its targets. Zillow will provide YRI a list of the top 30 MSAs prior to Launch.

 

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  3.2.3 Beginning on the Launch Date, Zillow shall contact existing Zillow-only customers who are in month-to-month auto renewing contracts and offer a Zillow-Yahoo Package when Zillow believes it has a reasonable opportunity for success in creating additional revenue opportunities for Yahoo. Nothing shall obligate such customers to accept a Zillow-Yahoo Package, but within 6 months after the Launch Date, Zillow will use commercially reasonable efforts in good faith to transition all such customers over to a Zillow-Yahoo Package.

 

  3.2.4 During the Term, brokers and agents that are subject to Zillow’s commitments above may [***]. For any broker or agent that [***].

 

  3.2.5 Zillow agrees to compensate its sales team for the sale of [***] under terms that are [***].

3.3 Display Advertising . Yahoo may also allocate YRE inventory of Display Ads to Zillow to sell to new home builders, real estate brokers (including franchisors), or real estate agents and Yahoo will keep Zillow informed of such inventory as described in Section 2.1(b)(vi). Zillow will be limited to selling display advertising in the Homes for Sale Section and New Homes Section of YRE unless the Parties mutually agree otherwise. At the Launch Date, Zillow will become the exclusive Yahoo reseller of graphical display ads to any new home builder advertisers, except the following: [***]. Yahoo and Zillow will work together to develop, no later than thirty (30) days before the Launch Date, and execute a transition plan for any existing Yahoo display advertising accounts. For clarity, Zillow may not sell display inventory to any advertisers whose primary business is [***]. In connection with the sale of Display Ads on YRE, and as a condition of displaying on YRE the Display Ads sold by Zillow following the Launch Date, the Parties shall enter into a written agreement (the “ APT Service Agreement ”), the terms of which are anticipated to be based on the sample agreement set forth in Exhibit J ) setting forth the terms and conditions on which Publisher shall use Yahoo!’s current Display Ad platform and any successor platform (“ APT ”) as Publisher’s exclusive adserver platform for display of Display Ads on YRE, it being understood that Publisher may not use APT for any other purpose, unless the parties agree in writing to the applicable terms and conditions of such additional uses of APT, including any additional compensation to be received by Yahoo!. Zillow agrees to book Display Ads inventory on YRE (“ Yahoo Available Inventory ”) in accordance with the procedures specified by Yahoo from time to time.

3.4 Advertising Terms and Conditions and Related Policies . With respect to the sale of advertising on the Yahoo Properties, Zillow will comply with Yahoo’s then-current advertising policies located at http://adspecs.yahoo.com/ including, without limitation, those policies located at http://adspecs.yahoo.com/policies.php and any other guidelines Yahoo provides to Zillow provided that such guidelines apply to all third party sellers of Display Ads on the Yahoo network. In addition, Zillow agrees to use the minimum terms and conditions from the Yahoo Display Ad Agreement (as such minimum terms are set forth on Exhibit C , the “ Minimum Display Ad Terms ”) in its sales of Display Ads on YRE, except that where an agency or advertiser requires, Zillow may instead use the IAB/AAAA Standard Terms and Conditions for Internet Advertising for Media Buys One Year or Less or other terms consistent with industry practices. Zillow agrees to directly employ at least the equivalent of one (1) fulltime sales person dedicated solely to selling advertising to new

 

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[***] 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.


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home builders. In no event may any page on the Zillow Site to which Users click through from any Zillow Content on the Yahoo Properties contain any “pop-up” or “pop-under” advertisements. Yahoo will not modify any Display Ad content or appearance.

3.5 Pricing & Inventory . Zillow will set pricing of all Real Estate Ad Products based on the guidelines contained herein. Zillow agrees to provide YRI a rate card for Real Estate Ad Products, (including without limitation Zillow-Yahoo Packages) before the Launch Date. Yahoo-Only Packages will be priced using the same methodology used to price Zillow-only and Zillow-Yahoo Packages, except as otherwise provided in this paragraph. Zillow agrees to give Yahoo notice prior to any changes in such methodology. 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. 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. If cancellation rates for Yahoo-Only Packages are greater than [***]% above the cancellation rates in same counties for Zillow-only packages and pricing is suspected, then the parties shall discuss adjusting the pricing floor. Yahoo will set floor pricing for Display Ads sold by Zillow in Yahoo’s sole discretion and shall from time to time make changes after giving reasonable advance notice. Zillow may 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. Yahoo shall provide Zillow estimates of available impressions in the Homes for Sale and New Homes sections at the DMA level on a quarterly basis.

3.6 Sales Exclusivity. Zillow agrees that YRE is the only website not owned by Zillow for which Zillow will sell Real Estate Ad Products for [***] following the Launch Date. After [***], Zillow may enter into agreements for the sale of Real Estate Ad Products on other websites, provided that Zillow provides [***] written notice to Yahoo and YRI before any third party partnership for the sale of such listing advertising becomes active, including the name of the partner, and 30 days written notice to Yahoo and YRI prior to the end of any such partnership.

3.7 Reporting to Yahoo .

(a) Within 15 days after the end of any month, Zillow will provide detailed reporting of all ad sales related to Yahoo and Zillow Packages, including but not limited to Zillow Yahoo Packages sold and cancelled, Display Ad impressions booked and delivered; the quantities of Leads generated by YRE, Zillow, and Total Leads; and Gross and Net Revenue. Zillow will present all information broken out by ad product type and advertiser type, clearly separating all data and revenue for YRE-Only Packages should they exist. If Lead scoring or other Lead/referral performance metrics are gathered by Zillow during the Term, such data will also be collected for the Yahoo referrals and Leads and such Yahoo referral and Lead-related information shall be shared with Yahoo on a regular basis.

(b) Zillow will apply to Leads provided by Yahoo hereunder the same rules for recognition of valid Leads that Zillow applies to Leads from the Zillow Site. Such rules of recognition will be designed to exclude communications that appear to be generated based on any manipulative, deceptive, malicious or fraudulent lead generation activity, or

 

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[***] 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.


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any activity that indicates end users are contacting advertisers for reasons that are not consistent with an interest in residential real estate opportunities (e.g., attempts to gather personal information from advertisers). By way of background, as of the Effective Date, Zillow uses the following rules of recognition for Leads from the Zillow Site:

 

   

All required fields must be present.

 

   

All filled out fields must have correctly structured data (e.g., phone number fields can’t contain letters; obviously invalid area codes or exchanges such as 555 are rejected).

 

   

Free-form text fields (e.g., message section) are scanned for profanity and other objectionable content.

 

   

Rate limits apply to how many contacts a user can make within a session, including a limit on the number of contacts for a particular home.

 

   

Review of whether the user making the contact has recently viewed the home/agent that the contact is for.

(c) Once per week during the Term, Zillow shall provide basic reporting to YRI that allows YRI to gauge its ongoing performance and monetization. Such reporting shall include: total Leads generated by YRI and the Yahoo Properties, Zillow and the Zillow network, and Gross Revenue generated during the time period. Both parties will mutually agree on any other data that shall be shared.

