Equity Research

Brian Bolan Research
25 August 2011

2Q11 Earnings Update
Company Overview and Key Data
Zillow (Nasdaq: Z)
Share Price: Price Target: 52-Week Range: Shares Outstanding: Market Capitalization: Dividend Yield: $26.26 $34 $23.43- $60.00 26.9 million $706 million NA

BUY

Zillow (Nasdaq: Z)
Investment Concept
Zillow is a leading Real Estate information site that has a database of 100M US homes of which 29M have user updated information and added 60M photos. Zillow is best known for its Zestimate – proprietary estimate of home values. The company also uses its platform to attract the ancillary services that revolve around the real estate market. Zillow provides rent Zestimates, as well as home value Zestimates, in serving the rental market. It provides advertising opportunities for home financing companies and similar opportunities to the home maintenance & improvement industry. Zillow beat on the top and bottom lines, posting $15.8M in revenue and $0.00 in EPS. Actual EPS was ~$0.07. We reiterate our BUY rating and a $34 price target.

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

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Brian Bolan 1 773 413 0285

Twitter: @BBolan1 BBolan1@Gmail.com

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

Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

Inside

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

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25 August 2011

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

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

Key Metrics
      Marketplace revenues of $9.7M was an increase of 41% from the prior quarter and 269% more than the year ago period. Display revenue was $6.1M, an increase of 40% from the prior quarter and 30% from the year ago period. Premier Agent Subscriptions increase 25% and ended the quarter at 13,385, in line with our estimate of 13,388. Unique Users checked in at 20.7M, below our estimate of 24M. We had high expectations due to July 2011 metrics that were previously released. Monthly Revenue per subscription saw a significant increase to $242 from $218 in the prior quarter and $183 in the prior year. In July 2011, there were 12M mobile users that viewed 2.5M homes per day. Overall, there was 23.2M users in the month of July.

Unique Users Our unique user estimate was based on a previously reported stat for July 2011, and our future estimates have been scaled back accordingly. We look at the monetization of users in the display revenue line item. Our metric of revenue per unique user increased 16% from the prior quarter, but was down 32% from the year ago period. We are anticipating a decrease of 5% in 3Q11. Marketplace Revenues. Marketplace revenues consist of subscriptions sold to real estate agents under the Premier Agent program and CPC advertising related to the Zillow Mortgage Marketplace sold to mortgage lenders. Marketplace revenues of $9.7M were well ahead of our estimate of $8.7M, representing 41% increase from the prior quarter and 269% more than the year ago period. Marketplace revenues are driven mostly through premier agents subscriptions. Display Revenues Display revenues primarily consist of graphical web and mobile advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers. Display revenues were $6.1M, ahead of our estimate of $5.7M. This represents 40% growth from the previous quarter and 30% ahead of year ago levels.

10 August 2010

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

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

Marketplace Revenue Our curve remain intact, although there is now a pronounced bump up in the line. We believe that given the cautious statements made on the call, a pull-back in estimates is warranted.

Premier Agent Subscribers The Premier Agent Subscribers metric is a key metric that can give insight into how professionals in the industry view the value of Zillow. We missed the exact number by 3, and given the tone of the call, we have decreased our estimate for subscribers in future quarters.

10 August 2010

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

Revenue per Subscriber (RPS) RPS saw a healthy increase in the quarter. We are maintaining our cautious approach to future increases.

Display Revenue

Unique users

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

Revenue per Unique users Revenue per Unique user is a metric that can see wild swings. We are modelling in a continued slight decline in this metric as users increase a rate faster than the company can monetize them.

Approximate CPM rates Our approximate CPM estimate was well below the ‘actual’ that we backed into. We are being cautious when forecasting future CPM’s.

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Cost of Sales Without much in the way of guidance from management, we are calling for a slight decline from the previous quarters gross profit. Future quarters are modelled at 82%,83% and 84%, implying minimal increases over the next year and a half.

10 August 2010

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

Investment Risks
If the company experiences any or all of the following risk factors, as well as others, the company’s stock price may be affected.  Several macro-economic indicators could damage the broader industry. The real estate industry is subject to several macro indicators that could serve to diminish demand. Prolonged high rates of unemployment, increases in inventory and lack of liquidity in the market may keep some consumers out of the market.  A better advertising platform is developed for the real estate market. Competition can be found all over the web, Tulia, Realtor.com and RedFin are among the strongest in the space. Another website that incorporates more completely with MLS could prove to be a formidable competitor.  Prolonged Value Erosion is keeping many market participants on the sidelines. With home values falling on a consistent basis since 2007, there are many participants waiting for the broader market to recover before they re-enter the market. .  Zillow must also add new streams of revenue. The company has two segments that drive revenue, the marketplace and subscription business. The addition of vacation home rentals or other ancillary businesses in the real estate industry  Loss of key management. The loss of either co-founder or the CEO would be harmful to the stock. The company’s leadership has done well in the short life of the company, any loss would be a negative for shareholders.  One major shareholder could sell. One of the positives of the tight float and small number of shares outstanding is that supply tends to be smaller than demand. The same thing can happen when a seller wants to shed shares to buyers in a market is not looking to bid up the stock.  Update speeds need to increase. In speaking with several realtors who use the site daily, their lone complaint tended to be the speed of the updates. When a listing is removed or repriced, the sellers and agents believe that the changes need to be more instantaneous than the potential 48 hour potential wait that is currently the norm. Recommendation and Valuation With Zillow coming out to an auspicious start trading at 3x its IPO pricing a few moments into its public stock life, some strong expectations were automatically attached to the stock. While $60 was too high for right now, $27 is too low. We believe there is value in both the long term and the short term for Zillow and initiate coverage with a BUY rating and price target of $34. We arrived at our price target via a multiple of 8x 2012 sales.

10 August 2010

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

Appendix

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

Zillow Income Statement Forecast

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

Annual Income Statement

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

Valuation Table

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Brian Bolan Research

Zillow (Nasdaq Global Markets: Z)

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

Source: Finviz.com

10 August 2010

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Brian Bolan Research Important disclosures:

Zillow (Nasdaq Global Markets Z)

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

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

Disclosures:
None

13 June 2011

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