3.8 Reporting to Advertisers. If an advertiser requests, [***].

SECTION 4: LICENSES

4.1 Zillow Grant. Subject to the terms and conditions of this Agreement, Zillow hereby grants to Yahoo and its Affiliates during the Term, the following:

 

  4.1.1

Zillow Content. A non-exclusive, worldwide, revocable, limited, fully paid up, royalty free license to use, copy, encode, store, distribute, transmit, modify and create derivative works of (solely to the extent expressly permitted by the next sentence), and publicly perform and publicly display the Zillow Content via the Internet on YRE and, subject to Section 4.2.2, other Yahoo Properties, provided that Yahoo may publicly perform and publicly display only Zillow Listings which Yahoo has obtained via the Listings API within 24 hours before such public performance or public display. Yahoo’s and its Affiliates’ license to modify and create derivative works of the Zillow Content is limited solely to (a) modifying the Zillow Content as necessary to fit the format and “look and feel” of Yahoo Real Estate or other Yahoo Properties on which the Zillow Content is displayed, as revised and changed from time to time in accordance with the terms of this Agreement, and (b) modifying the Zillow Content to create Teaser Content. Yahoo’s and its Affiliates’ license to distribute, transmit and publicly perform and display Teaser Content is limited to placements on Yahoo Properties that use the Teaser Content in a contextually relevant manner and location in order to promote features and functionality of YRE or other real estate-related content and services

 

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[***] 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.


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  that can reasonably be anticipated to generate Leads. Yahoo will provide prior written notice (email will suffice) to Zillow of any new programmatic use of Zillow Listings as Teaser Content on any Yahoo Property(ies) other than YRE. Yahoo is not authorized to and will not use any Teaser Content to promote any content, products or services on the Yahoo Properties that compete with Lead-generating content, products or services. Further, Yahoo’s license rights in Teaser Content are subject to the condition that Yahoo will cease any exercise of rights in specific Teaser Content if Zillow so requests based on reasonable concern about disruptions to Zillow’s licenses or business relationships with providers of applicable Zillow Content (including Zillow Listings).

 

  4.1.2 Integration with Additional Yahoo Services. Yahoo and its Affiliates may exercise their rights in the Zillow Content (as set forth in Section 4.1.1) in order to integrate Zillow Content into any products, services, functionality or tools of the Yahoo Properties (other than YRE, which is subject to the licenses set forth in Section 4.1.1), and of third parties as hosted and used on the Yahoo Properties, provided that (i) Yahoo notifies Zillow in writing in advance of such integration; and (ii) upon written requests by Zillow based on reasonable concern about disruptions to Zillow’s licenses or business relationships with providers of applicable Zillow Content (including Zillow Listings),Yahoo will not undertake, or will promptly cease, any exercise of rights in Zillow Content under this Section 4.1.2. Subject to the foregoing, and by way of example and not limitation, Yahoo may (a) plot and display Zillow Content on aerial, satellite, street level and hybrid maps imagery within the Yahoo Properties; (b) include Zillow Content in widgets, badges, display and Yahoo smart advertisements; (c) integrate Zillow Content into third party applications, tools and content within YRE, such as mapping, neighborhoods, and schools; and (d) aggregate Zillow Content to provide monthly metrics ( e.g. , top cities, hot markets) for display on the Yahoo Real Estate Home Page and other locations in the Yahoo Properties. Notwithstanding the foregoing, Yahoo agrees that Zestimates and other data derived from recently sold homes data may not be made available by Yahoo or YRI via any mobile device.

 

  4.1.3 Zillow Brand Features. A non-exclusive, revocable, worldwide, fully paid up, royalty free right and license to use, copy, encode, store, and publicly display the Zillow Brand Features: (1) as expressly permitted under this Agreement in connection with the presentation of the Zillow Content on Yahoo Properties targeted to U.S.-based audiences; and (2) as expressly permitted under this Agreement in connection with the marketing and promotion of Yahoo Real Estate to U.S.-based audiences. Zillow agrees that Zillow Brand Features, as provided by Zillow, may be used in accordance with the terms of this Agreement on the Search Results Pages and Details Pages that display Zillow Listings and on the Yahoo Real Estate partners page. Any use of the Zillow Brand Features will be in compliance with the Zillow Brand Features Guidelines, attached here to as Exhibit F . If Zillow objects to Yahoo’s use of the Zillow Brand Features, Yahoo will promptly comply with Zillow’s reasonable requests for changes or removal, and Yahoo will promptly replace any removed use with a corrected one where necessary to comply with the terms of this Agreement. Zillow does not grant Yahoo any right, title, or other property interest in the Zillow Brand Features.

 

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[***] 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.


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  4.1.4 Right to Sublicense. The right to sublicense, solely as applied to Zillow Listings, the rights and licenses set forth in Sections 4.1.1 and 4.1.2 for use, in accordance with all terms of this Agreement, (i) in connection with any mirror site controlled by Yahoo or Affiliate of Yahoo and (ii) in a distribution or syndication arrangement in which Yahoo operates a co-branded or private label version of substantially all of YRE as part of a co-branded or private label version of Yahoo’s Internet portal (e.g., sites currently operated by Yahoo for AT&T or British Telecom). All sublicenses granted under this Section 4.1.4 will be subject to the same restrictions that apply to Yahoo and YRI with respect to the use of the applicable Zillow Content and Zillow Brand Features.

4.2 Yahoo Grant. Subject to the terms and conditions of this Agreement, Yahoo hereby grants to Zillow during the Term, a non-exclusive, revocable, limited, worldwide, fully paid up license to use, copy, encode, store, and publicly display the Yahoo Brand Features as expressly permitted under this Agreement, and in marketing and sales materials related to this Agreement, subject to Yahoo’s prior written approval in each instance. Any use of the Yahoo Brand Features will be in compliance with the Yahoo Brand Features Guidelines, attached here to as Exhibit E and will be subject to Yahoo’s approval as described in Exhibit E . If Yahoo objects to Zillow’s use of the Yahoo Brand Features, Zillow will promptly comply with Yahoo’s reasonable requests for changes or removal. Yahoo does not grant Zillow any right, title, or other property interest in the Yahoo Brand Features.

4.3 Trademarks. Each Party will comply with the trademark guidelines provided by the other party with respect to the use of any of such Party’s brand features and no Party will alter or impair any acknowledgment of copyright or other Intellectual Property Rights of the other. Each Party retains the right to inspect and approve any use of its brand features to ensure that such usage is consistent with its trademark standards. Each Party agrees that its use of the other Party’s brand features will inure solely to the benefit of the owner. Each Party recognizes the goodwill attached to the other Party’s brand features and acknowledges and agrees not to adopt or use any names, logos or trademarks, which include or may be confusingly similar to the other Party’s brand features, nor shall it engage in or allow others under its control or direction (including independent contractors, employees and agents) to engage in any practice or other activity that is or is likely to be detrimental to the goodwill associated with the other Party’s brand features.

4.4 No Other Rights. Except as expressly set forth in Sections 4.1 and 4.2 above, neither Party grants to the other Party any other rights to the Zillow Content, the Zillow Brand Features, or the Yahoo Brand Features, as the case may be. All rights not expressly granted herein are reserved.

SECTION 5: COMPENSATION

5.1 Real Estate Ad Products Revenue Share. During the Term, Zillow will pay to YRE a Revenue Share equal to [***] percent
([***]%) of [***] received times the [***] (except for [***], for which Zillow will pay to Yahoo [***] percent ([***]%) of [***], applying no [***]).

 

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  5.1.1 [***] as Zillow Network Expands. After [***] following the Launch Date, if Zillow sells listings-based advertising for any new members of the Zillow Network, the number of Leads that Zillow advertisers receive from the new partner(s) shall be included in the number of Total Leads for purposes of calculating the [***] as follows: In the first month that the new partner Leads are included, only [***] of the corresponding actual Leads will be used in the calculation of Total Leads. In the second month, the new partner Leads shall be added to the Total Leads at the rate of [***] of actual Leads. This calculation of adding an additional [***] each month of actual Leads to the [***] shall continue throughout [***]. In month [***], the new partner’s Leads shall be added to the Total Leads at the rate of [***]% of the corresponding actual Leads.

 

  5.1.2 Display Ad Revenue Share. Zillow will pay Yahoo [***] ([***]%) of [***] recognized by Zillow from the sale of Display Ads. Yahoo will be entitled to retain [***] and otherwise on the [***] in accordance with Sections [***] (i.e., [***]).

 

  5.1.3 Homes for Rent Compensation. The revenue structure for such an implementation shall be mutually agreed upon in writing before any Zillow feeds shall be accepted by YRE.

5.2 Payment Terms. All fees due under this Section 5 are due within thirty (30) days of Zillow’s receipt of invoice from Yahoo. Any payments not paid on such due date and that are not subject to good faith dispute will bear interest commencing on the due date at the lesser of (x) one percent per month or (y) the maximum amount allowed by Law. Any failure by Zillow to make payments as required hereunder or disputed in good faith will constitute a material breach of this Agreement, subject to a right to cure per Section 10.2(a).

5.3 Right to Audit Compliance with Payment and Data Provisions.  No more than once each year during the Term and for a period of one (1) year thereafter, Yahoo, through an independent nationally recognized third-party representative and upon thirty days prior written notice, may conduct an audit of Zillow’s relevant financial books and records (including electronic records), processes and systems to review Zillow’s compliance with the payment provisions set forth in Section 5.1 . Prior to any audit, Yahoo will obtain from the auditor a signed confidentiality agreement, the provisions of which shall be no less restrictive than the obligations referenced in Section 13 (Confidential Information and Publicity). Yahoo shall pay the costs and expenses of any such audit; provided, however that if an audit reveals an underpayment of five percent (5%) or more for the audited period, Zillow shall pay for the costs and expenses of such audit within 45 days of such finding, in addition to the amount of any shortfall.

SECTION 6: REPRESENTATIONS AND WARRANTIES

6.1 General. YRI, Yahoo and Zillow each represent, warrant and covenant to each other that, as regards to itself:

 

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  (a) their negotiation, entry and performance of this Agreement will not violate, conflict with, interfere with, result in a breach of, or constitute a default under any other agreement to which they are a party or any applicable Law;

 

  (b) they own or have the right to use all brand features (including trademarks and logos) that they authorize the other Parties to reproduce and display pursuant to this Agreement and any exercise of rights in brand features granted under this Agreement, will, to the best of their knowledge, not infringe third party rights; and

 

  (c) they have all necessary power and authority to enter into this Agreement, and to carry out their obligations hereunder.

6.2 By Zillow. Zillow represents, warrants and covenants to YRI and Yahoo that:

(a) Zillow has acquired or will acquire permission, prior to distribution of the Zillow Listings to YRI, from the third parties providing the Zillow Content, for YRI and Yahoo to use the Zillow Listings as provided in this Agreement.

SECTION 7: LIMITATIONS AND DISCLAIMERS.

7.1 Limitations of Liability and Remedies. EXCEPT PURSUANT TO THE INDEMNITY OBLIGATIONS OF SECTION 9, OR FOR A MATERIAL BREACH OF A PARTY’S OBLIGATIONS UNDER SECTIONS 12 OR 13, OR FOR INFRINGEMENT OR MISUSE OF INTELLECTUAL PROPERTY RIGHTS OF A PARTY HEREUNDER, (A) NO PARTY, NOR ITS AFFILIATES NOR EMPLOYEES, OFFICERS, REPRESENTATIVES NOR AGENTS WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR EXEMPLARY DAMAGES, COSTS, OR LIABILITIES ARISING FROM THE SUBJECT MATTER OF THIS AGREEMENT, REGARDLESS OF THE TYPE OF CLAIM AND EVEN IF THAT PARTY OR AFFILIATE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS; AND (B) DAMAGES IN CONNECTION WITH CLAIMS UNDER THIS AGREEMENT SHALL BE LIMITED TO ($1,000,000) ONE MILLION DOLLARS.

7.2 Disclaimers.

(a) EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES MADE IN THIS AGREEMENT, ALL YRI OR YAHOO PAGES, YAHOO PROPERTIES, ZILLOW SITE(S), ZILLOW CONTENT, ZILLOW LISTINGS, AND ANY APIs, FEEDS, DATA, CONTENT OR MATERIALS PROVIDED BY EITHER PARTY (OR ITS AFFILIATES) TO THE OTHER PARTY (OR ITS AFFILIATES) IN CONNECTION WITH THIS AGREEMENT (COLLECTIVELY AND INTERCHANGEABLY, THE “ COVERED SUBJECT MATTER ”) ARE PROVIDED “AS IS.” THE REPRESENTATIONS AND WARRANTIES IN SECTION 6 ARE IN LIEU OF ALL OTHER WARRANTIES, REPRESENTATIONS, ASSURANCES, OR CONDITIONS, EXPRESS, IMPLIED,

 

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STATUTORY OR OTHERWISE, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY, TITLE AND NON-INFRINGEMENT, AND AS TO THE SUFFICIENCY OF ANY REVENUES ANY OTHER PARTY MAY RECEIVE IN CONNECTION WITH ACTIVITIES UNDER THIS AGREEMENT.

(b) For the avoidance of doubt, the foregoing disclaimers do not modify either Party’s obligations under the terms of the Service Level Agreement set forth in Exhibit A .

SECTION 8: SUBCONTRACTORS USED BY THE PARTIES

Each Party will be responsible for all acts and omissions of that Party’s employees, independent contractors, and other persons or entities performing any part of that Party’s responsibilities under this Agreement for or on behalf of that Party and any of its independent contractors. Any breach of this Agreement by any of these persons or entities will be deemed a breach of this Agreement by that Party.

SECTION 9: INDEMNIFICATION

9.1 By Zillow. Zillow, at its own expense, will indemnify, defend and hold harmless Yahoo, its Affiliates and their respective employees, representatives and agents (“ Yahoo Indemnified Parties ”), against any claim, suit, action, or other proceeding brought against Yahoo Indemnified Parties by an unrelated third party based on or arising from a claim (a) that if true would constitute a breach of Zillow’s representations and warranties set forth in Section 6 above; (b) that if true would constitute a breach by Zillow of Section 12 (“User Data and Privacy”) of this Agreement; (c) that the Zillow Content or Zillow Brand Features used as expressly authorized under this Agreement infringe in any manner any copyright, trademark, trade secret or any other non-patent Intellectual Property Right or other right of such third party, defame any third party, or infringe any third party patent right (provided that this clause (c) does not apply to any third party patent infringement claim that requires software, services, products, technology or other materials not provided by Zillow hereunder) ; and provided further that Zillow’s total cumulative liability with respect to this subsection (c) shall not exceed Three Million Dollars, (d) that Zillow or a Zillow Affiliate has provided products and services in violation of Law or an agreement with any third party (each, a “ Zillow Indemnified Claim ”), provided, however, that: (x) YRI or Yahoo provides Zillow with prompt notice of any such Zillow Indemnified Claim; (y) YRI and Yahoo permits Zillow to assume and control the defense of such Zillow Indemnified Claim, with counsel chosen by Zillow (who will be reasonably acceptable to YRI and Yahoo), and reasonably cooperates with Zillow, at Zillow’s sole expense, in the defense of such Zillow Indemnified Claim; and (z) Zillow’s indemnity obligations will not apply to any damages incurred by Yahoo based on Yahoo’s continued use of any Zillow Content following a written take-down notice (email will suffice) by Zillow to Yahoo in which Zillow requests that Yahoo cease using (or using in a specified manner) certain Zillow Content because of a potential third party claim to which Zillow’s indemnity obligations would otherwise apply. Zillow will not enter into any settlement or compromise of any such Zillow Indemnified Claim that would impose any obligations on YRI or Yahoo without Yahoo’s prior written

 

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[***] 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.


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consent, which consent will not be unreasonably withheld. Subject to the terms of this paragraph, Zillow will pay any and all costs, damages, and expenses, including, but not limited to, reasonable attorneys’ fees and costs awarded against or otherwise incurred (in accordance with this Section 9.1) by a Yahoo Indemnified Party in connection with or arising from any Zillow Indemnified Claim.

9.2 By YRI and Yahoo. Yahoo and, at Yahoo’s and YRI’s discretion, YRI, shall, at their own expense, indemnify, defend and hold harmless Zillow, its Affiliates, and their respective employees, representatives and agents (“ Zillow Indemnified Parties ”), against any claim, suit, action, or other proceeding brought against Zillow Indemnified Parties by an unrelated third party based on or arising from a claim (a) that the Yahoo Brand Features used as expressly authorized under this Agreement infringe in any manner any patent, trademark, copyright, trade secret or any other Intellectual Property Right of such third party; (b) that if true would constitute a breach by YRI or Yahoo of any of their representations and warranties set forth in Section 6 above; or (c) that Yahoo has failed to provide a makegood for advertising that was sold on YRE in accordance with the terms of this Agreement, for which a makegood is owed under the Minimum Terms set forth on Exhibit C (each, a “ Yahoo Indemnified Claim ”); provided, however, that: (x) Zillow provides YRI and Yahoo with prompt notice of any such Yahoo Indemnified Claim; (y) Zillow permits YRI and Yahoo to assume and control the defense of such claim, with counsel chosen by YRI and Yahoo (who will be reasonably acceptable to Zillow), and reasonably cooperates with YRI and Yahoo, at Yahoo’s or YRI’s sole expense, in the defense of such Yahoo Indemnified Claim. Yahoo or an Affiliate will not enter into any settlement or compromise of any such Yahoo Indemnified Claim that would impose any obligations on Zillow without Zillow’s prior written consent, which consent will not be unreasonably withheld. YRI or Yahoo will pay any and all costs, damages, and expenses, including, but not limited to, reasonable attorneys’ fees and costs awarded against or otherwise incurred (in accordance with this Section 9.2) by a Zillow Indemnified Party in connection with or arising from any such claim.

9.3 Obligations. Each party’s obligation to defend, indemnify and hold harmless the other party hereunder shall be mitigated and reduced to the extent that such party has been prejudiced by a failure of the indemnified party(ies) to provide prompt notice of any and all such claim to the indemnifying party or to provide reasonable cooperation in the defense and/or settlement of such claims.

SECTION 10: TERM AND TERMINATION.

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 30 months from the Launch Date (“ Initial Term ”). Following the Initial Term, this Agreement will automatically renew for an additional period of 12 months unless one Party provides the other Party with written notice of non-renewal at least 180 days prior to the end of the Initial Term. Zillow shall ensure that any advertising contracts it signs with new home builders are terminable by Zillow with respect to Display Ads no later than the end of the Term.

10.2 Termination Rights.

 

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[***] 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.


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(a) This Agreement may be terminated by any Party immediately upon notice if the other Party (v) has not cured a trademark guidelines conflict under Section 4.1.2, 4.1.3 or 4.2, as applicable, within thirty (30) days after receiving written notice of such conflict; (w) becomes insolvent; (x) files a petition in bankruptcy or is otherwise the subject of such a filing that is not dismissed within sixty (60) days of the filing date; (y) makes an assignment for the benefit of its creditors; or (z) materially breaches any of its representations and warranties or any of its obligations under this Agreement in any material respect, which breach is not cured within thirty (30) days following written notice to such Party.

(b) YRE may terminate this Agreement if for any period of two consecutive calendar months the average number of listings provided by Zillow falls below 70% of the average existing home inventory for sale in the United States over the same period, as calculated from data reported by the National Association of Realtors (“ NAR ”), and Zillow does not cure such shortfall by the end of the next two consecutive calendar month period that follows any notice by YRE to Zillow of such a shortfall (with determination of such cure to be based on NAR data for such subsequent two month period). If NAR ceases to publish such data, YRE may terminate the agreement if for any period of two consecutive calendar months the number of listings provided by Zillow falls below 70% of the lowest monthly number of NAR listings in the previous 12 months, and Zillow does not cure such shortfall by the end of the next two consecutive calendar month period that follows any notice by YRE to Zillow of such a shortfall (with determination of such cure to be based on the same lowest monthly number of NAR listings as used in the previous calculation). YRE may not pursue any other remedies (whether based on any implied obligations of Zillow or otherwise) with respect to any listings shortfall giving rise to a right of termination by YRE under this Section 10.2, and such a listings shortfall will not be deemed to breach this Agreement.

(c) If a Party invokes its right to terminate this Agreement pursuant to Section 2.5 or 14.9, then such termination will be effective fifteen (15) calendar days from written notice of termination by the terminating Party to the non-terminating Parties.

(d) Termination by Yahoo for Financial Reasons. Yahoo may terminate this Agreement upon sixty (60) days notice if Zillow’s cash position, taking into consideration all cash equivalents, short term investments and marketable securities on the balance sheet as recorded in accordance with GAAP, at any time falls below Four Million Dollars ($4,000,000). Zillow will notify Yahoo in writing in the event such a cash position event occurs. Zillow will provide a confidential report to Yahoo on a quarterly basis, certified by its CFO, that details Zillow’s cash position and rate of cash burn during the prior quarter.

10.3 Effect of Termination. Terminating this Agreement in accordance with Section 10.2 will not impose any liability or obligation on the terminating party. Upon termination of this Agreement for any reason, a ninety (90) day wind-down period (the “ Transition Period ”) will occur during which the Parties’ rights and obligations under this Agreement will remain in effect, except that Zillow will cease to sell Real Estate Ad Products or Display Ads as of the effective date of termination (i.e., prior to the start of such Transition Period) and the exclusivity provisions of this Agreement will no longer apply to either Party. Upon any termination of this Agreement, Zillow shall have no further obligation to make any payments

 

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[***] 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.


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under Section 5 after the effective date of any such termination, other than any with respect to any payments that became due prior to the effective date of termination or during the Transition Period. The rights afforded the parties under this Section 10 will not be deemed to be exclusive, and are in addition to any rights or remedies provided by Law, but subject to all limitations of remedies expressly set forth in this Agreement. Additionally, the provisions of Sections 1, 5 but only with respect to payments thereunder that have been earned and remain unpaid as of the date of termination and 6 through 14 shall survive any termination or expiration of this Agreement.

SECTION 11: OWNERSHIP

11.1 Zillow Ownership: As between Zillow and its Affiliates on the one hand, and Yahoo and its Affiliates on the other, Zillow and its Affiliates own all right, title and interest in the Zillow Content, Zillow Listings, Zillow Site(s), Zillow Brand Features and all APIs, data feeds and other functionality or materials made available by Zillow under this Agreement. Nothing in this Agreement will confer in Yahoo or an Affiliate any license or right of ownership in any of the foregoing except as expressly stated. In addition, all User Data submitted directly by a User to Zillow or its Affiliates is, as between the Parties, owned solely by Zillow and its Affiliates.

11.2 Yahoo Ownership: As between Zillow and its Affiliates on the one hand, and Yahoo and its Affiliates on the other, Yahoo or its Affiliates own all right, title and interest in the Yahoo Properties and the Yahoo Brand Features. Nothing in this Agreement will confer in Zillow and its Affiliates any license or right of ownership in the Yahoo Properties or Yahoo Brand Features except as expressly stated.

11.3 No Joint Works: The Parties do not intend that any joint works under U.S. copyright law be made in connection with this Agreement. On termination of this Agreement (subject to the Transition Period referenced in Section 10.3) each Party shall destroy any copyrighted works as to which the contributions of the Parties are inextricably combined, but may retain any separable contributions thereto as it owns. The Parties do not intend to jointly develop or invent any joint invention; however if any invention is inextricably a joint invention, then the Parties will in good faith cooperate in the preparation of pertinent patent applications. All rights, title, and interests in Intellectual Property Rights not expressly granted herein are reserved to their respective owners.

11.4 User Data Ownership (Yahoo Properties). All User Data provided to Yahoo by Users of the Yahoo Properties or otherwise collected by Yahoo relating to User activity on the Yahoo Properties shall be owned solely by Yahoo. All User Data collected by Zillow directly from users of the Zillow Content shall be solely owned by Zillow. Yahoo grants to Zillow, subject to the terms and conditions of this Agreement, a perpetual, non-exclusive, worldwide, royalty-free, limited license to reproduce, store, display, disclose, distribute and otherwise use the User Data as provided by Yahoo to Zillow solely for the purposes of (1) confirming and fulfilling Leads and other requests submitted by Users, including without limitation by transmitting and disclosing User Data to residential real estate brokers and agents (and their marketing representatives), real estate franchisors, and homeowners consistent with the applicable Lead generation product or feature, (2) providing follow-ups on Leads and other requests by Users, (3) complying with Law, (4) investigating or taking

 

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[***] 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.


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action against fraudulent or illegal activity, (5) protecting the safety of Users, and (6) any other purpose for which Yahoo provides prior written approval. Notwithstanding the foregoing, Zillow’s license shall be limited to those uses disclosed in Zillow’s privacy policy. Except as specifically authorized by this Agreement, Zillow agrees it will not sell, lease, license, sublicense or otherwise distribute to any third parties any User Data licensed to it by Yahoo.

SECTION 12: PRIVACY

12.1 Zillow will continuously comply with all applicable privacy and consumer protection Laws within the United States (including the CAN-Spam Act of 2003) in its conduct of activities under this Agreement, including its collection and use of User Data through Yahoo Real Estate and the Yahoo Properties. During the Term, Zillow will have a published privacy policy in compliance with applicable Law and consistent with this Agreement, Zillow will comply with its published policy, and will provide a link to its privacy policy on any page or listing or link through which User Data is collected by Zillow. Users will receive clear disclosure at those times through written privacy policies as to how, by whom, and for what purpose the User Data will be used. Yahoo and Zillow will work together to transmit any User Data as required under this Agreement in HTTPS or other secure means. Yahoo agrees it will comply with its published privacy policy with respect to any data collected in locations of YRE where both Yahoo and Zillow’s respective privacy policies are linked to or posted.

12.2 On all sections of Yahoo Real Estate and any other Yahoo Properties (or mirror sites or other syndication or distribution arrangement authorized by Section 4.1.4) on which Users are providing User Data to YRI for transmittal to Zillow in accordance with this Agreement, YRI or Yahoo will include notices to Users that User Data will be provided to Zillow and that such User Data is subject to Zillow’s privacy policy. Each such notice will include a link to Zillow’s privacy policy.

12.3 During the Term and thereafter:

(a) User Data collected by each Party will be distributed to, shared with, or otherwise made available to any other third party, whether directly or indirectly, subject to the restrictions contained in this Agreement and only as permitted by such Party’s privacy policy or otherwise required by Law;

(b) Zillow will not use User Data for the transmission of “junk mail”, “spam”, or any other unsolicited mass distribution of information or otherwise in violation of Law; and

(c) Zillow will not include in any ongoing electronic or internet correspondence to a User an internet standard “opt-out” provision or hypertext link that allows a User to elect to not receive any further communication

SECTION 13: CONFIDENTIAL INFORMATION AND PUBLICITY

Information and material disclosed in connection with this Agreement or any of the Parties’ activities hereunder are subject to the terms of the Mutual Nondisclosure Agreement between Yahoo and Zillow dated November 18, 2005 (the “ NDA ”). The Parties’ obligations of confidentiality under such NDA will remain in effect as described in the previous sentence for the Term of this Agreement and a period of two (2) years thereafter, regardless of any

 

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[***] 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.


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termination or expiration of the NDA. Without limiting the terms of the NDA, the terms and conditions of this Agreement will be considered confidential and will not be disclosed to any third parties except to a Party’s accountants, attorneys, employees with a need to know, institutional investors conducting due diligence and their attorneys, or other parties who agree are subject to a duty of confidentiality. No Party will make any public announcement regarding the existence of this Agreement without the other Parties’ prior written approval and consent. Zillow and/or Yahoo and YRI may release a press release on or after the date this Agreement is executed, provided the Parties mutually approve of the text in writing prior to its release. Any and all publicity relating to this Agreement and performance thereunder and the method of its release will be approved in advance of the release by both Parties.

SECTION 14: GENERAL PROVISIONS

14.1 Third Party Beneficiaries. There are no third party beneficiaries of this Agreement.

14.2 No Agency. The Parties are, and will be deemed to be, independent contractors with respect to the subject matter of this Agreement, and nothing contained in this Agreement will be deemed or construed in any manner whatsoever as creating any partnership, joint venture, employment, agency, fiduciary or other similar relationship between the Parties.

14.3 Entire Agreement. This Agreement, together with all Exhibits, represents the entire agreement among the Parties with respect to the subject matter hereof and thereof and will supersede all prior agreements and communications of the Parties, oral or written.

14.4 Waiver. No amendment to, or waiver of, any provision of this Agreement will be effective unless in writing and signed by all Parties. The waiver by any Party of any breach or default will not constitute a waiver of any different or subsequent breach or default.

14.5 Governing Law; Dispute Resolution. This Agreement will be governed by and interpreted in accordance with the laws of the State of California without regard to the conflicts of laws principles thereof. Any litigation related to this Agreement will be brought in the state or federal courts located in the county of the principal place of business, as reflected first above, of the defending Party, and the Parties hereby irrevocably consent to the personal jurisdiction of such courts for such purpose, all without waiving any right to remove to federal court in the same county. No Party will make a motion to dismiss or transfer any case filed in accordance with this subsection on the basis of improper venue, personal jurisdiction, or for the convenience of any Party or witness. If a Party employs attorneys to enforce any rights arising out of or relating to this Agreement, the substantially prevailing Party will be entitled to recover its reasonable attorneys’ fees, costs, and other expenses.

14.6 Assignment. This Agreement will bind and inure to the benefit of each Party’s permitted successors and assigns. Neither party may assign this Agreement, in whole or in part, without the other Party’s prior written consent, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Yahoo may assign this Agreement in its entirety to YRI, provided that (i) such assignment shall not have the effect of causing a reduction in the level of performance of Agreement; and (ii) Yahoo guarantees YRI’s performance under the Agreement. Furthermore, either Party may assign this Agreement without the prior written consent of other Party in connection with any merger, consolidation, any sale of all or substantially all of its assets or any other transaction in which more than

 

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[***] 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.


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fifty percent (50%) of its voting securities are transferred (each such event hereinafter referred to as a “ Change of Control Event ”); provided that: (a) in the event of a Change of Control Event for Zillow, Yahoo will have the right to terminate the Agreement upon sixty days written notice to Zillow; and (b) in the event of a Change of Control Event for Yahoo, Zillow or its controlling entity will have the right to terminate the Agreement upon three hundred sixty-five (365) days written notice to Yahoo. Any attempt to assign this Agreement other than in accordance with this provision shall be null and void.

14.7 Force Majeure. No Party will be liable for failure to perform or delay in performing any obligation (other than the payment of money) under this Agreement if such failure or delay is due to fire, flood, earthquake, strike, war (declared or undeclared), embargo, blockade, legal prohibition, shortage, strike, failure of environmental controls, failure of Internet-mediated transmissions, terrorist attack, governmental action, riot, insurrection, damage, destruction or any other similar cause beyond the control of such Party (“force majeure”), provided that the putative force majeure was not reasonably avoidable by the defaulting party. A Party may terminate this Agreement if the force majeure continues to materially impair performance of the other Party for more than forty-five (45) days.

14.8 Notices. All notices, requests and other communications called for by this Agreement will be deemed to have been given immediately if made by facsimile (confirmed by concurrent written notice sent via overnight courier for delivery by the next business day), if to Yahoo at the address first written above, Greg Hintz, Head of Listings, e-mail:ghintz@yahoo-inc.com with a copy to its General Counsel Mike Callahan (e-mail: callahan@yahoo-inc.com), if to YRI at the address first written above, Fax: (408) 349-7966, (with a copy to Yahoo’s General Counsel Mike Callahan (e-mail: callahan@yahoo-inc.com), and if to Zillow: Zillow, Inc., 999 Third Avenue, Suite 4600, Seattle WA 98104, Attn.: President, with a copy to Zillow Legal Department at the same address, Fax: 206.470.7002 Attn. President with a copy to Zillow Legal Department or such other addresses as one Party will specify to the other.

14.9 Severability. Except as set forth in the next sentence, if any provision of this Agreement is held by a court of competent jurisdiction to be invalid, illegal or unenforceable for any reason, that provision will be enforced to the maximum extent permissible so as to effect the intent of the Parties, and the remainder of this Agreement will continue in full force and effect. Notwithstanding the foregoing, if any provision of this Agreement providing for exclusivity is held by a court of competent jurisdiction to be invalid, illegal or unenforceable for any reason, the Party benefitting from such exclusivity provision will be entitled to terminate this Agreement by providing written notice to the other Party.

14.10 Approvals. Whenever a provision of this Agreement affords a Party with a right to consent or approve the actions of another Party, or provides that the Parties shall mutually agree upon a course of action, the Parties agree that any such approval, consent, or mutual agreement shall not be unreasonably withheld or delayed by any Party, unless expressly provided to the contrary in the Section of this Agreement in which such approval, consent or mutual agreement rights are conferred.

[ Signature page follows ]

 

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[***] 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.


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14.11 Counterparts. This Agreement may be executed in two or three counterparts, all of which taken together will constitute a single instrument. Execution and delivery of this Agreement may be evidenced by facsimile transmission.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.

 

YAHOO! INC.:
By:  

/s/ Raymond Stern

Title:  

SVP, BD & Partnerships, North America

Printed Name:  

Raymond Stern

Date:  

7/7/10

 

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

/s/ Aman Kothari

    By:  

/s/ Spencer Rascoff

Title:  

VP, CAO

    Title:  

COO

Printed Name:  

Aman Kothari

    Printed Name:  

Spencer Rascoff

Date:  

7/8/10

    Date:  

7/6/2010

 

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[***] 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

API SPECIFICATIONS

Exhibit A

Functional Specification Document

 

Homes for Sale Partnership

Yahoo! Real Estate & Zillow.com

 

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[***] 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.


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¯ Table of Contents

 

1

   Introduction      33   
   1.1    Purpose and Scope      33   
   1.2    Intended Audience      33   
   1.3    Product Release Identification      33   
   1.4    Revision History      33   
   1.5    References—To be done      33   
   1.6    Glossary      33   
   1.7    Assumptions—To be done      33   

2

   Listings API Specifications      34   
   [***]   

3

   Ad Products API Specifications      57   
   [***]   

 

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[***] 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

 

4

  Recommendations Module / Vibes      69   

5

  Beacon      70   
  [***]   

6

      Address Resolution Logic      71   

7

  Image Specification      72   

8

      Service Level Agreement      73   
   

8.1

  Definitions      73   
   

8.1.1

  Zillow Availability      73   
   

8.1.2

  Yahoo! Availability      73   
   

8.1.3

  Production System      73   
   

8.1.4

  Results Set      73   
   

8.1.5

  Internal Zillow Response Time      73   
   

8.1.6

  Minor Problem      73   
   

8.1.7

  Moderate Problem      74   
   

8.1.8

  Severe Problem      74   
   

8.1.9

  Catastrophic Problem      74   
   

8.1.10

  Problem Resolution      74   
   

8.1.11

  Unresolved Catastrophic Problem.      74   
   

8.1.12

  Scheduled Maintenance      74   
   

8.1.13

  Temporary Workaround      74   
   

8.1.14

  Timeouts      75   
   

8.1.15

  Aggregate Response Time      75   
   

8.1.16

  Critical Threshold      75   
   

8.2

  Contact Information      75   
   

8.2.1

  Yahoo! Support Personnel—To be done      75   
   

8.2.2

  Zillow Support Personnel      75   
   

8.3

  Support Procedures      76   
   

8.3.1

  Support Procedures.      76   
   

8.3.2

  Zillow Response      76   
   

8.3.2.1

  Support Table      76   
   

8.3.3

  Zillow Notification and Escalation Process—To be done      76   
   

8.4

  Operational Metrics      77   
   

8.4.1

  Availability      77   
   

8.4.1.1

  Zillow Availability      77   
   

8.4.2

  Capacity      78   
   

8.4.3

  Query Response Time      78   
   

8.4.4

  Aggregate Response Time      79   
   

8.4.5

  Site monitoring      79   
   

8.4.6

  Maintenance Requirements      79   
   

8.4.7

  Reporting      79   
   

8.4.8

  Image Serving      80   
   

8.4.9

  Business Continuity Planning      80   
   

8.4.10

  Sole and exclusive Remedy      80   

 

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[***] 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.


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9

   Failover Requirements      81   

10

   Reviewers      82   

 

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[***] 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

 

Introduction

 

Purpose and Scope

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

Intended Audience

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

Product Release Identification

 

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

Revision History

 

Version #

  

Date

  

Revised By

  

Revision Description

1.0    7/1/10    Yahoo! Inc.    Base version.

References– To be done

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

 

Document/Book

 

Author(s)

Design Document

  Development

Test Plan

  QA

Glossary

This document references the following terms, acronyms and abbreviations:

 

Term/Expression

  

Definition

  
  
  

Assumptions – To be done

 

   

To be done.

[***] 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


Homes for Sale Partnership

 

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 page 34 and pages 35 to 56 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.

 

34


Homes for Sale Partnership

 

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 page 57 and pages 58 to 62 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.

 

 

57


Homes for Sale Partnership

 

Form Type

Short form

 

LOGO

With broker logo

 

 

LOGO

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

[***] 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.

 

63


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LOGO

Contact Type

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.

 

64


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Leader board

 

LOGO

E-mail Content

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

[***]

[***] 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.

 

65


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        [***]

Paid Listing Agent

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

 

LOGO

Broker Match – for sale

[***]

 

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.

 

66


Homes for Sale Partnership

 

Dormant 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.

 

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Active listing agent

 

LOGO

For Sale by Owner

 

LOGO

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.

 

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Recommendations Module / Vibes

 

[***]

[***] 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.

 

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Beacon

 

[***]

[***] 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.

 

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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.

 

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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.

 

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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.

In addition to the below service level agreements, the Parties intend to agree on SLAs around completeness/data-quality of the listings – address normalization, geo-coding, neighborhood support etc.

SLA on listing update/addition/deletion – information should be available to Yahoo! [***] from broker submit 8.1, 8.2, 8.3 are proposals pending additional review and mutual agreement.

Definitions

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)).

Yahoo! Availability

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

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.

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.

Internal Zillow Response Time

The period of time beginning at the time of Zillow’s receipt of an API call to the completion of sending the results set. Maximum of this value will be mutually agreed upon prior to Launch.

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. Once a Minor Problem has been outstanding for [***], either party may escalate the issue for resolution through the 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.

 

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Personnel table, with notice to the other party. 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 Moderate Problem, Severe Problem, or Catastrophic Problem, not a Minor Problem. This is otherwise known as “P3”.

Moderate 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 [***] Zillow’s queries to exceed the Critical Threshold within a day’s time. Once a Moderate Problem has been outstanding for [***], either party may, using reasonable judgment, upgrade the issue to a Severe Problem. This is otherwise known as “P2”.

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. Once a Severe Problem has been outstanding [***], either party may, using reasonable judgment, upgrade the issue to a Catastrophic Problem. This is otherwise known as “P1”.

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! can also identify catastrophic problems and may include security issues. This is otherwise known as “P0”.

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.

Unresolved Catastrophic Problem

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

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.

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.

Timeouts

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

[***] 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.

 

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Aggregate Response Time.

Aggregate Response Time

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

Critical Threshold

The value that exceeds the Aggregate Response Time.

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.

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

   [***]    [***]

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.

 

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Support Procedures

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 Moderate Problems, 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 via e-mail to the contact information set forth in the Support Table, and each such Moderate 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.

Zillow Response

If notice of a problem is received from Yahoo!, Yahoo! will identify whether the problem is a Minor Problem, a Moderate Problem, a Severe Problem, or a Catastrophic Problem or none of the above according to the definitions set forth above. 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 Zillow shall reasonably cooperate with Yahoo! to assist in finding a Problem Resolution.

Support Table

 

Priority Description

   Initial
Response
Target
  Status
Updates
  Target for
Workaround
or Fix

Catastrophic Problem “P0”

   [***]   [***]   [***]

Severe Problem “P1”

   [***]   [***]   [***]

Moderate Problem “P2”

   [***]   [***]   [***]

Minor Problem “P3”

   [***]   [***]   [***]

Zillow Notification and Escalation Process

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

[***] 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.

 

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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, with the call to happen as soon as practical after the trigger time below:

 

Time Problem Outstanding

   Yahoo! Contact    Zillow Contact
[***]      

Operational Metrics

Availability

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. Incase 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. Zillow will have no more than 2 catastrophic problems per quarter.

 

API

   Availability   Internal
Zillow
Response
Time

Listing Search API

   [***]   [***]

Listing Detail API

   [***]   [***]

Listing Concise API

   [***]   [***]

[***] 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.

 

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Market Snapshot API

   [***]   [***]

Contact Agent API

   [***]   [***]

Listings Ad

   [***]   [***]
Agent Profile API    [***]   [***]

 

Page / Service

   Availability   User
Page
Render
time

FSBO Zillow landing page and Service

   [***]   [***]

The Image Serving system should adhere to the service levels described below. The availability and response times should be respected under peak load scenarios noted under Capacity section below.

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

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

Listing Search API

   [***]

Listing Detail API

   [***]

Listing Concise API

   [***]

Market Snapshot API

   [***]

Contact Agent API

   [***]

Listings Ad

   [***]

Agent Profile API

   [***]

Page

   Peak
Image
Request
Rate

Listing Search Results Page

   [***]

Listing Detail Page

   [***]

Page / Service

   Peak
Request
Rate

FSBO Zillow landing page and Service

   [***]

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.

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

[***] 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.

 

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Listing Search API

   [***]

Listing Detail API

   [***]

Listing Concise API

   [***]

Market Snapshot API

   [***]

Contact Agent API

   [***]

Listings Ad

   [***]

Agent Profile API

   [***]

Exceptions to these are the following queries, which will have a maximum Internal Zillow Response time [***].

 

  1. Listing Search API call with [***].

 

  2. Listing Search API call with [***].

 

  3. Listing Search API call with [***].

 

  4. Listing Concise API with [***].

 

  5. Listing Details API call for MLS [***].

 

  6. Listing Search API call with [***].

 

  7. Listing Search API call with [***].

Listing Search API call with [***].

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.

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.

Maintenance Requirements

Zillow will use commercially reasonable efforts to notify Yahoo! [***] before any Scheduled Maintenance is performed on its 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!.

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

[***] 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.

 

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discrepancies going forward.

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!

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.

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.

 

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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.

 

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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.

 

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EXHIBIT B

Zillow Activity Data

Yahoo agrees to allow Zillow to collect the user activity that occurs on YRE listed in Table 1 under “Measure,” (referred to as “Activity Data” in this Agreement). Such Activity Data will be captured via the API. [***]

Table 1

 

[***]

        

[***] 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.

 

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EXHIBIT C

MINIMUM DISPLAY AD TERMS

1. License Grant . Subject to the terms and conditions of the Agreement, Advertiser grants to Zillow and Yahoo a limited, non-exclusive and non-transferable license (without the right to sublicense) to use, reproduce and display the creative or content (Creative”) contained in the advertisements provided by Advertiser and the Advertiser’s name, logo, trademarks or service marks “collectively, “Trademarks”) solely as necessary to perform the obligations set forth in this Agreement.

2. Right to Reject Advertising. Advertiser agrees that Yahoo! may reject a creative for any reasonable basis. Without limiting Yahoo!’s rights under the preceding sentence, it is agreed that Yahoo! may reject or remove any Display Ad provided by Publisher (a) that it reasonably determines fails to meet all or any requirements in this Agreement or any policies of Yahoo!, (b) if Yahoo receives one or more regulatory inquiries with respect to such advertisement or it determines such advertisement may expose Yahoo! to liability under applicable law or regulation, (c) that is inconsistent with Yahoo!’s public image, goodwill, or reputation; or (d) that promotes a Yahoo! Named Company. “ Yahoo! Named Companies ” means About.com, Amazon.com, AmericanGreetings.com, AOL Time Warner (including, without limitation, AOL, CNN, ICQ, Mapquest, Moviephone, Netscape), CBS Network (including, without limitation, CBS Marketwatch, CBS Sportsline), Bluemountainarts.com, CNet, eBay, Earthlink, Fox Network, Google, Hollywood.com, Homestead.com, Hotwire.com, Disney Internet Group (including, without limitation, ABC Network, ESPN, Go.com Network), Infospace, InterActiveCorp (including, without limitation, Ask.com, Citysearch.com, Evite.com, Expedia.com, Match.com, Ticketmaster.com), Intuit (including, without limitation, Quicken.com, MyTurbotax.com), Iwon.com, LookSmart, Microsoft Corporation (including, without limitation, MSN), Monster.com, MSNBC, MTV Networks, NBC Network (including, without limitation, NBCi.com), News Corporation, Northern Light, Ofoto.com, Priceline.com, Real Networks, Teoma, Terra Lycos, Ticketmaster, Webshots.com, and any of their Affiliates, as well as other companies with businesses substantially similar to all or a portion of Yahoo!’s business.

3. Indemnification. Advertiser at its own expense, will indemnify, defend and hold harmless Yahoo!, its Affiliates, and Yahoo!’s and its Affiliates’ employees, officers, directors, representatives and agents and the respective successors and assigns of each of the foregoing (“ Yahoo! Indemnified Parties ”), from and against any loss, liability, judgment, penalty, damage or expense (including reasonable expenses of investigation and reasonable attorneys’ fees and costs) incurred or suffered by any Yahoo! Indemnified Party resulting from, arising out of, or in connection with or otherwise with respect to any third-party claim, suit, action, or other proceeding brought against any Yahoo! Indemnified Party based on, arising from or relating to (a) claims that a Display Ad distributed by Advertiser on the Yahoo! Properties (i) infringes any Intellectual Property Rights in the License Territory of any Person, (ii) breaches any duty toward, or rights of, any Person, including rights of publicity and/or privacy, or (iii) is false, deceptive, misleading, unethical, defamatory, libelous, or threatening; or (b) claims that any Trademark infringes any Trademark of any person or entity.

4. NO CONSEQUENTIAL DAMAGES . TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, YAHOO WILL NOT BE LIABLE FOR ANY

[***] 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.

 

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INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES (INCLUDING FOR THE INDIRECT LOSS OF PROFIT, REVENUE OR CONTENT) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, HOWEVER CAUSED, AND UNDER WHATEVER CAUSE OF ACTION OR THEORY OF LIABILITY BROUGHT (INCLUDING UNDER ANY CONTRACT, NEGLIGENCE OR OTHER TORT THEORY OF LIABILITY) EVEN IF YAHOO HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

5. LIMITATION OF LIABILITY . TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, YAHOOS AGGREGATE LIABILITY TO ANY PARTY UNDER THIS AGREEMENT WILL BE LIMITED TO $1,000,000.

6. EXCEPTIONS . THE EXCLUSIONS AND LIMITATIONS OF LIABILITY CONTAINED IN THIS AGREEMENT WILL NOT APPLY TO: (I) A PARTY’S BREACH OF ITS CONFIDENTIALITY OBLIGATIONS; AND (II) A PARTY’S DEFENSE OR INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT, RESPECTIVELY, OR ANY AMOUNTS PAID OR PAYABLE IN CONNECTION THEREWITH.

7. Makegoods. If APT fails to deliver, in a specific month, the minimum guaranteed number of Impressions of Display Ads committed to an Advertiser for such month or the impressions are delivered in the wrong location, then Advertiser’s sole and exclusive remedy is limited, at Publisher’s election, to (i) cancellation of the order for any undelivered Impressions or (ii) requiring Yahoo!’s delivery of the Impressions at a later time.

[***] 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.

 

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EXHIBIT D

Brand Features/Attribution

Yahoo Brand Features:

Subject to the Yahoo Brand Guidelines, attached as Exhibit E , “Yahoo” and the following Yahoo and YRI logos:

http://realestate.yahoo.com/ LOGO

 

LOGO

Zillow Brand Features:

Subject to the Zillow Brand Guidelines, attached as Exhibit F, “Zillow Real Estate” and the following logos:

 

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.

 

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EXHIBIT E

YAHOO BRAND FEATURES GUIDELINES

 

1. General. All Yahoo! trademarks, logos, service marks, trade dress, slogans, copyrighted designs or other brand features (collectively “Brand Features”) will be used only as explicitly licensed by Yahoo!, and only under the terms and conditions and for the purposes described in such License. The other party to the License granted by Yahoo! is referred to as the “Licensee”. To the extent they may differ with the general terms below, the specific terms of the License govern all use of the Brand Features by the Licensee.

 

2. Approval. All specific uses of any Yahoo! Brand Features must be approved in advance by Yahoo! Brand Marketing. You may request approval by completing the Request for Approval Form attached as an Exhibit to the License and/or which may be found at http://docs.yahoo.com/info/permissions/permissions.html , and forwarding it to Permissions Agent at fax no. (408) 349-5310 or c/o Yahoo! Inc., 701 First Avenue, Sunnyvale, CA 94089. You must also include complete samples of each proposed use. Yahoo!’s brand marketing department will typically review the request and respond within ten (10) business days, but is under no obligation to respond. You may not use Brand Features unless and until Yahoo! has granted its specific approval and any and all conditions of such approval have been fulfilled by the Licensee.

 

3. Appearance of Logos. The Licensee will ensure that the presentation of the Yahoo! Brand Features will be consistent with Yahoo!’s own use of the Yahoo! Brand Features in comparable media. From time to time during the term of the License, Yahoo! may provide to Licensee written guidelines as to the size, typeface, colors, and other graphic characteristics of the Yahoo! Brand Features, which upon delivery to the Licensee shall be deemed to be incorporated into the License and into these Guidelines.

 

4. Notices. All trademarks and service marks included in the Yahoo! Brand Features will be designated with “SM”, “TM” or “®”, in the manner directed by Yahoo!.

 

5. Restrictions upon Use. The Yahoo! Brand Features will not be presented or used: a) in a manner that suggests that editorial content has been authored by, or represents the views or opinions of, Yahoo! or any Yahoo! personnel or affiliate; b) in a manner that is misleading, defamatory, libelous, obscene, infringing or otherwise objectionable; c) in connection with any material that infringes the trademark, copyright or any other rights of any third party; d) as part of a name of a product or service of a company other than Yahoo!; or e) in a manner that infringes, derogates, dilutes, or impairs the rights of Yahoo! in the Brand Features. Yahoo! shall have complete discretion to evaluate Licensee’s use and to decide whether that use violates any of the foregoing restrictions.

 

6. Use for Yahoo!’s Benefit. Any use of the Yahoo! Brand Features shall inure to the benefit of Yahoo! By using the Brand Features pursuant to Yahoo!’s approval, Licensee acknowledges Yahoo!’s ownership of all Brand Features and warrants that it will not take any action which is inconsistent with Yahoo!’s ownership.

 

7. Nonexclusive Remedy. The Licensee will make any changes to its use of the Yahoo! Brand Features as are requested by Yahoo! This remedy is in addition to any other legal remedies to which Yahoo! may be entitled in relation to Licensee’s use of Yahoo! Brand Features.

 

8. Revisions & Further Info. These Guidelines may be modified at any time by Yahoo! upon written notice to the Licensee.